The DCIT, Circle-1(1),, Baroda v. Dinesh Platechem Ltd.,, Baroda

ITA 485/AHD/2008 | 2002-2003
Pronouncement Date: 24-12-2010 | Result: Dismissed

Appeal Details

RSA Number 48520514 RSA 2008
Assessee PAN AABOM6414A
Bench Ahmedabad
Appeal Number ITA 485/AHD/2008
Duration Of Justice 2 year(s) 10 month(s) 13 day(s)
Appellant The DCIT, Circle-1(1),, Baroda
Respondent Dinesh Platechem Ltd.,, Baroda
Appeal Type Income Tax Appeal
Pronouncement Date 24-12-2010
Appeal Filed By Department
Order Result Dismissed
Bench Allotted B
Tribunal Order Date 24-12-2010
Date Of Final Hearing 22-12-2010
Next Hearing Date 22-12-2010
Assessment Year 2002-2003
Appeal Filed On 11-02-2008
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH B AHMEDABAD BEFORE SHRI N.S.SAINI ACCOUNTANT MEMBER AND SHRI MAHAVIR SINGH JUDICIAL MEMBER ITA NO.485 & 829/AHD/2008 ASSESSMENT YEAR:2002-03 DATE OF HEARING:22.12.10 DRAFTED:22.12.10 DCIT CIRCLE-1(1) BARODA DINESH PLATECHEM LTD. C/O DINESH MILLS LTD. P.O. BOX NO.2501 OLD PADRA ROPAD BARODA PAN NO.AABOM6414A V/S. V/S. DINESH PLATECHEM LTD. C/O. DINESH MILLS LTD. PADSU ROAD BARODA ACIT CIRCLE-1(1) BARODA (APPELLANT) .. (RESPONDENT) ASSESSEE BY :- SHRI SUNIL H TALATI AR REVENUE BY:- SHRI K. MADHUSUDAN SR-DR O R D E R PER MAHAVIR SINGH JUDICIAL MEMBER:- THESE CROSS-APPEALS BY REVENUE AND BY ASSESSEE ARE ARISING OUT OF THE ORDER OF COMMISSIONER OF INCOME-TAX(APPEALS)-I BAR ODA IN APPEAL NO.CAB/I-02/05- 06 DATED 12-10-2007. THE ASSESSMENT WAS FRAMED BY T HE ACIT CIRCLE-1(1) BARODA U/S.143(3) OF THE INCOME-TAX ACT 1961 (HEREINAFTER REFERRED TO AS THE ACT) VIDE HER ORDER DATED 31-01-2005 FOR THE ASSESSMENT YEAR 2002 -03. 2. THE FIRST COMMON AND INTER-CONNECTED ISSUE IN TH ESE CROSS APPEALS IS AS REGARDS TO ASSESS ABILITY OF THE RECEIPT OF RS.1 16 59 500/- ON ACCOUNT OF BUSINESS TRANSFER AGREEMENT AND ASSIGNMENT AGREEMENT. FOR T HIS REVENUE HAS RAISED THE FOLLOWING GROUND:- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW THE LD. CIT(A) ERRED IN TREATING RS.76 59 500/- AS LONG TER M CAPITAL GAINS AS AGAINST REVENUE RECEIPT ADOPTED BY THE ASSESSING OFFICER. FOR THIS ASSESSEE HAS RAISED THE FOLLOWING THREE GROUNDS :- ITA NO.485 & 829/AHD/2008 A.Y.2002-03 DCIT CIR-1(1) BRD V. DINESH PLATECHEM LTD. PAGE 2 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND CONSIDERING THE DECISION OF THE CIT(A) THAT BIFURCATION IS NOT POS SIBLE AND FURTHER CONSIDERING THE FACT THAT MAJORITY OF THE CONSIDERATION UNDER B TA IS FOR NON-TAXABLE INTANGIBLE ASSET THE ENTIRE SUM OF RS.116.59 LACS O UGHT TO HAVE BEEN CONSIDERED AS CAPITAL RECEIPT AND NOT SUBJECT TO CA PITAL GAIN TAX 2. WITHOUT PREJUDICE TO ABOVE ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE CIT(A) ERRED IN REJECTING THE ASSESSEES CLAIM THAT OUT OF TOTAL RECEIPT OF RS116.59 LACS (RS.1 16 59 500 TO BE PREC ISE) A SUM OF RS.40 00 000 WAS FOR ASSESSEES AGREEMENT NOT TO CO MPETE IN THAT LINE OF BUSINESS WITH THE BUYER-PAYER AND HE FURTHER ERRED IN NOT ACCEPTING THE ASSESSEES CLAIM THAT THE SAID SUM OF RS.40 LACS WA S NOT AT ALL LIABLE TO TAX EVEN UNDER THE HEAD CAPITAL GAINS. 3. WITHOUT PREJUDICE ON THE FACTS AND IN THE CIRCU MSTANCES OF THE CASE THE CIT(A) ERRED IN NOT ACCEPTING THE APPELLANTS ALTER NATIVE ARGUMENTS THAT THE SAID SUM OF RS.40 00 000 AT ANY RATE CANNOT BE TA XED AS SHORT TERM CAPITAL GAINS. 3. THE BRIEF FACTS ARE THAT THE ASSESSEE-COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND DEALING IN ELECTROPLATING SALTS A ND CHEMICALS BRIGHTENERS AND ADDITIVES. THE ASSESSEE-COMPANY ALONG WITH THE RETU RN OF INCOME FILED NOTES FORMING PART OF INCOME STATING THAT DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE-COMPANY HAS TRANSFERRED ITS BUSINESS OF GE NERAL METAL FINISHING AND ELECTROPLATING TO MAX ATOTECH LTD. (IN SHORT MAL) F OR A TOTAL CONSIDERATION OF RS.1 16 59 500/-. THE ASSESSEE CLAIMED THAT THE ABO VE SAID AMOUNT INCLUDES A SUM OF RS.40 LAKH BEING NON-COMPETE FEE WHICH WAS TREAT ED BY THE COMPANY AS CAPITAL RECEIPT. THE ASSESSEE OFFERED A SUM OF RS.76 59 500 /- AS LONG TERM CAPITAL GAIN ON THE ABOVE RECEIPT AND THE BALANCE SUM OF RS.40 LAKH AS CAPITAL RECEIPT BEING NON- COMPETE FEE. DURING THE COURSE OF ASSESSMENT PROCE EDINGS THE ASSESSING OFFICER REQUIRED THE ASSESSEE TO JUSTIFY THE TREATMENT OF E NTIRE CONSIDERATION RECEIVED BY IT AND ALSO SUBMIT ALL NECESSARY AGREEMENT VALUATION REPORT DIRECTORS REPORT AND BRIEF HISTORY PRECEDING THE TRANSFER OF BUSINESS. T HE ASSESSING OFFICER NARRATED THE BRIEF HISTORY THAT THE ASSESSEE-COMPANY WAS INCORPO RATED ON 26-02-1998 AND THEREAFTER SHRI DINESH MILLS LTD. SUBSCRIBED 51% OF ITS SHARE HOLDING AND IT BECAME SUBSIDIARY OF SHRI DINESH MILLS LTD. THE BALANCE 49 % HOLDING WAS SUBSCRIBED MCGEAN ROHCO INCOME. USA WITH EFFECT FROM 17-04-199 8. THE ASSESSEE-COMPANY ENTERED INTO TRANSFER AGREEMENT DATED 19-01-1998 WI TH SHRI DINESH METAL LTD. FOR TAKING OVER THE FIXED ASSETS CURRENT ASSETS AND C URRENT LIABILITIES OF THE PLATWELL PROCESSING AND CHEMICAL DIVISION AS GOING CONCERN FOR A CONSIDERATION OF RS.1.60 ITA NO.485 & 829/AHD/2008 A.Y.2002-03 DCIT CIR-1(1) BRD V. DINESH PLATECHEM LTD. PAGE 3 CRORES. MRI WAS ENGAGED IN MANUFACTURING OF GENERAL METAL FINISHING BUSINESS AND ALSO BEING 49% SHARE HOLDER IN THE ASSESSEE-COMPANY WAS USING TECHNOLOGY OF THE ASSESSEE-COMPANY. THE AO ALSO NOTED THAT TECHNOLOGY OR OTHER PROCESS OR FORMULATIONS IN FORM OF INTANGIBLE WERE NEVER PURCH ASED BY THE ASSESSEE-COMPANY OR OWNED BY THE ASSESSEE-COMPANY IN ANY FORM BUT WE RE ONLY MADE AVAILABLE ON ACCOUNT OF MRI BEING 49% SHARE HOLDING WITH THE ASS ESSEE-COMPANY. MRI DURING THE YEAR UNDER CONSIDERATION HAD SOLD ITS WORLD-WID E METAL SURFACE FINISHING CHEMICALS BUSINESS RIGHT TO ATOTECH INC. USA DUE TO GLOBAL RE-ORGANIZATION OF ITS BUSINESS. SHRI DINESH MILLS LTD. THEREAFTER PURCHAS ED 49% EQUITY OF THE ASSESSEE- COMPANY FROM MRI AND THE ASSESSEE-COMPANY BECAME 10 0% SUBSIDIARY OF SHRI DINESH MILLS LTD. ACCORDING TO AO TRANSFER OF SHAR E HOLDING FROM MRI TO HOLDING COMPANY SHRI DINESH MILLS LTD. DID NOT INVOLVE ANY TRANSFER OF TANGIBLE OR INTANGIBLE ASSETS AND ALL THE ASSETS WHICH WERE PART OF ERSTWH ILE PLATWELL CHEMICALS DIVISION OF SHRI DINESH MILLS LTD. CONTINUED TO BE THE ASSET S OF IS100% SUBSIDIARY. THE ASSESSEE-COMPANY ENTERED INTO BUSINESS TRANSFER AGR EEMENT AND ASSIGNMENT AGREEMENT WITH MAL ON 24-08-2001 AND UNDER THIS AGR EEMENT THE ASSESSEE- COMPANY RECEIVED A SUM OF RS.1 16 59 500/-. THE ASS ESSING OFFICER TREATED THE ENTIRE RECEIPT AS REVENUE BUSINESS INCOME AND TAXED ACCORDINGLY. AGGRIEVED ASSESSEE PREFERRED APPEAL BEFORE CIT(A). 4. THE CIT(A) PARTLY ALLOWED THE APPEAL AND TREATED THE RECEIPT OF RS.76 59 500/- AS LONG TERM CAPITAL GAIN AND RS.40 LAKH AS SHORT T ERM CAPITAL GAIN. THE CIT(A) HELD IN PARA-5 OF HIS APPELLATE ORDER AS UNDER:- 5. I HAVE CONSIDERED THE RIVAL SUBMISSIONS. IT IS OBSERVED THAT THE APPELLANT COMPANY NAMELY DINESH PLATECHEM LTD. FORMERLY KNOW N AS MCGEAN ROHOCO DINESH LTD. TRANSFERRED CERTAIN ASSETS OWNED BY IT IN ITS BUSINESS OF GENERAL METAL FINISHING AND ELECTRONICS AND USED BY IT IN T HE OPERATION OF THE BUSINESS TO MAX ATOTECH LTD.