9911796707
TMI Blog2010 (12) TMI 911X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer." For this, assessee has raised the following three grounds:- "1. On the facts and in the circumstances of the case and considering the decision of the CIT(A) that, bifurcation is not possible and further considering the fact that majority of the consideration under BTA is for non-taxable intangible asset the entire sum of Rs.116.59 lacs ought to have been considered as capital receipt and not subject to capital gain tax" 2. Without prejudice to above, On the facts and in the circumstances of the case, the CIT(A) erred in rejecting the assessee's claim that out of total receipt of Rs116.59 lacs (Rs.1,16,59,500 to be precise) a sum of Rs.40,00,000 was for assessee's agreement not to compete in that line of business with the buyer-payer and he further erred in not accepting the assessee's claim that the said sum of Rs.40 lacs was not at all liable to tax even under the head "Capital gains. 3. Without prejudice, on the facts and in the circumstances of the case, the CIT(A) erred in not accepting the appellant's alternative arguments that the said sum of Rs.40,00,000, at any rate, cannot be taxed as short term capital gains." 3. The brief ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee-company became 100% subsidiary of Shri Dinesh Mills Ltd. According to AO, transfer of share holding from MRI to holding company, Shri Dinesh Mills Ltd. did not involve any transfer of tangible or intangible assets and all the assets which were part of erstwhile "Platwell Chemicals Division" of Shri Dinesh Mills Ltd. continued to be the assets of is100% subsidiary. The assessee-company entered into Business Transfer Agreement and Assignment Agreement with MAL on 24-08-2001 and under this agreement the assessee-company received a sum of Rs.1,16,59,500/-. The Assessing Officer treated the entire receipt as revenue business income and taxed accordingly. Aggrieved, assessee preferred appeal before CIT(A). 4. The CIT(A) partly allowed the appeal and treated the receipt of Rs.76,59,500/- as long term capital gain and Rs.40 lakh as short term capital gain. The CIT(A) held in para-5 of his appellate order as under:- "5. I have considered the rival submissions. It is observed that the appellant company namely Dinesh Platechem Ltd., formerly known as McGean Rohoco Dinesh Ltd., transferred certain assets owned by it in its business of general metal finishing and e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o pay Rs.1,16,59,500/-. It is thus seen that the consideration is for transfer of assets and retention of liabilities as indicated at Para 1.1 and Pare 1.3 of the Article-I of the Agreement. Till this stage the appellant has no quarrel. It is only on the amount of consideration for transfer of assets that there is a dispute. The appellant claims consideration on this account is Rs.76,59,500/- since Rs.40,00l,000/- is claimed as consideration for non-competition. How is not supported by the covenants/articles of the BTA. At para 5.7 of Article-V, there is no mention of any consideration for non-competition and non-disclosure of information. Thus, the reading of the covenants/articles supports the view expressed by the Assessing Officer that it is the appellant who has done the artificial bifurcation of the total consideration value of Rs.1,16,59,500/- into Rs.40 lakhs consideration for non-competition and rs.76,59,500/- for transfer of intangible assets. It is reiterated that there is nothing in the language of the contents of the agreement to even remotely suggests that a part of the consideration is for non-compete/non-disclosure clause. In this background, it is held that the tal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hese intangible assets, the consideration value of which has been voluntarily declared by the appellant at Rs.76,59,500/-, have been held as long term assets. With nothing on record to contradict this, the same is adopted as representing long term capital gain from out of the total consideration amount of Rs.1,16,59,500/-. It is on record that the appellant has paid the due capital gain tax on this amount. Under the circumstances, it is held that Rs.76,59,500/- represents long term capital gain on transfer of intangible assets in the hands of the appellant. As regards the balance amount of sales consideration of Rs.40 lakhs which remains to be decided, it is observed that some of the intangible asses would have been acquired over a period much closure to the date of transfer so that these would have been transferred before less than 36 months of acquisition. Also, if assets worth only Rs.76,59,500/- have been held far more than 36 months, it follows from that argument that the balance Rs.40 lakh worth of assets have been held for a lesser period resulting