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.)

In case of transit sales via dealer, consignee can take credit on basis of invoice issued by manufacturer/importer

The Government vide Notification No. 8/2015 - Central Excise (NT), dated 1-3-2015inserted 3rd and 4th proviso to rule 11 of Central Excise Rules, 2002. The amendment provided facility to direct dispatch of goods to customer’s premises without bringing them to premises of dealer/importer.

It has been clarified that the purpose of inserting said provisos is to allow an additional facility for direct transport of goods from the manufacturer/importer to the consignee where the consignee can avail Cenvat Credit on the basis of the Cenvatable invoice issued by the registered dealer/registered importer. This facility obviates the need for the goods to be brought to the premises of the registered importer/registered dealer for subsequent transport of the goods to the consignee.

Further, various issues referred by the trade are clarified as follows:

1)Consignee can avail cenvat on the basis of invoice issued by the manufacturer/registered importer where registered dealer negotiates-

osale of an entire consignment from manufacturer/registered importer and orders direct transport of goods to the consignee

osale of goods from the total stock ordered on a manufacturer/importer to multiple buyers and orders direct transportation of goods to the consignees where the manufacturer/importer is willing to issue individual invoices for each sale in favour of the consignees for such individual sale. In both the forgoing cases, dealer won’t issue cenvatable invoice but it can issue commercial invoice.

2)Consignee can avail cenvat on the basis of invoice issued by registered dealer where such dealer negotiates sale by splitting a consignment procured from a manufacturer/registered importer and issues Cenvatableinvoices for each of the sale. In such case, it would now be possible for the dealer to order direct transport of the consignments as per the individual sales to the consignee without bringing the goods to his godown.

3)Where goods are sold by the registered importer to an end-user (say a manufacturer) who would avail credit on the basis of importer's invoice and the goods are transported directly from the port or warehouse at the port to the buyer's premises, the amendment prescribes that for such movement the factum of such direct transport to the buyer's premises needs to be recorded in the invoice - CIRCULAR NO.1003/10/2015-CX, DATED 5-5-2015.

LPG subsidy isn't taxable as it is for welfare of people; Govt. clarifies provision in Finance Bill, 2015

A subsidy is a form of financial aid or support extended to an economic sector (or institution, business, or an individual) generally with the aim of promoting economic and social policy. Subsidies come in various forms - direct one (cash grants, interest-free loans) and indirect ones (tax breaks, insurance, low-interest loans, depreciation write-offs, rent rebate etc.).

There was an unendingdispute between the revenue and the taxpayers about the tax treatment of the subsidy received from Government or any other authority. The revenue always tried to treat subsidy as revenue receipt but the assessees always opposed such treatment and wanted to treat it as capital receipt.

The Government tried to settle this dispute by proposing amendments to the Finance Bill, 2015 as passed by Lok Sabha. It has been proposed that assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession, etc. (by whatever name called) by the Government or any authority or body or agency, in cash or kind to the assesse (other than one considered under Explanation 10 to Section 43(1)) would be includible in income.

In view of aforesaid amendment certain doubts had arisen on tax treatment of LPG subsidy received by individuals under direct benefit transfer. Certain tax experts were of the view that this proposal would deem such LPG subsidy as income of individuals and they would be required to pay taxes on subsidy received in their bank accounts.

In this regard, the CBDT has clarified that the proposed amendment in the Finance Bill, 2015 would not be applicable to individuals not having any income chargeable under the head "Profits and gains of business or profession" and receiving LPG subsidy or any other subsidy which is for the welfare of the individuals. Thus, it has been clarified that LPG subsidy received by Individuals would not be taxable.

CAT dismisses complaint of Adidas against Nike as latter had taken permission of ICC to use Sachin’s name on T-shirts

Where pursuant to sponsorship agreement with International Cricket Association Nike was permitted to use names of cricketers including Sachin Tendulkar on its sports products for purpose of advertising, it could not be said that Nike had violated separate agreement between Adidas and Tendulkar entered for advertising Adidas sports product; unfair trade practice could not be alleged

Facts:

a)The complainant-company Adidas and the respondent-company Nike were engaged in business of manufacturing, distributing and selling quality footwear, sports equipments and other products and were competitors in the market.

b)The Complainant's brand, i.e., Adidas was endorsed by Cricketer Sachin Tendulkar pursuant to an agreement between both parties.

c)Later on, Nike signed an agreement for sponsorship and supply of footwear, apparel and related cricketing accessories with International Cricket Association and sold T-shirts bearing names of various members of Indian Cricket Team including Sachin Tendulkar’s

d)Accordingly, Adidas filed complaint alleging unfair and restrictive trade practice indulged by Nike.

