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TMI Blog2013 (9) TMI 188X X X X Extracts X X X X X X X X Extracts X X X X ..... odwill in the books of accounts; 3) That the Hon'ble CIT(A) erred in law and on facts by disregarding the contention of the Appellant that the Goodwill recorded in the books represents intangible assets eligible for depreciation under section 32(1 )(ii), although the same was recorded as Goodwill in the books of accounts; 4) That the Hon'ble CIT(A) erred in law and on facts by holding that depreciation on 'Goodwill' is not allowable since the same does not find a mention in the words used in section 32(1)(ii) of the Act, although the Appellant has submitted that the amount recorded as 'Goodwill' in fact represents amount paid towards intangible assets eligible for depreciation; 5) That the Hon'ble CIT(A) erred in law and on facts by granting restrictive meaning to section 32(1 )(ii) of the Act; 3. The assessee in ITA No.294/Chd/2012 has raised the following grounds of appeal: 1) That the order passed by the Hon'ble Commissioner of Income-tax (Appeals) ["CIT(A)"] under section 250 of the Act is contrary to the provisions of the law. 2) That the Hon'ble CIT(A) erred in upholding the order of the learned Assessing Officer ("AO") in making ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 147/148 of the Act. The reasons for reopening the assessment were that in the computation of income the assessee had claimed depreciation on goodwill, which as per the Assessing Officer was not allowable as goodwill was an intangible asset. The Assessing Officer while reopening the assessment had found support from the judgment of the Hon'ble Bombay High Court in CIT Vs. M/s Techno Shares and Stocks Ltd. decided on 11.9.2009. The extract of the relevant portion of the judgment was reproduced by the Assessing Officer under paras 3 to 5 at pages 2 and 3 of the assessment order. The Assessing Officer consequently issued notice under section 148 of the Act to the assessee. The assessee in reply submitted that the copy of return of income earlier filed by it may be treated as filed under section 148 of the Act. The assessee also raised objection to the reopening of assessment under section 148 of the Act which was disposed off by the Assessing Officer. The Assessing Officer observed that under the amended provisions of section 32 of the Act w.e.f. 1.4.1998 though the assessee was entitled to depreciation on tangible/intangible assets but the same was allowable only on the restric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 1273.78 lacs. The Assessing Officer vide para 19 thus observed that A perusal of the table shows that the valuer had separately assigned a value to the intangible assets representing specific intellectual property rights in the form of 'brands' and also assigned values to the tangible assets, and the balance 'slump' price, which could not be allocated to any other specific tangible or intangible asset, was given a consolidated value as goodwill acquired by the company. The Assessing Officer vide para 25 enlisted the reasons for non-allowance of claim of depreciation of goodwill acquired at Rs. 12.74 crores. 6. Reliance was placed by the Assessing Officer on the restrictive interpretation of section 32(1)(ii) of the Act made by the Hon'ble Bombay High Court and implicitly approved by the Hon'ble Supreme Court in the case of M/s Techno Shares & Stocks [327 ITR 323 (SC)] and it was held that the assessee was not entitled to the claim of depreciation on the aforesaid goodwill. The Assessing Officer also distinguished the facts of other cases on which reliance was placed by the assessee and held the same to be not applicable. In contrast, the Assessing Office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lump price as laid down in para 35 and 36 of AS-10 issued by the ICAI. They have taken all the assets including the fixed assets and the intangible assets at their respective fair market value. "Goodwill" is calculated as the difference between the aggregate slump price and aggregate fair market value of other assets including the fixed assets and intangible assets. According to the CIT (Appeals) the assessee had failed to furnish the break-up of the value assigned by the Accountants to the given components namely employees, contracts, licenses, approvals etc. in spite of queries raised by the Assessing Officer and in view of the confession of the assessee that no such break-up was available and the assessee having failed to substantiate its claim during the appellate proceedings, the CIT (Appeals) observed that the assessee was trying to mis-interpret the term 'goodwill'. The CIT (Appeals) further held that the Income Tax Act though recognizes the concept of intangible assets and their value to the business and the allowability of depreciation on the same assets which are eligible for depreciation under section 32 of the Act clearly and consciously leaves out goodwill from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The appellant has not been able to show as to how employees, contracts, licenses etc. are individually valued and incorporated under the head 'goodwill', when all the assets for the purpose of apportionment of slump price have been distinctly identified. (11) The appellant has not been able to show as to what is the value of 'goodwill ' simpliciter. (12) It is not the appellant's case that the value of 'goodwill' simpliciter is Nil. (13) The appellant has not been able to, explain as to what prevented the Valuers and the management from separately booking the value of assets like licenses, approvals etc. despite detailed discussion about the same in the BPA. (14) The appellant has not been able to establish as to how the Valuers have included the value of other intangible assets under the head goodwill, despite clearly delineating the method of accounting of allocation of slump price. (15) The appellant has been shifting its stand even regards the so-called intangible assets included in the goodwill." 