S 12AA Corpus Donation

A voluntary corpus contribution received by a trust, not registered under Section 12AA, is considered a capital receipt and falls outside the scope of income chargeable under Section 2(24)(iia). Consequently, such contributions cannot be subjected to taxation, even for trusts not registered under Section 12A/12AA. ACIT v Financial Inclusion Trust [2023] 156 taxmann.com 415 (Delhi - Trib.)

S. 28(va) Transfer of business

When an agreement specifies certain restrictive covenants, the consideration paid, whether explicitly mentioned or implied, falls under the purview of Section 28(va).

Since the Indian company’s operations continued under the existing entity, there was no transfer of a business in its entirety, including all assets and liabilities.

If non-depreciable capital assets are transferred separately (not as part of a slump sale), capital gains are calculated using the standard procedures outlined in Chapter IV-E. In cases where the transfer of capital assets, without constituting a transfer of the entire business, is accompanied by negative covenants, the consideration for the share transfer should be used to determine both capital gains and income under Section 28(va). When an assessee agrees to a non-compete clause as part of the transfer of any capital asset, such as shares, but not the right to manufacture, etc., the entire consideration cannot be attributed entirely to the share transfer for calculating capital gains under Section 45. To the extent that the consideration relates to the non-compete clause, the provisions of Section 28(va) must be applied. The proviso to Section 28(va) clearly indicates that in all other cases where the right to manufacture, etc., or to carry on any business is not transferred and a non-compete clause is included in the agreement, the portion of the total consideration attributable to the non-compete clause should be segregated and taxed as business income.

The assessee never claimed that the Rs. 85.79 crores were for the transfer of any right to manufacture, produce, or process any article or thing or the right to carry on any business. In fact, the assessee did not possess such rights. They only held a 51% shareholding in the Indian company, which they transferred.

Therefore, it must be concluded that the total consideration of Rs. 85.79 crores should be segregated into portions attributable to the transfer of shares and negative covenants. The portion related to the transfer of shares will be used to calculate capital gains tax, while the portion related to the negative covenants covered by sub-clauses (a) and (b) of Section 28(va) will be taxed as business income.

The Assessing Officer treated the entire sale consideration of Rs. 85.79 crores as attributable to the transfer of the business, leaving no room for determining a separate consideration for the transfer of shares for the purpose of calculating capital gains. The Commissioner (Appeals) also did not thoroughly examine the portion of the consideration attributable to the transfer of shares. They simply applied a rule of thumb and determined that 10% of the consideration was attributable to the non-compete clause and the termination of the assessee’s management role. No justification or reasoning was provided for the arbitrary figure of 10%. Under these circumstances, the Assessing Officer must reassess the allocation of the sale consideration between the shares and the negative covenants. Consequently, the Assessing Officer should be directed to segregate the consideration attributable to the sale of shares and then calculate the capital gains on the transfer of such shares accordingly; the remaining amount attributable to negative covenants should be taxed as business income under Section 28(va). Jayant Avinash Dave v. DCIT [2023] 156 taxmann.com 458 (Pune - Trib.)

S. 32 Depreciation on Intangible

The non-compete agreement’s specific clause clearly demonstrates that non-compete fees cannot be considered in isolation. The non-compete fee paid by the assessee is an integral part of the initial outlay for the acquisition of the business, and the combined interpretation of the asset purchase agreement and the non-compete agreement indicates that the non-compete agreement was a crucial component of the entire acquisition of GE India Pvt Ltd’s business by the assessee. As a result of the non-compete agreement, the assessee has acquired the right to conduct business without the threat of competition, safeguarding the business as a whole and enhancing the value of the capital assets. Therefore, since it was considered capital expenditure, assesse is entitled to depreciation under Section 32(1)(ii). Consequently, the Assessing Officer should be directed to grant depreciation on payments made for non-compete fees, customer and other contracts, backlog orders, and customer and supplier lists under Section 32(1)(ii). Eaton Power Quality (P.) Ltd. v. DCIT [2023] 156 taxmann.com 14 (Chennai - Trib.)

