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NLC Nalco India Limited Versus D.C.I.T., Circle-10, Kolkata

2015 (10) TMI 2236 - ITAT KOLKATA

Revised return filed beyond the permissible date - Set off of brought forward business loss and unabsorbed depreciation of amalgamating company - Held that:- We find that the revised return reflecting the consolidated results of the amalgamated entity was filed beyond the permissible time limit u/s 139(5) of the Act. This is due to the fact of delayed passing of the order of the High Court approving the scheme of merger with effective date as 1.4.2000. This delay is definitely not attributable t .....

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results reflected in the revised return.

Compensation received by the assessee for restraint of trade - capital receipt or revenue receipt - Held that:- We find that the assessee had received the compensation from its US parent company amounting to USD 326374 has been received for entering into restrictive covenants of not entering into competitive business. We also find that the provisions of section 28(va) of the Act had been introduced in the statute book by Finance Act 2002 with .....

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ry of capital receipts. Further the correspondences dated 20.4.1999; 4.1.2000 ; 10.4.2000 & 20.11.2000 as reproduced supra, clearly goes to prove that the compensation received for undertaking restrictive covenants of not competing with the business of the assessee and fall in the nature of capital receipt. - Decided in favour of assessee.

Treatment of exchange fluctuation loss arising out of restatement of Exchange Commercial Borrowings (ECB) from holding company of the assessee util .....

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the said loan at the end of the year, be it gain or loss, would also fall on revenue account and hence automatically comes under the ambit of taxation if it is a gain and allowable as an expenditure if it is a loss. This issue is squarely covered by the decision of the Supreme Court in the case of CIT vs Woodward Governor India P Ltd reported in (2009 (4) TMI 4 - SUPREME COURT) to hold that the "loss" suffered by the assessee on account of the exchange difference as on the date of the balance s .....

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03.2011 for the Asst Year 2005-06 arising out of the order of the Learned Assessing officer framed u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the Act ). 2. Shri.R.N.Bajoria , Senior Advocate, and Shri.A.K.Gupta , the Learned ARs argued on behalf of the assessee and Shri.Soumesh Kumar Das, JCIT, the Learned Senior DR argued on behalf of the revenue. 3. The first ground raised by the assessee is general in nature and hence is not adjudicated herein. 4. The first issue to be .....

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l loss of ₹ 2,24,85,438/-. The original return of income of assessee company was filed with DCIT,Circle-10, Kolkata on 19.10.2001 showing total income of ₹ 4,10,84,370/-. Pursuant to the scheme of amalgamation approved by Calcutta High Court on 24.2.2003, the company ACS was merged with assessee company with effect from 1.4.2000 (i.e the effective date of merger as per the court approved order is 1.4.2000) and accordingly, the assessee in order to reflect the consolidated results of .....

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the assessee reflecting the consolidated results of amalgamated entity in the name of Ondeo Nalco India Ltd on 28.3.2003. Accordingly, the assessee requested the Learned AO to consider the revised return . The assessee also placed reliance on the decision of Hon ble Supreme Court in the case of Marshal Sons and co. (India) Ltd vs ITO reported in 223 ITR 809 (SC) in support of its contentions. 4.2. The Learned AO ignored the revised return filed by the assessee consolidating the results thereby i .....

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pproval of High Court is required in a scheme of merger? Firstly, inter se interests of shareholders, particularly of minority shareholders are important, and the High Court plays an important role in ensuring that the interest of shareholders of merging entities are safeguarded by way of public hearing. This is not an issue in the merger of a 100% subsidiary with the parent company, i.e. the appellant here. Secondly, interests of the third party creditors have to be protected. No issue has been .....

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cer 233 ITR 809 has held, in the last Para of the order, For the above reasons, the appeals are accordingly allowed. The writ petitions filed by the appellant in the High Courts shall be deemed to have been allowed. We, however, make it clear that we have not expressed any opinion on the plea of the learned counsel for the revenue that the amalgamation itself is a device designed to evade taxes legitimately payable by the subsidiary company. If the income tax authorities think that they are enti .....

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vise the return of income, the appellant ahs tried to reduce its taxable income and evade taxes. Besides, it has not also fulfilled the conditions laid down in section 72A read with Rule 9C and necessary details in Form 62 have not been filed. Therefore, I have no hesitation in deciding that the revised return is invalid, and the tax benefits in terms of current or past business losses and unabsorbed depreciation cannot be allowed to the appellant. This has no bearing in maintaining the consolid .....

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ed by Hon ble Calcutta and Madras High Court with effective date as 1.4.2000. We hold that whatever objections, if any, in the minds of the income tax department, to the scheme of merger, the revenue is supposed to raise the same in the court convened creditors meeting. When no objections are raised by the revenue to the scheme of merger, then the revenue is duty bound to follow the orders of the court strictly. We find that the revised return reflecting the consolidated results of the amalgamat .....

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e to appellate authorities. In view of the aforesaid facts and circumstances, we direct the Learned AO to kindly frame the assessment by considering the loss returned by Aqua Chemicals & Systems (Mfg) Ltd i.e by considering the consolidated results reflected in the revised return. Accordingly, the Ground No. 2 raised by the assessee in this regard is allowed. 5. The next issue to be decided in this appeal is as to whether the compensation received by the assessee for restraint of trade is to .....

