The Mumbai bench of the Income Tax Appellate Tribunal (ITAT ) has concluded that Piramal Enterprises suffered a setback by categorizing the compensation of Rs. 92.7 crore from termination as ‘business income’ instead of ‘capital gain’.
During the relevant year, the assessee company received Rs. 92,76,62,688 from Roche Diagnostics Gmbh ( RDG ) of Germany under a settlement agreement for the termination of agency, distribution, and manufacturing rights granted by RDG through an agreement dated 30.06.1997. This amount was declared as ‘capital gains’ by the assessee for tax purposes.
Mr. Priyank Gala, representing the assessee, M/s Primala Enterprises Limited, challenged the CIT(A)’s findings, arguing that the amount received was for the transfer of a capital asset, i.e., the business, and thus should be taxed as capital gains. He contended that the compensation was for the transfer or termination of business rights under the AMDA 1997 agreement.
On the other hand, Mr. P.D. Chogule, representing the Revenue, stated that the amount was received by the assessee for the termination of the agency, invoking Section 28(ii)(c) of the Income Tax Act, 1961, and contended that it compensated the assessee for foregoing prospective future profits from the agency business of RDG products.
The contention raised by Mr. Chogule regarding the provisions under Section 28(va), arguing that the existing provisions were restrictive and that compensation related to business and employment should be taxable, was deemed unsustainable by the ITAT. It was not the assessee’s case before the AO or CIT(A) that the compensation was for business loss or employment.
The two-member bench, comprising S. Rifaur Rahman ( Accountant member ) and Kuldip Singh (Judicial member), held that the compensation received by the assessee from RDG in the out-of-court settlement was business income and not capital gains as claimed by the assessee. Therefore, the provisions under section 28(ii)(c) read with section 28(va)(a) of the Income Tax Act were applicable. Consequently, the CIT(A)’s decision to confirm the addition of Rs. 92,76,62,688 as business income was upheld.
As a result, the ITAT ruled against the assessee.
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