Case Law Details

Case Name : CIT Vs Bisleri Sales Ltd. (Bombay High Court)
Appeal Number : Income Tax Appeal No.: 1436 of 2013
Date of Judgement/Order : 30/06/2015
Related Assessment Year :
Courts : All High Courts (4669) Bombay High Court (867)

Brief of the Case

In the present facts of the Case there were two vital issues contended by the Revenue which were dismissed by the Hon’ble High Court by observing that the amount received as restrictive covenant is a capital receipt and is taxable only as a revenue receipt w.e.f. 1/4/2003. Regarding second issue the Hon’ble High Court held that the book profits declared under P/L account cannot be disturbed.

Facts of the Case

There was an agreement between an assessee and a company due to which Assessee was prohibited from utilizing its business know-how for 5 years. The AO was of the view that the consideration received is taxable as capital gains u/s 55(2)(a) of the Act.

The AO for the assessment year recomputed the book profit under the MAT provision (section 115JA) by adding the amount received on account of goodwill and non-compete fees which were directly taken into Balance Sheet. The AO was of the views that the same amount should be routed through P/L account under the Companies Act.

Held by CIT(A)

The CIT(A) allowed the appeal of the Assessee by observing that the amendment to Section 55(2)(a) of the Act on 1.4.1998 will not take within its a negative / restrictive covenant. This negative / restrictive covenant was taxable after the introduction of Section 28(va) in the Act w.e.f. 1.4.2003.

Regarding second issue CIT(A) allowed Assessee’s appeal by relying on the Judgment of Apollo Tyres Ltd. V/s CIT [2002] 255 ITR 273 (SC), where it was held that the AO has no power to disturb the profits in the P/L Account as except to the extent provided in the explanation to Section 115JA.

Held by the Tribunal

The Hon’ble Tribunal was agreed with the view of CIT(A) and affirm the decision by relying on the Judgement of Hon’ble Supreme Court in the case of Guffic Chem Pvt.Ltd. v/s CIT, [2011] 332 ITR 602(SC), where it was held that 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 which has been made taxable after 1.4.2003.

Regarding the second issue the Hon’ble Tribunal rejected the contentions of Revenue and relied on the Judgment of Apollo Tyres Ltd. V/s CIT(supra) as followed by CIT(A) in it’s appeal.

Held by the Hon’ble High Court

The Hon’ble High Court while dismissing the appeal of the Revenue regarding the first issue held that 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. In the present case, it stands covered only w.e.f. 1.4.2003 on introduction of Section 28(va) of the Act.

The Hon’ble High Court also dismissed the second issue and held that there is no debit to the P/L account of the amount of Reserves. 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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