TMI Blog2015 (10) TMI 2473X X X X Extracts X X X X X X X X Extracts X X X X ..... ; and, not taking into consideration the fact that the covenant of not to carry on business was (i) attached alongwith the transfer of leader business, which was being carried on by the assessee since 1997; and, (ii) for a period of 10 years, which is a fairly long period. Under these circumstances, the non-compete fee is to be assessed as long term capital gain. - Decided in favour of assessee Gain on transfer of Distribution Network, Registration and Licenses, Copyrights and Goodwill - taxable as "Short Term Capital Gains" OR "Long Term Capital Gains" - Held that:- Regarding Distribution Network it has been explained that the sales of ‘Leader’ products were being made by the assessee-company through a dealer Distribution Network. The assessee company had entered into contracts/ arrangements with several distributors for sale and distribution of their products covered under Leader business. On transfer of leader business to Sumitumo, all the rights of the assessee company under such contracts/businesses arrangements in relation to leader business were transmitted in favour of Sumitomo as per the Business Transfer agreement. Since the Distribution Network was in the nature of bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of the CIT(A) to the Assessing Officer for adopting the value of opening stock in consonance with the value of closing stock adopted for the immediately preceding year does not require any interference, and is hereby affirmed. - Decided against assessee Income derived from growing and selling of Hybrid Seeds - whether is to be considered as agricultural income so as to be eligible for deduction under section 10(1) as held by CIT(A) - Held that:- No merit in the ground raised by the Revenue as no fault can be found with the decision of the CIT(A), which is in consonance with the precedents in assessee’s own case - Decided against revenue - ITA No. 3171/MUM/2012, ITA No. 3743/MUM/2012 - - - Dated:- 30-10-2015 - SHRI G.S.PANNU, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER Appellant by : Shri Rajan Vora Respondent by : Shri S.J.Singh Shri A.K.Nayak ORDER PER G.S. PANNU,AM: The captioned are cross- appeals filed by the assessee and the Revenue, directed against the order of the CIT(A)-17, Mumbai dated 06/03/2012, pertaining to the assessment year 2007-08, which in turn has arisen from an order passed by the Assessing Officer dated 16/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;s decision in the case of CIT vs Namdhari Seeds (P) Ltd. (2011) 203 Taxman 565 (Kar), in which on the same facts and circumstances, the revenue's view and action have been upheld. 4. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in treat ing the non-compete fees of ₹ 2 crores received by the assessee is not taxable as business income in terms of sec. 28(va) of the I.T, Act. 5. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in treat ing gains of ₹ 7,61,20,585/- arising f rom the transfer of assets such as distribution network, Registration Licenses, Copy Rights Goodwill on sale of Leader Business are not short term capital gains as per provisions of sec.50 of I.T.Act. 6. Without prejudice to the above, the CIT (A) has erred in holding that gains of the appellant on transfer of distribution network, Registration Licenses, Copy Rights Goodwi l l on sale of Leader Bus ines s are not bus ines s income, wi thout appreciating the fact that entire expenditure incurred for generating these assets as deduction u/s. 37(1) of the I.T. Act in earlier years. 7 3. The assessee before us is a comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts - 78,97,585 78,97,585 (vii) Goodwill - 31,49,231 31,49,231 (viii) Plant and Machinery - 48,97,905 48,97,905 (ix) Inventory 11,53,90,709 11,48,85,095 -5,05,614 Total 13,66,05,269 30,13,65,095 16,47,59,826 4.1 In so far as the profit in sale proceeds received on account of Non-compete Fees, Distribution Network, Registration and licenses, Copy- rights, and Goodwill is concerned, it was treated as Long Term Capital Gain ; the profit in relation to Technical know-how and Trademark was declared as Short Term Capital Gain; the sale consideration received in relation to Plant Machinery was reduced from the block of assets ; and, the loss incurred on transfer of inventory was charged to the Profit loss account. The Assessing Officer disagreed with the assessee-company with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rival submissions. As per the Business Transfer Agreement with Sumitomo , the entire Leader Business has been transferred lock, stock and barrel, which inter-alia, contained a covenant to the effect that assessee-company would not engage in or carryon any business for a period of 10 years, which competes directly or indirectly with whole or part of the herbicide business carried on by the buyer. Clause -13 of the Business Transfer Agreement, placed in the Paper Book, is relevant, which reads as under:- 13. Non Competition and Non Solicitation. 13.1 Monsanto India shall not, and shall ensure that its Affiliates do not, for a period of ten(10) years from the Closing Date, directly or indirectly whether through partnership or a distributor or as a shareholder, joint venture partner, collaborator, employee, consultant or agent or in any other manner whatsoever, whether for profit or otherwise: 13.1.1 Engage in or carry on any business which competes directly or indirectly with the whole or any part of the Herbicide Business carried on by Sumitomo in the Territory. 8.1 On the basis of the aforesaid, assertion of the assessee-company is that it had discontinued the wheat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all 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 section 28(va)(a) of the Act are not carrying out any activity in relation to any business , Proviso (i) to section 28(va)(a) provides for exception to cases where such receipts are taxable as capital gain, viz., where any sum is received for transfer of a right to carry on any business which is chargeable to tax as capital gain. When the transferor is already carrying on business and agrees not to carry on business transferred, then the same would fall for consideration only under section 55(2)(a) of the Act. With the change in law receipts on account of giving up right to carry on business even if it is capital receipt would now be chargeable to tax as income from business. The difference would be that if it is paid to the transferor for giving up right to carry on business, it would be regarded as capital gain, the cost of acquisition of right to carry on business being determined in accordance with the provisions of section 55(2)(a) of the Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us is that since the consideration has been received for transfer of business alongwith right to not carry on business for a period of 10 years, being a fairly long period, the consideration for non-compete fees is liable to be treated as long term capital gain. The Ld. Departmental Representative has reiterated the stand of the CIT(A) on this aspect. 