V.K.SINGHAL,J. - (1.) THE Tribunal has referred the following question of law arising out of its order dt. 13th Feb., 1986, for the asst. year 1974 75 : "Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the compensation of Rs. 20,000 paid by the assessee company to M/s Zoraster and Co. is allowable as business expenditure ?"
(2.) THE brief facts of the case are that the assessee owed a sum of Rs. 15,000 from M/s S. Zoraster & Co. and in order to liquidate the said liability entered into an agreement to purchase the cinema building along with accessories known as 'Prem Prakash' at Jaipur. The consideration for the said transfer was agreed at a figure of Rs. 17 lakhs and in the agreement entered into it was provided that the effect to the agreement shall be given within a period of five years from the date of agreement. It was also provided that if the assessee fails to fulfil the agreement, then it would pay Rs. 20,000 to M/s S. Zoraster & Co. The case of the assessee company is that subsequently they realised that the objects contained in the memorandum of association did not permit to run a cinema and, therefore, the assessee cannot go ahead with the said agreement and backed out. In view of the clause contained in the agreement an amount of Rs. 20,000 was paid to M/s S. Zoraster & Co. as compensation. The said amount was claimed as deduction in the IT assessment proceedings for the asst. year 1974 75. The ITO was of the view that the expenditure is of capital nature and, therefore, it cannot be allowed under S. 37 of the Act. In appeal before the CIT(A) it was found that the compensation has been paid to a sister concern and is not in the course of money lending business, but in the course of an agreement to purchase the picture hall which is not covered with the object clause of the company and, hence, the compensation was not paid in the course of assessee's business. The disallowance was upheld. In the second appeal before the Tribunal, it was found by the Tribunal in its order dt. 31st Dec., 1993, that the amount has been considered as income in the hands of M/s S. Zoraster and Co. The Tribunal found that the intention of the assessee company was clear that the transaction was entered into with a view to clear old outstanding dues and when they realised that the company cannot run the cinema as it was not provided in the objects clause of the company, the agreement was not honoured. The Tribunal found that the expenditure of compensation was in the nature of exploration in respect of project which project subsequently having been realised as not viable was abandoned. The expenditure of compensation was accordingly allowed as the business expenditure. 3. In the case of CIT vs. MCTM Corporation Pvt. Ltd. (1995) 124 CTR (Mad) 290 : (1995) 211 ITR 95 (Mad), the Madras High Court has considered the case of the assessee company which was engaged in the trading, investment and money lending business and negotiated for the sale of a house belonging to it. The sale was not completed and the amount of advance was forfeited. The question was raised that the said forfeited amount constitute income of the assessee and as such is liable to tax. The High Court observed that the amount forfeited is recorded as estimate of the loss or profit which the assessee would otherwise have made on the transaction being completed. The buyer was freed from the obligation to buy the house and the assessee was also enabled to offer the house for sale to others. The amount forfeited represented compensation for the loss of income or the profits, to the assessee and has to be regarded as revenue receipt as the capital assets continued to exist as before, not in any manner affecting activities of the assessee.
(3.) IN the case of CIT vs. Balaji Chitra Mandir (1985) 45 CTR (AP) 206 : (1985) 154 ITR 777 (AP), the Andhra Pradesh High Court observed that where compensation is paid to a person for cancellation of a contract which does not affect the trading structure of his business nor deprive him of what, in substance, is his source of income, termination of the contract being a normal incident of the business and such cancellation leaves him free to carry on his trade, the receipt is revenue. Where, however, by the cancellation of an agreement, the trading structure of the assessee is impaired or such cancellation results in loss of what may be regarded as the source of the assessee's income, the payment made to compensate for cancellation of the agreement is normally a capital receipt. In CIT vs. Rai Bahadur Jairam Valji and Ors. (1959) 35 ITR 148 (SC) : TC 13R.629, it was observed by the apex Court that when once it is found that a contract was entered into in the ordinary course of business, any compensation received for its termination would be a revenue receipt, irrespective of whether its performance was to consist of a single act or a series of acts spread over a period. In this respect it differs from an agency agreement. It was also observed that where a person who is carrying on business is prevented from doing so by external authority in exercise of a paramount power and is awarded compensation therefor, whether the receipt is a capital receipt or a revenue receipt will depend upon whether it is compensation for injury inflicted on a capital asset or on a stock in trade. In the case of Glenboig Union Fireclay Co. Ltd. vs. IRC 12 Tax Cases 427 (HL), it was held by the House of Lords that the amount received for compensation in respect of fireclay left unworked was not a profit earned in the course of the company's trade, but was a capital receipt, being a payment made for the sterilisation of a capital asset. The amount received as damages for the wrongous interdict was not a trading profit of the company, but was merely the equivalent of expenditure incurred in protecting a capital asset which subsequently turned out to be unproductive owing to the exercise by the railway company of its statutory powers. ;