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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 ..... T and D India Ltd. Vs. DCIT [2012 (4) TMI 79 - DELHI HIGH COURT], wherein it has been held that 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 - Intangible assets, viz., business claims; business information; business records; contracts; employees; and knowhow, are all assets, which are invaluable and result in carrying on the transmission and distribution business by the assessee, which was hitherto being carried out by the transferor, without any interruption. The aforesaid intangible, assets are, therefore, comparable to a license to carry out the existing transmission and distribution business of the transferor. In the absence of the aforesaid intangible assets, the assessee would have had to commence business from scratch and go through the gestation period whereas by acquiring the aforesaid business rights along with the tangible assets, the assessee got an up and running business – Thus, intangible assets enables the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issioner of Income-tax (Appeals), Shimla dated 28.12.2011 and 12.12.2011 relating to assessment years 2007-08 and 2008-09 against the order passed u/s 143(3) of the Income Tax Act, 1961 (in short 'the Act'). 2. The grounds of appeal raised by the assessee in ITA No.293/Chd/2012 read as under: 1) That the order passed by the Hon'ble Commissioner of Income-tax(Appeals)-I 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 in making an addition of ₹ 27,871,700 on account of disallowance of depreciation claimed on intangible assets recorded as Goodwill 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T(A) erred in equating the penalty received under the original SPA with the compensation received on the cancellation of the agreement. 4. Both these appeals by the assessee on similar issue were heard together and are being disposed off by this consolidated order for the sake of convenience. ITA No.293/Chd/2012 :: Asst. Year 2007-08 5. The brief facts of the case are that the assessee company was engaged in diversified business i.e. diagnostic laboratory solutions, chemical research and veterinary care. During the year under consideration the assessee had filed return of income declaring total income of ₹ 8,81,93,276/- on 31.10.2007. The case of the assessee was picked up for scrutiny after issue of notice under section 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s per the assessee was allowable in view of the amended provisions of the Act. Reference was made to various covenants of the agreement and also the list of the intangible assets and their description, which was acquired by the assessee. The Assessing Officer in the order has reproduced submission of the assessee under para 16 at pages 10 to 19 of the assessment order. Reliance was placed on various decisions for allowance of said expenditure. The Assessing Officer noted that the Accountant's report on which the assessee was placing reliance and claiming depreciation reflected that the brands were valued at ₹ 1061.76 lacs and other tangible assets were also valued by the Accountant and the balance was included under the head 'goodwill' at ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been defined in detail in the said BPA. Reference was made to clause 2.2 of the BPA which is reproduced by the CIT (Appeals) at pages 15 and 16 of the appellate order and the CIT (Appeals) observed that though in the BPA attention was paid to minute details while executing BPA but similar attention was not paid to the valuation of each and every item separately i.e. in respect of intangible asset. Reference was also made to the valuation made by the Accountants under paras 57 and 58 wherein the Accountants had allocated slump price of ₹ 62 crores to various asset i.e. both the tangible and intangible and it was observed by the CIT (Appeals) in para 5.9 that A perusal of the above makes it amply clear that the Valuers have strictly followed the norms of apportionment of the slump 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of valuation of 'Goodwill' has been discussed in the Valuation Report. (6) Tax auditors and statutory auditors have also not allowed depreciation on the 'goodwill', while they have allowed depreciation on other intangible assets. (7) 'Goodwill' simplicitier is not entitled to depreciation as per the provisions of Section 32(ii) and Section 55 (1). It was never the intention of the legislature to allow depreciation on goodwill. (8) Every business and commercial right is not eligible for depreciation within the meaning of Section 32(1 )(ii). It has to be in the nature of intellectual property rights, like trade-marks, patents, franchises, copyrights etc. (9) The words any other business or commercial rights of similar nature have to be interpreted ejusdem generis. (10) 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 ' simplicite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ributed to the goodwill i.e. ₹ 12.73 crores. The learned A.R. for