(MAL) FOR A CONSIDERATION OF RS.1 16 59 500/- AS PER BUSINESS TRANSFER AGREEMENT DATED 24-8-2001. IT IS FURTHER OBSERVED THAT IN THE SAID AGREEMENT NO FURTHER BIFURCATION OF THE TO TAL AMOUNT IS AVAILABLE. HOWEVER THE APPELLANT SATED IN THE NOTES FORMING P ART OF THE RETURN THAT THIS AMOUNT OF RS.1 16 59 500/- CONSISTED OF TWO PATS. T HE FIST PART WAS OF RS.40 LAKHS ON ACCOUNT OF THE NON-COMPETE CLAUSE AND THE SECOND PART CONSISTED OF THE REMAINING AMOUNT OF RS.76 59 500/- ON ACCOUNT O F THE TRANSFER OF INTANGIBLE ASSETS. THE APPELLANT FURNISHED A VALUAT ION REPORT FROM M/S.K.H. SHAH & ASSOCIATES CHARTERED ACCOUNTANTS IN SUPPORT OF THE CONSIDERATION OF RS.40 LAKHS FOR NON-COMPETE CLAUSE. THE APPELLANT H AS ARGUED THAT THE ENTIRE AMOUNT OF RS.1 16 59 500/- IS A CAPITAL RECEIPT AND NON TAXABLE. AS AN ALTERNATE IT HAS ARGUED THAT RS. 40 LAKHS ON ACCOUN T OF NON-COMPETE CLAUSE IS ITA NO.485 & 829/AHD/2008 A.Y.2002-03 DCIT CIR-1(1) BRD V. DINESH PLATECHEM LTD. PAGE 4 A CAPITAL RECEIPT AND RS.76 59 500/- REPRESENTS LON G TERM CAPITAL GAINS. THE ASSESSING OFFICER HAS ASSESSED THE ENTIRE RECEIPT A S A REVENUE RECEIPT. ALTERNATIVELY THE ASSESSING OFFICER HAS HELD THE E NTIRE RECEIPT OF RS.1 16 59 500/- AS A SHORT TERM CAPITAL GAIN. IN T HIS BACKGROUND FIRSTLY IT IS TO BE DECIDED IF THE TOTAL RECEIPT OF RS1 16 59 500/- IS A BUSINESS REVENUE RECEIPT OR A CAPITAL RECEIPT OR IT REPRESENTS SHORT TERM CA PITAL GAINS AS HELD BY THE ASSESSING OFFICER. IF REQUIRED THE APPELLANTS ALT ERNATE PLEA THAT RS.40 00 000/- CONSTITUTES CAPITAL RECEIPT AND RS.7 6 59 500/- REPRESENTS LONG TERM CAPITAL GAINS WILL BE EXAMINED. THIS MAY REQUI RE EXAMINATION OF THE APPLICABILITY OF SEC. 28(VA) TO THE APPELLANTS CAS E. IN THIS BACKGROUND IT IS OBSERVED THAT IT IS UNDISPUTED THAT NO TANGIBLE ASSETS HAVE BEEN TRANSFERRED AND ONLY INTANGIBLE AS SETS IN THE FORM OF CONTRACTS INTELLECTUAL PROPERTY TRADE SECRETS DO CUMENTS AND GOODWILL HAVE BEEN TRANSFERRED. THE PURCHASE ASSES HAVE BEEN GIVE N AT PARA 1.1 OF ARTICLE-I OF THE AGREEMENT. AS PER PARA 1.3 OF ARTICLE-I THE BUYER HAS ALSO AGREED TO PAY AND DISCHARGE ANY LIABILITY RELATING TO THE OWN ERSHIP USE OR OPERATION OF THE PURCHASED ASSETS TO THE EXTENT SUCH LIABILITIES ARISE AFTER THE CLOSING DATE. AS PER PARA-2.1 OF ARTICLE-II AS CONSIDERATION FOR TRANSFER OF BUSINESS COMPRISING OF THE PURCHASED ASSETS AND RETENTION OF THE LIABILITIES THE BUYER WAS TO PAY RS.1 16 59 500/-. IT IS THUS SEEN THAT T HE CONSIDERATION IS FOR TRANSFER OF ASSETS AND RETENTION OF LIABILITIES AS INDICATED AT PARA 1.1 AND PARE 1.3 OF THE ARTICLE-I OF THE AGREEMENT. TILL THIS ST AGE THE APPELLANT HAS NO QUARREL. IT IS ONLY ON THE AMOUNT OF CONSIDERATION FOR TRANSFER OF ASSETS THAT THERE IS A DISPUTE. THE APPELLANT CLAIMS CONSIDERAT ION ON THIS ACCOUNT IS RS.76 59 500/- SINCE RS.40 00L 000/- IS CLAIMED AS CONSIDERATION FOR NON- COMPETITION. HOW IS NOT SUPPORTED BY THE COVENANTS / ARTICLES OF THE BTA. AT PARA 5.7 OF ARTICLE-V THERE IS NO MENTION OF ANY CONSIDERA TION FOR NON- COMPETITION AND NON-DISCLOSURE OF INFORMATION. THUS THE READING OF THE COVENANTS / ARTICLES SUPPORTS THE VIEW EXPRESSED BY THE ASSESSING OFFICER THAT IT IS THE APPELLANT WHO HAS DONE THE ARTIFICIAL BIF URCATION OF THE TOTAL CONSIDERATION VALUE OF RS.1 16 59 500/- INTO RS.40 LAKHS CONSIDERATION FOR NON-COMPETITION AND RS.76 59 500/- FOR TRANSFER OF INTANGIBLE ASSETS. IT IS REITERATED THAT THERE IS NOTHING IN THE LANGUAGE OF THE CONTENTS OF THE AGREEMENT TO EVEN REMOTELY SUGGESTS THAT A PART OF THE CONSIDERATION IS FOR NON-COMPETE / NON-DISCLOSURE CLAUSE. IN THIS BACKGR OUND IT IS HELD THAT THE TALK OF CONSIDERATION OF RS.40 00 000/- FOR THE NON -COMPETE CLAUSE IS EXTRANEOUS TO THE ISSUE AT HAND SINCE IT IS NOT GER MANE TO THE BUSINESS TRANSFER AGREEMENT. IT IS HELD HAT THE CONSIDERATIO N AMOUNT OF RS.1 16 59 500/- IS A COMPOSITE AMOUNT AND IS TO BE CONSIDERED AND EXAMINED AS SUCH. IN OTHER WORDS THE CONSIDERATION OF RS.1 16 59 500/- IS FOR THE TRANSFER OF THE PURCHASED ASSTS BEING INTANGI BLE ASSETS OF CONTRACTS INTELLECTUAL PROPERTY TRADE SECRETS DOCUMENTS & G OODWILL OF THE BUSINESS. UNDER THE CIRCUMSTANCES THE APPELLANTS CLAIM WITH REGARD TO THE BIFURCATION OF THE COMPOSITE CONSIDERATION AMOUNT OF RS.1 16 59 500/- IS REJECTED BEING UNFOUNDED UNREASONABLE AND UNREALISTIC. THE NEXT QUESTION IS TO BE ANSWERED IF THE AMOUNT OF RS.1.16 CRORE RECEIVED ON ACCOUNT OF TRANSFER OF INTANGIBLE ASSETS REPRESE NTS A LONG TERM CAPITAL GAIN OR A SHORT TERM CAPITAL GAIN. ITA NO.485 & 829/AHD/2008 A.Y.2002-03 DCIT CIR-1(1) BRD V. DINESH PLATECHEM LTD. PAGE 5 FOR EXAMINING THIS THREE THINGS HAVE TO BE SEEN: ONE WHAT IS THE DATE OF ACQUISITION TWO WHAT IS THE COST OF ACQUISITION A ND THREE WHAT IS COST OF CONSIDERATION. AS SEEN ABOVE THE COST OF CONSIDERA TION IS RS.1.16 CRORE AS A COMPOSITE RECEIPT IS FOR THE TRANSFER OF INTANGIBLE ASSTS. AS REGARDS THE COST OF ACQUISITION THE APPELLANT HAS CLEARLY MENTIONED TH AT THE SAME IS NIL. IT IS NOT UNDER DISPUTE BY THE ASSESSING OFFICER EITHER. AS R EGARDS THE DATE OF ACQUISITION OF THESE INTANGIBLE ASSETS IT IS OBSER VED THAT NO SPECIFIC DATE HAS BEEN MENTIONED AGAINST EACH OF THESE ASSETS MENTION ED IN THE DTA. THE APPELLANT HAS ARGUED THAT THESE HAVE BEEN ACQUIRED OVER A PERIOD BUT THIS HAS NOT BEEN FURTHER BROKEN UP INTO VARIOUS DATES OR PE RIODS WITH THE RESULT NO SPECIFIC DATE OF ACQUISITION IS AVAILABLE ON RECORD AND IT CANNOT ALSO BE SO WORKED OUT. THE ASSESSING OFFICER HAS ALSO NOT SUGG ESTED OR POINTED OUT ANY DEFINITE DATE OF ACQUISITION OF THESE ASSETS WHILE PROPOSING TO TAX THE GAIN AS SHORT TERM CAPITAL. HOWEVER IT IS OBSERVED THAT TH E APPELLANT HAS ITSELF IN ITS ALTERNATE SUBMISSION WORKED OUT AN AMOUNT OF RS.76 59 500/- REPRESENTING LONG TERM CAPITAL GAIN. IT GOES WITHOUT SAYING THAT IT WOULD HAVE ADOPTED SOME CRITERION TO ARRIVE AT THAT FIGURE IN ITS OWN INTER NATIONAL CALCULATION. IN THE ABSENCE OF AN OTHER BETTER ALTERNATIVE AND IN THE ABSENCE OF ANY DEFINITE DATE OF ACQUISITION AVAILABLE FROM RECORDS IT IS BOTH AP PROPRIATE AND PRACTICAL TO HOLD THE VIEW HAT PART OF THESE INTANGIBLE ASSETS THE C ONSIDERATION VALUE OF WHICH HAS BEEN VOLUNTARILY DECLARED BY THE APPELLANT AT R S.76 59 500/- HAVE BEEN HELD AS LONG TERM ASSETS. WITH NOTHING ON RECORD TO CONTRADICT THIS THE SAME IS ADOPTED AS REPRESENTING LONG TERM CAPITAL GAIN F ROM OUT OF THE TOTAL CONSIDERATION AMOUNT OF RS.1 16 59 500/-. IT IS ON RECORD THAT THE APPELLANT HAS PAID THE DUE CAPITAL GAIN TAX ON THIS AMOUNT. U NDER THE CIRCUMSTANCES IT IS HELD THAT RS.76 59 500/- REPRESENTS LONG TERM CA PITAL GAIN ON TRANSFER OF INTANGIBLE ASSETS IN THE HANDS OF THE APPELLANT. AS REGARDS THE BALANCE AMOUNT OF SALES CONSIDERA TION OF RS.40 LAKHS WHICH REMAINS TO BE DECIDED IT IS OBSERVED THAT SOME OF THE INTANGIBLE ASSES WOULD HAVE BEEN ACQUIRED OVER A PERIOD MUCH CLOSURE TO TH E DATE OF TRANSFER SO THAT THESE WOULD HAVE BEEN TRANSFERRED BEFORE LESS THAN 36 MONTHS OF ACQUISITION. ALSO IF ASSETS WORTH ONLY RS.76 59 500/- HAVE BEEN HELD FAR MORE THAN 36 MONTHS IT FOLLOWS FROM THAT ARGUMENT THAT THE BALA NCE RS.40 LAKH WORTH OF ASSETS HAVE BEEN HELD FOR A LESSER PERIOD RESULTING IN YIELDING SHORT TERM CAPITAL GAINS OF RS.40 LAKHS THE COST OF ACQUISITI ON BEING NIL. IN VIEW OF THE DISCUSSION ABOVE IT S HELD THAT T HE CONSIDERATION OF RS.1 16 59 500/- IS ON ACCOUNT OF THE TRANSFER OF I NTANGIBLE ASSETS OUT OF WHICH RS.76 59 500/- CONSTITUTES LONG TERM CAPITAL GAINS AND THE REMAINING RS.40 LAKHS REPRESENTS SHORT TERM CAPITAL GAINS. THE ASSE SSING OFFICER IS DIRECTED TO GIVE EFFECT TO THE ORDER ACCORDINGLY. AGGRIEVED REVENUE AS WELL AS ASSESSEE CAME IN SECO ND APPEAL BEFORE US. 5. THE SR-DR MADE ARGUMENTS ON BOTH ISSUES AND SUBM ITTED WRITTEN SUBMISSIONS AS UNDER:- ITA NO.485 & 829/AHD/2008 A.Y.2002-03 DCIT CIR-1(1) BRD V. DINESH PLATECHEM LTD. PAGE 6 I.ON THE NATURE OF RECEIPT: ASSESSEE COMPANY RECEIVED