9911796707
TMI Blog2013 (1) TMI 393X X X X Extracts X X X X X X X X Extracts X X X X ..... drawn by the AO for the reason that section 55(2)(a) is for the purpose of determining the cost of acquisition in relation to a capital asset which also includes right to manufacture produce or process any article or thing or right to carry on any business. In the present case, the assessee has not received any right to carry such kind of activities. In fact, the amount has been given for not to carry out any such business activities or manufacturing. Regarding other aspect that the assessee has itself treated part of its receipt as capital gain by making the investment in specified securities for the purpose of exemption under section 54EA, will also not help the case of the Revenue as one has to see the nature of receipts and not the conduct of the assessee. Thus as rightly pointed out assessee that if at all this sum can be treated to be as taxable income, the same can be taxed under the provisions of section 28(va) which has been brought in the statute w.e.f. 1st April 2003. Thus following the judgment in case of Guffic Chem Pvt. Ltd. (2011 (3) TMI 6 - SUPREME COURT) wherein held that prior to this period, such a payment is to be treated as capital receipt not liable for tax n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t depreciation and can be set-off against the income under any head. Also see General Motors Pvt. Ltd. v/s DCIT [2012 (8) TMI 714 - GUJARAT HIGH COURT]- in favour of assessee. Disallowance of retirement compensation paid to workmen - the expenditure was incurred upon the closure of the business - Held that:- The issue now stands covered by the judgment of Jurisdictional High Court rendered in Bhor Industries Ltd. [2003 (2) TMI 20 - BOMBAY HIGH COURT] wherein held that the retirement compensation paid to the workmen is revenue expenditure and is to be allowed in this year - revenue expenditure, which is incurred wholly and exclusively for the purposes of business, must be allowed in its entirety in the year in which it is incurred and it cannot be spread over a number of years even though the assessee has written it off in its books over a period of years - in favour of assessee. X X X X Extracts X X X X X X X X Extracts X X X X ..... tilising of business knowhow Rs. 5.00 crores 4. The assessee had declared the amount received for goodwill of Rs. 1.00 crore as long term capital gain and with regard to a sum of Rs. 5.00 crores received towards restraint covenants as non-taxable receipt in the return of income. The assessee, in the return of income, made following notes:- "Pursuant to agreement dated 27.11.98, the assessee received a sum of Rs.1,00,00,000/- towards goodwill from Hindustan Coca- Cola Bottling Northwest Pvt. Ltd. The assessee was advised that the receipt may be brought to tax under the head "capital gains" as long term capital gain. In view thereof; the assessee has invested the entire sum of Rs. 1,00,00,000/- in DSP Merill Lynch Bond Fund (Growth) (Security) qualifying for exemption under section 54EA. The taxable portion of capital gains comprised therein is NIL. Details about investment in 54EA qualifying securities alongwith necessary proof is sent herewith. Consideration for Restraint & Desisting from use of know-how: A sum of Rs.5.00,00,000 received by the company under agreement dated 27. 11.98 in consideration of ten year restraint on right to use business entrepreneurship and/or for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rated at Page-5 of the assessment order. The assessee, however, submitted that by way of abandoned precaution, a sum of Rs. 3.00 crores were invested into notified securities under section 54EA. 6. The Assessing Officer rejected the assessee's contention and added the balance of Rs. 2.00 crores after observing and holding as under:- "The claim of the assessee that the amount of Rs. 5.00 crores is not taxable is not acceptable for the following reasons. a) The very circumstances that the assessee has himself invested sum of Rs. 3.00 crores in section 54EA securities is indicative that the assessee himself regards this amount as revenue receipt. b) Reference to section 55(2)(a) of the Act will show that the coverage and scope of section is being consistently expanded with attempted tax avoidance by the assessee. Since assessment year 1998-99, apart from goodwill other valuable rights are also covered. The non-compete right is also a valuable right as evidenced by the conduct of the parties by putting value thereon. The right also being a valuable right and asset, it can be regarded as covered by section 55(2)(a) of the Act. Having regard to the above, I reject the claim of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case as taxability of income under section 115JA is a deeming provision and supersedes the normal manner of computation of income; (iii) all kind of profits are to be taken in the Profit & Loss account as it would reflect the position of actual profit & loss of a company. For this conclusion, he relied upon the dictionary meaning of "Profit & Loss Account"; (iv) even as per the requirement of