Subject

Taxation law

topic
Assistant Commissioner of Income Tax (ACIT)
vs.
Jackie Shroff

Pritam Muhuri
B.Com. LLB (08)
10th Semester, 5years.
 Subject Matter

 Charge of income-tax.
Section 4 of the Income-Tax Act, 1961 (the Act), is the basic charging section under which
income-tax is chargeable on the total income of every person. The word “income” is defined
under section 2(24) of the Act.

Section 2(24): The income includes profits and gains, dividend and voluntary contributions
received by a trust created wholly or partly for charitable. The trust" includes any other legal
obligation.

Section 4:  

i. Where any Central Act enacts that income-tax shall be charged for any assessment
year at any rate or rates, income-tax at that rate or those rates shall be charged for that
year in accordance with, and subject to the provisions (including provisions for the
levy of additional income-tax) of, this Act in respect of the total income of the
previous year of every person :

Provided that where by virtue of any provision of this Act income-tax is to be charged in
respect of the income of a period other than the previous year, income-tax shall be charged
accordingly.

ii. In respect of income chargeable under sub-section (1), income-tax shall be deducted
at the source or paid in advance, where it is so deductible or payable under any
provision of this Act.

As per section 14, all income, for the purpose of charge of income-tax and computation of
total income, is classified under five heads of income.

 Section 15 “Income from salaries”,

Income from salary includes wages, pension, annuity, gratuity, fees, commission, profits,

leave encashment, annual accretion and transferred balance in recognised Provident Fund
(PF) and contribution to employees pension account.

 Section 22 “Income from house property”,

Income from house property shall be taxable under this head if following conditions are
satisfied:

a. The house property should consist of any building or land appurtenant thereto;
b. The taxpayer should be the owner of the property;
c. The house property should not be used for the purpose of business or
profession carried on by the taxpayer.
  Section 28 “Profits and gains of business or profession”,

Profit and gains of business or profession” is one of the heads of income under the Income
Tax Act. ... While filing an income tax return, the taxpayer must declare the amount
of profits and gains of business or profession in case the assessee is having any such income.

 Section 45 “Capital gains” 

Any Income derived from a Capital asset movable or immovable is taxable under the
head Capital Gains under Income Tax Act 1961. The Capital Gains have been divided in two
parts under Income Tax Act 1961. One is short term capital gain and other is long term
capital gain.

 Section 56 “Income from other sources”.

Income which is not exempt and cannot be charged under the heads of salary, income from
house property, profits and gains from business or profession, or capital gains, form income
from other sources for taxation purpose. All dividends received are taxable under the head
of income from other sources.
 Facts

Shroff got $1.5 million (69.8 million at the time) from one Sudesh Iyer.
He did not offer it for taxation.

The issue dates back many years when the actor and others proposed
bringing Sony TV channel to India. A company Atlas Equfin was
incorporated to hold shares in Multi Screen Media India (MSM), owners
of the Sony TV channel. The aggregate share holding of Atlas and
another Mauritius-based company, Grandway Global Holdings, in
MSM was 23 per cent.

In 1995, Atlas and Grandway were trying to exit MSM and Standard

Chartered Bank, Singapore (SCB) was given the mandate. The actor
refused to sign it but found his signature on the mandate.

In 2010, Shroff filed a complaint with the Mumbai police's economic

offences wing (EOW) for an investigation into the matter. He had, he
said, never signed that mandate.

After the complaint was made, he was approached to settle the matter
amicably. In January 2011, a deed of settlement was signed between the
actor and Sudesh Iyer for settling the dispute. According to the terms,
Iyer agreed to pay a sum of $3,500,000 on the condition that Shroff
withdraw the criminal complaint.

The amount was to be paid in two instalments. Shroff withdrew his

EOW complaint and got the first instalment of 69.8 million. Since the
amount was compensation, the actor argued, he treated it as capital
receipt and non-taxable. However, the I-T assessing officer disagreed
and held the amount be treated as Shroff's income and hence taxable. 
 Issue

i. Whether the compensation received by assessee for

withdrawing criminal complaint was a capital receipt or
revenue receipt?
Why capital receipt is not taxable?

Profit motive to not decisive of the question whether a particular receipt is capital or income.
An accretion to capital does not become taxable income merely because an asset is acquired
in the hope that it may be sold at a profit.

Can capital receipt be taxed?

The Capital Receipts are to be charged to tax under the head “Capital Gains” and Revenue

Receipts are Taxable under other heads, it is of vital importance to understand
which receipt is a capital receipt and which one is a revenue receipt.

What are Capital Receipts?

Capital receipts are cash inflow in business arising from financial (capital) activities and not
the operating activities of the business. These are receipts resulting from activities which are
occasional or not of routine nature. Capital Receipts are not the regular or main source of
income for an organisation. Thus it either creates a liability or reduces the assets for the
business entity. And, because of its capital nature such receipts are shown in the balance
sheet of a company and not the income statement or Profit and Loss account.

