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TMI Blog2024 (8) TMI 801X X X X Extracts X X X X X X X X Extracts X X X X ..... ion in the case of Rohitasava Chand [ 2008 (3) TMI 16 - HIGH COURT OF DELHI] The amount received as non-compete fee is not taxable and the AO is directed to delete the same. Ground No. 1 is allowed. Addition on cancellation of own debentures - AO dismissed the contention of the assessee on the ground that it is not supported by any principle of accounting - HELD THAT:- We find that these debentures were issued for obtaining funds for capital outflow involving capital expenditure. A perusal of the offer letter for issue of debentures show the object of issue, project and repurchase of debentures. The Hon'ble High Court of Bombay in the case of Scindia Steam Navigation [ 1977 (11) TMI 6 - BOMBAY HIGH COURT] had an occasion to consider a similar issue and held that surplus on cancellation of debentures is not equivalent to profits earned out of the business. On a reverse transaction, the Hon'ble Delhi High Court in the case of Dalmia Dadri Cement [ 1980 (2) TMI 45 - DELHI HIGH COURT] has held that loss on cancellation of debentures is a capital loss. Disallowance being provision for premium on redemption of debenture - AO found that the assessee has not debited in its profit a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... improvement at Rs. 185.37 lakhs taken by the AO is correct - AO ought to have given benefit of indexation on this cost of improvement. Therefore, to this extent, we direct the AO to recompute the capital gain after giving benefit of indexation on cost of improvement of Rs. 185.37 lakhs. Coming to the hard metal business, we find that the hard metal business was acquired by the assessee in pursuance to a scheme of amalgamation approved by BIFR. Therefore, cost to the previous owner shall become cost of the assessee on acquisition as per relevant provisions of the Act being section 49 r.w.s 47 of the Act as the transfer was under a scheme of amalgamation. Therefore, cost of acquisition to the assessee shall be cost to the previous owner. Since no opportunity was given to the assessee to furnish the cost of acquisition to the previous owner, therefore, we direct the AO to give reasonable opportunity to the assessee to furnish details of cost to the previous owner. The assessee is also directed to furnish the said cost for determination of capital gain/loss afresh. In light of the above, Ground No. 5 is allowed for statistical purposes. Additional ground of appeal - disallowance of ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being payment mode to another bidder for loss of business / investment opportunity.. 5. That on the facts and circumstances of the case and in law the Commissioner of Income-Tax (Appeals) erred in holding that the Assessing Officer had correctly worked out capital gains on transfer of Compressor business (subject to arithmetical mistake) and on transfer of Hard Metal business. 6. That the Commissioner of Income-tax (Appeals) ought to have held that in absence of any direction in the assessment order to charge interest, interest u/s 234B 234C could not be charged. 7. That the order passed by the CIT(A) is bad in law and void ab-initio. 3. The assessee has also raised additional grounds, which are more or less alternative pleas in respect of grounds taken in Form No. 36. 4. Representatives of both the sides were heard at length. Case records carefully perused. Relevant documentary evidence brought on record duly considered in light of Rule 18(6) of the ITAT Rules. 5. Briefly stated, the facts of the case are that the assessee filed its return of income on 28.11.1997 showing net loss of Rs. 11,78,54,540/- and computed tax u/s. 115J of the Income-tax Act, 1961 [the Act, for short]. Ret ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecause of their goodwill they have created. It is not in respect of any existing assets tangible but in respect of future adventure which may or may not take place and the goodwill of the assessee. In other way, this is a payment received by the assessee company for a future likely profit which it is otherwise capable of earning by being in similar business as mentioned in the agreement as exploit its goodwill. It is also important to note that the payment is also not compensation for any asset (tangible or intangible) or any profit-making structure which might have been taken away from the assessee. Thus, it will be seen that the assessee company has only realized its future profits in present and they cannot be treated as a capital receipt. 13. After giving thoughtful consideration to the observations of the Assessing Officer, we are of the considered view that none of the lower authorities have doubted that the receipts are on account of restrictive covenants mentioned in the agreement. 14. The impugned quarrel is now well settled by the decision of the Hon'ble Supreme Court in the case of Guffic Chem Pvt Ltd 332 ITR 602. The relevant findings read as under: 5. The position ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interfering with the concurrent findings of fact recorded by the CIT(A) and the Tribunal. One more aspect needs to be highlighted. Payment received as non-competition fee under a negative covenant was always treated as a capital receipt till the assessment year 2003-04. It is only vide Finance Act, 2002 with effect from 1.4.2003 that the said capital receipt is now made taxable [See: Section 28(va)]. The Finance Act, 2002 itself indicates that during the relevant assessment year compensation received by the assessee under non- competition agreement was a capital receipt, not taxable under the 1961 Act. It became taxable only with effect from 1.4.2003. It is well settled that a liability cannot be created retrospectively. In the present case, compensation received under Non-Competition Agreement became taxable as a capital receipt and not as a revenue receipt by specific legislative mandate vide Section 28(va) and that too with effect from 1.4.2003. Hence, the said Section 28(va) is amendatory and not clarificatory. Lastly, in Commissioner of Income-Tax, Nagpur v. Rai Bahadur Jairam Valji reported in 35 ITR 148 it was held by this Court that if a contract is entered into in the ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed with a transitory or ephemeral loss. 18. Considering the facts of the case in totality, in light of the judicial decisions discussed herein above, we are of the considered view that the amount received as non-compete fee is not taxable and the Assessing Officer is directed to delete the same. Ground No. 1 is allowed. 