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TMI Blog2013 (11) TMI 732X X X X Extracts X X X X X X X X Extracts X X X X ..... of income on 31-10-2001 declaring a total loss of Rs.3,68,30,330/-. But determined the tax payable under Section 115JB at Rs.38,26,607/-. 4. The case was selected for scrutiny and notice under Section 143(2) was issued on 25-10-2002. The authorized representative of the assessee appeared on behalf of the assessee. On examination of income tax returns and other details furnished by the assessee- Company, it was noticed that the assessee-company entered into an agreement of sale of two Units i.e. Unit at Jigani and Bannerghatta Unit to M/s. Tumkur Chemicals Limited (hereinafter referred to as 'TCL') for a consideration of Rs.5.75 Crores. Subsequently that agreement was cancelled. In view of that, the assessee/company forfeited a sum of Rs.1.10 crores from the amount paid by the TCL. The said amount was treated as capital receipt and the same is not liable to be taxed. However, the Assessing Authority treated the said amount as revenue receipt and assessed for tax. 5. In the return of income, the assessee/company has shown the closing stock for both the Units as NIL. The closing stock value of Rs.12.5 crores as on 31-3-2000 has been shown. The said closing stock shall be the openin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty held that the consideration received towards sale of technical knowhow and mere condition that knowhow shall not be disclosed to others does not change the character of receipt and it is the consideration towards the sale of capital assets liable to tax under the head of capital gain and not revenue receipt. Accordingly, allowed the appeal in part by its order dated 13-12-2004. The assessee being aggrieved by the order passed by the First Appellate Authority preferred an appeal before the Income Tax Appellate Tribunal, Bangalore Bench in ITA No.81/Bang/2005. Further, the Revenue also preferred an appeal in ITA No.292/Bang/2005 before the Income Tax Appellate Tribunal, Bangalore on some other findings. 7. The Appellate Tribunal on considering the matter in detail allowed the appeal filed by the assessee in part and dismissed the appeal filed by the revenue. The appellate Tribunal held that the forfeited amount of a sum of Rs.1.10 crores received by the assessee towards cancellation of agreement of sale is a capital receipt and the same cannot be taxed. Insofar as the closing stock of bulk drug is concerned, the contention of the assessee was upheld and set aside the order passed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ideration of Rs.25 crores should be treated as a capital receipt, not liable to capital gains tax and not consideration received towards sale of capital asset, liable to capital gains tax." 10. We have carefully considered the arguments addressed by the learned counsel appearing for the parties and perused the records. 11. Substantial Question of Law No.1: With regard to the first substantial question of law is concerned, Sri.M.Thirumalesh, learned counsel appearing for the appellants contended that the order passed by the Tribunal is contrary to law and the Tribunal has committed an error in arriving at a conclusion that Rs.1.10 crores amount forfeited from the Rally's India Limited (hereinafter referred to as 'the RIL') is a capital receipt to compensate the loss sustained due to the cancellation of agreement of sale. As per the two agreements of sale at clauses 14 and 15, there is a clear agreement between the parties that failure on the part of the purchaser to perform his part of contract, the vendor shall be entitled to terminate the agreements, and to claim Rs.25,00,000/- and Rs.5,00,000/- as liquidated damages from the advance consideration, whereas, the assessee had for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... damages of Rs.25,00,000/- and Rs.5,00,000/- respectively. However, in the present case, by mutual consent of the parties, the RIL had agreed to forego Rs.1.10 crores in favour of the assessee for loss of earnings due to the cancellation of agreement and the loss sustained in the sale transaction. The amount over and above Rs.30,00,000/- has to be treated as revenue receipts. The Assessing Authority as well as the First Appellate Authority had taken the entire amount of Rs.1.10 crores as revenue receipts and assessed to tax. In the facts and circumstances of the case, we are of the opinion that as per the agreement, the assessee is entitled to forfeit only a sum of Rs.30,00,000/- and the remaining amount of Rs.80,00,000/- has to be treated as revenue receipt and the assessee is liable to pay tax. With regard to the severability of compensation paid for the loss of sale transaction and business loss, the Hon'ble Supreme Court in the judgment reported in 1966 Vol. LX ITR 11 in the case of COMMISSIONER OF INCOME-TAX, MADRAS v/s BEST AND CO. (PRIVATE) LTD., has held as under: "If the compensation paid was in respect of two distinct