Parts-II and III of Schedule-VI of Companies Act, 1956, under which Profit & Loss account has to be maintained as per the requirement of section 115JA(2), is that the company should disclose the result of the working of the company including credit or receipt and debit or expenditure in respect of non-recurring expenditure transactions or transaction of an exceptional nature, therefore, the assessee should have disclosed the receipts in question in the Profit & Loss account even as per Companies Act, 1956; (v) as per the accounting standard AS/5 issued by the Institute of Chartered Accountants of India, net profit and loss for the period contemplates that all the disclosure should be made in the profit and loss itself. Thus, the assessee has not prepared the Profit & Loss account as per the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve covenant and therefore is clearly of the nature to which the decision of Hon. ITAT 'A' bench Mumbai in the case of ITA No.4705 and 4706 quoted supra wherein the Hon. ITAT has followed the decisions of Hon. Supreme Court and the jurisdictional High Court is clearly applicable. The English cases quoted supra have only persuasive importance but they provide important input for interpreting the law. The decision of Hon. Calcutta High Court as reported in 34, ITR 729, clearly lays down that consideration received for restrictive covenant in regard to one's business or profession is a capital receipt. In view of this decision also, the receipt of Rs.5 crores is held to be capital in nature. Thus, in view of case laws relied upon by the appellant and mentioned hereinbefore, I am of the considered view that consideration received by the assessee for restrictive covenant at Rs.5 crore is a capital receipt because it is received for foregoing opportunities b' impairing trading structure of the assessee. On given facts, it is held that this receipt of Rs.5 crores on account of restrictive covenant is a capital receipt because it impairs the trading structure of the appellant. 5.7 On give ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... strictive covenant between the appellant and the HCCC does not result in any transfer. In fact the exercise of option of not engaging into specified business activity and non-disclosing of technical know-how to a third party and non-utilisation of the same for a period of ten years is, in my considered view, a denial / restriction resulting into non-exercise of a right inherent in the appellant and this right, as a result of the restrictive covenant, shall be dormant for ten years. Thus, in my view, the right is retained with the appellant in dormant form for ten years and there is no transfer of any sight by the restrictive covenant entered into by the appellant with TCCC. In this view of the matter, I do not find any merit in the views of the A.O. that broadened scope of section 55(2)(a) covers the receipt on account of promise to not exercise the right for a period of ten years. 5.10 In view of discussion herein before and following decision of Hon. ITAT in the case of appeal Nos. 4705 & 4706 quoted supra wherein the Hon. ITAT Bench, Mumbai followed the decisions of Hon. Supreme Court in the three cases quoted supra, it is held that amount of Rs. 5 crores received by the appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the statute by Finance Act, 2002, w.e.f. 1st April 2003, which is applicable from the A.Y. 2003-04. Therefore, this section will not apply in the assessment year 1999-2000. He submitted that this issue has been now set at rest by the judgment of Hon'ble Supreme Court in Guffic Chem Pvt. Ltd. v/s CIT, [2011] 332 ITR 602 (SC). Thus, in view of the judgment of Hon'ble Supreme Court, such a receipt cannot be held to be taxable at all in the impugned assessment year i.e., 1999-2000 and, hence, the finding of the learned Commissioner (Appeals) is to be upheld. 14. We have carefully considered the rival contentions of the parties, perused the orders of the authorities below and the case laws relied upon by both the parties including the material available on record. The assessee has received a sum of Rs. 5.00 crores under an agreement dated 27th November 1998, in consideration of 10 years of restraint on right to carry on business or to carry on specified activities mentioned therein. The Assessing Officer has treated the sum so received to be taxable under the head "Capital Gains" firstly, on the ground that the assessee has itself invested the sum of Rs. 3.00 crores out of the recei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the 1961 Act. It became taxable only with effect from 1.4.2003. It is well settled that a liability cannot be created retrospectively. In the present case, compensation received under Non-Competition Agreement became taxable as a capital receipt and not as a revenue receipt by specific legislative mandate vide Section 28(va) and that too with effect from 1.4.2003. Hence, the said Section 28(va) is amendatory and not clarificatory. Lastly, in Commissioner of Income-Tax, Nagpur v. Rai Bahadur Jairam Valji reported in 35 ITR 148 it was held by this Court that if