19. Since we have deleted the entire addition, the alternative plea taken in the additional grounds become otiose. 20. Second grievance relates to the addition Rs. 1,73,91,898/- on cancellation of own debentures. 21. While scrutinizing the return of income, the Assessing Officer noticed that the assessee has claimed a sum of Rs. 1,73,91,890 as a deduction being profit on cancellation of debentures. 22. The assessee was asked to justify its claim and in its reply, the assessee explained that an offer of 9432237 13% Non Convertible Debentures [NCD] of Rs. 100/- each aggregating to Rs. 9432.24 lakhs for cash at par were made to the equity shareholders on right basis and 150000 NCD of Rs. 100/- each aggregating to Rs. 150 lakhs to employees were offered. 9577020 NCD of Rs. 100/- each were allotted in November 1994 and March 1995. 23. It was further explained that the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ipulated appropriations to the sinking fund. Accordingly the company cancelled the debentures against the sinking fund investments. The surpluses accrued to the company since the debentures were quoted at a discount in the open market. The ITO took the view that since the assessee-company was purchasing and cancelling debentures year after year, the surplus amounts for the assessment years 1957-58 and 1958-59 could be regarded as business profits. In appeal, the AAC agreed with the ITO. In further appeal, the Tribunal upheld the assessee's contention, observing that what had been done had nothing whatsoever to do with the regular business of shipping. According to the Tribunal, what had been done was to materially alter its permanent framework or its capital structure and in the process the assessee had taken advantage of the favourable capital market. Such operation, according to the Tribunal, was essentially relatable to its capital and the benefit reaped by the company was essentially a capital benefit. The mere frequency of operations did not change the capital aspect. On reference: HELD-IV The Tribunal had found that what was being done by the assessee-company could be reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid by him as the price of debentures would be treated as capital outlay. Although the entire price was paid because of debentures were pregnant with some accrued interest, no interest actually became payable until the due dates arrived. Thus, in between the two payment dates, the, extra price would only be paid of the purchase price. When eventually such an assessee was assessed on the interest received by him on the debentures, he could not seek to set off against such income the extra amount paid by him at the time of purchasing the debentures by treating it as accrued interest. Similarly, a seller of securities-cum-interest was not assessable in respect of the amounts he received towards interest from the purchaser. However, where a company itself purchased debentures issued by it, the company could not become its own debenture holder or creditor and that such a transaction would amount to redemption of the debentures and extinguishments of the company's liability to the debenture-holders, so that the excess payment over and \'e the face value of the debentures could be attributable only to interest. However, this position no longer prevailed in view of section 121 of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as placed on the decision of the Hon'ble Supreme Court in the case of Madras Industrial Investment Corporation 225 ITR 802. 33. Contentions of the assessee were dismissed and addition of Rs. 6,43,000/- was made. 34. We find that the decision in the case of Madras Industrial Investment Corporation [supra] apply on the facts of the case in as much as in that case, it was held that the discount was expenditure allowable u/s 37 of the Act and it should be allowed as deduction proportionately for each year. The only difference is that, in the case in hand debentures having been issued at discount at the time of redemption, premium @ 5% of the face value has been paid. Respectfully following the decision of the Hon'ble Supreme Court [supra], we direct the Assessing Officer to delete the impugned addition. Ground No. 3 is allowed. 35. Ground No. 4 relates to the disallowance of claim of deduction of Rs. 1.95 crores being payment made to another bidder for loss of business/investment opportunity. 36. On perusal of the computation of income, the Assessing Officer noticed that the assessee has claimed a sum of Rs. 1.95 crores as revenue expenditure on account of payments made to pers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Asset Value Variation Over Previous Year Net cost of Improvement 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 71.91 96.54 98.00 99.18 124.60 110.70 188.76 248.94 202.58 110.22 (189.67) 782.08 658.98 624.43 1,113.62 975.42 24.63 1.46 1.18 25.42 (13.90) 78.06 60.18 (46.36) (92.36) (299.89) 971.75 (123.10) (34.55) 489.19 (138.20) Total 903.51 43. In the notes, the valuer have mentioned that since the accounts of the assessee close on 30th September, therefore, the audited figures are not available as on 31st March till the accounting year is changed. 44. In our considered opinion, the cost of improvement means the actual capital expenditure incurred by the assessee on the assets. We do not find basis in the aforementioned valuation being actual capital expenditure incurred by the assessee on improvement of the capital asset. Since the assessee has not been able to give any specific additions carried out to this unit of compressor division, we do not find much merit on cost of improvement adopted by the assessee. 45. Considering the net asset value as on 31.03.1996, we are of the considered view that the cost of improvement at Rs. 185.37 lakhs taken ..... X X X X Extracts X X X X X X X X Extracts X X X X
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