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Judgment
PER SHRI M.BALAGANESH, A.M.:
The appeal in ITA No.1227/Del/2025 for AY 2014-15 and CO 50/Del/2026, arises out of the order of the ld National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as ‘ld. CIT(A)’, in short] dated 26.12.2024 against the order of assessment passed u/s 143(3) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) dated 28.12.2016 by the Assessing Officer, DCIT, Circle-10(1), New Delhi (hereinafter referred to as ‘ld. AO’).
The revenue has raised the following grounds of appeal:
a. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in ignoring the fact that the assessee had entered into agreement of JV for the purpose to enhance their business by way of pooling resources of both the parties so that both of them will have 50% equity capital in the new entity. Accordingly, there was no any restraint on business activities of the assessee and its profit earning apparatus was never affected
b. Whether on the facts and circumstances of the case and in law, the Ld CIT(A) erred in ignoring the below mentioned facts
I. That no new source of income was created and the source of income remained the same e processing; manufacturing and selling of Barley Malt in the country
II. Even during the negotiation period of the joint venture, the assessee company kept on manufacturing the goods which were supplied.
III. The joint venture never came into existence
IV. Even after cancellation of the Joint Venture Agreement, the assessee company continued to enjoy its original position and kept on manufacturing various products and selling these products on its own
c. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in not taking into consideration the landmark judgement of Hon’ble Supreme Court in the case of Gillander Arbuthnot And Co Ltd v CIT, Calcutta [1964], where Hon’ble Supreme Court held that: the compensation received by Gillanders Arbuthnot & Co Ltd upon termination of its agency agreement with Imperial Chemical Industries (Export) Ltd. was a revenue receipt and thus taxable under the Indian Income Tax Act. 1922. The Court reasoned that the termination of a single agency, out of many held by the appellant did not impair the company’s overall trading structure or result in the loss of an enduring asset. Consequently the compensation was in the ordinary course of business to adjust the relationship between the parties and was not compensatory for loss of goodwill or any capital asset. The Appeals were dismissed, affirming the lower courts and decisions to tax the compensation as income.
d. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in treating income of Rs. 12,74,15,684/- in the form of exclusivity fee as Capital receipt instead of Revenue Receipt, received against non-execution of institution of a new Joint venture agreement ignoring the fact that the assessee has not been deprived of his business and, in fact, as observed the same business continued before the joint venture and after the termination of the joint venture?
e. The appellant craves leave to add, amend and alter the grounds of appeal during appellate proceedings.
Though the revenue has raised several grounds, the only effective issue to be decided is as to whether a sum of Rs. 12,74,15,864/- received by the assessee company in the nature of exclusivity fees could be subjected to tax as a revenue receipt in the facts and circumstances of the case.
We have heard the rival submissions and perused the material available on record. The assessee company (formerly known as GEM Engineering Private Limited), operates primarily in barley and related product trading since 1981. The assessee company and certain other group companies are promoted by Mr. P K Jain and his family members (in short Jain family). The assessee company is the holding company of M/s. Malt Company India Private Limited (in short MCIL), which is engaged in manufacturing of malt and malt extracts and is also promoted by Jain Group. The assessee company is the major shareholder of MCIL holding 60% of equity shares. During the FY 2008-09, Jain family, the promoters of the assessee company, were approached by M/s. Malteris Soufflet S.A.S (Soufflet in short), a prominent French company and leading malt manufacturer in Europe with a reputable trade name to explore a potential Joint Venture (JV) in the Jains family’s malt business and whereby the assessee company’s shareholding in MCIL was proposed to be transferred. To facilitate the negotiations for a joint venture in the malt business, Soufflet and MCIL signed a mutual Non-Disclosure Agreement (NDA) on 13.09.2009. For the proposed JV, Soufflet required exchange of confidential information with the Jain family’s business. This NDA was entered to ensure that both parties would protect the confidentiality of sensitive information shared during