TaxTMI 
TaxTMI 
TaxTMI 
2024 (8) TMI 1622
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....e of Commodities trading as members or brokers of various exchanges for clients. (A-2) To carry on the business of insurance agents, brokers, third party administrators, surveyors, consultants, or other wise deal in all incidental and allied activities relating to life and life insurance business." The appellant was a wholly owned subsidiary of Geojit Financial Services Ltd. [GFSL], a public listed company, which was primarily engaged in the business of equity and derivatives brokerage. In March 2007, BNP Paribas S.A. [BNP Paribas], a French Bank, acquired 27.18% equity stake in GFSL, through a preferential issue. In order to further increase its stake in GFSL, BNP Paribas was informally intimated by the Reserve Bank of India [RBI] in December, 2007 that before approval could be given to BNP Paribas for acquiring further shares through making an open offer, it was necessary that the appellant, being a wholly owned subsidiary of GFSL, should discontinue the commodity brokerage business. Pursuant thereto, BNP Paribas vide letter dated 23.05.2008 approached GFSL to consider discontinuing the commodity brokerage business undertaken by its subsidiary, i.e. the appellant, in order to ....
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....Consequently, the appellant stopped the commodity brokerage business w.e.f 01.01.2009. Subsequently, the objects clause of the appellant was amended, followed by name change from 'Geojit Commodities Limited' to 'Geojit Investment Services Limited' with effect from 02.04.2009. Objects clause (A-1) was omitted and (A-2) was retained in the revised Memorandum of Association, i.e., limited to carrying on insurance business. 4. The compensation of Rs. 40 crores paid by BNP Paribas to the appellant was credited to the Profit & Loss account of the appellant for the year ending 31.03.2009 and disclosed as an 'extraordinary item'. In the income tax return, the appellant included the compensation of Rs. 40 crores while computing book profit and paid tax thereon as per provisions of Section 115JB of the Income tax Act, 1961 [hereinafter referred to as the 'Act']. For the purpose of computing tax under the normal provisions of the Act, the appellant excluded such compensation, considering the same to be in the nature of non-taxable 'capital receipt'. In the assessment framed under Section 143(3) of the Act, the assessing officer held that the appellant ....
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.... contention that the compensation of Rs. 40 crores should also be excluded from the calculation of book profit under Section 115JB of the Act being in the nature of capital receipt, notwithstanding the same having been credited to the Profit & Loss Account. The Tribunal, however, sustained the addition of Rs. 40 crores holding that there is no sterilisation of profit earning apparatus for the appellant since the new company, GCL, set up by the same promoters, continued to carry on the same business by obtaining new licenses, for which all the existing clients as well as their credit balance were transferred by the appellant to GCL. The Tribunal further found that the GCL carried out business in the same premises by using trademark, administrative set up, equipments, manpower, etc. of the appellant's parent company. Accordingly, the contention that the compensation was in the nature of capital receipt was rejected by the Tribunal by concluding that there was no real loss from the consolidated perspective of the Group. The Tribunal also denied the alternate plea of the appellant qua reduction of compensation from calculation of book profit under Section 115JB, on the ground that ....
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....s on behalf of its clients/customers; c) the appellant had to change its corporate name from 'Geojit Commodities Limited' to 'Geojit Investment Services Limited'; d) the appellant had to alter its main objects clause in the Memorandum of Association. Even though, the appellant continued in business, viz, carrying on a completely different activity, i.e. insurance business, the source of income in the form of commodity brokerage business was sterilized. There was thus impairment of the profit making apparatus with the cessation of the commodity brokerage business, and the amount received to compensate the aforesaid loss of source of income/business was in the nature of capital receipt, which was not subject to tax under the provisions of the Act. ● It is settled law that compensation received against loss of source of income/profit earning apparatus as opposed to loss of income, is in the nature of capital receipt which is not liable to tax under the provisions of the Act. Reliance was placed on the following decisions, namely, CIT v. Vazir Sultan & Sons - [(1959) 36 ITR 175 (SC)]; Kettlewell Bullen and Co. Ltd. v. CIR - [(1964) 53 ITR 261 (SC)], CIT v.....