the assessee referred to the chart already filed on record under which it had filed the list of other items taken over by the assessee. The learned A.R. for the assessee pointed out that the Assessing Officer had allowed depreciation on the tangible assets and even on the brand value holding it to be intangible assets but the depreciation on goodwill of ₹ 12.73 crores had been denied. Reliance was placed by the learned A.R. for the assessee in CIT Vs. SMIFS Securities Ltd. [348 ITR 302 (SC)] and on Areva T and D India Ltd. Vs. DCIT [345 ITR 421 (Del)]. The learned A.R. for the assessee concluded by stating that the assessee had acquired business/commercial rights which were covered under section 32 (1)(ii) of the Act on which depreciation was allowable as per ratio laid down by 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the assessee. 12. The learned D.R. for the Revenue further pointed out that the learned A.R. of the assessee has cited various judicial authorities to support his case, however, with due deference to the same it is submitted that the peculiar facts of the case do not deserve the ratio of the given case laws. Further objections of the learned D.R. for the Revenue were as under: A) During the course of appellate proceedings, the CIT(A) observed that the assessee submitted a list of intangible assets as part of goodwill which was at variance with the list as submitted before the Ld. A. O. It was observed that the assessee was trying to enlarge or adjust the scope of goodwill without any concrete basis. The Ld. CIT(A) observed that there was no mention of name licence, export registrations etc. before the A.O., while during the course of appellate proceedings, the lease hold 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ller to them. In fact the BPA ensures that the terms and conditions of the employment of the erstwhile employees of the seller remain unaffected by way of slump sale of its business. Thus, far from ascribing value to the employees in terms of technical knowhow, the focus of the BPA is on securing their continuation in the employment on already existing terms and conditions. E) It is further pertinent to mention that the valuers have strictly followed the norms of apportionment of the slump price as laid down in para 35 36 ofAS-10 issued by the ICAI. They have given a fair allocation of slump price of ₹ 6200 Lakhs paid/to be paid by RFCL to RLL and specified the same in clause 3.1 of the agreement as under: Sr.No. Assets Rs. In Lakhs 1. Brands 1061.76 2. Building 126.99 3. Plant and Machinery 397.12 4. Furniture Fixture 28.71 5. Vehicles 24.24 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he value of the above mentioned intangible assets in the value of 'goodwill' with reference to the commercial or other rights derived by the assessee from the acquisition of the said assets. The assessee's argument simply means that the value of 'goodwill' simplicitor is NIL in the BPA and the valuation report. The Ld. CIT(A) has rightly concluded that the assessee has chosen to name all these intangible assets as 'goodwill' without elaborating which identifiable asset acquired was for what value and what method of valuation was adopted to arrive at that particular value. H) It may be mentioned here that depreciation on specific intangible assets in the form of IPRs has been claimed and allowed by the Tax Auditors of the assessee simply because as per the BPA and the Valuers' report, the said 'intangible assets' denote the total value of the specific 'intangible assets' in the form of trade-marks/brands acquired by the assessee in the given business deal which were identified for separate evaluation. The BPA also makes it clear that the said intangible assets are used in connection with the goodwill of the business. This clearly me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cquire and accept from the seller, all of sellers right, title and interest in the Assets free of all encumbrances (Save and except to the extent specifically disclosed to the Purchaser by the Seller vide the Disclosure Letter) including without limitation, the following: 2.2.1 The trademarks along with the trade names and the brand names owned by or applied for or registered in the name of the seller in relation to the products as described in Schedule 6 together with the goodwill of the business in connection with which the Trademarks are used. For the purposes of transfer of Trademarks, the Seller shall, on or before the Closing date, execute a deed of assignment in favour of the Purchaser, thereby transferring and assigning absolutely to the Purchaser the title to and any and all rights and interests in the trademarks, in the form as set forth in Schedule 7 hereto: 2.2.2 The relevant client portfolio consisting of the detailed list of wholesale stockists and all marketing and promotions information and documents in relation to the products; 2.2.3 All licenses, covenants, permissions, health registrations, approvals and concessions required from any Governmental A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, validations