9. The assessee is in appeal against the order of CIT (Appeals). Both the authorized representatives had elaborately addressed the Bench on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Hon'ble Delhi High Court in Areva T and D India Ltd. Vs. DCIT (supra) and even if it is treated as goodwill, it will still to be intangible asset qualifying for depreciation under section 32 of the Act, as per the ratio laid down by the Hon'ble Supreme Court in CIT Vs. SMIFS Securities Ltd. (supra). The learned A.R. for the assessee has submitted written submissions in this regard and the same have been considered. 11. The learned D.R. for the Revenue had also filed written submissions in which firstly reliance was placed on the orders of the authorities below. Further the learned D.R. for the Revenue referred to the reasoning of the Assessing Officer for making aforesaid disallowance which were as under: 4. The Ld. A.O. had made the disallowance on account of the following reasons: a) The assessee claimed depreciation of Rs. 2,78,71,700/- even though the depreciation on 'goodwill' was denied even by the Assessee's Tax Auditors in the tax audit report attached with the return of income. b) The Chartered Accountants, in their valuation report had separately assigned a value to the intangible assets, representing specific intellectual property rights ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... old rights/tenancy rights, permits, licenses, approval and registrations for carrying on the allied business have not been considered as apart of goodwill. B) A perusal of the business Purchase Agreement (BPA) between the assessee Ranbaxy Fine Chemicals Ltd. and the Ranbaxy Laboratories Ltd. show that the assessee was a wholly owned subsidiary company of the seller i.e. Ranbaxy Laboratories Ltd. On page 2 at Sr. No. C(of BPA), it is clearly mentioned that the business of Ranbaxy Labs has been sold "as a going concern on a slump sale basis". The term "allied business" has been defined meaning "the animal Health care and Diagnostic business carried on by the seller at India and overseas market and includes the employees employed by the seller in relation thereto". Similarly, the term contract had been defined in detailed in the said BPA. It is pertinent to mention that a reference may be made to paras 2.2, 2.2.1, 2.2.2, 2.2.3 & 2.2.4. A perusal of these paras make it clear that on the payment of the purchase price the assessee was entitled to all the rights, titles and interest of the seller in the allied business. The trade marks alongwith the trade names and the brand names, all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt Assets 3287.40 7. Goodwill 1273.78 Total 6200.00 It is clear from the above that the valuer have taken all the assets including the fixed assets and the intangible assets at their respective fair market value. "Goodwill" is calculated as the difference between the aggregate slump price and aggregate fair market value of other assets including the fixed assets and intangible assets Under the heading "Identification of Assets", the valuers have clearly identified the various heads of assets which could be considered as the components of the Business divisions acquired by the assessee, and against which the slump price was required to be apportioned on a fair basis. It is in this process of identification of assets that brands have been specifically mentioned and evaluated. Therefore, there is no scope for any ambiguity, as the slump price has been allocated to all the assets identified in the said business deal and the 'goodwill' has been separately and categorically ascribed the value as per the accepted accounting standard. F) In view of the paras mentioned above the assessee's claim that the residual 'goodwill' contained the variou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; while treating it to be a synonym for other 'intangible assets', the assessee is trying to take double benefit of depreciation as it has already availed of the depreciation on the real 'intangible assets' shown in the balance sheet. 