matters, one taking the character of a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .3.00 crores, within three months. No document or register pertaining to above issue is produced. In the absence of the same, the Tribunal ought not to have held that the stock pertaining to Bulk Drug Unit and R & D Unit should be taken as NIL as on 30-06-2000. On the other hand, Sri.Ramabhadran, learned counsel appearing for the assessee contended that the assessee had discontinued the manufacture of bulk drug during the previous year ended 31-3-2000. The factory was leased to TCL as per the agreement dated 15-11-1999. The said factory was sub-leased to the RIL as sub-lessee of TCL. The stock of Bulk Drug which was valued at Rs.12.78 crores as on 31-3-2000 was valued at NIL in the account as on 31-3-2001. The Assessing Officer also observed that the said Bulk Drug stock was valued at NIL in the account prepared on 30th June 2000 under the Companies Act and placed before the Shareholders. The Assessing Officer sought information from the assessee with regard to scrap of bulk drug of Rs.12.78 crores. The assessee vide its letter dated 3-3-2004 informed that out of Rs.12.78 crores of value of bulk drug, major portion of the stock was WIP, R & D stock, solvent, II crop material, majo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he technical supervision of Mr.Swaminathan, in November 2001. The life of the bulk drug was expired and it cannot be sold in the market. The Central Excise Records also disclose that the said goods cannot be sold in the market. The Income Tax Appellate Tribunal, taking into consideration all these aspects of the matter and that the manufacturer has been completely stopped the manufacturing of the bulk drug, has taken the value of closing stock of bulk drug as NIL. The assessee has not adopted any colourable devices in order to avoid the tax. Hence, we find there is no infirmity or irregularity in the said finding. However, the judgment relied upon by Sri.H.S.Ramabhadran is not applicable to the facts of the case on hand. Hence, the finding recorded by the Tribunal is purely a question of fact. Accordingly, the second substantial question of law is held against the Revenue and in favour of the assessee. 13. Substantial question of law No.3: The third substantial question of law raised in this appeal is with regard to a sum of Rs.4.00 crores received from M/s.Recon Health Care Limited pursuant to the agreement dated 30-06-2000. As per the agreement, the assessee and the promoters o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the approval of the shareholders of the assessee-company. Against the net assets transferred, assessee received Rs.3.05 crores and, utilized the same to acquire Rs.25,50,000 equity shares of Rs.10/- each in the financial year 1997-98 and later Rs.1.00 crore in the financial year 2000-01. These shares were sold to Sri.Suresh, Managing Director of RAL at the price of Rs.2.55 lakhs, which was 1% of the value of the share. The assessee indexed the cost of acquisition to Rs.3,12,77,964/- and arrived at long term capital loss of Rs.3,10,22,946/-. The Assessing Officer on verification of the records came to the conclusion that buying and selling of the shares of RAL were between the interested persons and family members as the assessee failed to adduce evidence that the valuation of the share was done at arm length. The Assessing Officer rejected the assessee's claim for long term capital loss. With regard to the short term capital loss, the Assessing Officer noticed that the assessee invested a sum of Rs.1.00 crore in equity shares of RAL in the financial year 2000-01. However, the said investment was also sold to Sri.Suresh, Managing Director of RAL for Rs.1,00,000/- within a short du ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s.0.10 per share. Sri.Suresh, to whom the shares were sold, was neither a relative of any of the promoters of the assessee nor Director of any of the Group Company. The balance sheet of RAL as on 31-3-2001 was prepared after taking into consideration an income of Rs.6.00 crores received from the assessee. The assessee was managing the affairs of the subsidiary companies through its nominee directors. The assessee gave a corporate guarantee to Karnataka Bank for the credit facility. The RAL suffered a loss due to the drought. The Karnataka Bank to whom the assessee has given corporate guarantee issued notice proposing to invoke the Bank Guarantee. The suppliers who have supplied to RAL on the guarantee of the assessee were pressurizing the assessee to pay their dues. In order to avoid the coercive steps and freezing of the assessee's credit facility, the assessee had taken a decision to sell the shares. The Assessing Officer disallowed both short term and long term capital loss. However the Appellate Authority has given partial relief. The Appellate Tribunal after taking into consideration all these aspects of the matter set aside the order passed by the First Appellate