2018 (8) TMI 375 - AT - Income Tax

Sum received by the assessee for discontinuing its business of commodity trading is a taxable receipt - capital gain of busniss income - Held that - Assessing Officer had come to a conclusion that there is no impairment in the loss of commodity trade to the group concern namely Geojit . Therefore, it was held that the profit making apparatus of the assessee-company / the group company was not impaired by the discontinuance of commodity trade business of the assessee per se. Since there is no sterilization of income / profit earning apparatus from the consolidate perspective of the group concerns, viz., Geojit , the amount so received by the assessee as compensation cannot be termed as a capital receipt not liable to be taxed under the provisions of the I.T.Act. Therefore, the finding of the Assessing Officer in this context is upheld. The assessee-company in the instant case, had received the compensation for not carrying on any activities in relation to its commodity trading business. The compensation so paid for not carrying any activity in relation to any business (commodity trading business) would be taxable going by the plain meaning of section 28(va)(a). Section 28(va) was introduced w.e.f. 01.04.2003. Though there was no written agreement for payment of compensation, the letters of BNP Paribas dated 23.05.2008 and 27.05.2008 and the Board Resolution of the assessee-company stating that it would discontinue the commodity trading business of the assessee on receipt of compensation of ₹ 40 crore, would come within the ambit of an arrangement / undertaking / action in concert, whether or not, the same was formal or in writing or it was intended to be enforceable by legal proceedings and that would tantamount to an agreement for the purpose of section 28(va). The wordings of section 28(va) of the I.T.Act is unambiguous and clear. The said section does not restrict, the bringing to tax only the non-compete fee but any sum that was received or receivable in cash or kind for not carrying out any activity in relation to any business. The exception for such taxation is only the cash received on account of transfer of right to manufacture, produce or process any article or thing or right to carry on any business, which is chargeable under the head Capital gains . - decided against assessee

Issues Involved:
1. Whether ?40 crore received by the assessee for discontinuing its business of commodity trading is a taxable receipt?

Detailed Analysis:

1. Nature of ?40 Crore Compensation:
The primary issue was whether the ?40 crore received by the assessee for discontinuing its commodity trading business was a taxable receipt. The assessee argued that the compensation was a capital receipt for the loss of the source of income/profit-earning apparatus and hence not liable to tax. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] disagreed, holding that the compensation was taxable.

2. Impairment of Profit-Earning Apparatus:
The assessee contended that the discontinuation of its commodity trading business impaired its profit-earning apparatus. The AO found that the business was transferred to a new company, Geojit Comtrade Ltd. (GCL), promoted by the same promoters as the assessee's parent company. The AO noted that the new company carried on the same business, in the same premises, using the same infrastructure, and even retained the same clientele and franchisees. Thus, there was no actual loss of the profit-earning apparatus, and the compensation could not be considered a capital receipt.

3. Applicability of Section 28(va):
The AO and CIT(A) held that the compensation was taxable under Section 28(va) of the Income Tax Act, which covers any sum received for not carrying out any activity in relation to any business. The assessee argued that Section 28(va) applies only to non-compete fees paid by a competitor, not to compensation for discontinuing a business due to regulatory requirements. The Tribunal found that the compensation fell within the ambit of Section 28(va) as it was for not carrying out the commodity trading business.

4. CIT(A)'s Additional Findings:
The CIT(A) also held the compensation taxable under Section 28(ii)(c), which applies to compensation received for termination of an agency. The Tribunal disagreed, noting that there was no principal-agent relationship between the assessee and its parent company, and the compensation was not for the loss of any agency.

5. Transfer Pricing Issues:
The CIT(A) directed the AO to refer the matter to the Transfer Pricing Officer (TPO) to ensure compliance with transfer pricing regulations. The Tribunal found this direction invalid as the time limit for issuing a notice under Section 143(2) had expired, making any proceedings regarding the determination of Arm’s Length Price by the TPO barred by limitation.

6. Book Profit under Section 115JB:
The assessee contended that the compensation should be excluded from the calculation of book profit under Section 115JB of the Income Tax Act. The Tribunal dismissed this contention since it had already held the compensation taxable under Section 28(va).

Conclusion:
The Tribunal upheld the AO's and CIT(A)'s findings that the ?40 crore compensation received by the assessee for discontinuing its commodity trading business was taxable under Section 28(va) of the Income Tax Act. The appeal filed by the assessee was dismissed.

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