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Facts
M.J. Associates, a partnership firm, received compensation of Rs. 25,71,00,000/- for the termination of its exclusive lottery distribution agreement in Kerala. The assessee claimed this as a capital receipt, revising its income return for AY 2012-13 to reflect a loss. The Assessing Officer (AO) completed the assessment under Section 143(3), treating the compensation as a revenue receipt, which was upheld by the CIT(A).
Held
The Tribunal held that the compensation received by the appellant firm for the termination of the distribution agreement constituted a loss of a source of income (profit-making apparatus) and was therefore a capital receipt, not taxable. The Tribunal also rejected the CIT-DR's plea for remand of the matter to the AO, stating that remand cannot be used to patch up weak points in the case.
Key Issues
Whether the compensation received by the assessee for the termination of a distribution agreement is a capital receipt or a revenue receipt, and thus whether it is taxable. Whether the matter should be remanded to the Assessing Officer for further examination.
Sections Cited
143(3)
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Income Tax Appellate Tribunal, COCHIN BENCH
Before: SHRI INTURI RAMA RAO, AM & SHRI SOUNDARARAJAN K., JM
O R D E R Per: Inturi Rama Rao, AM These appeals filed by the assessee are directed against different order of the National Faceless Appeal Centre, Delhi [CIT(A)], dated 30.07.2024 for Assessment Year (AY) 2012-13 and 31.07.2024 for AY 2013-14.
Since identical issues are involved in these appeals, they are heard together and disposed of by this common order. For the sake of convenience and clarity the facts relevant to the appeal bearing for AY 2012-13 are stated herein.
& 785/Coch/2024 M.J. Associates 3. Brief facts of the case are that the appellant is a partnership firm duly incorporated under the Partnership Act. The return of income fo AY 2012-13 was filed on 30.09.2012 declaring income of Rs. 5,57,74,320/-. The same was revised on 05.10.2012. Again the said return of income was revised on 27.052013 at a loss of Rs. 20,13,25,685/-. The difference between the revised income is on account of claiming compensation receipt of Rs. 25,71,00,000/- as capital receipt. Against the said return of income, the assessment was completed by the ACIT, Circle-, Palakkad (hereinafter called "the AO") vide order dated 14.02.2014 passed u/s. 143(3) of the Income Tax Act, 1961 (the Act) at total income of Rs.5,57,74,310/-. While doing so, the AO made addition of the compensation of Rs. 25,71,00,000/- received by the appellant firm from M/s. Future Gaming Solutions (India) Pvt. Ltd. by holding it to be revenue receipt.
4. The factual backgrounds leading to the above addition as extracted by the AO is as under: -
“The assessee firm had entered into a commercial agreement with one M/s.Future Gaming Solutions (India) Private Limited (FGSIPL) on 14-12-2007. For exclusive right for distribution of the lotteries of the Govt of Bhutan in the State of Kerala for a period of 7 years through the associate of FGSIPL viz M/s.Megha Distributor, Palakkad. The assessee had established a wide network of stockist all over Kerala and was doing business since 01-01-2008 on 13- 06-2010 all of a sudden M/s.Megha Distributor, under & 785/Coch/2024 M.J. Associates instruction from FGSIPL terminated the distributorship of the assessee in Kerala. M/s.Megha Distributor took over the existing Stockiest network of the assessee and started selling lotteries directly to the stockist from 14-06-2010 onwards. Due to the termination of the agreement, the source of income was totally severed whereby the profit earning apparatus could never to utilised by the assessee. The entire customer network was taken over by the other party to the agreement. The assessee filed several suits in various courts/forums for continuation of the agreement or for suitable compensation. After lengthy discussions and on the arbitration of senior advocates the other party FGSIPL and their associate M/s.Megha Distributor agreed to pay lump sum compensation to the assessee on the condition of withdrawal of all suits against them. Under the above circumstances, the assessee received a compensation of Rs.25,71,00,000/- from FGSIPL during the A.Y.2012-13. Therefore, the compensation received by the assessee is a capital receipt. Under similar facts of the assessee, the Madras High Court has held in CIT V Ambadi Enterprises Ltd (2004) 267 ITR 0702 and in CIT V. TL & M Sales Ltd (2003) 259 ITR 116 (Mad) that the compensation received by the assessee for loss of profit making apparatus is a capital receipt.”
