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TMI Blog2013 (10) TMI 1039X X X X Extracts X X X X X X X X Extracts X X X X ..... e judgment in the case of CIT Vs. Artex Manufacturing Company [1997 (7) TMI 7 - SUPREME Court] - Transaction has to be taken a slump sale and the capital gains have to be computed accordingly as per the provisions of Section 45 to 50 – Decided in favor of assessee. Whether the amount received by the assessee as non-compete fee is a revenue or capital in nature for the purpose of taxability – Held that:- This issue to be decided on the basis of the facts and circumstances of each case as per the pre-amendment provisions of the Act. It is settled proposition on the point that if the compensation/receipt for refrain from carrying on business which effects the profit making structure of the assessee than such restriction will lead to loss of enduring trading asset by depriving the assessee from the future income and the receipt would be capital in nature. If the profit making structure is not affected as no loss of source of income resulted by putting such restrictions under the negative covenant then the receipt for agreeing such restrictive covenant would be revenue. Therefore, the principle is based on the test whether agreeing to the negative covenant, the assessee is deprived o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The assessee is engaged in manufacture of dyestuffs and chemicals, pharmaceuticals and pesticides, and also manufacture of additives, polymers, pigments and composites. During the course of the scrutiny assessment proceedings, the AO observed that the assessee has declared capital gains on sale of Oral Hygiene Business (OHB) and on sale of Bhandup land amounting to Rs.52,37,28,011/- and Rs.8,32,06,680/- respectively. The AO further observed that for computing the long term capital gain on sale of OHB the assessee has taken gross consideration for sale at Rs.99,54,00,000/- from which it deducted expenses in connection with sale at Rs.22,98,0389/- . The assessee further deducted the cost of acquisition by taking Fair Market Value as on 1.4. 1981 at Rs.17,32,40,000/- and applying indexed cost value deducted the indexed cost of acquisition at Rs.44,86,91,600/-, determined by applying the universally accepted method of valuations which is Discounted Cash Flow(DCF) method which is based on the valuation advisory report by M/s Arthur Anderson. The AO was of the firm belief that the method of the valuation on the basis of Discounted Cash Flow(DCF) was open to question. The AO sought clar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f stock in trade Rs. 84.33 million In response to this the assessee filed additional ground by which it claimed that the entire sale is a Slump Sale and the resultant profit is not taxable. The CIT(A) admitted the additional ground. The assessee further objected to enhancement notice stating that it would amount to change of opinion and such change of opinion cannot be considered in the appellate proceedings and therefore, it is without jurisdiction. The CIT(A) outrightly rejected this contention of the assessee. 7. The assessee strongly submitted before the CIT(A) that the ratio laid down by the Hon'ble Supreme Court in the case of B.C. Srinivasa Setty (128 ITR 294) squarely apply on the facts of the case and therefore, no profit has resulted which can be subject to tax. The CIT(A) rejected this plea of the assessee considering the decision of the Hon'ble Supreme Court in the case of Sun Engineering (198 ITR 297 at page 320) . The CIT(A) further dismissed the additional plea taken by the assessee to consider the entire transaction as a slump sale holding it to be a change of opinion and afterthought , taking a leaf out of the decision of the Hon'ble Supreme Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relied upon the decision of the Hon'ble Supreme Court in the case of PNB Finance Limited, 307 ITR 75(SC), Hon'ble Jurisdictional High Court of Mumbai in the case of Polychem Limited 343 ITR 115 (BOM). 15. Per contra the Learned DR strongly objected to the additional plea of the assessee. It is the say of the DR that the assessee itself has shown capital gains arising from the transfer of OHB, therefore, at this stage, the assessee cannot retract from what has been returned by it in its return of income. It is the say of the DR that the assessee is taking shelter behind the subsequent rulings of the High Court though. At the time of the filing of the return the intention of the assessee was absolutely clear to offer capital gains arising out of the resultant transfer of OHB . The DR contended that the CIT(A) has rightly computed the capital gains tax liability by adopting the itemized value of each item. The DR strongly submitted that the CIT(A) has based his finding on the manner in which the entries have been accounted for in the books of Colgate and Palmolive and pleaded that the finding of the CIT(A) deserves to be confirmed. 