(2014) 102 DTR 151 (Mum) 3i Infotech Ltd. vs. ACIT A.Y. 2003-04 Dated : 21-08-2013

FACTS:
The assessee has been providing back-office services to ICICI bank in respect of retail lending business of ICICI Bank comprising of housing loans, auto loans, credit cards etc., for providing such services the assessee had put in place adequate resources in terms of office space, software, IT infrastructure, manpower sources with technical skill, managerial and other skills required to handle such activity.

With a view to exercise control over the activities and to reduce cost, the bank has decided to carry on the activities independently. On termination of the agreement, the assessee received Rs. 15 crore from the bank as compensation for loss of business/future earning/transfer of knowledge. The assesssee claimed that it has given up one source of income completely for which compensation has been received. Such compensation is towards loss of business order and towards loss of one source of income which has affected the profit-making structure of the assessee and the same is accordingly a capital receipt.

The AO did not accept such claim of the assessee and considered the said amount as revenue receipt. The main basis on which the AO has held this issue against the assessee is that there is no transfer of any asset or business expertise or IPR or such item which is normally transferred when such type of business is transferred by one entity to another. Another ground on which the AO rejected the claim of the assessee was that there is no clause in the agreement which restrain or restrict the assessee from continuing the aforementioned activities and the assessee is free to carry on such activities, if it so desired. Further, it was also contended that the abovementioned activities of the assessee were continued in respect of subsequent period also and there was no loss of business or one source of income. Thus, it was argued by the Revenue that there was no absolute erosion of such source.

HELD:
It was a case where the compensation has been received by the assessee on losing its rights to receive income in respect of services rendered by the assessee to the bank. In the facts and circumstances of the case it is a loss of source of income to the assessee and compensation has been determined on the basis of said loss. According to arguments of the learned Departmental Representative, the assessee company has not given up its entire activity of rendering back office services as the assessee has been earning income from such activity even after termination of such agreement. Therefore. it is the case of the learned Departmental Representative that the amount received by the assessee should be considered as income in the nature of revenue. However, such argument of the learned Departmental Representative does not find support from the decisions of the Hon’ble Supreme Court in the cases of Oberoi Hotel (P) Ltd. vs. CIT 236 ITR 903 (SC) and Kettlewell Bullen & Co. Ltd. vs. CIT 53 ITR 261 (SC). It has been observed that it is irrelevant that the assessee continued similar activity with the remaining agencies. So, the relevant criteria to decide such issue is that whether or not the assessee has lost one of its sources of income. In the present case, the assessee has lost its source of income with respect to  its agreement entered into by it with the bank. It is also the case of the assessee that it has never rendered such services to any other person right from the inception and there is no material on record to contradict such argument of the assessee. Therefore in view of the facts it was held that the compensation received by the assessee was in the nature of capital receipt.