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TMI Blog2017 (4) TMI 969X X X X Extracts X X X X X X X X Extracts X X X X ..... was right in holding that the amount of Rs. 3 crores received as sale consideration in respect of goodwill should not be assessed to long term capital gains? 2. The Assessee/Respondent is engaged in the manufacture of Soft drinks under a franchise from Coco Cola. It had two bottling plants, Unit I at Poonamallee High Road, Arumbakkam and Unit II at Pulianthope, Trivellore District, Nemam. The assessee, in the previous year relevant to the present assessment year, entered into an arrangement for transfer of its entire soft drinks and beverage undertaking as a going concern to Hindustan Coco Cola Bottling South West Pvt. Ltd (in short HCC ). 3. The first issue raised in the appeal relates to the reduction of the value of breakages of bottles and crates from the written down value ( WDV ) in the computation of short term capital gains u/s 50 of the Income tax Act 1961 (the Act ). The Assessee had sold bottles and crates to HCC offering short term capital gain of an amount of Rs. 8,28,97,258/- to tax in terms of section 50 of the Act. In doing so, WDV was adopted at Rs. 12,02,56,812/-. Separately, the assessee accounted for breakages of bottles and crates at the rate of 15% a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s assailed in appeal before the Income Tax Appellate Tribunal, which held the issues in favour of the assessee. The aforesaid order of the Tribunal dated 12.06.2006 is challenged in appeal before us. 6. We have heard the submissions of Mr.T.Ravikumar, learned counsel appearing for the Income Tax Department and Mr.V.S.Jayakumar, and Mr. Sandeep Bagmar, learned counsels appearing for the Assessee/Respondent. 7. Adverting to the issue of computation of short term capital gain, the assessee has been consistently providing for breakage of bottles and crates, 33% in the present year as against 15% in the past, adding the same back for the claim of depreciation. The assessee also did did not claim the loss from breakage since it was capital in nature. The income from sale of bottles was being offered as income. This practice has been accepted by the department on all counts. In the financial year relevant to the present assessment year, the assessee transferred the assets to the purchaser and this gave rise to short term capital gain computed in terms of section 50 of the Act, relating to depreciable assets. Section 50 reads thus: "50. Notwithstanding anything contained in clause (42A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from WDV. The case law relied upon by the assessing officer have been rightly distinguished by the Tribunal as they turn on entirely different facts. Substantial Question No.1 is answered against the Revenue and in favour of the Assessee. 9. Adverting to Substantial No. 2, the Assessee had set up a new plant in Nemam to commence production from March 1997. In this regard, an Agreement to enter into Lease dated 23.2.1995 was entered into between the assessee and M/s.Sundaram Finance Limited ( SFL ) for financing of the plant and machinery, at the behest of the assessee and subsequent lease thereof by SFL to the assessee. The agreement provided for various terms and conditions for the intended lease including the payment of compensation charges at the rate of 21% in the following terms: "6.The intending lessee further declare, confirms and assures the intending lessor as follows: a) . b) . c) . d) That he shall pay compensation charges, at 21% per annum at monthly rests or any amount advanced by the intending lessor to the manufacturer/supplier, from the date such payment till the date of the lease agreement to be entered into. In the alternative, the intending less ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hases of the equipment and the assessee undertakes to pay charges at the rate of 21% to compensate SFL for the advances made by it to the manufacturers and suppliers of equipment. We are thus of the view that the assessee assumes the role of the borrower in this situation. The compensation charges paid are in the nature of interest, liable to be allowed in terms of section 36(1)(iii) of the Act. 13. With respect to the alternate plea under section 37 of the Act, the equipment has been acquired for the expansion of the business of the assessee. The second unit at Nemam is also engaged in the bottling of beverages under the existing franchaisee with Coco Cola. Thus, while a new asset is acquired, it is for the purpose of the expansion of the existing business of the assessee and not for the development of a new line of business. The charges paid are consequently allowable u/s 37 of the Act being wholly revenue in nature. Substantial Question No.2 is thus answered against the Revenue and in favour of the Assessee. 14. Now we address the question of goodwill. The assesse and HCC had negotiated for the transfer of the beverage division as a going concern. This division, referred to as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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