9911796707
TMI Blog2012 (2) TMI 217X X X X Extracts X X X X X X X X Extracts X X X X ..... arvard University, USA and Doctorate in Science from JNTU, Hyderabad. He was a doyen of cement industry, who started his carreer as a technocrat and rose to the level of Chairman & Managing Director of Cement Corporation of India, a public sector Corporation. While in this job, he had set up many cement factories in various sites in Madhya Pradesh, Andhra Pradesh, Himachal Pradesh, Assam and Karnatka. The Government of India recognized his services with an award of "Padmasree" and "Padmabhushan". He promoted and was Chairman of two cement companies, M/s. Raasi Cements Ltd.(RCL) and M/s. Sri Vishnu Cements Ltd.(SVCL). He did not have controlling interest in RCL and SVCL and therefore M/S.India Cements Ltd., took over RCL and SVCL. Both these companies were subject matter of a hostile corporate takeover by rival company viz. M/s. India Cements Securities Ltd. (ICL) and its associated companies. After the takeover, the assessee lost his business and died in pain on 8th June, 2002. 3. Meanwhile, there was a search conducted in the case of one Shri Ravindra Varma, a close relative of the assessee, who had also worked as Vice Chairman of M/s. Sri Vishnu Cements Ltd. During the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unit, lest it should have a bearing on their business. With that object in view, ICL entered into a Non-Compete Agreement with Mr.B.V.Raju. 5. During the course of assessment proceedings, the assessing officer confronted the legal heirs of Mr.B.V.Raju with regard to the receipt of Rs.11 crores by the assessee as per the non-compete agreement. They however expressed complete ignorance about the said transaction. The assessing officer, therefore, made a direct enquiry with ICL which revealed that the sum of Rs.11 crores payable to the assessee as per the non-compete agreement was not paid to him in cash and the same was adjusted against the sums which were due to M/s. Raasi Cement Ltd. by some of the erstwhile customers known to the assessee. RCL got merged with India Cements Ltd., with effect from 1-4-1998. ICL also informed the AO that Mr.B.V.Raju had given an authorization for such adjustment. A copy of such authorization was also furnished to the AO by ICL. The authorization reads thus: "ICL Securities Limited, Chennai October, 27, 1999 Raasi Cements Limited, Hyderabad Dear sir, This has reference to the Non Compete Agreement executed by me today with yourselves. The conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refers to an annexure to the said letter. But the annexure has a title stating that it forms a part of the non-compete agreement dated 27.10.1999. It was submitted that the annexure refers to various parties but there is no reference to these parties in the noncompete agreement. It was argued that the annexure cannot be considered to be a part of the non-compete agreement. It was argued that there is no privity of contract between Dr.B.V.Raju and the parties referred to in the annexure. The Assessee also relied upon the fact that in the letter dated 27.10.1999 produced by M/s. ICL there was reference only to two debtors, though subsequently, M/s. ICL claimed to have squared off accounts of 8 parties. These eight parties were never informed by M/s. ICL of any such write-off of their dues. Therefore, the agreement cannot be considered to be complete in respect of right and duties of contracting parties. (ii) It was argued that the AO has relied totally upon a letter dated 27.10.1999 given by M/s.ICL, wherefrom they have stated that monies due to them were adjusted in lieu of the non-compete fee. The AO's basis to justify the claim of M/s. ICL is the audited books of accounts of M/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tanding as on 1.4.1998, the date of amalgamation, then the same amount should have also been reduced by them from their liability side of the balance sheet or some other asset should have been created. The AO has not examined this aspect and, therefore, the claim made by M/s. ICL appears to be suspect. (vi) The Assessee also argued that even if this agreement was genuine, no monies were received either in cash or indirectly through the medium of these so-called debtors of M/s. RCL by late Dr. BV Raju. The AO has not brought any evidence by which it can be said that late DR.BV Raju received the money either directly or indirectly. (vii) It was argued by the assesse that the alleged payment of non compete fee was made after hostile takeover of M/s.SVCL which was in October, 1999. The transactions of adjustments relates to dues of Ms/. RCL. Apparently, there was no occasion for such consideration of such dues of M/s. RCL, since that takeover was complete long time back in 1997-98." 