Chakiat Agencies Pvt. Ltd. 40, Rajaji Salai 2[Nd] Floor, Chennai – 600 001 v. The Assistant Commissioner Of Income Tax

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 2.12.2014 CORAMTHE HON'BLE MR.JUSTICE R.SUDHAKARANDTHE HON'BLE MR.JUSTICE R.KARUPPIAH Chakiat Agencies Pvt. Ltd.40, Rajaji Salai2[nd] Floor, Chennai – 600 001... AppellantVs. The Assistant Commissioner of Income Tax Company Circle III(1)Chennai. .. Respondent PRAYER: Appeal under Section 260A of the Income Tax Act, 1961against the order of the Income Tax Appellate Tribunal 'A' Bench,Chennai, dated 15.9.2006 made in I.T.A.No.957/Mds/2006 for theassessment year 2001-2002. and appeal against the order of the Commissioner of IncomeTax, Chennai I 121 M.G. Road, Chennai-34 dated 24.3.2006 made inC.No.218(10) /CIT-1/05-06 and appeal against the order of theAssistant Commissioner of Income Tax, Company Circle I (3) (i/c)Chennai in G.I.No.P.A.No.G.I.No.CX-1-03 dated 25.3.2014. For Appellant :Mr.C.V.Rajan For Respondent :Mr.T.Ravi KumarSenior Standing Counsel This appeal is filed by the assessee challenging the order ofthe Income Tax Appellate Tribunal 'A' Bench, Chennai, dated15.9.2006 made in I.T.A.No.957/Mds/2006 for the assessment year2001-2002, and the same has been admitted on the followingquestions of law: (i)Whether the Tribunal was right in holding thatthe consideration received by the appellant for https://hcservices.ecourts.gov.in/hcservices/ transfer of goodwill was taxable as 'profits andgains of business' under Section 28(ii)(c) of theIncome Tax Act and not under the head 'capitalgains'? (ii)Whether the Tribunal was right in holding thatthe consideration received by the appellant wasonly towards the transfer of agency business andnot for 'goodwill' ignoring the fact that therewas no agency agreement subsisting at the time ofreceipt towards goodwill? 2.1. The facts in a nutshell are as under: The appellant,which is a private limited company incorporated in the year 1984,is engaged in the business of shipping and clearing agency. It wassub-agent of M/s.Sea Land (I) Ltd., who acted as an agent ofM/s.Sea Land Inc., USA. The appellant was a partnership firm at theinception and was carrying on the business of clearing, forwardingand shipping agency. It had entered into a service agreement withSea Land Service Inc. in November, 1978, which was renewed in 1981. 2.2. The appellant company took over the assets andliabilities of the partnership firm – Chakiat Agencies and alsoacquired the goodwill of the firm for a consideration ofRs.20,00,000/-. Thereafter, the appellant continued the businessarrangement with Sea Land (I) Ltd., agent of Sea Land Inc., USA,and renewed it also. 2.3. It appears that A.P.Moller, Denmark took over thebusiness of Sea Land Inc., USA, on 11.12.1999. Consequently, witheffect from 13.12.1999, Sea Land Inc., USA terminated the AgencyAgreement dated 14.10.1992 entered into with Sea Land (I) Ltd. Bynotice dated 15.11.1999, Sea Land (I) Ltd. terminated the Sub-Agency Agreement dated 8.11.1992 entered into between Sea Land (I)Ltd. and Chakiat Agencies Private Limited with effect from15.2.2000. 2.4. Thereafter, A.P.Moller of Copenhagen, Denmark appointedMAERSK as their agents in India for all cargoes carried bycontainer ships under the trade name “Maersk Sealand” with effectfrom 11.12.1999. MAERSK was desirous of purchasing the shippingsub-agency business of the appellant with goodwill, which theappellant was willing to sell and, therefore, they entered into anagreement for sale of shipping sub-agency business in relation toSealand with goodwill. The relevant portion of the said agreementdated 1.6.2000 reads as under: “SALE OF SHIPPING SUB-AGENCY BUSINESS IN RELATION TOSEALAND WITH GOODWILL CHAKIAT hereby transfers to MAERSK the shipping sub-agency business related to Sealand and covered by theSub-Agency Agreement dated 8[th] November 1992 along with 2.4. Thereafter, A.P.Moller of Copenhagen, Denmark appointedMAERSK as their agents in India for all cargoes carried bycontainer ships under the trade name “Maersk Sealand” with effectfrom 11.12.1999. MAERSK was desirous of purchasing the shippingsub-agency business of the appellant with goodwill, which theappellant was willing to sell and, therefore, they entered into anagreement for sale of shipping sub-agency business in relation toSealand with goodwill. The relevant portion of the said agreementdated 1.6.2000 reads as under: “SALE OF SHIPPING SUB-AGENCY BUSINESS IN RELATION TOSEALAND WITH GOODWILL CHAKIAT hereby transfers to MAERSK the shipping sub-agency business related to Sealand and covered by theSub-Agency Agreement dated 8[th] November 1992 along with goodwill in relation thereto. It is made clear thatno assets of any description than those specifiedherein belonging to CHAKIAT are the subject matter ofsale.” Consequent to this agreement, a sum of US$ 650,000/- (equivalent toRs.2,98,33,700/-) was received as consideration by the appellantfrom Maersk India Ltd., which became the agent of A.P.Moller. 