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

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