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the terms of the agreement, NALCO USA and its subsidiaries were to exit from this business in every form and the assessee was required to complete the exit by 1.5.2000. The following correspondences in this regard warrant utmost importance:- Letter dated 20.4.1999 addressed by Nalco Chemical Company Illinois to Nalco Chemicals India Limited, Calcutta 20th April, 1999 Nalco Chemicals India Limited 20/A Park Street Calcutta - 700016. India. Dear Sir, Re: Sale of Lubricant Business As you are awar .....

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iness. For taking away your right to sell lubricants in your territory and for the resultant loss of your source of income from the above, it has been decided to pay you suitable compensation as may be decided in due course. The date for your withdrawing from the lubricant business will be intimated to you in due course. Thanking you, Yours faithfully Sd/- Chris Trunck Manager, International Tax Nalco Chemical Company. Letter dated 4.1.2000 addressed by Nalco Chemical Company Illinois to Nalco C .....

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from the lubricant business and the same business cannot be undertaken by you in any form or manner whatsoever. We have now decided that Nalco India will totally exit from the lubricant business in India effective 1st May, 2000. Please confirm to us that you are adhering to the above date for total exit from the lubricant business in India. Thanking you, Yours faithfully Sd/- Chris Trunck Manager, International Tax Nalco Chemical Company. Letter dated 10.4.2000 addressed by Nalco Chemicals Indi .....

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n for giving up our right to process/purchase/sale of lubricants. We shall be grateful if you kindly let us know when we would be receiving the above compensation. Thanking you, Yours faithfully For Nalco Chemicals India Limited Sd/- N.Khanna Director & Secretary Letter dated 20.11.2000 addressed by Nalco Chemical Company Illinois to Nalco Chemicals India Limited, Calcutta 20th November, 2000 Nalco Chemicals India Limited 20/A Park Street Calcutta - 700016. India. Dear Sir, Re: Sale of Lubri .....

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Company. 5.2. Pursuant to these correspondences, the assessee was in receipt of USD 326374 (equivalent to ₹ 1,52,16,000/-) as compensation received for restraint of trade and compensation for cancellation of total right to deal with the lubricant business in India. The Learned AO concluded the said receipt to be a business receipt and accordingly brought the same to tax which was upheld by the Learned CIT(A). Aggrieved, the assessee is in appeal before us on the following ground:- 3. For .....

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not entering into competitive business. He argued that hence the said receipt is to be construed only as a capital receipt. He further argued that the provisions of section 28(va) of the Act were introduced in the statute by Finance Act 2002 with effect from 1.4.2003 only, wherein, the non-compete fees received under an agreement for not carrying out any activity in relation to any business is construed as business income of the assessee. The said amendment is not retrospective in operation. He .....

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dance with law as proper facts were not brought out in the earlier tribunal order and hence no reliance should be placed on the old tribunal order. 5.4. We have heard the rival submissions and perused the materials available on record. We agree with the contention of the Learned AR that the earlier tribunal order relied upon by the Learned DR is not well placed as the same has been set aside by the Hon ble High Court to decide the issue by bringing out the full facts of the case. We find that th .....

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year under appeal before us is Asst Year 2001-02 , during which year, the provisions of section 28(va) of the Act were not in the statute. We also hold that the payments received for impairment of income earning apparatus, sterlisation of source of income or transfer of a capital asset would generally fall in the category of capital receipts. Further the correspondences dated 20.4.1999; 4.1.2000 ; 10.4.2000 & 20.11.2000 as reproduced supra, clearly goes to prove that the compensation receive .....

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mpetition fee. The said amount was paid by Ranbaxy under an agreement dated March 31, 1997. The assessee is a part of the Guffic group. The assessee agreed to transfer its trade marks to Ranbaxy and in consideration of such transfer the assessee agreed that it shall not carry on directly or indirectly the business hitherto carried on by it on the terms and conditions appearing in the agreement. The assessee was carrying on the business of manufacturing, selling and distribution of pharmaceutical .....

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e payment made to the assessee was in consideration of the restrictive covenant undertaken by the assessee for a loss of source of income. 5. The position in law is clear and well settled. There is a dichotomy between receipt of compensation by an assessee for the loss of agency and receipt of compensation attributable to the negative/restrictive covenant. The compensation received for the loss of agency is a revenue receipt whereas the compensation attributable to a negative/restrictive covenan .....

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loss of agency was a revenue receipt whereas compensation received for refraining from carrying on competitive business was a capital receipt. This dichotomy has not been appreciated by the High Court in its impugned judgment. The High Court has misinterpreted the judgment of this court in Gillanders case (supra). In the present case, the Department has not impugned the genuineness of the transaction. In the present case, we are of the view that the High Court has erred in interfering with the c .....

