2013 (10) TMI 1039 - AT - Income Tax

Whether sale of assessee s OHB to Colgate Palmolive is a slump sale as contended by the assessee or an itemized sale as contended by the Revenue Held that - A perusal of the sale agreement shows that the business sold included (a) Goodwill (b) all tangible assets including the enhance packing , machinery and equipments (c) all rights, title , interest , benefit and advantages in under all agreements or arrangements pertaining and relating to or concluded with the business, authorized dealers, manufacturers (d) Distributors and customers (e) all rights , title, interest and benefits in relation to copy rights, trades, design and trade marks connected with the business (f) all rights , title , interest and benefits in respect of process know how technology (h) all other immovables , including tangible and intangible assets right and interest of any nature. The sale agreement further stated that in consideration of the sale of OHB to Colgate Palmolive (I) Limited India as going concern , CPL shall pay to assessee a sum of Rs. 99.54 crores Reliance has to be placed upon the judgment in the case of CIT Vs. Artex Manufacturing Company 1997 (7) TMI 7 - SUPREME Court - Transaction has to be taken a slump sale and the capital gains have to be computed accordingly as per the provisions of Section 45 to 50 Decided in favor of assessee. Whether the amount received by the assessee as non-compete fee is a revenue or capital in nature for the purpose of taxability Held that - This issue to be decided on the basis of the facts and circumstances of each case as per the pre-amendment provisions of the Act. It is settled proposition on the point that if the compensation/receipt for refrain from carrying on business which effects the profit making structure of the assessee than such restriction will lead to loss of enduring trading asset by depriving the assessee from the future income and the receipt would be capital in nature. If the profit making structure is not affected as no loss of source of income resulted by putting such restrictions under the negative covenant then the receipt for agreeing such restrictive covenant would be revenue. Therefore, the principle is based on the test whether agreeing to the negative covenant, the assessee is deprived of a source of future earnings being the structure of the whole business or not. In the present case, assessee has refrained from competing same business which has been sold to CPL for which it has received this compensation. By doing this the assessee has given up one of its source of income and therefore it has to be treated as a capital receipt Decided in favor of Assessee. Addition of freight in Closing stock Held that - Addition is being deleted following the reasoning given for the deletion of the addition on account of modvat Reliance has also been placed upon the judgment in the case of Indo Nippon Chemical Co. Ltd. 2000 (8) TMI 69 - BOMBAY High Court Decided in favor of Assessee. Exclusion of sales tax and excise duty from the total turnover from the computation of deduction u/s 80HHC of the Act Held that - Deduction u/s 80HHC to be computed by excluding the amount of sales tax and excise duty from the total turnover Reliance has been placed upon the judgment in the case of in the case of M/s Sudarshan Chemical Industries ltd. 2000 (8) TMI 73 - BOMBAY High Court , which is decided in favor of Assessee. Nature of expenditure, whether Capital or Revenue Expenditure on production of advertisement films, On production of TV films, On production of cinema slides etc. Held that - expenditure is revenue in nature Decided in favor of Assessee.

Issues Involved:
1. Sale of Oral Hygiene Business (OHB) and its tax implications.
2. Non-compete fees and its tax treatment.
3. Capital gains on the sale of Bhandup land.
4. Depreciation claim on Kandla Plant.
5. Deduction under Section 80HHC related to trading loss.
6. Incremental liability for payment of pension under the Voluntary Retirement Scheme (VRS).
7. Disallowance of foreign traveling expenses.
8. Disallowance of expenses as entertainment expenses under Section 37(2).
9. Addition to the value of closing stock on account of MODVAT credit.
10. Addition to the value of closing stock on account of freight.
11. Exclusion of sales tax and excise duty from the total turnover for Section 80HHC deduction.
12. Treatment of expenses on advertisement films, TV films, and cinema slides.
13. Treatment of capital gains on the sale of goodwill.

