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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 ..... revenue receipt and the assessee is liable to pay tax. - Decided partly in favor of revenue. Whether stock pertaining to bulk drug unit and R & D should be taken as NIL as on 30.6.2000 when its realizable value as on 30.03.2000 was Rs.12.78 crores – Held that:- The said goods were not saleable items in the market - 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 – Decided against the Revenue. Whether the amount received in regard to noncompetition clause for three year is a capital receipt – Amount received is Rs.4 Crore - Held that:- Compensation received for refraining from carrying on competitive business was a capital receipt - In the instant case, Rs.4.00 crores received from M/s.Recon Health Care Limited towards noncompetition to discontinu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /2006 - - - Dated:- 19-9-2013 - Dilip B Bhosale And B Manohar, JJ. For the Appellant : Sri. M Thirumalesh, Adv For the Respondent : Sri. H S Ramabhadran, Adv JUDGEMENT:- PER : B Manohar The Revenue has preferred this appeal under Section 260A of the Income Tax Act, challenging the order dated 2-1-2006 made in ITA No.81/Bang/2005 passed by the Income Tax Appellate Tribunal, Bangalore (hereinafter referred to as the Appellate Tribunal ) setting aside the assessment order passed by the Assessing Authority as well as the First Appellate Authority for the assessment year 2001-02. 2. The respondent/assessee M/s.Wintac Limited, earlier known as M/s. Recon Limited, is a company incorporated under the provisions of Companies Act, 1956, carrying on the business of formulations and manufacture of bulk drug, having its three units at No.82/A, Jigani Unit-Manufacturing bulk drugs, Bannerghatta Road Unit-R D Unit, Nelamangala Unitformulation. 3. The assessee filed return 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r in detail held that receipt of 1.10 crores of forfeited amount is a revenue receipt and is liable to be taxed. Further, insofar as the closing stock of the bulk drug in the plant is concerned, the Assessing Officer held that some of the stocks have been sold and the life of some of the bulk drugs available with the assessee had expired and reduced the said amount to Rs.1,49,82,784/- instead of Rs.11,56,74,925/- assessed by the Assessing Officer. Insofar as receipt of Rs.4.00 crores from Recon Health Care Limited towards noncompetition fee is concerned, it was held to be the revenue receipts and liable to be taxed. Insofar as disallowance of the long term and short term capital loss, the Appellate Authority partly allowed the claim made by the assessee and disallowed the short term capital loss claimed by the assessee. Insofar as receipt of Rs.25.00 crores by the assessee from Recon Health Care Limited towards transfer of the technical knowhow is concerned, the First Appellate Authority 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 consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held that the assessee had adopted a colourable device in order to avoid tax. 3. Whether the Tribunal was correct in holding that the amount of Rs.4 crores received by the assessee as per the agreement dated 30.6.2000 entered by the assessee with M/s.Recon Health Care limited to discontinue its business with a noncompetition clause for three year is a capital receipt. 4. Whether the Tribunal was correct in holding that for the computation of capital gains arising on sale of equity shares of M/s.Recon Agro Tech Pvt Ltd., the loss under capital gains is to be computed by adopting cost of acquisition of Rs.0.10 per share when interse parties were interested persons and family members and the entire transaction was a colourable device. The 5th substantial question of law has been reframed by this court, which reads thus: 5. Whether the Tribunal was correct in holding that the transfer of technical knowhow by the assessee for a consideration 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 add ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnot be treated as Revenue receipt. In support of his contention, he relied upon the Judgments reported in 2000 (243) ITR 243 in the case of TRAVENCORE RUBBER AND LEAD CO. LTD., v/s COMMISSIONER OF INCOME TAX. The order passed by the Tribunal is in accordance with law. The Tribunal after considering the matter, set aside the order passed by the Assessing Authority as well as the First Appellate Authority and the same does not call for interference and sought for dismissal of the appeal. The records clearly disclose that the assessee had received an advance amount of Rs.4.49 crores in terms of agreements of sale dtd.15-11-1999 and 17-01-2000. However, the said agreements were terminated with the consent of both the parties on 13-1-2001 and 15-1-2001 and handed over both the Units to the assessee. As per the agreement, if the purchaser fails to perform their part of the contract, the Vendor is entitled to terminate the agreement and claim liquidated 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 74,925/-. However, the First Appellate Authority assessed the value of the closing stock at Rs.1,49,82,784/- after deducting the waste stock to an extent of Rs.10,06,92,141/-. The finding of the First Appellate Authority is challenged both by the assessee and the Revenue before the Appellate Tribunal. The Tribunal accepted the contention of the assessee and rejected the contention of Revenue. The order passed by the Appellate Tribunal is contrary to law. The Tribunal failed to take note of the fact that the assesseecompany entered into an agreement of sale of Bulk Drug Unit and R D Unit with TCL, the closing stock pertaining to the above was retained with the assessee. The assessee valued the stock pertaining to Bulk Drug Unit and R D Unit as its realizable value at Rs.12.78 crores on 31-3-2000 and NIL on 30-06-2000. The assessee failed to explain as to what was the reason under which, the value of stock got suddenly eroded its value to Rs.