13. We have heard the rival contentions and perused the record. The assessee company during the financial year 2005-06 entered into Business Purchase Agreement with Ranbaxy Laboratories Ltd. for purchase of entire Animal Health Care and Diagnostics Business divisions of Ranbaxy Laboratories Ltd., both in India and overseas market in addition to the employees employed by the said company. The copy of BPA is placed at pages 29 to 126 of the Paper Book and in the preamble it is mentioned that; "A. The Seller is engaged in business activities pertaining to pharmaceuticals, including inter alia, Animal Health Care and Diagnostics business. B. The Purchaser is a wholly owned subsidiary of the Seller. C. The Seller is desirous of transferring by sale, and the Purchaser is desirous of acquiring by purchase, the entire Animal Health Care and Dignostics business divisions, excluding the Excluded Liabilities and Dade Behring Business, to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on - a) The manufacturing know-how, in particular the specifications and test methods, manufacturing and packaging instructions, master formulae, validation reports, stability data, analytical methods and any other documents necessary to manufacture, control and release the Products; b) Any drug safety reports in relation to the products 16. As per clause 3 the total lump-sum consideration for transfer of the allied business to the assessee was agreed upon at Rs. 62 crores. As per clause 4 the allied business shall be conducted by the seller and operated for the benefit of the purchaser during the period commencing from the effective date i.e. the date of execution of this agreement to the closing date i.e. the date on which closing occurs i.e. the date on which allied business shall be transferred from the seller to the purchaser, as defined under clause 1.1 of the BPA. As per clause 5 all the employees as set out in Schedule 2 shall w.e.f. the effective date become the employees of the purchaser i.e. the assessee before us, on the same terms and conditions of employment as were offered by the seller. Clause 6 of the BPA enlists the representations, warrants and disclaimers o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... down by the Hon'ble Bombay High Court in M/s Techno Shares & Stocks [323 ITR 69 Bom)]. 18. Before the CIT (Appeals) the decision of the Hon'ble Supreme Court in the case of M/s Techno Shares & Stocks (supra) was also referred to but the CIT (Appeals) rejected the same observing that section 32(1 )(ii) of the Act had restrictive application and depreciation was not allowable on the goodwill simpliciter. The second objection of the authorities below in not allowing the depreciation on goodwill was the said non-allowance made by the tax auditors in the accounts prepared by them. 19. The issue arising before us is whether the assessee is entitled to the claim of depreciation on the said acquisition of intangible assets in line with the acquisition of business of Animal Health Care and Diagnostics Business divisions of Ranbaxy and/or also whether the assessee is entitled to the claim of depreciation on the amount booked under the head goodwill simpliciter. 20. Under the amended provisions of section 32 of the Act w.e.f. 1.4.1999, ambit of depreciation has been enlarged to cover both the tangible and intangible assets. The depreciation on buildings, machinery plant of furnitur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s referred in Section 32(1)(ii) of the Act preceding the term "business or commercial rights of similar nature", it is seen that the aforesaid intangible assets are not of the same kind and are clearly distinct from one another. The fact that after the specified intangible assets the words "business or commercial rights of similar nature" have been additionally used, clearly demonstrates that the Legislature did not intend to provide for depreciation only in respect of specified intangible assets but also to other categories of intangible assets, which were neither feasible nor possible to exhaustively enumerate. In the circumstances, the nature of "business or commercial rights" cannot be restricted to only the aforesaid six categories of assets, viz., knowhow, patents, trademarks, copyrights, licenses or franchises. The nature of "business or commercial rights" can be of the same genus in which all the aforesaid six assets fall. All the above fall in the genus of intangible assets that form part of the tool of trade of an assessee facilitating smooth carrying on of the business. In the circumstances, it is observed that in case of the assessee, intangible assets, viz., business c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, if the asset is used as a business tool for earning income." 24. The above said ratio was referred to by Mumbai Bench of the Tribunal in M/s India Capital Markets P. Ltd. Vs. DCIT (supra) wherein the purchase of clientele business by the assessee from M/s AFC was held to be right which could be used as a tool to carry on the business and the consideration paid for which was held eligible for depreciation. 25. As pointed out in paras hereinabove the assessee in addition to building, plant & machinery, furniture, fixtures, vehicles and net current assets alongwith brands valued at Rs. 49.26 crores had also acquired the under-mentioned assets: S.No. Details of Intangible Assets acquired Paper Book Reference Page Numbers 1. Stockist Agreements 51-75 2. Distribution Agreements 76-79 3. Lease Agreements 81 4. Distribution and Marketing Agreements 82 5. List of Employees 83-86 6. List of Licenses and Permissions (Export Registrations) 126 7. Various Products - Enlarged product range and customer base 108-120 8. Name License 45 9. Manufacturing know how, specifications and test methods, manufacturing and packaging instructions, master formulae, validati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 32(1) of the Income Tax Act, 1961 ['Act', for short] We quote hereinbelow Explanation 3 to Section 32(1) of the Act: "Explanation 3 - For the purposes of this sub-section, the expressions 'assets' and 'block of assets' shall mean-la] tangible assets, being buildings, machinery, plant