Issue-wise Detailed Analysis:

1. Sale of Oral Hygiene Business (OHB):
The assessee contended that the sale of OHB was a slump sale, not liable for capital gains tax, while the Revenue argued for capital gains tax liability. The AO rejected the Discounted Cash Flow (DCF) method used by the assessee for determining the Fair Market Value (FMV) and instead used the share price method. The CIT(A) also rejected both methods and proposed reworking the taxable profits based on itemized entries from the purchaser's records. The Tribunal concluded that the transaction was a slump sale, not liable for capital gains tax, based on the sale agreement and judicial precedents, including the Hon'ble Supreme Court's decision in PNB Finance Limited.

2. Non-compete Fees:
The AO treated the non-compete fees of Rs. 31.45 crores as revenue receipt, while the assessee claimed it as a capital receipt. The CIT(A) upheld the AO's decision, considering the non-compete agreement as a temporary restriction. The Tribunal, however, upheld the Revenue's view, stating that the non-compete fees were revenue in nature, as the restriction did not result in the loss of an enduring asset or source of income.

3. Capital Gains on Sale of Bhandup Land:
The AO computed the capital gains based on a lower FMV determined by the DVO. The CIT(A) upheld the AO's reference to the DVO. The Tribunal restored the issue to the AO for verification of the assessee's working of capital gains based on the DVO's rate.

4. Depreciation on Kandla Plant:
The AO disallowed the depreciation claim, citing non-operation of the plant. The CIT(A) upheld this disallowance. The Tribunal restored the issue to the AO, directing verification of the plant's operational status, following the Tribunal's earlier decisions in the assessee's own case.

5. Deduction under Section 80HHC:
The AO disallowed the deduction due to a trading loss exceeding manufacturing profits. The CIT(A) upheld this decision, following the jurisdictional High Court's decision in IPCA Laboratories. The Tribunal dismissed the assessee's ground, aligning with the High Court's decision.

6. Incremental Liability for VRS:
The AO disallowed the incremental liability for VRS. The CIT(A) upheld this disallowance. The Tribunal restored the issue to the AO for verification of the actuary valuation certificate and agreement, following the Tribunal's earlier decisions.

7. Foreign Traveling Expenses:
The AO disallowed the entire expenditure on foreign visitors. The CIT(A) allowed the expenditure on foreign directors but confirmed the balance disallowance. The Tribunal directed the AO to delete the addition, following the Tribunal's earlier decisions in the assessee's own case.

8. Entertainment Expenses under Section 37(2):
The AO disallowed certain expenses as entertainment expenses. The CIT(A) upheld this disallowance. The Tribunal directed the AO to allow lunch expenses, business meeting expenses, and AGM expenses fully, confirming partial disallowance of canteen expenses, following the Tribunal's earlier decisions.

9. Addition to Closing Stock on Account of MODVAT Credit:
The AO added MODVAT credit to the closing stock value. The CIT(A) deleted this addition, following the jurisdictional High Court's decision in Indo Nippon Chemical Co. Ltd. The Tribunal upheld the CIT(A)'s decision.

10. Addition to Closing Stock on Account of Freight:
The AO added freight to the closing stock value. The CIT(A) deleted this addition, following the reasoning for deleting the MODVAT addition. The Tribunal upheld the CIT(A)'s decision.

11. Exclusion of Sales Tax and Excise Duty from Total Turnover:
The AO included sales tax and excise duty in the total turnover for Section 80HHC deduction. The CIT(A) directed exclusion, following the jurisdictional High Court's decision in Sudarshan Chemical Industries Ltd. The Tribunal upheld the CIT(A)'s decision.

12. Expenses on Advertisement Films, TV Films, and Cinema Slides:
The AO treated these expenses as capital in nature. The CIT(A) treated them as revenue, following the Tribunal's decision in Metro Shoes Pvt. Ltd. The Tribunal upheld the CIT(A)'s decision, citing the jurisdictional High Court's decision in the assessee's own case.

13. Capital Gains on Sale of Goodwill:
The CIT(A) directed the AO to treat the capital gains on the sale of goodwill as long-term capital gains, contrary to the AO's treatment as short-term capital gains. The Tribunal's decision in the assessee's appeal rendered the Revenue's appeal on this issue otiose.

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