The Cochin bench of the Income Tax Appellate Tribunal (ITAT) has held that the compensation received for discontinuing commodity trading business is taxable as a non-competent fee under Section 28(va) of the Income Tax Act, 1961.
While considering a second appeal by the assessee, the bench applied the literal interpretation of section 28(va) of the Income Tax Act and clarified that all payment of compensation for discontinuance of a business activity would be covered under the said provision unless the same was liable to be taxed under the head `capital gains’.
The assessee, M/s.Geojit Investment Services Limited, received Rs. 40 crore for discontinuing its commodity trading business from BNP Paribas. The amount was credited to the profit and loss account of the assessee for the year ending 31.03.2009 and disclosed as an “extraordinary item”. While filing returns, the assessee included the compensation of Rs.40 crore while computing book profit and paid tax thereon as per the provisions of Section 115JB of the Income Tax Act. For the purpose of computing tax under normal provisions of the Act, the assessee excluded the said compensation as not liable to tax. The Assessing Officer held that the amount is taxable by holding that the assessee’s source of income/profit earning apparatus was not impaired since a new company under the same group `Geojit’ was incorporated by common promoters and in essence there was no loss of profit-making apparatus or source of income.
The AO further made an alternative view that even it is assumed that the profit-making apparatus of the assessee was impaired, the compensation received by the assessee was taxable in terms of the provisions of section 28(va) of the Act.
The first appellate authority, confirmed the order and held that the compensation received by the assessee was taxable u/s 28(ii)(c) of the Income Tax Act.
On appeal, the assessee contended that the compensation received was capital receipts for loss of source of income / profit earning apparatus and hence not liable to tax.
Upholding the orders of the lower authority, the bench concluded that the compensation was received for not carrying on any activities in relation to its commodity trading business.
The bench said that “the compensation so paid for not carrying any activity in relation to any business (commodity trading business) would be taxable going by the plain meaning of section 28(va)(a) of the Act. Section 28(va) of the I.T.Act was introduced w.e.f. 01.04.2003. Though there was no written agreement for payment of compensation, the letters of BNP Paribas dated 23.05.2008 and 27.05.2008 and the Board Resolution of the assessee-company stating that it would discontinue the commodity trading business of the assessee on receipt of compensation of Rs.40 crore, would come within the ambit of an arrangement / undertaking / action in concert, whether or not, the same was formal or in writing or it was intended to be enforceable by legal proceedings and that would tantamount to an agreement for the purpose of section 28(va) of the I.T.Act. The wordings of section 28(va) of the Income Tax Act is unambiguous and clear. The said section does not restrict, the bringing to tax only the non-compete fee but any sum that was received or receivable in cash or kind for not carrying out any activity in relation to any business.”
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