2.5. In the return filed, the appellant offered theconsideration received by it on transfer of goodwill as capitalgains and claimed exemption under Section 54EC of the Act on thepremise that investments were made in prescribed bonds. Acceptingthe claim of the assessee, the Assessing Officer completed theassessment under Section 143(3) of the Act on 25.3.2004 on totalincome of Rs.24,53,911/- as per normal computation and book profitunder Section 115JB of the Act of Rs.2,89,38,484/-. 2.6. However, the Commissioner of Income Tax was of theview that the order passed by the jurisdictional Officer waserroneous insofar as it is prejudicial to the interest of therevenue and thereby, invoked Section 263 of the Act and revised theassessment order. The Commissioner of Income Tax held that theconsideration received by the assessee was basically in the natureof compensation received in connection with termination of agencyunder Section 28(ii)(c) of the Act and, therefore, directed theAssessing Officer to modify the assessment by applying theprovisions of Section 28(ii)(c) of the Act. 2.7. Calling in question the said order passed by theCommissioner of Income Tax, the assessee preferred an appeal beforethe Tribunal. The Tribunal dismissed the appeal filed by theassessee, by confirming the order passed by the Commissioner ofIncome Tax. 2.8. Aggrieved by the said order passed by the Tribunal, thepresent appeal is filed on the questions of law, referred supra. 3. We have heard Mr.C.V.Rajan, learned counsel for theappellant and Mr.T.Ravi Kumar, learned Senior Standing Counselappearing for the Revenue and perused the order passed by theTribunal and the authorities below. 4. As the questions of law raised are intertwined and arerelating to the interpretation of Sections 28(ii)(c) and 45 of theAct, they are dealt with together. 5. It is the plea of the appellant that the considerationreceived by them for transfer of goodwill is a profit or gain out https://hcservices.ecourts.gov.in/hcservices/ of transfer of capital asset under the head 'profits and gains ofbusiness or profession' as defined in Section 45 of the Act and,therefore, it is not chargeable to income-tax under Section 28(ii)(c) of the Act. 6. Before adverting to the merits of the said plea, it isapposite to refer to Sections 28(ii)(c) and 45 of the Act, whichread as under: “Section 28. Profits and gains of business orprofession.--The following income shall be chargeableto income-tax under the head 'Profits and gains ofbusiness or profession',-- (i) **** (ii) any compensation or other payment due to orreceived by,-- (a) **** (b) **** https://hcservices.ecourts.gov.in/hcservices/ of transfer of capital asset under the head 'profits and gains ofbusiness or profession' as defined in Section 45 of the Act and,therefore, it is not chargeable to income-tax under Section 28(ii)(c) of the Act. 6. Before adverting to the merits of the said plea, it isapposite to refer to Sections 28(ii)(c) and 45 of the Act, whichread as under: “Section 28. Profits and gains of business orprofession.--The following income shall be chargeableto income-tax under the head 'Profits and gains ofbusiness or profession',-- (i) **** (ii) any compensation or other payment due to orreceived by,-- (a) **** (b) **** (c) any person, by whatever name called, holding anagency in India for any part of the activitiesrelating to the business of any other person, at or inconnection with the termination of the agency or themodification of the terms and conditions relatingthereto. Section 45. Capital gains.