5. The appellant firm claimed that the compensation amount of Rs. 25,71,00,000/- is capital receipt and exempt from tax as held by the Hon'ble Madras High Court in the case of CIT v. Ambadi Enterprises Ltd. [2004] 267 ITR 702 and CIT v. TL&M Sales Ltd. [2003] 259 ITR 116.
6. However, the AO was of the opinion that on account of cancellation of the contract of distribution vide settlement deed & 785/Coch/2024 M.J. Associates dated 04.07.2011, the business of the appellant firm had not resulted in closure nor deprived the appellant from carrying on similar line of business in the absence of any restrictive covenant. Therefore, he proceeded to hold that the compensation received other than the purpose of placing restrictive covenant is revenue in nature, placing reliance on the decision of the Hon'ble Apex Court in the case of Gufic Chem P. Ltd. v. CIT 332 ITR 602. Accordingly brought to tax the compensation received.
Being aggrieved, an appeal was filed before the CIT(A), who vide the impugned order, after analysing various judicial precedents and also placing reliance on the decision of the Hon'ble Supreme Court in the case of Oberoi Hotel (P) Ltd. v. CIT 236 ITR 903 held that the compensation received is revenue in nature.
Being aggrieved, the appellant is in appeal before us in the present appeal.
It is submitted by the learned counsel for the assessee that the compensation in question was received by the appellant firm for settlement of dispute that arose as a result of breach of contract. Therefore, the AO as well as the CIT(A) ought not to have held that the absence of non competitive clause will make the compensation revenue in nature. He further submits that the findings of the AO that cancellation of contract had not deprived of the appellant from carrying on business, failing to appreciate that it amounts to loss of & 785/Coch/2024 M.J. Associates source of income. He submitted that the compensation received as a consequence of settlement in order to bring an end to the dispute arising on account termination of contract is capital in nature placing reliance of the decision of the Hon'ble Bombay High Court CIT v. Parle Soft Drinks (Bangalore (P.) Ltd.) 400 ITR 108 and also placing reliance on the decision of the Hon'ble Apex Court in the case of e of Oberoi Hotel (P) Ltd. v. CIT 236 ITR 903.
On the other hand the ld. CIT-DR filed the following submissions: - “1. This is not a case of receipt of compensation for loss of revenue or investment or damages etc. as made out to be by the appellant. Instead it is a clear case of orchestrated attempts between two partners of the appellant Firm to derive undue financial gain as is evident from the records (a close perusal of agreements dated 14.11.2007 & 15.12.2007; partnership deed dated 14.12.2007; letters dated 26.06.2010, 13.07.2010 and 24.07.2010 and particularly deed of termination and settlement dated 04.07.2011 would reveal the same). 2. The said termination of agreement letter dated 26.06.2010 talks about terminating the agreement dated 15.08.2008 whereas the fact is there is no such agreement has been ever made which is clarified in the letter dated 24.07.2010 by one of the partners viz., Sh, N Jayamurugan which has not been contended by anyone. Therefore the impugned termination letter has no legitimacy and no sanctity. And therefore there is no termination of any kind as claimed by the appellant Firm. 3. The deed of termination and settlement dated 04.07.2011 has no legal sanctity for the following reasons; i. It is entered into by partners of the appellant Firm in their individual capacity and an unrelated person viz., M/s Future & 785/Coch/2024 M.J. Associates Gaming Solutions Pvt. Ltd. Which has entered as the 4th Party (in which one of the partners of the appellant Firm viz., Shri. S Martin is the shareholder director). ii. M/s Future Gaming Solutions Pvt. Ltd. has no locus standi to be a party to the impugned deed as it has never ever entered into any agreement with the appellant Firm in connection with its business or otherwise. iii. Surprisingly and most importantly, this party viz., M/s Future Gaming Solutions Pvt. Ltd. has made payment of Rs.55,45,00,000 to the appellant Firm pursuant to the said deed which it has claimed as "revenue