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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?

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 31st 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. 31st July, 1997 but said scheme of transfer of assets and liabilities is effective from 1st July, 1996. Therefore all rights and liabilities have become effective under the said agreement as on 1st July, 1996. There is no dispute to the fact that profit in respect of Condom Division which have taken place after 1st 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 1st 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 31st July, 1997 approving scheme of arrangement with effect from 1st 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.

3. It was contended that sale of said Condom Division and the capital gain on transfer thereof was offered to tax in the return for assessment year 1997-98. That non-compete allowance which was received by assessee was also shown in the return of assessment year 1997-98 as non taxable, being a capital receipt. It was also contended that Raymond Ltd. under the said non-compete agreement read with Joint Venture Agreement was to receive a sum of Rs. 60 lakhs and same was also shown in the return of Raymond filed for the year 1997-98. It was contended that AO has considered said amount of Rs. 1 crore as capital receipt in the assessment year under consideration merely because date of Court’s order is after 31st March, 1997 but totally overlooked the fact that as per order of High Court, effective date of arrangement of transfer of Condom Division was 1st July, 1996. On behalf of assessee, action of AO was disputed stating the following reasons before Ld. CIT(A) which are mentioned at page 6 of CIT(A)’s order as under:

i)  “The AO failed to appreciate that the non-compete allowance of Rs. 1 crore received by the assessee was in respect ofthe hive off of its Condom Division and that the same was a capital receipt, not liable to tax.

ii) The AO overlooked the fact that as per the High Court’s order, the Joint Venture Agreement was sanctioned by the High Court and the same relates back to the appointment date which was 1st July, 1996. Therefore, the effective date of the transfer as per the settled position in law as enunciated by the Supreme Court in the case of Marshall Sons and Co. (India) LtdVs ITO (223 ITR 809) would be 1st July, 1996. Accordingly, the transfer ofthe said Division has taken place in the A.!. 1997-98.

iii) In the identical circumstances, such consideration received by Raymond Ltd. under the aforesaid clause 14.4 was brought to tax in the A.!. 1997-98 by the AO.

iv) In the case of the assessee also, the AO has accepted the fact that the transfer had taken place in the A.!. 1997-98 and accordingly, the capital gain on the transfer of the said undertaking was brought to tax.

v) The AO has in fact, accepted that the transfer of the said division had taken place in the A.!. 97-98 and has accordingly taxed the profits of the same only upto 30.6.96 and the profits after this date are not brought to tax in the hands of the assessee.”

4. Ld. CIT(A) considered the submissions of assessee vide para-5 and held that for all practical purposes, actual date of transfer is the effective date i.e. 1st July, 1996 and therefore, non-compete fee of Rs. 1 crore though received by assessee in assessment year 1998-99 but has to be considered in assessment year 1997-98. The said para-5 of order of Ld. CIT(A) reads as under:

“I have carefully gone through the facts of the case and the contentions of the appellant as also of the AO and I am of the view that the clauses ofthe Joint venture have to be strictly followed where the agreement and the non-compete agreement and the whole ofthe schedule was effective from 1st July, 1996. The Joint Venture Agreement was entered into on 17.12.96, the non-compete agreement which was part of the JV Agreement was signed on 4.1.97. The effective date of transfer of all the assets was 1st July, 1996. The effective entries though made subsequently but relates from the period 1st July, 1996. Therefore, all the effective events on the basis of mercantile system of accounting were during the accounting year 1996- 97 i.e. relevant to A.!. 97-98 and the non-complete allowance was also part of the Joint Venture Agreement. The AO could not assess the particular income on the basis of the same JV in the A.!. 97-98 while part ofthe other income in A.!. 98-99. It was rightly pointed out that when the capital gains charged to tax by AO in the A.!. 97-98, non-compete allowance which was also part of the same deal could not be considered for A.!. 98-99. It is also correctly stated that after receipt of the High Court order, the terms of agreement would relates back to the effective date which is stated in the order itself. There, 17.96 is the actual date of the transfer and not the date of the order and for all practical purposes, all the entries related to A.!. 97-98. Since, all the events took place in the A.!. 97-98 itself , the impugned sum relates to A.!. 97-98 and not to A.!. 98-99. Therefore, no addition in this regard could be made in the year under consideration.”

