2015 (4) TMI 323 - AT - Income Tax

Taxability of compensation - CIT(A) while deciding the appeal has held the impugned amount to be specifically taxable u/s 28(va) of the IT Act - notice u/s 153C - Held that - Search in the premises of Cabana group was conducted on 31-7-09 whereas the settlement agreement in question and other agreements were executed much earlier on 24-11-08. It has not been alleged that the agreements are a subterfuge, thus the genuineness of agreements is not in question. All the clauses of the agreement read together reflect that the real intent, objective and purpose of the payment of compensation as per Settlement Agreement was to ensure withdrawal of all the pending litigation by Satyam from various forums instituted for breach of terms of conditions. The dominant consideration for compensation being surrendering the right to sue; its neither in lieu of surrender of any agency or agreement for non competition. This being so the compensation neither falls in the ambit of sec. 28 (ii) c as held by AO nor u/s 28 (va) as held by ld. CIT(A). Assessee has vehemently denied having any where admitted that part of the compensation was for non competition. In our considered view the compensation in question was meant, intended and paid for withdrawal of aforesaid litigation instituted by assessee which could have resulted in many adverse consequences for the reputation of Coca Cola/Atlantic besides entailing huge cost and efforts of litigation. Relinquishment of right to sue is neither a capital asset nor taxable u/s 28 which provides specific types of receipt to be held taxable as business income. Relinquishment of right to sue does not find any mention therein. In this eventuality we have no hesitation to hold that the impugned amount of ₹ 8,16,22,040/- is a capital receipt not liable to Income Tax. The addition is deleted, assessee's grounds in this behalf are allowed. Apropos the issue about validity of satisfaction u/s 153C, since we have allowed the relief on merits we find no necessity to dwell on this technical issue. - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of the notice issued under Section 153C.
2. Taxability of the compensation received by the assessee.
3. Levy of interest under Sections 234A, 234B, and 234C.

Detailed Analysis:

1. Validity of the Notice Issued Under Section 153C:
The assessee challenged the notice issued under Section 153C, arguing that the documents seized during the search on the Cabana Group did not belong to the assessee. The assessee contended that the documents were merely photocopies and unsigned cheques, which should be considered as belonging to the Cabana Group. The Tribunal noted that for a notice under Section 153C to be valid, the Assessing Officer (AO) must be satisfied that the seized documents belong to a person other than the searched person. The Tribunal cited various judicial precedents, including the Delhi High Court's rulings in Pepsi Foods Pvt. Ltd. and Pepsico India Holdings Pvt. Ltd., which emphasize that the AO must have cogent material to rebut the presumption that the documents belong to the searched person. The Tribunal found that the AO's satisfaction was not adequately demonstrated and thus the notice under Section 153C was invalid.

2. Taxability of the Compensation Received by the Assessee:
The AO treated part of the compensation received by the assessee as a revenue receipt under Section 28(ii)(c), while the CIT(A) held it taxable under Section 28(va). The assessee argued that the entire compensation was a capital receipt for withdrawing the right to sue and not for terminating any agency or non-compete agreement. The Tribunal examined the Settlement Agreement and found that the compensation was indeed for withdrawing litigation and not for any non-compete clause. The Tribunal relied on various judicial precedents, including the Supreme Court's ruling in Union of India vs. Raman Iron Foundry and the Delhi High Court's decision in Commissioner of Income-tax v. J. Dalmia, which held that compensation for withdrawing the right to sue is a capital receipt and not taxable as business income. Consequently, the Tribunal concluded that the compensation was a capital receipt not liable to income tax.

3. Levy of Interest Under Sections 234A, 234B, and 234C:
The Tribunal noted that the levy of interest under Sections 234A, 234B, and 234C is consequential in nature. Since the primary issue of taxability of the compensation was decided in favor of the assessee, the issue of interest levy was rendered moot.

Conclusion:
The Tribunal allowed the appeal of the assessee, holding that the notice issued under Section 153C was invalid and the compensation received was a capital receipt not liable to income tax. The levy of interest under Sections 234A, 234B, and 234C was deemed consequential and not separately adjudicated. The Tribunal's decision was pronounced in the open court on 27.2.2015.