TaxTMI 
TaxTMI 
2006 (2) TMI 218
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....il, 1997 i.e. during the year under consideration, the assessee entered into an agreement with GSL whereby the assessee agreed to transfer its entire shareholding in favour of DCMSC and their associates. The agreement, inter alia, provided that the assessee will not, for a period of five years, directly or indirectly promote or set up sugar business/factory or purchase/invest in sugar business/factory within a radius of 100 k.m. from the factory of GSL. In consideration of this undertaking, GSL paid to the assessee a sum of Rs. 42,50,000 as non-compete fees. The assessee claimed this as a capital receipt not chargeable to tax. The AO referred to the agreement wherein the assessee was described as having adequate technical and managerial expertise in promoting and setting up sugar factory. According to the AO this was completely divorced from reality. According to him, there was no evidence to show that the assessee possessed either all or any of the four essentials of entrepreneurship viz. land, labour, capital and organization. He also observed that the transaction was not at arm's length insofar as that GSL and Hind Industrial Resources Ltd. (HIR) were companies of the same g....
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....ave carefully considered the rival contentions and the material on record. Since the learned Departmental Representative has relied on the judgment of the Supreme Court, we shall first deal with the same. In that case, amongst various businesses and agencies that the assessee had, it had a sole agency of explosives manufactured by Imperial Chemical Industries (Export) Ltd., Scotland. Later on, the principal company desired to set up its own organization and intimated the assessee that its agency may be cancelled after two or three years. The agency was subsequently terminated by way of a letter for which the assessee was paid certain compensation by way of commission on sales. The letter also mentioned that as a condition for paying the compensation, the assessee would give a formal undertaking to refrain from selling or accepting any agency for explosives or other commodities competitive with those covered by the agency agreement. The assessee claimed this as a capital receipt not liable to tax. The Supreme Court took note of the fact that the formal undertaking required from the assessee to refrain from selling or accepting any agency for explosives was never given by the assesse....
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....rrying on a competitive business would be a capital receipt. In any case, the decision relied upon by the learned Departmental Representative does not help the Department but in fact, it helps the assessee, though the facts in that case are quite different. 7. In the present case, the main reason for treating the compensation as revenue receipts by the Department is that there was no potential threat to GSL from the assessee. This is contrary to the facts on record. The main objects for which the assessee-company was incorporated as averred by the AO himself in his order are to carryon the business of financiers, trading, hire charges, leasing, moneylending etc. Here, the object to act as financiers has to be construed in a wide term. If the term financiers has to be construed in a narrow sense, then, there was no need to mention the object of moneylending. Moneylending is certainly a narrower term than, financiers. Moneylending would constitute merely giving money as a loan with or without interest. On the other hand, financier would be including not only moneylending but would also include an activity like financing a project. Financing a project may be in any of the modes lik....
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.... the fact of classification in the balance sheet and further submitted that this was a one-time transaction so far as these shares were concerned. It was also pointed out that the shares were held for a long time and were not shown as stock-in-trade. The learned counsel relied on several decisions in support of his contentions. 10. The learned Departmental Representative, quoting from some judgment (citation not mentioned), to contend that law cannot follow the changing footprints of accountancy but accountancy had to follow the law. It was contended that the primary object of the assessee was to deal in shares and moreover, there was no bifurcation of shares between those held as investments and those held as stock-in-trade. Thus, he strongly supported the orders of the authorities below. 11. We have duly considered the rival contentions and the material on record. At the outset, it may be mentioned that there can be no dispute with regard to the two main arguments of the learned Departmental Representative that law cannot follow the changing footprints of accountancy and that the entries in the books are not determinative of the issue. In questions like the one before us, t....