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2010 (12) TMI 911 - AT - Income TaxAmount received on account of Business Transfer Agreement and Assignment Agreement - Capital gain or revenue receipt - assessee-company is engaged in the business of manufacturing and dealing in Electroplating salts and Chemicals, Brighteners and Additives - CIT(A) partly allowed the appeal and treated the receipt of Rs.76,59,500/- as long term capital gain and Rs.40 lakh as short term capital gain - Held that - As the reading of the covenants/articles supports the view expressed by the Assessing Officer that it is the appellant who has done the artificial bifurcation of the total consideration value of Rs.1,16,59,500/- into Rs.40 lakhs consideration for non-competition and rs.76,59,500/- for transfer of intangible assets. It is reiterated that there is nothing in the language of the contents of the agreement to even remotely suggests that a part of the consideration is for non-compete/non-disclosure clause. In this background, it is held that the talk of consideration of Rs.40,00,000/- for the non-compete clause is extraneous to the issue at hand since it is not germane to the Business Transfer Agreement - the appellant s claim with regard to the bifurcation of the composite consideration amount of Rs.1,16,59,500/- is rejected being unfounded, unreasonable and unrealistic. Amount of Rs.1.16 crore received on account of transfer of intangible assets - whether represents a long term capital gain or a short term capital gain - Held that - It goes without saying that the assessee would have certainly adopted some criterion to arrive at that figure in its own international calculation and in the absence of any better alternative and also in absence of any definite date of acquisition available from record it is most appropriate and practical to hold the view that this intellectual assets are in the nature of long term capital assets. Whether out of Rs.1,16,59,500/- the balance amount of Rs.40 Lacs is in the nature of non-compete fee or not? - Held that - As find from the valuation report that it clearly contents that this was for the purpose of proposed agreement, which clearly contains that the company will be restricted from entering into any competitive business, directly or indirectly, for the period of next five years from the date of agreement. The buyer being a foreign collaborator company not agreeable of any bifurcation of different intellectual property and instead insisted for a total and composite cost from the agreement it can be clearly brought out that there is a specific clause 5.7 of Article-V regarding non-competition and therefore Rs.40 lakh is really attributable to non-compete reason being the assessee lost its complete right and source of income of this business - As decided in Oberoi Hotel Pvt. Ltd. v CIT 1999 (3) TMI 2 - SUPREME Court the amount received by the assessee was the consideration for giving up its right to purchase and/or to operate the property or for getting it on lease before it was transferred or let out to other persons. It was not for settlement of rights under a trading contract, but the injury was inflicted on the capital asset of the assessee and giving up the contractual right on the basis of the principal agreement had resulted in loss of source of the assessee s income. The receipt in the hands of the assessee was a capital receipt. Part of the compensation attributable to the restrictive cogent - whether is a capital receipt or a revenue receipt?- Held that - As answered by in Gillanders Arbuthnot and Co. Ltd. v. Commissioner of Income-tax 1964 (5) TMI 5 - SUPREME Court the compensation paid for agreeing to refrain from carrying on competitive business in the commodities in respect of the agency terminated or for loss of goodwill was prima facie of the nature of a capital receipt. In the present case, the covenant was an independent obligation undertaken by the assessee not to compete with the new agents in the same field for a specified period. It came into operation only after the agency was terminated. It was wholly unconnected with the assessee s agency termination. Therefore, hold that part of the compensation attributable to the restrictive covenant was a capital receipt and hence not assessable to tax. Whether the compensation paid is severable - Held that - As the decision of the lower authorities in assessing this non-compete fee as short term capital gain rather this compensation is for loss of source of income and accordingly capital in nature not taxable. This issue of the assessee s appeal is allowed. Disallowance being late payment of ESIC - Held that - The amendments, though made applicable by Parliament only with effect from 1-4-2004, were curative in nature and would apply retrospectively w.e.f. 1-4-1988. Accordingly, following Apex Court in the case of Alom Extrusions Ltd. (2009 (11) TMI 27 - SUPREME COURT) and P.M. Electronics Ltd. (2008 (11) TMI 3 - DELHI HIGH COURT) allow the claim of the assessee.
Issues Involved:
1. Assessability of the receipt of Rs.1,16,59,500/- on account of Business Transfer Agreement and Assignment Agreement. 2. Nature of the receipt: Whether the amount received is a business revenue receipt or a capital receipt. 3. Bifurcation of the receipt: Whether Rs.40,00,000/- was for a non-compete agreement and its taxability. 4. Disallowance of Rs.11,626/- for late payment of ESIC. Detailed Analysis: 1. Assessability of the Receipt of Rs.1,16,59,500/- The assessee-company transferred its business of general metal finishing and electroplating to Max Atotech Ltd. for Rs.1,16,59,500/-. The assessee claimed Rs.40 lakh as a non-compete fee (capital receipt) and Rs.76,59,500/- as long-term capital gain. The Assessing Officer treated the entire receipt as revenue business income. The CIT(A) treated Rs.76,59,500/- as long-term capital gain and Rs.40 lakh as short-term capital gain. 2. Nature of the Receipt The CIT(A) observed that the receipt was for the transfer of intangible assets like contracts, intellectual property, trade secrets, documents, and goodwill. The CIT(A) concluded that the consideration of Rs.1,16,59,500/- was a composite amount for these intangible assets and not bifurcated for non-compete fees. The CIT(A) held Rs.76,59,500/- as long-term capital gain and Rs.40 lakh as short-term capital gain due to the lack of specific acquisition dates. 3. Bifurcation of the Receipt The assessee argued that Rs.40 lakh was for the non-compete clause and hence a capital receipt not subject to tax. The CIT(A) rejected this claim due to the absence of specific consideration for non-compete in the agreement. However, the Tribunal found that the non-compete clause was indeed part of the agreement and supported by a valuation report. The Tribunal held that Rs.40 lakh received for the non-compete clause was a capital receipt and not taxable for the assessment year 2002-03, following the principles laid down by the Hon'ble Supreme Court in cases like Best and Co. Pvt. Ltd. and Oberoi Hotel Pvt. Ltd. 4. Disallowance of Rs.11,626/- for Late Payment of ESIC The disallowance was made because the payments were not made within the stipulated date but were made before the due date of filing the return. The Tribunal allowed the claim based on the Delhi High Court's decision in CIT v. P.M. Electronics Ltd., which held that contributions made before the due date of filing the return are allowable as deductions. This was further supported by the Supreme Court's decision in CIT v. Alom Extrusions Ltd. Conclusion: The Tribunal concluded: - Rs.76,59,500/- as long-term capital gain. - Rs.40 lakh as a capital receipt for the non-compete clause, not taxable. - Allowed the claim for late payment of ESIC based on higher court rulings. The appeal of the Revenue was dismissed, and the appeal of the assessee was partly allowed.
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