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TMI Blog2015 (4) TMI 323X X X X Extracts X X X X X X X X Extracts X X X X ..... held by ld. CIT(A). Assessee has vehemently denied having any where admitted that part of the compensation was for non competition. In our considered view the compensation in question was meant, intended and paid for withdrawal of aforesaid litigation instituted by assessee which could have resulted in many adverse consequences for the reputation of Coca Cola/Atlantic besides entailing huge cost and efforts of litigation. Relinquishment of right to sue is neither a capital asset nor taxable u/s 28 which provides specific types of receipt to be held taxable as business income. Relinquishment of right to sue does not find any mention therein. In this eventuality we have no hesitation to hold that the impugned amount of ₹ 8,16,22,040/- is a capital receipt not liable to Income Tax. The addition is deleted, assessee's grounds in this behalf are allowed. Apropos the issue about validity of satisfaction u/s 153C, since we have allowed the relief on merits we find no necessity to dwell on this technical issue. - Decided in favour of assessee. - ITA No. 225/JP/2013 - - - Dated:- 27-2-2015 - R. P. Tolani, JM And T. R. Meena, AM,JJ. For the Appellants : Shri Ajay Wad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der Dated 23-01-2012. Assessee filed the return u/s 153C declaring a depreciation loss of Rs.(-) 1,80,94,965/- on 22-12-2011. According to AO the brief facts of assessee's business relations with CHL are as under:- The assessee company M/s. Satyam Food Specialities (P) Ltd. (now, M/s. Karmik Business Specialties (P) Ltd. Satyam') was incorporated in 1992 in the state of Rajasthan. The company entered into a franchisee soft drink bottling agreement with Cadbury Schweppes Beverages India (P) Ltd. (hereinafter referred to as CSBIPL) on 5-11-1997. It set up an exclusive plant only to meet the requirement of Cadbury's products for the state of Rajasthan which commenced operations on 02-05-1999 in terms of the above referred agreement. Vide this agreement rights were granted to Satyam to manufacture, fill into authorized containers and to sell the products in the state of Rajasthan. Subsequently on 12-12-1998, M/s. Satyam wee informed that CSBIPL has agreed to sell its soft drink brands to M/s. Coco Cola Company. Vide letter dated 28-06-1999 Satyam was also informed that M/s. Coco Cola Company would also honour al the existing agreements with CSBIPL. It was also informed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18,3,11,020/- Settlement Agreement includes receipts on account of Asset Transfer Agreement, receipts on account of Conveyance Deed as well as 'other' receipts 2. Asset Transfer Agreement 5,94,57,684/- 3. Conveyance Deed 4,22,31,296/- In view of the above mentioned agreements, Satyam had transferred its bottling business assets as well as immovable property to M/s. Coco Cola India (P) Ltd. The assessee company treated the amount of ₹ 18.33 crores received from Atlantic as a capital receipt and transferred it to the Reserve and Surplus account in its balance sheet as on 31-03-2009. The AO issued a show cause notice as to why the said receipts of ₹ 18.33 crs. Should not be treated as revenue receipt, assessee filed a detailed reply which in sum and substance contended that:- i. The entire compensation received by the appellant was in lieu of withdrawing the right to sue against Atlantic/Coca Cola. Any agreed compensation received for withdrawing the right to sue is patent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of 'capital' and 'Revenue'. Being so, the capital component comprises of the amounts received on account of transfer of capital assets such as the plant and machinery under the terms of the aforesaid ATA amounting to ₹ 5.94 crores as well as the transfer of the immovable property such land and building by means of a conveyance deed amounting to ₹ 4.22 crores. Thus, the total capital component of the amount received by the assessee company is ₹ 10.16 crores [5.94+4.23]. The balance amount of ₹ 8.16 crores [18.33 - 10.17] is hence, the 'Revenue' receipt of the assessee because the assessee has been compensated for the losses suffered by it in past years as well as breach of other terms of contract/ agreement. 8.6 Taxability of Revenue Receipt Once it has been established that ₹ 8.16 crores has been received by the assessee company as Revenue receipt, it is essential to examine the taxability of the same under the provisions of the Act. This amount is in the nature of compensation and / or other payment received by the assessee company as has been established in the preceding paragraphs. The taxability of the 'Revenue&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld. AO in this behalf. Qua merits however it was held that provisions of sec 28(va) are applicable and not sec 28(ii)c as applied by AO. Consequently the part of compensation indicated by AO was received by assessee was held taxable u/s 28(va) i.e. receiving for not carrying out of its business against Coca cola/ Atlantic. Thus on merits also ld CIT(A) upheld the AO's order though applying a different clause of sec. 28 and dismissed assessee's appeal by following observations: Keeping in view of such facts