The Competition Appellate Tribunal held as under:

1)Since sponsorship and licence agreement entered between Nike and Cricket association permitted former to use name of members of cricket team for purpose of advertising in different ways, same did not amount to unfair trade practice

2)The products such as T-shirts and Tees manufactured by Nike did not violate agreement entered between Adidas and Tendulkar; hence, Nike could not be held to have indulged in any unfair trade practice and, thus, complaint was to be dismissed - ADIDAS INDIA MARKETING (P.) LTD. V. NIKE INDIA (P.) LTD. [2015] 56 TAXMANN.COM 344 (CAT)

MCA simplifies incorporation process; releases new integrated Form INC-29 for Cos applying for incorporation

With a view to simplify the process of incorporation of a company, MCA has introduced new ‘Integrated Incorporation Form – INC.29’ which is effective from 01.05.2015. Form No. INC.29 is a single integrated from for incorporating a company. Form No. INC. 29 comprises of three separate segments namely, 1) Application for allotment of DIN; 2) Application for reservation of Name, 3) Application for incorporation of Company. The key features of Form No.INC.29 are as follows:

a)Now, applicant of the proposed company can propose only one name for approval in this e-form.

b)Application for DIN is permissible upto 3 directors through this INC-29. Personal details in relation to the director or subscriber is not required in case director/subscriber already has DIN. Scanned copy of Memorandum and Articles of Association need to be attached with the form.

c)There will be an additional Fee for the form is Rs. 2000/- in addition to the normal registration fee.

d)Facility for using ‘integrated form’ is not available for incorporating Section 8 companies.

Introduction of this new form has resulted in doing away with filing of the following e-forms:

1.Form DIR-3 (Application for allotment of DIN in case proposed Directors have no DIN)

2.Form INC-1/INC-2 (Application for Reservation of name)

3.Form INC-7 (Application for incorporation of a company other than OPC)

4.Form DIR-12 (Details of Directors)

5.Form INC-22 (Details of registered office) (Optional at the time of incorporation)

However, it is to be noted that the facility to file single integrated application form for incorporation in Form No INC.29 is optional. If any stakeholder wants to avail the existing process for incorporating company he may use aforesaid forms instead of filing single integrated form.

Rental income taxable as business income if main object of Co. as per MOA is to earn income by letting out properties

Where in terms of memorandum of association, main object of assessee-company was to acquire properties and earn income by letting out same, said income was to be brought to tax as business income and not as income from house property.

Facts:

a)The assessee-company was incorporated with main object, as stated in the Memorandum of Association (MOA)of acquiring the properties and letting out of those properties.

b)It had rented out such properties and shown the rental income received therefrom as income from business.The Assessing Officer (AO) held that since the income was received from letting out of the properties, it was in the nature of rental income. He, thus, treated it as income from house property and taxed accordingly.

c)Assessee filed appeal before CIT(A) who treated such rental income as income from business, which was confirm by the Tribunal. d)On further appeal, the High Court set-aside orders of lower authorities. The aggrieved-assessee filed instant appeal before the Supreme Court.

The Supreme Court held in favour of assessee as under:

1)The main object of the company was to acquire and hold the properties and to let out those properties.

2)In 'Karanpura Development Co. Ltd. v. Commissioner of Income Tax, West Bengal' [44 ITR 362 (SC)] the leasing out of the coal fields to the collieries and other companies was the business of the assessee. The income received from letting out of those mining leases was shown as business income. Department took the position that it was to be treated as income from the house property. The Court pointed out that the deciding factor was not the ownership of land or leases but the nature of the activity of the assessee and the nature of the operations in relation to them. It was highlighted and stressed that the objects of the company must also be kept in view to interpret the activities. It held that such income was to be treated as business profits.

3)The judgment in case of Karanpura Development Co. Ltd (Supra)was squarely applied to the facts of the present case. Thus, after applying the aforesaid principle to the facts, which were there before the Court, it came to the conclusion that income had to be treated as income from business and not as income from house property.

