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2015 (11) TMI 388 - BOMBAY HIGH COURT

2015 (11) TMI 388 - BOMBAY HIGH COURT - [2015] 377 ITR 144 (Bom) - Non-compete consideration received - whether is not liable to tax as capital gains even after the amendment to section 55(2)(a) of the Act with effect from April 1, 1998, which introduced the words 'or a right to manufacture, produce or process any article or thing' ? - Held that:- Section 55(2)(a) of the Act would have no application in the present circumstances, as it deals with the cost of acquisition in relation to a capital .....

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- Supreme Court ] no substantial question of law arises for our consideration. Accordingly question No. 1 as proposed is not entertained.- Decided against revenue.

Whether the Tribunal was correct in holding that the non-compete consider ation taken as reserves to the balance-sheet cannot be added to the book profit under section 115JA of the Act even in terms of clause (b) of the Explanation thereto ? - Held that:- Explanation to section 115JA of the Act to be invoked it is necessar .....

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cumulatively, viz., there must be a debit of the amount to the profit and loss account and the amount so debited must be carried to reserves. Admitted position in this case is that there is no debit to the profit and loss account of the amount of reserves. The impugned order has in view of the self-evident position taken a view that in the absence of the amount being debited to profit and loss account and taken directly to the reserve account in the balance-sheet, the book profits as declared un .....

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JUDGMENT 1. This appeal filed by the Revenue under section 260A of the Income-tax Act, 1961 ("the Act"), challenges the order dated November 30, 2012, passed by the Income-tax Appellate Tribunal ("the Tribunal"). The impugned order disposes of cross-appeals as well as cross-objections relating to the assessment year 1999-2000. 2. Although numerous questions have been formulated Mr. Pinto, learned counsel for the Revenue, at the time of admission, urges that two issues arise i .....

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l was correct in holding that the non-compete consider ation taken as reserves to the balance-sheet cannot be added to the book profit under section 115JA of the Act even in terms of clause (b) of the Explanation thereto ?" 3. Question No. 1 (a) An agreement dated November 27, 1998, was entered by the respondent-assessee into with M/s. Hindustan Coco Cola Bottling North West Pvt. Ltd. which prohibited the respondent-assessee from utilising its business know-how, i.e., carrying on its busine .....

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see. It held that even the amendment to section 55(2)(a) of the Act on April 1, 1998, will not take within its scope a negative/restrictive covenant. This negative/restrictive covenant was taxable after the introduction of section 28(va) in the Act with effect from April 1, 2003. (c) Being aggrieved the Revenue carried the issue in appeal to the Tri bunal. By the impugned order the Tribunal held that the entire issue of restraint of right to carry on business would be taxable only with effect fr .....

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n received for the loss of agency is a revenue receipt whereas the compensation attributable to a negative/ restrictive covenant is a capital receipt . . . 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 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, .....

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(va) and that too with effect from April 1, 2003. Hence, the said section 28(va) is amendatory and not clarifi catory. Lastly, in CIT v. Rai Bahadur Jairam Valji reported in [1959] 35 ITR 148 (SC) it was held by this court that if a contract is entered into in the ordinary course of business, any compensation received for its termination (loss of agency) would be a revenue receipt. In the present case, both the Commissioner of Income-tax (Appeals) as well as the Tribunal, came to the conclusion .....

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plication in the present circumstances, as it deals with the cost of acquisition in relation to a capital asset which includes a right to manufacture or carrying on busi ness. In the present case, the agreement prohibits the assessee inasmuch as it amounts to giving up its right to carry on business, i.e., a restrictive cov enant. It held that such restrictive covenant stands covered only with effect from April 1, 2003, on introduction of section 28(va) of the Act. (e) In view of the above, the .....

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e fees which were directly taken to the balance- sheet by the respondent-assessee. This was, inter alia, on the basis of clause (b) of the Explanation to section 115JA of the Act. The Assessing Officer had also held that the above amounts had to be routed through the profit and loss account for the purpose of computing profits under the Companies Act, 1956. (b) Being aggrieved, the respondent-assessee filed an appeal to the Commissioner of Income-tax (Appeals) (the Commissioner). By order dated .....

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disturb the profits in the profit and loss account as except to the extent provided in the Explanation to section 115JA. (c) On further appeal by the Revenue the Tribunal by the impugned order dismissed the Revenue's appeal. The impugned order places reliance upon the decision of the apex court in Apollo Tyres Ltd., wherein it was held that it is not open to the Assessing Officer to question the correctness of the profit and loss account when the same have been prepared in accordance with t .....

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ction 115JA of the Act. This is so as the Explanation presupposes that the amounts received should have been debited to the profit and loss account before the same can be added in terms of the Explanation. Accordingly the impugned order dismissed the Revenue's appeal. (d) The grievance of the Revenue before us is that even though the Assessing Officer is bound by the audited accounts, made in accordance with the provisions of the Companies Act and cannot be disturbed the profits so arrived, .....

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