- (1) Any profits or gainsarising from the transfer of a capital asset effectedin the previous year shall, save as otherwise providedin sections 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54Gand 54H, be chargeable to income-tax under the head"Capital gains", and shall be deemed to be the incomeof the previous year in which the transfer took place. (1A) Notwithstanding anything contained in sub-section(1), where any person receives at any time during anyprevious year any money or other assets under aninsurance from an insurer on account of damage to, ordestruction of, any capital asset, as a result of-- (i) flood, typhoon, hurricane, cyclone,earthquake or other convulsion of nature; or (ii) riot or civil disturbance; or (iii) accidental fire or explosion; or (iv) action by an enemy or action taken incombating an enemy (whether with or without adeclaration of war), then, any profits or gains arising from receipt ofsuch money or other assets shall be chargeable toincome-tax under the head “Capital gains” and shall be https://hcservices.ecourts.gov.in/hcservices/ deemed to be the income of such person of the previousyear in which such money or other asset was receivedand for the purposes of section 48, value of any moneyor the fair market value of other assets on the dateof such receipt shall be deemed to be the full valueof the consideration received or accruing as a resultof the transfer of such capital asset. Explanation.--For the purposes of this sub-section,the expression “insurer” shall have the meaningassigned to it in clause (9) of section 2 of theInsurance Act, 1938 (4 of 1938). (2) Notwithstanding anything contained in sub-section(1), the profits or gains arising from the transfer byway of conversion by the owner of a capital assetinto, or its treatment by him as stock-in-trade of abusiness carried on by him shall be chargeable toincome-tax as his income of the previous year in whichsuch stock-in-trade is sold or otherwise transferredby him and, for the purposes of section 48, the fairmarket value of the asset on the date of suchconversion or treatment shall be deemed to be the fullvalue of the consideration received or accruing as aresult of the transfer of the capital asset. (2A) Where any person has had at any time during theprevious year any beneficial interest in anysecurities, then, any profits or gains arising fromtransfer made by the depository or participant of suchbeneficial interest in respect of securities shall bechargeable to income-tax as the income of thebeneficial owner of the previous year in which suchtransfer took place and shall not be regarded asincome of the depository who is deemed to be theregistered owner of securities by virtue of sub-section (1) of section 10 of the Depositories Act,1996, and for the purposes of-- (i) section 48 ; and (2A) Where any person has had at any time during theprevious year any beneficial interest in anysecurities, then, any profits or gains arising fromtransfer made by the depository or participant of suchbeneficial interest in respect of securities shall bechargeable to income-tax as the income of thebeneficial owner of the previous year in which suchtransfer took place and shall not be regarded asincome of the depository who is deemed to be theregistered owner of securities by virtue of sub-section (1) of section 10 of the Depositories Act,1996, and for the purposes of-- (i) section 48 ; and (ii) the proviso to clause (42A) of section 2,the cost of acquisition and the period of holding ofany securities shall be determined on the basis of thefirst-in-first-out method. Explanation.--For the purposes of this sub-section,the expressions "beneficial owner", "depository" and"security" shall have the meanings respectivelyassigned to them in clauses (a), (e) and (l) of sub-section (1) of section 2 of the Depositories Act,1996. (3) The profits or gains arising from the transfer ofa capital asset by a person to a firm or otherassociation of persons or body of individuals (notbeing a company or a co-operative society) in which heis or becomes a partner or member, by way of capitalcontribution or otherwise, shall be chargeable to taxas his income of the previous year in which suchtransfer takes place and, for the purposes of section48, the amount recorded in the books of account of thefirm, association or body as the value of the capitalasset shall be deemed to be the full value of theconsideration received or accruing as a result of thetransfer of the capital asset. (4) The profits or gains arising from the transfer ofa capital asset by way of distribution of capitalassets on the dissolution of a firm or otherassociation of persons or body