RS.1 16 59 500 FROM THE M AX AUTOTECH LTD (REFERRED AS MAL OR BUYER) UNDER THE AGREEMENT DATE D 24.8.2001. THIS AGREEMENT IS A COMPREHENSIVE AGREEMENT BETWEEN (THE SELLER) AND THE MAL FOR TRANSFER OF CERTAIN ASSETS AS MENTIONED IN THE AGREEMENT MORE PARTICULARLY EXHIBIT-I OF THE AGREEMENT TRANSFER OF SELECTED ST AFF. THIS IS THE ALL IN ALL AGREEMENT AS MENTIONED IN THE AGREEMENT ITSELF AT CLAUSE 10.8 OF THE AGREEMENT. CLAUSE 10.8 READS. ENTIRE AGREEMENT : THIS AGREEMENT INCLUDING THE EX HIBITS SCHEDULES AND OTHER DOCUMENTS REFERRED TO HEREIN WHICH FORM P ART THEREOF CONTAIN THE ENTIRE UNDERSTANDING OF THE PARTIES HERETO WITH RES PECT TO THE SUBJECT MATTER CONTAINED HEREIN AND THEREIN. THIS AGREEMENT SUPERC EDES ALL PRIOR AGREEMENTS AND UNDERSTANDINGS BETWEEN THE PARTIES W ITH RESPECT TO SUBJECT MATTER IN OTHER WORDS THERE IS NO OTHER SEPARATE AGREEMEN T WHATSOEVER FOR PAYMENT OF ANY OTHER AMOUNT BY THE BUYER TO THE SELLER. ALL TRANSFERS AND PAYMENTS ARE AS PER THIS AGREEMENT ONLY. THIS IS ALSO EVIDENT FR OM VARIOUS CLAUSES OF THE AGREEMENT WHEREIN THE RESPONSIBILITIES OF THE BUYER AND THE SELLER HAVE BEEN LAID DOWN IN DETAIL AT THE CLOSING STAGE. IN THE CI RCUMSTANCES THERE IS NO SCOPE REGARDING IN TO THE LINES TO BIFURCATE THE LUMP S UM PAYMENT MADE BY THE BUYER TO THE ASSESSEE IN TO PAYMENT FOR NON COMPETI TION FEE AND OTHER HEADS. NON COMPETITION IS ONE OF THE CLAUSES OF THE AGREEMENT LIKE ANY OTHER CONDITION OF THE AGREEMENT. THERE IS NO SUCH CLAUSE ATTRIBUTING ANY AMOUNT TOWARDS VARIOUS ACTIVITIES/TRANSFERS IN THE AGREEME NT. IF THAT WAS THE UNDERSTANDING IT WOULD HAVE BEEN MENTIONED IN THE ELABORATELY DRAFTED AGREEMENT. 2. BIFURCATION OF THE LUMP SUM AMOUNT RECEIVED TOW ARDS NON COMPETITION AND TOWARDS OTHER TRANSFERS IS AN AFTERTHOUGHT NOT BORN E OUT OF THE RECITALS AND DOCUMENTS GERMANE TO THE ISSUE. THIS BIFURCATION OF THE RECEIPTS AT A LATER STAGE IS INTENDED TO REDUCE THE INCIDENCE OF TAX WH ICH IS DUE TO THE EXCHEQUER. THE VALUATION REPORT OF A CHARTERED ACCO UNTANT IS A SELF SERVING DOCUMENT PREPARED FOR THE INTENDED PURPOSE OF REDUC ING THE TAX. IT MAY BE NOTED THAT THE PURPORTED DATE OF VALUATION REPORT I S 24.7.2001. IF THAT IS SO AND THE VALUATION OF NON COMPETITION WAS ARRIVED AT RS. 40.00 LAKHS IT IS SURPRISING TO NOTE THAT THE SAME IS NOT MENTIONED OR THE AMOUN T IS NOT ADOPTED IN THE SAID AGREEMENT DATED 24.8.2001. THIS CLEARLY RAISED THE DOUBTS ABOUT THE DATE OF THE VALUATION REPORT AND VINDICATES THE DEP ARTMENTS CONTENTION THAT THE VALUATION REPORT WAS A SELF SERVING AFTER THOUG HT. 3. THEREFORE IT IS REQUESTED THAT THE VALUATION REP ORT MAY NOT BE GIVEN ANY CREDENCE AND THE ENTIRE AMOUNT RECEIVED UNDER THE A GREEMENT DATED 24.8.2001 MAY BE TREATED AS THE LUMP SUM AMOUNT REC EIVED TOWARDS THE TRANSFER OF BUSINESS BY THE ASSESSEE. II BUSINESS TRANSFER ONLY ITA NO.485 & 829/AHD/2008 A.Y.2002-03 DCIT CIR-1(1) BRD V. DINESH PLATECHEM LTD. PAGE 7 4. THE AGREEMENT BETWEEN THE ASSESSEE AND THE MAL I S NAMED BUSINESS TRANSFER AGREEMENT. THE NAME IS CORRECT AS PER THE TERMS OF THE AGREEMENT AND THE TRANSFERS MADE AS PER THE AGREEME NT. AS PER THE AGREEMENT ONLY PART OF THE BUSINESS OF THE ASSESSEE WAS TRANSFERRED TO MAL AND NOT ALL THE BUSINESS OF THE SELLER AS MENTI ONED AT VARIOUS CLAUSES OF THE AGREEMENT AS DISCUSSED UNDER. 5. SELECTED INTANGIBLE ASSETS WERE ONLY TRANSFERRED PRELIMINARY STATEMENT: SELLER DESIRES TO SELL AND THE BUYER DESIRES TO PU RCHASE FROM THE SELLER CERTAIN ASSETS OWNED BY THE SELLER THIS IS ALSO EVIDENT FROM THE CLAUSES AND DETAILS T HAT FOLLOW. OUT OF THE ASSETS OWNED BY THE ASSESSEE CERTAIN INTANGIBLE ASSETS REL ATED TO THE BUSINESS ACQUIRED BY THE BUYER WERE ONLY TRANSFERRED TERMED AS PURCHASED ASSETS AS MENTIONED IN ARTICLE 1(CL 1.1) AND ALSO THE EXH IBIT-I AS AGAINST THE EXCLUDED ASSETS MENTIONED AT CLAUSE 1.2. IT MAY BE NOTICED THAT THE PURCHASED ASSETS ARE REL ATED TO THE BUSINESS OF THE METAL FINISHING BUSINESS ACQUIRED BY THE BUYER AND MOSTLY INTANGIBLE ASSETS. ALL THE OTHER REAL ESTATE ASSETS INVENTORY RECEIVA BLES PERMITS WERE NOT PURCHASED BY THE BUYER FROM THE ASSESSEE AND THEY C ONTINUE TO REMAIN WITH THE ASSESSEE FOR HIS OTHER BUSINESS. 6. SOME OF THE BUSINESS WERE ONLY TRANSFERRED. ASSESSEE DEALS IN ELECTROPLATING SALTS CHEMICALS BRIGHTENERS AND ADDITIVES ETC. BUT THE BUYER ACQUIRED ONLY SOME OF THE BUSINE SS OF THE ASSESSEE AS PER THE AGREEMENT AND ALSO DOCUMENTS ON RECORDS. PRELIMINARY STATEMENT: SELLER DESIRES TO SELL AND THE BUYER DESIRES TO PUR CHASE FROM THE SELLER CERTAIN ASSETS OWNED BY THE SELLER IN ITS GENERAL METAL FIN ISHING AND ELECTRONIC BUSINESS COMPRISED OF THE PRODUCT LINES IDENTIFIED ON EXHIBIT-I ATTACHED HERETO (THE BUSINESS ) .. MEANWHILE MAX AUTOTECH HAD SHOWN INTEREST IN ACQUIRING METAL SURFACE FINISHING CHEMICALS BUSINESS RIGHTS AND THEREFORE MRDL HAD EXECUTED BUSINESS TRANSFER INCLUDING ASSIGNMEN T AND SUPPLY AGREEMENTS WITH MAX AUTOTECH LTD. ON 24.8.2001. EXHIBIT-I CONTAINS THE PRODUCT LINES PURCHASES BY T HE BUYER OUT OF MANY PRODUCT LINES OF THE ASSESSEE. HERE IT MAY BE MENTI ONED THE PAPER BOOK SUBMITTED BY THE ASSESSEE DOES SNOT CONTAIN THE LIS T OF PRODUCT LINES. NON COMPETITION AND NON DISCLOSURE OF INFORMATION ( CL.5.7) SEE 4 TH PARA ON PG 47 OF PB ITA NO.485 & 829/AHD/2008 A.Y.2002-03 DCIT CIR-1(1) BRD V. DINESH PLATECHEM LTD. PAGE 8 NOTWITHSTANDING ANYTHING CONTRARY IN THIS SECTION 5 .7 THE PARTIES AGREE THAT THE SELLER MAY CONTINUE TO OPERATE THE BUSINESS (OTHER THAN THE BUSINESS) IT CURRENTLY OPERATES. 7. THEREFORE IT IS EVIDENT THAT ONLY PART OF THE BU SINESS (CALLED BUSINESS IN THE AGREEMENT) ALONG WITH THE BUSINESS RELATED INTANGIB LES WERE ACQUIRED BY THE BUYER OUT OF THE BUSINESS OF THE ASSESSEE. THEREFOR E THE INCOME EARNING STRUCTURE OF THE ASSESSEE WAS NOT DESTROYED. THE AGREEMENT OF THE ASSESSEE THAT THE ASSESSEES B USINESS CAME TO STAND STILL IS NOT CORRECT AS THE ASSESSEE CONTINUED THE BUSINESS BEYOND THE DATE OF TRANSFER AS AGREED IN THE AGREEMENT. IN SUCH SITUAT ION WHERE ONLY PART OF THE BUSINESS WAS CLARIFIED AND OTHER BUSINESS CONTINUED THE COURTS HAVE HELD THE RECEIPTS ARE REVENUE IN NATURE. 35 ITR 148 (SC) CIT VS. RAI BAHADUR JAIRAMVALJI & O RS. 29 ITR 910 (SC) CIT VS. SOUTH INDIA PICTURES LTD. 115 ITD 443 (ITAT DELHI) ANSAL PROPERTIES & INDUST RIES LTD. VS. DCIT 8. THEREFORE IT SUBMITTED THAT THE ENTIRE AMOUNT O F RS.1 16 59 500 RECEIVED BY THE ASSESSEE RELATES TO THE TRANSFER OF THE BUSINESS (BEING PART OF THE BUSINESS OF THE ASSESSEE) AS PER THE BUSINESS TRAN SFER AGREEMENT: DATED 24.8.2001 PAID BY THE BUYER FOR THE LOSS OF FUTURE PROFIT OF THE ASSESSEE AS A RESULT OF SAID TRANSFER OF THE BUSINESS. THESE ARGUMENTS MAY CONSIDERED AND TAKEN AS ARGUMEN TS OF THE DEPARTMENT IN ADDITION TO THE FINDING OF THE ASSESSING OFFICER AND THE CIT(A). 