TMI Blog2003 (9) TMI 306X X X X Extracts X X X X X X X X Extracts X X X X ..... overcome the period of limitation provided under s. 143(2) of the IT Act and as such the instant proceedings initiated are without jurisdiction. 4. That the reliance placed by the learned CIT(A) on the decided cases is wholly inapplicable as such of those decisions had been rendered prior to the amendment made in the scheme of IT Act for making assessment under Chapter XIV of the IT Act." 3. The brief facts are that the assessee filed its IT return on31st Oct., 1995, declaring total income of Rs. 34,55,190. The appellant entered into a strategic alliance agreement with M/s Brook Bond Lipton India Ltd. ( BBLIL ) on14th Oct., 1994. In terms of the said agreement the appellant also entered into a non-competition agreement on the same date where under the appellant received a sum of Rs. 50 lacs as compensation. The appellant treated the amount received as a capital receipt. 4. The return filed by the assessee was initially processed under s. 143(1)(a) vide intimation dt.19th March, 1996. Subsequently, proceedings were initiated by the AO under s. 147 vide notice dt.12th March, 2001, issued under s. 148 of the IT Act. 5. Shri Ajay Vohra, learned counsel for the assessee, submitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the letter dt.12th Feb., 2001. In that letter the appellant further claimed that the sum of Rs. 50 lacs received from BBLIL is in the nature of capital receipt not chargeable to tax under the Act. 8. The counsel submitted that the AO proceeded to issue notice under s. 148 on the basis of the said audit objection. Relying on the decision of the Supreme Court in the case of Indian Eastern Newspaper Society vs. CIT (1979) 12 CTR (SC) 190 : (1979) 119 ITR 996 (SC), it was claimed that the proceedings under s. 147 are illegal. The counsel further challenged the initiation of proceedings under s. 147 on the ground that the reasons recorded under s. 148 were vague. It was submitted that the reasons recorded do not reflect application of mind by the AO resulting in formation of a reasonable belief that income of the appellant had escaped assessment. 9. The learned Departmental Representative, on the other band, relied on the order of the CIT(A). It was submitted that the challenge to the initiation of proceedings under s. 147 by the AO, after having failed to issue notice under s. 143(2) has been dealt at length by the CIT(A). The learned Departmental Representative relied heavily ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. 13. The issue that arises for consideration is whether there is application of mind by the AO in a case where only intimation is issued under s. 143(1)(a) and no assessment has been completed under s. 143(3) of the Act. The scope of adjustments, it is settled law, is limited to only prima facie mistakes. No adjustment under s. 143(1)(a) can be made in respect of debatable issues. In our considered view there is no application of mind on the part of the AO at the time of issuing intimation under s. 143(1)(a) of the Act. The mere fact that after issuing intimation under s. 143(1)(a), the AO does not issue notice under s. 143(2), it cannot be said that the AO has impliedly, after application of mind, concurred with the return filed by the assessee. Proceedings under s. 147 can be initiated if the conditions precedent for assuming jurisdiction under that section are satisfied. 14. In view of the aforesaid, the ground challenging the initiation of proceeding under s. 147 on mere change of opinion fails. 15. As regards the initiation of the proceedings under s. 147 on the basis of the audit objection, in the IT return filed by the appellant, it is true that disclosure was made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is part of the Lamba group, which along with Ghai family owned the Kwality group. KICC was manufacturing ice cream, etc., at its factory and was marketing them under the trademark Kwalilty through an extensive marketing network of distributors, dealers, vendors and agents in parts of Haryana, Punjab, Himachal Pradesh, Jammu Kashmir and Union Territory of Chandigarh. KICC was authorised by Shri P.L. Lamba and Shri Sunil Lamba, the owners of the "Kwality" trademark, to use the said trademark for marketing of varieties of the ice cream which were manufactured by it. The Kwality group comprising of the appellant, Mr. Sunil Lamba, Kwality Restaurant and Ice-cream (1978)Co.and others entered into a strategic alliance agreement with BBLIL on14th Oct., 1994. Various constituents of the Kwality group were party to the said agreement with BBLIL. The preamble of the agreement read as under. "StrategicAllianceAgreement dt.14th Oct., 1994Between K (North) And Brooke Bond Lipton India Ltd. (BBIL) Unilever Industries (P) Ltd. (UIPL) This agreement of strategic alliance made and entered into at Bombay on this fourteenth day of October one thousand and nine hundred ninety four by and be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreement the assessee surrendered in favour of BBLIL its marketing rights in respect of ice cream, etc., for a period of ten years from the effective date of the agreement. It was further agreed under the said agreement that the appellant shall not engage directly or indirectly in marketing and selling of the ice cream products in competition with BBLIL. In terms of cl. 10 of the strategic alliance agreement the appellant and other constituents of the Kwality group undertook to desist from engaging themselves in the competing business. The relevant extracts of the said clause read as under: "10. Mr. P.L. Lamba and Mr. Sunil Lamba along with six other constituents of K (North) shall execute at the time of the execution of this agreement, a non-competition Agreement in favour of BBLIL against payment of a consideration of Rs. 7.50 crores (Rupees seven crores and fifty lakhs only) comprising of Rs. 1 crore to Mr. Sunil Lamba. Rs. 1 crore to Mr. P.L. Lamba, Rs. 2 crores to Kwality Restaurant Ice Cream (1978) Co., Rs. 0.50 crore to Kwality Ice Cream Co., Ludhiana, Rs. 0.25 crore to Vigro Frozen Foods (P) Ltd., Rs. 0.25 crore to Delhi Ice Cream Co. (P) Ltd., Rs. 0.50 crore to Monsa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said