8. After having considered the submissions made on behalf of the assessee as well as the material available on record before him, the learned CIT(A) found that non-compete agreement was validly en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t or extinguishment of any right, there was no transfer within the meaning of S.2(47) of the Act, so as to give rise to any capital gain. The learned CIT(A) held that the sum of Rs.11 crores itself was agreed to be paid by ICL to the assessee as per the noncompete agreement against a restrictive covenant on the right to exercise the business, and the same was in the nature of a capital receipt not chargeable to tax, before the insertion of provisions of S.28(va) of the Income-tax Act, with effect from 1.4.2003. Accordingly, the addition of Rs.11 crores made by the assessing officer to the total income of the assessee on account of capital gains was deleted by the learned CIT(A). Aggrieved by the order of the learned CIT(A), Revenue has filed this appeal before the Tribunal. 10. The ld. Counsel for the assessee at the outset submitted that the scope of the question before the Special Bench is as to whether the amendment made to Sec.55(2)(a) of the Act by the Finance Act 1997 w.e.f. 1/4/1998 will apply or whether the amendment made to the aforesaid provisions by the Finance Act of 2002 w.e.f. 1/4/2003 whereby "right to carry on business" when transferred would have nil cost of acqui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that there was an accrual of income but has come to the conclusion that it cannot be said with conviction that Shri B.V.Raju had received a sum of Rs. 11 crores, without any basis. According to the ld. D.R if there is a doubt or want of corroboration the CIT(A) cannot leave the matter as it is and was duty bound to make further investigation. If there were doubts as to whether a sum of Rs. 11 crores was received by the assessee as consideration under the NCA dated 27/10/1999, deletion of the addition made by the AO was not the natural consequence and the CIT(A) ought to have exercised his plenary powers and made further investigation. In this regard reliance was placed by Ld. D.R on the decision of the Hon'ble Delhi ITAT in the case of Swaroop Vegetable Products, 96 ITR 468 (Del) and Commissioner of Income-tax v. Late Begum Noor Banu Alladin 204 ITR 166 (AP) (FB). It was his further submission that the CIT(A) had not given positive finding that the assessee did not receive a sum of Rs. 11 crores as non-compete fee. His further submission was that once there is evidence to show that sum of Rs. 11 crores has accrued as income in the hands of the assessee under the non-compete agreem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Y. 1997-98 also corroborates the version of ICL. The said debts claimed to have been adjusted against the Non-Compete fee are reflected in the audited accounts of the company. The relevant extracts of the Annual Report which have a bearing in the case are reproduced below: "6. CURRENT ASSETS, LOANS AND ADVANCES A) SUNDRY DEBTORS a) ............................. b)............................. B) Sales include sale of 13,025.83 tons of clinker to Viswam Cements Limited at prices substantially below the average variable cost of production. The management is reviewing the transaction. Further a sum of Rs. 67.34 lacs is due to from the party and is grouped under the head Sundry debtors. C) Transactions with Maatha Cements Limited (MCL) a) Sales include sale of 9517 tons of clinker to Maatha Cements Limited at prices below the average variable cost of production. The management is reviewing the transaction. b) The Company, pursuant to a contract for manufacture of Slag Cement, advanced a sum of Rs. 75.00 lacs as on interest free advance to MCL. Notwithstanding that the company has terminated the contract with manufacturing unit the above mentioned advance has not been reco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y M/s Maata Cements Ltd and M/s Viswam Cements Ltd stating that no amount is payable to M/s Raasi Cements Ltd as per their books of account cannot be the basis to hold that there was no constructive payment of Rs.11 crores by ICL to Dr.B.V.Raju. 16. We are of the view that in the light of the evidence available on record one has to come to the conclusion that amount of Rs.11 crores accrued to the assessee under the NCA dated 27/10/1999 and that was enough to attract the provisions of Sec.45 of the Act to tax capital gain on transfer of a capital asset. The facts on record further show there were certain debts due to RCL to the extent of Rs. 11 crores. These debts were considered at nil value when ICL took over RCL. Thus these amounts were treated as paid to RCL. ICL when it took over RCL had duly taken into consideration the discharge of these debts by the debtors to RCL. Thus there was an adjustment of the monies payable by ICL to Shri B.V.Raju under the NCA dated 27/10/1999 by treating the debts payable by debtors of RCL to RCL, as discharged. We therefore, restore the findings of the AO in this regard. In our view the discrepancies pointed out by the CIT(A) will not stop accrua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... process any article or thing. When the present appeal of the Assessee Mr.B.V.Raju came up before the Division Bench, the Division Bench had some reservations on the aforesaid view and hence a reference was made to the Special Bench. 