TaxTMI 
TaxTMI 
2014 (6) TMI 262
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.... Indian Made Foreign Liquor (for short 'IMFL') in the brand name of UB Products at Kumbalgodu. It has filed income-tax returns for the assessment year 1999-2000 on 31-12-1999 declaring a net loss from business of Rs.45,579/-. The return was processed and taken up for scrutiny after issuing notice under Section 143(2) of the Act. The authorized representative of the assessee appeared and produced necessary documents inter alia contending that the company has discontinued the manufacturing business from the financial year 1994-95 and as such, losses claimed on account of administration expenses were not allowed to be carried forward. No business operations in the nature of distillery are undertaken from that year. 3. While assessing the returns of M/s. Mc Dowell and Co. Ltd., it was noticed that M/s.Mc Dowell had claimed a revenue expenditure of Rs.5.31 crores on account of lease foreclosure payment made to the assessee. The assessee has not declared the said transaction resulting in gain of Rs.5.31 crores in its return of income filed. A notice under Section 142(1) of the Act was issued on 11-2-2002 calling for necessary particulars regarding receipt of the said amount. In ....
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....st Appellate Authority preferred an appeal before the Appellate Tribunal contending that the order passed by the First Appellate Authority declaring that a sum of Rs.5.31 crores was not a managerial remuneration is contrary to law. The assessee even though received Rs.5.31 crores, has not disclosed the same in the returns. The finding recorded by the First Appellate Authority that the compensation has been given for loss of source of income and the said compensation amount cannot be brought to tax even under the capital gain is erroneous in law. The Appellate Tribunal after considering the matter in detail relying upon the various judgments of the Hon'ble Supreme Court dismissed the appeal by its order dated 31-5-2007 holding that the amount that is received as compensation towards termination of lease and noncompetition fee would be capital in nature. The Revenue being aggrieved by the said order, preferred this appeal. 6. This appeal was admitted to consider the following substantial questions of law: (i) Whether the Tribunal was correct in holding that the amount of Rs.5.31 crores received by the assessee from M/s. Mc Dowell as a result of arbitration aw....
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....hority as well as the Appellate Tribunal contending that Mc Dowell & Co. was running a business of distillery in the manufacture of IMFL of various brands taking the land, building and distillery on lease from M/s.Mysore Wine Products Limited. However, the Mc Dowell company could not run the distillery due to labour problem and was suffering huge loss. Accordingly, the said distillery was leased in favour of the assesseecompany in the year 1986. From the year 1986, the assessee was running the distillery on the lease agreement entered into with Mc Dowell & Co. and solved the labour problems by installing new machineries thereby improved the performance of the distillery and started earning income. At that time, the UB group abruptly terminated the lease as per the memorandum of agreement entered into on 25-3-1993. Accordingly, the company was handed over as a running concern to Mc Dowell and Co. The said company agreed to pay the reasonable compensation as consideration for loss of source of income to the assessee-company and the assessee-company was prevent from using the knowhow for manufacturing of IMFL. To avoid competition from the assessee, as per the award passed by the sole....
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....well & Co. and to receive reasonable compensation. In view of the dispute regarding the quantum of compensation, the matter was referred to the sole Arbitrator and the Arbitrator passed an award fixing the quantum of compensation and other consideration at Rs.5.31 crores. The assessee contended that the said amount was paid in order to prevent the assessee from carrying on similar business using the knowhow possessed by the assesseecompany. In order to prevent competition in the business, the amount was paid and it is a capital in nature and not liable to tax. However, the Assessing Officer noticed that receipt of the amount has not been disclosed by the assessee in their declaration. The Assessing Authority held that the amount received is a revenue receipt and the same is liable to tax. Being aggrieved by the assessment order declaring the said amount as a revenue receipt, the assessee preferred an appeal before the first Appellate Authority. The First Appellate Authority after examining the matter in detail held that the compensation received towards the loss of source of income and also towards non-competition fee by way of an award passed by the sole Arbitrator and the said am....