a contract is entered into in the ordinary course of business, any compensation received for its termination (loss of agency) would be a revenue receipt. In the present case, both CIT (A) as well as the Tribunal, came to the conclusion that the agreement entered into by the assessee with Ranbaxy led to loss of source of business; that payment was received under the negative covenant and therefore the receipt of Rs.50 lakhs by the assessee from Ranbaxy was in the nature of capital receipt. In fact, in order to put an end to the litigation, Parliament stepped in to specifically tax such receipts under non-competition agreemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it to the capital reserve account in the balance sheet. Hence, there was no necessity to increase the book profit by reserves which are not debited to Profit & Loss Account. He submitted that this issue has since been settled by the Hon'ble Supreme Court in Apollo Tyres Ltd. (supra) and he drew our attention to the question of law no.1, which was required to be answered by the Hon'ble Supreme Court and the relevant observation and findings of the Hon'ble Supreme Court given at Pages-279 and 280 of the judgment. He further relied upon the decision of the Hon'ble Supreme Court in CIT v/s HCL Comnet Systems and Services Ltd., [2008] 305 ITR 409 (SC) = (2008-TIOL-182-SC-IT), wherein the principle laid down in Apollo Tyres Ltd. (supra) has been reiterated that the Assessing Officer has to accept the authenticity of the accounts maintained in accordance with the provisions of Parts-II and III of Schedule-VI of Companies Act, 1956, which has been certified by the auditor and approved by the company in general meeting. The Assessing Officer has power only to examine as to whether the books of account are duly certified by the authorities under Companies Act, 1956 or not and whether such b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f section 115JA only and the Assessing Officer has to rely upon the statement of accounts of the company prepared in that manner only. The limited scope of the Assessing Officer is to examine as to whether the books of account have been certified by the authority under Companies Act having been properly maintained in accordance with the said Act. His scope is limited only for making increases and reductions as provided in the Explanation to the said section. This issue is no longer res integra as the Hon'ble Supreme Court in three judges Bench in Apollo Tyres Ltd (supra) has interpreted the scope of section 115JA. Before the Hon'ble Supreme Court, one of the main questions to be answered was as under:- "(i) Can an Assessing Officer while assessing a company for income tax under section 115J of the Act question the correctness of the Profit & Loss account prepared by the assessee company and certified by the statutory auditors of the company as having been prepared in accordance with the requirements of Parts-II and III of Schedule VI to the Companies Act? This question has been answered by Their Lordships after analyzing the provisions of section 115J as under:- "If we examine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the purpose of income-tax both maintained under the same Act. If the legislature intended the AO to reassess the company's income, then it would have stated in s. 115J that "income of the company as accepted by the AO. In the absence of the same and on the language of s. 115J, it will have to held that view taken by the Tribunal is correct and the High Court has erred in reversing the said view of the Tribunal. Therefore, we are of the opinion, the AO while computing the income under s. 115J has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The AO thereafter has the limited power of making increases and reductions as provided for in the Explanation to the said section. To put it differently, the AO does not have the jurisdiction to go behind the net profit shown in the P&L a/c except to the extent provided in the Explanation to s. 115J." 20. This principle has been reiterated by the Hon'ble Supreme Court in Malayala Manorama Co. Ltd. v/s CIT, [2008] 300 ITR 251 (SC). In this case, the Hon'ble Supreme Court has referred to the decision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 23. In ground no.1, the assessee has taken alternative ground that the Assessing Officer should have accepted the contentions of the assessee that at least, to the extent of the receipts which are exempt under section 54EA, should not construed part of book profit. Since we have already dismissed the grounds no.3, 4 and 5, raised in the appeal preferred by the Revenue in ITA no. 6571/Mum./2002, and has allowed the assessee's contentions, this ground becomes infructuous and, accordingly, the same is dismissed as such. 24. Ground no.2, relates to levy of interest under section 234B and 234C of the Act. 25. Both the parties agree before us that this ground is consequential in nature. Accordingly, the Assessing Officer is directed to give consequential effect in accordance with law while computing the income of the assessee. 