Rajasthan High Court - Jaipur
Commissioner Of Income Tax vs Shri P M Lodha on 28 March, 2017
HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT
JAIPUR
D.B. Income Tax Appeal No. 76 / 2008
Commissioner Of Income Tax
----Appellant
Versus
Shri P M Lodha
----Respondent
D.B. Income Tax Appeal No. 90 / 2008 Commissioner Of Income Tax
----Appellant Versus Shri P M Lodha
----Respondent _____________________________________________________ For Appellant(s) : Mr. Anuroop Singhi with Mr. Aditya Vijay For Respondent(s) : Mr. Anant Kasliwal with Mr. Ganesh Joshi _____________________________________________________ HON'BLE THE ACTING CHIEF JUSTICE HON'BLE MR. JUSTICE GOVERDHAN BARDHAR Judgment 28/03/2017
1. Since both these appeals relate to same assessee, they are decided by this common judgment.
2. By way of these appeals, the Department has assailed the judgment and order of the Tribunal whereby the Tribunal has partly allowed the appeal of the assessee and dismissed the appeal filed by the Department and considered the capital gain to be long term capital gain.
3. While admitting the appeals, this court framed the following (2 of 6) [ITA-76/2008] substantial question of law:-
"Whether the ITAT was justified in holding that the amount of Rs.1,75,37,275/- paid by the Company to the assessee in terms of the agreement dt. 24.5.1999, would not fall within the meaning of words 'right to manufacture, produce or process any article or thing' but, within the meaning of the words 'right to carry on any business?"
4. Counsel for the appellant Mr. Singhi has taken us to the provision of Section 55 2(a) of the Income Tax, 1961 which reads as under:-
"(2) [For the purposes of sections 48 and 49, "cost of acquisition"
(a) in relation to a capital asset, being goodwill of a business [or a trade mark or brand name associated with a business] [or a right to manufacture, produce or process any article or thing] [or right to carry on any business], tenancy rights, stage carriage permits or loom hours,--
(i) in the case of acquisition of such asset by the assessee by purchase from a previous owner, means the amount of the purchase price ; and
(ii) in any other case [not being a case falling under sub- clauses (i) to (iv) of sub-section (1)of section 49], shall be taken to be nil"
5. Section 48 & 49 of the Act reads as under:-
"48. The income chargeable under the head "Capital gains" shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely :--
(i) expenditure incurred wholly and exclusively in connection with such transfer
(ii) the cost of acquisition of the asset and the cost of any improvement thereto:
49. Cost with reference to certain modes of acquisition (1) Where the capital asset became the property of the assessee-
(i) on any distribution of assets on the total or partial partition of a Hindu undivided family;
(ii) under a gift or will;
(3 of 6) [ITA-76/2008]
(iii) (a) by succession, inheritance or devolution, or
(b) 1 on any distribution of assets on the dissolution of a firm, body of individuals, or other association of persons, where such dissolution had taken place at any time before the 1st day of April, 987, or]
(c) on any distribution of assets on the liquidation of a company, or
(d) under a transfer to a revocable or an irrevocable trust, or
(e) under any such transfer as is referred to in clause (iV) 2 or clause (V)] 3 or clause (Vi)] 4 or clause (via)] of section 47;
(iv) 5 such assessee being a Hindu undivided family, by the mode referred to in sub- section (2) of section 64 at any time after the 31st day of December, 1969 ,] the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee, as the case may be."
6. Therefore, he contended that Tribunal while considering the case of the assessee observed as under:-
"Thus, between two phraseologies "or a right to manufacture, produce or process any article or thing"
inserted with effect from 01.04.1998 and "or right to carry on any business" inserted with effect from 01.04.2003 in sub-clause (a) to sub-section (2) to section 55 of the Act, the later one is more suitable to the facts and circumstances of the present case as the assessee was admittedly by the agreement in question was restrained to compete with the business of the Company in any manner whatsoever including that of manufacturing as an aspect. Therefore, in or view, the practice of payment of non-compete fees very much recognized earlier cannot be allowed for the purpose of benefit of income-tax with effect from 01.04.2003, i.e., from the assessment year 2003-04."
7. He further contended that the contradictory finding has been given by the Tribunal as under:-
"We, thus, arrive at to this conclusion that in the present case, the receipt of non-compete fee in question is a capital receipt and will not be liable to income tax."