6. WE HAVE HEARD THE RIVAL CONTENTIONS AND GONE THO UGH THE FACTS AND CIRCUMSTANCES OF THE CASE. WE HAVE ALSO PERUSED THE CASE RECORDS INCLUDING THE ASSESSMENT ORDER THE ORDER OF CIT(A) ASSESSEES T WO PAPER BOOKS CONTAINING PAGES-1- TO 155 AND 1 TO 85 THE WRITTEN SUBMISSION S FILED BY LD. SR-DR. WE FIND THAT THE ASSESSEE-COMPANY DURING THE YEAR TRANSFERR ED ITS BUSINESS OF GENERAL METAL FINISHING AND ELECTROPLATING CHEMICALS TO MAL VIDE A BUSINESS TRANSFER AGREEMENT DATED 24-08-2001 BY VIRTUE OF WHICH THE ASSESSEE R ECEIVED A SUM OF RS.1 16 59 500/-. THE ASSESSEE DECLARED A SUM OF RS .76 59 500/- AS LONG TERM CAPITAL GAIN OUT OF THE ABOVE RECEIPTS AND THE BALA NCE SUM OF RS.40 LAKH WAS CLAIMED AS EXEMPT BEING CAPITAL RECEIPT ON ACCOUNT OF NON-COMPETE FEE. FIRST OF ALL WE HAVE TO GO THROUGH THE RELEVANT CLAUSES OF BUSIN ESS TRANSFER AGREEMENT. WE FIND THAT ASSESSING OFFICER AND THE CIT(A) HAS DISC USSED THE MAIN FEATURES OF THE ITA NO.485 & 829/AHD/2008 A.Y.2002-03 DCIT CIR-1(1) BRD V. DINESH PLATECHEM LTD. PAGE 9 AGREEMENT AND THE RELEVANT CLAUSE-1.1 OF ARTICLE-I I.E. PURCHASE AND SALE OF ASSETS READS AS UNDER:- 1.1 PURCHASE ASSETS. SUBJECT TO THE TERMS AND CONDITIONS OF THIS AGREEM ENT AT THE CLOSING SELLER SHALL SELL TRANSFER CONVEY ASSIGN AND DELIVER TO BUYER AND BUYER SHALL PURCHASE ACQUIRE AND ACCEPT FROM S ELLER THE INTERESTS OF SELLER IN AND TO THE BUSINESS COMPRISING OF THE FOL LOWING DESCRIBED ASSETS USED IN THE OPERATION OF THE BUSINESS (THE PURCHASED ASSETS ) FEE AND CLEAR OF AN LIEN CHARGE MORTGAGE PLEDGE ENCUMBR ANCE SECURITY INTEREST TITLE DEFECT OPTION OR ANY OTHER RESTRICTION OR TH IRD-ARTY RIGHT OF ANY KIND ( ENCUMBRANCE ): (A) CONTRACTS. THE SELECTED CONTRACTS AND SELECTED CONTRACTORS IN ACCORDANCE WIT THE PROCEDURE LAID DOWN IN SECTION 1 .4 (B) INTELLECTUAL PROPERTY. ALL OF THE INTELLECTUAL PROPERTY RIGHTS BELONGING TO AND/OR USED BY SELLER IN RELATION TO THE BUSINES S HERETOFORE INCLUDING BUT NOT LIMITED TO PATENTED (IF ANY) AND UNPATENTED INVENTIONS OR TECHNOLOGIES TRADEMARKS (REGISTERED AND UNREGISTERED) TRADEMARK REGISTRATIONS AND APPLICAT IONS TRADE NAMES / BRAND NAMES OF THE PRODUCTS (UNREGISTERED) BELONGING TO AND/OR USED BY SELLER IN RELATION TO THE BUSINESS ( COLLECTIVELY THE INTELLECTUAL PROPERTY ) (C) TRADE SECRETS. ALL TRADE SECRETS FORMULATIONS CONFIDENTIAL PROCESSES AND PROCEDURES TECHNOLOGY KNOW-HOW ENG INEERING DESIGN AND OTHER TECHNICAL DRAWINGS MANUFACTURING PROCEDURES FOR PRODUCTS QUALITY CONTROL PROCEDURES FOR PRODUCTS PRODUCT SPECIFICATIONS RAW MATERIAL SPECIFICATIONS RAW MA TERIAL QUALITY CONTROL PROCEDURES SPECIFICATIONS AND ALL OTHER SI MILAR PROPERTY WHETHER TANGIBLE OR INTANGIBLE WHETHER DOCUMENTED OR NOT BELONGING TO AND/OR USED BY SELLER IN RELATION TO T HE PURCHASED ASSETS AND / OR BUSINESS INCLUDING THE TECHNICAL K NOW-HOW IMPROVEMENTS AND DOCUMENTS PROVIDED TO SELLER UNDER AND PURSUANT TO THE TECHNICAL KNOW-HOW AGREEMENT DATED APRIL 1 1999 BY MCGEAN ROHCO INC. (THE CAPITALIZED EXPRESS IONS DEFINED THERE UNDER) SUBJECT TO THE CONSENT OF MEGEAN ROHC O INC. (D) DOCUMENTS ALL RECORDS (WHETHER IN HARD COPY FORM COMPUTERI ZED OR ELECTRONIC DATABASE OR OTHERWISE) INCLUDING WI THOUT LIMITATION CUSTOMER AND SUPPLIER LISTS SALES AND MARKETING RE PORTS AND PLANS BUSINESS PLANS AND PRODUCT FILES AND CORRESPONDENCE USED OR HELD FOR USE IN THE OPERATION OF THE BUSINESS ( BOOKS AND RECORDS ) SUBJECT IN EACH CASE TO THE RIGHT OF SELLER TO RETA IN COPIES THEREOF AND TO RETAIN THE ORIGINALS OF DOCUMENTS AND RECORD S TO THE EXTENT REQUIRED BY LAW; PROVIDED THAT IF REQUESTED BY BUYE R SELLER SHALL EXECUTE BUYERS STANDARD FROM OF CONFIDENTIALITY AG REEMENT. (E) GOODWILL. ALL GOODWILL OF THE BUSINESS. 1.2 EXCLUDED ASSETS . ALL ASSETS OF SELLER OTHER THAN THE PURCHASED ASSET S SHALL BE RETAINED BY SELLER AND ARE NOT BEING SOLD OR ASSIGNED TO BUYER HEREUNDER (COLLECTIVELY THE EXCLUDED ASSETS ) INCLUDING WITHOUT LIMITATION THE FOLLOWING: ITA NO.485 & 829/AHD/2008 A.Y.2002-03 DCIT CIR-1(1) BRD V. DINESH PLATECHEM LTD. PAGE 10 (A) REAL PROPERTY. ANY OWNED OR LEASED REAL PROPERTY. (B) FIXED ASSETS AND INVENTORY. ALL FIXED ASSETS INCLUDING ALL PERSONAL PROPERTY AND ALL INVENTORY INCLUDING WITHOUT LIMIT ATION SAMPLES WORK-IN-PROGRESS RAW MATERIALS MANUFACTURING SUPP LIES MACHINE REPLACEMENT PARTS AND PACKAGING MATERIALS. (C) CASH AND ACCOUNTS RECEIVABLE . ALL CASH CASH EQUIVALENTS ACCOUNTS RECEIVABLE PROMISSORY NOTES AND OTHER NOT ES RECEIVABLE AND OTHER RIGHTS TO RECEIVE PAYMENTS OR REFUNDS. (D) OTHER BUSINESS . ALL ASSETS RELATING TO ANY BUSINESS OF SELLER OTHER THAN THE PURCHASED ASSETS. (E) PERMITS. ALL PERMITS INCLUDING WITHOUT LIMITATION ENVIRON MENTAL AND SITE-RELATED PERMITS HELD BY SELLER. (F) SELLERS NAME . SELLERS NAME; PROVIDED THAT SELLER AGREES THAT BUYER SHALL HAVE THE RIGHT TO USE THE SELLERS NAME AND PERMUTATIONS THEREOF AND PRODUCT LITERATURE CONTAIN ING SUCH NAMES FOR A PERIOD NOT TO EXCEED BEYOND TWO MONTHS FROM A ND AFTER DETERMINATION OR SOONER TERMINATION OF THE SUPPLY A GREEMENT REFERRED TO IN SECTION 7.1(F) AND ANY EXTENSION OF ITS TERM OR FOR SUCH SHORTER PERIOD AS MAY BE PERMITTED BY REGULATO RY AUTHORITIES WITH RESPECT TO ANY REGULATED PRODUCTS ON LABELS O N BUYERS EXISTING INVENTORY. EACH DATA SHEETS AND MATERIAL S AFETY DATA SHEETS SUBJECT TO APPROVAL OF MCGEAN ROHCO INC. A ND SHRI DINESH MILLS LIMITED (BEING THE JOINT VENTURE PARTNER OF M CGEAN ROHCO INC. IN SELLER). SHRI DINESH MILLS LIMITED HAS BY ITS L ETTER DATED AUGUST 24 2001 WHICH IS ATTACHED HERETO AS SCHEDULE 1.2( F) GRANTED ITS APPROVAL FOR THE AFORESAID. WE FIND FROM THE ABOVE CLAUSES OF AGREEMENT THAT TH E ASSESSEE HAS SOLD THE PURCHASE ASSETS AS DEFINED IN PARA-1.1 ARTICLE-I CONSISTING OF FOLLOWING SIX ITEMS:- (A) CONTRACTS (B) INTELLECTUAL PROPERTY (C) TRADE SECRETS (D) DOCUMENTS (E) GOODWILL FURTHER FROM THE ABOVE IT IS NOTICED THAT THERE IS SPECIFIC EXCLUSION OF CERTAIN ASSETS LIKE REAL PROPERTY CASH AND ACCOUNTS RECEIVABLE O THER BUSINESSES PERMITS AND SELLERS NAME IS MADE BY THE BUSINESS TRANSFER AGRE EMENT. 7. IN VIEW OF THE ABOVE FACTS WE FIND THAT THE ASS ESSING OFFICER AFTER MENTIONING SOME OF THE CLAUSES/ARTICLES OF THE BUSINESS TRANSF ER AGREEMENT CAME TO THE CONCLUSION THAT ENTIRE RECEIPT OF RS.1 16 59.500/- ARE IN THE NATURE OF REVENUE INCOME INASMUCH AS ACCORDING TO THE ASSESSING OFFICER TH E ASSESSEE WAS NOT THE OWNER OF ITA NO.485 & 829/AHD/2008 A.Y.2002-03 DCIT CIR-1(1) BRD V. DINESH PLATECHEM LTD. PAGE 11 INTELLECTUAL PROPERTIES AND THERE IS NO SEPARATE CO NSIDERATION MENTIONED OF RS.40 LAKHS FOR NON-COMPETE FEES RECEIVED BY THE ASSESSEE . THE CIT(A) AFTER PERUSAL OF THE AGREEMENT AND CONSIDERING THE SUBMISSION CAME TO THE CONCLUSION THAT THE RECEIPT OF RS.76 59 500/- FOR SELLING THE SIX DIFFE RENT ITEMS OF INTELLECTUAL PROPERTIES ARE IN THE NATURE OF LONG TERM CAPITAL GAIN BUT AS THERE IS NO SPECIFIC AMOUNT MENTIONED OF NON-COMPETE FEES OF RS.40 LAKHS THE SA ME WAS TREATED AS SHORT TERM CAPITAL GAIN. 8. WE FIND FROM THE ARGUMENTS MADE BY THE LD. COUNS EL FOR THE ASSESSEE SHRI TALATI THAT THE AMOUNT OF RS.76 59 500/- IS LONG TE RM CAPITAL GAIN AS CORRECTLY SHOWN IN THE RETURN OF INCOME. WE FIND THAT ALL THE PURCH ASED ASSETS TRANSFERRED BEING INTELLECTUAL PROPERTIES IN THE NATURE OF CONTRACTS INTELLECTUAL PROPERTY TRADE SECRETS DOCUMENTS AND GOODWILL ARE OWNED BY THE ASSESSEE-CO MPANY AS IT IS IN THE BUSINESS OF MANUFACTURING ELECTO-PLATING SALTS AND CHEMICALS BRIGHTNESS AND ADDITIVES SINCE ITS INCEPTION AND IT IS THE BUSINES S WHICH HAS BEEN TRANSFERRED AND NOT ANY PHYSICAL ASSTS PURCHASED ON A PARTICULAR DA TE WHICH CAN BE IDENTIFIED AND VERIFIED. THE ASSETS LIKE CONTRACTS TRADE SECRETS DOCUMENTS ETC. ALL HAVE BEEN GENERATED OVER A PERIOD OF TIME IN THE BUSINESS OF MANUFACTURING ELECTROPLATING SALTS AND CHEMICALS BRIGHTNESS AND ADDITIVES CONDUCTED SINCE SEVERAL YEARS ONLY THE OWNERSHIPS BEING CHANGED IN THE ASSESSEE-COMPANY. I F THE ASSETS ARE SOLD THEN THE COST AND PERIOD OF HOLDING AS ENVISAGED U/S.49 OF T HE ACT RELATES BACK TO THE COST AND PERIOD FOR WHICH PREVIOUS OWNER OF THE PROPERTY ACQUIRED IT. HERE THE BUSINESS OF MANUFACTURING ELECTRO-PLATING SALTS AND CHEMICALS BRIGHTNESS AND ADDITIVES WAS CONTINUOUSLY GOING ON SINCE 1980 AND