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2019 (5) TMI 548

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..... 001-02 as not speculative business loss. Explanation to Section 73 of the Act invoked by the Assessing Officer was held to be not applicable in relation to sale of investments in the appeal for the assessment year 2001-02. Learned counsel for the appellant-revenue has not been able to show that the findings recorded by the Tribunal are illegal, erroneous or perverse warranting interference by this Court. - answered in favour of the assessee Signing of negative covenant for not carrying out a speciality business - whether it does not amount to transfer of right to carry on business, the consideration of which is liable to be taxed as capital gain - AO held that since the assessee extinguished its right to re-enter the market of plating chemicals and process for general metal finishing and electronics plating for consideration, the same amounted to transfer of right to carry on business and therefore the amount of consideration received was liable to be taxed under the head capital gains - CIT(A) held that undertaking a restrictive convenant not to carry on business without transfer of any business was not in the nature of right to carry on business to be regarded as transfer of c .....

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..... c) Whether the ITAT was justified in law and in facts in holding that various expenses incurred for expansion of business are revenue expenditure ignoring the fact that the same has been incurred on projects that were subsequently either shelved or were an entirely new line? d) Whether the ITAT was justified in law and in facts in holding that the assessee is at liberty to convert its stock into investment ignoring the wholistic picture where in the end result of the conversion is to escape provisions of explanation to section 73 of the Income Tax Act? e) Whether the ITAT was justified in law and in facts in not considering that the selective conversion of shares from stock in trade to investment has resulted in undue benefit to the assessee which falls within the purview of tax avoidance through colourable devices which has already been held to be not acceptable by the Hon ble Supreme Court in the Mcdowell case? f) Whether the ITAT was justified in law and in facts in allowing the subsequent losses on the sale of investment as regular losses, ignoring the issue that the conversions were merely colourable de .....

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..... owances:- i) Disallowance on account of non compete fee payment; ii) Disallowance of expenses on account of expansion of business of healthcare division; iii) Disallowance of expenditure on account of expansion of Maxxon business, Max Foil Division; iv) Disallowance of speculation loss in trading of shares. Aggrieved by the assessment order, the assessee company filed an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]. Vide order dated 12.1.2011, Annexure A.2, the CIT(A) allowed the appeal and deleted the additional/disallowances made by the Assessing Officer. Not satisfied with the order, the revenue filed appeal before the Tribunal. Vide order dated 8.3.2013, Annexure A.3, the Tribunal dismissed the appeal. Hence the instant three appeals by the revenue before this Court. 6. We have heard learned counsel for the parties. 7. Firstly, while taking up ITA No.187 of 2013, question (a) as to whether payment of compete fee is a revenue expenditure and an allowable deduction, the same has already been considered and concluded against the revenue b .....

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..... the Act invoked by the Assessing Officer was held to be not applicable in relation to sale of investments in the appeal for the assessment year 2001-02. The relevant findings recorded by the Tribunal read thus:- 14. First of all, we take up appeal of the Revenue in ITA No. 103 (Asr)/2006 for the assessment year 2001-02 as under: ( i) The brief facts regarding first ground of Revenue, which are in three parts are that Max Corporation Limited (MCL), a wholly owned subsidiary of the assessee was incorporated on 12.09.1996 was merged with the assessee w.e.f. 1.7.1999, pursuant to a scheme of merger approved by the Hon ble Punjab Haryana High Court. Pursuant to merger, all assets and liabilities of Max Corporation Ltd; including various shares held by Max Corporation Ltd, as stock in trade and as investments, vested in the assessee. On 3.7.2000, as per the decision of management, shares of 11 companies, which were acquired by MCL and were held as stock in trade , prior to merger and which vested with the assessee post merger, were decided to be held as investment . Accordingly, the said shares were converted from stock in trade .....

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..... er. Explanation to Section 73 was not applicable to loss arising from sale of shares (held as stock in trade), claimed by the assessee as business loss. The AO was directed to allow loss of ₹ 3.72 crores arising on sale of shares as normal business loss (Refer page 15 of Ld. CIT (A) s order). 15. We may point out that the assessee has accepted the order of the Ld. CIT (A) disallowing notional loss arising on conversion of stock in trade into the investments on 3.7.2000 and no appeal has been filed by the assessee against the aforesaid decision of Ld. CIT (A). 16. The Revenue has challenged the aforesaid order of the Ld. CIT (A) accepting conversion of stock in trade into investments and allowing loss arising during the relevant previous year on sale of part shares so converted and other shares held as stock in trade. xxxxxxxxxxxxxxxxxx 22. We have heard the rival contentions and perused the facts of the case. We are of the view that conversion of part of shares acquired from Max Corporation Ltd; as stock in trade into investments cannot be said to be a device for evading the t .....