of individuals (notbeing a company or a co-operative society) orotherwise, shall be chargeable to tax as the income ofthe firm, association or body, of the previous year inwhich the said transfer takes place and, for thepurposes of section 48, the fair market value of theasset on the date of such transfer shall be deemed tobe the full value of the consideration received oraccruing as a result of the transfer. (5) Notwithstanding anything contained in sub-section(1), where the capital gain arises from the transferof a capital asset, being a transfer by way ofcompulsory acquisition under any law, or a transferthe consideration for which was determined or approvedby the Central Government or the Reserve Bank ofIndia, and the compensation or the consideration forsuch transfer is enhanced or further enhanced by anycourt, tribunal or other authority, the capital gainshall be dealt with in the following manner, namely:-- (a) the capital gain computed with reference tothe compensation awarded in the first instanceor, as the case may be, the considerationdetermined or approved in the first instance bythe Central Government or the Reserve Bank ofIndia shall be chargeable as income under thehead "Capital gains" of the previous year inwhich such compensation or part thereof, orsuch consideration or part thereof, was firstreceived ; and (b) the amount by which the compensation orconsideration is enhanced or further enhancedby the court, tribunal or other authority shallbe deemed to be income chargeable under thehead "Capital gains" of the previous year inwhich such amount is received by the assessee. (a) the capital gain computed with reference tothe compensation awarded in the first instanceor, as the case may be, the considerationdetermined or approved in the first instance bythe Central Government or the Reserve Bank ofIndia shall be chargeable as income under thehead "Capital gains" of the previous year inwhich such compensation or part thereof, orsuch consideration or part thereof, was firstreceived ; and (b) the amount by which the compensation orconsideration is enhanced or further enhancedby the court, tribunal or other authority shallbe deemed to be income chargeable under thehead "Capital gains" of the previous year inwhich such amount is received by the assessee. (c) where in the assessment for any year, thecapital gain arising from the transfer of acapital asset is computed by taking thecompensation or consideration referred to inclause (a) or, as the case may be, enhancedcompensation or consideration referred to inclause (b), and subsequently such compensationor consideration is reduced by any court,Tribunal or other authority, such assessedcapital gain of that year shall be recomputedby taking the compensation or consideration asso reduced by such court, Tribunal or otherauthority to be the full value of theconsideration.Explanation.--For the purposes of this sub-section,-- (i) in relation to the amount referred to inclause (b), the cost of acquisition and thecost of improvement shall be taken to be nil ; (ii) the provisions of this sub-section shallapply also in a case where the transfer tookplace prior to the 1st day of April, 1988 ; (iii) where by reason of the death of theperson who made the transfer, or for any otherreason,theenhancedcompensationorconsideration is received by any other person,the amount referred to in clause (b) shall bedeemed to be the income, chargeable to taxunder the head "Capital gains" of such otherperson. (6) Notwithstanding anything contained in sub-section(1), the difference between the repurchase price ofthe units referred to in sub-section (2) of section80CCB and the capital value of such units shall bedeemed to be the capital gains arising to the assesseein the previous year in which such repurchase takesplace or the plant referred to in that section isterminated and shall be taxed accordingly. https://hcservices.ecourts.gov.in/hcservices/ Explanation.