TMI Blog2005 (12) TMI 527X X X X Extracts X X X X X X X X Extracts X X X X ..... and sale of plant, machinery and equipment for the dairy, vegetable, oil, food and beverage, brewery, sugar pharmaceutical, chemical, fertilizer, petrochemical, power ship building and general engineering and process industries including the manufacture and sale of refrigeration plant and equipment and accessories for land applications. M/s. Asea Brown Boveri Ltd., (ABB) is a company engaged in the business, inter alia, of production, distribution and efficient use of electricity, railway systems, electrical drives, process automation, oil and gas instrumentation, power lines ; general contracting, environmental control, marine air-conditioning, etc. M/s. ABB and the assessee-company jointly promoted a new public limited company, namely, ABB Alfa Stal Refrigeration Ltd. (JVC) to be incorporated in the State of Maharashtra, to carry on the business of manufacture and sale of refrigeration equipment and refrigeration systems in India as well as abroad, and to provide specialised services to a larger sector of the market, i.e., expertise on marine refrigeration and industrial air-conditioning and that of land refrigeration with equity share capital of 51 per cent. (ABB) and 49 per ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arine applications hitherto carried on by ABB and Alfa. (c) Business : JV will handle all refrigeration business as provided in the agreement. All reasonable expenses incurred before the incorporation of the JV shall be shared equally by the promoter companies, i.e., ABB and Alfa. However, all expenses relating to incorporation of this JV will be borne by the JV. All firm orders received prior to the date of certificate of commencement of business of the JV shall be executed by Alfa/ABB. However, all new orders received by Alfa/ABB including against pending inquiries on and from the date of commencement of business of JV will be executed by the JV. (d) Trademark : ABB will make its trademark available to JV subject to its minimum holding 51 per cent. in the paid up share capital of JV and further subject to JV adhering strictly to quality standard and trademark use policy of ABB and there will be no payment of trademark fees for the use of trademark by JV. For use of ABB/Alfa names and ABB s trademarks as the case may be, the JV shall enter into appropriate agreements in terms of draft provided by ABB/Alfa. (e) Imports for execution of refrigeration projects in Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly towards agreeing not to undertake the competing business of refrigeration equipment and refrigeration systems. It is submitted that our company has agreed not to manufacture/sell or in any way deal in the business of refrigeration equipment and refrigeration systems. It is submitted that compensation paid for agreeing to refrain from carrying on competitive business is a capital receipt not chargeable to tax (Refer : Gillanders Arbuthnot and Co. Ltd. v. CIT [1964] 53 ITR 283 (SC). The Supreme Court in the case of Kettlewell Bullen and Co. Ltd. v. CIT [1964] 53 ITR 261 examined various English and Indian case law and laid down the following principle (page 282) : On the analysis of these cases which fall on two sides of the dividing line, a satisfactory measure of consistency in principle is disclosed. Where on a consideration of the circumstances, payment is made to compensate a person for cancellation of a contract which does not affect the trading structure of his business, nor deprive him of what in substance is his source of income, termination of the contract being a normal incident of the business and such cancellation leaves him free to carry on his trade (freed from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shown in the profit and loss account under the head Goodwill . He further stated that with effect from April 1, 1995, the money received on account of transfer of goodwill became taxable even in the cases where the cost of acquisition was nil . Similarly, with effect from April 1, 1998, the business transfer rights became taxable. The learned Departmental Representative further submitted that the Commissioner of Income-tax (Appeals) had erred in deleting the addition holding that simply because the term goodwill was used, the transaction under consideration shall not fall under the head Income from capital gains . In the facts of the present case, there was mutual sharing of the expertise and what has to be seen is the terms of the agreement wherein many advantages are being passed and goodwill is the basket of the affirmative advantages. The Departmental Representative further submitted that without non-compete clause the transfer of business is incomplete and stressed that the Assessing Officer was right in invoking the provisions of section 55 of the Income-tax Act. He placed reliance on the undermentioned decisions : 1. Mehra Khanna and Co. v. CIT [2001] 250 ITR 436 (De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on transfer of goodwill under the head Income from capital gains . Thereafter, another amendment to the Income-tax Act was made with effect from April 1, 1998, to include the transfer of business rights, i.e, non-compete fee, as Income from capital gains . The agreement between the parties have been entered prior to April 1, 1998, and consequently the said provisions being substantive in nature are not applicable to the present case of transfer of rights under consideration. The learned Authorised Representative further stressed that under the circumstances the Commissioner of Income-tax (Appeals) had followed the correct principles of law in not including the said receipt on account of non-compete fee received by the assessee-company as taxable under the head Income from capital gains. We have heard rival submissions and perused the records. The agreement between the parties, i.e., the assessee-company and M/s. ABB was to promote a JVC with equity shareholding of 49 per cent. and 51 per cent., respectively, with the aim of carrying on the business of manufacture and sale of refrigeration equipment and refrigeration systems in India as well as abroad. The assessee-company was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... corporated