2012 (4) TMI 126 - AT - Income Tax

Compensation for foregoing right to acquire the shares - the company received Rs.10 Crores towards compensation for waiving the right to receive the equity shares which was admitted under the head Other Income in the profit and loss account whereas in the computation of income the assessee company claimed this receipt to be capital in nature -It was the contention of AR that, there was no cost of acquisition incurred by the assessee for obtaining the rights under the agreement cited earlier in this order and so there could be no capital gains assessable in that connection - Held that - the entire amount of Rs.10 crores received by the assessee company towards compensation for waiver of rights to receive the shares of KPCL is to be brought to tax as capital gain to be computed as long term or short term depending upon the investments/advances as made by assessee Recalculation of deduction under section 80IC - The AO has pointed out in the assessment order that the assessee has clearly deflated salary expenses, raw material expenses, etc. with respect to Dehradun to artificially inflate the profit - the formulations in Mekaguda unit cannot be sold in the market, it is obviously not practical for him to calculate the prices of inputs on the basis of market prices - Held that - it is most appropriate to consider the actual cost as per cost records maintained by the assesee and thereafter assessing office consider the profits on these transaction as compared to other industries in similar line or if there is no comparable, fix reasonable percentage of profit depending upon market condition prevailing in the similar line of industry. Thus to set aside this issue to the file of assessing office to bring the comparable cases on record and redo the assessment on this issue. addition made by the assessing office towards interest - The assessee company had advanced certain loans to M/s Natco Organics Limited in the earlier years and the assessee has not admitted any interest - Held that - Assessing Officer does not have any basis on the addition made for the interest - The issue is covered in favor of the assessee as that interest has to be charged from the date on which there is a resolution of the Board of the company stating that interest has to be charged.

Issues Involved:
1. Taxability of compensation received for waiving the right to acquire shares.
2. Restriction of deduction under Section 80IC of the Income Tax Act.
3. Addition of interest receivable on loans given to a sister company.

Detailed Analysis:

1. Taxability of Compensation Received for Waiving the Right to Acquire Shares:

The assessee company received Rs.10 crores as compensation for waiving its right to convert advances into equity shares of Krishnapatnam Port Co. Ltd. (KPCL). The assessee claimed this compensation as a capital receipt, arguing that the right to acquire equity shares is not a capital asset as per Section 2(47) of the Income Tax Act and should not be taxable. The Assessing Officer, however, treated the compensation as short-term capital gain, while the CIT (A) assessed it as income from other sources.

The tribunal analyzed the agreements and found that the right to convert advances into equity shares is a capital asset under Section 2(14) of the Act, as it constitutes property. The tribunal held that relinquishing this right constitutes a transfer under Section 2(47), making the compensation liable for capital gains tax. The tribunal disagreed with the assessee's argument that there was no cost of acquisition for the right, noting that the advances made to KPCL were in consideration for the right to acquire shares. Consequently, the tribunal ruled that the Rs.10 crores received should be taxed as capital gain, either long-term or short-term, depending on the period of investment.

2. Restriction of Deduction under Section 80IC:

The assessee claimed a deduction of Rs.20,66,45,736 under Section 80IC for its Dehradun unit, which was restricted to Rs.6,01,46,943 by the Assessing Officer. The officer observed that the profit margins of the Dehradun unit were significantly higher compared to other units, suggesting inflated profits. The CIT (A) upheld this restriction.

The tribunal noted that the Assessing Officer is empowered under Section 80IA(8) to recompute eligible profits on a reasonable basis if there are exceptional difficulties in computing profits as per the prescribed method. The tribunal agreed with the Assessing Officer's findings that the Dehradun unit's profits were artificially inflated by deflating expenses in other units. The tribunal directed the Assessing Officer to re-compute the eligible profits by considering the market value of goods transferred and comparing with similar industries, thus partially allowing the assessee's appeal.

3. Addition of Interest Receivable on Loans Given to a Sister Company:

The Assessing Officer added Rs.1,32,78,739 as interest receivable on loans given to Natco Organics Limited, which the assessee had not admitted. The CIT (A) deleted this addition, stating that there was no basis for the Assessing Officer's claim.

The tribunal upheld the CIT (A)'s decision, noting that the issue was covered by a previous tribunal decision in favor of the assessee. The tribunal found no evidence that the assessee had charged interest for the current year and not disclosed it. The tribunal confirmed the deletion of the addition, dismissing the revenue's appeal on this issue.

Conclusion:

The tribunal partly allowed both the assessee's and the revenue's appeals. The compensation received for waiving the right to acquire shares was ruled taxable as capital gain. The deduction under Section 80IC was to be re-computed based on market values and comparable industry standards. The addition of interest receivable was deleted, confirming the CIT (A)'s decision. The order was pronounced in the open court on 29.2.2012.

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