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..... nancial year 2000-01. We have held the aforesaid conversion from stock in trade to the investment as valid and upheld the order of Ld. CIT (A) treating the loss on sale of investment arising in the assessment year 2001-02 as not speculative business loss. The Explanation to Section 73 of the Act invoked by the AO was held to be not applicable in relation to sale of investments in the appeal for the A.Y. 2001-02. Therefore, being no change in the facts and position in law in the relevant previous year as compared to assessment year 2001-02 and in the absence of any new arguments having been raised by the parties, we dismiss this ground of appeal of the Revenue following our own order for the assessment year 2001-02 hereinabove. 9. Further in Commissioner of Income Tax Vs. Yatish Trading Co. Private Limited , [2013] 359 ITR 320 (Bom), it was held that the shares sold were held by the assessee as investments and the gains arising out of the sale of the investments were to be assessed under the head Capital gains and not under the head Business profits . The relevant paras of the judgment read thus:- The assessee .....

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..... ssessing Officer held that conversion of stock in trade into investment was done with an intention of not to pay taxes as Section 10(38) of the Act was introduced by Finance Act, 2004 with effect from 01.04.2005. It was held by the Assessing Officer that the entire amount was taxable as a trading receipt and not under the head capital gains . The Tribunal, however, allowed assessee s claim. It was noted from records that shares in question were sold nearly two years after conversion of stock in trade into investment with a specific declaration. Therefore, the Tribunal rightly set aside impugned assessment order. The Delhi High Court upheld the order passed by the Tribunal. The relevant paras of the judgment read thus:- 3. The Assessing Officer has recorded that as per the business activities under taken by the assessee, they were dealing and trading in shares and financial securities in Bombay Stock Exchange, Delhi Stock Exchange and Calcutta Stock Exchange. The respondentassessee was a registered broker with the said exchanges. The Assessing Officer held that the business of the assessee was not to invest in shares but to deal with the shares as a st .....

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..... 20,000 33,97,200/- 6. The Commissioner (Appeals) has observed that in the balance sheet as on 31st March, 2005 the shares were shown under the head inventories and in the subsequent balance sheet as on 31st March, 2006, shares were again shown under the head investment at book/fair value on Ist April, 2004 . Thus, the assessee converted the aforesaid stock in trade of ₹ 3,18,38,850/- to the head investment at book/fair value on Ist April, 2004 and the said disclosure was made in the balance sheets as on 31st March, 2005 and 31st March, 2006. In the first year, the Assessing Officer did not disturb the aforesaid conversion and accepted the same. The Commissioner (Appeals) noticed that for the Assessment Year 2005-06 assessment was concluded under Section 143(3) vide order dated 27th November, 2007 but the Assessing Officer did not object to the said conversion. These shares were subsequently sold as detailed in paragraph 2.9 of the order of the Commissioner (Appeals) in August, 2005, September, 2005 and substantial portion was sold in March, 2006 and long term capital gains was declared. .....

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..... r the appellant-revenue has not been able to show that the findings recorded by the Tribunal are illegal, erroneous or perverse warranting interference by this Court. Accordingly, questions (d) to (f) are answered in favour of the assessee and against the revenue. 13. As regards question (g), as to whether signing of negative covenant for not carrying out a speciality business does not amount to transfer of right to carry on business, the consideration of which is liable to be taxed as capital gain, it needs to be noticed that the assessee company divested its shareholding in Max Atotech Limited. The shares were sold on 29.6.2001 to M/s Atotech BV, Netherlands for ₹ 13.58 crores. Alongwith the signing of the agreement for sale of shares, the assessee had undertaken negative covenants of not entering into market of plating chemicals and processes for General Metal Finishing and Electronics Plating during the period 29.6.2001 to 28.6.2004 in lieu of receipt of consideration of ₹ 1.43 crores which was claimed as capital receipt not liable to tax. The Assessing Officer held that since the assessee extinguished its right to re-enter the market of plating ch .....

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..... ribunal in that case categorically held that taking over a restrictive obligation does not amount to transfer of right in any business and therefore, non-compete fee cannot be considered as resulting in capital gains. There are several other decisions of the Courts/ Tribunal on the issue in question which have been referred to by the ld. counsel for the assessee also support the contentions of the assessee. The contention of the Ld. DR that non-compete fee has to be considered as income under the head capital gains from the transfer of right in a business is without any factual or legal basis. We find that Section 55(2)(a), which is prospective in nature, is not applicable to the facts of the present case, in the absence of any capital asset being transferred by the assessee in lieu of which the assessee has received the impugned amount of non-compete fee. Our views are supported by the decision of the Special Bench of ITAT Hyderabad in the case of ACIT vs. B.V. Raju (supra). 14. In Guffic Chem. P. Ltd Vs. Commissioner of Income Tax and another, [2011] 332 ITR 602 (SC), the assessee was carrying on the business of manufacturing, selling and distribution of .....

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..... 003. It is well settled that a liability cannot be created retrospectively. In the present case, compensation received under the non-competition agreement became taxable as a capital receipt and not as a revenue receipt by specific legislative mandate vide Section 28(va) and that too with effect from April 1, 2003. Hence, the said Section 28 (va) is amendatory and not clarificatory. Lastly, in CIT v. Rai Bahadur Jairam Valji reported in [1959] 35 ITR 148 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 that the agreement entered into by the assessee with Ranbaxy led to loss of source of business; that payment was received under the negative covenant and therefore the receipt of ₹ 50 lakhs by the assessee from Ranbaxy was in the nature of a capital receipt. In fact, in order to put an end to the litigation, Parliament stepped in to specifically tax such receipts under non-competition agreement with effect from April 1, 2003. .....

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