2015 (10) TMI 2236 - AT - Income Tax

Revised return filed beyond the permissible date - Set off of brought forward business loss and unabsorbed depreciation of amalgamating company - Held that - We find that the revised return reflecting the consolidated results of the amalgamated entity was filed beyond the permissible time limit u/s 139(5) of the Act. This is due to the fact of delayed passing of the order of the High Court approving the scheme of merger with effective date as 1.4.2000. This delay is definitely not attributable to the assessee and it is not within the control of the assessee. We also find the revised return has been filed herein before the completion of assessment proceedings. The decision of Goetze India reported in 2006 (3) TMI 75 - SUPREME Court is not applicable to appellate authorities. In view of the aforesaid facts and circumstances, we direct the Learned AO to kindly frame the assessment by considering the loss returned by Aqua Chemicals & Systems (Mfg) Ltd i.e by considering the consolidated results reflected in the revised return. Compensation received by the assessee for restraint of trade - capital receipt or revenue receipt - Held that - We find that the assessee had received the compensation from its US parent company amounting to USD 326374 has been received for entering into restrictive covenants of not entering into competitive business. We also find that the provisions of section 28(va) of the Act had been introduced in the statute book by Finance Act 2002 with effect from 1.4.2003 (relevant to Asst Year 2003-04) only and not earlier. Accordingly, the non-compete fees would become taxable only from Asst Year 2003- 04 and not earlier. The year under appeal before us is Asst Year 2001-02 , during which year, the provisions of section 28(va) of the Act were not in the statute.We also hold that the payments received for impairment of income earning apparatus, sterlisation of source of income or transfer of a capital asset would generally fall in the category of capital receipts. Further the correspondences dated 20.4.1999; 4.1.2000 ; 10.4.2000 & 20.11.2000 as reproduced supra, clearly goes to prove that the compensation received for undertaking restrictive covenants of not competing with the business of the assessee and fall in the nature of capital receipt. - Decided in favour of assessee. Treatment of exchange fluctuation loss arising out of restatement of Exchange Commercial Borrowings (ECB) from holding company of the assessee utilized for general corporate objectives - Held that - It is observed from the finding given in the assessment order that the ECB Loan of USD 50,00,000 was utilized for general corporate objectives and not for acquisition of any fixed assets by the assessee, though contradictory finding is taken by the Learned AO in his order. Hence we hold that the borrowings were utilized on revenue account. Based on this, it could logically be concluded that any exchange fluctuation arising out of restatement of the said loan at the end of the year, be it gain or loss, would also fall on revenue account and hence automatically comes under the ambit of taxation if it is a gain and allowable as an expenditure if it is a loss. This issue is squarely covered by the decision of the Supreme Court in the case of CIT vs Woodward Governor India P Ltd reported in (2009 (4) TMI 4 - SUPREME COURT) to hold that the loss suffered by the assessee on account of the exchange difference as on the date of the balance sheet is an item of expenditure under Section 37(1) of the 1961 Act - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of the revised return filed beyond the permissible date.
2. Treatment of compensation received for restraint of trade.
3. Treatment of exchange fluctuation loss on ECB loan.

Detailed Analysis:

1. Validity of the Revised Return Filed Beyond the Permissible Date:
The first issue is whether the revised return filed beyond the permissible date should be considered for the set-off of brought forward business loss and unabsorbed depreciation of the amalgamating company. The original return of income for Aqua Chemicals & Systems (Mfg) Ltd (ACS) was filed declaring a total loss, and the original return for the assessee company was filed showing total income. Pursuant to a scheme of amalgamation approved by the Calcutta High Court, ACS merged with the assessee company, and a revised return was filed reflecting the consolidated results. The revised return was ignored by the AO and CIT(A) despite the merger being approved by the High Courts. The Tribunal held that the revenue is bound to follow the court orders approving the merger and directed the AO to frame the assessment considering the consolidated results in the revised return, allowing the assessee's ground.

2. Treatment of Compensation Received for Restraint of Trade:
The second issue is whether the compensation received by the assessee for restraint of trade should be treated as a capital receipt or revenue receipt. The assessee received compensation from its parent company for exiting the lubricant business, which was sold globally. The AO treated this compensation as a business receipt and brought it to tax. The Tribunal, however, noted that the compensation was received for entering into restrictive covenants and not competing in the business, making it a capital receipt. The Tribunal relied on the Supreme Court decision in Guffic Chem P Ltd vs CIT, which held that compensation for refraining from carrying on competitive business is a capital receipt. Thus, the Tribunal directed the AO to treat the compensation as a capital receipt and delete the addition, allowing the assessee's ground.

3. Treatment of Exchange Fluctuation Loss on ECB Loan:
The third issue is the treatment of exchange fluctuation loss arising from the restatement of Exchange Commercial Borrowings (ECB) utilized for general corporate objectives. The assessee availed an ECB loan from its parent company, which was restated based on the exchange rate at the end of the year, resulting in a loss. The AO treated the loss as capital in nature but did not grant depreciation. The Tribunal held that since the loan was utilized for general corporate objectives (revenue account), any exchange fluctuation arising from restatement should be treated as revenue in nature. The Tribunal relied on the Supreme Court decision in CIT vs Woodward Governor India P Ltd, which allowed such losses as deductions under section 37(1) of the Act. Consequently, the Tribunal allowed the exchange loss as a deduction, allowing the assessee's grounds.

Conclusion:
The Tribunal allowed the appeal of the assessee, directing the AO to consider the revised return reflecting the consolidated results, treat the compensation for restraint of trade as a capital receipt, and allow the exchange fluctuation loss as a deduction. The order was pronounced on 21.09.2015.