in yielding short term capital gains of rs.40 lakhs, the cost of acquisition being Nil. In view of the discussio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and documents germane to the issue. This bifurcation of the receipts at a later stage is intended to reduce the incidence of tax which is due to the exchequer. The valuation report of a Chartered Accountant is a self serving document prepared for the intended purpose of reducing the tax. It may be noted that the purported date of valuation report is 24.7.2001. If that is so and the valuation of Non competition was arrived at Rs.40.00 lakhs, it is surprising to note that the same is not mentioned or the amount is not adopted in the said Agreement dated 24.8.2001. This clearly raised the doubts about the date of the valuation report and vindicates the Department's contention that the valuation report was a self serving after thought. 3. Therefore it is requested that the valuation report may not be given any credence and the entire amount received under the Agreement dated 24.8.2001 may be treated as the lump sum amount received towards the Transfer of business by the assessee. II BUSINESS TRANSFER ONLY 4. The Agreement between the assessee and the MAL is named "Business Transfer Agreement". The name is correct as per the terms of the agreement and the transfe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness) it currently operates. 7. Therefore it is evident that only part of the business (called Business in the Agreement) along with the Business related intangibles were acquired by the Buyer out of the business of the assessee. Therefore the income earning structure of the assessee was not destroyed. The agreement of the assessee that the assessee's business came to stand still is not correct as the assessee continued the business beyond the date of transfer as agreed in the Agreement. In such situation where only part of the business was clarified and other business continued the courts have held the receipts are revenue in nature. 35 ITR 148 (SC) CIT vs. Rai Bahadur JairamValji and Ors. 29 ITR 910 (SC) CIT vs. South India Pictures Ltd. 115 ITD 443 (ITAT Delhi) Ansal Properties and Industries Ltd. vs. DCIT 8. Therefore, it submitted that the entire amount of Rs.1,16,59,500 received by the assessee relates to the transfer of the business (being part of the business of the assessee) as per the "Business transfer agreement": dated 24.8.2001 paid by the Buyer for the loss of future profit of the assessee as a result of said transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crets. All trade secrets, formulations, confidential processes and procedures, technology, know-how, engineering, design and other technical drawings, manufacturing procedures for Products, quality control procedures for Products, Product specifications, raw material specifications, raw material quality control procedures, specifications and all other similar property, whether tangible or intangible, whether documented or not, belonging to and/or used by Seller in relation to the Purchased Assets and/or Business including, the Technical Know-how, Improvements and Documents provided to Seller under and pursuant to the Technical Know-how Agreement dated April, 1 1999 by McGean Rohco, Inc. (the capitalized expressions defined there under), subject to the consent of MeGean Rohco Inc. (d) Documents. All records (whether in hard copy form, computerized or electronic database, or otherwise) including, without limitation, customer and supplier lists, sales and marketing reports and plans, business plans and product files and correspondence used or held for use in the operation of the Business ("Books and Records"), subject in each case to the right of Seller to retain copies thereo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Further from the above it is noticed that there is specific exclusion of certain assets like real property, cash and accounts receivable, other businesses, permits and seller's name is made by the Business Transfer Agreement. 7. In view of the above facts, we find that the Assessing Officer after mentioning some of the clauses/articles of the Business Transfer Agreement came to the conclusion that entire receipt of Rs.1,16,59.500/- are in the nature of revenue income inasmuch as, according to the Assessing Officer, the assessee was not the owner of intellectual properties and there is no separate consideration mentioned of Rs.40 lakhs for non-compete fees received by the assessee. The CIT(A) after perusal of the Agreement and considering the submission, came to the conclusion that the receipt of Rs.76,59,500/- for selling the six different items of intellectual properties are in the nature of long term capital gain but as there is no specific amount mentioned of non-compete fees of Rs.40 lakhs the same was treated as short term capital gain. 8. We find from the arguments made by the Ld. counsel for the assessee, Shri Talati that the amount of Rs.76,59,500/- is long ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d of less than 36 months. The CIT(A) as well as we find that it goes without saying that the assessee would have certainly adopted some criterion to arrive at that figure in its own international calculation and in the absence of any better alternative and also in absence of any definite date of acquisition available from record it is most appropriate and practical to hold the view that this intellectual assets are in the nature of long term capital assets. 