TaxTMI 
TaxTMI 
2021 (2) TMI 463
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....f the case. 2. Further, the CIT(A), erred in confirming the addition made by the AO to the extent of Rs. 6,00,00,000/- u/s 28(va). 3. The order of CIT(A) is arbitrary, unjust and untenable in law. 4. The addition of Rs. 6,00,00,000/- u/s 28(va) is arbitrary, unjust and bad in law. In this regard, the appellant wishes to submit as under: On Jurisdiction: 1. In this connection it is respectfully submitted Ld.CIT(A) has failed to consider the arguments put forward at the time of hearing and in the written submissions, fairly, judicially on jurisdiction of the issue, the copy of the same is reproduced as below: a. There is no valid reason for again re-opening the same assessment for the second time, as it was evident that all material, they relied upon were already made available to them during the first assessment itself. b. The appellant has submitted more than 30 items of details/documents in the first hearing during the assessment proceedings. We enclose herewith the copy of the notice received from AO and submissions made for the same. c. The submission includes "Notes to Accounts" and "Tax Audit Report". The ....
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.... schedule to notes on accounts- item No. 10 and 8 of separate P&L Accounts of SaiMirra Innopharm Private Limited and SaiMirra pharmaceuticals Private Limited respectively that Capital reserve represents compensation received from one of its major customer towards pre-closure of ten years manufacturing agreement." 3. The above schedule was available with the Assessing Officer when the original assessment was completed. Thus the appellant disclosed fully and truly all the materials relevant to the assessment for the Assessment year 2009-10. After taking into considerations of the above schedule of the Balance Sheet which represents the Capital Accumulation of Rs. 8.75 crores, the AO completed the original assessment u/s 143(3). a. CIT(A) erred in recognizing a capital receipt as "Extra-ordinary item" or "exceptional item" and deciding it as a revenue receipt. "Extraordinary item" or "exceptional items" are those that revenue in nature but not directly resulted due to current year normal operations. Hence, the same should be reported as below line item and will not fonn part of current period profit/loss it will be treated as part of Net Profit. Please refer....
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....information and manufacturing licenses of the products produced for them. As a result our company incurs huge cash losses due to loss of major source of income. 7. It is held in the case of CIT vs Pane Soft Drinks (2018)400 ITR 108(Bom) that "Compensation for breach of contract resulting in loss of source of income f emanating from termination of a business contract is not a capital gain/business income but a non- taxable capital receipt ". It is to be noted that the decision of the Bombay High Court was upheld by the Hon'ble Supreme Court -(2018) 97 taxmann.com 136(SC). 8. In this case, there is a breach of contract giving rise to claim for damages and the compensation was paid on account of failure to honor the commitment which is capital in nature.(10 Years Manufacturing Agreement). 9. This compensation is for extinction of right to sue which is a capital receipt not chargeable to tax. 10. The Ld.CIT(A) has noted that as the appellant has entered into another agreement with Dr.Reddy's Lab, on similar conditions on 20/11/2006 for a period of TWO months after termination of the manufacturing agreement in September 20006.Based on this the CIT(A)A....
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....lar products by the appellant for the period up to 2010, which means for the remaining period of original manufacturing contract. There is no restriction on appellant continuing with the business of manufacturing pharmaceutical products and other related activities. 14. In order to bring in to tax net all compensations (including right to sue), a new section28(ii)(e) introduced w.e.f. AY 20 19-20. The compensation received in this case is chargeable to tax u/s 28(ii)(e) only. However, the same was introduced with effect from AY 2019-20 only and does not apply to the year under consideration. 15. In view of the above submissions, compensation received by the appellant is not taxable u/s 28(va). 16. Further the compensation is only to avoid litigation connected with the agreement, further it is in lieu of cancellation of manufacturing contract which is a revenue generating stream of activity. 17. The assessee received the compensation under agreement for relinquish his right to sue in contract agreement. The property asset was not transferred to the assessee. Hence this transaction is outside the scope u/s 2(47) of IT Act. The fol....
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....sue in contract agreement. Hence, this compensation does not fall under the category of Section 28 (va) (a) i.e., not carrying out any activity in relation to any business or Section 28 (va)(b) i.e., not sharing any know-how, patent, copyright, trade-mark, license, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for services. In the given case, the appellant is only a contract manufacturer of Dr. Reddy 's Laboratories Limited with the inputs given by them viz., their know-how, patent, trademarks, and speculation of pharma products. Thus, the appellant is not owning any know-how, patent and trademarks, Further, the appellant is not restricted to carry out his business being a manufacturer of pharma products. (emphasis supplied). Whereas, Section 28(va) speaks about "not carrying out any activity in relation to any business; or (b) not sharing any know-how, patent, copyright, trade-mark, license, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of g....
