AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2015 (10) TMI 2473
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....he return of income. 2. On the facts and in the ci rcumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in holding that the disallowance under section 14A of the Act be made at the rate of 2% of the dividend income earned over and above the amount of Rs. 20,39,893 disallowed suo moto by the appellant in the return of income. 3. On the facts and in the ci rcumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in directing the Assessing Officer to re-compute the value of closing inventory in accordance with the provisions of section 145A of the Act. Grounds of Revenue's Appeal:- 1. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in restricting the disallowance of RsJ,00,44,000/- made u/s.14A of the Act r .w. Rule 8D to Rs. 18,58,789/- wi thout appreciat ing that in the case of M/s. Godrej and Boyce Manufacturing Co. Ltd. vs DCIT (328 ITR 81) (supra) , thei r Lordships had upheld the content ions of the Union of India that Rule 8D i s reasonable in its nature." 2. "On the facts and in the ci rcumstances of the case and in law, the Ld. CIT(A) erred in restricting the disallowance of Rs. 1....
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....mpany, and accordingly the Revenue as well as the assessee company are in appeal before us. 4. The first substantive dispute in the cross-appeals relates to the taxability of profit earned by the assessee company on the sale of its business of trading and manufacture of Selective Wheat herbicide containing the active ingredient known as Sulfosulfuron under the trademark LEADER (hereinafter referred to us 'Leader Business' to Sumitomo Chemical India Private Limited (hereinafter referred to as 'Sumitomo') vide a Business Transfer Agreement dated 31/08/2006 for a total consideration of Rs. 30,13,65,096/-. The Business Transfer Agreement envisaged itemised break-up of the capital assets transferred, and in the return of income filed, assessee treated the gain on sale of 'Leader business' as under:- Particulars Cost of Acquisition (Rs.) Sale Consideration (Rs.) Profit (Rs.) (i) Non-compete Fees - 2,00,00,000 2,00,00,000 (ii) Technical Know- 1,06,07,280 4,27,30,755 3,21,23,475 How (iii) Trade mark and Goodwill 1,06,07,280 4,27,30,755 3,21,23,475 (iv) Distribution Network - 3,01,66,336 3,0....
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....g not to engage in or carry on any business which could compete directly or indirectly with the herbicide business carried on by the buyer, and since such restrictions was for a period of ten years, the consideration was rightly offered to tax under the head capital gains as a long term capital gain. In support, reliance was placed on the following decisions:- (i) Lyka Labs Ltd., 116 ITD 457 (Mum). (ii) ACIT vs. Dr. B.V.Raju (2012), 14 ITR (Trib) 387 (Hyd) (iii) ACIT vs. M/s. Track Chemicals Pvt. Ltd.,ITA No.4131/Mum/2008& Others order dated 30/12/2011. (iv) Delhi Bench decision in the case of Mediworld Publications P. Ltd., ITA No.4086/Del/09 dated 2/07/2010. 7. On the otherhand, the Ld. Departmental Representative has defended the action of the Assessing Officer in treating the noncompete fee as business income on account of application of section 28(va) of the Act. 8. On the aspect of taxability of non-compete fee, we have considered the rival submissions. As per the Business Transfer Agreement with 'Sumitomo', the entire 'Leader Business' has been transferred lock, stock and barrel, which inter-alia, contained a covenant to the effect that assessee-company would not....
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....to cases where sum is received on account of "transfer of the right to manufacture,.......... or right to carry on any business.....", which is taxable under the head capital gains. In the context of the controversy before us, it has to be understood that, given the phraseology of section 28(va) read with proviso (i) thereof, non-compete fee paid to the transferor for giving up the right to carry on business is to be regarded as capital gain, in contrast to a situation where it is paid for 'not carrying out any activity in relation to business, then it is to be taxed as business income. The subtle difference has also been explained by the Special Bench of the Tribunal in the case of Late Dr.B.V. Raju (supra), wherein the relevant discussions is as under:- "If a payment is in the nature of non-compete fee received by the transferor when he sells his business and agrees not to carry on the business which he transfers then that would fall for consideration under (category (b) referred to earlier) section 55(2)(a) "right to carry on business" If the non-compete fee is paid to persons associated with the transferor then the same would fall for consideration only under section 28(va)(a)....