or Furniture; [b] intangible assets, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature." Explanation 3 states that the expression 'asset' shall mean an intangible asset, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. A reading of the words 'any other business or commercial rights of similar nature' in clause (b) of Explanation 3 indicates that goodwill would fall under the expression 'any other business or commercial right of a similar nature'. The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b). In the circumstances, we are of the view that Goodwill' is an asset under Explanation 3(b) to Section 32( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made, the assessee is entitled to the claim of depreciation on such goodwill as held by the Hon'ble Supreme Court in CIT Vs. SNIFS Securities Ltd. (supra). Similarly other arguments raised by the learned D.R. for the Revenue that residual concession, various rights, licences, approvals, etc. was not correct, does not stand in view of our decision in paras hereinabove in turn following the ratio laid down by the Hon'ble Delhi in Areva T and D India Ltd. Vs. DCIT (supra). 30. The last objection of the authorities below and learned D.R. for the Revenue was that the Tax Auditors had denied benefit of depreciation on goodwill booked in the Balance Sheet. It is an established rule that the treatment of an entry in the books of account does not establish its allowability in the hands of the assessee. It is the nature of the expenditure which determines allowability of the expenditure in the hands of the assessee. The opinion of the auditors is not determinative of the correct position of law and while allowing the claim in the hands of the assessee, the authorities have to independently examine its allowability under the provisions of the Act and also as per the relevant judicia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntire biomed division of Wipro Ltd. comprising of Diagnoostices, Medical systems and life sciences business (hereinafter referred to as "the Allied Business"). Clause 2.2 of the BAA details the assets, rights, titles, etc of M/s Wipro Ltd. that were conveyed to the assessee in consideration for the purchase price as a going concern on a slump sale basis. The relevant extract of clause 2.2 is as under: "2.2 The Seller shall according to the provisions of this Agreement on the Closing Date, as part of the Specified Business, transfer all rights, title and interest of the Seller in the Specified Business, together with the said Movable Assets, Current Assets, Assumed Liabilities, sake Employees, said Contracts, goodwill, consumables and all other rights and privileges in relation thereto to the Purchaser." 35. The allied business of M/s Wipro Ltd. was purchased by the assessee for a consideration of Rs. 13.297 crores. The list of trademarks, contracts and licenses, employees, insurance policies etc that were acquired by the assessee as part of the BAA are detailed in schedules to the BAA, placed at pages 54 to 65 of the Paper Book. The valuer allocated Rs. 13.297 crores to Fixed As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e: S.No. Details of Intangible Assets acquired Paper Book Reference Page Numbers 1 Details of trade marks 54 2. List of Contracts 55 3. Details of Licenses 56 4. List of employees 58 5. Details of Insurance Policies 65 38. The assessee claimed depreciation on the intangible assets acquired under the above said BAA and the same was disallowed by the Assessing Officer and the CIT (Appeals). We find that the facts of acquisition of allied business of M/s Wipro Ltd. and M/s Godrej Industries Ltd. are identical to the facts of acquisition of allied business of Ranbaxy Laboratories Ltd. In line with our decision in ITA No/293/Chd/2012 and the facts being identical our decision in ITA No.293/Chd/2012 would apply mutatis mutandis to the facts in ITA No.294/Chd/2012. We have already directed the Assessing Officer to allow depreciation on goodwill of allied business of Ranbaxy Laboratories Ltd. The ground No.2 raised by the assessee in this regard is thus allowed. 39. The ground No.3 raised by the assessee is against the addition of Rs. 2.25 crores on account of compensation received towards cancellation of share purchase agreement. 40. The brief facts as refe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o a Supplemental Agreement to the SPA on the same day March 10, 2007 (please refer page nos. 204 to 209 of the paper book), wherein the Sellers agreed to convince Cadila to sell the balance 50 percent of shares of Zydus held by Cadila to the Appellant. The Supplementary Agreement was entered into by the Appellant to acquire 100 percent equity of Zydus. As a part of the Supplemental Agreement, the Appellant deposited another Rs. 15 Crores with the escrow agent. However, on May 10, 2007, (please refer page nos. 210 and 211 of the paper book) the Appellant received a letter from the Sellers stating that Cadila in fact had exercised its rights under ROFR to purchase the shares of Zydus from Sellers. Accordingly, the Sellers requested the Appellant to terminate the SPA and also agreed to repay the EMD of Rs. 24,81,68,263 with interest at 14 percent per annum amounting to Rs. 5,901,645 (net of taxes) and penalty at the rate of 5 percent of the EMD amounting to Rs. 12,408,413. However, the Appellant demanded a compensation for termination of the SPA from