19. The ld. D.R in this regard submitted that the NCA in clause-1 defines business to mean the business of manufacture, production, development, sale etc. of cement. According to him, therefore, the amount in question was paid for giving up a right to manufacture, produce, or process any article or thing. In this regard ld. D.R submitted that the assessee had vast experience in the cement industry and ICL wanted to restrain him from manufacturing cement and hence a sum of Rs.11 crores was paid. 20. The ld. D.R submitted that it is not correct to say that it is only when the person is already manufacturing a product that he can give up the right to manufacture. In this regard he submitted that right to manufacture and manufacturing rights are akin to right of occupancy and right to occupy. In this regard the following passage from Ramnath Iyer Law Lexicon 5th edition page 4144 was referred to: "RIGIT OF OCCUPANCY" AND "RIGHT TO OCCUPY". A right of oc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould not be followed. It was submitted by him that the Tribunal in the aforesaid decision has proceeded on the basis that since the assessee was not engaged in manufacturing he could not have transferred a right to manufacture. In this regard ld. D.R submitted that when the agreement dated 27/10/1999 says that right to manufacture was being transferred it was not possible for anybody to say that such an undertaking could not have been given by Shri B.V.Raju. 22. The learned counsel for the Assessee reiterated submission as was made before the CIT(A). In short the contention on behalf of the assessee was that the amount if considered as received by the assesse, is only for undertaking not to compete in similar business as carried on by ICL and that there was no right to manufacture that was given up by the assessee. Another submission that was made was that right to manufacture cement can be exercised by any person. The question is that whether the assessee was the owner of such right. It was his submission that SVCL and RCL had a right to manufacture but not the assessee. Therefore, the assessee could not have transferred a right which he did not possess. Further reliance was also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... took place. The Indian Finance Act, 1949, virtually abolished the levy and restricted the operation of section 12B to "capital gains" arising before the 1st April, 1948. But section 12B, in its restricted form, and the VIth head, "capital gains" in section 6, and sub-sections (2A) and (2B) of section 24 were not deleted and continued to form part of the Act. The Finance (No. 3) Act, 1956, reintroduced the "capital gains" tax with effect from the 31st March, 1956. As a result of the Finance (No. 3) Act of 1956, "capital gains" again became taxable in the assessment year 1957-58. In the Income Tax Act, 1961, the provisions of Sec.45 which are in pari-materia the same as Sec.12B of the Income Tax Act, 1922, have been retained. The same is as follows: "45. (1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 53 and 54, be chargeable to income-tax under the head 'Capital gains', and shall be deemed to be the income of the previous year in which the transfer took place." The Hon'ble Supreme Court in the case of in CIT v. B. C. Srinivasa Shetty [1981] 128 ITR 294(SC) dealt with the question whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crual of consideration for transfer of capital asset. 27. THE STATUTORY AMENDMENTS TO OVERCOME THE DIFFICULTIES IN BRINGING TO TAX RECEIPTS ON TRANSFER OF SELF GENERATED ASSETS IN THE HANDS OF THE TRANSFEROR To overcome the decision in the case of B.C.Srinivasa Shetty (supra) and with a view to ensure that computation provisions do not fail when there is a transfer of goodwill, the provisions of Sec.55(2)(a) were introduced by the Finance Act, 1988 w.e.f 1-4-1989. These provisions read as follows: 55. Meaning of "adjusted", "cost of improvement" and "cost of acquisition".