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.... introduced with effect from AY 2019-20 and it is applicable prospectively only, hence it does not apply to the year under consideration. 21. For the above reasons and other reasons that may be adduced at the time of hearing, the addition made by the Assessing Officer may kindly be deleted and justice be rendered. 22. The Appellant craves leave to amend, alter or delete any of the above grounds of appeal." 3. The brief facts of the case are that the assessee is a private limited company engaged in the business of manufacturing and marketing of pharmaceutical products, filed its return of income for assessment year 2007-08 on 31.10.2007 declaring loss of Rs. 6,01,45,065/-. The assessment for the impugned assessment year was completed u/s.143(3) of the Income Tax Act, 1961 (hereinafter the 'Act') on 15.12.2009 and determined total loss at Rs. 3,00,43,396/- by inter-alia making addition of Rs. 3.01 crores towards disallowance of expenditure u/s.40(a)(ia) of the Act and disallowing long term capital loss claimed by the assessee of Rs. 4,20,058/-. The case has been subsequently reopened u/s.147 of the Act for the reasons recorded as per which, income chargeable to t....
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....sessment is not on valid ground, because the AO has formed reasonable belief of escapement of income on the basis of return of income filed by the assessee without reference to any 'tangible material' which comes to his possession subsequent to the date of original assessment proceedings, which is evident from the fact that the reasons recorded by the AO clearly states that the AO has formed reasonable belief of escapement of income on the basis of return of income filed for the relevant assessment year. The assessee has also challenged addition made by the AO on merits in light of certain judicial precedents including the decision of Hon'ble Supreme Court in the case of CIT vs. Parle Soft Drinks (Bangalore) P. Ltd., (2018) 400 ITR 108 (Bom) and argued that compensation for breach of contract resulting in loss of source of income is not capital gain / business income, but a non-taxable capital receipt. The assessee further submitted that, in order to bring into tax compensation received for termination of contract, it should be in the nature of non-compete fee for compensating for surrender or non-using of technical know-how which can be brought to tax, but compensation paid for lo....
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....d therefore this constitutes change of opinion on the part of the Assessing Officer. 62. The order u/s 143(3) dated 15.12.2009 has been verified in detail. There is no discussion or reference anywhere in the assessment order about the receipt of Rs. 6 crores towards compensation. The appellant did not submit any proof during the course of assessment proceedings to show that the appellant had submitted complete details on the receipt of compensation to the Assessing Officer. On the other hand, there was enough material to suggest that the appellant had failed to disclose fully and truly all material facts relevant for computing the assessable income. This is evident from the fact that the assessee did not route the receipt of compensation through the profit and loss account and credited the same straightaway to the capital reserve and disclosed it in the balance sheet as capital reserve which was nil as at the beginning of the year. This receipt of Rs. 6 crores is a one-time event and constitutes one sixth of the total revenues disclosed in the financial. The accounting policies also do not throw any light as to the creation of this capital reserve. Under ....
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....huge losses to the tune of Rs. 12 crores during the balance period for the Principal Agreement from April 2006 to April 2010 as it has invested huge amounts in infrastructure, man power and other operational commitment based on the principal agreement assurances and promises made by Dr. Reddys. (e) In Page 4 of the Agreement, it is mentioned as under: "Termination of Principal Agreement: All principal agreements executed between M/s Sai Mirra and Dr. Reddys hereby stand terminated effective from April 1 2006. In Para 4 Sai Mirra and VSR agreed to issue a No Objection Certificate in the agreed format (Annexure III) appointing any other contracting manufacturer other than Sai Mirra or its affiliate or manufacture the same on its own, for manufacture of the products covered under the principal agreement (f) In Page 6 in Para 12 of the Agreement under the head Non-compete, it is mentioned as under: "Sal Mirra and VSR shall not directly or indirectly manufacture finished dosage formulations similar to products using the information till 31.03.2010 or use receptively similar brand names or trademarks to those of Dr. Reddys. Sai Mirra ....