reports, stability data, analytical methods and any other documents necessary to manufacture, control and release the products 36-37 17. The assessee also appointed the Chartered Accountant to provide Valuation Report in order to work out the fair market value of certain brands acquired by the assessee as part of the BPA. As per the Valuation Report the purchase consideration totaling ₹ 49.26 crores was allocated to the brands and the tang ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be allowed on intangible assets i.e. know-how, patent and copyrights, trademarks, licences or franchises or any other business or commercial rights of similar nature. The Hon'ble Delhi High Court in Areva T and D India Ltd. Vs. DCIT (supra) applied the principle of ejusdem generic to interpret the expression business or commercial rights of similar nature referred to in section 32(1)(ii) of the Act and held 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. The Hon'ble Court further held that in the circumstances, the nature of business or commercial rights could be of the same genus in which all the aforesaid six assets fall and thus intangible assets i.e. business claims; business information; business records;, contracts; employees; and know-how, were held to be assets which are invaluable and result in carrying on the business of the assessee, without any interruption and are comparable to a licence or akin to a licence which is one of the items falling in section 32(1)(ii) of the Act. 21. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce of the aforesaid intangible assets, the assessee would have had to commence business from scratch and go through the gestation period whereas by acquiring the aforesaid business rights along with the tangible assets, the assessee got an up and running business. This view is fortified by the ratio of the decision of the Supreme Court in Techno Shares and Stocks Ltd.(supra) wherein it was held that intangible assets owned by the assessee and used for the business purpose which enables the assessee to access the market and has an economic and money value is a license or akin to a license which is one of the items falling in Section 32(1)(ii) of the Act. 14. In view of the above discussion, we are of the view that the specified intangible assets acquired under slump sale agreement were in the nature of business or commercial rights of similar nature specified in Section 32(1)(ii) of the Act and were accordingly eligible for depreciation under that Section. 22. Similar view has been laid down by the Hon'ble Bombay High Court in CIT-II Vs. M/s Birla Global Asset Finance Co. Ltd., Income Tax Appeal No.6835 of 2010 - date of decision 16.10.2012 and it was held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and packaging instructions, master formulae, validations reports, stability data, analytical methods and any other documents necessary to manufacture, control and release the products 36-37 26. The perusal of the Schedules to BPA comprising of the above said list of Stockist Agreements, Distribution Agreements, Lease Agreements and also Distribution and Marketing Agreements, alongwith List of Licenses and Permissions and List of various Products, the name license and also the manufacturing know-how etc., alongwith List of employees are assets, which are invaluable and instrumental in carrying on the business of Animal Health Care and Diagnostics Business divisions acquired by the assessee from M/s Ranbaxy Laboratories Ltd. as per BPA. The acquisition of the above said items is bundle of rights acquired by the assessee for which lump sum price was fixed and no break up in the value of price was determined either by the assessee or by the auditors but the same constituted bundle of rights akin to a licence or comparable to a license to carry on the business of Animal Health Care and Diagnostics Business divisions which was being carried on by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the circumstances, we are of the view that Goodwill' is an asset under Explanation 3(b) to Section 32(1) of the Act 28. In view of the ratio laid down by the Hon'ble Supreme Court in CIT Vs. SNIFS Securities Ltd. (supra), it is held that the goodwill simpliciter was eligible for depreciation and the assessee having paid consideration of ₹ 12.74 crores for acquisition of the said goodwill and having accounted for the same in its books of account as goodwill, was entitled to the claim of depreciation. We accordingly direct the Assessing Officer to allow the claim of the assessee vis- -vis the claim of depreciation on goodwill of ₹ 12.74 crores. 