discussions. A Memorandum of Understanding (MOU) dated 18-11-2010 was entered between Soufflet and Jain group represented by Mr. P K Jain for and on behalf of the company and M/s. MCIL. The MOU also outlined a non-solicitation clause, whereby neither Soufflet nor the Jain family (i.e. assessee company and MCIL) would initiate or engage in negotiations or discussions regarding any potential sale, transfer or issuance of shares in any entity associated with the joint venture business to third parties. After signing of the MOU, various negotiations took place between both the parties and the correspondences exchanged between 2010 to early 2014. Despite nearly 4 years of negotiations, the venture did not proceed beyond due to factors beyond the parties’ control, leading both to mutually part ways and rescind all prior agreements and understandings. The assessee company being the primary shareholder in MCIL whose shares were intended for transfer to Soufflet, was a major loser as it was bound by the MOU Exclusivity Clause (clause VII.2) and was restricted from negotiating with other parties to sell or transfer shares, resulting in a considerable loss of time. The assessee company formally wrote to Soufflet referencing the agreement between the parties regarding the payment of an Exclusivity Fee. The letter highlighted that in the event the joint venture did not materialize, Soufflet was obligated to pay Exclusivity Fee to the assessee company. This fee was to compensate for securing exclusivity under the commitments made by the assessee company as well as for engaging in exclusive negotiations with Soufflet. Accordingly during AY 2014-15, the assessee company received Rs. 7,17,68,320 as an exclusivity fee from Soufflet and thereafter Rs. 5,56,47364/- was received in AY 2015-16. This fee was paid in exchange for the company's commitment to an exclusive negotiation with Soufflet for the sale of shares in Malt company in MCIL. As this transaction ultimately did not materialize, the assessee company classified the amount received totaling to Rs. 12,74,15,684 as a capital receipt and credited it to the capital reserve not chargeable to tax.
The ld AO in total disregard of the submissions made by the assessee company made addition of Rs. 12,74,15,684/- in AY 2014-15 treating the receipt as revenue receipt taxable u/s 28(iv) and 28(va) of the Act. Further this sum of Rs. 12,74,15,684/- was also added to the book profit u/s 115 JB of the Act by the ld AO.
The ld CIT(A) by way of a speaking order observed that if an agreement is entered in the ordinary course of business, compensation received for its termination would be revenue receipt however where the agreement was primarily for transfer of shares (being a capital asset), fee received on cancellation of the same would be a capital receipt more particularly when the company was not obligated to restrict any kind of its business activity.
Aggrieved, the revenue is in appeal before us.
We find the operative portion of the observations made by the ld AO are as under:-
“The reply filed by the assessee is considered. It has been observed from the reply dated 28.11.2016 that inspite of MOU being valid for 60 days as per para VI of MOU dated 18.11.2010. There was informal agreement between the assessee and Soufflet to achieve the end objective as prescribed in the MOU. The assessee in para 6 of its letter dated 28-11-2016 has stated as under:
"After signing of the MOU various negotiations took place between both the parties, agreements were signed, correspondence exchanged, demerger scheme was filed, restricting of shares was done and various other activities were executed between both the parties between 2010 to early 2014. Copy of sample letters such as dated 27.07.2010, 02.11.2010, 25.08.2011, 27.10.2011. 15.11.2012, 04.02.2013, 08.03.2013, 23.05.2013.12.07.2013 and 23.09.2013 are enclosed herewith."
On perusal of MOU it has been observed that both the assessee and Soufflet are in the business of processing & manufacturing of Barley Malt in their respective countries. Both the entities has agreed to enhance their business by way of creating a new entity in India in such a way that both the parties should have 50% equity capital in the new entity. The agreement is simple agreement for setting up a business in joint venture by way of pooling resources of both the parties. The assessee in its reply has admitted that there was agreement between assessee Company and Soufflet for Joint Venture. For this purpose it was agreed between the parties that subsidiary of assessee Company M/s Malt Company India Private Limited (MCIL) will go for demerger and Gurgaon plant of MCIL will be separated from MCIL and one separate entity will be created which will control Pataudi unit and Kashipur plant of MCIL. Accordingly, shares of MCIL will be restructured and will be issued.
