2016 (10) TMI 1365 - AT - Income Tax

Revision u/s 263 - treatment to income - compensation received under compromise - As per CIT AO wrongly assumed the facts as transfer of capital asset which is incorrect inasmuch as the assessee never had any trade mark right in Southeast Asia and transfer of capital asset does not arise - According to the CIT, the agreement that was entered into between the assessee and M/s. Group Danone is in the nature of non-compete agreement, not to launch the biscuit products under the trade mark TIGER in Singapore and Malaysia and the amount that was received by the assessee was towards loss of profits on account of the assessee company s inability to launch its products in Singapore and Malaysia and only because the assessee withdrew its right to expand business in Singapore and Malaysia, and consequently incurred loss of future profit, which they could have otherwise arranged, the compensation was paid - HELD THAT - It could be seen from the submissions of the assessee before the AO, the assessee placed reliance on so many decisions in respect of their contentions to object the treatment of the amount either as business income or as capital gain. Having considered all these facts and also the law laid down in such decisions, the AO consciously reached a conclusion that the income is to be treated as capital gain but not as either capital receipt or business income. This is one of the probable views that could have validly be taken. By no stretch of imagination could it be said that the AO mechanically passed this order taking the view that the income has to be charged as capital gain. The AO made enquiries, called for details of such income and having considered the submissions of the assessee in respect of all the three probable views i.e. capital receipt, business income and capital gain, the AO for the reasons recorded in his order at page nos. 7 to 10, came to the conclusion that the income in dispute has to be charged as capital gain but not as capital receipt or business income. In this factual context, we are called upon to examine the question whether the CIT is justified in terming the order of AO as erroneous and without proper enquiry or on wrong assumption of the facts. In JMC Projects (India) Ltd. 2015 (12) TMI 1510 - GUJARAT HIGH COURT held that the power u/s. 263 of the Act cannot be exercised when though addition has been made on the footing or the premise which are not to the satisfaction of the Commissioner to make additions on better premise with better reasoning or on different application of legal principles. We are of the firm conclusion that the Assessment Order is not the result of non application of mind or wrong assumption of facts or without any proper enquiry. And it, therefore, follows that assumption of jurisdiction u/s. 263 of the Act by the Ld. CIT is unwarranted and the order cannot be sustained. We, therefore, quash the same. Appeal of assessee is allowed.

Summary

Issues Involved:
1. Whether the CIT was justified in invoking section 263 of the Income-tax Act, 1961.
2. Nature of the receipt of Rs. 22.79 crores received by the assessee from Group Danone.
3. Whether the receipt should be treated as capital receipt, capital gains, or business income.

Issue-wise Detailed Analysis:

1. Justification of CIT in invoking section 263:
The CIT invoked section 263 of the Income-tax Act, 1961, directing the AO to revise the assessment order, which he deemed erroneous and prejudicial to the interest of the Revenue. The CIT held that the AO wrongly assumed the facts as a transfer of a capital asset, which was incorrect since the assessee never had any trademark rights in Southeast Asia. He opined that the agreement between the assessee and Group Danone was a non-compete agreement, and the amount received was towards loss of profits due to the inability to launch products in Singapore and Malaysia, thus considering it as business income. The CIT's order was challenged by the assessee on grounds that the AO had already examined the issue at length, and the CIT was unjustified in invoking section 263 merely to impose his opinion over an otherwise legal and probable view taken by the AO.

2. Nature of the receipt of Rs. 22.79 crores:
The assessee received Rs. 22.79 crores from Group Danone as part of a settlement agreement. The AO treated this amount as capital gains, stating that the payment was directly attached to a capital asset owned by the assessee, and the assessee had given up its right to claim damages, with Group Danone transferring the trademark rights back to the assessee. The CIT, however, viewed the amount as business income, arguing that the assessee did not have trademark rights in Southeast Asia, and the payment was for the loss of future profits due to the non-compete agreement.

3. Treatment of the receipt as capital receipt, capital gains, or business income:
The assessee claimed the amount as a capital receipt, not chargeable to tax, arguing it was a casual, windfall, and voluntary receipt, not arising from regular business activity. The AO disagreed, treating it as capital gains under section 2(47) read with section 45 of the Act. The CIT, on the other hand, considered it as business income, arguing that the payment was for the loss of future profits due to the non-compete agreement.

The tribunal examined the terms of the settlement agreement and found that neither party conceded claims or admitted to any infringement of trademark rights. The settlement was reached without either party relinquishing their claims. The tribunal noted that the AO had made an in-depth inquiry, considered various aspects, and reached a probable view that the income should be treated as capital gains. The tribunal held that the AO's view was one of the possible views and that the CIT was not justified in invoking section 263 merely to impose his opinion over the AO's probable view. The tribunal quashed the CIT's order, concluding that the AO's assessment order was not erroneous or without proper inquiry.

Conclusion:
The tribunal allowed the appeal of the assessee, holding that the AO's assessment order was not erroneous or prejudicial to the interest of the Revenue. The tribunal quashed the CIT's order under section 263, concluding that the AO had made a proper inquiry and reached a probable view that the income should be treated as capital gains. The tribunal emphasized that the CIT cannot invoke section 263 merely to impose his opinion over an otherwise legal and probable view taken by the AO.