the AO came to the conclusion that the remaining amount received by the appellant amounting to ₹ 8.16 crores was essentially received on account of damages occurred to the appellant company due to breach of terms of conditions of bottling agreement. On the other hand, the appellant has contended that the whole receipt of ₹ 18.33 crores including ₹ 8.16 crores are essentially on account of premature termination of the business of the assessee as compensation and that even if the receipts are treated as Revenue to be taxed as business income they are covered by the first proviso to Section 28(va) according to which even revenue receipt are not taxable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount of ₹ 10,17,88,980/- (59457864+42331296). Such consideration received by the appellant was taxable under the provisions of capital gain and the appellant was himself shown capital gain liability on such receipt. But the remaining amount of settlement agreement amounting to ₹ 8,16,22,040/- is also claimed to be a capital receipt and accordingly not offered for taxation. It may be noted that by such settlement dated 24-11-2008 the appellant received total consideration of ₹ 18.33 crores and with such agreement the appellant surrendered all his rights of carrying out any business manufacturing / production and sale of Cadbury items in Rajasthan State. The appellant's case is that by such agreement the income generating source of the appellant itself has drained out/ finished that therefore, such receipt is of capital nature. However, as stated above inserting provisions of Section 28(va) by Finance Act, 2002 w.e.f. 1-04-2003, the provisions provide for taxation of such receipts even if the same is of capital nature. The provisions of the Act in terms of Section 28(va) proviso (a) are very clear which provides that only exception will be income chargeable t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the documents seized from the Cabana Group do not fall within the scope of the term belongs or belong to the assessee. Following contentions are raised in this behalf. The existence of business relations between Cabana and assessee have not been denied by any party. During the course of such bipartite business relationship several documents are mutually exchanged, each party retains its part of documents as its belonging and such documents will invariably bear the names of both parties. The nature of documents seized from Cabana group is as under: i. Photocopies of Cumulative Redeemable Preference Shares purchased by PepsiCo India Holdings Private Limited from M/s. Tripty Drinks Limited and M/s. SMV Beverages Limited. ii. Some unsigned original leaves in the cheque books which belonged to the Jaipuria Group of companies, written in favour of PepsiCo India Holdings Private Limited. iii. A photocopy of a Supply and Loan Agreement made on 01.10.2010 between Pearl Drinks Limited and PepsiCo India Holdings Private Limited. The fact remains that impugned papers were found in the custody of Cabana group and have not been denied by them as not belonging to them. In this event ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer is satisfied that any money, bullion, jewellery or other valuable article or thing or books of account or documents seized or requisitioned belongs or belong to a person other than the person referred to in section 153A, then the books of account or documents or assets seized or requisitioned shall be handed over to the Assessing Officer having jurisdiction over such other person 3a[and that Assessing Officer shall proceed against each such other person and issue notice and assess or reassess the income of the other person in accordance with the provisions of section 153A. 1.2 Section 132 of the Act, Search and seizure (1) (4A) Where any books of account, other documents, money, bullion, jewellery or other valuable article or thing are or is found in the possession or control of any person in the course of a search, it may be presumed- (i) that such books of account, other documents, money, bullion, jewellery or other valuable article or thing belong or belongs to such person; (ii) that the contents of such books of account and other documents are true ; and (iii) that the signature and every other part of such books of account and other documen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Since these are the only High Court judgments available on the meaning of these terms, their ratio is pleaded to be binding on the Tribunal as held by Commissioner of Income-tax v. Smt.Godavaridevi Saraf [1978] 113 ITR 589 (Bom.) and Taylor Instrument Co. (India) Ltd. v. Commissioner of Income-tax, [1998] 99 TAXMAN 155 (DELHI). 