2013 (1) TMI 393 - AT - Income Tax

Long Term Capital Gain on relinquishment from utilization of business know-how - CIT(A)deleted the addition - whether utilization of business know- how constitutes an asset within the meaning of Section 2(14)? - Held that - The assessee has received a sum of ₹ 5.00 crores under an agreement dated 27th November 1998, in consideration of 10 years of restraint on right to carry on business or to carry on specified activities mentioned therein. The AO has treated the sum so received to be taxable under the head Capital Gains firstly, on the ground that the assessee has itself invested the sum of ₹ 3.00 crores out of the receipts of ₹ 5.00 crores in the securities specified under section 54EA and, secondly, the non compete right is also a valuable right and is covered by section 55(2)(a). Thus finding no merit in such a conclusion drawn by the AO for the reason that section 55(2)(a) is for the purpose of determining the cost of acquisition in relation to a capital asset which also includes right to manufacture produce or process any article or thing or right to carry on any business. In the present case, the assessee has not received any right to carry such kind of activities. In fact, the amount has been given for not to carry out any such business activities or manufacturing. Regarding other aspect that the assessee has itself treated part of its receipt as capital gain by making the investment in specified securities for the purpose of exemption under section 54EA, will also not help the case of the Revenue as one has to see the nature of receipts and not the conduct of the assessee. Thus as rightly pointed out assessee that if at all this sum can be treated to be as taxable income, the same can be taxed under the provisions of section 28(va) which has been brought in the statute w.e.f. 1st April 2003. Thus following the judgment in case of Guffic Chem Pvt. Ltd. (2011 (3) TMI 6 - SUPREME COURT) wherein held that prior to this period, such a payment is to be treated as capital receipt not liable for tax no merit in the grounds raised by the Revenue and, consequently, the findings given by the Commissioner (Appeals) are upheld that the sum of ₹ 5.00 crores is treated as a capital receipt and is not chargeable to tax in the year under appeal - in favour of assessee. Addition of ₹ 6 Crores for computing book profit under Section 115JA as these amounts were not credited to P & L A/c. and directly brought to reserve account in the balance-sheet - CIT(A)deleted the addition relying on Appollo Tyres case 2002 (5) TMI 5 - SUPREME COURT - Held that - The Explanation is very clear that the book profit means the net profit as shown in the Profit & Loss Account which has been prepared in accordance with Parts-II and III of Schedule-VI to the Companies Act, 1956, and such net profit has to be increased and reduced in view of the provisions given in the Explanation. Thus, the Explanation pre-supposes that the amount received should be debited to the Profit & Loss Account and if the same has not been debited and has been directly taken to the capital reserve account in the balance sheet, the same cannot be tinkered with so as to include it in the Profit & Loss Account. Otherwise, it will enhance the scope of the AO to re-work the net profit arrived at by the company which has been certified by the prescribed authority and duly approved by the company in its general meeting and which has been filed before the Registrar of Companies who has a satisfactory obligation to examine and satisfy that the accounts have been maintained in accordance with the requirement of Companies Act, 1956. Thus, in view of the ratio laid down Malayala Manorama Co. Ltd. v/s CIT 2008 (4) TMI 20 - SUPREME COURT wherein referred the decision of Kynetic Motors 2003 (1) TMI 47 - BOMBAY HIGH COURT & Apollo Tyres 2002 (5) TMI 5 - SUPREME COURT that AO cannot re-work the net profit prepared by the company in accordance with Companies Act no reason to deviate from the findings given by the Commissioner (Appeals) - against revenue. Disallowance of set-off of unabsorbed depreciation against income chargeable under the head short term capital gains - Held that - As issue now stands covered by DCIT v/s Times Guarantee Ltd 2010 (6) TMI 516 - ITAT, MUMBAI insofar as the issue of brought forward unadjusted depreciation allowance up to assessment year 1996-97 is concerned, the same is to be treated as current depreciation and can be set-off against the income under any head. Also see General Motors Pvt. Ltd. v/s DCIT 2012 (8) TMI 714 - GUJARAT HIGH COURT - in favour of assessee. Disallowance of retirement compensation paid to workmen - the expenditure was incurred upon the closure of the business - Held that - The issue now stands covered by the judgment of Jurisdictional High Court rendered in Bhor Industries Ltd. 2003 (2) TMI 20 - BOMBAY HIGH COURT wherein held that the retirement compensation paid to the workmen is revenue expenditure and is to be allowed in this year - revenue expenditure, which is incurred wholly and exclusively for the purposes of business, must be allowed in its entirety in the year in which it is incurred and it cannot be spread over a number of years even though the assessee has written it off in its books over a period of years - in favour of assessee.