16. We have heard the rival submissions at lengt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction was a slump sale." Thus, the very decision on which the CIT(A) has based his finding as gone in favour of the assessee and the Jurisdictional High Court while deciding the issue has also considered the decision of the Hon'ble Supreme Court in the case of CIT Vs. Artex Manufacturing Company (227 ITR 260) , which is another decision on which the CIT(A) has based his finding . With this decision of the Jurisdictional High Court going in favour of the assessee, the transaction has to be taken a slump sale and the capital gains have to be computed accordingly as per the provisions of Section 45 to 50. The chargeability has to be decided in the light of the ratio laid down by the Hon'ble Supreme Court in the case of PNB Finance Limited (supra) wherein it has been held: "As regards applicability of section 45 is concerned, three tests are required to be applied. In this case, section 45 applies. There is no dispute on that point. The first test is that the charging section and the computation provisions are inextricably linked. The charging section and the computation provisions together constituted an integrated code. Therefore, where the computation provisions cannot ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and, therefore, the said amount of Rs. 10.20 crores was not taxable under section 45 of the 1961 Act. Accordingly, the impugned judgment is set aside." 18. To sum up considering the facts of the case in totality in line with the sale agreement and in the light of the decisions discussed herein above. We have no hesitation to hold that the transaction of the sale of OHB is a slump sale and that being so in our humble opinion there cannot be any capital gain tax liability in the light of the ratio laid down by the Hon'ble Supreme Court in the case of PNB Finance Limited (supra). Ground No. 1 with all its sub-ground is allowed. This will also decide the additional grounds and the cross objections of the assessee. 19. Ground 2 relates to non compete fees of Rs.31.45 Crores treated as revenue receipt as against the claim of the assessee it being capital receipt and therefore not subject to tax. 20. While scrutinizing the return of income, the AO observed that an amount of Rs.31.45 Crores was taken as exempt which was the consideration received on account of non-compete fees from Colgate Palmolive(India) Ltd (CPL). When questioned by the AO regarding the nature of this transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... observed that the amended provisions in this regard have to be treated as a rule of evidence and as declaratory in nature. According to the CIT(A), these provisions can always be treated to have existed even during the period prior to 01.04.2003 on the basis of the fact that these provisions merely declare the law more elaborately. The CIT(A) drew support from the decision of the Hon'ble Supreme Court in the case of M/s Poddar Chemicals Ltd. 226 ITR 625 and accordingly the addition of Rs. 31.45 Crores on account of non compete consideration was confirmed. 24. Aggrieved by this finding of the CIT(A), assessee is before us. Counsel for the assessee took us through various clauses of the non compete agreement and submitted that the assessee has refrained from competing same business which has been sold to CPL for which it has received this compensation. By doing this the assessee has given up one of its source of income and therefore it has to be treated as a capital receipt. Per contra the ld. DR strongly supported the orders of the lower authorities. 25. We have considered the rival submissions as well as relevant material on record. The question arises is whether the amount rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gative covenant, the assessee is deprived of a source of future earnings being the structure of the whole business or not. In the case in hand the CIT(A) has reproduced the item No. 10 of 46 annual report of the assessee company wherein the facts and circumstances are described under which the assessee took the decision to divest the activity of Oral Hygiene Business as under:- "Members are aware that while the Company has been in the Oral Hygiene Business (viz. Toothpaste, toothbrush etc.) In India for several years, this does not form part of the Ciba-Geigy worldwide operations. As a result, the Indian Company does not have access to new developments, innovation in this field. This business will increasingly face even tougher competition in the future from international brands in the emerging competitive environment. Exploratory discussions were held with leading international companies in the oral hygiene sector with a view to divest this activity and use the resources for the\core business of the Company, in which Ciba-Geigy has worldwide operations expertise. Arising out of these discussions aimed at restructuring the business of the Company, is the proposal which is the sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ral Hygiene Business activity sold by the assessee was not a part of core business of the assessee. iii) By agreeing to a restrictive covenant the assessee was not deprived of a source of business activity rather the assessee transferred a particular activity under the scheme of business restructuring and to avoid the adverse and tough situation in future. iv) The restriction under the agreement is only for limited period of five years and not permanent or indefinite period. 