From the above definition, it’s clear that a receipt can be called capital receipt if it adheres to
at least one of the following conditions --

 It must create a liability. For example, if a company takes a loan from a bank or a
financial institution, then it would create a liability. That’s why it is a capital receipt in
nature. But if a company received a commission for using its expertise in producing a special
type of product for another company, it would not be called a capital receipt because it didn’t
create any liability.
 It must reduce the assets of the company. For example, if a company sells out its
shares to the public, it would help reduce the asset, which could create more money in the
future. That means it should be treated as a capital receipt.
 Types of Capital Receipts

Capital receipts are divided into three groups-

a. Borrowings:-
It includes the funds raised from outside to meet the expenditure incurred in the
company. It is considered as the capital receipts because it creates liability for the
company.

b. Recovery of Loans:-
Sometimes the company separates a part of the asset to recover the loans in future, as
a result, it decreases the assets of the company.

c. Other Capital Receipts:-

Under this category of Capital Receipts, Disinvestment and Small Savings are
covered. 

Examples of Capital Receipts

 Cash received from the sale of fixed assets

 Amount received from Shareholders and debenture holders
 Borrowings which includes loans, disinvestment, insurance claims etc.

What are Revenue Receipts?

Revenue receipts are money earned by a business through its day to day operational
activities. These are recurring in nature and directly affect the profit and loss of the business.
Thus, the disclosures of revenue receipts are required to be made in the income statement of
the company or organization.

In general terms, we can say that revenue receipts do not create any liability for the business
nor does it reduces the assets. It simply suggests that goods or services have been delivered
to the clients and in return, income has been received. Ultimately it is a source of cash inflow
which leads to an increase in the total revenue of a company. Revenue Receipts are those
receipts that neither reduces the assets of the company, nor they create any liability. They are
always recurring in nature, and they are earned during the normal course of business.

From the definition, it is clear that any type of receipt needs to satisfy one of the two
conditions to be called as revenue receipt --

 First, it must not reduce the assets of the company.

 Second, it must not create any liability for the company.
Examples of Revenue Receipts

Some examples of receipts which are of routine nature i.e. revenue receipts in an
organization are,

 Money received for services provided to customers

 Rent received
 Discount received from suppliers, vendors or creditors
 Dividend received
 Interest earned
 Commission received
 Bad-debts recovered(if any)
 Revenue earned by the sale of scrap material or waste etc

Capital Receipts vs. Revenue Receipts – Key differences

The capital receipts are to be charged to tax under “Capital Gains” and revenue receipts are
taxable under other heads, it is of vital importance to understand which receipt is a capital
receipt and which one is Revenue. Some tests, however, can be applied in particular cases.
These Tests are:

A. On the basis of nature of Assets: If a receipt is referred to Fixed Asset, it is capital

receipt and if it is referable to circulating asset it is revenue receipt.
Fixed assets is that with the help of which owner earns profit by keeping it in this
possession, e.g. Plant, Machinery, Building or factory etc.
Circulating Asset is that with help of which owner earns profits by parting with it and
letting others to become its owner, e.g. Stock-in Trade.

B. Profit on the sale of Motor Car used in business by an assessee is Capital Receipt
whereas the profit earned by an automobile dealer, dealing in cars, by selling a car is
his revenue receipt.

C. Termination of source of income: Any sum received in compensation for the

termination of source of income is capital receipt, e.g. compensation receives by an
employee from its employer on termination of his services is capital receipt.
Amount received in substitution of income: Any sum received in substitution of
income is revenue receipt,
e.g. ‘A’ company purchased the right to produce a Film for its earlier producer with
the condition that no other produce will be given these rights. Afterwards, it is found
that the rights for producing this film had already been sold. The ‘A’ Company
claimed damages and was awarded Rs.50,000. It was held that damages received are
 the compensation for the profits which were to be earned. Hence, this is Revenue
Receipt.
D. Compensation received on termination of Lease or surrender of a Right. Any amount
received as compensation on surrendering a right or termination of any Lease is
Capital Receipt where as any amount received for loss of future income is a revenue
receipt.

e.g. An Author gives up his right to publish a book and receives Rs. 1,00,000 as
compensation. It is capital receipt but if he receives it as advance Royalty for 5 years
it is Revenue receipt.

The Bombay High Court in the case of CIT v. Amar Dye Chem Ltd.
[1994] also held that the amount received towards compensation or
damage for settlement of dispute was capital receipt which was not
taxable. Thus, compensation received by assessee for withdrawing
criminal complaint was a capital receipt and couldn’t be treated as
income.

The compensation received by the assessee was not for his professional
activities but for settlement of dispute between him and some other
party resulting in filing of a criminal complaint. The amount received
towards compensation could not fit in to the definition of income as per
section 2(24), read with section 4 of the Income-tax Act, 1961. Thus,
compensation received by assessee for withdrawing criminal complaint
was a capital receipt and couldn’t be treated as income.
 

THANK YOU