TMI Blog2008 (9) TMI 611X X X X Extracts X X X X X X X X Extracts X X X X ..... earned Commissioner of Income-tax (Appeals) failed to appreciate that the appellant had on a fair and reasonable basis estimated 25 per cent of the expenses as attributable to the staff and officers accompanying the guests and that the action of the Assessing Officer in estimating the expenses at a lower amount was not warranted or called for. 4.The learned Commissioner of Income-tax (Appeals) erred in confirming the addition of Rs. 26,55,000 being the amount received from G.E. Plastics towards non-compete fees. 5.The learned Commissioner of Income-tax (Appeals) failed to appreciate that the amount received towards non-compete fees was a capital receipt not liable to tax. 6.The learned Commissioner of Income-tax (Appeals) further erred in holding that the non-compete receipt was in the nature of goodwill and as such was taxable. 7.The learned Commissioner of Income-tax (Appeals) erred in confirming the addition of Rs. 26,55,000 being the amount received from G.E. Plastics towards termination of distributorship agreement. 8.The learned Commissioner of Income-tax (Appeals) failed to appreciate that the amount received towards termination of distributorship agreement was a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Supreme Court in the case of Britannia Industries Ltd. v. CIT [2005] 278 ITR 546 . Therefore, this ground of appeal is rejected. 4. As regards ground No. 2, the ld. counsel for the assessee submitted that in view of smallness of the amount, assessee does not wish to press the same. Accordingly, this ground of appeal is rejected. 5. As regards ground Nos. 4 to 12 are concerned, brief facts are that the assessee-company had a receipt of Rs. 79,65,000 from General Electric Plastics BV and treated the same as a capital receipt. The receipt was consequent to agreement dated 1-7-1996 between assessee-company and General Electric Plastics by virtue of which the agency and distributorship agreement between these two parties were terminated retrospectively from 31-10-1995 and 3-12-1995 respectively and the assessee agreed to discontinue the said activity and to compete with the GEP for silicon products. Since the effective date of all the three agreements was in the accounting year 1995-96, the assessee added it to the total income of the relevant assessment year and claimed the deduction as a capital receipt. The Assessing Officer examined the agreements and found that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In order to look at the reality of the transaction, he held that it is necessary to lift the corporate veil. He held that the Non-competition mentioned in agreement has no meaning as it is mentioned in the agreement that there is no time limit for the non-compete agreement which means that assessee has given up for all time to come its right to do business in silicon products for a meagre amount of Rs. 26 lakhs. Therefore, he held the amount received, though bearing the name of non-compete fee, as a taxable receipt under section 28 and the nomenclature used is only to avoid tax. He held that even if it is held to be capital receipt, it would qualify as payment for goodwill and taxable as such. Consequently, he disallowed assessee s claim of capital receipt and added it to the total income of the assessee. 7. Aggrieved, assessee filed an appeal before CIT(A) who confirmed the addition made by the Assessing Officer and the assessee is in second appeal before us. 8. The ld. counsel for the assessee Shri Kothari while reiterating the submissions made by the assessee before the authorities below, drew our particular attention to para-5 of the written submissions filed by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uate qualified staff and have to maintain secrecy of its confidentiality of its trade secret. 11. As regards licence to repack agreement, assessee was required to manufacture and pack silicon products in India which in turn were sold under the Distributorship agreement and for this purpose the assessee had set up fully manufacturing facility at Pune and the goods were subjected to Central Excise Duty. He submitted that all these three agreements were terminated with effect from 31-10-1995 and this agreement had also incorporated very important clause by which the assessee had agreed to non-compete agreement. He drew our attention to last para on page 2 of the termination of the agreement in which it is stated that G.E., i.e., the assessee herein, shall not directly or indirectly own, manage, borrow, join, have inter se control or participate in the ownership, management, operation or control of or be otherwise connected in any manner with any other business entity which directly or indirectly engages as a commercial activity in India or abroad any silicon business. Thus, according to the ld. counsel for the assessee, the agreements of Agency and Distributorship did not spec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or