ALL THESE INTE LLECTUAL PROPERTIES HAD BEEN ACQUIRED SINCE RUNNING THE SAME BUSINESS FOR MORE T HAN 20 YEARS. FROM THE ARGUMENTS IT IS GATHERED THAT THE ASSESSEE CAME INT O EXISTENCE IN 1998 AND IT WAS EARLIER DOING THE BUSINESS IN THE NAME OF PLATWELL PROCESS AND CHEMICALS BEING DIVISION OF DINESH MILLS LTD. SINCE 1980. THE SAID BUSINESS OF DINESH MILLS LTD. OF MANUFACTURING ELECTRO-PLATING SALTS AND CHEMICALS BRIGHTNESS AND ADDITIVES (WHICH ARE BEING SOLD WORLDWIDE AS METAL SURFACING FINISHI NG PRODUCTS IN THE NAME OF PLATEWELL PROCESS & CHEMICALS DIVISION) WAS ACQUIRE D BY THE ASSESSEE-COMPANY EARLIER WAS INCORPORATED AS MCGEAN-ROHCO DINESH LTD AND WAS EFFECTIVELY OWNING ALL THESE INTELLECTUAL PROPERTIES AS MENTIONED IN T HE BUSINESS TRANSFER AGREEMENT RIGHT FROM 1980 AND CONTINUED TO OWN AND PROCESS TH E SAME. IT WAS ONLY THAT THE ITA NO.485 & 829/AHD/2008 A.Y.2002-03 DCIT CIR-1(1) BRD V. DINESH PLATECHEM LTD. PAGE 12 BUSINESS OF ELECTRO-PLATING HAVING SUCH INTELLECTUA L PROPERTIES EARLIER BEING SUBSIDIARY/DIVISION OF DINESH MILLS LTD WAS NOW OWN ED BY THE ASSESSEE-COMPANY NAMELY DINESH PLATECHEM LTD (FORMERLY KNOWN AS MCGE AN-ROHCO DINESH LTD). IN ANY EVENT AS CORRECTLY HELD BY CIT ALSO THE ASSESSI NG OFFICER HAS NOT SUGGESTED OR POINTED OUT ANY DEFINITE DATE FOR ACQUISITION OF TH ESE ASSETS AS TO WHY THEY ARE HELD FOR A PERIOD OF LESS THAN 36 MONTHS. THE CIT(A) AS WELL AS WE FIND THAT IT GOES WITHOUT SAYING THAT THE ASSESSEE WOULD HAVE CERTAIN LY ADOPTED SOME CRITERION TO ARRIVE AT THAT FIGURE IN ITS OWN INTERNATIONAL CALC ULATION AND IN THE ABSENCE OF ANY BETTER ALTERNATIVE AND ALSO IN ABSENCE OF ANY DEFIN ITE DATE OF ACQUISITION AVAILABLE FROM RECORD IT IS MOST APPROPRIATE AND PRACTICAL TO HOLD THE VIEW THAT THIS INTELLECTUAL ASSETS ARE IN THE NATURE OF LONG TERM CAPITAL ASSET S. 9. NOW IN VIEW OF THE ABOVE FACTS WE HAVE TO CONS IDER THE CASE REFERRED BY BOTH SIDES AND OF BEST & CO. PRIVATE LTD.(SUPRA) W HEREIN HONBLE APEX COURT RELYING ON ANOTHER CASE IN KETTLEWELL BULLEN AND CO. LTD. V . CIT (1964) 53 ITR 261 (SC) EXPRESSED ITS CONCLUSION AS UNDER:- WHERE ON A CONSIDERATION OF THE CIRCUMSTANCES PAY MENT IS MADE TO COMPENSATE A PERSON FOR CANCELLATION OF A CONTRACT WHICH DOES NOT AFFECT THE TRADING STRUCTURE OF HIS BUSINESS NOR DEPRIVE HIM OF WHAT IN SUBSTANCE IS HIS SOURCE OF INCOME TERMINATION OF THE CONTRACT BEING A NORMAL INCIDENT OF THE BUSINESS AND SUCH CANCELLATION LEAVES HIM FREE TO CARRY ON HIS TRADE (FREED FROM THE CONTRACT TERMINATED) THE RECEIPT IS REVENU E; WHERE BY THE CANCELLATION OF AN AGENCY THE TRADING STRUCTURE OF THE ASSESSEE IS IMPAIRED OR SUCH CANCELLATION RESULTS IN LOSS OF WHAT MAY BE REGARDE D AS THE SOURCE OF THE ASSESSEES INCOME THE PAYMENT MADE TO COMPENSATE F OR CANCELLATION OF THE AGENCY AGREEMENT IS NORMALLY A CAPITAL RECEIPT. AND FURTHER HELD THAT ORDINARILY COMPENSATION FOR L OSS OF OFFICE OR AGENCY IS REGARDED AS A CAPITAL RECEIPT BUT THE RULE IS SUBJECT TO AN EXCEPTION THAT PAYMENT RECEIVED EVEN FOR TERMINATION OF AN AGENCY AGREEMENT WHERE THE AGENCY IS ONE OF MANY WHICH THE ASSESSEE HOLDS AND THE TERMINATION OF TH E AGENCY DOES NOT IMPAIR THE PROFIT-MAKING STRUCTURE OF THE ASSESSEE BUT IS WIT HIN THE FRAMEWORK OF THE BUSINESS IT BEING A NECESSARY INCIDENT OF THE BUSINESS THAT EXISTING AGENCIES MAY BE TERMINATED AND FRESH AGENCIES MAY BE TAKEN IS REV ENUE AND NOT CAPITAL. BUT GOING BY THE FACTS OF THIS CASE WE ARE OF THE VIEW THAT THE ASSESSEE HAD RIGHTLY CLAIMED ALL THE ASSETS TRANSFERRED BEING INTELLECTUAL PROPERTI ES IN THE NATURE OF CONTRACTS INTELLECTUAL PROPERTY TRADE SECRETS DOCUMENTS AND GOODWILL OWNED BY THE ASSESSEE- ITA NO.485 & 829/AHD/2008 A.Y.2002-03 DCIT CIR-1(1) BRD V. DINESH PLATECHEM LTD. PAGE 13 COMPANY IN ITS BUSINESS OF MANUFACTURING ELECTO-PLA TING SALTS AND CHEMICALS BRIGHTNESS AND ADDITIVES SINCE ITS INCEPTION AS LO NG TERM CAPITAL ASSETS AND CONSEQUENTLY DECLARED LONG TERM CAPITAL GAIN AND PA ID TAX ON THE SAME. HENCE FOLLOWING THE PRINCIPLE LAID DOWN BY HONBLE APEX C OURT IN THE CASE OF BEST & CO. PVT. LTD. (SUPRA) WE CONFIRM THE ORDER OF CIT(A) ON THIS IS SUE AND GROUNDS RAISED BY REVENUE AS WELL AS ASSESSEE ARE DISMISSED. 10. COMING TO SECOND AND THIRD GROUND OF APPEAL O F THE ASSESSEE THE ONLY ISSUE IS THAT WHETHER OUT OF RS. 1 16 59 500/- THE BALAN CE AMOUNT OF RS. 40 LACS IS IN THE NATURE OF NON-COMPETE FEE OR NOT IN THE GIVEN FACT S AND CIRCUMSTANCES. BEFORE US LD. COUNSEL FOR ASSESSEE STATED THAT AN AMOUNT OF R S.40 LAKH RECEIVED IS CERTAINLY IN NATURE OF NON-COMPETE CLAUSE AND THEREFORE CAPITAL RECEIPT AND HENCE NOT TAXABLE. ACCORDING TO HIM THE VERY FIRST PARAGRAPH OF VALUA TION REPORT PREPARED BY A CHARTERED ACCOUNTANT CLEARLY MENTION THAT THE VALUE OF CONSIDERATION FOR NON- COMPETITION AND NON-DISCLOSURE OF INFORMATION THAT MAY BE CONSIDERED FOR THE PURPOSE OF INCLUSION IN PROPOSED AGREEMENT FOR TRAN SFER OF DIVISION/BUSINESS AND THAT IS HOW VALUATION REPORT IS DATED 24-07-2001. HE ARG UED THAT THE BUYER BEING FOREIGN COLLABORATION COMPANY WAS NOT AGREEABLE OF ANY BIFU RCATION OF DIFFERENT INTELLECTUAL PROPERTY AND INSISTED FOR A TOTAL AND COMPOSITE COS T OF RS.1 16 59 500/- AND THEREFORE IN AGREEMENT THE AMOUNT IS COMPOSITE. HE DRAWN OUR ATTENTION TO THE FACT THAT THERE IS A SPECIFIC ARTICLE FOR NON-COMPETITIO N BEING PARA-5.7 AND 5.8 OF THE BUSINESS TRANSFER AGREEMENT AND STATED THAT THE LIM ITED POINT IS WHETHER CONSIDERATION OF RS.40 LAKH IS REALLY ATTRIBUTABLE TO NON-COMPETE CLAUSE OR NOT. HE FURTHER STATED THAT THE FACT OF NON-COMPETE CLAUSE IS NOT IN DISPUTE EITHER BY AO OR CIT(A) AND THE FACT THAT BUSINESS TRANSFER AGREEMEN T SPECIFICALLY CONTAINED ARTICLE-5 BY WAY OF CONVENIENT AND IN TERMS OF PROHIBITS THE ASSESSEE-COMPANY TO DO THE BUSINESS OF THE SAME NATURE FOR NEXT FIVE YEARS AND ALSO PROHIBITS NON-DISCLOSURE OF INFORMATION. IN OTHER WORDS THE ASSESSEE LOST ITS COMPLETE RIGHT AND SOURCE OF INCOME OF THIS BUSINESS AND FURTHER IT IS THE CONS EQUENCE OF NON-COMPETE CLAUSE THAT ANY AMOUNT RECEIVED BY WAY OF NON-COMPETE CLAU SE IS TAXABLE ONLY FOR AND FROM ASSESSMENT YEAR 2003-04 AND NOT IN ASSESSMENT YEAR 2002-03. 11. WE HAVE HEARD RIVAL CONTENTIONS ON THIS ISSUE AND NOW WE HAVE TO FIND OUT AS TO HOW THIS AMOUNT IS WORKED OUT AS TO WHETHER THIS AMOUNT OF RS.40LAKH IS FOR NON- ITA NO.485 & 829/AHD/2008 A.Y.2002-03 DCIT CIR-1(1) BRD V. DINESH PLATECHEM LTD. PAGE 14 COMPETE CLAUSE AND IS ALSO APPROPRIATE OR NOT. THE LD. COUNSEL FOR THE ASSESSEE STATED THAT SO FAR AS THE ASSESSING OFFICER IS CONC ERNED HE HAS NOT AT ALL DEALT WITH THE VALUATION ASPECT OF NON-COMPETE CLAUSE. BUT IN THE ALTERNATIVE CONTENTION SHE DID MENTION THAT EVEN IF IT IS A CAPITAL ASSET IT IS SH ORT TERM CAPITAL ASSET. THE SAME IS THE VIEW TAKEN BY CIT(A) IN HIS ORDER. ONCE RS.40LAKH I S ATTRIBUTABLE TO NON-COMPETE FEE CLAUSE AND THIS VALUATION I.E. COMPONENT OF NON-COM PETE FEES IS NOT CHALLENGED BY LOWER AUTHORITIES AND LIMITED POINT TO BE DECIDED N OW IS WHETHER IT IS TAXABLE OR NOT. WHILE CONCLUDING THE ARGUMENTS ON THIS GROUND HE S TATED THAT ON THE BASIS OF RECENT DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT V. NARENDRA D DESAI 214 CTR 190 (BOM) AND ALSO ON THE BASIS OF CHENNAI TRIB UNAL IN THE CASE OF TTK HEALTHCARE 114 ITD 171 IT IS CONCLUSIVE THAT NON-COMPETE FEE S RECEIVED UP TO ASSESSMENT YEAR 2002-03 HAS BEEN CONSISTENTLY HELD AS CAPITAL RECEIPT AND IT IS ONLY FROM ASSESSMENT YEAR 2003-04 WHEN THE ACT HAS BEEN AMENDED THE NON-COMPETE FEES HAS BEEN SPECIFICALLY BROUGHT TO TAX AS INCOME . HE ALSO RELIED IN CERTAIN OTHER CASE LAWS WHICH WE WILL DISCUSS IN THIS ORDER. IT WAS THEREFORE STATED THAT RS.40 LAKH BEING SPECIFICALLY RECEIVED AS NON-COMPETE FEES BE TREATED AS CAPITAL RECEIPT NOT TAXABLE. 