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....tion 28(va) of the Act. 9. The next aspect of the dispute is as to whether such capital gain is a long term capital gain or short term capital gain. As per section 2(29A) of the Act, long term capital asset means a capital asset which is not a 'short term capital asset. Section 2(42A) of the Act further defines 'short term capital asset as a capital asset held for not more than 36 months immediately preceding the date of transfer. Therefore, the incidence of tax on transfer of a capital asset depends on the period for which the capital asset was held prior to its transfer. While holding that non-compete fee was taxable as capital gain, the CIT(A) further held that the right of non-compete came into existence at the time of divesture of the Leader business and therefore, the period of holding being less than 36 months, the consideration received would be taxable as short term capital gains. The contention of the assessee before us is that since the consideration has been received for transfer of business alongwith right to not carry on business for a period of 10 years, being a fairly long period, the consideration for non-compete fees is liable to be treated as long term capital g....
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.... or not. Thirdly, as per the Assessing Officer, since the assessee company had treated the gain on sale of two intangible assets, namely, Technical know-how and Trademarks as short term capital gain, then the gain on transfer of the impugned intangible assets should also be taxed as short term capital gain. 11.1 The CIT(A) has considered each of the objections raised by the Assessing Officer and upheld the stand of the assessee company that the gain on the sale of the aforesaid assets is to be taxed as long term capital gains. On the issue of the applicability of section 50 of the Act, the conclusion of the CIT(A) is as under:- "The crucial words in the said section are that depreciation should have been allowed under the provisions of the Act in order that section 50 comes into play. Now, the AO is of the view that by virtue of Explanation -5, to section 32, even if the appellant has not claimed depreciation the same is deemed to have been allowed . The argument of the AO suffers from the following anomalies. First, Explanation -5 is a legal fiction incorporated in the computation of business income and section 50 is a legal fiction for the purpose of computing capital gains. It....
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....rights, Goodwill etc. Only in respect of Registration and Permits, the assessee company had submitted that the cost incurred for obtaining registration and permits were claimed u/s 37(1) of the Act, since the expenses were not incurred for the purpose of appreciating he capital assets but were incurred for the purpose of producing profit in the conduct of business and were attributable to business operations. The expenditure incurred by the assessee-company on a year to year basis was only for renewal of registrations and permits. Since these assets were not acquired for any consideration, but were self-generated having NIL cost, the question of claiming depreciation under section 32 and applying Explanation 5 to section 32 of the Act and offering resultant gain as taxable under section 50 would not arise. 11.5 On each of the aforesaid assets, it has been sought to be justified that the gain was a long term capital gain, on facts also. Regarding Distribution Network it has been explained that the sales of 'Leader' products were being made by the assessee-company through a dealer Distribution Network. The assessee company had entered into contracts/ arrangements with several distri....
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....93/- suo-motto disallowed by the assesseecompany. The Revenue has challenged the part-relief allowed by the CIT(A), whereas assessee-company has challenged the sustenance of disallowance over and above the amount suo-motto disallowed. 14. With respect to the interest expenditure, the explanation of the assessee-company has been that no borrowings were made during the year under consideration, and there was no interest expenditure which was directly relatable to the earning of exempt income. In this context, the Learned Representative for the assessee pointed out that the entire interest expenditure of Rs. 24.22 lacs debited in the Profit & Loss Account was paid in relation to the Security Deposits received from the Distributors. The aforesaid factual assertions of the assessee-company have been accepted by the CIT(A) and accordingly the disallowance of Rs. 9,36,000/- out of interest expenditure has been deleted. 15. Before us, the Ld. Departmental Representative has not controverted the factual findings of the CIT(A). Rather, we find that the findings of the CIT(A) are fully borne out of the material on record. The balance sheet of the assessee- company reveals that the aggregate....
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....red the rival stands on this aspect, at the threshold we are satisfied that the Assessing Officer has not complied with the jurisdictional prescription of section 14A(2) of the Act in as much as there is no objective satisfaction recorded by the Assessing Officer that the claim of the assessee made in the return of income was incorrect. Notably, in the present case assessee had suo-moto disallowed certain expenditure under section 14A of the Act and the Assessing Officer is empowered to disagree with it only after he was "not satisfied with the correctness of the claim......." made by the assessee, having regard to the accounts of the assessee. Thus, in the absence of the recording of such satisfaction the disallowance over and above Rs. 20,39,893/- made out of administrative expenses is untenable and is hereby directed to be deleted. Apart therefrom we also find that even otherwise the disallowance estimated by the assessee at Rs. 20,39,893/- is reasonable considering that the same was even more than the estimation of 2% of dividend income canvassed by the CIT(A). In this manner, we hereby set aside the order of CIT(A) and direct the Assessing Officer to restrict the disallowance ....