Authority an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... balance sheet drawn up on a date immediately preceding the valuation date, and in the absence of both, the balance sheet drawn up on a date immediately after the valuation date. There is no dispute that break up value with reference to balance sheet is to be applied. The question is which is the relevant balance sheet. On that, the jurisdictional High Court's case in CED v.J.Krishna Murthy (1974) (96 ITR 87) (although the judgment related to Estate Duty Act) held that the published balance sheet immediately prior to the date of death as relevant of break up method as appropriate. That case is applicable to the facts of the instant case. Admittedly, there is an audited balance sheet as at 30.6.2000 which is prior to November, 2000. Hence, it would not be correct to further look at the subsequent balance sheet i.e., the balance sheet dated 31.3.2001. Further, due consideration must be given to appellant's submission that if balance sheet as at 31.3.2001 is considered , then deduction should be granted for Rs.5 crores foregone by the appellant. The contention of the AO that sale of Recon Agro Tech Ltd Shares was between related parties has been rebutted by the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee being aggrieved by the assessment order preferred an appeal before the Commissioner of Income Tax (Appeals). The Appellate Authority after examining the matter held that as per the provision of Section 32(1)(ii), the knowhow acquired after 1-4-1998 is a capital asset for the purpose of allowance of depreciation. In the case of assessee, the consideration of Rs.25.00 crores on sale of knowhow being the capital assets would be exigible to the tax under the head capital gain and directed the Assessing Officer to tax the said amount under the head capital gain. The assessee being aggrieved by the order passed by the First Appellate Authority, approached the Income Tax Appellate Tribunal challenging the same. However, the Revenue has not preferred any appeal. The Appellate Tribunal, after examining the records and some of the clauses of the agreement dated 30-06-2000, relying upon the judgment reported in 36 ITR 175 (C.I.T v/s VAZIR SULTAN TOBACOO COMPANY LIMITED) held that in view of the agreement, the assessee is prevented from manufacturing goods with respect to Pharmaceuticals which has been sold to the M/s.Recon Health Care Limited. The consideration of Rs.25.00 crores received ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t during the financial year 2000-01, the assessee-company has received a sum of Rs.40.00 crores from M/s.Recon Health Care Limited as per the agreement dated 30-06-2000. The nature of the transaction was as follows: (a) The sale of the brand Rs.11.00 crores (b) Sale of Technical Knowhow Rs.25.00 crores (c) Non-compete fee Rs. 4.00 crores In the return of income, the assessee-company has offered for tax only the technical knowhow fee, however sale of brands and non-competition fee were claimed as capital receipts and treated as non-taxable. During the course of assessment, the assessee claims that a sum of Rs.25.00 crores received on transfer of the technical knowhow was in the nature of capital receipt vide Office letter dated 18-3-2004 and treated the said amount as capital receipt. However, the assessee has not filed revised returns as contemplated under Section 139(5) of the Act. The three agreements produced by the parties clearly disclose that one is with regard to transfer of the knowhow and another is with regard to non-competition fee and the third agreement is with regard to transfer of its current brand, trade mark. As per the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is a transfer of knowhow. The Madras High Court in Indo Tech Electric Company's case in para 12.3 and 13.2 has held as under: "12.3. Technical know-how is defined as an intangible revenue producing asset which can be put to use so as to produce revenue in two ways. The manufacturer can use it himself to make things for sale and make profit in that way, or he can teach it to others, so that they can make their own things, in which case he gets paid for the knowledge and information which he imparts to them. His fees and rewards are then revenue in his hands. Under the Income-Tax Act, transfer of Technical know-how is subject to tax only from the Assessment Year 1998- 99 by the amendment through Finance Act, 1997.. 13.2. Therefore, it is clear that inasmuch as the assessee's firm has been taken over as a going concern, it could not have been taken over without the so called technical knowhow. The assessee could not have sold the other tangible assets, keeping it the so called technical knowhow. Hence, we are of the considered view that the receipt for technical knowhow and the compensation for non-competing fees are nothing but a part of composite receipt ..... X X X X Extracts X X X X X X X X Extracts X X X X
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