However, even after negotiation of almost four years (as admitted by the assessee in para 7 of its letter dated 28-11-2016) the joint venture could not be achieved due to various reasons therefore both the parties decided to part their ways and cancel all arrangements between them. The assessee in its letter dated 10-11-2016 has admitted that the so called capital receipt is the amount received on cancellation of agreement for purchase of equity shares, and other benefits as per the agreements, of M/s. Malt Company India Private Limited from assessee Company by Soufflet. Whereas in its reply dated 28-11-2016 the assessee as stated that it has received fee on account of exclusivity period offered to Soufflet for sale of its shares held in MCIL. Contradiction in the statement of the assessee in a short interval of time itself makes it clear that the assessee itself was not clear about the nature of receipt of such money before treating it as capital receipt. This entire arrangement between the assessee and Soufflet is fictitious to give colour and manipulate the transaction in such a manner that revenue receipt is shown as capital receipt. The settlement did not affect in any way the business of the assessee as the assessee was already in the trade of processing and manufacturing of Barley Malt. The assessee has got its Town developed infrastructure and there was no impairment of resources of income. The profit earning apparatus was not affected in any way so that the receipt could be considered as capital receipt. The compensation so received by the assessee was not for loss of source of income but loss on account of breach of terms of the business agreement by Soufflet. There is no injury suffered by the assessee company for any of its capital assets whatsoever. Therefore, the amount received by the assessee on account of alleged exclusive fee is to be treated as revenue receipt instead of capital receipt.
On perusal of the clause-C of the MOU dated 18.11.2010, as furnished by the assessee during the course of assessment proceedings, the activity of the JV would be as under:-
"The joint venture's activity will be to produce and/or process in India and/or sell and/or trade malt processed from barley or wheat for the brewing and distilling industry in India and/or trade of any type of barely for which soufflé and/or its affiliates have an exclusive marketing or production right to the extent described in clause V.1.c hereof, and sale of malt exported by Soufflet to India as more fully described in Clause V.La) to e) hereof (JA business")"
The plain reading of the clause makes it very clear that the proposed activities of the JV were carrying out business activities similar to that of the assessee. Further, on perusal of the letter dated 21.01.2014 which was written by the assessee to M/s Maltries Souffle SAS, as submitted by the assessee during the course of assessment proceedings, in para 2 the assesses itself has stated as under:-
"Based on mutual discussions between GEM, Malt and its promoters, it was agreed that neither Malt nor Malt's shareholders including GEM nor their respective promoters, directors, officers, employees, agents, representatives and affiliates will initiates or participate in any discussion or negotiations with any person other than soufflé and its promoters to set up the Joint Venture for carrying on the JV Business. Further as per mutual discussions, GEM. Malt and its promoters carried out the demerger of the Kashipur and Pataudi plant of Malt into a new entity to facilitate the setting up of the Joint Ventures.
It has been agreed between the parties that in case the Joint Ventures is not set up. Soufflet shall be required to pay an exclusivity fee to GEM towards securing exclusivity and commitment from GEM for having entered into exclusive negotiations with Soufflet ("Exclusivity Fee")."