12. FIRST OF ALL WE HAVE TO GO TO CLAUSE 5.7 OF A RTICLE 5 OF BUSINESS TRANSFER AGREEMENT FROM WHERE WE CAN FIND OUT THAT THE ASSES SEE AGREED FOR NON-COMPETITION IN THE SAME LINE OF BUSINESS AND THAT THE SAME IS M ENTIONED AT CLAUSE-5.7 OF ARTICLE- V OF THE BUSINESS TRANSFER AGREEMENT WHICH READS A S UNDER:- 5.7 NON-COMPETITION AND NON-DISCLOSURE OF INFORMAT ION. (A) NONCOMPETITION. SELLER AGREES HAT IT SHALL NOT AT ANY TIME DURING THE FIVE- YEAR PERIOD IMMEDIATELY FOLLOWING THE CLOSING DATE DO ANY OF THE FOLLOWING EITHER DIRECTLY OR INDIRECTLY AS AN OWNER PARTNER SHAREHOLDER CONSULTANT AGENT OR OTHERWISE: (I) ENGAGE IN ANY BUSINESS WHICH COMPETS WITH THE B USINESS OR INVEST IN ANY PERSON OR ENTITY WHICH COMPETES WITH THE BUSINESS; (II) SELL SOLICIT OR ACCEPT BUSINESS OR ORDERS FRO M CUSTOMERS OR PROSPECTIVE CUSTOMERS OF THE BUSINESS WITH THE TERM CUSTOMER INCLUDING ANY PURCHASER OF PRODUCTS FROM THE BUSINESS AT ANY TIME DURING TH E 12 MOTHS IMMEDIATELY PRECEDING THE DATE OF THIS AGREEMENT; (III) INTERFERE WITH DISRUPT OR ATTEMPT TO DISRUPT RELATIONSHIPS CONTRACTUAL OR OTHERWISE OR BUYER WITH ITS EMPLOYEES CONTRACTORS SUPPLIERS OR CUSTOMERS IN THE OPERATION OF THE BUSINESS; (IV) SOLICIT ANY EMPLOYEE WHOSE NAME IS SPECIFIED IN SCHEDULE 5.4 AND WHO HAS ACCEPT AN EMPLOYMENT WITH BUYER; OR ITA NO.485 & 829/AHD/2008 A.Y.2002-03 DCIT CIR-1(1) BRD V. DINESH PLATECHEM LTD. PAGE 15 (V) OPERATE OR PERFORM ANY ADVISORY OR CONSULTING S ERVICES FOR ANY PERSON OR ENTITY WHICH COMPETES WITH THE BUSINESS. NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS SE CTION 5.7 THE PARTIES AGREE THAT SELLER MAY CONTINUE TO OPERATE THE BUSINESS (O THER THAN THE BUSINESS) IT CURRENTLY OPERATES. FURTHER WE FIND FROM CLAUSE-1.3 OF ARTICLE-I OF BU SINESS TRANSFER AGREEMENT THAT DEFINES LIABILITIES AS UNDER:- 1.3 LIABILITIES. ALL LIABILITIES AND OBLIGATIONS OF WHATSOEVER NATU RE AND KIND DIRECT OR INDIRECT KNOWN OR UNKNOWN ASSERTED OR U NASSERTED ASCERTAINED OR UNASCERTAINED RELATING TO SELLER INCLUDING THOSE CONNECTED WITH THE BUSINESS AND THE PURCHASED ASSETS (COLLECTIVELY THE LIABILITIES ) SHALL CONTINUE TO REMAIN WITH SELLER EVEN AFTER THE CLOSING DATE EX CEPT TO THE EXTENT SET FORTH IN THE SECOND SENTENCE OF THIS SECTION 1.3. BUYER S HALL PAY PERFORM AND DISCHARGE ANY DEBTS LIABILITIES OBLIGATIONS EXPEN SES CONTRACTS OR COMMITMENTS RELATING TO THE OWNERSHIP USE OR OPERA TION OF THE PURCHASED ASSETS AND ANY BUSINESS RELATED THERETO TO THE EXTE NT SUCH LIABILITIES AND OBLIGATION ARISE AFTER THE CLOSING DATE IN RELATION TO THE PERIOD THEREAFTER. FURTHER WE FIND FROM CLAUSE 2.1 OF ARTICLE-II OF B USINESS TRANSFER AGREEMENT REGARDING CONSIDERATION AND PURCHASE PRICE WHICH R EADS AS UNDER:- 2.1 PURCHASE PRICE. SUBJECT TO THE TERMS AND CONDITIONS OF THIS AGREEM ENT AS CONSIDERATION FOR TRANSFER OF BUSINESS COMPRISIN G OF THE PURCHASED ASSETS AND RETENTION OF THE LIABILITIES BUYER SHALL PAY T O SELLER RUPEES ELEVEN MILLION SIX HUNDRED FIFTY NINE THOUSAND FIVE HUNDRED (RS.11 69 500) ON THE CLOSING DATE. 13. FURTHER WE FIND FROM THE ARGUMENTS OF LD. COUNS EL OF ASSESSEE THAT FOR THE PURPOSES OF NON-COMPETE FEES THE VALUATION REPORT D ATED 24-07-2001 VALUING THE NON-COMPETE TAKING INTO CONSIDERATION THE PRESENT P ROFITABILITY IS VALUED AT RS.40 LAKHS BY ONE SHRI K.K. SHAH & ASSOCIATES AND WHICH WAS FILED BEFORE THE ASSESSING OFFICER DURING THE COURSE OF ASSESSMENT PROCEEDINGS AND EVEN BEFORE CIT(A). THE RELEVANT PORTION OF VALUATION REPORT (WHICH IS ENCL OSED AT ASSESSEES PAPER BOOK PAGES-57 TO 59) READS AS UNDER:- BASIS OF VALUATION BY VALUE OF THE PROPOSED AGREEMENT THE COMPANY WIL L BE REST5ICTED FROM ENTERING INTO ANY COMPETITIVE BUSINESS DIRECTLY OR INDIRECTLY FOR THE PERIOD OF NEXT FIVE YEARS. THIS IMPLIES THAT IT IS DEPRIVED O FF THE PROFIT THAT MIGHT HAVE BEEN EARNED BY THE COMPANY FOR THE SAID PERIOD OF F IVE YEARS. ITA NO.485 & 829/AHD/2008 A.Y.2002-03 DCIT CIR-1(1) BRD V. DINESH PLATECHEM LTD. PAGE 16 THE EXPECTED PROFIT FOR THE FUTURE YEARS CAN BE COM PUTED ONLY ON THE BASIS OF THE PAST PERFORMANCE. SINCE THE COMPANY HAS COMPLE TED TWO YEAR OF ITS OPERATIONS WE HAVE TO WORK OUT THE VALUE OF CONSID ERATION FOR THE RESTRICTIVE CONDITIONS ON THE BASIS OF PERFORMANCE OF THE SAID TWO YEARS ONLY. AS ALREADY MENTIONED ABOVE THE OPERATING PROFIT OF THE COMPAN Y FOR THE FOR THE FINANCIAL YEAR 1999-2000 AND 2000-2001 WERE RS.21 14 190/- AN D RS.9 01 997/- RESPECTIVELY. THESE SHOWS SHARP DECLINE IN THE OPER ATING PROFIT AFTER TAX IN HE SECOND YEAR AS COMPARED TO FIRST YEAR. AS THE PERFO RMANCE OF THE LAST YEAR IS MORE IMPORTANT AND GIVE BETTER IDEA OF THE PRESENTE D PROFITABILITY THE WEIGHTED AVERAGE SHOULD BE TAKEN TO ARRIVE AT THE EXPECTED P ROFIT. THE SAME IS WORKED OUT AS UNDER: NET CASH FLOW AS DETERMINED ABOVE A= 1-2 RS.9 01 997 RS.21 14 190 WEIGHT ASSIGNED B 2 3 WEIGHTED CASH FLOW C=AXB RS.18 03 994 RS.21 14 190 TOTAL WEIGHTED CASH FLOW D RS. 39 18 184 WEIGHTED AVERAGE D/3 RS.13 06 061 SAY RS.13 00 000 IN VIEW OF THE ABOVE THE AMOUNT OF EXPECTED PROFIT IS RS.13 00 000/- P.A. HOWEVER IT IS IMPORTANT TO TAKE NOTE OF THE FACT T HAT THE MONEY RECEIVED AT PRESENTED HAS HIGHER VALUE THAN MONEY RECEIVABLE AT SOME FUTURE DATE OR AT SOME REGULAR INTERVALS IN FUTURE. THEREFORE IT IS ESSENTIAL TO WORK OUT THE PRESENTED VALUE OF THE ABOVE PROFIT EXPECTED TO BE RECEIVED DURING THE PERIOD OF NEXT FIVE YEAR. IN ORDER TO ARRIVE AT THE PRESENTED VALUE THE ABOV E EXPECTED PROFIT NEEDS TO BE DISCOUNTED AT APPROPRIATE RATE. FOR THAT PURPOSE AN APPROPRIATE RATE OF DISCOUNT NEEDS TO BE DETERMINED. PRESENTLY THE RISK FREE RATE OF RETURN IS @ 9%. HO WEVER IN THE GIVEN CASE WE HAVE TO FIND OUT THE RATE FOR DISCOUNTING THE FUTUR E PROFITS OF THE COMPANY. THEREFORE WHILE DETERMINING THAT RATE THE RISK OF UNCERTAINTY OF FUTURE EARNING AND OTHER BUSINESS RISKS SHOULD BE TAKEN CARE OF. I N VIEW OF THE SMALL LENGTH OF PERIOD OF OPERATIONS OF THE COMPANY THE FINANCI AL PERFORMANCE DURING THAT PERIOD AND PREVAILING RATES OF INTEREST THE RATE O F 18% WOULD BE APPROPRIATE RATE IT DISCOUNT THE EXPECTED PROFIT FOR THE FUTURE YEARS. VALUE THE PRESENT VALUE OF THE FUTURE PROFIT OF THE COMPA NY EXPECTED OVER NEXT FIVE YEARS WOULD BE WORKED OUT AS UNDER:- YEAR EXPECTED PROFIT AMOUNT (RS) DISCOUNT FACTOR @ 18% PRESENT VALUE AMOUNT (RS) 1 13 00 000 0.8475 11 01 695 2 13 00 000 0.7182 9 33 640 3 13 00 000 0.6086 7 91 220 4. 