29. The objection of the Assessing Officer in not allowing the said claim as pointed out by the learned D.R. for the Revenue in his written submissions, was that the assessee was enlarging the scope of goodwill without any basis. We find no merit in the above said observation of both the Assessing Officer and the CIT (Appeals) and the pleadings of the learned D.R. for the Revenue in view of the ratio laid down by the Hon'ble Delhi High Court in Areva T and D India Ltd. Vs. DCIT (supra). The second plea of the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have to independently examine its allowability under the provisions of the Act and also as per the relevant judicial precedents. In view thereof, we direct the Assessing Officer to allow the claim of the assessee vis- -vis depreciation with regard to claim of depreciation on intangible assets booked as goodwill in the books of account valued at ₹ 12.74 crores. The grounds of appeal raised by the assessee in ITA No.293/Chd/2012 are thus allowed. ITA No.294/Chd/2012:: Asst. Year 30. The facts of the case in ITA No.294/Chd/2012 are similar to the facts in ITA No.293/Chd/2012. The assessee during the year under consideration had claimed depreciation on goodwill represented by various intangible assets amounting to ₹ 3,34,82,355/-. The assessee during the year under consideration had claimed the said depreciation on intangible assets on account of following acquisitions: a) Purchase of entire Animal Health Care and Diagnostics Business divisions of Ranbaxy Laboratories Limited ( Ranbaxy Acquisition ) b) Purchase of the entire Biomed division of Wipro Limited comprising of Diagnostics, Medical systems and life sciences business ( Wipro Acquisition ) c) Purcha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e allied business of M/s Wipro Ltd. was purchased by the assessee for a consideration of ₹ 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 ₹ 13.297 crores to Fixed Assets, Debtors, Inventory, Liabilities. The remaining purchase consideration of ₹ 3.788 crores, represents the value attributable to the intangible assets detailed in clause 2.2 are tabulated below and the same was recorded as goodwill in the books of account of the assessee: 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 2.25 crores on account of compensation received towards cancellation of share purchase agreement. 40. The brief facts as referred to by the learned A.R. for the assessee in the written submissions are as under: Ambalal Sarabhai Enterprises Ltd, Mautik Exim Ltd, Haryana C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herein 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 ₹ 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 ₹ 24,81,68,263 with interest at 14 percent per annum amounting to ₹ 5,901,645 (net of taxes) and penalty at the rate of 5 percent of the EMD amounting to ₹ 12,408,413. However, the Appellant demanded a compensation for termination of the SPA from the Sellers for a sum of ₹ 2,25,91,587 and it was mutually settled between the Sellers and the Appellant through a Supplementary Agreement dated May 22, 2007. Sl. No Particulars of payme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties. Therefore, the fact that the compensation was not mentioned in the original SPA would not be a relevant factor for determining the nature of the receipt under the Act. It was not the case of the revenue that the parties have camouflaged the interest as compensation for termination of the SPA. In fact, the compensation has been paid 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 so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee claimed ₹ 2.25 crores as capital receipt being the compensation amount received for the breach or cancellation of the share purchase agreement. This raised the question as to whether it was a revenue receipt that ought to be taxed or is a capital receipt as claimed by the assessee. The assessee claimed it to be a capital receipt on the basis that it was received for 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontained in the assessment order even if the receipt so received by the assessee is termed as compensation, still in real sense its true nature shall continue to be of revenue. This was on account of the reason that the receipt was received by the assessee by investing some money with the vendors form whom he was going to acquire the shares. It was against such investment, when the agreement did not 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 busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a by 10.3.2007, the shares of the sellers in Zydus were to be taken over by Cadila. The sellers approached the assessee to sell the shares of Zydus for total consideration of ₹ 72.5 crores and Share Purchase Agreement dated 10.3.2007 was entered between the parties. The assessee deposited sum of ₹ 24.81 crores with the sellers as earnest money from which the sellers repaid the loan taken from Cadila and also executed the blank transfer 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expanded its business. Even the auditors in their Audit Report had given an opinion that there were no capital receipts which was credited to the Profit Loss Account. The deal between the parties being pure business deal, the additional monetary benefits accruing to the assessee were revenue in nature as the assessee had entered into a business venture for acquisition of 50% stake n the business. 