expenses" in its books. iv. Thereafter both the partners of the appellant firm viz., Shri. S Martin and Shri. N Jayamurugan withdrawn the amounts from the firm as "withdrawals", as is evident from records. v. The said deed is a "mutually agreed" one (as evident from page 6 of the deed), solely made for the purpose of sharing Rs.55,45,00,000 between the said two partners. vi. In page 7 of the deed of termination and settlement dated 04.07.2011, it is, inter alia, stated that on the appellant Firm furnishing in writing proof of withdrawals of all suits etc. or furnishing an undertaking that they withdraw all litigation etc......a further sum of Rs.29,74,00,000 shall be paid. This stipulation is void and infructuous. As can be seen that all the suits etc, are dismissed as "withdrawn" and "not pressed" by the Hon'ble Courts on 12.04.2011 and 23.06.2011 well before the date of the deed which is 04.07.2011. This very fact nullifies the entire legitimacy and reliability of the deed and unmasks the plan of the two partners of the appellant Firm to derive undue monetary mileage.
Further both the partners of the appellant Firm have their own infrastructure in the state of Kerala for lottery business and the impugned arrangement is made to avoid competition among them and to form synergy of their expertise. The appellant Firm has not created any new infrastructure (profit & 785/Coch/2024 M.J. Associates making apparatus etc.) for the said purpose. Therefore the argument that the Firm has lost its profit making apparatus etc. is not factually correct. They remain as it were and the business is being carried out by the parties as usual.
Therefore the impugned sum of Rs. 55,45,00,000 coming to the appellant Firm from one of partner's company (Shri. S Martin) and thereafter the same getting shared between two partners (the other one Shri. N Jayamurugan who has filed frivolous suits etc.) can at best be termed as "windfall gain" for the Firm made to happen by the two for their personal benefits using the appellant Firm. Therefore the same can not at any stretch of imagination be termed as "capital receipt".
In view of the above, it is very much evident that the impugned sum of Rs.55,45,00,000 is purely a revenue receipt in the hands of the Appellant Firm and a taxable profit very much in the hands of the Firm. Partners making withdrawals from the Firm's profit is a natural corollary of Firm's constitution.
7. In view thereof, it is prayed to dismiss these two appeals”.
We have heard the rival contentions and perused the material available on record. The question arose for our determination is whether the compensation received by the appellant firm on settlement of the dispute arising out of termination of agreement is capital receive or revenue receipt. The appellant firm had entered into an agreement with Martin Lottery Agencies Ltd. on 14.12.2007 and with Mega Distributors on 15.12.2007 for selling of lottery tickets in the state of Kerala. The said agreement was terminated vide notice dated 26.06.2010 and the appellant filed a O.P. (Arb) No. 674 of 2010 on 23.06.2011 and finally entered into a deed of termination and settlement on 04.07.2011 in consideration of & 785/Coch/2024 M.J. Associates payment of compensation of Rs. 25,71,000/- during the FY 2012-13. Clause 9 of the deed of termination and settlement reads as under: - “The Second and Third Parties hereby have agreed to withdraw all the legal suits filed in various forums against the parties of the First, Fourth and Fifth Parts with respect to the lottery business in the State of Kerala.”
In the above background, the question that is to be determined by us is whether this compensation received by the appellant firm towards the appellant agreeing to withdraw the suit filed against the parties or towards termination of the original agreement. Even assuming, for a moment, that the compensation was received on account of termination of original agreement, it is nothing but a compensation received for loss of source of income, which is capital in nature in view of the judgement of the Hon'ble Supreme Court in the case of Oberoi Hotel (P) Ltd. v. CIT 236 ITR 903 and Hon'ble Bombay High Court in the case of CIT v. Parle Soft Drinks (Bangalore (P.) Ltd.) 400 ITR 108.