27. Since the assessee has sold only a non-core business activity with motive and object to concentrate on the core business activity therefore, by agreeing to the restrictive negative covenant the assessee is not deprived from the carrying on the business activity but the assessee freed its resources from a non-core business activity to apply and use the same for the core and main business activity of the assessee. Thus, restraining itself from manufacturing a particular product for a limited period of five years would not result loss of income earning structure when the assessee itself has decided to continue and concentrate on the core business activity. When it is not a loss in the nature of enduring ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... much lower compared to the rate adopted in the valuation report. Based on this local enquiry, the AO referred the matter u/s 55A of the Act to the DVO to determine the FMV of the land as on 01.04.81. The assessee strongly objected to this reference made by the AO. According to the assessee, the AO can only refer when he is of the opinion that the fair market exceed the value of the asset. In the present case, it was contended that the fair market value at Rs.3,500/- has been considered by the AO as higher. Therefore, there is no scope for referring the present land valuation case to the DVO. This contention of the assessee was rejected by the AO. Who was of the opinion that reference of the valuation officer can be made u/s 55A to ascertain fair market value of capital asset for determining the capital gains. The AO, thereafter, went on to compute the long term capital gain on sale of land by adopting the FMV as per the preliminary report of the valuation officer who has taken the FMV at Rs.1400/- per sq. meter based on 1 FSI. The long term capital gain was computed at Rs.13,30,61,590/-. 29. Aggrieved by this finding, the assessee carried the matter before the CIT(A). It was exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... VO's rate at FSI 1. The AO is expected to give a reasonable opportunity of being heard to the assessee before deciding this issue afresh in the light of the working given by the assessee. 32. Ground no. 3 is allowed for statistical purpose with this additional Ground no. 1, 2 and CO. number 2 are also accordingly decided. 33. Ground no.4 relates to the grievance that the CIT(A) erred in confirming the action of the AO in not allowing depreciation of Rs.7,97,982/- with respect to Kandla Plant. This issue has been discussed by the AO at para 7 on page 30 of its order. The AO observed that the Kandla plant was throughout non- operational during the year. Therefore, the AO was of the opinion that assessee is not entitle for a claim of depreciation , plant being non-operational. The assessee carried the matter before the CIT(A). The CIT(A) has considered this grievance of the assessee at para 9 on page 30 of his order. The CIT(A) was of the opinion that the facts of the case are identical to those of A.Y. 1993-94 and 1994-95 where the similar claim was disallowed by the AO and confirmed by his predecessors. The CIT(A) followed the findings of his predecessors and confirmed the disal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been decided against the assessee by the Hon'ble High Court in the case of Ipca laboratories 266 ITR 521 as the counsel has himself pointed out that this issue has been decided against the assessee by the decision of the Hon'ble High court, Ground no. 5 is accordingly dismissed. 36. Ground no. 6 relates to the disallowance of Rs.3,90,12,431/- on account of incremental liability for payment of pension under the Voluntary retirement scheme (VRS) created on an actuarial basis in computing the assessee's total income. The AO has discussed this issue on para 12 on page 32 of his order, wherein the AO followed order of 1993-94 and 1994-95 for disallowing the incremental liability of Rs.3.90 crores. When the matter was agitated before the CIT(A), the CIT(A) has considered this issue of the assessee at para 13 of page 33 of his order wherein the CIT(A) has followed the decision of his predecessors for A.Y. 1993-94 and 1994-95 and confirmed the disallowance made by the AO. Before us, the counsel for the assessee drew our attention to page 134 of the paper book which is internal page 15 of order of the Tribunal in assessee's own case for A.Y. 1994-95 in ITA No. 2874/Mum/1999 and ITA