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2017 (4) TMI 969 - MADRAS HIGH COURT

2017 (4) TMI 969 - MADRAS HIGH COURT - TMI - 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 - Held that:- In accordance with the provisions of section 50, where a capital asset forms part of a block of assets and depreciation has been allowed in regard to the same, then, in the computation of capital gain on the transfer of such asset, the cost of acquisition shall be the written down value of th .....

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e and in favour of the Assessee. - Compensation charges paid - Claim u/s 36(1)(iii) rejected on the ground that there was no borrowal by the assessee per se - alternate claim under section 37 was also rejected on the ground that the expenditure was capital in nature - Held that:- The arrangement with SFL for financing the acquisition and leasing of the equipment is only for the business purposes of the assessee. The provision of compensation charges is in the nature of the interest liability .....

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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. - 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 .....

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was tentative or that the transfer was incomplete or subject to other stipulations. The finding of the Tribunal to the effect that the consideration on account of goodwill was not received is contrary to Clause No.2 extracted above wherein the vendors specifically confirm the receipt thereof. The execution of a Bank Guarantee as well as the Letter dated 28.03.2002 by HCC where the payment of ₹ 3 crores is shown as an advance has to be seen in the context of the agreements between the parti .....

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ll stand reduced from the taxable income in respect of assessment year 2002-03. - Tax Case (Appeal) No. 2695 of 2006 - Dated:- 12-4-2017 - Nooty Ramamohana Rao And Anita Sumanth, JJ. For the Appellant : Mr. T. Ravikumar For the Respondent : Mr. V. S. Jayakumar JUDGMENT ( Judgment of this Court was delivered by Anita Sumanth, J. ) 1. This Tax Case Appeal is filed at the instance of the Income Tax Department in relation to the assessment year 1999-2000 raising the following substantial questions o .....

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f the case, the Tribunal was right in holding that the amount of ₹ 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, ent .....

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of an amount of ₹ 8,28,97,258/- to tax in terms of section 50 of the Act. In doing so, WDV was adopted at ₹ 12,02,56,812/-. Separately, the assessee accounted for breakages of bottles and crates at the rate of 15% as against 33% for earlier years. The realization from the sale of broken bottles and crates was offered to tax. The assessing officer was of the view that the value of breakages should be deducted from the WDV adopted for bottles and crates, whereas, according to assessee, .....

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anced to ₹ 10,54,18,206/- in place of ₹ 8,28,97,258/- computed by the Assessee. 4. The second issue related to the allowability of an amount of ₹ 1,84,63,029/- being compensation charges. The Assessee had claimed the same in terms of Section 36(1)(iii) of the Act or alternatively as a revenue outgo in terms of Section 37(1) of the Act. The Assessing Officer was of the view that the compensation charges were capital in nature and disallowed the same. The third adjustment related .....

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ed by the Assessing Officer, who noted that the Assessee had, as on 28.02.1999, stopped manufacturing operations and was only rendering job work for HCC. The Assessing Officer drew support from the Annual Report of the Company for the year ending 31.03.1999 that corroborated this position and reflected the closing stock as Nil. Thus the Assessing Officer brought to tax the amount of ₹ 3 crores in the present assessment year being of the view that the transfer of goodwill business had been .....

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agmar, 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 .....

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r under the Indian Income tax Act 1922 (11 of 1922), the provisions of sections 48 and 49 shall be subject to the following modifications:- (1) where the full value of the consideration received or accruing as a result of the transfer of the asset together with the full value of such consideration received or accruing as a result of the transfer of any other capital asset falling within the block of assets during the previous year, exceeds the aggregate of the following amounts, namely:- (i) exp .....

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transferred during the previous year, the cost of acquisition of the block of assets shall be the written down value of the block of assets at the beginning of the previous year, as increased by the actual cost of any asset falling within that block of assets, acquired by the assessee during the previous year and the income received or accruing as a result of such transfer or transfers shall be deemed to be the capital gains arising from the transfer of short-term capital assets. 8. In accordan .....

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12,02,56,812/- after reducing the depreciation allowable. In such an event, and in the light of the fact that the breakages have not been claimed in the computation of income, there is no justification for any further reduction 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 .....

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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 lessee may also remit the advance payment which will be reimbursed by the intending lessor, at .....

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ring the financial year under consideration, the lease agreement was terminated and the entire balance outstanding interest was claimed in the present year. The claim, in terms of section 36(1)(iii), was rejected on the ground that there was no borrowal by the assessee per se. The alternate claim under section 37 was also rejected on the ground that the expenditure was capital in nature. 11. The assessee would submit that the compensation charges were in the nature of interest payments. In fact, .....

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ssee was not per se, the borrower of the funds. However the agreement dated 23.2.1995, while providing for the financial assistance extended by SFL for the purchase of the plant and machinery, also provides for the subsequent lease of the machinery to the assessee. Thus, the arrangement with SFL for financing the acquisition and leasing of the equipment is only for the business purposes of the assessee. The provision of compensation charges is in the nature of the interest liability payable to t .....

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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 a .....

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as the Acquired Business Undertaking was proposed to be transferred in a phased manner, defined as the stages of pre-closing and closing. An Agreement dated 28.2.99 was entered into for the transfer of goodwill and a Business Purchase Agreement dated 27.3.99 was entered into that set out the terms and stages of the transfer. The limited question that arises before us is the year of taxability of the consideration received for the sale of goodwill. Revenue would contend that the consideration wa .....

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7; 3,00,00,000/- (Rupees Three Crores only) (the Consideration ) the receipt and sufficiency whereof is hereby acknowledged by the seller. 20. Entire Agreement Amendment Supremacy This document sets forth the entire understanding between the parties relating to the subject matter contained herein and supercedes all other agreements and undertakings entered into between the parties prior hereof. 15. The parties have thus unequivocally transacted for the transfer of goodwill as on 28.02.1999. The .....

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