- (1) ............. (2) For the purposes of sections 48 and 49, "cost of acquisition",-- (a) in relation to a capital asset, being goodwill of a business,-- (i) in the case of acquisition of such asset by the assessee by purchase from a previous owner, means the amount of the purchase price ; and (ii) in any other case, shall be taken to be nil ; By the Finance Act, 1997 w.e.f 1-4-1998, provisions of Sec.55(2)(a) were again amended as follows: (2) For the purposes of sections 48 and 49, "cost of acquisition",-- (a) in relation to a capital asset, being goodwill of a business, or a right to manufacture, p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or brand name associated with a business or a right to manufacture, produce or process any article or thing or right to carry on any business, tenancy rights, stage carriage permits or loom hours, -- (i) in the case of acquisition of such asset by the assessee by purchase from a previous owner, means the amount of the purchase price ; and (ii) in any other case not being a case falling under sub-clauses (i) to (iv) of sub-section (1) of section 49, shall be taken to be nil ; (underlining by us for emphasis) 30. In Circular No.8 of 2002 dt. 27.8.2002 the CBDT has explained the above provisions of Finance Act, 2002, as below: "39. Amendment of section 55 of the Income-tax Act, 1961 39.1 Under section 45, any capital receipts arising out of transfer of any business or commercial rights are taxable under the head "Capital gains". The amount of "capital gains" is computed according to section 48 of the Income-tax Act, 1961. For this purpose, "cost of acquisition" and "cost of improvement" are defined under section 55. At present, in case of receipts for transfer of right to manufacture, produce or process any article or thing the "cost of acquisition" and "cost of improveme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st & CO. 60 ITR 11 (SC) held on the taxability of non-compete fee as follows: "The House of Lords in Beak v. Robson (1942) 25 Tax Cas. 33. had to consider whether compensation paid for a restrictive covenant was a capital receipt or a revenue receipt. Under a service agreement the respondent therein covenanted in consideration of the payment to him of 7,000 pounds on the execution of the agreement, that if the agreement were determined by notice given by him or by his breach of its provisions, he would not compete directly or indirectly with the company within a radius of fifty miles of its place of business until the five years had expired. The House of Lords held that the said amount was a payment for giving up a right wholly unconnected with his office and operative only after he ceased to hold that office, and, therefore, it was not taxable under Schedule E of the Income Tax Acts. This court in Gillanders Arbuthnot and Co. Ltd. v. Commissioner of Income-tax 53 I. T. R. 283 (S. C.) 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 good ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or not carrying out activity in relation to any business ; or not to share any know-how, patent, copyright, trade-mark, licence, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for services. However, the provisions clarify that receipts for transfer of right to manufacture, produce or process any article or thing or right to carry on any business, which are chargeable to tax under the head "Capital gains", would not be taxable as profits and gains of business or profession. 36. Thus with the amendment to the law, non-compete fee even if it is capital receipt is now chargeable to tax as Income from business. In Guffic Chem. P. Ltd. v. Commissioner of Income-tax, 320 ITR 602 (SC) the Hon'ble Supreme Court held that 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 the Finance Act, 2002 with effect from April 1, 2003 that receipt by way of non-compete fee was made taxable u/s. 28(va)). The Hon'ble Court also held that it was well settled that a liability canno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions were amended to provide cost of acquisition being treated as nil. These amendments are set out in the later part of this order. As far as category (c) is concerned, the same would fall for consideration to see if it is capital receipt chargeable to tax as on the date of transfer because after 1-4-2003 such consideration even if regarded as capital receipt would be chargeable to tax u/s.28(va)(a) of the Act. Therefore the law as it prevails on the date on which a person agrees to desist from doing certain acts in relation to any business would be relevant. 39. If a payment is in the nature of non-compete fee received by the transferor when he sells his business and agrees not to carry on the business which he transfers then that would fall for consideration under (category (b) referred to earlier) section 55(2)(a) "right to carry on business". If the non-compete fee is paid to persons associated with the transferor then the same would fall for consideration only under Sec.28(va)(a) of the Act introduced by the Finance Act, 2002, w.e.f 1-4-2003. It is significant to note that the words used in Sec.28(va)(a) of the Act are "not carrying out any activity in relation to any busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... can be ascertained by looking into the legislative intention behind introduction of the aforesaid expression. As we have already seen selfgenerated assets like goodwill were not considered as "Capital Assets" because of the impossibility of computing their cost of acquisition and consequently capital gain on their transfer. 