2017 (4) TMI 969 - HC - Income Tax

Reduction of the value of breakages of bottles and crates from the written down value ( WDV ) in the computation of short term capital gains u/s 50 - Held that - In accordance with the provisions of section 50, where a capital asset forms part of a block of assets and depreciation has been allowed in regard to the same, then, in the computation of capital gain on the transfer of such asset, the cost of acquisition shall be the written down value of the block of assets at the beginning of the previous year, as increased by the actual cost of any asset falling within that block acquired during the previous year. In the present case, the WDV as on 1.4.1998 is ₹ 12,02,56,812/- after reducing the depreciation allowable. In such an event, and in the light of the fact that the breakages have not been claimed in the computation of income, there is no justification for any further reduction from WDV. Question No.1 is answered against the Revenue and in favour of the Assessee. Compensation charges paid - Claim u/s 36(1)(iii) rejected on the ground that there was no borrowal by the assessee per se - alternate claim under section 37 was also rejected on the ground that the expenditure was capital in nature - Held that - The arrangement with SFL for financing the acquisition and leasing of the equipment is only for the business purposes of the assessee. The provision of compensation charges is in the nature of the interest liability payable to the manufacturer or supplier of the equipment by SFL that the assessee makes good. The sum and substance of the arrangement is that the assessee engages the services of SFL for rendering financial assistance for acquisition of equipment for its business. SFL, while advancing the funds, negotiates the purchases of the equipment and the assessee undertakes to pay charges at the rate of 21% to compensate SFL for the advances made by it to the manufacturers and suppliers of equipment. We are thus of the view that the assessee assumes the role of the borrower in this situation. The compensation charges paid are in the nature of interest, liable to be allowed in terms of section 36(1)(iii) of the Act. With respect to the alternate plea under section 37 of the Act, the equipment has been acquired for the expansion of the business of the assessee. The second unit at Nemam is also engaged in the bottling of beverages under the existing franchaisee with Coco Cola. Thus, while a new asset is acquired, it is for the purpose of the expansion of the existing business of the assessee and not for the development of a new line of business. The charges paid are consequently allowable u/s 37 of the Act being wholly revenue in nature. Substantial Question No.2 is thus answered against the Revenue and in favour of the Assessee. Year of taxability of the consideration received for the sale of goodwill - Held that - There is nothing whatsoever to indicate that the agreement was tentative or that the transfer was incomplete or subject to other stipulations. The finding of the Tribunal to the effect that the consideration on account of goodwill was not received is contrary to Clause No.2 extracted above wherein the vendors specifically confirm the receipt thereof. The execution of a Bank Guarantee as well as the Letter dated 28.03.2002 by HCC where the payment of ₹ 3 crores is shown as an advance has to be seen in the context of the agreements between the parties and the suspension of the business of the assessee as on 28.02.1999. We are thus of the view that the Tribunal erred in deleting the addition on account of goodwill when the same has, as a fact, been transferred as on 28.2.1999 and full consideration received then and there. The amount representing goodwill is thus liable to be taxed in the present year. The conclusion of the Tribunal stands reversed and that of the Assessing Officer in this regard restored. Consequently, the amount shall stand reduced from the taxable income in respect of assessment year 2002-03.

Summary

Issues Involved:
1. Reduction of the value of broken bottles from the written down value (WDV) for short-term capital gains calculation.
2. Treatment of lease compensation charges as revenue expenditure.
3. Taxability of ?3 crores received as sale consideration for goodwill.

Detailed Analysis:

1. Reduction of the Value of Broken Bottles from WDV:
The first issue concerns whether the value of broken bottles should be deducted from the WDV when calculating short-term capital gains under Section 50 of the Income Tax Act, 1961. The Assessee had sold bottles and crates to HCC, offering short-term capital gain of ?8,28,97,258/- to tax, adopting a WDV of ?12,02,56,812/-. The Assessee accounted for breakages at 15%, whereas the assessing officer estimated breakages at ?1,88,47376 and reduced this from the WDV, enhancing the short-term capital gain to ?10,54,18,206/-. The Tribunal held that the breakages had already been accounted for in the Assessee's statement of income, and there was no need for further reduction from the WDV. The High Court agreed, stating that the Assessee's practice of accounting for breakages had been accepted by the department consistently. Thus, the court held that there was no justification for any further reduction from the WDV. Substantial Question No.1 was answered against the Revenue and in favor of the Assessee.

2. Treatment of Lease Compensation Charges as Revenue Expenditure:
The second issue dealt with the allowability of ?1,84,63,029/- as compensation charges. The Assessee claimed this amount under Section 36(1)(iii) or alternatively as a revenue outgo under Section 37(1) of the Act. The assessing officer disallowed the claim, viewing the compensation charges as capital in nature. The Tribunal found that the compensation charges were in the nature of interest payments, allowable under Section 36(1)(iii) as the Assessee assumed the role of the borrower in the arrangement with SFL for financing the acquisition and leasing of equipment. The Tribunal also held that the expenditure was revenue in nature and allowable under Section 37 of the Act, as it was for the expansion of the existing business and not for a new line of business. The High Court upheld this view, answering Substantial Question No.2 against the Revenue and in favor of the Assessee.

3. Taxability of ?3 Crores Received for Goodwill:
The third issue was whether ?3 crores received as sale consideration for goodwill should be taxed in the assessment year 1999-2000 or in AY 2002-03. The Assessee contended that the amount was taxable in AY 2002-03, supported by a letter from HCC stating the sum was an advance. However, the assessing officer noted that the Assessee had stopped manufacturing operations by 28.02.1999 and was only rendering job work for HCC, bringing the amount to tax in the present assessment year. The Tribunal initially deleted the addition, but the High Court reversed this, stating that the agreement dated 28.02.1999 unequivocally transacted for the transfer of goodwill, with the Assessee acknowledging receipt of the consideration. The court concluded that the amount representing goodwill was liable to be taxed in the present year and should be reduced from the taxable income for AY 2002-03. Substantial Question No.3 was answered against the Assessee and in favor of the Revenue.

Conclusion:
The High Court disposed of the Departmental Appeal, answering Substantial Questions Nos.1 and 2 in favor of the Assessee and against the Revenue, and Substantial Question No.3 against the Assessee and in favor of the Revenue. No costs were imposed.