9. Now, in view of the above facts, we have to consider the case referred by both sides and of Best and Co. Private Ltd.(supra), wherein Hon'ble apex court relying on another case in Kettlewell Bullen and Co. Ltd. v. CIT (1964) 53 ITR 261 (SC), expressed its conclusion as under:- "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 the contract terminated) the receipt is revenue; where by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y was not agreeable of any bifurcation of different intellectual property and insisted for a total and composite cost of Rs.1,16,59,500/- and therefore in agreement the amount is composite. He drawn our attention to the fact that there is a specific Article for non-competition being para-5.7 and 5.8 of the Business Transfer Agreement and stated that the limited point is whether consideration of Rs.40 lakh is really attributable to non-compete clause or not. He further stated that the fact of non-compete clause is not in dispute either by AO or CIT(A) and the fact that Business Transfer Agreement specifically contained Article-5 by way of convenient and in terms of prohibits the assessee-company to do the business of the same nature for next five years and also prohibits non-disclosure of information. In other words, the assessee lost its complete right and source of income of this business and further, it is the consequence of non-compete clause that any amount received by way of non-compete clause is taxable only for and from assessment year 2003-04 and not in assessment year 2002-03. 11. We have heard rival contentions on this issue and, now we have to find out as to how ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the 12 moths immediately preceding the date of this Agreement; (iii) interfere with, disrupt or attempt to disrupt relationships, contractual or otherwise, or Buyer with its employees, contractors, suppliers or customers in the operation of the Business; (iv) solicit any employee, whose name is specified in Schedule 5.4 and who has accept an employment with Buyer; or (v) operate or perform any advisory or consulting services for any person or entity which competes with the Business. Notwithstanding anything to the contrary in this Section 5.7, the parties agree that Seller may continue to operate the business (other than the Business) it currently operates." Further, we find from clause-1.3 of Article-I of Business Transfer Agreement that defines liabilities as under:- 1.3 Liabilities. All liabilities and obligations of whatsoever nature and kind, direct or indirect, known or unknown, asserted or unasserted, ascertained or unascertained, relating to Seller, including, those connected with the Business and the Purchased Assets (collectively, the "Liabilities"), shall continue to remain with Seller, even after the Closing Date, excep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed profitability, the weighted average should be taken to arrive at the expected profit. The same is worked out as under: Net Cash flow - as determined above A= 1-2 Rs.9,01,997 Rs.21,14,190 Weight assigned B 2 3 Weighted Cash Flow C=AXB Rs.18,03,994 Rs.21,14,190 Total Weighted Cash Flow D Rs. 39,18,184 Weighted Average D/3 Rs.13,06,061 Say Rs.13,00,000 In view of the above, the amount of expected profit is Rs.13,00,000/- p.a. However, it is important to take note of the fact that the money received at presented has higher value than money receivable at some future date or at some regular intervals in future. Therefore, it is essential to work out the presented value of the above profit expected to be received during the period of next five year. In order to arrive at the presented value, the above expected profit needs to be discounted at appropriate rate. For that purpose, an appropriate rate of discount needs to be determined. Presently, the risk free rate of return is @ 9%. However, in the given case, we have to find out the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee lost its complete right and source of income of this business. Even from liability clause-1.3, it can easily be inferred that all liabilities relating to this