COMMISSIONER OF INCOME TAX Vs. LOHADA J B

JUDGEMENT

(1.) THE Tribunal, Hyderabad, has referred the following five questions under S. 256(2) of the IT Act, 1961. They are :

(2.) THE assessee is the managing director of "Sunder Shila (P) Ltd.". He filed a return on August 22, 1973, for the asst. year 1971 72 disclosing an income of Rs. 14,614, comprising of Rs. 12,000 being the salary received from the said company, and Rs. 5,614 being the interest received from bank less Rs. 3,000 deductible therefrom under S. 80L. This return was filed in his individual capacity. At about the same time, he filed a return in respect of the HUF of which he was the Karta. In Part III of this return, he stated that he had received a sum of Rs. 2,00,000 from the Nizam of Hyderabad in pursuance of agreement dt. November 3, 1969, towards liquidt. damages but that the said sum belongs to him in his individual capacity, The ITO, alerted by the said entry in Part III of the return filed by the HUF, sought to include the said sum of Rs. 2 lakhs in the individual assessment of the assessee. According to him, the said amount constituted the assessee's income by virtue of cl. (ii) of S. 28 of the IT Act. He overruled the contention of the assessee that it represented a capital receipt in his hands. He noticed further that the assessee had received another sum of Rs. 55,000 from the Andhra Pradesh Industrial Development Corporation Ltd. (APIDC), which was paid to him on behalf of the Nizam in pursuance of the agreement aforesaid, by way of interest With respect to this amount, the assessee's case was that he had apportioned the said interest amount among the relevant assessment years and that the whole of it cannot be included in the income of the asst. yr. 1971 72. This contention was rejected and the said amount also was included in the assessee's individual income. The order of the ITO was upheld by the AAC. A further appeal to the Tribunal, however, proved successful. The Tribunal held (i) the amount of Rs. 2 lakhs was paid by the Nizam on account of termination of the earlier agreement dt. July 23, 1964 ; that the said earlier agreement constituted a profit making apparatus and a capital asset in the hands of the assessee and, therefore, the receipt was capital in nature ; even if the said amount is treated as liquidt. damages, it cannot be treated as a revenue receipt; (ii) the sum of Rs. 2 lakhs cannot be treated as income, under S. 28(ii)(a.) of the Act, inasmuch as it cannot be treated as a payment on account of termination of the managing directorship of the assessee. The assessee had resigned the managing directorship two years ago ; there was no real or reasonable connection between the resignation/termination of the managing directorship and the said payment; (iii) in any event, the said amount of Rs. 2 lakhs cannot be brought to tax in the accounting year relevant to the asst. yr. 1971 72, and (iv) so far as the interest amount of Rs. 55,000 was concerned, it is not includible in the income for the said assessment year, for the reason that it cannot be said to have been received in the accounting year relevant to the asst. year 1971 72. Of the five questions, questions Nos. (1) to (3) deal with the sum of Rs. 2 lakhs and questions Nos. (4) and (5) with the interest amount of Rs. 55,000.

(3.) IT is evident from the above facts that a proposed venture, which had been acted upon to some extent, suddenly failed on account of the refusal of the successor Nizam to abide by the agreement. It appears that the assessee threatened the successor Nizam with a suit for specific performance or in the alternative for damages for breach of contract. Negotiations were held between them, which ultimately resulted in the agreement dt. November 3, 1969. Under this agreement, the successor Nizam agreed to pay a sum of Rs. 2 lakhs by way of liquidt. damages in full and final settlement of all the demands and claims of the assessee against the Nizam, arising from the non implementation of the aforesaid agreement, etc. The amount was to be paid to the assessee in the manner specified in the agreement. Besides the above, a further sum of Rs. 55,000 was also to be paid by the successor Nizam towards interest on the said sum of Rs. 2 lakhs. In accordance with this arrangement, the assessee received a sum of Rs. 2,55,000 on February 23, 1970, in the form of a cheque issued by the APIDC, as contemplated by the agreement dt. November 3, 1969.