5. It is relevant to state that Ld. CIT(A) also relied on the decision of  Hon’ble Apex Court in the case of Marshall Sons & Co. India Ltd. Vs ITO 223  ITR 809 wherein Hon’ble Apex Court has held that date of amalgamation/transfer was the date with effect from which it is provided in the scheme of amalgamation that shall take place unless Court specifies any other date of amalgamation/transfer. It was held that where the court does not prescribe any such date but merely sanctions the scheme presented to it, it should follow that date of transfer is the date specified in the scheme as ‘Transfer Date’. It is relevant to state that the case before us, the Hon’ble Bombay High Court approved the scheme of arrangement of transfer of Condom Division the effective date as mentioned in the scheme on 1st July, 1996. Ld. CIT(A) has also stated that on similar facts and circumstances in the case of Raymond Ltd. an amount similar in nature received was brought to tax in assessment year 1997-98 and not in later year. We reproduce relevant para i.e. para 5.2 of order of Ld. CIT(A) which is as under:

“The appellant has also rightly pointed out that on similar facts and the circumstances in the case of Raymond’s Ltd. an amount similar in nature received has been brought to tax in A.!. 19997- 98 and not in later year. Surprisingly, the AO in the present case as well has considered resultant capital gains in A.!. 1997-98 while non compete fee which arises from the same scheme, has been taxed in the subsequent assessment year. It is also noted that the AO has in fact, accepted that the transfer ofthe said division had taken place in the A.!. 1997-98 itself and had accordingly, taxed the profits of the same only upto 30.6.96 and the profits after this date were not brought to tax in the hands of the assessee.”

Hence, department is in further appeal before Tribunal.

