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2015 (10) TMI 2473 - AT - Income TaxNon-compete fees received on divesture of Leader business - taxable as Short Term Capital Gains OR Long Term Capital Gains - Held that - In the present case, we are dealing with a situation where the non-compete fee has been received by the assessee-company for not carrying on the business of what herbicide manufacturing (i.e. Leader business), which it was hitherto carrying on. Thus, what is transferred is right to carry on business, which is a capital asset. Thus, such sum is to be regarded as Capital gain, the cost of acquisition being determined in accordance with section 55(2)(a) of the Act. Accordingly, we are unable to uphold the stand of the Assessing Officer that non-compete fee is taxable as business income on account of section 28(va) of the Act. Whether such capital gain is a long term capital gain or short term capital gain? - Held that - CIT(A) has erred in treating the non-compete fee as a short term capital gain. In our considered opinion, the CIT(A) misdirected himself in considering as to when the . Right of not to compete came into existence . ; and, not taking into consideration the fact that the covenant of not to carry on business was (i) attached alongwith the transfer of leader business, which was being carried on by the assessee since 1997; and, (ii) for a period of 10 years, which is a fairly long period. Under these circumstances, the non-compete fee is to be assessed as long term capital gain. - Decided in favour of assessee Gain on transfer of Distribution Network, Registration and Licenses, Copyrights and Goodwill - taxable as Short Term Capital Gains OR Long Term Capital Gains - Held that - Regarding Distribution Network it has been explained that the sales of Leader products were being made by the assessee-company through a dealer Distribution Network. The assessee company had entered into contracts/ arrangements with several distributors for sale and distribution of their products covered under Leader business. On transfer of leader business to Sumitumo, all the rights of the assessee company under such contracts/businesses arrangements in relation to leader business were transmitted in favour of Sumitomo as per the Business Transfer agreement. Since the Distribution Network was in the nature of business right existing for more than three years, in our view, the same has been rightly held by the CIT(A) to be taxable as long term capital gain.Regarding Goodwill , it was quite clear that the same is inseparable from business, which was in existence for more than three years, and it gets automatically transferred alongwith the business. Thus, the gain on transfer of Goodwill has to be assessed as long term capital gain. The stand of the CIT(A) is affirmed on this aspect also. Similarly, in relation to the gain on transfer of Registration and licenses and copyrights are concerned, the same have also been rightly treated by the CITA) as long term capital gains. - Decided against revenue Disallowance u/s. 14A - assessee-company had earned dividend income which was claimed exempt u/s. 10(35) - Held that - Assessing Officer has not complied with the jurisdictional prescription of section 14A(2) of the Act in as much as there is no objective satisfaction recorded by the Assessing Officer that the claim of the assessee made in the return of income was incorrect. Notably, in the present case assessee had suo-moto disallowed certain expenditure under section 14A of the Act and the Assessing Officer is empowered to disagree with it only after he was not satisfied with the correctness of the claim . made by the assessee, having regard to the accounts of the assessee. Thus, in the absence of the recording of such satisfaction the disallowance over and above ₹ 20,39,893/- made out of administrative expenses is untenable and is hereby directed to be deleted. Apart therefrom we also find that even otherwise the disallowance estimated by the assessee at ₹ 20,39,893/- is reasonable considering that the same was even more than the estimation of 2% of dividend income canvassed by the CIT(A). In this manner, we hereby set aside the order of CIT(A) and direct the Assessing Officer to restrict the disallowance under section 14A of the Act to ₹ 20,39,893/- made in the return of income - Decided in favour of assessee Recomputing value of closing inventory in accordance with the provisions of section 145A - Held that - Apart from pointing out that even after applying the provisions of section 145A r.w. section 43B of the Act there would be no effect on profit, the assessee company has not substantiated the said plea. In any case we find that the direction of the CIT(A) to the Assessing Officer for adopting the value of opening stock in consonance with the value of closing stock adopted for the immediately preceding year does not require any interference, and is hereby affirmed. - Decided against assessee Income derived from growing and selling of Hybrid Seeds - whether is to be considered as agricultural income so as to be eligible for deduction under section 10(1) as held by CIT(A) - Held that - No merit in the ground raised by the Revenue as no fault can be found with the decision of the CIT(A), which is in consonance with the precedents in assessee s own case - Decided against revenue
Issues Involved:
1. Taxability of non-compete fees. 2. Disallowance under section 14A of the Income Tax Act. 3. Re-computation of closing inventory under section 145A. 4. Classification of gains from the transfer of business assets. 5. Treatment of income from growing and selling hybrid seeds. Detailed Analysis: 1. Taxability of Non-Compete Fees: The appellant received non-compete fees on the divestiture of its 'Leader' business. The Commissioner of Income-tax (Appeals) [CIT(A)] held that this non-compete fee is taxable as "Short Term Capital Gains" instead of "Long Term Capital Gains" as considered by the appellant. The CIT(A) further held that the non-compete fee received was taxable as a short-term capital gain. The appellant contended that the non-compete fee should be taxable as a long-term capital gain, while the Revenue argued it should be taxed as business income under section 28(va) of the Act. The Tribunal concluded that the non-compete fee is to be regarded as a capital gain and not business income, and further held it as a long-term capital gain due to the ten-year restriction period. 2. Disallowance under Section 14A: The appellant had earned dividend income, which was claimed exempt under section 10(35) of the Act. The Assessing Officer (AO) made a disallowance under section 14A, which was partly upheld by the CIT(A). The Tribunal found that the AO did not record objective satisfaction that the appellant's claim was incorrect and directed the disallowance to be restricted to the amount suo-moto disallowed by the appellant in the return of income. Thus, the Tribunal allowed the appellant's ground and dismissed the Revenue's grounds. 3. Re-computation of Closing Inventory under Section 145A: The appellant argued for an adjustment to the value of closing stock under section 145A based on previous assessment years. The CIT(A) directed the AO to recompute the value of closing inventory by taking the figure of opening stock as per the closing stock valued in the preceding assessment year. The Tribunal affirmed this direction, finding no interference necessary. 4. Classification of Gains from the Transfer of Business Assets: The appellant transferred its 'Leader' business to Sumitomo, which included various assets like Distribution Network, Registration and Licenses, Copyrights, and Goodwill. The AO treated the gains from these assets as short-term capital gains, while the CIT(A) accepted them as long-term capital gains. The Tribunal upheld the CIT(A)'s decision, affirming that the gains on these assets were rightly treated as long-term capital gains due to their nature and the period for which they were held. 5. Treatment of Income from Growing and Selling Hybrid Seeds: The CIT(A) held that the income derived from growing and selling hybrid seeds is to be treated as agricultural income and thus eligible for deduction under section 10(1) of the Act. The Tribunal noted that this issue had been consistently decided in favor of the appellant in previous assessments and upheld the CIT(A)'s decision. Conclusion: The Tribunal partly allowed the appellant's appeal and dismissed the Revenue's appeal, affirming the CIT(A)'s decisions on the treatment of non-compete fees, disallowance under section 14A, re-computation of closing inventory under section 145A, classification of gains from the transfer of business assets, and treatment of income from growing and selling hybrid seeds.
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