Capital or revenue receipt: Test: A. Y. 1997- 98: assessee receiving amount in terms of release agreement: Compensation for loss of source of income: Capital receipt: Not taxable:

The assessee is a firm of Chartered Accountants. Since 1983, the assessee had an arrangement with a foreign firm whereunder the foreign firm referred work to the assessee through a Calcutta firm in respect of clients based in Delhi and nearby areas. The arrangement was reduced to writing in 1992. In 1996, the foreign firm wanted a firm of Chartered Accountants of Bombay to represent its work in India. Accordingly, an agreement was entered into on 14-11-1996, which was called a release agreement, under which the assessee was to no longer represent the foreign firm in India and thereafter the foreign firm would not refer any work to the assessee. In consideration of the termination of the services of the assessee, the assessee received an amount of Rs. 1,15,70,000/- in terms of the release agreement. The assessee claimed the amount to be capital receipt. The assessing Officer assessed the amount as professional income. The CIT(A) deleted the addition. The Tribunal upheld the decision of the Assessing Officer.

On appeal by the assessee, the Delhi High Court reversed the decision of the Tribunal and held as under:

“i) The fact that the assessee continued its business or its usual operations even after termination of an agency is of no consequence. If the receipt represents compensation for the loss of a source of income, it would be capital and it matters little that the assessee continues to be in receipt of income from its other similar operations.

 ii) There was no evidence that the assessee had entered into similar arrangements with other international firms of Chartered Accountants. The arrangement with the foreign firm was in operation for a fairly long period of 13 years and had acquired a kind of permanency as a source of income. When that source was unexpectedly terminated, it amounted to the impairment of the profit-making structure or apparatus of the assessee. It was for that loss of the source of income that the compensation was calculated and paid to the assessee.

 iii) The compensation was thus a substitute for the source. Therefore, the amount of Rs. 1,15,70,000/- received by the assessee in terms of the release agreement represented a capital receipt, not assessable to tax.”