46. The Hon'ble Supreme Court in CIT Vs. Saurashtra Cement 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 De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... universal application but various workable rules have been evolved for guidance. Applying the aforesaid test laid down by this court in the present case, in our view, the Tribunal was right in arriving at a conclusion that it was a capital receipt. The reason is that as provided in article XVIII of the first agreement the assessee was having an option or right or lien, if the owner desired to transfer the hotel or lease all or part of the hotel to any other person, the 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 amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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. 49. In the facts of the present case before us, the assessee had entered into first agreement on 10.3.2007 for acquisition of 50% shares belonging to the sellers, who in turn had hypothecated their shares to Cadila. As per terms of the said agreement in case there was cancellation of the agreement, the assessee was entitled 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 here ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ow Agent immediately at the expiry of the said 30-day period from the Closing Date. 4. It is hereby further agreed that for successful completion of the transaction contemplated under the SPA, the Escrow Agent within 1 day of Closing release to the Purchaser the ₹ 7,50,00.000/- (Rs. Seven Crores and Fifty Lakhs Only) kept in escrow with the Escrow Agent in the manner specified in Article 2 above, as success fee payable by the Vendors to the Purchaser. The applicable TDS and any other withholding taxes shall be deducted 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 ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not been any authoritative adjudication and therefore the respective position taken by the learned Assessing Officer and the learned CIT(A) have to be treated as mere guesswork. After all, neither the learned Assessing Officer nor the learned CIT(A) had the access to evidence/material the assessee-company on the one hand and Fried Krupp Essen on the other would have relied upon if the matter had gone into a full blown litigation. They also did not have the occasion to hear the arguments of both sides at full length. 35. We are of the view 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Hon'ble Supreme Court have stated the legal position in the following words : It is now well-settled that, in order to find out whether a receipt is a capital or revenue receipt, one has to see what it is in the hands of the receiver and not its nature in the hands of the payer. In other words, the nature of receipt is determined entirely by its character in the hands of the receiver and the source from which the payment is made has no bearing on the question. Where an amount is paid which, so far as the payer is concerned, is paid wholly or partly 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 ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on, the taxability or otherwise of DM 10.5 million in the hands of the assessee-company is to be viewed and determined on this basis. We, therefore, hold that the learned CIT(A) erred in arriving at the finding that the money received by the assessee-company was a fortuitous receipt. 52. The Tribunal further held as under: 42. We have already held with reference to Settlement Agreement dated 20th December, 1994, that whatever may be the conflicting stands of the parties and the legal position prior to 20th December, 1994, the sum of DM 10.5 million received 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding of Meturit AG in Widia (India) Ltd. that in itself would not have given rise to any income in the hands of the assessee but only created an income earning source in the hands of the assessee. It is important to bear in mind that the assessee was supposed to purchase these shares at the price mutually agreed upon. Hence compensation received by the assessee for surrender of its right cannot be viewed other than compensation received in lieu of a profit making source. 44. In the case of CIT v. Tushar Commercial Co. Ltd. [1998] 230 ITR 918 (Cal.) the Hon'ble 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 ₹ 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arlier judgment of the Court in the case of Kettlewell Bullen Co. Ltd. v. CIT [1964] 53 ITR 261. The Hon'ble Court also found support from the judgment in the case of Karam Chand Thapar Bros. (P.) Ltd. v. CIT [1971] 80 ITR 167 (SC). Considering the principle elicited from the judgments, the Hon'ble Supreme Court held that the amount received by Oberoi Hotel Pvt. Ltd., was for the consideration for giving up their right to purchase and/or to operate the property or for getting it on lease before it was transferred or let out to other persons. The Hon'ble Supreme 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 footi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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