2024 (8) TMI 801 - AT - Income Tax

Nature of receipt - Non-compete fee received as revenue receipt liable to tax or not? - HELD THAT - When compensation received for loss of agency is taxable as revenue receipt, however, receipts attributable to the negative covenants for not to carry on a business are capital receipts not liable to tax. There is no dispute that there is no allegation levelled by the AO/ CIT(A) that the receipts for non compete are attributable to any other source. On the contrary, the AO says that it is for future profit. It would be pertinent to mention here that transfer of compressor business was done pursuant to scheme of arrangement sanctioned by the Hon'ble Delhi High Court. The Hon'ble Delhi High Court had an occasion to consider a case of similar agreements, namely, Smt. Tara Sinha 2017 (8) TMI 731 - DELHI HIGH COURT wherein the Hon'ble High Court followed the decision of the Hon'ble Supreme Court in the case of Guffic Chem Pvt Ltd 2011 (3) TMI 6 - SUPREME COURT and also the decision in the case of Rohitasava Chand 2008 (3) TMI 16 - HIGH COURT OF DELHI The amount received as non-compete fee is not taxable and the AO is directed to delete the same. Ground No. 1 is allowed. Addition on cancellation of own debentures - AO dismissed the contention of the assessee on the ground that it is not supported by any principle of accounting - HELD THAT - We find that these debentures were issued for obtaining funds for capital outflow involving capital expenditure. A perusal of the offer letter for issue of debentures show the object of issue, project and repurchase of debentures. The Hon'ble High Court of Bombay in the case of Scindia Steam Navigation 1977 (11) TMI 6 - BOMBAY HIGH COURT had an occasion to consider a similar issue and held that surplus on cancellation of debentures is not equivalent to profits earned out of the business. On a reverse transaction, the Hon'ble Delhi High Court in the case of Dalmia Dadri Cement 1980 (2) TMI 45 - DELHI HIGH COURT has held that loss on cancellation of debentures is a capital loss. Disallowance being provision for premium on redemption of debenture - AO found that the assessee has not debited in its profit and loss account but claimed the same in the computation of income - HELD THAT - We find that the decision in the case of Madras Industrial Investment Corporation 1997 (4) TMI 5 - SUPREME COURT apply on the facts of the case in as much as in that case, it was held that the discount was expenditure allowable u/s 37 of the Act and it should be allowed as deduction proportionately for each year. The only difference is that, in the case in hand debentures having been issued at discount at the time of redemption, premium @ 5% of the face value has been paid. Respectfully following the decision of the Hon'ble Supreme Court 1997 (4) TMI 5 - SUPREME COURT we direct the Assessing Officer to delete the impugned addition. Ground No. 3 is allowed. Disallowance of claim of deduction being payment made to another bidder for loss of business/investment opportunity - HELD THAT - As is apparent from the contention of the assessee, payment of Rs. 1.95 crores is a consideration for acquisition of Kanpur Sugar Works. This is cost of acquisition towards capital assets of a going concern and cannot be taken to be on revenue account as it is not the business of the assessee to take over and sell an undertaking as a going concern. Since the assessee itself is in the sugar business, cost of acquisition of a going concern for acquiring extra capacity is a capital expenditure and cannot be allowed as revenue expenditure. We do not find any error in the findings of the ld. CIT(A). Ground No. 4 is dismissed. Capital gain/loss on transfer of compressor business and hard metal business - benefit of indexation on the cost of improvement - HELD THAT - In the notes, the valuer have mentioned that since the accounts of the assessee close on 30th September, therefore, the audited figures are not available as on 31st March till the accounting year is changed. The cost of improvement means the actual capital expenditure incurred by the assessee on the assets. We do not find basis in the aforementioned valuation being actual capital expenditure incurred by the assessee on improvement of the capital asset. Since the assessee has not been able to give any specific additions carried out to this unit of compressor division, we do not find much merit on cost of improvement adopted by the assessee. Considering the net asset value as on 31.03.1996, we are of the considered view that the cost of improvement at Rs. 185.37 lakhs taken by the AO is correct - AO ought to have given benefit of indexation on this cost of improvement. Therefore, to this extent, we direct the AO to recompute the capital gain after giving benefit of indexation on cost of improvement of Rs. 185.37 lakhs. Coming to the hard metal business, we find that the hard metal business was acquired by the assessee in pursuance to a scheme of amalgamation approved by BIFR. Therefore, cost to the previous owner shall become cost of the assessee on acquisition as per relevant provisions of the Act being section 49 r.w.s 47 of the Act as the transfer was under a scheme of amalgamation. Therefore, cost of acquisition to the assessee shall be cost to the previous owner. Since no opportunity was given to the assessee to furnish the cost of acquisition to the previous owner, therefore, we direct the AO to give reasonable opportunity to the assessee to furnish details of cost to the previous owner. The assessee is also directed to furnish the said cost for determination of capital gain/loss afresh. In light of the above, Ground No. 5 is allowed for statistical purposes. Additional ground of appeal - disallowance of capital loss on account of surrender of land to Delhi Development Authority DDA - HELD THAT - The petition was heard by the Hon'ble Supreme Court who ordered that after leaving the part of the land with the owner for developing the same in accordance with the permissible land use under the Master Plan, the remaining land should be surrendered to the DDA for developing the same to meet the community needs. Accordingly, as per the order, 68% of the land was surrendered to the DDA and 32% was left with the owner. The assessee has claimed capital loss on such surrender in A.Y 1997-98 and also claimed in A.Ys 2001-02 and 2004-05. Since no such claim was made either in the return of income or during the assessment proceedings, this claim by way of additional ground cannot be entertained as it requires verification of factual matrix and no question of law is involved. Therefore, we decline to entertain this ground in light of the ratio laid in the case of NTPC 1996 (12) TMI 7 - SUPREME COURT