3. Hon'ble Delhi High Court in the case of Pepsi Foods Pvt. Ltd. (supra) on the relevant aspect held as under: 6. On a plain reading of Section 153C, it is evident that the Assessing Officer of the searched person must be satisfied that inter alia any document seized or requisitioned belongs to a person other than the searched person. It is only then that the Assessing Officer of the searched person can handover such document to the Assessing Officer having jurisdiction over such other person (other than the searched person). Furthermore, it is only after such handing over that the Assessing Officer of such other person can issue a notice to that person and assess or reassess his income in accordance with the provisions of Section 153A. Therefore, before a notice under Section 153C can be issued two steps have to be taken. The first step is t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t case for issuance of a notice under Section 153C, there is nothing which would indicate as to how the presumptions which are to be normally raised as indicated above, have been rebutted by the Assessing Officer. Mere use or mention of the word satisfaction or the words I am satisfied in the order or the note would not meet the requirement of the concept of satisfaction as used in Section 153C of the said Act. The satisfaction note itself must display the reasons or basis for the conclusion that the Assessing Officer of the searched person is satisfied that the seized documents belong to a person other than the searched person. We are afraid, that going through the contents of the satisfaction note, we are unable to discern any satisfaction of the kind required under Section 153C of the said Act. Thus following Hon'ble Delhi High Court it becomes obvious that mere use of words 'satisfaction' or 'I am satisfied' would not meet the requirements of the satisfaction in terms of sec 153C. The satisfaction note must objectively demonstrate the reasons or basis for arriving at the objective satisfaction of AO of the searched person that the seized documents ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ght of these contentions, it is pleaded that none of the purported seized documents, can be said to 'belong to' the assessee; thus the basic ingredients of section 153C of the Act have not been satisfied in the instant case. Consequently, the notices issued under section 153C of the Act and in pursuance thereto, the assessment orders passed under section 143(3) read with section 153C of the Act, deserve to be quashed. 2.7 Apropos merits it is contended that Ld. AO erred in applying section 28(ii)(c) for upholding the addition of ₹ 8,16,22,040/- as revenue receipt ld. CIT(A) further erred in changing the charging section and wrongly applying Section 28(va) of the Act. 2.8 Adverting to AOs order, it is contended that a plain reading of sec. 28(ii)(c) make it specifically applicable only to holder of an agency in India. None of the original agreement or litigation documents claim that assessee was holding any agency whatsoever. The assessee only held rights for manufacturing/filling/selling and distributing beverages under fixed trade marks for a period of 50 years and not for grant of any agency. In first appeal ld.CIT(A) realizing the wrong application of this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ween Satyam and Atlantic under the Bottling Agreement pursuant to which Satyam initiated arbitration proceedings and filed an application before the High Court of Rajasthan for the appointment of arbitrator. Additionally, Satyam filed a complaint before the Monoploies and Restrictive Trade Practices Commission ( MRTP Commission ) for an inquiry into alleged unfair trade practices being conducted by Atlantic and its Affiliates; 82 D Satyam and Atlantic agreed upon heads of terms in a letter agreement dated August 25, 2008 ( Letter Agreement ), with the intent to resolve the disputes under the Bottling Agreement or otherwise and amicably settle all demands, disputes, differences, losses, damages and claims arising thereunder and settle, fully and finally, such disputes, whether quantified or not; and upon such settlement procure an Affiliate of Atlantic to purchase certain specified assets of Satyam subject to legal, operational and tax due diligence. 82 E In consideration of the execution of the Letter Agreement and as advance money on the Settlement Amount (defined hereinafter) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ges Atlantic, its Affiliates and Atlantic's successors and assigns and its current, former and future officers, directors, representatives, agents, employees and attorneys (collectively, the Atlantic Releases ) with effect from Completion, from any and all or present and future claims, causes of action, rights, debt, liabilities, promises, agreements, demands, damages, accountings and costs and expenses of any kind whatsoever in law or in equity, whether known or unknown, existing or contingent, asserted or unasserted, apparent or concealed, that it has or may have in the future against Atlantic or any of the other Atlantic Releases, directly or indirectly, arising out of or relating to the Bottling Agreement or any proceedings referred to in Schedule I or otherwise. It is the intent of Agreement to completely release all claims against the Atlantic Releases even if not specifically excluded or accepted individually or by category in this Agreement. 85 85 2.4 Satyam further agrees and acknowledges that on receipt of the Settlement Amount, it shall be left with no other outstanding claims(s), demand(s), difference(s), dispute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o withdraw all legal proceedings pending before the MRTP Commission, the Rajasthan High Court and the arbitral tribunal more specifically set out in Schedule 1 and settle all claim(s) raised therein together with all claim(s) connected thereto. 