There is always a dispute in respect of capital & revenue receipt & expenditure. Let’s clarify the same with the help of some of the latest judicial decisions in this respect.
01. Non Compete Fees : Non compete fee received by assessee for refraining from manufacturing and selling time pieces for a period of ten years after the sale of its units while it was continuing with its other business activities constituted revenue receipt. Refer Tata Coffee Limited, 29 DTR 336.
However, in the case of Tecumseh India (P) Limited v ADD CIT, ITAT Delhi held that Non compete fees is capital expenditure.
In the case of BASF India Ltd. vs. Addl. CIT, it was held that Amount received on account of transfer or assignment of marketing rights in exchange of source of income is a capital receipt. Amount received as non-compete fee is a capital receipt. Capital gains not taxable where cost of acquisition not determined.
02. Reimbursement: Payment by way of reimbursement of expenses incurred on behalf of payer is not income chargeable to tax in the hands of payee. Refer Siemens Aktiongesellschaft, 15 DTR 233.
Similar decision was given in the case of Rajesh Pilot, 175 Taxmann 8, it was held that It was found that the money received by the agent was spent on the expenditure of jeeps required for the election campaign of the assessee. The Court held that every receipt is not taxable as income. It may be receipt, but not necessarily “income”.
03. Real Income: What could be assessed was real income as income tax is tax on income. The test therefore, before income can be taxed is whether there is real accrual of income. Since there was no real accrual of income to the assessee and it was only on arbitral proceedings coming to an end and award being passed, that income received by assessee would be liable to be assessed. Refer FGP Limited, 177 Taxmann 147.
04. Non Occupancy Charges: Bye-laws themselves provided for non-occupation charges. In these circumstances, the principle of mutuality would apply. The non-occupancy charges were not taxable. Refer, Mittal Court Premises Co-operative Society Ltd, 320 ITR 414.
05. Income from Surplus Fund: Investment of surplus funds by the assessee club with member banks and institutions not with a definite idea of using the same in any specific projects for the further development of the infrastructural facilities of the club did not satisfy the concept of mutuality and therefore benefit of exemption cannot be extended to the interest income. Refer Madras Gymkhana Club, 226 CTR 176.
Similar view was given in the case of CIT vs. Wellington Gymkhana Club, 46 DTR 22, where it was held that Interest income on investments with banks is not exempt on the principle of mutuality even though the concerned banks are members of the club.
However, in the case of Canara Bank Golden Jubilee Staff Welfare Fund, 19 DTR 64, it had been held that Assessee society having been formed for the mutual benefit of its members, income earned by it by way of interest and dividend by making investment of surplus fund which is wholly contributed by the members is governed by the principle of mutuality and is not taxable.
Similar view was provided in the case of CIT v Talangang Co –operative Group Housing Society Ltd, where it was held that Assessee, a co-operative housing society, was formed for the development and construction of residential houses/flats for its members and to provide them necessary common amenities and facilities, and therefore the principle of mutuality would apply to the income of the society, including the income from sale of shops. Principle of mutuality is attracted also to the interest derived from deposits made by the society out of contribution made by its members.
Again in the case of ITO v Hill Properties Ltd, it was held that Principle of mutuality is applicable to the assessee even though it is an incorporated company .Interest earned by the mutual association from banks bonds etc on surplus funds is not liable to tax.
In the case of CIT vs. Delhi Gymkhana Club Ltd., 53 DTR 330, Delhi High Court held that Assessee company is running a recreation club for its members the income earned from the members is exempt on the principle of mutuality. Income of the club from FDR’s in banks and Government securities, dividend income and profit on sale of investment is also covered by the doctrine of mutuality and is not taxable.
Again, in the case of ITO v. Damodar Bhuvan CHS Ltd, ITA No. 1610/Mum/2010 dated 16-9-2011 Bench ‘D’. 421 (2012) 43-B BCAJ., it was held that Amount received in excess of the limits prescribed under the law from its members by the Housing Society is also exempt from tax on the principle of mutuality.
06. Retiring/ Deceased Partner: Contractual payment made by the firm to its retiring partners, in terms of partnership deed, is not includible in the total income of the firm, since to that extent income has never reached the hands of the assessee. Refer RSM & Co., ITA No 3269/Mum/2007 Bench D dt. 12-10-2009 /391 (2009) 41-B BCAJ Jan 2010.
In the case of Dy. CIT v. Lakshmi M. Iyer (Mrs), 64 DTR 420, it was held that payment received by the widow of the deceased partner from the partnership firm after death of her husband under the terms of partnership deed was not chargeable to tax in her hands as revenue receipt as such payment did not relate to any business done by her for the firm and was not to compensate the assessee any loss of profits suffered by her because of the firm or to compensation for any services rendered by her either in present or future
07. Government Incentives: Incentives in the form of excise duty refund and interest subsidy which has been granted for substantial expansion of unit, only after commencement of production and not for setting up of new industries or to purchase capital assets, same constitute revenue receipt. Refer, Shree Balaji Alloys, 33 DTR 67.
