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TMI Blog2024 (8) TMI 801X X X X Extracts X X X X X X X X Extracts X X X X ..... ioner of Income-tax (Appeals) erred in confirming the action of the Assessing Officer in disallowing the claim of Rs. 6,43,000/- being provision for premium on redemption of debentures. 4. That on the facts and circumstances of the case and in law the Commissioner of Income-tax (Appeals) erred in confirming the action of the Assessing Officer in disallowing the claim of deduction Rs. 1,95,00,000/- being payment mode to another bidder for loss of business / investment opportunity.. 5. That on the facts and circumstances of the case and in law the Commissioner of Income-Tax (Appeals) erred in holding that the Assessing Officer had correctly worked out capital gains on transfer of Compressor business (subject to arithmetical mistake) and on transfer of Hard Metal business. 6. That the Commissioner of Income-tax (Appeals) ought to have held that in absence of any direction in the assessment order to charge interest, interest u/s 234B & 234C could not be charged. 7. That the order passed by the CIT(A) is bad in law and void ab-initio. 3. The assessee has also raised additional grounds, which are more or less alternative pleas in respect of grounds taken in Form No. 36. 4. Repr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore, non-compete fees is not a consideration received for transfer of any asset as all assets were already transferred. 12. The relevant observations of the Assessing Officer read as under: "..... Therefore, whatever might have been written in the agreement, it is clear that the restrictive covenant is only in respect of any future adventure which could otherwise be taken by the assessee company or its promoters because of their goodwill they have created. It is not in respect of any existing assets tangible but in respect of future adventure which may or may not take place and the goodwill of the assessee. In other way, this is a payment received by the assessee company for a future likely profit which it is otherwise capable of earning by being in similar business as mentioned in the agreement as exploit its goodwill. It is also important to note that the payment is also not compensation for any asset (tangible or intangible) or any profit-making structure which might have been taken away from the assessee. Thus, it will be seen that the assessee company has only realized its future profits in present and they cannot be treated as a capital receipt." 13. After giving tho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... compensation received for refraining from carrying on competitive business was a capital receipt. This dichotomy has not been appreciated by the High Court in its impugned judgment. The High Court has misinterpreted the judgment of this Court in Gillanders' case (supra). In the present case, the Department has not impugned the genuineness of the transaction. In the present case, we are of the view that the High Court has erred in interfering with the concurrent findings of fact recorded by the CIT(A) and the Tribunal. 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 1.4.2003 that the said capital receipt is now made taxable [See: Section 28(va)]. The Finance Act, 2002 itself indicates that during the relevant assessment year compensation received by the assessee under non- competition agreement was a capital receipt, not taxable under the 1961 Act. It became taxable only with effect from 1.4.2003. It is well settled that a liability cannot be created retrospectively. In the present case, compensati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... compete agreement incorporates a restrictive covenant on the right of the Assessee to carry on his activity of development of software. It may not alter the structure of his activity, in the sense that he could carry on the same activity in an organization in which he had a small stake, but it certainly impairs the carrying on of his activity. To that extent it is a loss of a source of income for him and it is of an enduring nature, as contrasted with a transitory or ephemeral loss. " 18. Considering the facts of the case in totality, in light of the judicial decisions discussed herein above, we are of the considered view that the amount received as non-compete fee is not taxable and the Assessing Officer is directed to delete the same. Ground No. 1 is allowed. 19. Since we have deleted the entire addition, the alternative plea taken in the additional grounds become otiose. 20. Second grievance relates to the addition Rs. 1,73,91,898/- on cancellation of own debentures. 21. While scrutinizing the return of income, the Assessing Officer noticed that the assessee has claimed a sum of Rs. 1,73,91,890 as a deduction being profit on cancellation of debentures. 