TaxTMI 
TaxTMI 
2006 (1) TMI 452
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.... not closed; 4.Taking the wrong plea that section 40A(7) is applicable to the assessee and the condition were not fulfilled; 5.Disallowing the amount of compensation of Rs. 16,29,343 by treating the compensation was paid after the closer of the business; and 6.Confirming the levy of interest under sections 234B and 234C which was not proper and for which no specific speaking order was passed by the Assessing Officer, as has been held by various High Courts as well as Supreme Court in the case of CIT v. Ranchi Club Ltd. [2001] 247 ITR 209. 2. Ground Nos. 1 to 3 2.1.1 The appellant is an Individual having Salary income from Eastern Air Products Pvt. Ltd. in which he is the Chairman and Managing Director. The Company was incorporated in 1964 and put up a Factory at Bhopal and started production in 1965. 2.1.2 Over the years, besides Bhopal he was instrumental in setting up several Gas factories at Jabalpur (1974), Indore (1979) and Dhar (1988). These factories were put up for Jabalpur Oxygen Company (JOC), Northern Air Products Pvt. Ltd. (NAP), Dhar Oxygen Pvt. Ltd. (DOPL). In J.O.C. he was Proprietor, in N.A.P. - Managing Director, in D.O.P.L. - Chairman & Managing ....
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....n down value of various assets in a summarized manner so that it can be seen at a glance. Rs. in lakhs Sales Value Market Value W.D. Value (as per I. Tax) Eastern Air Products Pvt. Ltd. Building (with Furniture & Fitting and Office Equipment) 30.00 22.02 15.82 Machinery 110.00 61.00 48.50 Goodwill 154.00 - - 294.00 83.02 64.32 Oxygen Cylinders etc. 250.00 166.00 - Total 544.00 249.02 64.32 Northern Air Products Pvt. Ltd. Building 13.00 11.13 2.59 Machinery 17.00 11.00 5.02 Goodwill 45.00 - - 75.00 22.13 7.61 Oxygen Cylinders etc. 52.00 33.80 - Total 127.00 55.93 7.61 Jabalpur Oxygen Company Building 20.00 12.80 8.85 Machinery 22.00 10.00 1.13 Goodwill 50.00 - - 92.00 22.80 9.98 Oxygen Cylinders etc. 21.00 13.65 - Total 113.00 36.45 9.98 Dhar Oxygen Pvt. Ltd. Land 15.00 ....
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....imself and developed good rapport both with the customers as well as Government Departments, all over Central India. 2.2.5 The Appellant supported the Company at all times by providing : (a)Efficient Technical services. (b)Establishment of good dealer network in the State of Madhya Pradesh, in the neighbouring States and the Central Government Departments. (c)Maintenance of personal rapport with dealers and big customers. (d)Maintenance of good relationship with employees and labourers in the Factory. (e)Establishment of efficient transportation network. (f)Establishment of good marketing system and advertisement. (g)Efficient financial management and good relationship with the financial institutions and banks. 2.2.6 In 2000-01 (Assessment year 2001-02) except for Bhopal Cryogenics Pvt. Ltd., Eastern Electro Chemical Industries and Eastern Gases, remain- ing gas business were sold to Inox Air Products Ltd. a World Renowned Multi-National Company vide agreements dated 10-7-2000 (3), 21-7-2000 (2) and 17-8-2000 (2). Separate Sale Agreements for each Concern were drawn up and entered into with each of the concerned entities. (Copy of agreements on Page Nos. ....
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....any capacity whatsoever from carrying on any business in competition with the business being taken over by Inox Air Products Ltd. and carried on by them. 2.2.10 In lieu of the above restriction and other conditions mentioned in the Agreement, Non-compete fee was paid to him. This non-compete fee having been received by him on account of restriction imposed on him i.e., for agreeing not to compete with Inox Air Products Ltd. has been claimed as "Capital Receipts" not liable to tax on the basis of various decisions of Income-tax Tribunals, High Court and Supreme Court. 2.2.11 Non-compete fee was a capital receipt and was not liable to be taxed. This was the position till assessment year 2003-04. But with a view to make such payments taxable, the Income-tax Act was amended w.e.f. assessment year 2003-04 for specific purpose of making such payments taxable. This being the position, it is obvious that any such payments received prior to 31-3-2002 are not taxable. Since assessee received non-compete fee before this date i.e., during assessment year 2001-02, it obviously is not taxable. 2.2.12 The above case was selected for scrutiny and the Assessing Officer had asked for variou....