However, in the case of Reliance Industries Limited, the Supreme Court held that the assessee received sales-tax incentive for setting up a new industrial undertaking in Patalganga. The assessee claimed that the said subsidy was a capital receipt. The Special Bench (DCIT vs. Reliance Industries Ltd 88 ITD 273) upheld the assessee’s claim. On appeal by the department (for a subsequent year), the Bombay High Court held (order enclosed) that as a finding had been recorded by the Special Bench that the object of the subsidy was to encourage the setting up of industries in the backward area by generating employment therein, the subsidy was, applying the “purposive test” in Ponni Sugars and Chemicals Ltd 306 ITR 392 (SC), a capital receipt and held that a substantial question of law did not arise. The department filed an appeal to challenge the judgment of the High Court. HELD allowing the appeal.
Similar view was provided in the case of CIT v. Rasoli Ltd, 245 CTR 667, Subsidy received by assessee from the State Government under a scheme of industrial promotion, which was meant to provide financial assistance to specified industries for expansion of capacities, modernization and improving their marketing capabilities, is capital receipt, though the amount of subsidy is equivalent to 90 percent of the sales-tax paid by the beneficiary.
08. Forgoing Interest: Resolution passed on last day of previous year forgoing interest, will not wipe out interest accrued during the year. Refer, Sarabhai Holdings P. Ltd. 307 ITR 89.
09. Prior Income before business commencement: Prior to commencement of business interest earned by parking surplus funds in bank, constitutes a capital receipt and hence is eligible for being set off against pre-operative expenses. Refer, Indian Oil Panipat Power Consortium Ltd., 181 Taxmann 249. However, please refer Tuticorin Alkali judgment also.
Similar view was given in the case of CIT vs. Arihant Threads Ltd, 49 DTR 251, where it was held that Interest on deposit of margin money for opening of letter for credit for import of machinery at the stage of setting up of industrial unit of the assessee is a capital receipt and the same is to be set off against preoperative expenses
Again, similar view was given in the case of CIT vs. Siya Ram Garg (HUF), 49 DTR 126, where it was held that Interest on deposit of margin money for opening of letter for credit for import of machinery at the stage of setting up of industrial unit of the assessee is a capital receipt and the same is to be set off against preoperative expenses.
10. Termination Compensation : Termination of an agency agreement which has no major effect on profit earning apparatus, the compensation received is taxable as revenue receipt but the part of the compensation which is attributable to restrictive covenant is capital receipt and not chargeable to tax. Refer Chemet, 122 TTJ 766.
In the case of S. Zoraster & Co., 31 DTR 10, it was held that Compensation received by assessee from the other party for termination of the agreement for transfer of property to be treated as capital receipt and not as revenue receipt.
Further, in the case of CIT v Saurashtra Cement Limited, SC held that Compensation for sterilization of profit earning source is a Capital receipt.
In the case of Ansal Properties & Industries Ltd. vs. CIT, 238 CTR 126, it was held that Compensation received from the land owner on termination of development agreement was the deprivation of potential income and loss of future profits as mentioned in the settlement agreement and not for divesting the assessee of its earning apparatus, as restrictive covenant in the said agreement only prohibited the assessee from undertaking a similar project in the vicinity of the existing project without consent of the land owner for the limited duration of three years, and therefore, the compensation was a revenue receipt.
Again in the case of Ion Exchange (India) Ltd. vs. ITO, 52 DTR 411, Mumbai ITAT held that Consideration received for premature termination of the joint venture agreement constituted revenue receipt.
11. Receipt of excess cash : Excess cash received at the cash counters of the bank represents the liability to pay to the customers as and when they may demand payment, therefore such excess cash collection cannot be considered as the income of the assessee. Refer CIT v Bank of Rajasthan Ltd, 233 CTR 530.
12. Know How Acquisition : If Know how acquired relates to process of manufacture, then any payment made for said purpose would have to be considered as a revenue expenditure. Refer CIT v Munjal Showa Limited.
13. Advance : Assessee received advance of Rs. 9 crores from certain foreign buyers, however he could not export within one year as stipulated by RBI vide its regulation, notification No. FEMA 23/2000-RB dt. 3-5-2000, and assessee periodically withdrew the amount and used for other business purpose. Assessing Officer treated the said receipt as income and made addition. On appeal CIT(A) deleted the addition. The Tribunal held that on the relevant year liability to pay was existing and foreign party’s claim was still enforceable under the law. After getting the approval from RBI the assessee remitted the amount to the buyer through banking channel, therefore, the order passed by the CIT(A) was upheld. Refer, ITO vs. Eurostar Distilleries (P) Ltd, 41 SOT 434.