26. In the result, assessee's cross objection is partly allowed for statistical purposes. We now take up Revenue's appeal in ITA no.3757/Mum./2003, vide which following grounds have been raised:- "1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in treating the receipt of Rs. 10 crores on sale of right to manufacture a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and circumstances of the case and in law, the learned CIT(A) erred in not permitting set off in respect of depreciation loss of Rs.4.65 Cr. pertaining to A.Y.1991-92 to 1996-97 (i.e. upto A.Y.1996-97) against income chargeable under section 50 of the Act. In the facts and circumstances of the case and in law, the learned CIT(A) erred in not accepting contention of the appellant. (a) That, the absorption of unabsorbed depreciation claim for the years upto A.Y. 1996-97 was governed by the provisions of Section 32(2) as they then subsisted. (b) That, amendment made to Section 32(2) w.e.f. A.Y. 1997-98 was prospective as was clear, inter alia, from legislative intent expressed in the Finance Minister's Speech [Refer 222 ITR 36 (St)] and was, therefore, meant to be applicable to depreciation claims arising in A.Y. 1997-98 and onwards. (c) That, income charged to tax under section 50 represents profits and gains of business and hence, in terms of decision of J.K.Chemicals V/s. ACIT (ITA No. 8206 / 8618 / B/89), the set off of unabsorbed depreciation claimed was correct. 2. In the facts and circumstances of the case and in law, the learned CIT(A) erred in holding that compensat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Special Bench in Times Guarantee (supra). 37. After carefully considering the findings of the Assessing Officer and the Commissioner (Appeals) as well as the decision of the Special Bench of the Tribunal cited supra, we find that insofar as the issue of brought forward unadjusted depreciation allowance up to assessment year 1996-97 is concerned, the same is to be treated as current depreciation and can be set-off against the income under any head. The relevant findings and observations are as under:- "38. The legal position of current and brought forward unadjusted/unabsorbed depreciation allowance in the three periods, is summarized as under :- A. In the first period (i.e. upto A.Y. 1996-97) i. Current depreciation , that is the amount of allowance for the year under section 32(1), can be set off against income under any head within the same year. ii. Amount of such current depreciation which cannot be so set off within the same year as per i. above shall be deemed as depreciation u/s 32(1), that is depreciation for the current year in the following year(s) to be set off against income under any head, like current depreciation. B. In the second period (i.e. A.Y. 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lenged the disallowance of retirement compensation of Rs. 23,17,936, paid to workmen on the ground that the expenditure was incurred upon the closure of the business. 40. Learned Counsel for the assessee submitted that this issue is covered by the judgment of the Jurisdictional High Court in CIT v/s Bhor Industries Ltd., [2003] 264 ITR 180 (Bom.), wherein the Jurisdictional High Court has held that expenditure relating to voluntary retirement scheme is a revenue expenditure and is an allowable deduction. 41. Learned Departmental Representative, on the other hand, fairly admitted that this issue stands covered by the judgment of Jurisdictional High Court cited supra. 42. After going through the order passed by the learned Commissioner (Appeals), we find that he has confirmed the disallowance on the ground that it is capital in nature after observing and holding as under:- "41. In the circumstances, it is to be seen whether the payment made to the employees leaving their services which in turn had arisen in the peculiar circumstances of the industrial undertaking of the appellant company having got closed in view of the said part of the business having been transferred can be he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... certained, quantified and discharged during the accounting year ending on March 31, 1996, and allowed the claim of the assessee. On appeal : Held, (i) that since the Revenue did not prefer any appeal against the order of assessment the Revenue could not contend that the entire expenses were in the capital field. (ii) That in the annual report for the accounting year March 31, 1996, the assessee had written off the said expenses over a period of sixty months. In the earlier years, the assessee had written off such expenses over a period of thirty-six months at the rate of Rs. 55,68,025 whereas in the year in question it had written off a smaller amount of Rs. 33,40,818. Thus, the Revenue could not have any grievance about the change of the period over which the amount was written off. (iii) That the said expenses were incurred by the assessee to save expense. This was not refereable to any income-yielding asset. It must be allowed in its entirety in the year in which it was incurred and it could not be spread over a number of years even though the assessee had written it off in its books over a period of years. Further, the assessee had incurred the said expenses not to the tu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A/c. and directly to be brought to reserve account in the balance-sheet; 6. deleting the addition of Rs.35 crores for computing book profit u/s.1I5JA relying on the decision of Appollo Tyres 255 ITR 273 where the facts of the case were different. 