business shall be with the assessee and in no way the payment is in respect of any liability outstanding or futuro. We further find that the assessee lost its complete right and source of income of this business. We further find from the Assessing Officer's conclusion in para-5(e) to the effect that income earning apparatus of a company has necessarily to be in the form of tangible assets and that since no part of the tangible assets of the assessee was transferred under the Business Transfer Agreement, the consideration received pursuant to that Agreement cannot be regarded as capital in nature since the Business Transfer Agreement did not at all impair the assessee's business apparatus, belies elementary commonsense as the similar issue has been dealt by Hon'ble Bombay High Court in the case of CIT v. Automobile Products of India Ltd. (1983) 140 ITR 159 (Bom), wherein it is held that the question which is required to be posed is whether the termination of this activity was a necessary incident of the business of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nbsp; 16. The next contention of the assessee, whether part of the compensation attributable to the restrictive cogent is a capital receipt or a revenue receipt and this has been answered by Hon'ble apex court in Gillanders Arbuthnot and Co. Ltd. v. Commissioner of Income-tax accepted the said principle and held that the compensation paid for agreeing to refrain from carrying on competitive business in the commodities in respect of the agency terminated or for loss of goodwill was prima facie of the nature of a capital receipt. In the present case, the covenant was an independent obligation undertaken by the assessee not to compete with the new agents in the same field for a specified period. It came into operation only after the agency was terminated. It was wholly unconnected with the assessee's agency termination. We, therefore, hold that part of the compensation attributable to the restrictive covenant was a capital receipt and hence not assessable to tax. 17. The next question is whether the compensation paid is severable. If the compensation paid was in respect of two distinct mattes, one taking the character of a capital receipt and the other of a revenue receipt, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssue in this appeal of the assessee is with regard to disallowance of Rs.11,626/- being late payment of ESIC. The disallowance was made only on the ground that the payments were not made within the stipulated date but it is not disputed that the payments are made within the due date of filing of return. We find that We find that the issue of Employee's contribution has been considered by the Hon'ble Delhi High Court in the case of CIT v. P.M. Electronics Ltd. (2008) 220 CTR 635 (Del), wherein the Hon'ble Delhi High Court has discussed in para-4 as under:- "4. On 27th Nov., 1998 the assessee had filed a return of income declaring a loss of Rs.8,92,888. On 11th May, 1999 the return was processed under s. 143(1)(a) of the Act. The case of the assessee was selected for scrutiny. Accordingly, a notice dt. 27th Sept., 1999 under s. 143(2) of the Act was issued to the assessee. In response to the notice and on examination of the details submitted by the assessee with respect to provident fund payments made both on account of employer's and employees' share revealed that payments in the sum of Rs.17,94,042 were late as per the provisions of s. 36(1)(va) r.w s. 2(24)(x) and s. 43B. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... authority below has stood merged in the order of the Supreme Court rejecting special leave petition or that the order of the Supreme Court is the only order binding as res judicata in subsequent proceedings between the parties." 11. Upon noting the observations of the Supreme Court in Kunhayammed and Ors. (supra) the Division Bench of the Madras High Court in the case of Nexus Computer (P) Ltd. (supra) came to the conclusion that the view taken by the Supreme Court in Vinay Cement (supra) would bind the High Court as it was law declared by the Supreme Court under Art. 141 of the Constitution. 12. We are in respectful agreement with the reasoning of the Madras High Court in Nexus Computer (P) Ltd. (supra). Judicial discipline requires us to follow the view of the Supreme Court in Vinay Cement (supra) as also the view of the Division Bench of this Court in I Dharmendra Sharma (supra). 13. In these circumstances, we respectfully disagree with the approach adopted by a Division Bench of the Bombay High Court in Pamwi Tissues Ltd. (supra). 14. In these circumstances indicated above, we are of the opinion that no substantial question of law arises for our ..... X X X X Extracts X X X X X X X X Extracts X X X X
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