Non-compete fees accrues on the appointed date of the Scheme and not in the year of approval

DCIT Vs. J.K. Investo Trade (India) Ltd. (ITAT Mumbai)- Issue before the Tribunal was that Whether non-compete fees payable pursuant to a joint venture agreement for transfer of manufacturing division, through a Scheme of arrangement, which is sanctioned by the High Court is taxable in the year of Appointed Date or Year of sanction of the Scheme or on receipt?

As per Joint Venture Agreement, effective date of transfer of assets and liabilities of Condom Division of assessee to JKAL is 1st July, 1996 and under the said Joint Venture Agreement as per Clause 14.4, assessee company shall cease to continue or initiate any business which is similar or will result in competition with the Condom Business of JKAL. Not only assessee company but Raymond Ltd, which is the majority share holder in assessee company, shall also ceased to continue or initiate any business which is similar or will result in competition with Condom business of JKAL. Pursuant thereto, a non- compete agreement was entered into date 4.1.1997 and Raymond Ltd. received a sum of Rs. 60 lakhs and assessee company received a sum of Rs. 1 crore by way of consideration. There is no dispute to the fact that said Non-compete fee of Rs. 1 crore was received by assessee in the assessment year under consideration i.e. after the scheme was sanctioned by Hon’ble Bombay High Court by its order date 31^st July, 1997 but undisputedly the said scheme is effective from appointed date which is ₁st July, 1996 as per Joint Venture Agreement. The Hon’ble Apex Court has held in the case of Marshall Sons & Co. (India) Ltd.(supra) that date of scheme of amalgamation of company is the date with effect from which it is provided in the scheme if the same is not altered by the Company Court sanctioning amalgamation even though amalgamation is sanctioned by Company Court later on and the amalgamating company is struck off the register of companies later on. In view of decision of Hon’ble Apex Court (supra), we agree with Ld. AR that even if scheme is approved by Hon’ble High Court by its order dt. 31^st July, 1997 but said scheme of transfer of assets and liabilities is effective from 1^st July, 1996. Therefore all rights and liabilities have become effective under the said agreement as on 1^st July, 1996. There is no dispute to the fact that profit in respect of Condom Division which have taken place after 1^st July, 1996 have been shown in the name of JKAL on approval of scheme by Hon’ble High Court. There is also no dispute to the fact that shares which have been allotted to assessee- company as per Joint Venture Agreement, though allotted after the scheme was approved by Hon’ble High Court i.e. after 31.3.1997 and the capital gain which has arisen thereon on account of transfer/ allotment of shares to assessee- company after 31.3.1997, but same has been assessed and considered by department in assessment year 1997- 98. We also observe that assessee in the return filed for assessment year 1997- 98 has shown in the return, non compete allowance/ fees of Rs. 1 crore and claimed it to be exempted from income tax. We are of the considered view that the right to receive the said compete fee of Rs. 1 crore accrued to assessee in assessment year 1997- 98 even though it has been received by assessee in the assessment year 1998-99 because said non compete fee is linked with transfer of business of Condom Division by assessee to JKAL which has taken place with effect from 1.7.1996 i.e. relevant to assessment year 1997- 98. Not only this, we observe that similar amount received by Raymond Ltd., for Rs. 60 lakhs under same Non Compete Agreement has been brought to tax by department in assessment year 1997- 98 and not in subsequent year. Hence we hold that Ld. CIT(A) has rightly concluded that amount of Rs. 1 crore received by assessee as per Non Compete Agreement dt. 4.1.1997 is to be assessed in the assessment year 1997- 98 and not in assessment year 1998- 99.

INCOME TAX APPELLATE TRIBUNAL, MUMBAI

ITA No. 1671/Mum/2010 Assessment Year- 1998- 99

The DCIT,

Vs.

M/s. J.K. Investo Trade (India) Ltd.

Date of pronouncement: 16.12.2011

ORDER

PER B.R. MITTAL JM:

The Department has filed this appeal for assessment year 1998-99 against order of Ld. CIT(A) dt. 16.12.2009.

2. The relevant facts giving rise to this appeal are that assessee is a  Public Ltd. Company carrying on business of manufacturing of chemical products. Besides, said business, assessee was having Condom manufacturing plant located at MIDC Waluj, Aurangabad, which was set up in the year 1991. The assessee company decided to hive off its Condom division. Therefore a scheme of arrangement was formulated with J.K. Condoms Pvt. Ltd. (presently known as J.K. Ansell Ltd.), (hereinafter to be referred in short as JKAL). In this respect, a Joint Venture Agreement dt. 17.12.1996 was entered into between Pacific Dunlop Ltd., a company incorporated under the laws of Australia and having its registered office at Level 41, 101 Collins Street, Melbourne, Victoria 3000 (hereinafter referred to as ‘Pacific Dunlop and Pacific Dunlop Holdings (Singapore) Pte, Ltd., a company incorporated under the laws of Singapore and having its registered office at 6, Loyang Wat 1, #02-02 Singapore 508704 (hereinafter referred to as ‘PDSL’. The assessee company i.e. M/s. J.K. Chemicals Ltd. presently known as M/s. J.K. Invest Trade India Ltd (hereinafter to be referred as assessee-company) and Raymond Ltd., a company incorporated under the laws of India and having its registered office at Plot No. 156/H No.2, Village Zadgaibm Ratnagiri, Maharashtra 415 612 (hereinafter referred to as ‘RAYMOND’). Under the said joint venture agreement, it was inter alia decided that in consideration of transfer of Condoms division by assessee-company, M/s. JKAL was to pay to assessee a sum of Rs. 5.51 crores and also assessee company to be paid an amount of Rs. One crore under the non-compete agreement which was entered into on 4.1.1997 with PDSL. A copy of Joint Venture Agreement dt. 17.12.1996 entered into containing relevant clauses are placed at pages 60 to 73 and at page 109 of Paper Book. A scheme of arrangement between assessee company and M/s. JKAL u/s. 391 r.w.s. 394 of Companies Act was prepared and filed before Hon’ble Bombay High Court for its approval. It is relevant to state that as per Joint Venture Agreement, effective date of transfer was decided to be on 1^st July, 1996 for the purposes of valuation of assessee’s Condom business or such other date as may be agreed to by parties. The Hon’ble Bombay High Court approved the scheme by its order date 31^st July, 1997 approving scheme of arrangement with effect from 1^st July, 1996 and all assets and liabilities of assessee’s Condom division was transferred to M/s. JKAL with effect from 1.7.1996 as per audited account of said division as on 30.6.1996. It is observed that assessee filed return of income for assessment year 1997-98 and also offered capital gain in respect of consideration received on transfer of its Condom division. However, nom-compete amount of Rs. 1 crore which assessee was entitled to be received as per Joint Venture Agreement read with non-compete agreement entered into, assessee did not include it in the computation of income for assessment year 1997-98 as assessee received said non-compete amount of Rs. 1 crore during assessment year under consideration. In view of above, the Assessing Officer stated that though non-compete agreement was entered into in January, 1997, it was of littlel consequence since High Court order was received only on August, 1997 and whole scheme of collaboration became operative only thereafter. Since no legal right had accrued by assessee for non-complete fee before High Court approved the scheme and the actual transfer of business, AO considered said non compete amount of Rs. one crore as accrued and due to assessee in assessment year 1998-99 and charged to tax under the head capital gain. Being aggrieved, assessee filed appeal before First Appellate Authority.