the Sellers for a sum of Rs. 2,25,91,587 and it was mutually settled between the Sellers and the Appellant through a Supplementary A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in addition to interest and penalty, which were offered to tax. * In addition, it may be noted that both the learned AO and the Hon'ble CIT(A) have failed to appreciate that the failure on the part of the Sellers to convince Cadila from exercising their ROFR rights and also to sell the balance 50 percent of the shares in Zydus resulted in termination of the SPA. Therefore, the sellers have agreed to pay compensation for not fulfilling their obligation undertaken under the SPA, which resulted in termination of the SPA. * Since the compensation is on account of termination of an agreement which if honored, would have resulted in an income earning apparatus coming into being. The inability of the Sellers to honor the terms of the agreement led to the termination of the SPA and consequently resulted in sterilization of a profit earning source for the Appellant. Consequently, the Appellant treated the compensation on account of termination of the SPA as a capital receipt. In this connection, the Appellant wishes to rely on the following judicial pronouncements wherein it has been held by various courts that the compensation for sterilization of the profit earning source, not i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r a branch of a contract or cancellation of the agreement. From the perusal of both the supplementary agreement and the original SPA it was concluded by the AO that there was no breach of contract or cancellation of any contract as claimed by the assessee. Rather the parties themselves compromised and calculated the amount of consideration to be paid as full and final payment by taking recourse to the supplementary agreement. The AO give specific reasoning for the additions made in this regard. a) While perusing the detail of compensation received and tabled at page 37 of the assessment order the AO observed that it was neither a breach nor a cancellation, rather it's a compromise or settlement arrangement vide which one party has paid the desired consideration, as shown above, as agreed to between the two parties since they could not work upon the original terms and conditions. And whatever monetary benefits were derived by the company in addition to earnest deposit amount was its income and was rightly credited to the profit and loss account by the statutory auditors and there after rightly commented upon by the tax auditor also. b) The AO further observed that the target ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot mature, that it received interest, penalty and compensation. The assessee by offering the interest and penalty so received against investment of earnest money deposited with the vendors for taxation has himself admitted that the same are revenue in nature. 10. The Ld. CIT(A) has appropriately upheld the findings oftheAO while giving specific reasoning for the same (Page 54, Para 6.13 of the Ld.CIT(A) order). i) The Statutory Auditors as well as the Tax Auditors of the assessee have treated the said receipt as a revenue receipt. ii) The assessee entered into the agreement with the seller fully knowing that the Other Shareholder could exercise its right of purchase and could thus prevent the successful closure of the agreement. iii) The assessee made a calculated business move by entering into the agreement, iv) The terms and conditions of the termination of the agreement were absolute and one sided, completely in favour of the assessee. This situation was exploited by the assessee to the hilt. v) There was no clause regarding compensation in the original SPA for the obvious reason that the termination was to be due to the operation of an external factor which both the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er form in favour of the assessee for transfer of his shareholdings in Zydus and the same was kept with the escrow agent. The sellers had to get the consent from Cadila for them to give up their right of first refusal within five months from the date of execution of the agreement. As per clause 7.6 of the agreement, in case of the failure of the sellers to obtain said permission, the agreement stood terminated and the sellers had to return the earnest money alongwith interest @ 14% per annum on pro-rata basis and also pay penalty as per clause 7.7(i) of the Act. Another supplemental agreement to the Share Purchase Agreement was entered between the assessee and the sellers on 10.3.2007 itself, copy of which is placed at pages 204 to 209 of the Paper Book. Under the said agreement the sellers agreed to convince Cadila to sell its shareholdings of 50% of shares of Zydus to the assessee. The objective of the said supplemental agreement was to acquire 100% equity of Zydus and consequently the assessee deposited another Rs. 15 crores with the escrow agent. 