2006 (5) TMI 155 - AT - Income Tax

Tribunal rules in favor of assessee: Capital receipt not taxable, interest income non-taxable for assessment year 2000-01

The Tribunal dismissed the Revenue's appeal, affirming that the Rs. 57.84 crores received by the assessee was a capital receipt and not taxable. ... Capital Or Revenue Expenditure Issues Involved:1. Taxability of Rs. 57.84 crores received by the assessee.2. Taxability of interest of Rs. 1,15,06,849 accrued on the escrow account.Issue-wise Detailed Analysis:1. Taxability of Rs. 57.84 crores received by the assessee:The Revenue contended that the sum of Rs. 57.84 crores received by the assessee was taxable, arguing that it was a revenue receipt under various sections of the Income Tax Act, including sections 28(ii), 17(3)(i), and 10(3). The Revenue also argued that the agreement was a colorable device designed to evade tax.The assessee, a managing director of Chennai Bottling Company Ltd., received the sum as part of a non-compete, non-disclosure, and non-sharing of know-how agreement with Hindustan Coca Cola Bottling South West (P) Ltd. The assessee claimed this amount as a capital receipt, exempt from taxation.The CIT(A) reversed the AO's decision, holding that the amount was a capital receipt and not taxable. The CIT(A) referenced various legal precedents, including decisions from the Hon'ble Gujarat High Court and the Supreme Court, to support the view that non-compete fees received before the amendment in the Finance Act, 2002, were not taxable.The Tribunal upheld the CIT(A)'s decision, agreeing that the payment did not fall under section 28(ii) and noting that section 28(va), which would make such payments taxable, was only effective from 1st April 2003 and not retrospective. The Tribunal also dismissed the Revenue's argument that the agreement was a colorable device, citing a similar case decided by the Delhi Tribunal (Dinesh Chand & Ors. vs. Jt. CIT), which held that non-compete fees received before the amendment were capital receipts and not taxable.2. Taxability of interest of Rs. 1,15,06,849 accrued on the escrow account:The AO had included the interest accrued on the escrow account as taxable income for the assessment year 2000-01. The assessee argued that the interest income should be taxed on a receipt basis, as the right to the interest had not accrued until the closing date of the business purchase agreement, which was extended to 30th April 2000.The CIT(A) agreed with the assessee, holding that the interest income did not accrue in the assessment year 2000-01 as the enforceable right to the interest arose only after the closing date. The CIT(A) also noted that the interest income was declared and accepted by the Revenue in the subsequent assessment year.The Tribunal upheld the CIT(A)'s decision, agreeing that the interest income could not be taxed in the assessment year 2000-01 as the right to the interest had not accrued. The Tribunal also noted that the Revenue had accepted the TDS certificate for the subsequent assessment year, further supporting the assessee's claim.Conclusion:The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision that the sum of Rs. 57.84 crores was a capital receipt and not taxable, and that the interest income of Rs. 1,15,06,849 accrued on the escrow account was not taxable in the assessment year 2000-01. The assessee's cross-objection, being supportive of the CIT(A)'s order, was dismissed as infructuous.