Summary

Issues Involved:
1. Taxability of non-compete fee.
2. Taxability of profit on cancellation of own debentures.
3. Disallowance of provision for premium on redemption of debentures.
4. Disallowance of payment made to another bidder for loss of business/investment opportunity.
5. Calculation of capital gains on transfer of compressor and hard metal businesses.
6. Charging of interest under sections 234B and 234C.
7. Legality of the CIT(A) order.
8. Disallowance of capital loss on surrender of land to DDA.

Detailed Analysis:

1. Taxability of Non-Compete Fee:
The assessee received a non-compete fee of Rs. 64,42,20,111/- from a collaborator, which was treated as a capital receipt and claimed as not liable to tax. The Assessing Officer (AO) treated it as a revenue receipt. The Tribunal relied on the Supreme Court's decision in Guffic Chem Pvt Ltd, which established that compensation attributable to a negative/restrictive covenant is a capital receipt, not taxable under the Income Tax Act until the assessment year 2003-04. The Tribunal concluded that the non-compete fee received by the assessee is not taxable as it is a capital receipt.

2. Taxability of Profit on Cancellation of Own Debentures:
The AO added Rs. 1,73,91,898/- as profit on the cancellation of debentures, which the assessee claimed as a capital receipt. The Tribunal referred to the Bombay High Court's decision in Scindia Steam Navigation, which held that surplus on cancellation of debentures is not equivalent to business profits. The Tribunal directed the AO to delete the addition, treating the profit as a capital receipt.

3. Disallowance of Provision for Premium on Redemption of Debentures:
The AO disallowed Rs. 6,43,000/- claimed as a provision for premium on redemption of debentures. The Tribunal relied on the Supreme Court's decision in Madras Industrial Investment Corporation, which allowed the discount on debentures as a deductible expenditure under Section 37 of the Act. The Tribunal directed the AO to delete the disallowance.

4. Disallowance of Payment Made to Another Bidder:
The AO disallowed Rs. 1.95 crores paid to another bidder for loss of business/investment opportunity, treating it as a capital expenditure. The Tribunal upheld the AO's decision, stating that the payment was for acquiring a capital asset (Kanpur Sugar Works) and not a revenue expenditure.

5. Calculation of Capital Gains on Transfer of Compressor and Hard Metal Businesses:
The AO recalculated the cost of improvement for the compressor business, reducing it from Rs. 903.51 lakhs to Rs. 185.37 lakhs. The Tribunal agreed with the AO but directed to give the benefit of indexation on the cost of improvement. For the hard metal business, the Tribunal directed the AO to allow the assessee to furnish the cost of acquisition to the previous owner and recompute the capital gain/loss accordingly.

6. Charging of Interest Under Sections 234B and 234C:
The Tribunal did not specifically adjudicate this issue as it was general in nature.

7. Legality of the CIT(A) Order:
The Tribunal did not find the CIT(A) order void ab-initio and did not specifically adjudicate this issue as it was general in nature.

8. Disallowance of Capital Loss on Surrender of Land to DDA:
The Tribunal declined to entertain the additional ground related to the capital loss on surrender of land to DDA, as it required verification of factual matrix and no question of law was involved.

Conclusion:
The appeal was partly allowed, with significant relief granted on the taxability of the non-compete fee, profit on cancellation of debentures, and provision for premium on redemption of debentures. The disallowance of payment to another bidder and the recalculation of capital gains on the transfer of businesses were upheld with modifications. The additional ground related to the capital loss on surrender of land to DDA was not entertained.