45. On 10.5.2007 the assessee was intimated by the seller that Cadila had exercised its rights to purchase shares of Zydus and thus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent Ltd. (supra) had addressed the issue of receipts being capital or revenue and vide Para1 11 to 13 had held as under: "The question whether a receipt is capital or income has frequently come up for determination before the courts. Various rules have been enunciated as furnishing a key to the solution of the question, but as often observed by the highest authorities, it is not possible to lay down any single test as infallible or any single criterion as decisive in the determination of the question, which must ultimately depend on the facts of the particular case, and the authorities bearing on the question are valuable only as indicating the matters that have to be taken into account in reaching a decision. Vide Van Den Berghs Ltd. v. Clark (1935) 3 I.T.R. (Eng. Cas.) 17. That however, is not to say that the question is one of fact, for, as observed in Davies. (H.M. Inspector of Taxes) v. Shell Company of China Ltd. (1952) 22 I.T.R. (Suppl.) 1 "these questions between capital and income, trading profit or no trading profit, are questions which, though they may depend no doubt to a very great extent on the particular facts of each case, do involve a conclusion of law to be draw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he same was required to be offered first to the assessee (operator) or its nominee. This right to exercise its option was given up by a supplementary agreement which was executed in September, 1975, between the receiver and the assessee. It was agreed that the receiver would be at liberty to sell or otherwise dispose of the said property at such price and on such terms as he may deem fit and was not under any obligation requiring the purchaser thereof to enter into any agreement with the operator (assessee) for the purpose of operating and managing the hotel or otherwise, and in its return, agreed consideration was as stated above in clause X. On the basis of the said agreement, the assessee has received the amount in question. The amount was received because the assessee had given up its right to purchase and/or to operate the property. Further it is loss of source of income to the assessee and that right is determined for consideration. Obviously, therefore, it is a capital receipt and not a revenue receipt." 48. The Hon'ble Supreme Court relied on the judgment in the case of Kettlewell Bullen and Co. Ltd. v. CIT [1964] 53 ITR 261 (SC), wherein the court has held as under (p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led to refund of the earnest money alongwith interest and penalty as stipulated in the terms of the agreement. Admittedly the said agreement between the parties was cancelled. The assessee received amount i.e. on account of refund of earnest money, interest and penalty and the assessee offered interest and penalty for tax which is an admitted position. However, the assessee also entered into supplemental agreement with the sellers for purchase of the shareholdings of Cadila in Zydus in order to acquire 100% shareholdings of Zydus. As per the covenant of the supplemental agreement dated 10.3.2007 placed at pages 204 to 209 of the Paper Book, which was agreed upon as under: 1. The Vendors hereby undertake that in the event the Other Shareholder does not exercise its Right of First Refusal, the Vendors shall procure that, within 30 days from the Closing Date, the Other Shareholder shall also sell the shares held by it in the Company, i.e. 2,70,00,000 (Two Crores Seventy Lakhs only}equity shares of face value of Rs. 10- each, constituting 50% of the balance issued, subscribed and paid up equity share capital of the Company, to the Purchaser at a price which is at least equal to the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted and deposited by the Escrow Agent on behalf of the Vendors. 5. In consideration of the Purchaser depositing the Earnest Money Deposit under the SPA, Ambalal Sarabhai Enterprises Limited (one of the Vendors under the SPA) does hereby agree to simultaneously herewith pledge in favour of the Purchaser (in a form acceptable to the Purchaser), by way of security, 11,00,000 shares of face value of Rs. 10/- held by Ambalal Sarabhai Enterprises Limited in ORG Informatics Limited, a company listed on the Bombay Stock Exchange, which shares, as on the date of this Supplemental Agreement, constitute 6.6% of the issued, subscribed and paid up equity share capital of the said company, 6. All terms and conditions set out in the SPA shall remain unchanged and shall continue to be in force in the manner stipulated thereto. 7. This Supplemental Agreement shall come into effect on the date of execution hereof. 8. This Agreement may be entered into in two or more counterparts each of which, when executed and delivered, shall be an original, but all the counterparts shall together constitute one and the same instrument 50. The conduct of the party reflects that the assessee was exploring ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iew that in a situation like this, it is the terms of Settlement Agreement which should be decisive. It is no doubt true that there was a dispute and both sides took up their respective positions. According to Fried Krupp Essen, there was no change because Krupp Widia GmbH continued to hold Meturit AG as before and Meturit AG continued to hold its shares in Widia (India) Ltd. According to the assessee, it was substance of the matter, which was required to be seen. If Krupp Widia GmbH was to be owned by any other entity, the effect was that the shares of Widia (India) Ltd. would beneficially be transferred to that entity. Hence with the transfer in the ownership of Krupp Widia GmbH there was, in substance, a transfer in the ownership of "A" series shares of Widia (India) Ltd. as well. This dispute was ultimately amicably settled by Settlement Agreement and the assessee received the sum of DM 10.5 million. We are strengthened in taking this view by the judgment of Hon'ble Bombay High Court in the case of CIT v. Tata Services Ltd. [1980] 122 ITR 5941. In that case there was an agreement of sale, entered into between one Anandji Haridas and the assessee Tata Services Ltd. for certa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtly out of the capital, and the receiver receives it as income on his part, the entire receipt is taxable in the hands of the receiver. Therefore, the fact that the amount sought to be taxed in these appeals was capital gains in the hands of the company is not a relevant circumstance. What we have to see is what it was in the hands of the assessee." 