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 in Sec.55(2)(a) of the Act. Where goodwill is purchased by the transferor, the cost of acquisition is taken to be the purchase price and in all other cases it is taken to be nil. On the same principle on which capital gain on transfer of goodwill of a business was held to be not Taxable, other self-generated assets like tenancy rights, stage carriage permits or loom hours, were also held to be not taxable. To bring to tax capital gain on such transfer, Finance Act, 1994 amended Sec.55(2)(a) of the Act w.e.f. 1-4-1995 whereby covered u/s.55(2)(a)of the Act whereby tenancy rights, stage carriage permits or loom hours were also covered and the cost of acquisition and cost of improvement of these capital assets were also to be co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r manufacture an article according to the invented process for a limited period. After the expiry of the duration of patent, anybody can make use of the invention. Any Person being the inventor of an invention or his assignee can apply alone or jointly with any other person. As per the Indian Patents Act, 1970 invention means any new or useful (i) art, process, method or manner of manufacture, (ii) machine, apparatus or other article., (iii) Substance produced by manufacture and includes any new and useful improvement of any of them and alleged invention. As can be seen from the legislative intention, there should be a transfer of right to manufacture, produce or process any article or thing by way of extinguishment or curtailment of such right. Thus the provisions contemplate existence of a right to manufacture, produce or process an article or thing. Otherwise the question of extinguishment or curtailment of such a right would not have been contemplated by the legislature. It would therefore be reasonable to presume that what is sought to be covered by the expression "a right to manufacture, produce or process any article or thing" found in Sec.55(2)(a) of the Act, is intangible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt in clause-1 defines Business as follows: "Business" shall mean the business of manufacture, production, development, sale, marketing and distribution of and research into cement and other business related to or connected with the manufacture, production, sale marketing and distribution of and research into cement." Clause-2 which contains the undertaking of B.V.Raju for which he received a sum of Rs.11 crores, which is the main clause which will decide the nature of right transferred, reads as follows: "2. COVENANT'S OF THE PARTIES OF THE ONE PART i. The SECOND PART requires that Dr.BVR shall not, for a period of 5 years after the execution of this First Agreement, either on his own account or on behalf of any other person, directly or indirectly, own, manage, operate, acquire shares, Control or participate in the management, operation or control of any corporate entity, partnership, proprietorship, association or other business entity which directly or indirectly engage in the Business to which Dr. BVR hereby agrees and confirm. ii. In addition to the above, Dr. BVR agrees that he shall not, in the future. a) do or commit any act or permit any deed or act to be done, eith ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mr.B.V.Raju during the course of his employment with Cement Corporation of India, RCL and SVCL acquired a corpus of knowledge, skill, expertise, and experience related to the production, distribution, marketing, running and managing of cement plants and has also acquired or otherwise come in possession of various secret information, know-how and trade secrets relating to the Cement line of business. The preamble refers to India Cements Ltd. and its associate companies having acquired RCL from the original promoters during April, 1998. There is also a reference to the fact that Mr.B.V.Raju together with his family members thereafter continued their business in Cement line with SVCL till October, 1999, when SVCL was proposed to be taken-over by India Cements Ltd., and its associate companies. The preamble further refers to the fact that Mr.B.V.Raju along with other persons entered into an agreement with ICL by which they sold the shares held by them in SVCL. The preamble further declares that with the acquisition of SVCL, the core family promoters of RCL & SVCL were out of Cement business. It is thereafter that ICL with a view to ward off competition desired that Mr.B.V.Raju should ..... X X X X Extracts X X X X X X X X Extracts X X X X
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