10. Having considered the rival stands on this aspect, in our view, the CIT(A) has erred in treating the non-compete fee as a short term capital gain. In our considered opinion, the CIT(A) misdirected himself in considering as to when the . Right of not to compete came into existence . ; and, not taking into consideration the fact that the covenant of not to carry on business was (i) attached alongwith the transfer of leader business, which was being carried on by the assessee since 1997; and, (ii) for a period of 10 years, which is a fairly long period. Under these circumstances, the non-compete fee is to be assessed as long term capital gain. Thus, on this aspect, assessee succeeds, and Ground No.1 is assessee s appeal is allowed. 11. Next, we may take-up Ground No.5 in Revenue s appeal, which seeks to challenge the action ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emed to have been allowed . The argument of the AO suffers from the following anomalies. First, Explanation -5 is a legal fiction incorporated in the computation of business income and section 50 is a legal fiction for the purpose of computing capital gains. It is trite law that a legal fiction cannot be extrapolated to a subject other than for which it has been legislated. In other words, a legal fiction meant for the purposes of computing business income cannot be extrapolated for the purpose of computing capital gains and vice versa. Second, in the case of goodwill, distribution network, registration and permits and copyright, the cost of acquisition of these assets has been taken to be nil by virtue of section 55(2)(a). The question of allowing depreciation under Explanation 5, to section 32, therefore, does not arise. 11.2 In the background of the aforesaid findings of the CIT(A), the Ld. Departmental Representative has not made any credible argument except reiterating the stand of the Assessing Officer . In our considered opinion, the aforesaid assets are intangible assets, being Distribution Network, Registration and Permits, copyrights, constitute business right/inform ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ain, on facts also. Regarding Distribution Network it has been explained that the sales of Leader products were being made by the assessee-company through a dealer Distribution Network. The assessee company had entered into contracts/ arrangements with several distributors for sale and distribution of their products covered under Leader business. On transfer of leader business to Sumitumo, all the rights of the assessee company under such contracts/businesses arrangements in relation to leader business were transmitted in favour of Sumitomo as per the Business Transfer agreement. Since the Distribution Network was in the nature of business right existing for more than three years, in our view, the same has been rightly held by the CIT(A) to be taxable as long term capital gain. 11.6 Regarding Goodwill , it was quite clear that the same is inseparable from business, which was in existence for more than three years, and it gets automatically transferred alongwith the business. Thus, the gain on transfer of Goodwill has to be assessed as long term capital gain. The stand of the CIT(A) is affirmed on this aspect also. Similarly, in relation to the gain on transfer of Registration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest expenditure has been deleted. 15. Before us, the Ld. Departmental Representative has not controverted the factual findings of the CIT(A). Rather, we find that the findings of the CIT(A) are fully borne out of the material on record. The balance sheet of the assessee- company reveals that the aggregate of the share capital and Reserves Surplus at the beginning and closing of the instant year is ₹ 327.02 crores and ₹ 374.97 crores respectively, as compared to the total investment of ₹ 182.16 crores. Prima-facie, the assessee-company had sufficient own-funds at its disposal to make the investments. Further, the interest expenditure claimed is with respect to the security deposit obtained from the Distributors, which has a nexus with assessee s non-investment activity and thus cannot be considered for disallowance u/s. 14A of the Act. Considering the fact-situation, we affirm the action of the CIT(A) deleting the disallowance of ₹ 9,36,000/- out of interest expenditure. 16. In so far as the disallowance made by the Assessing Officer of ₹ 91,08,000/- out of administrative expenses is concerned, the same was made by the Assessing Officer in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Apart therefrom we also find that even otherwise the disallowance estimated by the assessee at ₹ 20,39,893/- is reasonable considering that the same was even more than the estimation of 2% of dividend income canvassed by the CIT(A). In this manner, we hereby set aside the order of CIT(A) and direct the Assessing Officer to restrict the disallowance under section 14A of the Act to ₹ 20,39,893/- made in the return of income. Thus, Ground of appeal No.2 of the assessee is allowed and Ground of appeal No.1 2 in the Departmental appeal are dismissed. 20. The only other ground in the appeal of the assessee is by way of Ground of Appeal No.3, which relates to the recomputing value of closing inventory in accordance with the provisions of section 145A of the Act. 21. In this context, the brief facts are that before the CIT(A), assessee submitted that while passing assessment order for the preceding Assessment Year of 2006-07, the Assessing Officer made an adjustment to the value of closing stock to the tune of ₹ 4,13,28,639/- on account of adjustment under section 145A of the Act. The assessee explained that in the course of assessment proceedings it submitted a w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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