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....referred to earlier. On the contrary, in Page 6 of the Agreement, there is a separate clause which clearly stipulates the terms and conditions for payment of non- compete fee. Therefore, it has to be held that the compensation is in the nature of non compete fee taxable rightly u/s 28(va)(a) as revenue receipt and therefore the addition of the Assessing Officer in accordance with law is confirmed. Therefore, this ground is dismissed." 7. The first issue that came up for our consideration from assessee's appeal is reopening of assessment u/s.147 of the Act. 7.1 The ld.AR for the assessee submitted that reopening of assessment is bad in law and liable to be quashed, because there is no valid reason for reopening of assessment, which is evident from the fact that the AO has formed reasonable belief of escapement of income on the basis of 'Notes to Accounts' and 'Tax audit report' filed by the assessee along with return of income which were very much available at the time of assessment proceedings. The ld.AR further submitted that the formation of belief by the AO is not based on any tangible material which came to his possession subsequent to completion of assessment. Therefore,....
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.... passed u/s.143(3) of the Act on 15.12.2009, we find that there is no discussion of whatsoever in the assessment order regarding the issue of compensation received for termination of contract. Further, the assessee has also failed to file any evidence to prove that it has furnished necessary details about receipt of compensation to the AO. In absence of any evidence to prove that all materials necessary for completion of assessment were placed before the AO, it cannot be said that the AO has considered the issue and formed an opinion on the issue. Unless, the AO has formed an opinion on the issue on the basis of materials furnished by the assessee, then it cannot be said that the assessment has been reopened on mere change of opinion. We, therefore, are of the opinion that there is no merit in the arguments taken by the assessee challenging reopening of assessment. In so far as, various case laws cited by the assessee including the decision of Hon'ble Supreme Court in the case of CIT vs. Kelvinator India Ltd., supra, we find that those case laws are not applicable to facts of present case and hence, are not considered. Hence, we reject the ground taken by the assessee challen....
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....e) of the Act has to be understand. As per Section 28(ii) of the Act, any compensation or other payment due to or received by an assessee can be brought to tax and such nature of receipts has been defined in sub-clause (a) to (d). Further, sub-clause (e) has been inserted by Finance Act, 2018 w.e.f., 01.04.2019 as per which "compensation by whatever name called in connection with the termination or the modification of the terms and conditions, of any contract relating to his business can be brought to tax as "Profits and gains of business or profession"". From this, it is very clear that up to assessment year 2019-20, compensation received for termination of any agreement cannot be taxed u/s.28(ii)(e) of the Act. In this case, the compensation received pertains to previous year before the amendment to Section 28(ii)(e) of the Act. Therefore, the said amount cannot be brought to tax as compensation or any other payment due to or received by any person by whatever name called in connection with termination of terms and conditions of any contract u/s.28(ii)(e) of the Act. 8.2 Having said so, let us examine whether the same falls within the ambit of Section 28(va)(a) of the Act. The....
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....r the termination of agreement with Dr.Reddy's Laboratories Ltd., the assessee continue to manufacture and distribute pharmaceutical products. 8.3 Coming to case laws relied upon by the assessee, the assessee has relied upon the decision of Hon'ble Bombay High Court in the case of CIT vs. Parle Soft Drinks (Bangalore) P.Ltd., where the Hon'ble Court under identical set of facts held that compensation received for breach of contract would be a capital receipt. The matter has been reached to the Hon'ble Supreme Court by way of SLP filed by the Revenue and the Hon'ble Supreme Court in CIT vs. Parle Soft Drinks (Bangalore) P. Ltd., (2018) 97 taxmann.com 136 (SC) upheld the order of the Hon'ble Bombay High Court and dismissed the SLP filed by the Revenue. Therefore, from the above it is very clear that any compensation received for termination of manufacturing agreement is in the nature of capital receipt for loss of investment in business or loss of profit from business but, it cannot be treated as revenue receipts liable to be taxed u/s.28(va)(a) of the Act. For better understanding, the findings of the Hon'ble Bombay High Court are reproduced as under:- " Under the master....
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....a Cola Company paid this amount to the assessee and not to LFFL. [Para 15] All the tests that were evolved by the Supreme Court in the decisions noted above, have been applied and to arrive at the correct conclusion. The view of the Tribunal is not in any way erroneous or illegal. Thus, it is not vitiated by any error of law apparent on the face of the record of perversity. [Para 16] Pearle Bottlings * The matter has to be approached from a factual view point. [Para 18] * Even in the case of Pane Bottling Private Limited, where the Assessing Officer has treated the receipt to be taxed as long term capital gains on protective basis and the Commissioner (Appeals) has treated the same receipt to be taxed as casual and non-recurring taxable income under section 10(3), the argument was that the assessee received this sum of Rs. 16.06 crore as compensation from the Coca Cola Company for breach of the right of first refusal agreement with regard to bottling rights of Pune territory. The Assessing Officer, according to the assessee, solely relied upon the observations and findings in the assessment order dated 30th March, 2001 in the case of Aqua Bissler....