13 00 000 0.5158 6 70 526 ITA NO.485 & 829/AHD/2008 A.Y.2002-03 DCIT CIR-1(1) BRD V. DINESH PLATECHEM LTD. PAGE 17 5 13 00 000 0.4371 5 68 242 NET PRESENT VALUE (DISCOUNTED @ 18%) 40 65 323 SAY RS.40 00 000 (NOTRE: FOR THE PURPOSE OF DISCOUNTING THE PROFIT ARE ASSUMED TO BE EARNED ON THE LAST DAY OF THE YEAR) CONCLUSION ON THE BASIS OF THE ABOVE IN OUR OPINION FOR THE PROPOSED BUSINESS TRANSFER AGREEMENT THE CONSIDERATION FOR INCLUSION OF RESTR ICTIVE CONDITIONS MAY BE FIXED AT RS.40 00 000/- (RUPEES FORTY LACS ONLY.) 14. FROM THE ABOVE FACTS AND FROM THE VERY FIRST PA RAGRAPH OF VALUATION REPORT PREPARED BY CHARTERED ACCOUNTANT IT IS CLEAR THAT THE VALUATION OF CONSIDERATION FOR NON-COMPETE FEE WAS MADE PRIOR TO THE PROPOSED BUSI NESS TRANSFER AGREEMENT AND THE VERY PURPOSE OF THE VALUATION REPORT WAS THE PR OPOSED AGREEMENT. THE RELEVANT PARA READS AS UNDER:- WE HAVE BEEN RETAINED BY DINESH PLATECHEM LIMITED TO DETERMINE THE VALUE OF CONSIDERATION FOR NON-COMPETITION AND NON DISCLO SER OF INFORMATION THAT MAY BE CONSIDERED FOR THE PURPOSE OF INCLUSION IN PROPO SED AGREEMENT FOR TRANSFER OF DIVISION /BUSINESS FURTHER WE FIND FROM THE VALUATION REPORT THAT IT C LEARLY CONTENTS THAT THIS WAS FOR THE PURPOSE OF PROPOSED AGREEMENT WHICH CLEARLY CONTAI NS THAT THE COMPANY WILL BE RESTRICTED FROM ENTERING INTO ANY COMPETITIVE BUSIN ESS DIRECTLY OR INDIRECTLY FOR THE PERIOD OF NEXT FIVE YEARS FROM THE DATE OF AGREEMEN T. THE BUYER BEING A FOREIGN COLLABORATOR COMPANY NOT AGREEABLE OF ANY BIFURCATI ON OF DIFFERENT INTELLECTUAL PROPERTY AND INSTEAD INSISTED FOR A TOTAL AND COMPO SITE COST FROM THE AGREEMENT IT CAN BE CLEARLY BROUGHT OUT THAT THERE IS A SPECIFIC CLAUSE 5.7 OF ARTICLE-V REGARDING NON-COMPETITION AND THEREFORE RS.40 LAKH IS REALLY ATTRIBUTABLE TO NON-COMPETE REASON BEING THE ASSESSEE LOST ITS COMPLETE RIGHT A ND SOURCE OF INCOME OF THIS BUSINESS. EVEN FROM LIABILITY CLAUSE-1.3 IT CAN EA SILY BE INFERRED THAT ALL LIABILITIES RELATING TO THIS BUSINESS SHALL BE WITH THE ASSESSE E AND IN NO WAY THE PAYMENT IS IN RESPECT OF ANY LIABILITY OUTSTANDING OR FUTURO. WE FURTHER FIND THAT THE ASSESSEE LOST ITS COMPLETE RIGHT AND SOURCE OF INCOME OF THIS BUSINES S. WE FURTHER FIND FROM THE ASSESSING OFFICERS CONCLUSION IN PARA-5(E) TO THE EFFECT THAT INCOME EARNING APPARATUS OF A COMPANY HAS NECESSARILY TO BE IN THE FORM OF TANGIBLE ASSETS AND THAT SINCE NO PART OF THE TANGIBLE ASSETS OF THE ASSESSE E WAS TRANSFERRED UNDER THE BUSINESS TRANSFER AGREEMENT THE CONSIDERATION RECE IVED PURSUANT TO THAT ITA NO.485 & 829/AHD/2008 A.Y.2002-03 DCIT CIR-1(1) BRD V. DINESH PLATECHEM LTD. PAGE 18 AGREEMENT CANNOT BE REGARDED AS CAPITAL IN NATURE SINCE THE BUSINESS TRANSFER AGREEMENT DID NOT AT ALL IMPAIR THE ASSESSEES BUSI NESS APPARATUS BELIES ELEMENTARY COMMONSENSE AS THE SIMILAR ISSUE HAS BEE N DEALT BY HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT V. AUTOMOBILE PRODUCTS OF INDIA LTD. (1983) 140 ITR 159 (BOM) WHEREIN IT IS HELD THAT THE QUESTION WHI CH IS REQUIRED TO BE POSED IS WHETHER THE TERMINATION OF THIS ACTIVITY WAS A NECE SSARY INCIDENT OF THE BUSINESS OF THE ASSESSEE OR DID IT IMPAIR THE PROFIT-MAKING STR UCTURE. ACCORDING TO HONBLE HIGH COURT THE TRIBUNAL AFTER CONSIDERING ALL THE CIRCUM STANCES APPEARS TO HAVE COME TO THE CORRECT CONCLUSION THAT THIS WAS NOT A NECESSAR Y INCIDENT OF THE BUSINESS OF THE ASSESSEE AND THAT EXTINCTION AND SURRENDER OF THE I NDUSTRIAL LICENCE AND THE COLLABORATION AGREEMENT DID IMPAIR THE PROFIT-MAKIN G STRUCTURE OF THE ASSESSEE. IF THAT BE SO ACCORDING TO HONBLE HIGH COURT THIS AMOUNT OF RS.24 LAKHS PAID BY PAL TO API AS COMPENSATION MUST BE REGARDED AS AN AMOUNT R ECEIVED BY THE ASSESSEE AS A CAPITAL RECEIPT AND NOT AS A REVENUE RECEIPT. SIM ILARLY THE HONBLE APEX COURT IN THE CASE OF OBEROI HOTEL PVT. LTD. V CIT (1999) 236 ITR 903 (SC) HELD THAT THE AMOUNT RECEIVED BY THE ASSESSEE WAS THE CONSIDERATION FOR GIVING UP ITS RIGHT TO PURCHASE AND/OR TO OPERATE THE PROPERTY OR FOR GETTING IT ON LEASE BEFORE IT WAS TRANSFERRED OR LET OUT TO OTHER PERSONS. IT WAS NOT FOR SETTLEMENT OF RIGHTS UNDER A TRADING CONTRACT BUT THE INJURY WAS INFLICTED ON THE CAPITAL ASSET OF TH E ASSESSEE AND GIVING UP THE CONTRACTUAL RIGHT ON THE BASIS OF THE PRINCIPAL AGR EEMENT HAD RESULTED IN LOSS OF SOURCE OF THE ASSESSEES INCOME. THE RECEIPT IN THE HANDS OF THE ASSESSEE WAS A CAPITAL RECEIPT. 15. SIMILARLY THE HONBLE MADRAS HIGH COURT IN THE CASE OF CIT V. SARASWATHI PUBLICITIES (1981) 132 ITR 207 (MAD) HELD AS UNDER:- ` THE CASES DECIDED BY THE SUPREME COURT THUS FALL I NTO TWO CAT4GORIES. THE FIST CATEGORY CONSISTS OF THOSE CASES WHERE THERE I S A MERE LOSS OF A TRADING AGENCY OF A COMPANY WHICH HAS A NUMBER OF SUCH AGEN CIES. THE SECOND CATEGORY COVERS THOSE CASES WHERE THE RECEIPT IS NO T FOR THE LOSS OF AN AGENCY BUT FOR CERTAIN RESTRICTIVE COVENANTS PREVENTING TH E ASSESSEE FROM CARRYING ON BUSINESS TO THAT EXTENT. WHILE THE LEARNED COUNSEL FOR THE REVENUE PROCEEDED AS IF THE CASE ON HAND FELL WITHIN THE AMBIT OF THE FIRST OF THE TWO PROPOSITIONS THE ATTEMPT OF THE LEARNED COUNSEL FOR THE ASSESSEE WAS TO BRING IT IN THE LATTER CATEGORY. IN VIEW OF THE FINDING OF THE TRIBUNAL WHICH WE HAVE ALREADY EXTRACTED THAT IN THE PRESENT CASE THE RECEIPT IS REFERABLE TO A RESTRICTIVE COVENANT WE HAVE TO HOLD THAT THE PRINCIPLE OF THE DECISION IN CIT V. BEST AND CO. (P). LTD. [1966] 60 ITR 11 (SC) IN SO FAR AS IT CONSIDERS THE RESTRICTIVE COVENANT AND THE RECEIPT THEREFORE WILL BE APPLICA BLE HERE. ITA NO.485 & 829/AHD/2008 A.Y.2002-03 DCIT CIR-1(1) BRD V. DINESH PLATECHEM LTD. PAGE 19 16. THE NEXT CONTENTION OF THE ASSESSEE WHETHER PA RT OF THE COMPENSATION ATTRIBUTABLE TO THE RESTRICTIVE COGENT IS A CAPITAL RECEIPT OR A REVENUE RECEIPT AND THIS HAS BEEN ANSWERED BY HONBLE APEX COURT IN GILLANDERS ARBUTHNOT AND CO. LTD. V. COMMISSIONER OF INCOME-TAX ACCEPTED THE SAID PRINCIPLE AND HELD THAT THE COMPENSATION PAID FOR AGREEING TO REFRAIN FROM CARR YING ON COMPETITIVE BUSINESS IN THE COMMODITIES IN RESPECT OF THE AGENCY TERMINATED OR FOR LOSS OF GOODWILL WAS PRIMA FACIE OF THE NATURE OF A CAPITAL RECEIPT. IN THE PRESENT CASE THE COVENANT WAS AN INDEPENDENT OBLIGATION UNDERTAKEN BY THE ASSESSE E NOT TO COMPETE WITH THE NEW AGENTS IN THE SAME FIELD FOR A SPECIFIED PERIOD. IT CAME INTO OPERATION ONLY AFTER THE AGENCY WAS TERMINATED. IT WAS WHOLLY UNCONNECTED WI TH THE ASSESSEES AGENCY TERMINATION. WE THEREFORE HOLD THAT PART OF THE C OMPENSATION ATTRIBUTABLE TO THE RESTRICTIVE COVENANT WAS A CAPITAL RECEIPT AND HENC E NOT ASSESSABLE TO TAX. 17. THE NEXT QUESTION IS WHETHER THE COMPENSATION P AID IS SEVERABLE. IF THE COMPENSATION PAID WAS IN RESPECT OF TWO DISTINCT MA TTES ONE TAKING THE CHARACTER OF A CAPITAL RECEIPT AND THE OTHER OF A REVENUE RECEIP T WE DO NOT SEE ANY PRINCIPLE WHICH PREVENTS THE APPORTIONMENT OF THE INCOME BETW EEN THE TWO ASPECTS OF THE MATTER. THE DIFFICULTY IN APPORTIONMENT CANNOT BE A GROUND FOR REJECTING THE CLAIM EITHER OF THE REVENUE OR THAT OF ASSESSEE. SUCH AN APPORTIONMENT WAS SANCTIONED BY COURTS IN WALES V. TILLEY CARLER V. WADMAN AND T. SADASIVAM V. COMMISSIONER OF INCOME-TAX. IN THE PRESENT CASE APPORTIONMENT OF THE COMPENSAT ION HAS TO BE MADE ON A REASONABLE BASIS BETWEEN THE LOSS OF THE AGENC Y IN THE USUAL COURSE OF BUSINESS AND THE RESTRICTIVE COVENANT. THE MANNER O F SUCH APPORTIONMENT HAS PERFORCE TO BE LEFT TO THE ASSESSING AUTHORITIES. W E FURTHER FIND THAT THE LOWER AUTHORITIES ATTEMPT REGARDING BIFURCATION OF THE CO NSIDERATION BETWEEN INTANGIBLE ASSETS HAVING NO COST OF ACQUISITION AND NON-COMPET ITION FEES AND ARTIFICIAL ON THE GROUND THAT THERE WAS NO VALUATION REPORT FOR THE I NTANGIBLE ASSETS WHICH WERE TRANSFERRED UNDER THE AGREEMENT IGNORES THE FACT A CHARTERED ACCOUNTANTS VALUATION REPORT IN RESPECT OF THE CONSIDERATION FO R THE NON-COMPETITION CLAUSES OF THE AGREEMENT HAD BEEN FURNISHED BY THE ASSESSEE-COMPAN Y AND THE LOWER AUTHORITIES HAVE NO QUARREL OVER THE MATTER OF VALUATION REPORT AND ONCE A VALUATION REPORT HAD BEEN OBTAINED FROM A COMPETENT PERSON IN RESPECT OF ONE OF THE TWO COMPONENTS OF THE CONSIDERATION IT IS NOT OPEN TO THE AUTHORITIE S TO OBJECT TO IT ON THE GROUND THAT THERE WAS NO VALUATION REPORT FOR THE OTHER COMPONE NT OF THE CONSIDERATION WITHOUT ITA NO.485 & 829/AHD/2008 A.Y.2002-03 DCIT CIR-1(1) BRD V. DINESH PLATECHEM LTD. PAGE 20 ANY DOUBT ON THE DEFINED VALUE. WE FIND THAT THE LO WER AUTHORITIES HAVE TREATED THE NON-COMPETE FEE AS TAXABLE JUST BECAUSE THERE WAS N O VALUATION REPORT FOR THE OTHER COMPONENT OF THE CONSIDERATION AND IT IS UNFORTUNAT E THAT THEY HAVE REFUSED TO CONSIDER SUCH VITAL FACTS FOR SOME HOW OR THE OTHER GETTING OVER THE SUBSTANCE OF WHICH THE NON-COMPETITION CLAUSE OF THE AGREEMENT W ERE MADE AND ACTED AND WHICH PREVENTED THE ASSESSEE FROM CONTINUING TO CARRY ON THE RELEVANT BUSINESS SO MUCH SO THAT IT HAD TO TERMINATE EMPLOYMENT OF A LARGE N UMBER OF EMPLOYEES EMPLOYED IN THAT BUSINESS. ACCORDINGLY WE ARE OF THE CONSIDERE D VIEW THAT THE DECISION OF THE LOWER AUTHORITIES IN ASSESSING THIS NON-COMPETE FEE AS SHORT TERM CAPITAL GAIN RATHER THIS COMPENSATION IS FOR LOSS OF SOURCE OF INCOME A ND ACCORDINGLY CAPITAL IN NATURE NOT TAXABLE. THIS ISSUE OF THE ASSESSEES APPEAL IS ALLOWED. 