Commissioner Of Income Tax v. Shri P M Lodha

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH ATJAIPUR 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 VijayFor Respondent(s) : Mr. Anant Kasliwal with Mr. Ganesh Joshi _____________________________________________________ HON'BLE THE ACTING CHIEF JUSTICE HON'BLE MR. JUSTICE GOVERDHAN BARDHARJudgment 28/03/2017 1.Since both these appeals relate to same assessee, they aredecided by this common judgment. 2.By way of these appeals, the Department has assailed thejudgment and order of the Tribunal whereby the Tribunal haspartly allowed the appeal of the assessee and dismissed theappeal filed by the Department and considered the capital gain tobe long term capital gain. 3.While admitting the appeals, this court framed the following substantial question of law:- “Whether the ITAT was justified in holding that theamount of Rs.1,75,37,275/- paid by the Company to theassessee in terms of the agreement dt. 24.5.1999,would not fall within the meaning of words ‘right tomanufacture, produce or process any article or thing’but, within the meaning of the words ‘right to carry onany 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 ofacquisition" (a) in relation to a capital asset, being goodwill of abusiness [or a trade mark or brand name associated witha business] [or a right to manufacture, produce orprocess any article or thing] [or right to carry on anybusiness], tenancy rights, stage carriage permits or loomhours,— (i) in the case of acquisition of such asset by theassessee 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], shallbe taken to be nil” 5.Section 48 & 49 of the Act reads as under:- “48. The income chargeable under the head "Capitalgains" shall be computed, by deducting from the fullvalue of the consideration received or accruing as aresult of the transfer of the capital asset the followingamounts, namely :— (i) expenditure incurred wholly and exclusively inconnection with such transfer (ii) the cost of acquisition of the asset and the cost ofany improvement thereto: 49. Cost with reference to certain modes of acquisition (1)Where the capital asset became the property of theassessee- (i)on any distribution of assets on the total or partialpartition of a Hindu undivided family; (ii)under a gift or will; (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 timebefore the 1st day of April, 987, or] (c)on any distribution of assets on the liquidation of acompany, or (d)under a transfer to a revocable or an irrevocabletrust, 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, bythe mode referred to in sub- section (2) of section 64 atany time after the 31st day of December, 1969 ,] thecost of acquisition of the asset shall be deemed to be thecost for which the previous owner of the propertyacquired it, as increased by the cost of any improvementof the assets incurred or borne by the previous owner orthe assessee, as the case may be.” (c)on any distribution of assets on the liquidation of acompany, or (d)under a transfer to a revocable or an irrevocabletrust, 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, bythe mode referred to in sub- section (2) of section 64 atany time after the 31st day of December, 1969 ,] thecost of acquisition of the asset shall be deemed to be thecost for which the previous owner of the propertyacquired it, as increased by the cost of any improvementof the assets incurred or borne by the previous owner orthe 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 tomanufacture, produce or process any article or thing”inserted with effect from 01.04.1998 and “or right tocarry on any business” inserted with effect from01.04.2003 in sub-clause (a) to sub-section (2) tosection 55 of the Act, the later one is more suitable tothe facts and circumstances of the present case as theassessee was admittedly by the agreement in questionwas restrained to compete with the business of theCompany in any manner whatsoever including that ofmanufacturing as an aspect. Therefore, in or view, thepractice of payment of non-compete fees very muchrecognized earlier cannot be allowed for the purpose ofbenefit 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 presentcase, the receipt of non-compete fee in question is acapital receipt and will not be liable to income tax.” 8.Taking into consideration the above, he contended that thecapital gain are to be considered as long term capital gaintherefore, it is taxable and not revenue receipts. He alsocontended that in view of the amendment which was brought intoforce in the year 2003 prior to that as per the finding it is amanufacturing activity as observed by the Tribunal in thepreceding paragraphs as referred hereinabove, therefore, theissue 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 ofcertain capital assets 30.1Up to assessment year 1988-89, the gains arisingon the transfer of goodwill were not liable to tax. Thiswas on account of the judicial view approved by theSupreme Court in CIT v B.C. Srinivasa Setty [1981] 128ITR 294. The rationale of the decision was that goodwillbeing a self-generated asset and not costing anything interms of money, the gains could not be computed inaccordance with the provisions of the Act. By the FinanceAct, 1987, the method of computing the cost ofacquisition as well as the cost of improvement of goodwillwas provided for. Where goodwill is purchased by thetransferor, the cost of acquisition is taken to be thepurchase price and in all other cases it is taken to benil.The cost of improvement in either case is taken to benil. 30.2Instances have come to light where rights tomanufacture, produce or process any article or thinghave been extinguished for a consideration and claimedto be not taxable. 30.2Instances have come to light where rights tomanufacture, produce or process any article or thinghave been extinguished for a consideration and claimedto be not taxable. 30.3The Act has, therefore, amended sections 55(1) and55(2) of the Income-tax Act in order to bringextinguishment of such a right to manufacture, etc.,within the ambit of capital gains tax. Capital gains taxwould be leviable only where such an extinguishment ofright to manufacture, etc., is for any consideration. Suchreceipts will be subjected to capital gains tax on the samebasis as already adopted for taxing transfer of goodwilland tenancy rights. The cost of acquisition and cost ofimprovement will be determined in the same manner asfor goodwill. 30.4The amendment will take effect from 1st April,1998, will, accordingly, apply in relation to assessmentyear 1998-99 and subsequent years.” 10.In that view of the matter, it be made clear that the saidcapital gain be considered as taxable and is required to be taxedeither it is long term or short term capital gain. The clause whichhas been introduced on 1.4.1998 namely right to manufacture,produce or process any article or thing is made to be taxableunder Section 155 2(a) and in that view of the matter, Tribunalhas seriously committed an error in holding against thedepartment and in favour of the assessee. 11.Counsel for the respondent has contended in view of theobservations made by the Supreme Court in Guffic ChemPrivate Limited vs. Commissioner of Income Tax, Belgaumand anr. reported in [2011] 332 ITR 602 wherein it has beenheld as under:- “6. Two questions arose for determination, namely,whether the amounts received by the Appellant forloss of agency was in normal course of business andtherefore whether they constituted revenue receipt?The second question which arose before this Court waswhether the amount received by the Assessee(compensation) on the condition not to carry on acompetitive business was in the nature of capitalreceipt? It was held that the compensation received bythe Assessee for loss of agency was a revenue receiptwhereas compensation received for refraining fromcarrying on competitive business was a capital receipt.8. One more aspect needs to be highlighted. Paymentreceived as non-competition fee under a negativecovenant was always treated as a capital receipt tillthe assessment year 2003-04. It is only vide FinanceAct, 2002 with effect from 1.4.2003 that the saidcapital receipt is now made taxable [See: Section28(va)]. The Finance Act, 2002 itself indicates thatduring the relevant assessment year compensationreceived by the Assessee under non-competitionagreement was a capital receipt, not taxable under the1961 Act. It became taxable only with effect from 1.4.2003. It is well settled that a liability cannot becreated retrospectively. In the present case,compensation received under Non-CompetitionAgreement became taxable as a capital receipt and notas a revenue receipt by specific legislative mandatevide Section 28(va)and that too with effect from1.4.2003. Hence, the said Section28(va)isamendatory and not clarificatory.” 12.In view of the observations which are made by the Tribunaland the finding arrived at regarding capital gain and clause tocarry on business as introduced in 2003, the observations madeby the Tribunal are required to be upheld and same is upheld. 13.In that view of the matter, the issue is answered in favour ofthe 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.