--For the purposes of this sub-section,"capital value of such units" means any amountinvested by the assessee in the units referred to insub-section (2) of section 80CCB” 7. In the light of the above provisions, we consider thenature of agreement entered into by the appellant with MAERSK on1.6.2000. Originally, by Sub-Agency Agreement dated 8.11.1992, SeaLand (I) Ltd. appointed CHAKIAT as their sub-agents in South Indiafor all cargoes carried by Sea Land Service Inc., USA. On11.12.1999, A.P.Moller of Copenhagen, Denmark took over thebusiness of Sea Land Service Inc., USA. Consequent to that, SeaLand Service Inc., USA terminated the Agency Agreement with SeaLand (I) Ltd., with effect from 13.12.1999 and Sea Land (I) Ltd.,by notice dated 15.11.1999, terminated the Sub-Agency Agreemententered with CHAKIAT with effect from 15.2.2000. Therefore, theappellant ceases to be an agent of Sea Land (I) Ltd. In thelight of these facts, Clause (1) of the agreement dated 1.6.2000,referred supra, provided that the appellant will transfer to MAERSKthe shipping sub-agency business related to Sea Land and covered bythe Sub-Agency Agreement dated 8.11.1992 along with goodwill inrelation thereto. 8. No doubt, Section 45 of the Act stipulates that any profitsor gains arising from the transfer of a capital asset effected inthe previous year shall be chargeable to income tax under the head“capital gains” and shall be deemed to be the income of theprevious year in which the transfer took place. However, Section 28(ii)(c) of the Act, which is extracted above, provides an answer tothe issue involved in this case. 9. In the case on hand, the appellant is a recipient ofcertain amount for holding an agency in India for the activitiesrelating to the business of Sea Land (I) Ltd. and it is only inconnection with the termination of the agency, the appellantreceived certain payment under Clause (1) of the agreement dated1.6.2000 by transferring such rights covered by the sub-agency toMAERSK and that is referable to the initial Sub-Agency Agreementdated 8.11.1992. Therefore, in our considered opinion, Section 28(ii)(2) of the Act would come into play and the income received bythe appellant has to be certainly treated as profits and gains ofbusiness. It can partake the character of transfer of capitalasset, as what is transferred is the sub-agency and goodwillattached. 10. If it is a case of transfer simpliciter of the asset,without reference to the sub-agency or the terms contained in theagreement dated 8.11.1992, then the appellant would be entitled toharp on Section 45 of the Act. But, when Clause (1) of the https://hcservices.ecourts.gov.in/hcservices/ agreement dated 1.6.2000 is interpreted as such, it will clearlyfall within the ambit and scope of Section 28(ii)(c) of the Act,which in no uncertain terms states that any payment received by anyperson holding an agency in India for any part of the activitiesrelating to the business of any other person in connection with thetermination of the agency shall be chargeable to income-tax underthe head “profits and gains of business”. This appears to be theintention of Clause (1) of the agreement dated 1.6.2000.Therefore, Section 28(ii)(c) of the Act gets squarely attracted. 11. In such view of the matter, the finding of theCommissioner of Income Tax, as upheld by the Tribunal, holding thatthe order passed by the Assessing Officer is erroneous isjustified. In our considered opinion, the Assessing Officer hasnot applied the correct provision of law and the Commissioner ofIncome Tax was justified in invoking Section 263 of the Act torevise the erroneous order. Insofar as prejudice to the interestof the revenue is concerned, it is apparent on the face of therecord that but for the application of Section 28(ii)(c) of theAct, the assessee would be entitled to the benefit of claiming thereceipt of the amount as capital gains under Section 45 of the Actand the consequent exemption that they have sought for. Therefore,the claim of the assessee would certainly be prejudicial to theinterest of the revenue. We hold accordingly. For the foregoing reasons, we dismiss the appeal answering thequestions of law against the assessee and in favour of the revenue.No costs. Sd/- Asst.Registrar (CO) /true copy/ Sub Asst. Registrar sasi To: 1. The Assistant Registrar, Income Tax Appellate Tribunal Chennai Bench "A", Chennai. Income Tax Appellate Tribunal Chennai Bench "A", Chennai. 2. The Secretary, Central Board of Direct Taxes, New Delhi.of Direct Taxes, New Delhi. 3. The Commissioner of Income Tax 121 MG Road Chennai – 34. 121 MG Road Chennai – 34. 4. The Assistant Commissioner of Income Tax Company Circle – I(3)(i/c), Chennai. Company Circle – I(3)(i/c), Chennai. 1 cc to Mr.C.V. Rajan, Advocate, Sr. 58696 1 cc to Mr.T. Ravikumar, Sr. Standing Counsel, for IT, Sr. 58371 KJI (CO)kk 26/12 T.C.(A).No.1279 of 2007