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....t & Co. (P.) Ltd. [1964] 60 ITR 11 (SC) (iv) Kettlewell Bullen & Co. Ltd. v. CIT [1964] 53 ITR 261 (SC) (v) Gillanders Arbuthnot & Co. Ltd. v. CIT [1964] 53 ITR 283 (SC) (vi) CIT v. Saraswathi Publicities [1981] 132 ITR 207 (Mad.) (vii) CIT v. Ambadi Enterprises Ltd. [2004] 267 ITR 702 (Mad.) (viii) CIT v. G.D. Naidu [1987] 165 ITR 63 (Mad.) (ix) P.L. Chemical Ltd. v. Asstt. CIT [1972] 86 ITR 46 (Mad.) (x) R.K. Swamy v. Asstt. CIT [1984] 88 ITD 185 (Chennai) (xi) ITO v. Smt. Sarojben v. Gandhi [2004] 83 TTJ (Ahd.) 716 (xii) Saroj Kumar Poddar v. Jt. CIT [2001] 77 ITD 326 (Cal.) (xiii) Asstt. CIT v. A.S. Wardekar [2001] 77 ITD 405 (Cal.) (xiv) Asstt. CIT v. Ashit M. Patel [2005] 96 TTJ (Mum.) 439 (xv) N. Sandeep Reddy v. Asstt. CIT [2005] 96 TTJ (Hyd.) 315 (xvi) CIT v. Podar Cement (P.) Ltd. [1997] 226 ITR 625 (SC) (xvii) CIT v. Union Saw Mills [1993] 203 ITR 581 (Ker.) 2.3.1 The Ld. DR, on the other hand, places reliance on the orders of the lower authorities and on the decisions followed by them. He submits that the Assessing Officer has rightly held that when the assessee had already sold the plant, there was no question of....
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....y) agreed to be paid as compensation for non-compete by INOXAP to the Covenantors in the manner as specified in Schedule 4 hereunder written each of the Covenantors hereby irrecoverably agree and undertake in favour of INOXAP, that from the 1st September, 2000, when INOXAP is scheduled to commence its Industrial and Medical gases manufacturing activities in the State of Madhya Pradesh or such other date on which INOXAP commences its Industrial and Medical gas manufacturing activities in the State of Madhya Pradesh and for a period of five years thereafter calculable from the date on which the last of the transfer of business and/or asset in terms of the said agreements is completed or in the event of completion not achieved by 31st December, 2000 and INOXAP terminating the Agreements after giving 90 days notice for a period of five years from the date of such termination of the Agreements : (ii)Each of the Covenantors shall discontinue their respective Industrial and Medical gases manufacturing and selling activities in the State of Madhya Pradesh with effect from 1st September, 2000 or such other date on which INOXAP commences its Industrial and Medical gas manufacturing activi....
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....ny by adopting the device to receive it directly from M/s. Inox Air Products Ltd. In this connection, it would be pertinent to consider the definition given under section 2(22)(a) - "Dividend includes - (a) any distribution by a company of accumulated profits, whether capitalised or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets of the Company." It appears that the Assessing Officer has treated this amount as deemed dividend as per the definition under this section. However, it is relating to a company who distributes accumulated profit or it would be taken as release of all or any part of the asset of the company. In the present case before us the amount has not been received by the assessee from a company in which he was shareholder or director. Rather the amount was directly received from another company, who had purchased the total business of the assessee and the company has given this amount by way of non-compete fees, which is definitely a separate amount and cannot be treated as dividend/deemed dividend. Likewise the income defined under section 2(24)(iv ) includes the value of any benefit or perquisite, whe....
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....re not got valued before sale is irrelevant in the context of deciding the matter regarding the taxability of the sum of Rs. 319 lakhs. The contention of the assessee in this regard remained that no valuation of assets was done before sale either by the seller by the purchaser. A query in this regard was also raised by the Assessing Officer by issuing summons under section 131 of the Act to Inox Air Products Ltd., who has confirmed the same. About the observation of the Assessing Officer that some of the undertaking whose names have been included in the Schedule-II, forming part of the non-compete agreement between Taneja and Inox are partnership firm or sole proprietary concerns of Taneja Group or parties to non-compete agreement but have not transferred any of the assets to Inox, the reply of the assessee remained that this comment is based on wrong understanding of the practices relating to arrangements concerning non-competition. The arrangement agreed upon can certainly envisage that no competition would be resorted to even by the concerns undertakings left with the recipients after sale of some of his units. We find substance in this contention of the assessee. The observatio....