22. The assessee was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terest accumulations in the company's own debentures. In the accounting year ended on 30-6- 1953, the debenture trust deed was amended so as to permit the existing sinking fund investments in the company's debentures being cancelled, simultaneously extinguishing the corresponding liability on account of debentures. It was further provided that the debenture liability could be reduced out of further purchase and cancellation of debentures from certain stipulated appropriations to the sinking fund. Accordingly the company cancelled the debentures against the sinking fund investments. The surpluses accrued to the company since the debentures were quoted at a discount in the open market. The ITO took the view that since the assessee-company was purchasing and cancelling debentures year after year, the surplus amounts for the assessment years 1957-58 and 1958-59 could be regarded as business profits. In appeal, the AAC agreed with the ITO. In further appeal, the Tribunal upheld the assessee's contention, observing that what had been done had nothing whatsoever to do with the regular business of shipping. According to the Tribunal, what had been done was to materially alter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l in the form of debentures. The ITO disallowed this amount as it was a capital loss. On appeal, the AAC deleted this addition holding that the loss which had been suffered was equivalent to the interest already earned by 'the other party and should have been set off against income receivable by the assessee. On appeal by the revenue, the Tribunal restored the disallowance. On reference: Held In the case of an assessee, who is not a dealer in debentures, the entire sum paid by him as the price of debentures would be treated as capital outlay. Although the entire price was paid because of debentures were pregnant with some accrued interest, no interest actually became payable until the due dates arrived. Thus, in between the two payment dates, the, extra price would only be paid of the purchase price. When eventually such an assessee was assessed on the interest received by him on the debentures, he could not seek to set off against such income the extra amount paid by him at the time of purchasing the debentures by treating it as accrued interest. Similarly, a seller of securities-cum-interest was not assessable in respect of the amounts he received towards interest fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the return of income, the Assessing Officer found that the assessee has not debited Rs. 6,43,000/- in its profit and loss account but claimed the same in the computation of income. 32. It was contended that as per the Accounting Policy followed by the assessee, provision for premium on redemption of debentures of Rs. 6,43,000/- has been adjusted against the share premium account. However, for Income tax purposes, this amount has been claimed as a deductible expenditure. Strong reliance was placed on the decision of the Hon'ble Supreme Court in the case of Madras Industrial Investment Corporation 225 ITR 802. 33. Contentions of the assessee were dismissed and addition of Rs. 6,43,000/- was made. 34. We find that the decision in the case of Madras Industrial Investment Corporation [supra] apply on the facts of the case in as much as in that case, it was held that the discount was expenditure allowable u/s 37 of the Act and it should be allowed as deduction proportionately for each year. The only difference is that, in the case in hand debentures having been issued at discount at the time of redemption, premium @ 5% of the face value has been paid. Respectfully following the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficer, net asset value as on 31.03.1996 is Rs. 975.42 lakhs only and, therefore, cost of improvement which can be allowed will be Rs. 975.42 minus 790.05 lakhs i.e. 185.37 lakhs only and recomputed the long term capital gain from compressor business at Rs. 698.7 lakhs. 42. We have seen the valuation report. The cost of improvement of compressor business, as valued by the M/s A.F. Ferguson & Co., is as under: SIEL Limited Annexure I Cost of Improvements Of Compressor Business Rs. lacs AS ON MARCH 31 Net Asset Value Variation Over Previous Year Net cost of Improvement 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 71.91 96.54 98.00 99.18 124.60 110.70 188.76 248.94 202.58 110.22 (189.67) 782.08 658.98 624.43 1,113.62 975.42 24.63 1.46 1.18 25.42 (13.90) 78.06 60.18 (46.36) (92.36) (299.89) 971.75 (123.10) (34.55) 489.19 (138.20) Total 903.51 43. In the notes, the valuer have mentioned that since the accounts of the assessee close on 30th September, therefore, the audited figures are not available as on 31st March till the accounti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t named SIEL Foods and Fertilizers Industrial Delhi vested with the assessee. The total land area occupied by this unit was 71.466 acres. Writ petition was filed wherein it was sought that hazardous/noxious/heavy and large industries should shift out of Delhi. 51. The petition was heard by the Hon'ble Supreme Court who ordered that after leaving the part of the land with the owner for developing the same in accordance with the permissible land use under the Master Plan, the remaining land should be surrendered to the DDA for developing the same to meet the community needs. 52. Accordingly, as per the order, 68% of the land was surrendered to the DDA and 32% was left with the owner. The assessee has claimed capital loss on such surrender in A.Y 1997-98 and also claimed in A.Ys 2001-02 and 2004-05. Since no such claim was made either in the return of income or during the assessment proceedings, this claim by way of additional ground cannot be entertained as it requires verification of factual matrix and no question of law is involved. Therefore, we decline to entertain this ground in light of the ratio laid down by the Hon'ble Supreme Court in the case of NTPC 229 ITR 383. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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