Tribunal directs AO to treat restraint of trade compensation as capital receipt & allow exchange loss deduction

The Tribunal allowed the appeal, directing the AO to consider the revised return reflecting consolidated results, treat compensation for restraint of trade as a capital receipt, and allow exchange fluctuation loss as a deduction. The order was pronounced on 21.09.2015.

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Issues Involved:
1. Validity of the revised return filed beyond the permissible date.
2. Treatment of compensation received for restraint of trade.
3. Treatment of exchange fluctuation loss on ECB loan.

Detailed Analysis:

1. Validity of the Revised Return Filed Beyond the Permissible Date:
The first issue is whether the revised return filed beyond the permissible date should be considered for the set-off of brought forward business loss and unabsorbed depreciation of the amalgamating company. The original return of income for Aqua Chemicals & Systems (Mfg) Ltd (ACS) was filed declaring a total loss, and the original return for the assessee company was filed showing total income. Pursuant to a scheme of amalgamation approved by the Calcutta High Court, ACS merged with the assessee company, and a revised return was filed reflecting the consolidated results. The revised return was ignored by the AO and CIT(A) despite the merger being approved by the High Courts. The Tribunal held that the revenue is bound to follow the court orders approving the merger and directed the AO to frame the assessment considering the consolidated results in the revised return, allowing the assessee's ground.

2. Treatment of Compensation Received for Restraint of Trade:
The second issue is whether the compensation received by the assessee for restraint of trade should be treated as a capital receipt or revenue receipt. The assessee received compensation from its parent company for exiting the lubricant business, which was sold globally. The AO treated this compensation as a business receipt and brought it to tax. The Tribunal, however, noted that the compensation was received for entering into restrictive covenants and not competing in the business, making it a capital receipt. The Tribunal relied on the Supreme Court decision in Guffic Chem P Ltd vs CIT, which held that compensation for refraining from carrying on competitive business is a capital receipt. Thus, the Tribunal directed the AO to treat the compensation as a capital receipt and delete the addition, allowing the assessee's ground.

3. Treatment of Exchange Fluctuation Loss on ECB Loan:
The third issue is the treatment of exchange fluctuation loss arising from the restatement of Exchange Commercial Borrowings (ECB) utilized for general corporate objectives. The assessee availed an ECB loan from its parent company, which was restated based on the exchange rate at the end of the year, resulting in a loss. The AO treated the loss as capital in nature but did not grant depreciation. The Tribunal held that since the loan was utilized for general corporate objectives (revenue account), any exchange fluctuation arising from restatement should be treated as revenue in nature. The Tribunal relied on the Supreme Court decision in CIT vs Woodward Governor India P Ltd, which allowed such losses as deductions under section 37(1) of the Act. Consequently, the Tribunal allowed the exchange loss as a deduction, allowing the assessee's grounds.

Conclusion:
The Tribunal allowed the appeal of the assessee, directing the AO to consider the revised return reflecting the consolidated results, treat the compensation for restraint of trade as a capital receipt, and allow the exchange fluctuation loss as a deduction. The order was pronounced on 21.09.2015.

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