Income Tax Act, 1961

--Income--Capital or revenue receipt Amount received on transfer of business--AA, a firm, wanted to invest as strategic investor in a company engaged in the business of merchant banking. Assessee-company was engaged in business of merchant banking and RS the managing director of assessee (transferor) incorporated a wholly-owned subsidiary, inducted AA as strategic investor in the company. AA purchased shares from assessee and RS, with a view to comply with adequacy of requirements to receive SEBI licence, AA subscribed Rs. 50 Million as shares issued by new company. Assessee surrendered its SEBI licence and transferee received SEBI licence for merchant banking. Assessee changed its name and ceased to use its trademark and transferred these to the new company. Assessee showed consideration of Rs. 25 lakhs for transfer of its intangible assets of merchant banking business. Assessing officer treated the same as revenue receipt being compensation chargeable to tax. Commissioner (Appeals) upheld order of assessing officer. Held: Not justified. As assessee had discontinued its business consideration received by assessee was a capital receipt and not revenue in nature, i.e., compensation as treated by Commissioner (Appeals).

Assessee has received Rs. 2.5 million (Rs. 25 lakhs) as consideration for transfer of the business and contracts. In view of that matter, there is no justifiable reason on the part of the authorities below to consider the transaction as sham which involves colourable device. [Para 9] Firstly, whether the amount of Rs. 25 lakhs is in the nature of compensation to the assessee received in the course of carrying on business activity and has resulted in no loss of capital structure. It is pertinent to mention that according to the judgment of the Calcutta High Court in CIT v. Siewart and Dholakia (P.) Ltd. 1974 TaxPub(DT) 45 (Cal-HC) : (1974) 95 ITR 573 (Cal), compensation to the assessee received in the course of carrying on business activity is a trading receipt only if it is received for injury to trade. If any amount is received as compensation for an injury which affects a capital asset of the assessee or the capital structure of the assessee's business, such amount may normally be considered to, be a capital receipt. If, however, any amount is received by an assessee as compensation or damages for any wrong done which does not affect any capital asset or the capital structure of the assessee's business but causes injury to the assessee in its trade, such amount will normally constitute a trading receipt of the assessee. Considering the fact that the assessee has received Rs. 2.5 million (Rs. 25 lakhs) as consideration for transfer of the merchant banking business to the transferee and the assessee has discontinued its business, the impugned receipt is capital in nature and not in the nature of compensation received during the course of business as has been found by the Commissioner (Appeals).