Therefore, receipt is very much revenue receipt and liable to be tax u/s 28 of the Act, considering the provisions of section 28(iv) and Section 28(va) of the Act. The plain reading of above letter Placed on on record clearly establish that the sum has been received by the assessee for not carrying out similar business activity in relations to the business agreed between the parties. The instant case is directly hit by provisions of section 28 (va) as well as 28(iv) of the Act which are reproduced as under-
The following income shall be chargeable to income-tax under the head profits and gains of business or profession",
((tv) the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession)
((va) any sum, whether received or receivable, in cash or kind, under an agreement for
(a)Not carrying out any activity in relation to any business, or"
On perusal of various replies, non disclosure agreement. MOU and series of correspondence between the assessee Company and Soufflet and provisions of Income-tax Act as mentioned above, it is absolute clear that the assessee Company has received Rs. 7,17,68,320/- during the year under review and Rs. 5,56,47,364/-during subsequent assessment year on account of pre-mature cancellation of agreement. Since the assessee is following mercantile system of accounting the receipt of Rs. 5,56,47,364/- in subsequent assessment year will be considered as income of the assessee for the year under consideration. Therefore, an addition of Rs. 12,74,15,684/- is being made to the total income of the assessee.
Further, the assessee has not considered this receipt while calculating its profit under section 115JB of the Income Tax Act, 1961. After giving effect of this receipt, the book profit under section 115JB will be enhanced by an amount of Rs. 12,74,15,684/-.
Since, I am satisfied that the assessee has furnished inaccurate particulars of its income, penalty proceedings under section 271(1)(c) are being initiated separately. (addition of Rs. 12,74,15,684/-)
The ld CIT(A) had dealt with the same as under:-
“6.5All the arguments of the appellant have been duly considered. First of all, whether the proposed transfer of shares was in the nature of capital, the answer is 'yes'. Further the MOU/agreement had refrained the appellant to make any agreement of sale of such shares. Here, there is no any kind of business activity or any kind of product of the appellant company was restricted which could affect the business activity. The MOU/agreement was only for purchasing of share in terms of Joint Venture. Provision of section 28(iv) and 28(va) apply only when any kind of business activity involves or any kind of benefit arises out of refraining business activity. Here, the transaction was not including the non-compete fee and there was no such kind of agreement made by either of the parties. The appellant had not received the amount of transaction out of the business activity, it was only the agreement to sale of shares in terms of joint venture which in the subsequent year not materialized and the opposite party paid the exclusivity fee for the same. The kind of transaction cannot be covered the definition of revenue receipt. It is also fact that the income could be taxable u/s. 28(iv) only when the benefit or perquisite received out of business activity. ………………………………….
6.8In the instant case, the compensation received under exclusivity fee becomes taxable as a capital receipt and not as a revenue receipt. When any agreement is entered into in the ordinary course of business, the compensation received for its termination would be a revenue receipt but in the appellant case, the agreement was made to transfer of shares in accordance with the Joint Venture however it was not materialized during the period 2010 to early 2014, the same was cancelled and the other party had paid the exclusivity fee in terms of the agreement. Here, the appellant was not obliged to restrict any kind of its business activity, the agreement was only for not to transfer the shares to other party during the period of negotiation.
6.9In view of the above, the undersigned is of considered view that the transaction cannot be considered as revenue receipt and its nature is in capital. Therefore, the contention of the appellant is found to be genuine and thus, the addition made by the AO treating the exclusivity fee as revenue receipt to the tune of Rs. 12,74,15,684/- is hereby ordered to be deleted. Accordingly, the Ground No. 1 to 3 raised by the appellant are allowed.”
We find that the ld AO had sought to invoke the provisions of Section 28(iv) of the Act to bring to tax the subject mentioned receipt. On plain reading of provisions of Section 28(iv) of the Act, we find that it is limited to non-monetary benefits arising from business operations. Admittedly the exclusivity fee in the instant case was received in cash. Hence as per the erstwhile provisions of section 28(iv) of the Act as it stood upto AY 2023-24, any cash consideration received would be outside the ambit of provisions of Section 28(iv) of the Act. Reliance in this regard has been rightly placed on the decision of the Hon'ble Supreme Court in the case of CIT Vs. Mahindra and Mahindra Limited reported in 404 ITR 1 wherein it was held as under:-
“13)On a plain reading of Section 28 (iv) of the IT Act, prima facie, it appears that for the applicability of the said provision, the income which can be taxed shall arise from the business or profession. Also, in order to invoke the provision of Section 28 (iv) of the IT Act, the benefit which is received has to be in some other form rather than in the shape of money. In the present case, it is a matter of record that the amount of Rs. 57,74,064/- is having received as cash receipt due to the waiver of loan. Therefore, the very first condition of Section 28(iv) of the IT Act which says any benefit or perquisite arising from the business shall be in the form of benefit or perquisite other than in the shape of money, is not satisfied in the present case. Hence, in our view, in no circumstances, it can be said that the amount of Rs 57,74,064/- can be taxed under the provisions of Section 28 (iv) of the IT Act.”