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compensation received by the assessee under noncompetition agreement was a capital receipt, not taxable under the 1961 Act. It became taxable only with effect from April 1, 2003. It is well settled that a liability cannot be created retrospectively. In the present case, compensation received under the noncompetition agreement became taxable as a capital receipt and not as a revenue receipt by specific legislative mandate vide section 28(va) and that too with effect from April 1, 2003. Hence, th .....

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to loss of source of business; that payment was received under the negative covenant and therefore the receipt of ₹ 50 lakhs by the assessee from Ranbaxy was in the nature of a capital receipt. In fact, in order to put an end to the litigation, Parliament stepped in to specifically tax such receipts under non-competition agreement with effect from April 1, 2003. Respectfully following the judicial precedent cited supra, we hold that the subject mentioned non-compete fees received by the as .....

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acts of this issue is that the assessee availed ECB loan of USD 50,00,000 from the parent company (equivalent to ₹ 23,21,50,000/-) with due approval of RBI for the purpose of general corporate objectives. On this fact of utilization of ECB Loan there is no dispute. The tenure of ECB loan is for 6 years and repayment schedule is in 9 instalments. The said loan was restated based on the exchange rate prevailing at the end of the year and it resulted in a exchange loss of ₹ 1,83,12,000/ .....

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ucing any reasons. Aggrieved, the assessee is in appeal before us on the following grounds:- 4. For that the Commissioner of Income Tax (Appeals) erred in holding that the loss arising due to fluctuation in rate of exchange is speculation loss and/or a mere provision and should be carried forward to be set of in future years against similar gain. 5. For that the Commissioner of Income Tax (Appeals) should have directed the allowance of loss arising due to fluctuation in rate of exchange as busin .....

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in second para page 5 of the assessment order is totally contradictory to the facts mentioned by him in first para page 5 of his order. He argued that the loan was utilized for working capital purposes of the assessee and hence the same is utilised only on revenue account. This loan was outstanding as on 31.3.2005 and the same was restated at the exchange rate prevailing at the end of the year in consonance with the Accounting Standard 11 (AS-11) issued by the Institute of Chartered Accountants .....

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perused the materials available on record. It is observed from the finding given in the assessment order that the ECB Loan of USD 50,00,000 was utilized for general corporate objectives and not for acquisition of any fixed assets by the assessee, though contradictory finding is taken by the Learned AO in his order. Hence we hold that the borrowings were utilized on revenue account. Based on this, it could logically be concluded that any exchange fluctuation arising out of restatement of the sai .....

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ditional liability arising on account of fluctuation in the rate of exchange in respect of loans taken for revenue purposes could be allowed as deduction under section 37(1) in the year of fluctuation in the rate of exchange or whether the same could only be allowed in the year of repayment of such loans? (ii) Whether, the assessee is entitled to adjust the actual cost of imported assets acquired in foreign currency on account of fluctuation in the rate of exchange at each balance sheet date, pe .....

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paid out" and that which has gone irretrievably. In this connection, heavy reliance was placed on the judgment of this Court in the case of Indian Molasses Company (supra). Relying on the said judgment, it was sought to be argued that the increase in liability at any point of time prior to the date of payment cannot be said to have gone irretrievably as it can always come back. According to the learned counsel, in the case of increase in liability due to foreign exchange fluctuations, if t .....

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ion "expenditure incurred" while dealing with the question as to whether there was a distinction between the actual liability in presenti and a liability de futuro. The word "expenditure" is not defined in the 1961 Act. The word "expenditure" is, therefore, required to be understood in the context in which it is used. Section 37 enjoins that any expenditure not being expenditure of the nature described in Sections 30 to 36 laid out or expended wholly and exclusively .....

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as used in Section 37 may, in the circumstances of a particular case, cover an amount which is really a "loss" even though the said amount has not gone out from the pocket of the assessee. 14. In the case of M.P. Financial Corporation v. CIT reported in 165 ITR 765 the Madhya Pradesh High Court has held that the expression "expenditure" as used in Section 37 may, in the circumstances of a particular case, cover an amount which is a "loss" even though the said amoun .....

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ture only, and not of business losses which are, however, deductible on ordinary principles of commercial accounting. (see page 617 of the eighth edition). It is this principle which attracts the provisions of Section 145. That section recognizes the rights of a trader to adopt either the cash system or the mercantile system of accounting. The quantum of allowances permitted to be deducted under diverse heads under Sections 30 to 43C from the income, profits and gains of a business would differ .....

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Section 145(1). One more principle needs to be kept in mind. Accounts regularly maintained in the course of business are to be taken as correct unless there are strong and sufficient reasons to indicate that they are unreliable. One more aspect needs to be highlighted. Under Section 28(i), one needs to decide the profits and gains of any business which is carried on by the assessee during the previous year. Therefore, one has to take into account stock-in-trade for determination of profits. The .....

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r, the value prevailing on the last date is relevant. This is because profits/loss is embedded in the closing stock. While anticipated loss is taken into account, anticipated profit in the shape of appreciated value of the closing stock is not brought into account, as no prudent trader would care to show increase profits before actual realization. This is the theory underlying the Rule that closing stock is to be valued at cost or market price, whichever is the lower. As profits for income-tax p .....

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