2004 (5) TMI 249 - AT - Income Tax

Summary

Issues Involved:
1. Nature of the amount received by the assessees from HCC.
2. Applicability of capital gains tax on the amount received.
3. Validity of the CIT's revision of the Assessing Officer's order under section 263.

Issue-wise Detailed Analysis:

1. Nature of the Amount Received by the Assessees from HCC:
The assessees, who were directors and principal promoter shareholders of M/s. Mansarovar Paper & Industries Ltd., received Rs. 1.5 crores each from HCC under an agreement to desist from using or disclosing confidential information regarding Coca-Cola's bottling and distribution. The assessees claimed this amount as a capital receipt not liable to tax, arguing that the agreement did not involve any transfer of know-how but merely restricted them from using or disclosing it for five years.

2. Applicability of Capital Gains Tax on the Amount Received:
The Assessing Officer accepted the assessees' claim, concluding that there was no transfer of capital asset as per section 2(47) of the Income Tax Act, and thus, the amount was not liable to capital gains tax. However, the CIT, upon examination, held that the agreement constituted an extinguishment of the assessees' right to manufacture, produce, or process, making the amount received liable to capital gains tax under section 55(2)(a) as amended by the Finance Act, 1997. The CIT relied on Supreme Court decisions in A.R. Krishnamurthy v. CIT and Kartikeya V. Sarabhai v. CIT to support this conclusion.

3. Validity of the CIT's Revision of the Assessing Officer's Order under Section 263:
The CIT found the Assessing Officer's order erroneous and prejudicial to the interest of the Revenue, invoking section 263 to revise it. The assessees contended that the restriction imposed by the agreement did not amount to a transfer of capital asset and that the amendment in section 55(2)(a) was not applicable. They argued that the non-compete fee was made taxable as 'business income' only from 1-4-2003 under section 28(va), indicating that it was not previously liable to capital gains tax. The Tribunal agreed with the assessees, noting that the agreement did not result in the transfer of any capital asset and that the subsequent introduction of section 28(va) supported their position. The Tribunal also distinguished the cases cited by the CIT and held that the Assessing Officer's order was in accordance with law, setting aside the CIT's revision under section 263.

Conclusion:
The Tribunal concluded that the amount received by the assessees was a capital receipt not liable to capital gains tax, as there was no transfer of capital asset involved. The CIT's orders under section 263 were set aside, and the Assessing Officer's original orders were restored. The appeals of the assessees were allowed.