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....ucts Ltd., have purchased assets of various companies i.e., Building, Plant & Machinery and Cylinders etc. the liabilities relating to all these concerns are of the companies themselves. The details are as under : 1999-00 (Rs.) 2000-01 (Rs.) Eastern Air Products Pvt. Ltd. 5,15,67,598 4,21,44,730 Northern Air Products Pvt. Ltd. 41,91,358 39,72,389 Dhar Oxygen Company Pvt. Ltd. 59,48,454 53,64,162 Jabalpur Oxygen Co. 1,20,75,558 1,06,41,161 Central India Gases Pvt. Ltd. 34,07,840 - From the above it is evident that these companies have to clear of all the above liabilities. Restrictive covenants not relevant for the concerns. As restrictive covenant applies only to persons/directors who are running the concerns or business. The technical expertise in a business concern is the persons/directors which is the moving force. The land, plant and machinery etc. in a concern are only the tools for running of a business concern. As such no compete was payable to the appellant only and not to the concerns. (iii)No obligation was impliedly cast upon any member of Taneja Group to pay the said non-compete fee to meet the liabil....
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.... The Appellant is not concerned with other competitors in M.P. and the reasons taken by learned CIT (Appeals) is irrelevant. (ix)The age, deteriorating health of the appellant, poor management behind loss making units apparently compelled the appellant and the members to carve out a profit/commission for themselves by entrusting the assets, cylinders and pending contracts to buyer who in lieu agreed to pay Rs. 5.30 crores to the concerns being party to transfer of assets and Rs. 3.67 crores to Taneja Group members in proportion to their request and for the direct gain in the deal. As the buyer was claiming the payments as revenue expenditure, it mattered little when Taneja Group wanted part of consideration in the disguise of non-compete fee. Comments: The above reason is based purely on presumption, assumption, surmises and having no basis. The buyers have agreed to pay Rs. 8.90 crores for assets, cylinders and goodwill and not Rs. 5.30 crores as stated by learned CIT (Appeals). The market value of these assets were only Rs. 4.11 crores and the amount received by these concerns were Rs. 7.87 crores by way of goodwill. The statement of the learned CIT (Appeals) about the....
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....of the agency terminated, or for loss of goodwill, such receipt was held to be in the nature of a capital receipt. In the case of Gillanders Arbuthnot & Co. Ltd. (supra), the Hon'ble Supreme Court was pleased to hold that there is no immutable principle that compensation received on cancellation of an agency must always be regarded as capital. If by cancellation of an agency the trading structure of the assessee is impaired, the payment should be treated as a capital receipt. In the case of Saraswathi Publicities (supra), the Hon'ble Madras High Court has held that as the receipt was referable to the restrictive covenant, it was a capital receipt not liable to Income-tax. The S.L.P. preferred against this judgment has been dismissed by the Hon'ble Supreme Court reported in 142 ITR (St) 6. In the case of Ambadi Enterprises Ltd. (supra), the Hon'ble Madras High Court was pleased to hold that one test for ascertaining as to whether what was received was a capital receipt or a revenue to receipt is to find out whether the assessee had snapped his link with the profit making apparatus, that was transferred. In this case, in pursuance of termination agreement, the source of income is tot....
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....be subjected to income-tax. 2.4.7 The Ld. DR has referred the decisions relied on by the Ld. Lower authorities. We have gone through these and find that the facts therein are distinguishable from the facts of the present case under consideration, hence these are not helpful to the revenue. In the case of K. Ramasamy v. CIT [2003] 261 ITR 358 (Mad.), a firm was constituted by 4 persons these persons promoted a corporate entity. The company leased the hotel business run by the firm. An amount of Rs. 20 lakhs was paid to these persons calling it as compensation for not conducting similar business. The Hon'ble Court held that the persons concerned with the firm and the company are the same. The genuineness of the transaction was not accepted the Hon'ble Court treated the amount paid as revenue receipts. This is not the position in the present case before us. The assessee is in no way connected with the buyer company (as the brothers were) and also because the assessee cannot do gas business in any manner, whatsoever, while the brothers could and were doing there hotel business through their company. In the case of KCP Ltd. v. CIT [2000] 245 ITR 421 (SC), the matter of accrual ....
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....initially received by the assessees were its trading liabilities and, therefore, the amount in question is not liable to be assessed as the income of the assessee. This judgment is also not applicable in the present case having different facts. The decision in the case of P.H. Divecha v. CIT [1963] 48 ITR 222 (SC), rather supports the case of assessee. In that case a firm which was conducting business in electrical goods entered into an agreement with a company under which the firm was given exclusive rights to purchase and sell electric lamps manufactured by the company. Upon termination of such agreement, the company paid compensation. The court observed that the agreement secured to the firm an advantage of an enduring nature and was not an ordinary trading agreement and thus the receipt is capital in nature. In the case of CIT v. Kolhia Hiragdgarh Co. Ltd. [1949] 17 ITR 545 (Bom.), it was held that in all taxable matter greater emphasis must be given to the business aspects of the transactions rather than to its purely legal and technical aspects. It is also not helpful to the revenue in the present case having different facts. In the case of Delhi Stock Exchange v. CIT [1961] ....
