2013 (11) TMI 732 - HC - Income Tax

High Court ruling: Revenue vs. assessee. Forfeited amount apportioned, closing stock valued NIL, non-competition fee capital.

COMMISSIONER OF INCOME TAX & ASST COMMISSIONER OF INCOME TAX Versus M/s WINTAC LTD

The High Court ruled partly in favor of the Revenue and partly in favor of the assessee in the case. The forfeited amount was apportioned between capital ... Nature of income – Capital receipt or revenue receipt – Forfeited amount out of the payment received, a capital receipt? - Assessee had received an advance amount of Rs.4.49 crores in terms of agreements of sale dtd.15-11-1999 and 17-01-2000. However, the said agreements were terminated with the consent of both the parties on 13-1-2001 and 15-1-2001 – Held that:- As per the agreement, if the purchaser fails to perform their part of the contract, the Vendor is entitled to terminate the agreement and claim liquidated damages of Rs.25,00,000/- and Rs.5,00,000/- respectively. However, in the present case, by mutual consent of the parties, the RIL had agreed to forego Rs.1.10 crores in favour of the assessee for loss of earnings due to the cancellation of agreement and the loss sustained in the sale transaction. The amount over and above Rs.30,00,000/- has to be treated as revenue receipts - As per the agreement, the assessee is entitled to forfeit only a sum of Rs.30,00,000/- and the remaining amount of Rs.80,00,000/- has to be treated as revenue receipt and the assessee is liable to pay tax. - Decided partly in favor of revenue. Whether stock pertaining to bulk drug unit and R & D should be taken as NIL as on 30.6.2000 when its realizable value as on 30.03.2000 was Rs.12.78 crores – Held that:- The said goods were not saleable items in the market - The life of the bulk drug was expired and it cannot be sold in the market. The Central Excise Records also disclose that the said goods cannot be sold in the market. The Income Tax Appellate Tribunal, taking into consideration all these aspects of the matter and that the manufacturer has been completely stopped the manufacturing of the bulk drug, has taken the value of closing stock of bulk drug as NIL. The assessee has not adopted any colourable devices in order to avoid the tax – Decided against the Revenue. Whether the amount received in regard to noncompetition clause for three year is a capital receipt – Amount received is Rs.4 Crore - Held that:- Compensation received for refraining from carrying on competitive business was a capital receipt - In the instant case, Rs.4.00 crores received from M/s.Recon Health Care Limited towards noncompetition to discontinue the business of three years has to be held as capital receipt – Decided against the Revenue. Whether Capital gains loss computed on sale of share of M/s.Recon Agro Tech Pvt Ltd., computed by adopting cost of acquisition of Rs.0.10 per share is a colourable transaction – Held that:- Under Section 48 of the Income Tax Act, the capital gain is to be computed after reducing the cost of acquisition of the asset, cost of any improvement thereto and the expenditure incurred in connection with the transfer of capital assets. In order to avoid the stringent action being taken by the financial institution, the assessee sold the shares to its subsidiary company in order to stabilize its financial position. No document has been produced by the Revenue to show that the transaction between the assessee and its subsidiary company is a colourable device. The finding recorded by the Appellate Tribunal is purely a question of fact. The Revenue has not made out a case to interfere with the same – Decided against the Revenue. Whether transfer of technical knowhow by the assessee for a consideration of Rs.25 crores should be treated as a capital receipt, not liable to capital gains tax and not consideration received towards sale of capital asset, liable to capital gains tax – Held that:- Under Section 28(v)(a) any sum, whether received or receivable, in cash or kind, under an agreement for not carrying out any activity in relation to any business, or not sharing any knowhow, patent, copyright, trademark, license, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of the goods is intangible goods acquired on or after 1-4-1998 is a capital asset and liable to be taxed under the head ‘Capital Gain’. The technical knowhow is an intangible asset, liable to be taxed under the head ‘Capital Gain’. The order passed by the Appellate Tribunal holding that the consideration of Rs.25.00 crores received is also for not carrying out certain activities pertaining to the business in manufacture of Pharmaceutical goods. Any consideration received for not carrying out certain activity in connection with business is not taxable earlier to 1-4-2003. Therefore, the receipt is a capital receipt and not liable for the capital gain is contrary to law – Decided in favor of Revenue. Issues Involved:1. Treatment of forfeited amount as capital or revenue receipt.2. Valuation of closing stock.3. Nature of non-competition fee as capital or revenue receipt.4. Computation of capital gains on the sale of equity shares.5. Treatment of consideration for transfer of technical knowhow.Detailed Analysis:1. Treatment of Forfeited Amount as Capital or Revenue Receipt:The first substantial question of law was whether the sum of Rs.1.10 crores forfeited should be treated as a capital receipt or a revenue receipt. The Tribunal had held that the amount was a capital receipt. However, the High Court found that while the assessee was entitled to forfeit Rs.30,00,000/- as per the agreement, the remaining Rs.80,00,000/- should be treated as revenue receipt. The Court referred to the Supreme Court judgment in COMMISSIONER OF INCOME-TAX, MADRAS v/s BEST AND CO. (PRIVATE) LTD., which allows for the apportionment of compensation between capital and revenue receipts. Thus, the High Court partly favored the Revenue and partly the assessee.2. Valuation of Closing Stock:The second question concerned the valuation of the closing stock of bulk drugs. The Tribunal had accepted the assessee's valuation of NIL as on 30-06-2000, whereas the Revenue argued that the stock was valued at Rs.12.78 crores as on 31-03-2000. The High Court upheld the Tribunal's decision, noting that the bulk drug's value had reduced due to non-mobility and expiry of the product's life, and the stock was not saleable. The Court found no evidence of the assessee adopting any colorable devices to avoid tax, thus ruling in favor of the assessee.3. Nature of Non-Competition Fee as Capital or Revenue Receipt:The third issue was whether the non-competition fee of Rs.4 crores received by the assessee should be treated as a capital receipt. The Tribunal had ruled it as a capital receipt, and the High Court agreed, citing the Supreme Court judgment in GUFFIC CHEMIC (P) LTD. v/s COMMISSIONER OF INCOME TAX, which held that compensation for refraining from carrying on competitive business is a capital receipt. Thus, the High Court ruled in favor of the assessee.4. Computation of Capital Gains on Sale of Equity Shares:The fourth question concerned the computation of capital gains on the sale of equity shares of M/s. Recon Agro Tech Pvt Ltd. The Tribunal had allowed the assessee's claim for both long-term and short-term capital losses. The Revenue contended that the transactions were between interested parties and were colorable devices. However, the High Court found no evidence to support this and upheld the Tribunal's decision, ruling in favor of the assessee.5. Treatment of Consideration for Transfer of Technical Knowhow:The fifth question was whether the Rs.25 crores received for the transfer of technical knowhow should be treated as a capital receipt. The Tribunal had ruled it as a capital receipt, not liable for capital gains tax. However, the High Court disagreed, noting that under Section 28(v)(a) and Section 32(1)(ii) of the Income Tax Act, technical knowhow is a capital asset subject to capital gains tax. The Court cited the Madras High Court judgment in INDO TECH ELECTRIC COMPANY v/s DEPUTY COMMISSIONER OF INCOME TAX, which held that technical knowhow is an intangible asset liable to be taxed under capital gains. Thus, the High Court ruled in favor of the Revenue.Conclusion:The appeal was allowed in part, with the High Court ruling partly in favor of the Revenue and partly in favor of the assessee on different issues.