4)In the instant case, in the return of income that was filed by the assessee,the entire income was shown through letting out of properties. There was no other income of the assessee except the income from letting out of these two properties.Thus, assessee had rightly disclosed the income under the Head Income from Business as it could not be treated as 'income from the house property'. - CHENNAI PROPERTIES & INVESTMENTS LTD. V. CIT[2015] 56 taxmann.com 456 (SC)

Assessee can be prosecuted anytime when exonerated in penalty proceedings on ground of limitation and not on merits

Where exoneration in adjudication/penalty proceedings is not on merits but on ground of limitation, assessee-accused cannot take shelter thereof to avoid prosecution proceedings; since there is no time-limit for launching prosecution, same can be launched despite recovery/penalty becoming time-barred.

Facts:

a)Department initiated prosecution proceedings for wrongful credit.

b)Revisional court discharged assessee on ground that penalty proceedings were decided in its favour and department's appeal thereagainst before High Court was dismissed.

c)Department argued that penalty was dropped on ground of limitation and not on merits and appeal before High Court was dismissed for non-appearance; hence, same cannot be relied upon in criminal matters, where there is no time-limitation.

High Court held in favour of revenue as under:

1)Proceedings for recovery of duty with penalty and prosecution/ punishment are separate proceedings. For recovery, there is time-limit of 1 year/5 years in section 11A, but, for prosecution there is no time-limit in section 9.

2)In this case, despite arguments on merits, adjudication/recovery/penalty was dropped on ground of limitation and not on merits and appeal thereagainst was dismissed on ground of non-appearance and not on merits.

3)Since exoneration in adjudication/penalty proceedings is not on merits, assessee-accused cannot take shelter thereof to avoid prosecution proceedings. Since there is no time-limit in section 9, prosecution proceedings can be launched despite recovery/penalty becoming time-barred. Hence, prosecution was valid - Superintendent (Prosecution) Central Excise & Customs Department v. Ashok Leyland Ltd. (2015) 56 taxmann.com 309 (Rajasthan).

Editor's Note:

In adjudication, the appellate authority may decide appeal on grounds of limitation and not on merits despite strong case on merits. In such cases the prosecution may be initiated by the department since there is no adjudication on merits. It appears that in adjudication proceedings on huge tax demand, the assessee must press more on merits (if they are strong enough) and not on limitation to avoid prosecution.

No TP adjustment by treating share application money as loan to AE merely due to delay in issuance of shares

Share application money could not be treated as loan amount merely because there was delay in issuance of shares by subsidiary in name of assessee, particularly when cause for delay was duly explained by assessee

Facts

a)The assessee advanced certain sum to its subsidiaryat Philippines, in the form of share application money. However, shares were not allotted till two subsequent years and subsidiary continued to use those funds.

b)TPO was of the view that the share application money was actually in the nature of loan as there was considerable delay in issuance of shares by subsidiary in name of assesse. Accordingly, TPO made addition to assessee’s income by determining the arm's length interest rate on the said transaction.

c)Commissioner (Appeals)confirmed the addition made by TPO. Aggrieved by the order, assessee filed the instant appeal before the tribunal.

d)On appeal, the assessee submitted that the delay was due to obtaining necessary approval from the Securities and Exchange Commission, Phillipines and finally, the shares were issued as per the share certificate, which had been produced by the assessee as additional evidence before the tribunal.

The tribunal held in favour of assessee as under-

1)Though there was delay in issuance of shares against the share application money given by the assessee to its subsiary, however, the assessee had duly explained the cause of delay and it was not a deliberate delay for using the money by subsidiary in the garb of share application money

2)Since share certificates were not before the authorities below, for limited purpose of considering the said certificates, the issue was remanded to Assessing Officer/TPO to consider the same.

3)As far as the re-characterization of the share application money as loan was concerned, the High Court in the case of DIT, International Taxation v. Besix Kier Dabhol S.A. [2012] 26 taxmann.com 169 (Bom.) had considered an identical issue and held that there were at the relevant time and even on relevant day no thin capitalization rules in force to consider debt as an equity.

4)Accordingly, subject to verification of the share certificates by the Assessing Officer, the share application money could not be treated as loan amount merely because there was a delay in issuance of shares by the subsidiary in the name of the assessee, particularly when cause for delay was duly explained by assessee- ADITYA BIRLA MINACS WORLDWIDE LTD. V. DCIT [2015] 56 taxmann.com 317 (Mumbai - Trib.)

