Sum Received in lieu of relinquishment of right to sue 'Coca-Cola' was capital receipt: ITAT

Consideration received on relinquishment of right to sue is not taxable under section 28; it is a capital receipt

Fact:

a)The assessee-company entered into a franchisee soft drink bottling agreement with Cadbury Schweppes Beverages India (P) Ltd. (CSBIPL) to sell its soft drinks. CSBIPL transferred its soft drink brands to Coca Cola. Coca Cola refused to encourage sale of cold drink sold by assessee to avoid competition to its own products.

b)Assessee suffered huge losses, thus filed a complaint under Monopolies and Restrictive Trade Practices Act (MRTP) before the MRTP Commission. Thereafter, the assessee and coca cola had entered into a settlement agreement through which the assessee had transferred its bottling business assets as well as immovable property to Coco Cola against a consideration.

c)Assessee submitted that the entire compensation received was in lieu of withdrawing the right to sue against Coca Cola and was patently a capital receipt. But Assessing Officer treated the compensation as revenue in nature under section 28(ii)(c) and taxed accordingly.

d)CIT (Appeals) held that provisions of section 28(va) were applicable and not section 28(ii)(c).Consequently the part of compensation indicated by Assessing Officer was held taxable under section 28(va). Aggrieved-assessee filed instant appeal before tribunal.

Tribunal held in favour of assessee as under:

1)All the clauses of the agreement between the assessee and coca colareflect that the real intent, objective and purpose of the payment of compensation as per settlement agreement was to ensure withdrawal of all the pending litigation by assessee, from various forums instituted for breach of terms or conditions.

2)The dominant consideration for compensation being surrendering the right to sue; its neither in lieu of surrender of any agency or agreement for non-competition and thus, the compensation neither fell in the ambit of section 28(ii)(c) nor under section 28(va).

3)Assessee had vehemently denied having anywhere admitted that part of the compensation was for non-competition. The compensation in question was meant, intended and paid for withdrawal of aforesaid litigation instituted by assessee which could have resulted in many adverse consequences for the reputation of Coca Cola besides entailing huge cost and efforts of litigation.

4)Thus, the impugned amount was a capital receipt hence not liable to Income-tax. Satyam Food Specialities (P.) Ltd. v. DCIT [2015] 57 taxmann.com 194 (Jaipur - Trib.)

Sums received in excess of capital account by retiring partner were capital receipts

Additional amounts paid to retiring partners in excess of the capital account are not in nature of any profit or income; hence not taxable

Facts:

a)  The assessees (i.e. partners) retired from the firm and at the time of retirement, they were paid amounts in addition to the amounts lying in their capital accounts.

b)  The Assessing Officer invoked section 28(va) and held that the amount received by partners in excess of the capital account was to be treated as business income on ground that while retiring from the firm, partners had agreed not to carry on any activity in relation to any business.

c)   The additional amount was, thus, brought to tax in the respective hands of the assessees. On appeal, the CIT (A) allowed the appeal of assessees.

The Tribunal held in favour of assessees as under:

1)  The retirement deeds executed by the parties were not in the nature of any agreement restraining the parties from carrying on business activities. Therefore, section 28(va) was not applicable if partners were retiring from the business. That clause was more applicable to situations like non-competition agreement, etc;

2)  The character of additional amounts paid to the retiring partners represented the share of the retiring partners in the worth and value of the business in which they were partners. The worth and value included the standing of the business, the goodwill and many other intangible virtues;

3)  So, what was paid to the retiring partners was their rightful share in that worth and value of the firm. The only thing was that their shares in worth and value of business had been separately computed;

4)  Therefore, the additional payments made to the retiring partners were not in the nature of any profit or income within the meaning of section 28(va); They were non-taxable capital receipts. Thus, the CIT(A) was right in holding that the amounts were not taxable. – ACIT v. P. Sivakumar (HUF) [2014] 43 taxmann.com 211 (Chennai - Trib.)