6. On behalf of department, it was contended that actual date of transfer of assets to be considered for taxing capital gain and referred the decision of ITAT Mumbai Bench in the case of Shri Sureshchandra Agarwal Vs ITO in ITA No. 2377/M/10 and Smt. Sushila S. Agarwal Vs ITO (2011) TIOL 66s dt. 14th September, 2011 and decision of ITAT ‘B’ Bench Pune in ITA No. 834/PN/2008 dt. 4.10.2011 in the case of B.V. Kodre (HUF) Vs ITO. The Ld. Departmental Representative submitted that assets and liabilities of Condom Division did not take place in assessment year 1997-98 and same had been transferred only after Hon’ble Bombay High Court approved the scheme vide its order dt. 31.7.1997. Therefore actual transfer of assets have to be considered in assessment year 1998-99 and consequently non compete amount of Rs. 1 crore received by assessee in assessment year 1998-99 has rightly been considered for tax as capital gain by AO. However, Ld. AR supported the order of Ld. CIT(A) to consider non compete amount of Rs. 1 crore received by assessee as capital receipt in assessment year 1997-98. Ld. AR submitted that this non compete amount of Rs. 1 crore relates to assessment year 1997-98 as Joint Venture Agreement was entered into on 17.12.1996 by which assessee agreed to transfer its Condom Division with assets and liabilities and all rights including Industrial and other licences, permits, trade names, copy rights, trade marks marketing and distribution net work to JKAL. The Ld. AR referred to Clause 14.4 of Joint Venture Agreement, a copy of which is placed at page 109 of Paper book and submitted that pursuant to Joint Venture Agreement, it was agreed that assessee ceased to continue or initiate any business which was similar or would result in competition with the Condom Business of JKAL and for that purpose it was also decided to enter into a Non-Compete Agreement, which was entered into on 4.1.1997. That pursuant to non-compete agreement it was agreed that assessee to receive Rs. 1 crore by way of consideration. Besides, Raymond to receive non compete amount of Rs. 60 lakhs. Ld. AR referred to pages 49 to 59 of Paper Book which is a copy of Non Compete Agreement dt. 4.1.1997 entered into between Pacific Dunlop Ltd., the assessee- company and Raymond Ltd. The Ld. AR submitted that till the scheme was approved by Hon’ble Bombay High Court by its order date 31.7. 1997, assessee company carried on business for and on behalf of JKAL and on approval of scheme, assessee company transfer not only the assets and liabilities of Condom business but also profit for the period 1.7.1996 to 31.3. 1997 in respect of said division to JKAL. To substantiate his submission, Ld. AR referred page-1s of Paper book which is a copy of notes on account of assessee company for the year ended 31.3.1998. Ld. AR also filed separately a copy of Annual Report and accounts of assessment year 1997-98 and referred to page-3 thereof which is a part of directors report to share holders and submitted that it was specifically stated that on approval of scheme by Hon’ble Bombay High Court consequential adjustments would be made in the next year account in respect of assets and liabilities of Condom Division and the assessee did so after the scheme was approved by Hon’ble Bombay High Court. Ld. AR submitted that once scheme is approved by Hon’ble High Court, the Hon’ble Apex Court has held in the case of Marshall Sons & Co. (India) Ltd. Vs ITO (supra) that date of amalgamation as provided in the scheme of amalgamation and approved by Company Court be deemed to have taken place on a date as provided in the scheme, even though the amalgamation is sanctioned by Company Court later. He submitted that in the said case the date of scheme of amalgamation was provided 1st January, 1982 but sanctioned by company court was later on, and the amalgamating company was struck off the Registrar of Companies on 21.1.1986 but the date of scheme was held to be 1.1.1982. He submitted that in the case of assessee even though scheme was approved in assessment year 1998-99, but effective date as approved by Hon’ble Bombay High Court is 1st July, 1996 and therefore all the rights and liabilities have to be considered to have crystallized as per the scheme in assessment year 1997- 98. Ld. AR submitted that assessee filed return for assessment year 1997- 98 on 28th November, 1997 and referred page-1 of return (copy filed separately) and submitted that in the said return, assessee stated that non compete allowance of Rs. 1 crore had accrued but it was claimed to be exempted from income tax. The Ld. AR submitted that in view of decision of Hon’ble Apex Court in the case of Marshall Sons & Co. (India) Ltd. Vs ITO (supra) the right to receive non compete fee to assessee arose on 1st July, 1996 and therefore Ld. CIT(A) has rightly held that it is to be considered in assessment year 1997-98 and not in assessment year 1998-99. He submitted that date of payment is not relevant. Ld. AR also submitted that AO himself assessed the capital gain in respect of shares allotted to assessee by JKAL on transfer of Condom business in assessment year 1997-98, even though shares were actually allotted in assessment year 1998-99 i.e. subsequent to approval of scheme by Hon’ble High Court. He submitted that order of Ld. CIT(A) to hold that said amount of Rs. 1 crore is to be considered in assessment year 1997-98 is in order.

7. We have carefully considered the submissions of Ld. Representatives of parties and have perused orders of authorities below. We have also perused relevant extract of Joint Venture Agreement date 17.12.1996 copy placed at pages 60 to 73 and 109 of paper book, copy of Non-Compete Agreement date 4.1.1997 placed at pages 49 to 59 and also scheme of arrangement filed before Hon’ble Bombay High Court placed at pages 75 to 80 of Paper book as well as Hon’ble High Court order approving the scheme placed at pages 81 to 89 of paper book and have also considered the relevant pages of Paper Book and the cases cited before us (supra).
8. We observe that 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 dt. 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 dt. 31st 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. 31st July, 1997 but said scheme of transfer of assets and liabilities is effective from 1st July, 1996. Therefore all rights and liabilities have become effective under the said agreement as on 1st July, 1996. There is no dispute to the fact that profit in respect of Condom Division which have taken place after 1st 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.

9. In view of above, we hold that there is no reason to interfere with the order of Ld. CIT(A). Hence we uphold his order and reject ground of appeal taken by department.

10. In the result, appeal filed by department is dismissed. Order pronounced on this 16th day of December, 2011

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