ascertaining as to whether what was received was a capital receipt or a revenue receipt is to find out whether the assessee had snapped his links with the profit making apparatus that was transferred and pursuant to termination of the agreement the source of income is totally severed, it is a capital receipt and not liable for taxation. Another decision relied upon by the assessee is in the case of Parry Co. Ltd. v. Dy. CIT [2004] 269 ITR 177 (Mad.), wherein the amount received on the premature termination of the agency business was held to be capital receipts not liable to tax as income under section 28( ii )( c ) of the Act. He also drew our attention to the sales figures from assessment years 1993-94 to 1997-98 to drive his point that after the termination of the agreement, the assessee had no sales of the silicon products. As regards the compensation received for non-compete agreement, he submitted that there was a covenant restricting the assessee from carrying on or associating itself with any other business of similar nature in the future whereby there is a loss of source of income to the assessee and hence capital in nature. 12. The Ld. DR, on the other hand, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revenue or capital in nature. The revenue has disallowed the assessee s claim of these being capital receipts on the following grounds ( i )That GE Plastics had control and management of the assessee group. ( ii )That the assessee was non-exclusive agent and distributor of the GVP. ( iii )That the assessee continued to have the repack agreement and continued to manufacture and sale the silicon products after the termination of the Agency and Distributorship agreements; ( iv )The assessee was the agent and distributor for a limited period of time and, therefore, could not have the expertise to become a formidable competitor for entering into any Non-Compete agreement and the compensation received is, in fact, goodwill. 14. As regards the first objection, we find that it is not sustainable. The agency and distributorship agreements were entered on 1-5-1991 and 31-10-1995 respectively and were terminated vide agreements dated 1-7-1996 with retrospective effect from 31-10-1995 and 3-12-1995 respectively. As on the date of the termination of the agreements, the GE Group was holding 50 per cent shareholders of the company, while the other 50 per cent of the shares were he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceipt. The revenue has sought to tax the same under section 28( ii )( c ) of the Act. The said provision is reproduced hereunder "Section 28. The following income shall be chargeable to Income-tax under the head "Profits and gains of business or profession", ( i )****** ( ii )any compensation or other payment due to or received by ( a )and ( b )****** ( c )any person, by whatever name called, holding an agency in India for any part of the activities relating to the business of any other person, at or in connection with the termination of the agency or the modification of the terms and conditions relating thereto;" Thus, it can be seen that the amount received for termination of agency is a taxable receipt. However, the nature of the receipt is to be seen before bringing it to tax under section 28( ii )( c ) of the Act. If the receipt is on termination of the agreements of agency and distributorship simplicitor, the compensation received is for the loss of revenue and hence revenue receipt. In such a case, the Agent/Distributor can carry on business of similar nature with any other principal. But if there is a restrictive covenant to deal with similar business, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt decision in the case of CIT v. British Paints (India) Ltd. [1991] 188 ITR 44 Assessing Officer held that proportionate part of employees cost and other expenses should be added to the closing stock. He further observed that the auditors report has also not accepted the valuation done by the assessee. Therefore, he valued the closing stock and added an amount of Rs. 17,24,361. Aggrieved, assessee filed an appeal before the CIT(A) who confirmed the addition and the assessee is in second appeal before us. 19. The ld.counsel for the assessee while reiterating the submissions made before the authorities below, submitted that the assessee has all along been following this method of valuing the closing stock by taking only the cost of raw materials into consideration and it has all along been accepted by the department. He submitted that the assessee had started the activity of processing silicon adhesive at Parmar Industrial Estate in assessment year 1994-95 and the said activity had been suspended in assessment year 1997-98 and the entire stock had been sold before 31-3-1997 and therefore the stock from 1994-95 to 1997-98 has to be valued by including the direct cost and t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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