TMI Blog2015 (10) TMI 2236X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 effect from 1.4.2003 (relevant to Asst Year 2003-04) only and not earlier. Accordingly, the non-compete fees would become taxable only from Asst Year 2003- 04 and not earlier. The 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 received for undertaking restrictive covenants of not competing with the business of the assessee and fall in the nature of capital rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... off of brought forward business loss and unabsorbed depreciation of amalgamating company. 4.1. The brief facts of this issue is that the original return of income of Aqua Chemicals Systems (Mfg) Ltd (in short ACS ) was filed with DCIT, Range 1, Nungambakkam, Chennai for the Asst Year 2001-02 on 29.10.2001 declaring total 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 the amalgamated entity, filed a revised return on 28.3.2003 showing total income of ₹ 1,85,98,930/-.The assessee stated that the Hon ble Madras High Court had approved the scheme of merger on 2.9.2002 and Hon ble Calcutta High Court had approved the scheme of merger on 24.2.2003 with effective date of merger as 1.4.2000. After the merger, the name of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat 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 entitled to raise this question in the proceedings under the Income Tax Act, it is open to them to do so by way of separate proceeding according to law. No costs. The above remarks make it abundantly clear that the scheme of merger if approved by the High Court in a different context, and if the facts warrant it, the law shall be allowed to take its due course, including under the Income Tax Act, 1961. It is abundantly clear, that by filing an invalid revised return beyond the permissible date to revise 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Chemical Company USA (seller ) and D.A.Stuart Company (Purchaser) dated 25.3.1999, the lubricant business of NALCO group was sold globally with effect from 6.4.1999 and under 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 aware, that effective April 6, 1999, we have sold our world wide lubricant business to M/s. D.A.Stuart, USA under the agreement of sale with M/s. D.A. Stuart, USA. Nalco Chemical Company, USA along with all its subsidiaries will have to discontinue manufacture and sale of lubricants globally. A territory wise time schedule is being agreed upon with the buyer of the lubricant business by which time Nalco Chemical Company, USA, along with its subsidiaries will have to com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 Lubricant Business We thank you for your letter dated 10th April, 2000. It has been decided to compensate you on the basis of direct contribution of your Indian entity. On this basis, we have worked out your compensation for cancellation of your total right to deal with the lubricant business in India at US Dollars 326374. Please let us have your bank details so that we may remit the compensation amount to you. Thanking you, Yours faithfully Sd/- Chris Trunck Manager, International Tax Nalco Chemical 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceived 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 effect from 1.4.2003 (relevant to Asst Year 2003-04) only and not earlier. Accordingly, the non-compete fees would become taxable only from Asst Year 2003- 04 and not earlier. The 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 received for undertaking restrictive covenants of not competing with the business of the assessee fall in the nature of capital receipt. We find that the issue under is squarely covered by the decision of the Hon ble Supreme Court in the case of Guffic Chem P Ltd vs CIT and CIT and Another vs Mandalay Inve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 concurrent findings of fact recorded by the Commissioner of Income-tax (Appeals) and the Tribunal. One more aspect needs to be highlighted. 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 the said capital receipt is now made taxable (See Section 28(va)). The Finance Act, 2002 itsle3f indicates that during the relevant assessment year 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 reve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... treated only as capital in nature. But strangely, the Learned AO having construed so did not bother to grant depreciation on the same in the assessment. This action of the Learned AO was also upheld by the Learned CITA without adducing 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 business loss and there was no basis of material to hold that the said loss was speculative in nature. 6.2. The Learned AR argued that the Learned AO having stated in the assessment order itself that the ECB loan was utilized for general corporate objectives of the assessee company in page 5 first para of his order, ought not to have stated that no details of utilization of ECB loan was furnished by the assessee as per second para in page 5 of his order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntitled 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, pending actual payment of the varied liability? Their Lordships had categorically held that since the loan was borrowed for general business purposes i.e on revenue account, any loss arising out of restatement at the end of the year would be squarely allowable u/s 37(1) of the act. 13. As stated above, one of the main arguments advanced by the learned Additional Solicitor General on behalf of the Department before us was that the word expenditure in Section 37(1) connotes what is 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 there is a revaluation of the rupee vis-`-vis fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, 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 according to the system adopted. This is made clear by defining the word paid in Section 43(2), which is used in several Sections 30 to 43C, as meaning actually paid or incurred according to the method of accounting upon the basis on which profits or gains are computed under Section 28/29. That is why in deciding the question as to whether the word expenditure in Section 37(1) includes the word loss one has to read Section 37(1) with Section 28, Section 29 and 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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