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....e in GFSL, could not be said to be in the nature of non-compete fees to ward off competition, to be caught within the ambit of Section 28(va) of the Act. ● It is pointed out that simultaneous with the insertion of Section 28(va), Section 55(2)(a) of the Act was amended to deem Nil cost of acquisition in case of transfer of right to carry on business. There is a difference between undertaking a restrictive/negative covenant for not carrying on any activity in relation to the business and the transfer per se of the right to carry on any business. While the former category requires taking on a negative obligation qua any activity in relation to the business, the latter encompasses a positive action of absolute transfer of right to carry on business in favour of another. In the former situation, the right of doing business remains with the person undertaking the restrictive/negative covenants but is suspended during the period of non-compete, whereas in the latter situation, the said right per se is transferred lock, stock and barrel. ● Where the assessee transfers the right to carry on the business, and as a consequence of such transfer undertakes certain restrictive c....
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....f termination payments not being subjected to tax, being in the nature of capital receipt as held by successive judicial precedents. In case, Section 28(va) was intended to cover termination payments as well, as is the case set up by the assessing officer / CIT(A) and then upheld by the Tribunal, Section 28(ii)(e) of the Act would become otiose, reduntant and surplusage. Such an intendment cannot be attributed to the Legislature. ● Section 28(ii)(e) inserted in the statute by the Finance Act, 2018 is wide in its sweep and ambit. The said provision applies to any and every type of compensation received for modification of the terms and conditions of any contract relating to the business of the payer. In the present case, in lieu of compensation of Rs. 40 crores, there was termination of the contract between the appellant and (i) the commodity exchanges with respect to membership licenses; (ii) the customers on whose behalf the appellant was carrying on the commodity business; and (iii) the appellant company and its employees engaged in the said business, etc. Payment of Rs. 40 crores would, therefore, be covered within the mischief of newly inserted Section 28(ii)(e) of the ....
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....te that any sum, whether received or receivable, in cash or kind, under an agreement for not carrying out any activity in relation to any business or profession would be chargeable to income tax under the head "Profits and gains of business or profession". It is pointed out that the statutory provision does not use the word "non-compete fee" and therefore, so long as the amount received by the assessee is under an agreement for not carrying out any activity in relation to any business that was carried on by the assessee, it would attract the provisions of Section 28(va)(a) of the Act and make the receipt chargeable to income tax under the head of "Profits and gains of business or profession". Referring to the first proviso to Section 28(va)(a) of the Act, he submits that the amounts received by the appellant/assessee in the instant case are not in the nature of amounts received on account of transfer of the right to manufacture, produce or process any article or thing or for the transfer of the right to carry on any business. He clarifies that if the receipt was of the nature of receipts mentioned in the proviso they would be chargeable under the head "capital gains". It is his arg....
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....idiary companies withdrew from the commodity trading business because, as per the RBI guidelines, no bank could have interest in commodity trading business. It was therefore that BNP Paribas had approached the parent company to consider discontinuing the commodity brokerage business undertaken by its subsidiary, that is, the assessee herein, so as to comply with the requirements under the Banking Regulation Act, 1949. It was as consideration for the assessee discontinuing the commodity brokerage business that BNP Paribas offered it a compensation of Rs. 40 crores. It is not in dispute that the assessee received the said amount under the above arrangement and that after receipt of the compensation and discontinuation of the business in commodity trading, it changed its name to "GISL". 13. The issue that we are called upon to consider in these appeals is whether the amounts so received by the assessee company would attract the provisions of Section 28(va)(a) of the Act. Section 28(va)(a) of the Act reads as under: "28. Profits and gains of business or profession. - The following income shall be chargeable to income-tax under the head "Profits and gains of business of profession"....
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....was with a view to bring to tax under the head "Profits and gains to business or profession" amounts received by an assessee in a situation where the receipt was a consideration for the assessee desisting from carrying out some of many activities in relation to its businesses. In other words, if there was a loss of earning opportunity in relation to only one of many lines of business and the said loss of business opportunity was duly compensated by the person who required the assessee to sacrifice/give up that line of business, and the assessee continued to carry on other lines of business, then the amount received by the assessee from the person at whose instance he subjected himself to a negative covenant would be liable to tax under Section 28(va)(a) of the Act. This, in our view, would be the correct interpretation to be placed on the provisions of Section 28(va)(a) of the Act. 14. We also find, as noticed by the Appellate Tribunal in the order impugned before us, that Section 28(va)(a) of the Act does not restrict the operation of the said provision to only amounts received by way of non-compete fee. The words used in the said provision do not admit of any such restricted mea....