sum of Rs. 50 lacs as a capital receipt not chargeable to tax, being received in lieu of sterilization of the income earning apparatus and for taking upon itself the restrictive covenant of not engaging in competitive business. The AO in the assessment completed under s. 143(3)/147 held that the consideration received by the appellant was for the loss of goodwill. The AO observed that the transaction entered into by the appellant was given the colour of transfer of marketing rights etc. only to circumvent the taxation of the said sum. Taking the cost of acquisition of the goodwill as nil, the AO brought to tax the entire receipt of Rs. 50 lacs as capital gain. 23. In appeal filed by assessee, the CIT(A) however, held that the strategic alliance agreement was entered into by the Kwality groupto synergise its activities with the activity of BBLIL which was also engaged in production of marketing of ice cream under the brand name "Walls". The CIT(A) consequently, held that the amount of Rs. 50 lacs received by the appellant to be a business receipt assessable under s. 28 of the Act. 24. Before us, the learned counsel for the assessee assailed the order of the CIT(A). It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order was filed in the Bench. 28. The learned counsel further stated that the Delhi Tribunal in the case of another constituent of the Kwality group viz., Shri Sunil Lamba and the Calcutta Tribunal in the case of Kwality Ice Cream Ltd. have held that the amount received form BBLIL under the strategic alliance agreement dt.14th Oct., 1994, is in the nature of capital receipt. A copy of the decision of the Delhi Tribunal dt.7th May, 2003, in the case of Sunil Lamba vs. Dy. CIT in ITA No. 3006/Del/2000 was filed in the Bench and the copy of the decision of the Calcutta Tribunal in ITA No. 1768/Del/1999 formed part of the compilation filed by the appellant. 29. The learned Departmental Representative, on the other hand, strongly relied on the order of the CIT(A) to contend that the amount received by the appellant was in the nature of business receipt. The learned Departmental Representative, was not able to distinguish decision in the case of Sunil Lamba. The learned Departmental Representative merely stated that in the case of Sunil Lamba, the assessee had challenged the exercise of revisionary power under s. 263 by the CIT. It was stated that the said decision could not be cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment is a test equivalent to the cost incurred by the assessee but excess accrues due to fortuitous circumstances or is a windfall than the accrual may be a receipt but it would not be an income arising from business and, therefore, not taxable under the Act ." 17. Similarly, in the case of J.C. Chandiok vs. Dy. CIT (1999) 64 TTJ (Del)(SB) 1 : (1999) 69 ITD 75 (Del)(SB), decided by the Special Bench of the Tribunal, Delhi, it was held as under: All receipts by an assessee cannot necessarily be deemed to be income of the assessee for the purpose of income-tax. The question whether a particular receipt is an income or not depends on the nature of the receipt and the true scope and effect of the relevant taxing provision. The AO cannot assess any receipt by using panoply of section of s. 10(3). He can assess only those receipts that amount to income. The taxability of an amount would depend on the nature and character of the receipt. 18. The Hon ble Supreme Court in the case of Gillanders Arbuthnot Co. Ltd. (1964) 53 ITR 283 (SC) considered similar issue and held as under: Compensation paid for agreeing to refrain from carrying on competitive business in the commodities i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the AO was erroneous insofar prejudicial to the interest of the Revenue. Thus, even on merits the CIT was not justified in assumng jurisdiction under s. 263 of the Act. The order under s. 263 is, therefore, quashed. 36. The taxability of the amount received by the assessee under the non-compete arrangement with BBLIL is also covered by decision of the Calcutta Tribunal in the case of another constituent, Kwality Ice Cream (T) Ltd. The relevant observations of the Tribunal are reproduced as under: "22. We have gone through the rival submissions and perused the records. We have noticed that the AO elaborating the nature of this receipt held that even if the receipt was capital, the same was taxable as per the decision of the Hon ble Allahabad High Court. Further, it has been noticed that the AO found that the receipt was casual receipt under s. 10(3) of the IT Act and was accordingly taxable. The AO made meticulous effort to ascertain the nature of this particular receipt and inspite of citing various judicial pronouncements, it is not clear to him as to its nature. We have noticed that non-competition agreement results in a restrictive covenant and the connotation receipt in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 55(2) can be made only from asst. yr. 1988-89 and subsequent assessment years. (ii) where the capital asset transferred is in the nature of a right to manufacture produce or process an article or thing, recourse to s. 55(2) can be made only from asst. yr. 1998-99 in respect of any consideration received for the transfer thereof which includes extinguishment or curtailment of such right. In this connection, attention is invited to cl. 19 of the memorandum explaining the provisions of the Finance Bill, 1997, wherein it has been pointed out that consideration received on extinguishment of such a right is in the nature of capital receipt and is not liable to tax under the head capital gains upto asst. yr. 1997-98. It is clarified that even where such transfer, extinguishment or curtailment of such a right is complete or in part the taxability of the consideration will remain unaffected, i.e., the same will not be taxable under the head capital gains only upto asst. yr. 1997-98 and will become taxable from the asst. yr. 1998-99 and subsequent assessment years. (iii) where the capital assets are intangible assets (like trademark, etc., listed in para 2 above) not being in the nat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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