2016 (7) TMI 337 - AT - Income Tax

Compensatory sum not taxable as business income under Section 28(va)

M/s. Orient Blackswan Private Limited, Hyderabad Versus Asstt. Commissioner of Income-tax Circle 16 (3), Hyderabad

The Tribunal allowed the appeals, ruling that the compensatory sum received was a capital receipt and not taxable as business income under Section 28(va). ... Compensatory sum received in terms of settlement agreement for not using the word ‘Longman’ in the name or trade mark of the assessee - business income or a capital receipt not liable to tax - Held that:- The agreement was towards settling various disputes on the use of name ‘ Longman’ and does not relate to any transfer of trade mark etc. While the assessee is precluded from using the name ‘Longman’, the corresponding Pearson Group is also precluded from using the name ‘Orient’. Thus, mutual obligations exists on both parties to the agreement. Section 28(va)(b) only deals with payment received for not sharing trade mark etc. this would presuppose that the assessee should own the trade mark and for a given consideration, has agreed no to share it with any other person. The word ‘sharing’ postulates there must be someone to use the trade mark. But in the present case, the sharing or otherwise is not possible when trade mark itself ceases to exist. We note that the settlement agreement has not been entered into in the ordinary course of business, therefore compensation received under a negative covenant for impairment of right to use the word ‘LONGMAN’ is in the nature of capital receipt. We find support for this proposition from the decision of coordinate bench in case of Govindbhai C. Patel vs. Dy. CIT Ahmedabad bench (2009 (10) TMI 637 - ITAT AHMEDABAD) wherein it was held that compensation received towards relinquishment of the assessee's right to sue it in the Court of law cannot be treated as revenue receipt taxable as business income under S. 28(va). - Decided in favour of assessee. Issues Involved:1. Condonation of delay in filing appeals.2. Nature of compensatory sum received under a settlement agreement: Business income or capital receipt.Issue 1: Condonation of Delay in Filing AppealsAt the outset, there was a delay of 69 days in filing the appeals for the assessment years 2009-10 and 2010-11. The assessee filed condonation petitions supported by affidavits, explaining that the delay was neither intentional nor deliberate. The Tribunal was convinced that sufficient cause existed for the delay, noting that it had not prejudiced the other side. The Tribunal prioritized substantial justice over technical considerations and condoned the delay under Section 253(5) of the Income Tax Act, allowing the appeals to proceed on their merits.Issue 2: Nature of Compensatory Sum Received Under Settlement AgreementFacts of the Case:The assessee, engaged in publishing and trading educational and academic books, received a compensatory sum of Rs. 5,38,27,108 from Pearson Group under a settlement agreement dated 22.11.2007. The agreement required the assessee to cease using the word 'Longman' in its trade name 'Orient Longman Pvt. Ltd.' The assessee initially declared this amount as business income but later revised the return, claiming it as a capital receipt not liable to tax. The Assessing Officer reopened the case, treating the amount as business income under Section 28(va) of the Income Tax Act, 1961.Assessing Officer's View:The Assessing Officer argued that the provisions of Section 28(va), effective from 1.4.2003, superseded previous judicial rulings that considered such receipts as capital. The Officer concluded that the receipt was taxable as revenue income, rejecting the assessee's claim that it was a capital receipt.CIT(A)'s View:The CIT(A) upheld the Assessing Officer's decision, stating that the compensatory sum arose in the course of business and was therefore a revenue receipt. The CIT(A) also noted that the settlement agreement did not restrict the assessee from carrying on its business, thus affirming the receipt as taxable under Section 28(va).Tribunal's Analysis:The Tribunal examined whether the compensatory sum received for not using the word 'Longman' was taxable as business income under Section 28(va)(b). The Tribunal noted that the agreement was not entered into in the ordinary course of business but was a settlement of disputes over the use of the trade name. The Tribunal emphasized that capital receipts are not chargeable to tax unless explicitly provided for. It found that the settlement agreement did not involve the transfer of the trade mark but rather mutual obligations not to use certain names.The Tribunal referred to case laws, including the Supreme Court's decision in CIT vs. BEST & Co. (60 ITR 1) and Guffic Chem. (332 ITR 602), which held that compensation for the loss of an enduring asset is a capital receipt. The Tribunal concluded that the compensatory sum was a capital receipt, not falling within the purview of Section 28(va)(b), as the trade mark ceased to exist and there was no sharing of the trade mark with Pearson Group.Conclusion:The Tribunal allowed the appeals, ruling that the compensatory sum received was a capital receipt and not taxable as business income under Section 28(va). The appeals for the assessment years 2009-10 and 2010-11 were also allowed based on the same reasoning.Result:All the appeals of the assessee were allowed.