86 2.10 Satyam irrevocably agrees that in the event that the Director General (Investigation Registration) of the MRTP Commission were to initiate any enquiry relatable to the subject matter of any of the complaints withdrawn by Satyam, Satyam shall fully cooperate with Atlantic and its Affiliates and take all efforts to defend the interests of Atlantic and its Affiliates and to take efforts to ensure that no prejudicial order is based against Atlantic or its Affiliates in any proceedings referred to in Schedule I or otherwise. 87 4.2 Satyam shall show proof of irrevocably and unconditionally withdrawing all notice(s), legal proceedings and claims, against Atlantic or any of its Affiliates (set out in Schedule I) before any court, tribunal or forum in order to procure appropriate orders of dismissal, discharge, disposal or withdrawal o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded by this Act or by any other law for the time being in force:..... (e) A mere right to sue cannot be transferred. The word 'transfer' in relation to capital asset has been defined in section 2(47) of the Income-tax Act, 1961, which includes 'sale, exchange or relinquishment of the asset or the extinguishment of any right therein'. The damages which were received by the assessee cannot be said to be on account of relinquishment of any of its assets or on account of extinguishment of its right of specific performance under the bottling agreement. (v) A mere right to sue certainly cannot be transferred. (vi) There cannot be any dispute with the proposition that in order that a receipt or accrual of income may attract the charge of tax on capital gains the sine qua non is that the receipt or accrual must have originated in a 'transfer' within the meaning of s. 45 r/w s. 2(47) of the Act. Since there could not be any transfer in the instant case, the amount received by the appellant as compensation was not assessable as capital gains. 2.10 It is further contended by ld. Counsel that: a. There is no cost of acquisition of right to sue. b. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on following cases in supports of above propositions: (i) In the case of Union Of India vs Raman Iron Foundry, 1974 AIR 1265, 1974 SCR (3) 556, Hon'ble Supreme Court held that: 18 When there is a breach of contract, the party who commits the breach does not eo instanti incur any pecuniary obligation, nor does the party complaining of the breach becomes entitled to a debt due from the other party. The only right which the party aggrieved by the breach of the contract has is the right to sue for damages. That is not in actionable claim and this position is made amply clear by the amendment in s. 6(e) of the Transfer of Property Act, which provides that a mere right to sue for damages cannot be transferred. (ii) In the case of Commissioner of Income-tax v. J. Dalmia, [1985] 20 Taxman 86 (Delhi), by the Hon'ble HIGH COURT OF DELHI held that: 9 ..We are to determine whether damages received by the assessee were in respect of transfer of a 'capital asset'. There was a breach of contract and the assessee received damages in satisfaction thereof. He had a mere right to sue for damages. Assuming the same to be 'property', this could not be t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ning of section 3 of the Transfer of Property Act, since it could not be said to be a debt or a beneficial interest in movable property not in the possession of the assessee .. 6. When a contract is broken, it gives rise to a civil wrong which may entitle the injured party to sue the wrong doer for damages liquidated or unliquidated, or for specific performance and in some cases for restitution or even an injunction But once there is a breach of contract and the defaulting party not only refuses to perform his part of the contract but also disposes of the subject-matter, the injured party has nothing left in the contract except the right to sue for damages .. After the amendment a mere right to sue, whether arising out of tortuous act or ex-contractual is not transferable. In Mulla's Transfer of Property Act, Seventh edn., we find the following statement:- But a debt or actionable claim must be distinguished from a right to sue for damages. After breach of a contract for the sale of goods nothing is left but a right to sue for damages which cannot be transferred. But before breach the benefit of an executory contract for the sale of goods may gene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question had been referred to the Hon'ble High Court for its opinion:- Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the amount received by the assessee-company by way of damages for breach of contract of sale of movable property was chargeable to tax under the head 'Capital gains'? 4.2. The Hon'ble Gujarat High Court after examining various judicial pronouncements at length observed that payment by way of compensation or damages is distinct from consideration for complying with the contract. The Hon'ble High Court after examining all aspects answered the question against the Revenue. 