18. THE NEXT ISSUE IN THIS APPEAL OF THE ASSESSEE I S WITH REGARD TO DISALLOWANCE OF RS.11 626/- BEING LATE PAYMENT OF ESIC. THE DISALL OWANCE WAS MADE ONLY ON THE GROUND THAT THE PAYMENTS WERE NOT MADE WITHIN THE S TIPULATED DATE BUT IT IS NOT DISPUTED THAT THE PAYMENTS ARE MADE WITHIN THE DUE DATE OF FILING OF RETURN. WE FIND THAT WE FIND THAT THE ISSUE OF EMPLOYEES CONTRIBUT ION HAS BEEN CONSIDERED BY THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT V. P.M. ELECTRONICS LTD. (2008) 220 CTR 635 (DEL) WHEREIN THE HON'BLE DELHI HIGH COURT HAS DISCUSSED IN PARA-4 AS UNDER:- 4. ON 27 TH NOV. 1998 THE ASSESSEE HAD FILED A RETURN OF INCO ME DECLARING A LOSS OF RS.8 92 888. ON 11 TH MAY 1999 THE RETURN WAS PROCESSED UNDER S. 143(1)(A) OF THE ACT. THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY. ACCORDINGLY A NOTICE DT. 27 TH SEPT. 1999 UNDER S. 143(2) OF THE ACT WAS ISSUED TO THE ASSESSEE. IN RESPONSE TO THE NOTICE A ND ON EXAMINATION OF THE DETAILS SUBMITTED BY THE ASSESSEE WITH RESPECT TO P ROVIDENT FUND PAYMENTS MADE BOTH ON ACCOUNT OF EMPLOYERS AND EMPLOYEES S HARE REVEALED THAT PAYMENTS IN THE SUM OF RS.17 94 042 WERE LATE AS PE R THE PROVISIONS OF S. 36(1)(VA) R.W S. 2(24)(X) AND S. 43B. CONSEQUENTLY THE AO DISALLOWED THE DEDUCTION AND ADDED A SUM OF RS.17 94 042 TOWARDS E PF CONTRIBUTION. AND SUBSEQUENTLY DECIDE THIS ISSUE IN PARA-10 TO 14 OF HON'BLE DELHI HIGH COURT WHICH READ AS UNDER:- 10. IN VIEW OF THE ABOVE IT IS QUITE EVIDENT THAT THE SPECIAL LEAVE PETITION WAS DISMISSED BY A SPEAKING ORDER AND WHILE DOING SO TH E SUPREME COURT HAD NOTICED THE FACT THAT THE MATTER IN APPEAL BEFORE I T PERTAINS TO A PERIOD PRIOR TO THE AMENDMENT BROUGHT ABOUT IN S. 43B OF THE ACT. T HE AFORESAID POSITION AS REGARDS THE STATE OF THE LAW FOR A PERIOD PRIOR TO THE AMENDMENT TO S. 43B HAS BEEN NOTICED BY A DIVISION BENCH OF THIS COURT IN DHARMENDRA SHARMA (SUPRA) . APPLYING THE RATIO OF THE DECISION OF THE SUPREME COURT IN VINAY CEMENT (SUPRA) A DIVISION BENCH OF THIS COURT DISMISSED T HE APPEALS OF THE ITA NO.485 & 829/AHD/2008 A.Y.2002-03 DCIT CIR-1(1) BRD V. DINESH PLATECHEM LTD. PAGE 21 REVENUE. IN THE PASSING WE MAY ALSO NOTE THAT A DIV ISION BENCH OF THE MADRAS HIGH COURT IN THE CASE OF CIT VS. NEXUS COMPUTER (P) LTD. BY A JUDGMENT DT. 19 TH AUG. 2008 PASSED IN TAX CASE (APPEAL) NO.1192/20 08 [REPORTED AT (2008) 219 CTR (MAD.) 54 ED.] DISCUS SED THE IMPACT OF BOTH THE DISMISSAL OF THE SPECIAL LEAVE PETITION IN THE CASE OF GEORGE WILLIAMSON (ASSAM) LTD. (SUPRA) AND VINAY CEMENT (SUPRA) AS WELL AS A CONTRARY VIEW OF THE DIVISION BENCH OF ITS OWN COURT IN SYNERGY FINANCIAL EXCHANGE (SUPRA). THE DIVISION BENCH OF THE MADRAS HIGH COURT HAS EXP LAINED THE EFFECT OF THE DISMISSAL OF A SPECIAL LEAVE PETITION BY A SPEAKING ORDER BY RELYING UPON THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF KUNHAYAMMED & ORS.VS. STATE OF KERALA & ANR. (2000) 162 CTR (SC) 97: 119 STC 505 AT P. 526 IN PARA 40 AND NOTED THE FOLLOWING OBSERVATIONS : IF THE ORDER REFUSING LEAVE TO APPEAL IS A SPEAKIN G ORDER I.E. GIVES REASONS FOR REFUSING THE GRANT OF LEAVE THEN THE O RDER HAS TWO IMPLICATIONS. FIRSTLY THE STATEMENT OF LAW CONTAIN ED IN THE ORDER IS A DECLARATION OF LAW BY THE SUPREME COURT WITHIN THE MEANING OF ART. 141 OF THE CONSTITUTION. SECONDLY OTHER THAN THE DECLA RATION OF LAW WHATEVER IS STATED IN THE ORDER ARE THE FINDINGS RE CORDED BY THE SUPREME COURT WHICH WOULD BIND THE PARTIES THERETO AND ALSO THE COURT. TRIBUNAL OR AUTHORITY IN ANY PROCEEDINGS SUB SEQUENT THERETO BY WAY OF JUDICIAL DISCIPLINE THE SUPREME COURT BEING THE APEX COURT OF THE COUNTRY. BUT THIS DOES NOT AMOUNT TO SAYING TH AT THE ORDER OF THE COURT. TRIBUNAL OR AUTHORITY BELOW HAS STOOD MERGED IN THE ORDER OF THE SUPREME COURT REJECTING SPECIAL LEAVE PETITION OR T HAT THE ORDER OF THE SUPREME COURT IS THE ONLY ORDER BINDING AS RES JUDICATA IN SUBSEQUENT PROCEEDINGS BETWEEN THE PARTIES. 11. UPON NOTING THE OBSERVATIONS OF THE SUPREME COU RT IN KUNHAYAMMED & ORS. (SUPRA) THE DIVISION BENCH OF THE MADRAS HIGH COUR T IN THE CASE OF NEXUS COMPUTER (P) LTD. (SUPRA) CAME TO THE CONCLUSION THAT THE VIEW TAKEN BY THE SUPREME COURT IN VINAY CEMENT (SUPRA) WOULD BIND THE HIGH COURT AS IT WAS LAW DECLARED BY THE SUPREME COURT UNDER ART. 141 OF THE CONSTITUTION. 12. WE ARE IN RESPECTFUL AGREEMENT WITH THE REASONI NG OF THE MADRAS HIGH COURT IN NEXUS COMPUTER (P) LTD. (SUPRA). JUDICIAL DISCIPLINE REQUIRES US TO FOLLOW THE VIEW OF THE SUPREME COURT IN VINAY CEMEN T (SUPRA) AS ALSO THE VIEW OF THE DIVISION BENCH OF THIS COURT IN I DHARM ENDRA SHARMA (SUPRA). 13. IN THESE CIRCUMSTANCES WE RESPECTFULLY DISAGRE E WITH THE APPROACH ADOPTED BY A DIVISION BENCH OF THE BOMBAY HIGH COUR T IN PAMWI TISSUES LTD. (SUPRA). 14. IN THESE CIRCUMSTANCES INDICATED ABOVE WE ARE OF THE OPINION THAT NO SUBSTANTIAL QUESTION OF LAW ARISES FOR OUR CONSIDER ATION IN THE PRESENT APPEAL. THE APPEAL IS THUS DISMISSED. 19. WE FIND THAT THE HON'BLE DELHI HIGH COURT IN TH E CASE OF P.M. ELECTRONICS LTD. (SUPRA) HAS DECIDED THIS ISSUE OF PAYMENT OF EMPLOY EES CONTRIBUTION TOWARDS ITA NO.485 & 829/AHD/2008 A.Y.2002-03 DCIT CIR-1(1) BRD V. DINESH PLATECHEM LTD. PAGE 22 PROVIDENT FUND AFTER CONSIDERING THE DECISION OF HO N'BLE APEX COURT IN THE CASE OF VINAY CEMENT (SUPRA) AND ALSO DISTINGUISHED THE CASE LAW REFERRED BY TH E LD. DR OF BOMBAY HIGH COURT IN PAMWI TISSUES LTD. (SUPRA) . EVEN NOW THIS ISSUE HAS BEEN CONSIDERED BY HONBLE APEX COURT IN THE CASE OF CIT VS. ALOM EXTRUSIONS LTD. (2009) 319 ITR 306 (SC) / (2009) 185 TAXMAN 416 (SC) WHER EIN IT IS HELD THAT CONTRIBUTION TO PROVIDENT FUND MADE BEFORE DUE DA TE OF FILING OF RETURN ALLOWABLE AS DEDUCTION. THE DELETION OF THE SECOND PROVISO TO SE CTION 43B AND THE AMENDMENT TO THE FIRST PROVISO BY THE FINANCE ACT 2003 WAS TO OVERCOME IMPLEMENTATION PROBLEMS. CONSEQUENTLY THE AMENDMENTS THOUGH MADE APPLICABLE BY PARLIAMENT ONLY WITH EFFECT FROM 1-4-2004 WERE CURATIVE IN NA TURE AND WOULD APPLY RETROSPECTIVELY W.E.F. 1-4-1988. ACCORDINGLY FOLL OWING APEX COURT IN THE CASE OF ALOM EXTRUSIONS LTD. (SUPRA) AND DELHI HIGH COURT IN P.M. ELECTRONICS LTD. (SUPRA) WE ALLOW THE CLAIM OF THE ASSESSEE. 20. IN THE RESULT REVENUES APPEAL IS DISMISSED AND TH AT OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN OPEN COURT ON 24/12/2010 SD/- SD/- (N.S.SAINI) (MAHAVIR SINGH) (ACCOUNTANT MEMBER) (JUDICIAL MEMBER) AHMEDABAD DATED : 24/12/2010 *DKP COPY OF THE ORDER FORWARDED TO :- 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT(APPEALS)-I BARODA 4. THE CIT CONCERNS. 5. THE DR ITAT AHMEDABAD 6. GUARD FILE. BY ORDER /TRUE COPY/ DEPUTY / ASSTT.REGISTRAR ITAT AHMEDABAD