2008 (10) TMI 593 - AT - Income Tax

Tribunal decision: ESIC & EPF late deposits disallowed, textile business transfer amounts ruled for Section 54EC.

The Tribunal upheld the disallowance under Section 43B for late deposit of ESIC and EPF contributions for payments made beyond the grace period. In the ... - Issues Involved:1. Disallowance under Section 43B for late deposit of employees' State Insurance Corporation (ESIC) and employees' Provident Fund (EPF) contributions.2. Taxation of the amount received from the transfer of the textile dye business, including the treatment of non-compete fees.Issue-wise Detailed Analysis:1. Disallowance under Section 43B for Late Deposit of ESIC and EPF Contributions:The first ground of the assessee's appeal concerns the confirmation of disallowance of Rs. 63,054 under Section 43B for the late deposit of ESIC and EPF contributions. The Revenue's corresponding ground is against the deletion of disallowance of Rs. 62,52,100 for late payment of EPF and Rs. 50,190 for late payment of ESIC under Section 43B. The Assessing Officer disallowed these amounts as they were paid after the due date under the respective Acts. The Commissioner of Income-tax (Appeals) allowed relief for amounts deposited within the grace period of five days but upheld disallowance for payments beyond this period.The Tribunal agreed with the Commissioner of Income-tax (Appeals), noting that the amounts deposited within the grace period were correctly allowed as per the judgment of the Madras High Court in CIT v. Shri Ganapathy Mills Company Ltd. [2000] 243 ITR 879. However, for amounts paid beyond the grace period, the Tribunal upheld the disallowance, citing the jurisdictional High Court's judgment in CIT v. Godaveri (Mannar) Sahakari Sakhar Karkhana Ltd. [2008] 298 ITR 149 (Bom), which held that the amendment to Section 43B by the Finance Act, 2003, effective from the assessment year 2004-05, did not apply to earlier years. Therefore, the Tribunal dismissed both the assessee's and the Revenue's grounds on this issue.2. Taxation of Amount Received from Transfer of Textile Dye Business:The second issue pertains to the taxation of Rs. 7.016 crores received by the assessee from transferring its textile dye business. The amount was bifurcated into Rs. 5.010 crores for assigning marketing rights and Rs. 2.006 crores as non-compete fees. The assessee claimed these as capital receipts, with Rs. 5 crores offered as long-term capital gain and claimed exemption under Section 54EC due to investment in NABARD bonds. The remaining Rs. 2 crores was claimed as non-taxable capital receipt.The Assessing Officer treated the entire amount as revenue receipt, noting the alignment with the worldwide policy of the parent company, BASF AG. The Commissioner of Income-tax (Appeals) partially agreed with the assessee, treating Rs. 5.010 crores as capital receipt eligible for Section 54EC deduction and Rs. 2.006 crores as part of the consideration for the transfer of the textile dye business, thus taxable under 'Capital gains.'The Tribunal examined the agreements and noted that the assessee transferred its business, including marketing rights, customer lists, and employees, but excluded fixed assets and certain current assets. The Tribunal held that the Rs. 5.010 crores received for marketing rights was a capital receipt, aligning with the principle that compensation for the loss of the source of income is capital in nature, as established in CIT v. Prabhu Dayal [1971] 82 ITR 804 (SC) and CIT v. Ambadi Enterprises Ltd. [2004] 267 ITR 702 (Mad). The Tribunal upheld the Commissioner of Income-tax (Appeals)'s view that this amount was correctly treated as a capital receipt and the deduction under Section 54EC was valid.Regarding the Rs. 2.006 crores non-compete fee, the Tribunal disagreed with the Commissioner of Income-tax (Appeals)'s view that it was similar to the marketing rights receipt. The Tribunal noted that non-compete fees are for agreeing not to compete, a negative covenant, and thus a capital receipt not taxable under the head 'Capital gains,' as supported by CIT v. Narendra D. Desai [2008] 214 CTR (Bom) 190 and CIT v. Shyam Sundar Chhapparia [2008] 305 ITR 181 (MP). The Tribunal emphasized that the amendment to Section 28 by the Finance Act, 2002, effective from April 1, 2003, which made non-compete fees taxable, was not applicable to the assessment year 2001-02.The Tribunal concluded that the non-compete fee was a capital receipt not liable to tax. Even if hypothetically considered under 'Capital gains,' the lack of cost of acquisition would prevent taxability, as per CIT v. B. C. Srinivasa Setty [1981] 128 ITR 294 (SC). The Tribunal thus accepted the assessee's ground and dismissed the Revenue's ground on this issue.Order Pronounced on October 22, 2008.