4.3. The reliance was also placed on the decision of Hon'ble Delhi High Court rendered in the case of CIT vs. J. Dalmia reported at 149 ITR 215. The question before the Hon'ble Delhi High Court was whether, on the facts and in the circumstances of the case, the amount of ₹ 1,02,500/- is assessable as capital gains other than long term capital gains in the hands of the assessee? The facts in that case were that M/s.Satish Kumar Sood Sons were the owners of this property. They entered into an agre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the amount of ₹ 1,02,500/- received by the assessee as damages was not assessable as capital gains. (v) Govindbhai C. Patel v. Deputy Commissioner of Income-tax, Circle 9, Ahmedabad, [2010] 36 SOT 270 (AHD.) 12. In view of the above provisions, the sum received or receivable in cash or kind under an agreement for not carrying out any activity in relation to any business or not sharing the receipts from know-how etc., the value of any benefit will be taxable under section 28(va) of the Act. But from the facts of the present case, it cannot be said that the assessee was carrying on business of obtaining loans or was in the business of money-lending or any other related business, but the transaction was out of the amount standing as liability in earlier years credited to the capital account by the assessee in the books of account as compensation for not enforcing his rights to sue in the court of law on account of full and final settlement. The assessee has not received any benefit in cash or kind which could be valued in the nature of income arising from the business for not competing. The provisions of section 28(va) of the Act provides that any sum whether received ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ehemently contends that the satisfaction u/s 153C has been properly recorded and it conforms to the language of the provisions. The validity is further demonstrated by the fact that though the assessee challenged them by writ petition before Hon'ble Rajasthan High Court the same has been dismissed as withdrawn. 2.13 Apropos the meaning and scope of the words Belongs or belong to much agitated by the assessee, it is vehemently contended that sec 153C does not refer to ownership, the reference is to belong which has wider connotations. Besides at the initial satisfaction stage what is required from AO is prima facie satisfaction and not demonstration of conclusive satisfaction. Hon'ble Supreme court in the case of Phoolchand Bajranglal 203 ITR 456 has held that at preliminary stage sufficiency of reasons cannot be examined. The intense business relationship of assessee and Caban group and genuineness of seized documents has been accepted by the assessee. AO of the searched person does not know whether and how the assessee has accounted for the amounts in question or not. Cabana group during their assessment made huge surrender of income; looking at the entire documents A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (A) has rightly invoked the provisions of sec. 28(v)(a) to hold that part of compensation received by assessee was revenue receipt. His order is relied on. 2.17 We have heard the rival contentions and perused the material available on record. We deem it expedient to first decide the issue on merits of taxability of compensation. Ld. CIT(A) while deciding the appeal has held the impugned amount to be specifically taxable u/s 28(va) of the IT Act, same has been reproduced above. Revenue has accepted this order. Consequently on merits, the issue before us is narrow - Whether the amount in question can be held to be falling within the scope of sec. 28(va). Search in the premises of Cabana group was conducted on 31-7-09 whereas the settlement agreement in question and other agreements were executed much earlier on 24-11-08. It has not been alleged that the agreements are a subterfuge, thus the genuineness of agreements is not in question. A reading of various clauses of said settlement agreement demonstrates that the consolidate compensation was paid by Coca Cola/Atlantic to assessee by settlement agreement Dtd. 24-11-08 mainly for following reasons: a. That certain disputes arose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... That the intention of the Settlement Agreement was to resolve the disputes and amicably settle all demands fully and finally. c) That in consideration of the mount received from Atlantic Industries, the assessee company would irrevocably and unconditionally release, acquit, waive, relinquish, withdraw all claims and complaints against Atlantic and its affiliates. d) That Satyam would not initiate and proceed with or prosecute any of the claims or the complaints and forever discharge Atlantic and/or its affiliates. e) That Satyam received the consideration amount towards full and final settlement of all its outstanding differences, disputes, damages, claims or demands against Atlantic and/or its affiliates. f) That all disputes raised by Satyam .shall stand fully and finally settled. g) That Satyam fully, completely, irrevocably, finally and forever releases, acquits and discharges Atlantic and/or its affiliates. h) That the amount received by Satyam would take care of any and all or present and future claims, causes of action, rights, debts, liabilities, promises, agreements, demand, damages, accountings and costs and expenses of any kind whatsoever. i) That t ..... 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