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....iscussed in view of the arguments advanced by the parties as well as the terms of the agreement entered into between the assessee and the other side suggest that the entire purpose behind the payment of amount termed as no compete fees by them was to keep out the assessee from the business in which the assessee equipped with around 45 years of experience and high goodwill had been enjoying monopoly. The amount i.e. no compete fees was paid by the buyer of the unit to secure their monopoly in the business for the period for which the agreement was entered into that the assessee will not do the same business in any manner whatsoever. Thus, it was in the interest of business of the other side to enter into such an agreement with the condition and for the same the amount in question has been paid as no compete fees. Till the amendment in sections 58 and 28 read with section 2 with effect from 1-4-2003 i.e. assessment year 2003-04 this practice of payment of non-compete fees was very much recognized. The assessment year under consideration before us is 2001-02. Hence, during this assessment year this practice of payment of non-compete fees was very much allowed within the then prevailin....
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....f Rs. 1,43,731 was outstanding but not paid till the filing of the return of income. He, therefore, disallowed the same and added to the assessee's income. The ld. CIT(A) has upheld the assessment order. 3.2.1 In support of the grounds the Ld. AR submits that it is the statutory liability according to the labour laws and amount has to be paid to the staff members who are working for the assessee for the last so many years. The gratuity amount has actually been paid during the above year and has been calculated on the basis of the rules prescribed under the Payment of Gratuity Act. He refers to the judgment of CIT v. Union Saw Mills [1993] 203 ITR 581 (Ker.) in which it has been held that the liability accrued to the assessee and closure of the business simultaneously resulted ere just two events that happened at the same time. That would not make any difference. The assessee was entitled to deduction of the gratuity liability. He submits that there was an agreement between the appellant and its workers on 11th November, 2000 at Jabalpur, according to which all workers will retire voluntarily on 15th November, 2000 and they will be paid gratuity according to the rules prevalent a....
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....he case of assessee the payment were made by the Appellant for purposes of business expediency. In the cases of Crompton Engg. Co. Ltd. v. CIT [1992] 193 ITR 483 (Mad.) and CIT v. Gaekwar Mills Ltd. [1993] 202 ITR 272 (Guj.) the judgments are relating to provisions of section 40A(7) of the Act are applicable whereas in the case of present assessee the gratuity payment was made during the assessment year and hence there was no question of approved gratuity fund. 3.3.1 The ld. DR on the other hand justifies the orders of the lower authorities and places reliance on the decisions followed by them. 3.4.1 We have considered the arguments advanced by the parties and have gone through the orders of the lower authorities as well as the judgments relied by them. It appears from the records that the payment of gratuity amount were made on the following dates : 16-12-2000 6,75,023 31-3-2001 25,390 29-9-2001 32,232 26-10-2001 18,032 Total 7,50,947 The facts of the case of the assessee are thus different from....
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.... in computing the income of the assessee of the previous year in which the sum is so paid. We thus while setting aside the orders of the lower authorities direct the Assessing Officer to verify the claim of the assessee as per Explanation to section 40A(7)(b) and allow the claimed deduction on those payments of gratuity which have been made during the accounting year relevant to the assessment year under consideration. The ground Nos. 3 and 4 are thus, partly allowed. 4.1.1 Ground No. 5 - The claim of deduction of Rs. 16,29,343 towards payment of compensation to the workers against their retirement from the job has been denied by the lower authorities on the basis that the concern was closed after selling the entire business to the buyer. 4.2.1 In support of this ground, the Ld. AR submits that it was agreed upon that all the workers opting for voluntary retirement will be paid compensation of 40 days for each completed year of service as on 15th November, 2000. It was also agreed that all the workers who have signed this agreement will be covered by the scheme provided they opted for voluntary retirement in writing. The Officers and senior staff of the company were not cover....
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....unt in respect of retrenchment compensation and other documents that the amount was not actually paid. In the case of T. Satyanarayana Murty v. ITO [1986] 16 ITD 420 (Hyd.) the payment of retrenchment compensation was made after the closure of the business.These judgments relied on by the lower authorities having distinguishable facts are not applicable to the present case as there was closure of business nor the company was wound up due to some problem. The ld. AR refers the decision in the case of Ambala Cantt. Electric Supply Corpn. Ltd. v. CIT [1982] 133 ITR 343 (Punj. & Har.) which supports the case of assessee, as in the present case as well the retrenchment compensation on transfer of the undertaking was there during the continuance of business but before actual transfer. 4.2.2 The Ld. DR, on the other hand, justifies the orders of the lower authorities and places reliance on the judgments relied on by them. 4.3.1 The orders of the lower authorities and the material available on record have been perused in view of the aforesaid arguments advanced by the parties and the judgment cited by them have been gone through. We find substance in the submissions of the ld. AR tha....