7. relying on the decision of Appollo Tyres 255 ITR 273 where the facts of the case were different in view of the fact that the arrears of depreciation were debited in profit and loss account in the said case." 48. Grounds no.1, 2 3 and 4, relate to taxability of non-compete (restraint covenant) receipt. This issue is similar to grounds no.1 and 2 raised by the Revenue in ITA no.6571/Mum./2002, and in view of our decision given therein, we dismiss these grounds also. 49. Grounds no.5, 6 and 7, relate to implication of MAT on account of receipt of goodwill and non-compete receipts. 50. The issue arising out of grounds no.5, 6 and 7, is similar to the issue raised in ground no.3 4 and 5 in Revenue's appeal in ITA no.6571/Mum./2002, and in view of our decision given therein, these grounds are dismissed as such. 51. In the result, Revenue's appeal is dismissed. We now take up assessee's cross objection no.293/Mum./2003, arising out of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2,10,403/- debited to fines and penalties." 54. At the time of hearing, learned Counsel for the assessee submitted before us that he did not wish to press grounds no.1, 2 and 4, to which, the learned Departmental Representative did not raise any objection. Consequently, these grounds are treated to be dismissed as "not pressed". 55. In ground no.3, the assessee has challenged disallowance of set-off of unabsorbed depreciation of Rs. 1,73,47,966, against the income of Rs. 10,44,29,082, under the head "short term capital gain" under section 50 of the Act. 56. Learned Counsel for the assessee submitted before us that unabsorbed depreciation pertains to assessment year 1997-98 and is allowed to be set-off in this assessment year against short term capital gain. He submitted that even though the Special Bench decision on this issue is against the assessee, however, the same has been now covered in favour of the assessee by the judgment of Hon'ble Gujarat High Court in General Motors Pvt. Ltd. v/s DCIT, passed in Special Civil Application no.1773/2012, vide judgment dated 23rd August 2012. 57. Learned Departmental Representative fairly agreed that this issue is covered in favour of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... depreciation allowance available in the A.Y. 1997-98 1999-00, 2000-01 and 2001-02 to be carried forward to the succeeding years, and if an unabsorbed depreciation or part thereof could not be set off till the A.Y. 2002-03 then it would be carried forward till the time it is set off against the profits and gains of subsequent years." 59. Thus, respectfully following the aforesaid judgment, we hold that assessee's claim for set-off of unabsorbed depreciation is allowable against short term capital gain. Consequently, ground no.3, is hereby allowed. 60. Insofar as ground no.5 is concerned, the learned Counsel for the assessee submitted that this ground becomes purely academic if grounds no.1 to 4, raised by the Revenue in its appeal in ITA no.6923/Mum./2002, are allowed in favour of the assessee. 61. Since we have already dismissed the grounds no.1 to 4, raised by the Revenue in its appeal in ITA no.6923/Mum./2002, ground no.5, raised in this appeal has been rendered academic and hence, dismissed as infructuous. 62. Ground no.6, relates to charging of interest under section 234B and 234C of the Act. 63. Both the parties agree before us that this ground is consequential in nature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o.1 and 2 in ITA no.6570/Mum./2002, are allowed in favour of the assessee. 68. Since grounds no.1 and 2, in ITA no.6570/Mum./2002, have already been dismissed and decided in favuor of the assessee, hence, these grounds become purely academic in nature and are dismissed as infructuous. 69. In the result, Revenue's appeal is dismissed. We now take up assessee's cross objection no.291/Mum./2002, vide which, following grounds have been raised:- Being aggrieved by the order of the Hon'able CIT.(A), the following memorandum of cross objection is filed which it is prayed may please be considered. 1. In the facts and circumstances of the case and in law, the learned C.I.T(A) erred in not dealing with following grounds raised at Sr. No. 7 in our Grounds of Appeal before C.I.T(A) - "Without prejudice, the learned A.O. ought to have accepted contention of the appellant that at least to the extent the receipts were exempted under section 54EA, the receipts did not constitute part of "book profits". In the facts and circumstances of the case and in law, the learned A.O. erred in not granting set off of business losslunabsorbed depreciation of Rs. 55,55,475/- in terms of clause (iii) ..... X X X X Extracts X X X X X X X X Extracts X X X X
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