S. 37(1) Membership Fees

the expenditure incurred towards entrance fees and annual membership would be a revenue expenditure because it has been incurred wholly and exclusively for the purposes of business and not towards capital account. Such expenditure only facilitates the smooth and efficient running of the business enterprise and does not add to the profit earning apparatus of the business enterprise. Swiss Re Services India (P.) Ltd. v DCIT [2023] 156 taxmann.com 56 (Bombay)

S.69A Unexplained investments

In the absence of evidence linking the assessee to the funds deposited in the foreign bank account, the assessee’s explanation that the account belonged to his nephew and that he had only signed some papers at the nephew’s request was deemed plausible. Considering the assessee’s occupation as an agriculturist with limited landholdings, it was improbable that they could possess such a substantial sum of foreign currency. Consequently, the addition made to the assessee’s income on account of the foreign bank account was unjustified. PCIT v. Joginder Singh Chatha [2023] 156 taxmann.com 509 (Punjab & Haryana)

S. 69C On money to builder

The reopening of the assessee’s case based solely on the statement of the sales head of Sunshine Group, alleging that the assessee had paid a certain sum in cash for the purchase of a property from Trincas was not legally sustainable. Further, the assessee’s transaction did not occur during the year under consideration, nor did the assessee enter into any agreement with Sunshine Group. Instead, the property was purchased under an agreement with T. Therefore, the AO’s assertion that the assessee had paid additional money (the difference between the agreement value and the market value) to the builders, which was subsequently added to the assessee’s income under Section 69C, was unsubstantiated Prashant Rameshchandra Samdani v. ACIT [2023] 157 taxmann.com 8 (Mumbai - Trib.)

S. 143(3) Assessment Procedure

Assessing Officer while passing assessment order relied on the statements of employees of the assessee company but has not granted opportunity to cross examine them. It was held that there is a violation of principles of natural justice and also due to noncompliance of Section 65(B) of the Indian Evidence Act. Appelate Authority remand the matters back to the Assessing Officer for de novo assessment with following directions:

1. provide all the details of the seized materials and furnish copies of the sworn statements of the witnesses;
2. afford an opportunity to the petitioners to crossexamine the persons whose statements are relied upon by the Assessing Officer for making additions or dis-allowances;
3. strictly comply with Section 65-B of the Indian Evidence Act in case the Assessing Officer wants to use the electronic document way of secondary evidence;
4. after cross-examination by the Assessee, Assessing Officer shall provide a personal hearing to the petitioner or their representative to advance their submissions in person;

SKM Animal Feeds and Foods (India) (P.) Ltd. v. ACIT [2023] 156 taxmann.com 385 (Madras)

S. 148 Reassessment

The reopening notices dated June 30, 2021, and June 28, 2021, issued under the unamended Section 148 for assessment years 2016-17 and 2017-18, respectively, would be considered as notices issued under the substituted Section 148A(b). Consequently, these reassessment notices were barred by limitation under Section 149. Ganesh Dass Khanna v. ITO [2023] 156 taxmann.com 417 (Delhi)

S. 148 Reassessment

The reopening notice issued by the Assessing Officer under Explanation (1) of Section 147, citing the assessee’s failure to provide details regarding the sale deed of agricultural land, was deemed invalid. The assessee had disclosed all relevant information about the land sale during the original assessment and promptly produced a copy of the sale deed upon request. The production of the sale deed did not constitute the production of books of accounts and did not fall within the purview of Explanation (1) of Section 147. Therefore, the reopening notice lacked justification. S. Uttam Chand v. ACIT [2023] 157 taxmann.com 9 (Madras)

S.245A Settlement Commission application

As the retrospective amendment to Section 245A aimed to render the ITSC inoperative from the date of the Bill’s introduction and redirect all pending applications to the Interim Board, it did not intend to abolish pending applications related to cases arising between February 1, 2021, and March 31, 2021. Consequently, the last date mentioned for filing applications in Section 245C(5) should be interpreted as March 31, 2021, instead of February 1, 2021. Accordingly, the last date specified in the Circular should also be read as March 31, 2021. Jain Metal Rolling Mills v. UOI [2023] 156 taxmann.com 513 (Madras)