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2025 (4) TMI 130 - AT - Income TaxCharacterization of receipt - applicability of section 28(ii)(b) - compensation received by appellant from M/s Disney Enterprises Inc. (Disney) for erosion in the value of investment of the appellant on account of termination of the right to merchandise the products and distribute the television products of Disney in India constituted capital receipt not liable to tax in the hands of the appellant. HELD THAT - We are of the considered view that neither the agreement clause between assessee and Disneys nor the assessment order and the CIT(A) as the case may be have proved the assessee to be a managing agency qua whole or substantially whole in the foregoing terms. This is indeed coupled with the fact that case law J.R. Kimtee Sons 1977 (10) TMI 21 - ANDHRA PRADESH HIGH COURT and Seshasayee Bros. (P) Ltd 1997 (2) TMI 24 - MADRAS HIGH COURT have settled the issue in assessee s favour and against the department that foregoing statutory provision covers the specified managing agency(ies) under clauses (a) to (c) than having any general applicability in all situations. We accordingly invoke stricter interpretation as per Commissioner Vs. Dilip Kumar 2018 (7) TMI 1826 - SUPREME COURT (LB) and hold that the assessee impugned compensation is not assessable u/s 28(ii)(b) of the Act once it is not the managing agency in the foregoing terms. The assessee s former twin substantive grounds raised in the instant appeal are accepted therefore. This being the outcome qua applicability of section 28(ii) of the Act against the department we further conclude that the assessee s endeavour to make the impugned sum is rendered academic in nature. Lower authorities have invoked section 73 Explanation to disallow its loss on sale of shares as speculative in nature - We note that this tribunal in assessee s case itself 2022 (8) TMI 1568 - ITAT DELHI in A.Y. 2002-03 has settled the issue in para 23 that it is not involved in trading of shares. Learned counsel has taken us to its balance sheet as well as books of account again reiterating the very factual position. CIT-DR could hardly rebut the fact that the assessee has enclosed his P L account and balance sheet wherein there is no such business income or loss arising from the specified business so as to attract the foregoing Explanation. We thus accept the assessee s instant latter substantive ground as well and direct the learned Assessing Officer to frame his consequential computation as per law.
ISSUES PRESENTED and CONSIDERED
The core legal questions considered in this judgment are: 1. Whether the compensation of Rs. 40,85,84,700 received by the appellant from Disney Enterprises Inc. for the erosion in the value of investment in M/s Abraxas Media Pvt. Ltd., due to the termination of rights to merchandise and distribute Disney products in India, constitutes a capital receipt not liable to tax. 2. Whether the compensation should be taxed under section 28(ii)(b) of the Income Tax Act, 1961, considering the absence of a managing agency relationship between Disney and the appellant. 3. Whether the loss on the sale of shares amounting to Rs. 41,79,00,000 incurred by the appellant should be treated as a loss from speculation business under the Explanation to section 73 of the Act. ISSUE-WISE DETAILED ANALYSIS Issue 1: Taxability of Compensation under Section 28(ii)(b) Relevant Legal Framework and Precedents: Section 28(ii)(b) of the Income Tax Act, 1961, pertains to the taxability of compensation or other payments received by a person managing the whole or substantially the whole of the affairs of another company in India, in connection with the termination of such management or modification of terms. Court's Interpretation and Reasoning: The Tribunal analyzed whether the compensation received by the appellant could be considered a capital receipt or if it fell within the ambit of section 28(ii)(b) as a revenue receipt. The appellant argued that the compensation was for the erosion of investment value, not for managing Disney's affairs. Key Evidence and Findings: The Tribunal noted that the compensation was paid by Disney to resolve disputes and avoid prolonged litigation, which included Disney transferring its shareholding in Abraxas to the appellant's subsidiary and agreeing to pay $10 million as compensation. Application of Law to Facts: The Tribunal concluded that the compensation did not fall under section 28(ii)(b) as the appellant was not managing Disney's affairs in India. The Tribunal emphasized that section 28(ii)(b) is applicable to managing agencies, which was not the case here. Treatment of Competing Arguments: The Tribunal considered the CIT-DR's argument that the compensation was a non-compete fee taxable under section 28(va), but rejected it due to the absence of such an addition by the lower authorities. Conclusions: The Tribunal held that the compensation was not taxable under section 28(ii)(b) as the appellant was not managing Disney's affairs, thus favoring the appellant's position. Issue 2: Treatment of Loss on Sale of Shares under Explanation to Section 73 Relevant Legal Framework and Precedents: Explanation to section 73 of the Income Tax Act, 1961, deems certain share transactions as speculative in nature unless the company proves otherwise. Court's Interpretation and Reasoning: The Tribunal examined whether the appellant was engaged in the business of share trading, which would attract the speculative transaction provisions. Key Evidence and Findings: The Tribunal referred to its previous decision in the appellant's case for the assessment year 2002-03, which established that the appellant was not involved in share trading. Application of Law to Facts: The Tribunal reviewed the appellant's balance sheet and profit and loss account, which did not reflect any business income or loss from share trading. Treatment of Competing Arguments: The CIT-DR failed to provide evidence contradicting the appellant's claim that the shares were held as investments. Conclusions: The Tribunal directed the Assessing Officer to treat the loss on the sale of shares as non-speculative, thus accepting the appellant's position. SIGNIFICANT HOLDINGS The Tribunal established the principle that compensation received in the absence of a managing agency relationship does not fall under section 28(ii)(b) as taxable business income. The Tribunal emphasized the necessity of a managing agency relationship for the application of section 28(ii)(b). The Tribunal also reaffirmed that the Explanation to section 73 does not apply to companies not engaged in share trading, thereby treating the appellant's share loss as non-speculative. The Tribunal's final determination was to allow the appeal, ruling in favor of the appellant on both issues presented.
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