in Switzerland having wider operations and business in refrigeration systems had agreed to the inclusion of its part name, i.e., Stal in the name of the JVC in order to promote the business of JVC. From the conduct of the parties, it is clear that the assessee-company and M/s. ABB had jointly setup the JVC in India using their respective technical expertise and as the assessee-company was already carrying on the business of refrigeration India, in order to stop its operation in India, it was necessary to compensate the assessee-company for forgoing its right to continue its business activity and consequently a sum of Rs. 90 lakhs was paid as consideration to the assessee-company. The Assessing Officer had placed strong reliance on the terms and conditions of the shareholders agreement entered into between the parties. The terms and conditions in the shareholders agreement are in furtherance to the agreement entered into between the parties which stipulated the rights and duties of the assessee-company and M/s. ABB for smooth carrying of the business in the JVC. The agreement is the basic document determining the terms and conditions agreed upon between the assesseecomp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny article or thing could not be taxed as capital gains before April 1, 1998. It also implies that in the hands of the JVC, the cost of acquisition of right to manufacture refrigeration equipment and refrigeration systems will be Rs. 90 lakhs and if subsequently the JVC transfers this right to any other person, capital gains have to be computed accordingly. The Central Board of Direct Taxes Circular No. 763 dated February 18, 1998, (see [1998] 230 ITR (St.) 55) regarding the amendment also makes the position very clear (page 73) : 30.1 Up to the assessment year 1988-89, the gains arising on the transfer of goodwill were not liable to tax. This was on account of the judicial view approved by the Supreme Court in CIT v. B. C. Srinivasa Shetty [1981] 128 ITR 294. The rationale of the decision was that goodwill being a self-generated asset and not costing anything in terms of money, the gains could not be computed in accordance with the provisions of the Act. By the Finance Act, 1987, the method of computing the cost of acquisition as well as the cost of improvement of goodwill was provided for. Where goodwill is purchased by the transferor, the cost of acquisition is taken to be the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , [1996] 217 ITR 514, their Lordships of the Bombay High Court had also considered the taxability of compensation on termination of agency, which was held to be a revenue receipt. The ratio of this case is not applicable to the facts of the present case under consideration as the case of the Revenue is to bring the amount received by the assesseecompany as taxable under the head Income from capital gains and not as Business income. In Mehra Khanna and Co. [2001] 250 ITR 436, their Lordships of the Delhi High Court had deliberated upon the issue of goodwill of the business. The relevant facts of that case are that, there was a partnership firm of two practising chartered accountants governed by the deed of partnership entered into between both of them. The partnership deed provided that goodwill of the firm was the property of both the partners in equal shares and in the event of death of one of the partners, the other partner would carry on the profession on payment of remuneration for the use of the deceased partner s share in the goodwill of the firm. On the expiry of one of the partners continuing partner entered into an agreement with the legal heirs of the deceased partn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penses are for business promotion including expenditure on the employees of the company, while entertaining the business association, which cannot be called entertainment expenditure. The assessee had claimed before the Assessing Officer that 25 per cent. of the total entertainment expenditure may be attributable to the expenditure incurred on the employees and allowed as business expenditure and excluded from working out the disallowance under section 37(2) of the Act in view of the decision of the Delhi Tribunal in the case of Kelvinator of India Ltd. v. IAC reported in [1989] 29 ITD 469. The Commissioner of Income-tax (Appeals) allowed the claim of the assessee following orders for earlier years. The Revenue is aggrieved, hence this appeal. A similar issue has been dealt with by the Income-tax Appellate Tribunal Mumbai Bench, in the assessee s own case for the assessment year 1992-93, in I. T. A. No. 51/Bom/95 and also by para. No. 3 in I. T. A. No. 6021/M/98 for the assessment year 1994-95. Their Lordships of the hon ble Delhi High Court in the case of CIT v. Expo Machinery Ltd. reported in [1991] 190 ITR 576 have held as under (headnote) : That in the case of composite ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the assessee-company on account of prepaid expenses which were disallowed in the earlier years also. The Commissioner of Income-tax (Appeals) had directed the Assessing Officer to verify the exact quantum to be allowed after excluding the amounts already allowed in the assessment years 1994-95 to 1995-96. Similar issue has been decided in favour of the assessee by the Income-tax Appellate Tribunal in the assessee s own case in I. T. A. No. 2496/Bom/84, 1072/Bom/ 88, 386/Bom/90, 1815/Bom/91, 8606/Bom/92, 51/Bom/95, 699/Mum/99 and also para. No. 6 in I. T. A. No. 6021/M/98. We agree with the directions of the Commissioner of Income-tax (Appeals) in this respect and confirm the same. The fifth ground of appeal raised by the Revenue is as under : On the facts and in the circumstances of the case and in law, the learned Commissioner of income-tax (Appeals) has erred in deleting the addition of Rs. 37,70,436 on account of modvat credit. The brief facts of the case relevant to this ground are that the assesseecompany in its system of accounting of Modvat reduced the modvat credit in respect of the material purchased directly from the purchase cost and the closing stock of raw ..... X X X X Extracts X X X X X X X X Extracts X X X X
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