By TIOL News Service

NEW DELHI, SEPT 29, 2017: THE issue before the Bench is - Whether signature bonus received by the assessee as compensation for losing a profit-making apparatus is taxable as capital gains. NO is the answer.

Facts of the case

The Assessee-an Indian multinational oil and gas company, had filed its return for the relevant AY. The Assessee-company was granted a mining lease to mine petroleum for 20 years in respect of Basing Offshore Area vide the Joint Secretary, Ministry of Petroleum, in respect of Mukta Field Area. Upon the Joint Secretary's letter, the Assessee intimated the proposal of JV Development in field of Mukta Panna to commence and carried out exploration and drilling activities. The Assessee agreed with the other companies to receive 40% of the share in the production and in addition to the sum of certain amounts depending upon the achievement of certain level of production. For AY 1995-96, the Assessee received a sum of Rs. 219.76 crores as 'Signature bonus' for demitting 60% share in the oil fields. The amount so received by the Assessee was treated as Revenue receipt and was brought it to tax by the AO.

However, on appeal before the CIT(A), it was held that the transfer by the Assessee was a Revenue yielding asset and the transfer of shares did not lead to any capital gain. Therefore, the Assessee's appeal was allowed and thereby, deleted the addition of Rs. 2,19,75,65,000/- made by the AO.

On appeal, the Tribunal held that,

++ it is evident that ONGC transferred 60% of rights in three fields to receive the signature bonus and the commercial activities have already been started at those three fields. As rightly held by the CIT(A) when the Revenue yielding ongoing concern was transferred there will only be capital gain or capital loss and the observation of the AO that since the joint operating agreement was entered into in respect of a business which is already yielding Revenue, the amounts received by the Assessee are Revenue in nature is not correct. Record does not support the observation of the AO that the signature bonus was a payment towards compensation to the Assessee for the profit which it loses, as a consequence of production sharing contract;

++ signature bonus was received by the Assessee in lieu of the transfer of 60% of rights in the oil fields, as such, by no stretch of imagination could it be said that the receipts on that account would be to receive the compensation for loss or profit. Under the joint operation agreement ONGC surrendered 60% of the rights to the other companies agreeing to receive signature bonus. We, therefore, hold that the amount of Rs. 219.76 crores received by ONGC is for transfer of 60% of shares in the Revenue yielding oil fields, as such, is capital in nature;

++ here in this case, the transfer was in the nature of slump sale and as is held by the Apex Court in PNB Finance Ltd. while referring to the decision in B.C. Sriniwas Shetty's case and holding that the ratio of Artex Manufacturing Co.'s case has no application to the facts of the case and prior to 1.4.2000 there was no computation provision that could be brought to tax as capital gains the consideration received in slump sale. The Jurisdictional High Court followed this principle in DLF Ltd.'s case;

++ while respectfully following the same, we are of the considered opinion that the amount of Rs. 219.76 crores received by the Assessee as signature bonus for demitting 60% shares in the three oil fields cannot be brought to tax. Even otherwise, as is held by the CIT(A) in this matter the transaction did not result in any capital gain in as much as by demitting 60% of share in three oil fields the book value of which is Rs. 882.86 crores the Assessee received only a sum of Rs. 219.76 crores. Viewing from any angle the amount received by the Assessee as signature bonus is not liable for tax. We, therefore, dismiss the grounds of appeal of the Revenue.

(See 2017-TIOL-1354-ITAT-DEL)