2015 (11) TMI 388 - HC - Income Tax

Non-compete consideration received - whether is not liable to tax as capital gains even after the amendment to section 55(2)(a) of the Act with effect from April 1, 1998, which introduced the words or a right to manufacture, produce or process any article or thing ? - Held that - Section 55(2)(a) of the Act would have no application in the present circumstances, as it deals with the cost of acquisition in relation to a capital asset which includes a right to manufacture or carrying on busi ness. In the present case, the agreement prohibits the assessee inasmuch as it amounts to giving up its right to carry on business, i.e., a restrictive cov enant. It held that such restrictive covenant stands covered only with effect from April 1, 2003, on introduction of section 28(va) of the Act. In view of the above, the impugned order having merely followed the decision of the apex court in Guffic Chem. Pvt. Ltd. 2011 (3) TMI 6 - Supreme Court no substantial question of law arises for our consideration. Accordingly question No. 1 as proposed is not entertained.- Decided against revenue. Whether the Tribunal was correct in holding that the non-compete consider ation taken as reserves to the balance-sheet cannot be added to the book profit under section 115JA of the Act even in terms of clause (b) of the Explanation thereto ? - Held that - Explanation to section 115JA of the Act to be invoked it is necessary that the amount which has been carried to the reserves should have necessarily been first debited to the profit and loss account resulting in a reduction in the profit declared by the respondent- assessee-company. This issue stands settled in view of National Hydroelectric Power Corpn. Ltd. v. CIT 2010 (1) TMI 281 - SUPREME COURT wherein it has been held that to invoke clause (b) of the Explanation below section 115JB (identical to section 115JA) of the Act, two conditions must be satisfied cumulatively, viz., there must be a debit of the amount to the profit and loss account and the amount so debited must be carried to reserves. Admitted position in this case is that there is no debit to the profit and loss account of the amount of reserves. The impugned order has in view of the self-evident position taken a view that in the absence of the amount being debited to profit and loss account and taken directly to the reserve account in the balance-sheet, the book profits as declared under the profit and loss account cannot be tampered with. Thus the Explanation to section 115JA of the Act would not be triggered. Thus, question No. 2 raises no substantial question of law for consideration. - Decided against revenue.

Summary

Issues:
1. Taxability of non-compete consideration as capital gains.
2. Treatment of non-compete consideration in balance-sheet for book profit calculation under section 115JA of the Income-tax Act, 1961.

Issue 1 - Taxability of Non-compete Consideration:
The appeal challenged the order of the Income-tax Appellate Tribunal regarding the taxability of non-compete consideration received by the assessee. The Tribunal held that the non-compete fee would be taxable only from the assessment year 2003-04, following the introduction of section 28(va) into the Act. The Tribunal relied on the Supreme Court's decision in Guffic Chem. Pvt. Ltd. v. CIT, emphasizing the distinction between compensation for loss of agency and compensation for negative/restrictive covenant. The Tribunal concluded that the non-compete consideration was a capital receipt until the amendment in 2003. The court further explained that the agreement in question involved a restrictive covenant, not covered under section 55(2)(a) of the Act, and therefore, no substantial question of law arose for consideration.

Issue 2 - Treatment of Non-compete Consideration in Book Profit Calculation:
The second issue pertained to the computation of book profit under section 115JA of the Act. The Assessing Officer had added amounts received for goodwill and non-compete fees directly taken to the balance-sheet by the assessee. However, the Commissioner of Income-tax (Appeals) allowed the appeal, citing the Supreme Court's decision in Apollo Tyres Ltd. v. CIT. The Tribunal dismissed the Revenue's appeal, emphasizing that the Assessing Officer cannot question the correctness of the profit and loss account prepared in accordance with the Companies Act. The Tribunal held that the provision for reserve made by the assessee could not be added to arrive at book profits under section 115JA. The court reiterated that for the Explanation to section 115JA to be invoked, the amount carried to reserves must have been debited to the profit and loss account, which was not the case here. Relying on the decisions of the apex court, the court concluded that the Explanation to section 115JA was not applicable in this scenario, and hence, no substantial question of law arose for consideration.

In conclusion, the High Court of Bombay dismissed the appeal filed by the Revenue, upholding the Tribunal's orders on both issues. The court clarified the taxability of non-compete consideration and the treatment of such consideration in the calculation of book profits under the Income-tax Act, 1961.