2012 (8) TMI 328 - AT - Income Tax

Tax Treatment of Non-compete Fees & Capital Losses: Section 28(va) Business Income, Rule 8D Disallowance

The non-compete fees received by the assessees were held to be chargeable to tax as business income under Section 28(va). The claim for long-term capital ... Non-Compete fees - taxability - assessee along with some other entities being promoters of a D Ltd, holding 52.60% shares of the said company transferred its shares and in addition to sale consideration received amount as ‘non-compete fees’ - revenue considered the same to be business income as against assessee contention of it being part of capital gain - AY 06-07 - Held that:- It is observed that assessees companies in the present cases were the ‘promoters’ and ‘shareholders’ of M/s. D and were having controlling interest in said company hence consideration paid would fall under the category of 'Consideration paid to persons associated with the transferor to ensure that they also do not indulge in competing business' consequently payment for “not carrying out any activity in relation to any business” as covered by the provisions of sec.28(va)(a) and since the said provisions were applicable w.e.f. 01.04.2003, the same will be chargeable to tax as ‘business income’ as held by the AO and not as ‘capital gains’. reliance placed on case of Dr B.V. Raju (2012 (2) TMI 217 - ITAT HYDERABAD )- Decided against Assessee Sale of shares of other companies - dis-allowance of claim of long term capital loss - assessee contended that said shares were transferred as a part of the family settlement and could not be regarded as ‘transfer’ and invoking the provisions of section 47(iv), and treating the loss as a notional loss - Held that:- We restore the matter to the file of the A.O. for deciding this issue afresh on merits after examining the stand of the assessee in the light of relevant documentary evidence. Dis-allowance u/s 14A - Rule 8D - Held that:- As held in Godrej & Boyce Mfg. Co. Ltd. v. DCIT [2010 (8) TMI 77 - BOMBAY HIGH COURT] that disallowance u/s.14A for the years prior to AY 2008-09 has to be made by adopting some reasonable method, we restore the matter to the file of the A.O. for recomputation. Issues Involved:1. Taxability of non-compete fees.2. Disallowance of long-term capital loss on sale of shares.3. Disallowance under Section 14A read with Rule 8D.4. Allowability of professional fees as a deduction in computation of capital gains.Detailed Analysis:1. Taxability of Non-Compete Fees:The main issue in these appeals relates to the taxability of non-compete fees received by the assessees. The assessees, who were promoters of M/s. Dawn Mills Co. Ltd., received Rs. 1,161 per share as non-compete fees in addition to the sale price of Rs. 4,642 per share. The assessees treated this non-compete fee as part of the sale consideration and offered it to tax as capital gains. However, the AO treated it as business income under Section 28(va) of the Act. The CIT(A) agreed with the AO except in the case of Ruia Apparels Pvt. Ltd., where the non-compete fee was treated as business income. The Tribunal, after considering the Special Bench decision in the case of ACIT vs. Dr. B.V. Raju, held that the non-compete fees received by the assessees are chargeable to tax as business income under Section 28(va) of the Act.2. Disallowance of Long-Term Capital Loss on Sale of Shares:The issue involves the disallowance of long-term capital loss claimed by the assessees on the sale of shares of M/s. Special Paints Ltd. The AO disallowed the loss on the grounds that the shares were sold at face value as part of a family settlement and treated the loss as notional under Section 47(iv). The CIT(A) upheld the AO's decision, noting that the net worth of M/s. Special Paints Ltd. was not negative. The Tribunal, after reviewing the documentary evidence, set aside the orders of the CIT(A) and restored the matter to the AO for a fresh examination of the loss claim on merits.3. Disallowance under Section 14A read with Rule 8D:The assessees claimed certain income as exempt from tax but did not disallow any expenditure related to such income under Section 14A. The AO applied Rule 8D to compute the disallowance, which was upheld by the CIT(A) based on the Special Bench decision in Daga Capital Management Pvt. Ltd. The Tribunal, following the Bombay High Court decision in Godrej Boyce Mfg. Co. Ltd., held that Rule 8D is applicable only from AY 2008-09. For years prior to AY 2008-09, disallowance under Section 14A should be made using a reasonable method. The Tribunal set aside the CIT(A)'s orders and directed the AO to recompute the disallowance using a reasonable method.4. Allowability of Professional Fees as Deduction in Computation of Capital Gains:In the appeal of Ruia Stud Farms Pvt. Ltd., the issue was whether professional fees paid to Kanga & Co. could be deducted in computing capital gains. The CIT(A) did not decide this issue. The Tribunal directed the CIT(A) to decide the issue on merits after giving the assessee an opportunity to be heard.Conclusion:- The non-compete fees received by the assessees are chargeable to tax as business income under Section 28(va).- The claim for long-term capital loss on the sale of shares of M/s. Special Paints Ltd. is remanded to the AO for fresh examination.- Disallowance under Section 14A for years prior to AY 2008-09 should be computed using a reasonable method, not Rule 8D.- The CIT(A) is directed to decide the allowability of professional fees as a deduction in computing capital gains on merits.Result:- All eight appeals of the Revenue are allowed.- Three appeals of the assessees are dismissed.- Six appeals of the assessees are partly allowed for statistical purposes.