Summary

Issues Involved:
1. Deletion of additions made on account of Long Term Capital Gains (L.T.C.G.) for desisting from utilization of business know-how.
2. Inclusion of amounts for computing book profit under Section 115JA.
3. Set-off of unabsorbed depreciation against short-term capital gains.
4. Disallowance of retirement compensation paid to workmen.
5. Levy of interest under sections 234B and 234C.

Issue-wise Detailed Analysis:

1. Deletion of Additions Made on Account of Long Term Capital Gains (L.T.C.G.) for Desisting from Utilization of Business Know-how:
The Tribunal addressed the taxability of Rs. 5.00 crores received by the assessee for a 10-year restraint on the right to carry on specified business activities. The Assessing Officer had treated this amount as taxable under "Capital Gains," asserting that the non-compete right is a valuable right covered by section 55(2)(a) of the Act. However, the Tribunal found no merit in this conclusion, stating that section 55(2)(a) pertains to determining the cost of acquisition for a capital asset, which does not apply here as the assessee received money for not carrying out business activities. The Tribunal referenced the Supreme Court judgment in Guffic Chem Pvt. Ltd., which held that payments received under non-competition agreements before April 1, 2003, are capital receipts not liable for tax. Therefore, the Tribunal upheld the Commissioner (Appeals)'s decision that the amount received was a capital receipt and not chargeable to tax.

2. Inclusion of Amounts for Computing Book Profit Under Section 115JA:
The Tribunal examined whether the amounts received should be included in the book profit for Minimum Alternate Tax (MAT) liability under section 115JA. The Assessing Officer argued that these amounts should be shown in the Profit & Loss account, but the Tribunal referred to the Supreme Court's decision in Apollo Tyres Ltd., which stated that the Assessing Officer cannot re-scrutinize the Profit & Loss account prepared in accordance with the Companies Act. The Tribunal concluded that since the amounts were directly credited to the capital reserve account and not routed through the Profit & Loss account, they should not be included in the book profit for MAT purposes. Consequently, the Tribunal upheld the Commissioner (Appeals)'s decision to exclude these amounts from the book profit computation.

3. Set-off of Unabsorbed Depreciation Against Short-term Capital Gains:
The Tribunal addressed the assessee's claim for set-off of unabsorbed depreciation against short-term capital gains. The Tribunal referred to the Special Bench decision in Times Guarantee Ltd., which allowed the set-off of unabsorbed depreciation up to the assessment year 1996-97 against income under any head. Additionally, the Tribunal cited the Gujarat High Court's judgment in General Motors Pvt. Ltd., which confirmed that unabsorbed depreciation from earlier years can be carried forward and set off against subsequent years' income. Therefore, the Tribunal allowed the assessee's claim for set-off of unabsorbed depreciation against short-term capital gains.

4. Disallowance of Retirement Compensation Paid to Workmen:
The Tribunal examined the disallowance of Rs. 23,17,936 paid to workmen as retirement compensation. The Commissioner (Appeals) had disallowed this amount, considering it capital expenditure. However, the Tribunal referred to the Bombay High Court's judgment in Bhor Industries Ltd., which held that voluntary retirement scheme expenses are revenue expenditures and allowable as deductions. Following this precedent, the Tribunal allowed the deduction of the retirement compensation paid to the workmen.

5. Levy of Interest Under Sections 234B and 234C:
The Tribunal acknowledged that the levy of interest under sections 234B and 234C is consequential in nature. Therefore, the Tribunal directed the Assessing Officer to give consequential effect in accordance with the law while computing the income of the assessee.

Conclusion:
The Tribunal dismissed the Revenue's appeals and upheld the Commissioner (Appeals)'s decisions on all grounds, including the exclusion of certain amounts from book profit computation under section 115JA, the non-taxability of amounts received for restraint covenants, and the allowance of set-off for unabsorbed depreciation and retirement compensation. The Tribunal also directed the Assessing Officer to apply the consequential effect for the levy of interest under sections 234B and 234C.