By TIOL News Service

JAIPUR, APR 09, 2015: THE issue before the Bench is - Whether relinquishment of right to sue is to be held as capital asset. And the verdict goes in favour of the assessee.

Facts of the case

The assessee had business relations with one Cabana group of Jaipur which was searched by the IT department on 31-7-2009. According to the AO from one of the group entities premises namely Cabana Hospitality Ltd. ( CHL) documents were also seized indicating that assessee had transferred huge funds. On the basis of these documents AO of Cabana group formed a belief that these documents belonged to assessee in question and represented its undisclosed income in terms of sec 153C. On the basis thereof a satisfaction note u/s 153C was recorded and sent to assessee's AO. Consequently notices u/s 153C for filing the returns were served on the assessee. The assessee challenged the notices u/s 153C before Rajsthan High Court which was finally dismissed as withdrawn by assessee vide order dated 23-01-2012. Assessee filed the return u/s 153C declaring a depreciation loss of Rs.(-) 1,80,94,965/- on 22-12-2011.

The assessee company entered into a franchisee soft drink bottling agreement with Cadbury Schweppes Beverages India (P) Ltd. (CSBIPL) on 5-11-1997. It set up an exclusive plant only to meet the requirement of Cadbury's products for the state of Rajasthan which commenced operations on 02-05-1999 in terms of the above referred agreement. Vide this agreement rights were granted to Satyam to manufacture, fill into authorized containers and to sell the products in the state of Rajasthan. Subsequently on 12-12-1998, M/s. Satyam were informed that CSBIPL has agreed to sell its soft drink brands to M/s. Coco Cola Company. Vide letter dated 28-06-1999 Satyam was also informed that M/s. Coco Cola Company would also honour all the existing agreements with CSBIPL. It was also informed M/s. Coco Cola India (P) Ltd. that all the brands of Cadbury Schweppes in India shall be acquired by M/s. Atlantic Industries, a company incorporated under the laws of the Cayman Island, Caribbean (Atlantic) and that the agreement dated 5-1-1997 between Satyam and CSBIPL stood assigned to Atlantic. In October, 1999, Satyam was intimated by Coco Cola India (P) Ltd. that Atlantic Industries, a wholly owned subsidiary of Coco Cola Company, USA shall be the owner of Schweppes Beverages trademarks and relate4d intellectual rights. There had been some disputes with regard to sale of Schweppes Beverage Products because M/s. Coco Cola Company India was not interested in encouraging the sale of Schweppes brand to avoid competition to its own products. Due to this Satyam suffered huge losses and therefore, in 2008 Satyam filed a complaint u/s 36 of Monopolies and Restrictive Trade Practices Act (MRTP) before the MRTP Commission, New Delhi. They also filed application u 12 and 12A of MRTP Act. An arbitration application u/s 11 of the Arbitration and Conciliation Act of the High Court Rajasthan was also filed by the assessee.

Subsequently, on 24-1-2008, Satyam entered into agreements. One with Atlantic, called Settlement Agreement vide which the bottling agreement dated 05-11-1997 was terminated on a settlement amount of Rs. 18,33,11,020/-. Out of this a sum of Rs. 5 crores had been paid in advance and balance was paid on 15-12-2008. As a part of this settlement agreement on the same day i.e. 24-11-2008, the assessee also entered into another agreement called Asset Transfer Agreement with M/s. Coco Cola India (P) Ltd. vide which the assessee sold also its assets as specified in Schedule A of the agreement including its rights, titles, and interests in the immovable property to M/s. Coco Cola India (P) Ltd. for a consideration of Rs. 5,94,57,684/-. Further as a part of settlement agreement a conveyance deed was made between the assessee and Coco Cola India (P) Ltd. on 07-01-2009 vide which Rs. 4,23,31,296/- was received by the assessee company as full and final settlement and payment in respect of the immovable property.

The AO issued a show cause notice as to why the said receipts of Rs. 18.33 crores should not be treated as revenue receipt. Assessee filed a detailed reply which in sum and substance contended that:-

i. The entire compensation received by the appellant was in lieu of withdrawing the right to sue against Atlantic/Coca Cola. Any agreed compensation received for withdrawing the right to sue is patently a capital receipt. The same is outside the purview and scope of taxation as Business or revenuer receipt as contemplated by the provisions of the I T Act.

ii. The compensation received by way of settlement agreement is wholly and exclusively in lieu of the assessee withdrawing all the cases filed against Atlantic/Coca-Cola.

The cases with MRTP were filed to bring home the point that Coca Cola was Monopolistic in its approach and was killing competition. The relevant paras of the settlement agreement read together demonstrated that the compensation was received merely for withdrawal of litigation. Such compensation was patently capital receipt and cannot be considered taxable revenue receipts in terms of any provision of I T Act. The AO however did not agree with assessee's submissions and held that entire receipt was not revenue in nature. Consequently AO split the compensation into two parts, one was held capital receipt and other part of Rs. 8,16,22,040/- was held as revenue in nature u/s 28(ii)(c), as according to AO, the assessee has received it in consideration of terminating the agency held or modification of terms thereof.

Assessment order was challenged on the grounds of validity of notice u/s 153C, satisfaction note and jurisdiction for initiation of 153C proceedings along with grounds on merits about taxability of receipts, by the assessee before CIT(A). CIT(A) rejected assessee's grounds about satisfaction u/s 153C and upheld the order of AO in this behalf. Qua merits however it was held that provisions of sec 28(va) were applicable and not sec 28(ii)(c) as applied by AO. Consequently the part of compensation indicated by AO was received by assessee was held taxable u/s 28(va) i.e. receiving for not carrying out of its business against Coca cola/ Atlantic. Thus on merits also CIT(A) upheld the AO's order though applying a different clause of sec. 28 and dismissed assessee's appeal. In conclusion CIT(A) upheld the addition holding the part of compensation to be taxable business receipt u/s 28(va) of the Act.

On further appeal by the assessee, the Tribunal held that,

++ on merits, the issue is narrow - Whether the amount in question can be held to be falling within the scope of sec. 28(va). Search in the premises of Cabana group was conducted on 31-7-09 whereas the settlement agreement in question and other agreements were executed much earlier on 24-11-08. It has not been alleged that the agreements are a subterfuge, thus the genuineness of agreements is not in question;

++ all the clauses of the agreement read together reflect 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 Satyam from various forums instituted for breach of terms of conditions. 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. This being so the compensation neither falls in the ambit of sec. 28 (ii) c as held by AO nor u/s 28 (va) as held by CIT(A);

++ assessee has 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/Atlantic besides entailing huge cost and efforts of litigation. Relinquishment of right to sue is neither a capital asset nor taxable u/s 28 which provides specific types of receipt to be held taxable as business income. Relinquishment of right to sue does not find any mention therein. In this eventuality, the impugned amount of Rs.8,16,22,040/- is a capital receipt not liable to Income Tax. The addition is deleted, assessee's grounds in this behalf are allowed;

++ apropos the issue about validity of satisfaction u/s 153C, since the relief on merits have been allowed, there is no necessity to dwell on this technical issue.

(See 2015-TIOL-371-ITAT-JAIPUR)