2012 (8) TMI 682 - AT - Income Tax

Reopening of assessment u/s 147 - return of income was processed u/s 143(1) - receipt under multi-party settlement agreement signed including Schneider Electric S.A. (SE) has been claimed to be capital in nature - Held that - As decided in Rajesh Jhaveri Stock Brokers P. Ltd. (2007 (5) TMI 197 - SUPREME COURT ) that income escaping assessment in the case of an intimation under sec. 143(1)(a) is covered by the main provision of sec. 147 as substituted with effect from 1-04-1989 and failure to take steps under sec. 143(3) will not render the AO powerless to initiate re-assessment proceedings when intimation under sec. 143(1) has been issued - If the AO has cause or justification that income had escaped assessment, he can be said to have reason to believe that income had escaped assessment and the expression reason to believe cannot be read to mean that the AO should have finally ascertained the fact by legal evidence or conclusion - the assessee vide letter dated 27.11.2007 had submitted details of agreement between the assessee and TE on the basis of which AO came to the prima facie belief that the amount received by the assessee of Rs. 12,12,18,990/- was taxable as revenue receipt and not as capital gains , thus it is neither the case of change of opinion nor there is re-appraisal of the material available on record - no infirmity in the order of the CIT(A) confirming the reopening of assessment - against assessee. Assessing the receipts from a joint venture agreement with a French company - Profits and gains of business or profession OR Capital gain - the assessee contested that Schneider had incorporated a wholly owned subsidiary company in India in contravention of Press Note No.18 of 1998 - Held that - The serious disputes arose between TE/Schneider on one hand and the assessee and CS on the other hand, which were subject matter of legal proceedings initiated by the parties against each other in various Courts. The Joint Venture Agreement intended to put an end to disputes and legal proceedings by amicable global settlement on the terms and conditions set out in the agreement. By virtue of Joint Venture Settlement Agreement the assessee recognized and acknowledged SE/SEI as owner of patents, designs and trade marks. SE/SEI agreed to exit from joint venture and were accepted as legal successor of TE/TC. It was jointly agreed to put an end to legal proceedings as well as their outstanding commission, if any agreed and to any claim/s or potential claim/s in relation thereto. The assessee company agreed not to use the name Telemecanique or TE or similar words, its logo, trade mark, copy right and design relating to artistic work - The entire joint venture agreement is in respect of legal disputes between the assessee and joint venture partner. Therefore, it is incorrect on the part of the assessee to say that the payment has been received by the assessee for giving no objection under Press Note No.18 of 1998 - Such disputes arose in 1989 whereas the Press Note No. 18 was issued on 14th December, 1998 - Joint venture settlement agreement was entered mainly to put end to all litigations between the parties. Press Note 18 played only a role of a catalyst to expedite the settlement. The clause of the letter dated 24th April, 2003 clearly indicates that there as no impairment of source of income. The assessee s engineers and work force was competent enough to produce Indianized product competing with that of the wholly owned subsidiary company set up by the collaborator. Moreover, the assessee had acquired high level of technical know-how in the manufacture of the products. If the assessee was deprived of the technology, the business would have collapse. Therefore, it cannot be said that profit earning apparatus was affected in any way. Therefore, the compensation received cannot be treated to have been received for impairment of source of income. The Tribunal has power to assess the income correctly. If income is assessable as business income, the compensation should be assessed as revenue receipt liable to be assessed as business income. Therefore the Revenue could have taken the additional legal plea at any time for assessing the compensation received by the assessee - against assessee.

Issues Involved:
1. Reopening of assessment under Section 147 of the Income Tax Act, 1961.
2. Taxability of compensation received by the assessee under Section 28(va)(a) of the Income Tax Act, 1961.
3. Nature of the compensation received: whether it is a capital receipt or revenue receipt.
4. Applicability of Section 2(47) and Section 55(2) of the Income Tax Act, 1961.

Detailed Analysis:

1. Reopening of Assessment under Section 147 of the Income Tax Act, 1961:
The first issue pertains to whether the reopening of the assessment under Section 147 was justified. The assessee argued that the reopening was based on no new material and was merely a reappraisal of existing information. The Assessing Officer (AO) reopened the assessment based on information obtained during the assessment proceedings for the subsequent year (AY 2005-06), indicating that the compensation received by the assessee was taxable under Section 28(va)(a) and not as capital gains. The Tribunal upheld the reopening, citing the Supreme Court's decision in Rajesh Jhaveri Stock Brokers P. Ltd., which clarified that processing a return under Section 143(1) does not constitute an assessment, and thus, the AO was justified in reopening the assessment based on new information.

2. Taxability of Compensation under Section 28(va)(a):
The second issue concerns whether the compensation received by the assessee falls under Section 28(va)(a) of the Income Tax Act. The AO concluded that the compensation was taxable as revenue receipt under Section 28(va)(a) because it was received for not carrying out any activity in relation to any business. The CIT(A) upheld this view, noting that the dominant factor in the settlement agreement was the assessee's commitment not to use the name "Telemecanique" or "TE" and to end all legal disputes. The Tribunal agreed with the CIT(A), stating that the compensation was for not carrying out any activity in relation to the business and thus fell under Section 28(va)(a).

3. Nature of the Compensation: Capital Receipt or Revenue Receipt:
The assessee contended that the compensation was a capital receipt as it was received for the impairment of the profit-earning apparatus, citing several judicial precedents. However, the Tribunal noted that the disputes between the assessee and the foreign collaborator had been ongoing since 1988, and the assessee had become technologically independent. The Tribunal concluded that the compensation was not for the impairment of the profit-earning apparatus but was a revenue receipt arising from the settlement of disputes and the agreement not to use the collaborator's name and trademarks.

4. Applicability of Section 2(47) and Section 55(2):
The assessee argued that the compensation should be treated as capital gains under Section 2(47) and that the cost of acquisition was indeterminate, making it non-taxable under Section 45 read with Section 48. The Tribunal rejected this argument, stating that the right to object under Press Note 18 did not constitute a capital asset as defined under Section 2(14). The Tribunal also noted that the compensation was not for the transfer of any capital asset but was a revenue receipt, and thus, the provisions of Section 54EC were not applicable.

Conclusion:
The Tribunal dismissed the appeal, upholding the reopening of the assessment under Section 147 and confirming that the compensation received by the assessee was taxable as revenue receipt under Section 28(va)(a) of the Income Tax Act. The Tribunal also rejected the assessee's alternative plea that the compensation should be treated as capital gains.

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