Even otherwise if it is considered as a compensation for withdrawal of suit, the same is in the nature of proprietary right (personal right) not a capital asset. The compensation received can held to be in the nature of damages for breach of agreement, which is capital in nature. Therefore, it is personal in nature and cannot be brought to tax. Reliance in this regard can be made on following decisions: - & 785/Coch/2024 M.J. Associates i) CIT vs. hiralal Motilal Mody [1981]131 ITR 421 (Guj.) ii) CIT vs. Asoka Marketing Ltd. [1987] 164 ITR 664 (Cal.) iii) CIT vs. Dhanraj Dugur [1982] 137 ITR 350 (Cal.)
Therefore, the compensation received by the appellant firm for entering into the termination agreement is not taxable as the same is in the nature of capital receipt. Accordingly, the orders of the lower authorities are hereby set aside and direct the AO to delete the addition.
As regards the submission of the ld. CIT-DR for remand of the matter to the file of AO to find out the true nature of the transaction, it cannot be accepted in view of the fact that the order of remand cannot be made to patch up the weak points in the case to either party to the litigation. Reliance can be placed on the following decision of the ITAT: i. Asst. CIT v. Anima Investment Ltd. (2000) 73 ITD 125 (Delhi); ii. Asst. CIT v. Arunodoi Apartments (P.) Ltd. (2002) 123 Taxman 48 (Gau.) The Courts have held that appeals are not to be decided for giving 'one more innings' to the lower authoriti in the appellate jurisdiction. i. Rajesh Babubhai Damania v. CIT ((2001) 251 ITR 541) (Guj.) iⅱ. CIT v. Harikishan Jethalal Patel (1987) 168 ITR 472 (Gui.) Remand not for the benefit as held by Hon'ble Gujarat High Court in the case of CIT v. Harikishan Jethalal Patel [1987] 169 ITR 472, the relevant portion of the same is extracted as under:
& 785/Coch/2024 M.J. Associates “Even the Hon'ble Karnataka High Court in the case of Karnataka Wakf Board v. State of Karnataka, reported in AIR 1996 Kar.55 at pages 63 & 64 held as under: "Where the party had an opportunity of adducing evidence in the case but with open eyes failed to adduce that evidence, the case should not be remanded to give a second chance to the party to adduce that evidence. The policy of the law is that once that matter has been fairly tried between the parties, it should not, except in special circumstances, be reopened and retrieved. In a recent decision their Lordships of the Supreme Court laid down that power to order retrial after remand, where there had already been a trial on evidence before the court of first instance, cannot be exercised merely because the Appellate Court is of the view that the parties who could lead better evidence in the Courts of first instance have failed to do so. The Hon'ble Tribunal, Delhi bench in the case of Zuari Leasing & Finance Corporation Ltd. v. ITO (2008) 112 ITD 205(Delhi) (TM), following the case-laws referred to above held that the Tribunal should not remand back to the file of the AO in order to give a second innings to the litigant. Therefore, following the principles enunciated in the above decision, we are unable to remand the present assessment order to the file of the AO for de novo examination as no case was made out by the assessee- firm that it was prevented by sufficient reasonable cause from filing necessary evidence in support of receipt of actual services from the AE. Simply because in earlier years the issue was remanded back to lower authorities, remand cannot be ordered in the present year without valid reason in the light of the decisions cited supra. Needless to mention that each year is an independent and separate assessment year and the principle of res-judicata is not applicable."
In the result, the appeal filed by the assessee stands allowed.
& 785/Coch/2024 M.J. Associates 17. Since identical issued are involved in 2024, the above findings are mutatis mutandis apply to this appeal also, hence, the same is allowed.
In the result, both the appeals filed by the assessee stand allowed.
Order pronounced in the open court on 19th May, 2025.