(4 of 6) [ITA-76/2008]
8. Taking into consideration the above, he contended that the capital gain are to be considered as long term capital gain therefore, it is taxable and not revenue receipts. He also contended that in view of the amendment which was brought into force in the year 2003 prior to that as per the finding it is a manufacturing activity as observed by the Tribunal in the preceding paragraphs as referred hereinabove, therefore, the issue is required to be answered in favour of the department.
9. He further contended that the circular which is introduced on 18.2.1998 reads as under:-
"Cost of acquisition and cost of improvement of certain capital assets 30.1 Up to assessment year 1988-89, the gains arising on the transfer of goodwill were not liable to tax. This was on account of the judicial view approved by the Supreme Court in CIT v B.C. Srinivasa Setty [1981] 128 ITR 294. The rationale of the decision was that goodwill being a self-generated asset and not costing anything in terms of money, the gains could not be computed in accordance with the provisions of the Act. By the Finance Act, 1987, the method of computing the cost of acquisition as well as the cost of improvement of goodwill was provided for. Where goodwill is purchased by the transferor, the cost of acquisition is taken to be the purchase price and in all other cases it is taken to be nil.The cost of improvement in either case is taken to be nil.
30.2 Instances have come to light where rights to manufacture, produce or process any article or thing have been extinguished for a consideration and claimed to be not taxable.
30.3 The Act has, therefore, amended sections 55(1) and 55(2) of the Income-tax Act in order to bring extinguishment of such a right to manufacture, etc., within the ambit of capital gains tax. Capital gains tax would be leviable only where such an extinguishment of right to manufacture, etc., is for any consideration. Such receipts will be subjected to capital gains tax on the same basis as already adopted for taxing transfer of goodwill and tenancy rights. The cost of acquisition and cost of improvement will be determined in the same manner as for goodwill.
(5 of 6) [ITA-76/2008] 30.4 The amendment will take effect from 1st April, 1998, will, accordingly, apply in relation to assessment year 1998-99 and subsequent years."
10. In that view of the matter, it be made clear that the said capital gain be considered as taxable and is required to be taxed either it is long term or short term capital gain. The clause which has been introduced on 1.4.1998 namely right to manufacture, produce or process any article or thing is made to be taxable under Section 155 2(a) and in that view of the matter, Tribunal has seriously committed an error in holding against the department and in favour of the assessee.
11. Counsel for the respondent has contended in view of the observations made by the Supreme Court in Guffic Chem Private Limited vs. Commissioner of Income Tax, Belgaum and anr. reported in [2011] 332 ITR 602 wherein it has been held as under:-
"6. Two questions arose for determination, namely, whether the amounts received by the Appellant for loss of agency was in normal course of business and therefore whether they constituted revenue receipt? The second question which arose before this Court was whether the amount received by the Assessee (compensation) on the condition not to carry on a competitive business was in the nature of capital receipt? It was held that the compensation received by the Assessee for loss of agency was a revenue receipt whereas compensation received for refraining from carrying on competitive business was a capital receipt.
8. One more aspect needs to be highlighted. Payment received as non-competition fee under a negative covenant was always treated as a capital receipt till the assessment year 2003-04. It is only vide Finance Act, 2002 with effect from 1.4.2003 that the said capital receipt is now made taxable [See: Section 28(va)]. The Finance Act, 2002 itself indicates that during the relevant assessment year compensation received by the Assessee under non-competition agreement was a capital receipt, not taxable under the 1961 Act. It became taxable only with effect from (6 of 6) [ITA-76/2008] 1.4.2003. It is well settled that a liability cannot be created retrospectively. In the present case, compensation received under Non-Competition Agreement became taxable as a capital receipt and not as a revenue receipt by specific legislative mandate vide Section 28(va) and that too with effect from 1.4.2003. Hence, the said Section 28(va) is amendatory and not clarificatory."
12. In view of the observations which are made by the Tribunal and the finding arrived at regarding capital gain and clause to carry on business as introduced in 2003, the observations made by the Tribunal are required to be upheld and same is upheld.
13. In that view of the matter, the issue is answered in favour of the assessee and against the department.
The appeals stand dismissed.
A copy of this judgment be placed in each file.
(GOVERDHAN BARDHAR),J. (K.S. JHAVERI)ACTING C.J.
Brijesh/ BM Gandhi 166-167.