14. Goodwill Compensation: If good will of the business is damaged on account of action of supplier of goods and later on some compensation is awarded in lieu of that, it will fall in the same category of loss to the source of income and consequently such a receipt will qualify to be characterized as a capital receipt. Refer; Inter Gold (India) (P) Ltd. vs. Jt. CIT, 47 DTR 150.
15. Affirmative Voting : Amount received by assessee for affirmative voting on a resolution was not a business receipt, but received as bounty or wind fall for voting affirmatively and supporting a resolution and was a capital receipt. Amount received by Assessee as casual receipt in the nature of windfall and not repetitive in character would not amount to income and therefore, not liable to tax. Refer, CIT vs. David Lopes Menezes, 195 Taxmann 131.
16. Gift from Public in Large : Where the devotees out of natural love and affection and veneration used in large numbers on the birthdays of the assessee and voluntarily made gifts, it cannot be said that the amount received by the assessee by way of gift would amount to vocation or profession since it is not the case of the Department that the devotees were compelled to make gifts on the occasion of the birthday of the assessee and therefore the same were not taxable as income in the hands of the assessee. Refer, CIT vs. Gopala Naicker Bangaru, 46 DTR 480.
17. Settlement : Assessee had availed various facilities from Madurai Bank over years, repayment of which was guaranteed by way of change on properties of assessee. As assessee failed to pay dues, bank filed a civil suit. Subsequently, out of settlement was reached at an amount of ` 160 lakhs. Vide Government resolution dt. 14-12-1994 and 19-7-1995, NSSK was permitted to buy spares, plant and machinery of assessee. It was to pay, on behalf of assessee a sum of ` 160 lakhs to Madhurai Bank towards settlement of amount due. The assessee claimed that as NSSK directly paid Madurai Bank it should be excluded from the sale consideration as that never became the income of the assessee as it stood diverted of overriding title and hence, should be ignored for the purpose of calculating capital gain. The Tribunal held that payment to bank is only application of income not a charge on income. The payment to bank and sale consideration of its assets are entirely two distinct transactions having no relation with each other except for the fact that there was a charge by bank on assets. Hence, amount not deductable from sale consideration. Refer, Shree Changdeo Sugar Mills Ltd. vs. Jt. CIT, 44 SOT 479.
18. Income from NPA : Income from non‐performing assets should be assessed on cash basis and not on mercantile basis despite of the assessee maintaining accounts on mercantile basis. Refer, CIT v. Canfin Homes Ltd., 201 Taxman 273.
However, in the case of Rohini Holdings (P) Ltd v CIT, 202 Taxman 341, the Madras High Court held that Assessee advanced certain amount against mortgage. Right from date of granting loan borrowers had neither paid principal amount nor interest `amount. The guarantor company has declared as sick company. Assessee has not shown the interest on the ground that enforceability of mortgage as a mode of recovery being complicated. The court held that, mere difficulty in successfully enforcing mortgage does not make debt bad, therefore interest was assessable on accrual basis in assessment years 2000-01 to 2002-03 and amount of such interest would be reduced from amount of interest offered in assessment year 2003-04.
19. Estate/ Trust : Assessee, administrator of the estate of deceased, having purchased the right to receive the sale proceeds of the estate by entering into an indenture with the legatee on account of close personal relations with her and not for overriding commercial considerations. The transaction cannot be construed as an adventure in the nature of trade. The aid receipt cannot be taxed even as capital gains as the estate continued to be the owner of the properties and as such payment did not result in extinguishment of assessee’s right hence there was no transfer of any capital asset. Refer, Dy CIT v Nusli Neville Wadia, 61 DTR 218.
20. Payment Received under degree of Court : In year 2004, the assessee had purchased certain land. On the eastern side of property, “P” a public company of developers, had trespassed assessee’s property by using a private road to reach their land located the said property. To get the encroached portion retrieved, the assessee filed civil suit for restraining that company’s entry on assessee’s land. As per the Court decree resulted in to by way of compromise between parties, the assessee permitted the use of private road enabling “P” to reach its property and in turn “P” paid certain amount to assessee. The assessee treated the said receipt as capital receipt. The assessing officer treated the said receipt as rent and taxable as income from house property. Commissioner (Appeals), reversed the finding of Assessing Officer. The Tribunal held that there being no relationship of land lord and tenant, between parties, amount received by assessee was only a capital receipt could not be taxed under the Act being an intangible asset having no cost. The Tribunal also held that the said receipt cannot be taxed as income from other sources . Refer, Dy. CIT v. T. Kannan, 48 SOT 374.
21. Interest on income tax not deductible : Assessee earned interest income on income tax refund. It also paid interest on late payment of tax. Assessee claimed that interest paid by it was to be set off against interest received and it was only net interest was liable to tax. The assessing officer rejected the claim. The Tribunal confirmed the view of the Assessing Officer that the gross interest was liable to be assessed. Refer, Dy. CIT v. Sandvik Asia Ltd., 133 ITD 126.
The above analysis is based on the recent judgment .