CIT vs. Bisleri Sales Ltd (Bombay High Court)

DATE: June 30, 2015 (Date of pronouncement)
DATE: July 29, 2015 (Date of publication)
AY: 1999-00
FILE: Click here to download the file in pdf format
S. 28(va)/ 115JA: non-compete consideration received prior to insertion of s. 28(va) is not taxable. Amount credited to reserves without a corresponding debit to the P&L A/c cannot be added to the "book profits"

The High Court had to consider two issues:

(i) Whether non-compete consideration received by the assessee is not liable to tax as capital gains even after the amendment to Section 55(2)(a) of the Act w.e.f. 1.4.1998 which introduced the words ‘or a right to manufacture, produce or process any article or thing’?

(ii) Whether non-compete consideration taken as Reserves to the Balance sheet cannot be added to the Book Profit under Section 115JA of the Act even in terms of clause (b) of the Explanation thereto? HELD by the High Court:

(i) The Supreme Court held in Guffic Chem Pvt.Ltd. v/s CIT that the restraint of right to carry on business would be taxable only with effect from Assessment Year 2003-2004 consequent to the introduction of Section 28(va) into the Act. It was held that there is a dichotomy between receipt of compensation by an Assessee for the loss of agency and receipt of compensation attributable to the negative/restrictive covenant. The compensation received for the loss of agency is a revenue receipt whereas the compensation attributable to a negative/restrictive covenant is a capital receipt. It was also held 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. Section 55(2)(a) of the Act would have no application in the present circumstances, as it deals with the cost of acquisition in relation to a capital asset which includes a right to manufacture or carrying on business. In the present case, the Agreement prohibits the assessee in as much as it amounts to giving up its right to carry on business i.e. a restrictive covenant.

(ii) For the Explanation to Section 115JA of the Act to be invoked it is necessary that the amount which has been carried to the reserves should have necessarily been first debited to the Profit and Loss account resulting in a reduction in the profit declared by the Assessee Company. In National Hydroelectric Power Corpn. Ltd. Vs Commissioner of Income Tax (2010) 320 ITR 0374 it has been held that to invoke clause (b) of the Explanation below Section 115JB (identical to Section 115JA) of the Act, two conditions must be satisfied cumulatively viz. there must be a debit of the amount to the Profit and loss account and the amount so debited must be carried to Reserves. Admitted position in this case is that there is no debit to the Profit and loss account of the amount of Reserves. The impugned order has in view of the self evident position taken a view that in the absence of the amount being debited to Profit and Loss account and taken directly to the reserve account in the balance sheet, the book profits as declared under the Profit and Loss account cannot be tampered with.

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