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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se aspects of the matter accepted the contention of the assessee and deleted the value of closing stock as NIL. There is no infirmity in the said finding. The records clearly disclose that the assessee had discontinued the manufacturing of bulk drug during the previous year ended 31-3-2000. The factory at Jigani Industrial area was leased to TCL as per the agreement of lease dated 5-11-1999. The RIL is manufacturing the drug and a portion of the finished goods were sold. The major portion of the stock was WIP, R D stock, solvents, II crop material, major portion of which carried from many years, whose value was reduced year after year on account of non-mobility. The said stock was aggregated about Rs.11.00 crores. The said goods were not saleable items in the market. Unsalable items were kept in the godown. It was accumulated year to year. Subsequently, all the goods were disposed of in the plot No.28 of KIADB Industrial area, Jigani under the 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 Ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a capital receipt. In the instant case, Rs.4.00 crores received from M/s.Recon Health Care Limited towards noncompetition to discontinue the business of three years has to be held as capital receipt. Accordingly, the third substantial question of law is answered in favour of the assessee. 14. Substantial question of law No.4: With regard to the computation of capital gains arising on sale of equity shares of M/s.Recon Agro Tech (P) Ltd., (hereinafter referred to RAL ) is concerned the Assessing Officer disallowed both long term capital loss of Rs.3,10,22,941/- and short term capital loss of Rs.99,00,000/- claimed by the assessee. Sri.M.Thirumalesh, learned counsel appearing for the appellants contended that during the accounting year ending 31-3-1997, the assessee transferred its Agro Division (manufacture and marketing of pesticide formulation) i.e. M/s.Agro Tech (P) Limited to RAL which is the subsidiary company of the assessee after obtaining 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s.1.00 crore was also sold to the RAL within few days, for Rs.1,00,000/- and suffered the short term capital loss. The purchase and sale of the shares between the close relatives and interested parties and family members, the entire transactions are colourable device. Hence, they are not entitled to claim short term and long term capital losses and sought for setting aside the said finding. On the other hand, Sri.Ramabhadran, learned counsel appearing for the assessee contended that the assessee was having a separate Agro Division and during the financial year 1997, a separate company was floated by name M/s.Recon Agro Tech (P) Ltd. The assessee has invested Rs.2,55,00,000/- for 25,50,000 equity shares of Rs.10/- each. The said company sustained heavy loss. The assessee with a view to disassociate itself with its subsidiary company, entered into a Memorandum of Understanding with Suresh, Managing Director of RAL and agreed to sell 25,50,000 shares at Rs.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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 52 which earlier provided for adopting the consideration for transfer in case of understatement etc has been omitted by Finance Act, 1987 w.e.f. 1.4.1988. Thus, unless and until it can be proved, that the assessee received something more than the apparent consideration, the Assessing Officer cannot compute the capital gain artificially by substituting fair market value in place of consideration received. There is no finding that transaction is a colorable one or that the agreement is sham. Therefore, there is no reason to substitute the consideration received with any other amount. Shares sold being unquoted equity shares, one of the recognized methods of valuation if Rule 11 of Schedule III of the Wealth Tax Act, As per Explanation to said Rule, the balance sheet is the balance sheet (including the Notes annexed thereto and forming part of the accounts) as drawn up on the valuation date, and if there is no such balance sheet, the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rds the transfer of technical knowhow, Sri.M.Thirumalesh, learned counsel appearing for the Revenue contended that as per the agreement dated 30th June 2000, the assessee transferred the technical knowhow in respect of certain products to M/s.Recon Health Care Limited. In consideration of the transfer, the transferee agreed to pay a sum of Rs.25.00 crores to the transferor, and the receipt was admitted and acknowledged by the transferor. The consideration received towards transfer of technical knowhow was originally offered to tax as a revenue receipt in the returns filed. However, during the course of assessment, the assessee contending that Rs.25.00 crores received towards transfer of technical knowhow is in the nature of capital receipt and not liable to be taxed, filed a revised statement. The Assessing Officer rejected the contention of the assessee and assessed the said amount to tax under the head business income. The assessee 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o for non-disclosure of technical knowhow to others. As per clause 3(1) of the Agreement, the transferor shall stop using or in any way dealing with the knowhow for the manufacture of the product from the date hereafter, and shall not use or deal with the same hereinafter except under the instruction and license from the transferor on that behalf. Hence it is clear that under the Agreement, the assessee not only has to convey certain knowledge to the transferee but also impose restrain on itself on use of such knowledge. He relied upon the judgment reported in 36 ITR 175 (supra) and contended that Section 55(2A) does not include knowhow as capital assets whose value shown to be taken to be NIL or at the cost of acquisition, though other assets are mentioned therein such as goodwill, trademark, brand name and right to manufacture. Therefore, the receipt is a capital receipt and not liable to be taxed. The records clearly disclose that 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Care Limited. The assessee has already received Rs.4.00 crores towards non-competition agreement. Under Section 28(v)(a) any sum, whether received or receivable, in cash or kind, under an agreement for not carrying out any activity in relation to any business, or not sharing any knowhow, patent, copyright, trademark, license, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of the goods is intangible goods acquired on or after 1-4-1998 is a capital asset and liable to be taxed under the head Capital Gain . The judgment relied upon by Sri.Ramabhadran reported in CIT v/s VAZIR SULTAN TOBACOO COMPANY LIMITED is not applicable to the facts of the present case. In that case, the compensation has been paid for termination of agency agreement which would be a capital receipt, whereas in the present case, there 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 manufact ..... X X X X Extracts X X X X X X X X Extracts X X X X
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