Now let us examine the applicability of provisions of section 28(va) of the Act. For the sake of convenience, the said section is reproduced below:-
“Section 28- The following income shall be chargeable to income tax under the head “ profits and gains of business or profession”-
(va)any sum, whether received or receivable, in cash or kind, under an agreement –
a. not carrying out any activity in relation to any business (or profession); ………………….
Hence, the Section mandates receipt of cash or in kind under an agreement for not carrying out any activity in relation to any business. In the instant case, the assessee company’s commitment was solely related to refraining from share sale negotiations with other parties and not refraining from any business activity and consequently the provisions of Section 28 (va) of the Act cannot be made applicable.
We find that the aforesaid interpretation of the provisions of the Act had been duly appreciated by the ld CIT(A). The ld AO in page 4 of the assessment order categorically states that the money received was on account of cancellation of agreement for purchase of equity shares of MCIL from assessee company. Hence, it is proved that the money received by the assessee was not for carrying out any business activity. In order to apply the provisions of Section 28 (va) of the Act, the compensation should have been received towards restraint of business activities, which is not the case herein. With regard to reliance placed by the revenue in its grounds on the judgment of Hon'ble Supreme Court in Gillanders Arbuthnot and Co. reported in 53 ITR 283 (SC), we find in that case, the assessee was carrying on business in variety of agencies and dealing in diverse commodities, compensation was paid to the assessee for termination of one of the distributing agencies and their compensation was worked out on the basis of 3 successive years of passed commission. The assessee in that case claimed the compensation receipt as capital receipt. The Hon'ble Supreme Court held that having regard to the vast array of business done by that assessee as agents, the termination of agency was in the normal course of business and the determination of individual agencies is a normal incident not affecting or impairing its trading structure. Hence, it could be seen that the facts prevailing before the Hon'ble Supreme Court are factually distinguishable with that of the facts prevailing in the instant case before us.
In view of the aforesaid observations and respectfully following the judicial precedents relied upon herein above, we hold that the ld CIT(A) had rightly adjudicated the issue in detail and on which we do not find any infirmity. Accordingly, the amount received in the sum of Rs 12,74,15,684 cannot be brought to tax both under normal provisions of the Act as well as in the computation of book profits u/s 115JB of the Act as they are only capital receipts. Hence the same has been rightly credited to capital reserve by the assessee company in its books. Accordingly, the grounds raised by the revenue are dismissed.
In the result, the appeal of the revenue is dismissed.
CO 50/Del/2026 (Assessee CO)
The only issue raised in the cross objection of the assessee is challenging the action of the ld CIT(A) in sustaining the disallowance made u/s 14A of the Act. It is not in dispute that there was no exempt income earned by the assessee in the year under consideration. The amendment brought in Section 14A of the Act by the Finance Act by way of insertion of an Explanation by the Finance Act 2022 is applicable only from AY 2022-23 onwards and the same cannot be applied for earlier assessment years. Reliance in this regard is placed on the decision of Hon’ble Jurisdictional Delhi High Court in the case of PCIT Vs. ERA Infrastructure India Limited reported in 448 ITR 674 (Del). Hence, in the absence of exempt income, the applicability of provisions of section 14A of the Act would not come into operation. Hence, the disallowance made under section 14A of the Act is deleted on merits.
To sum up, the appeal of the revenue is dismissed and the cross objection of the assessee is allowed.