N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 69,255/- 4) Expenses on Annual General Meeting(AGM) Rs. 9,084/- Rs.10,37,656/- 50% disallowed of Rs.5,18,828 39. Both parties agreed that similar issue has been decided by the Tribunal in assessee's own case in A.Y. 1991-92, 1992-93 and 1993-94. We have carefully considered the order of the Tribunal for A.Y. 1993-94 in ITA No.334/Mum/1997. We find that identical facts have been considered by the Tribunal at para 48 of its order. We find that the Tribunal has directed the AO to allow the business meeting expenses and expenses of AGM and the Tribunal has confirmed disallowance of Rs. 2 lakhs out of total canteen expenses which come to around 40% of the total canteen expenses disallowed. Lunch expenses on employees during the course of outdoor duty has been fully allowed u/s 37(3) of the Act. Respectfully following the findings of the Tribunal (Supra), we direct the AO to allow the lunch expenses on employees during the outdoor duty, business meeting expenses, expenses on AGM fully and we confirmed disallowance of Rs.85,000/- out of the total canteen expenses of 2,18,004/-. Ground no. 8 is partly allowed. 40. Ground no. 9 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its finding on para 46, wherein it has followed the findings given by the Tribunal in assessee's own case for A.Y. 1991-92 and restored back the issue to the files of AO for further verification. Facts and circumstances are being identical following the findings of the Tribunal (supra) we restore this issue back to the files of AO. The AO is directed to consider the details filed by the assessee giving break up of expenses incurred on guest house maintenance and allow the expenses incurred on food beverages. This ground is allowed for statistical purposes. C.O. 183/Mum/2003 43. The additional ground relates to levy of interest u/s 234(B), we find that this levy relates to the enhancement made by the CIT(A) during the appellate proceedings, as we have decided the ground on enhancement in favour of the assessee. Therefore this grievance of the assessee becomes otiose. 44. In the result, appeal of the assessee is partly allowed. And with this Ground no. 1,2 3 of C.O. 183/Mum/2003 are also disposed of in accordance with our specific decision on each ground. ITA No.1749/Mum/2003 45. Ground 1 relates to the deletion of the disallowance of Rs.8,33,946/- on account of computer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. 245 ITR 385. Before us, the ld. DR could not bring any distinguishing case, as the CIT(A) has deleted the addition following the decision of the Hon'ble jurisdictional High Court. We do not find any reason to interfere with the findings of the CIT(A), Ground no. 2 is accordingly dismissed. 47. Ground no. 3 relates to the deletion of the addition of Rs. 94,476/- to the closing stock on account of freight. This issue has been discussed by the AO at para 10 on page 31 of his order and the grievance of the assessee has been considered by the CIT(A) at para 11 on page 31 of its order. The CIT(A), while deleting the addition, observed that the addition is being deleted folowoing the reasoning given for the deletion of the addition on account of modvat before us. The ld. DR relied up on to assessment order, the counsel for the assessee relied upon the order of the CIT(A). We have carefully considered the rival submissions and perused the orders of the lower authorities. We find that the reasoning given by the CIT(A) are in parity with the reasoning given for deleting the addition on account of modvat. Wherein, the decision of the jurisdictional High Court in the case of Indo Nippo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is exhibited on page 143 of the paper-book. The ld. DR fairly conceded on this, we have carefully perused the orders of the lower authorities and the order of the Hon'ble jurisdictional High Court in assessee's own case (supra). We agree with the submission of the ld. Counsel that this issue has been settled in favour of the assessee. Accordingly, ground no. 5 is dismissed. 50. The additional ground of the revenue relates to ground no. 3 of assessee's appeal. For similar reasons, this additional ground of the revenue is disposed off. 51. In the result, the appeal filed by the revenue is partly allowed and with this ground no. 4 to 6 of C.O. 183/Mum/2003 are disposed off on specific decision on related grounds of appeal. ITA No.3554/Mum/2005 C.O. 361/Mum/2005 52. This appeal by the revenue is against the order of the ld. CIT(A) 19, dated 22.03.2005 pertaining to A.Y. 1995-96. The revenue has raised following grounds of appeal:- I. On the facts and in the circumstances of the case and in law, the CIT(A) erred in directing the AO to treat the capital gains on sale of goodwill including the deem4ed short term capital gains of Rs.90.29 crores as "Long Term Capital Gain" ..... X X X X Extracts X X X X X X X X Extracts X X X X
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