1998 (6) TMI 105 - AT - Income Tax

Intangible rights taxed as capital gains, interest partially retained, assessee not entitled to carry forward business losses.

The Tribunal held that the intangible rights acquired were taxable as capital gains, with the cost of acquisition being the cost of shares. It determined ... Capital Gains, Hotel, Goodwill, Cost Of Acquisition, Business Loss, Set Off Issues Involved:1. Levy of short-term capital gains.2. Taxability of the receipt under the arbitration award.3. Continuation of business operations and entitlement to carry forward business losses and depreciation.4. Levy of interest under section 217.5. Taxability of interest income.6. Correct computation of total income and carried forward losses.Detailed Analysis:1. Levy of Short-term Capital Gains:The first issue relates to the deletion of the levy of short-term capital gains of Rs. 11 lakhs by the CIT(A). The facts reveal that the assessee-company and an associate held shares in M/s Fonseca (P.) Ltd., which ran a hotel business. A memorandum of agreement was reached with IHCL to purchase the shares and business undertaking of M/s Fonseca (P.) Ltd. However, disputes arose, leading to arbitration, which resulted in IHCL being directed to pay Rs. 25 lakhs to the assessee. The Assessing Officer treated the entire payment received by the assessee as short-term capital gains. The CIT(A) held that no transfer of shares occurred and considered the rights transferred as intangible rights or goodwill, applying the Supreme Court's decision in CIT v. B.C Srinivasa Setty to hold that the capital gains were non-taxable due to the absence of cost. The Tribunal agreed with the CIT(A) that no shares were transferred and held that the intangible rights were acquired by purchasing the shares of M/s Fonseca (P.) Ltd., thus taxable as capital gains, with the cost of acquisition being the cost of shares.2. Taxability of the Receipt Under the Arbitration Award:The Tribunal examined whether the receipt under the award was taxable and the year of taxability. It concluded that the intangible rights were transferred in the assessment year 1976-77 when the memorandum of agreement was signed, not in the assessment year 1980-81. Therefore, the capital gains were not taxable in the assessment year 1980-81.3. Continuation of Business Operations and Entitlement to Carry Forward Business Losses and Depreciation:The assessee contended that it continued its business by running a lodging house in Bangalore and a hotel in London. The Tribunal found that the lodging house was run on a limited scale, constituting a business activity, but not equivalent to running a full-fledged hotel. The old business of running a hotel in Calcutta was considered closed, and the new business in Bangalore was separate. Therefore, the assessee was not entitled to carry forward business losses from the earlier years but was entitled to set off unabsorbed depreciation as per the judgments of the Karnataka High Court and the Supreme Court.4. Levy of Interest Under Section 217:The CIT(A) cancelled the levy of interest under section 217 in the reassessment, following the Karnataka High Court's judgment in Charles DSouza v. CIT. The Tribunal directed the Assessing Officer to examine and retain the interest to the extent levied in the original assessment order.5. Taxability of Interest Income:The assessee contended that the entire interest amount of Rs. 94,074 should not be taxed in the relevant assessment year. The CIT(A) held that the interest accrued due to the Bombay High Court's decree approving the award, and the entire interest income arose in the assessment year 1980-81. The Tribunal agreed with this finding.6. Correct Computation of Total Income and Carried Forward Losses:For the assessment year 1979-80, the CIT(A) directed the Assessing Officer to allow the expenses incurred in running the lodging house and to consider the correct figures of total income and carried forward losses. The Tribunal upheld the CIT(A)'s decision to allow the expenses but reversed the order regarding the set-off of carried forward business losses, allowing only the unabsorbed depreciation to be set off.Conclusion:The Departmental appeals were partially allowed to the extent that the assessee was not entitled to set off carried forward business losses but was entitled to set off unabsorbed depreciation. The cross-objection filed by the assessee for the assessment year 1980-81 was dismissed.