37. Similar observations have been made in various other judgments, some of which are as mentioned below: "The principle that capital receipt spells capital expenditure or vice versa is simple but it is not necessarily sound. Whether the payment is or is not in the nature of capital expenditure depends or may depend upon the character of the business of the payer and upon other factors related thereto - Anglo Persian Oil Co. (India) Ltd. v. CIT [1933] 1 ITR 129 (Cal.); If a receipt is capital receipt in hands of recipient, it does not necessarily follow that expenditure is capital expenditure in hand of payer. Whether it is capital expenditure or revenue expenditure would have to be determined having regard to the nature of the transaction and other relevant factors - Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC) ; There ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee, has to be viewed as the amount received in lieu of surrender of his rights and claims against Fried Krupp Essen; Krupp Widia GmbH and Meturit AG. In other words, the amount received by the assessee was in the nature of compensation for loss of the assessee's perceived/alleged rights. It is now well-settled legal position in this regard that if compensation is received for loss/detriment to the amounts of profits, the same would constitute revenue receipt, but if the compensation is received for loss/detriment to profit-making structure, such receipt would not be on the revenue account and constitute capital receipt in the hands of the recipient. In determining whether compensation is a capital or trading receipt, the relevant rule has been formulated by Lord Diplock L., in the following words : ". . . Where, pursuant to a legal right, a trader receives from another person compensation for the trader's failure to receive a sum of money which, if it had been received, would have been credited to the amount of profits (if any) arising in any year from the trade carried on by him at the time when the compensation is so received, the compensation is to be tre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court have held that right to subscribe to shares is a capital asset in the hands of an assessee other than a dealer in shares. In the case of CIT v. Hiralal Manilal Modi [1981] 131 ITR 421 4 (Guj.), the assessee entered into in 1956 an agreement of sale and paid the earnest money of Rs. 50,000 for purchase of certain plots of land. On the suit for specific performance filed by the assessee, the vendors compromised the matter and agreed to pay certain additional amounts. On these facts, Hon'ble High Court held that the receipt was "not by way of income but by way of damages for the loss of a good bargain which the assessee had to forgo because the vendors were not prepared to execute the deed of conveyance". On these facts, the Hon'ble High Court held that the Tribunal was justified in not treating it as income of the assessee. 45. In our opinion, the judgment of Hon'ble Supreme Court in the case of Oberoi Hotel (P.) Ltd. v. CIT [1999] 236 ITR 903 squarely applies on the facts of the case of the assessee. In that case Oberoi Hotel Pvt. Ltd. was operating, managing and administering many hotels belonging to others for a fee at several places, such as, Cairo, Colom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court held: "It is not for settlement of rights under a trading contract, but the injury is inflicted on the capital asset of the assessee and giving up the contractual right on the basis of the principal agreement has resulted in loss of source of the assessee's income. In this view of the matter, the order passed by the High Court is set aside and the appeal is allowed. The question is answered in favour of the assessee and against the Revenue by holding that receipt in the hands of the assessee was capital receipt." 45.1 We find the facts of the case of the assessee before us on stronger footing. In the case before us the first right of purchase was acquired by the assessee by way of Promotion Agreement and Articles of Association of Widia (India) Ltd. even before the commencement of business by Widia (India) Ltd. Hence by no stretch of logic the receipt can be viewed as receipt of the business carried on by the assessee." 53. We find the said reliance by the assessee to be misplaced as in the facts before the Delhi Bench of the Tribunal in DCIT Vs. Sak Industries (P) Ltd. (supra), the assessee was part of the shareholding company and the company was in existence sinc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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