CIT(A) should adopt market rates in valuers directory/stamp duty reckoner in absence of sale instances in same area

Where no sale instances were available of same area, Fair Market Value of land could be determined by relying upon rate mentioned in Indian Valuers Directory and Reference Book and Stamp Duty Ready Reckoner and by adopting annual rate of appreciation method

Facts

a)The assessee-company sold its factory land. The assessee reported fair market value (FMV) of land as on 1-4-1981 at Rs. 14.12 crore on the basis of report of a registered valuer and, accordingly, it computed the capital gains;

b)As no instances of sale of similar property in same area were available, registered valuer determined the value of property by presuming the value it would fetch if residential flats were constructed and sold on that land in 1981, utilising the maximum Floors Space Index (FSI);

c)The Assessing Officer (AO) referred matter to Departmental Valuation Officer (DVO) who determined the value of land, taking into account rate of land in undeveloped industrial area as on 1-4-1981 as per Indian Valuers Dictionary and Reference Book (IVDRB), at Rs. 1.7 crore;

d)The Commissioner (Appeals)rejected the valuation made by registered valueras he determined the value of land on the basis of some imaginary situations. He also did not agree with the DVO’s valuation as land was situated in a developed industrial area;

e)The CIT(A) taking into account the rate quoted in IVDRB and Stamp Duty Ready Reckoner and by adopting annual rate of appreciation method worked out FMV at Rs. 2.78 crore;

f)Aggrieved by the order of CIT(A), assessee filed the instant appeal before the Tribunal.

The Tribunal held in favour of revenue as under:

1)It is true that for valuation purposes some kind of assumption has to be taken especially if valuation is to be done in the year 2001 for the year 1981. But, assumption should have some basis. In the instant case, the very base adopted by the valuer was totally improper as concept of FSI was not prevalent in the year 1981;

2)The value determined by DVO was also improper as land was situated in developed industrial area and not in under-developed industrial area;

3)CIT(A) determined the value of property by referring to IVDRB and stamp duty Ready Reckoner and by adopting annual rate of appreciation method. So, the method adopted by him was a better 'guess work' than the guess work done by the registered valuer. His estimation was also very near to the valuation made by the DVO;

4)Therefore, FMV adopted by the CIT(A) was more reasonable as compared to the FMV quoted by the registered valuer- PFIZER LTD. V. DCIT [2015] 56 taxmann.com 260 (Mumbai - Trib.)

No denial of sec. 54F relief on pretext of two houses when assessee had gifted one of them orally under Muslim law

Facts:

a)The assessee had sold a vacant site and purchased another vacant site. She deposited the balance capital gain in the Capital Gains Account Scheme to claim deduction under section 54F.

b)The Assessing Officer (AO) denied relief under Section 54F on the ground that the assessee was owner of two residential houses at the time of sale of vacant land.

c)The assessee contended that she was not owner of two houses as she had made an oral HIBA by which one of the properties was given as a gift to her daughter before the date of transfer of land.

d)The AO rejected the explanation taking a view that gift had not been executed by a registered document.On appeal, the CIT (A) confirmed the order of AO. The aggrieved-assessee filed the instant appeal before the Tribunal.

The Tribunal held in favour of assessee as under:


2)However, the assessee herein was a Muslim andunder the Mohammedan Law, essentials of a gift are declaration of gift by the donor and acceptance of the gift by the donee and delivery of possession. This rule of Mohammedan Law was unaffected by the provision of section 123 of the Transfer of Property Act, 1882.

3)Thus,oral gift made by the assessee could not be disregarded by the revenue authorities.The requirements of a valid gift as per Mohammedan Law were duly satisfied inasmuch as there had been a declaration of gift by the donor and acceptance of gift by the donee and delivery of possession. The delivery in this case would only be constructive.

4)Since the gift satisfied all the requirements of Mohammedan law it had to be held as valid in law. Assessee could not be regarded as owner of two properties as one of themwas gifted by him before the transfer of vacant land. Thus, restriction placed under the proviso to section 54F(1) would not be attracted in the instant case - SMT. SAJIDA BEGUM V. ITO[2015] 56 taxmann.com 269 (Bangalore - Trib.)