Non Compete Fees received shall not be liable to Capital Gains and shall not be added to the book profits : Bom HC

In a recent decision, Hon’ble Bombay High Court held that:

Section 55(2)(a) of the Act would have no application in the present circumstances, as it deals with the cost of acquisition in relation to a capital asset which includes a right to manufacture or carrying on business. In the present case, the Agreement prohibits the assessee in as much as it amounts to giving up its right to carry on business i.e. a restrictive covenant. It held that such restrictive covenant stands covered only w.e.f. 1.4.2003 on introduction of Section 28(va) of the Act. In view of the above, the impugned order having merely followed the decision of the Apex Court in Guffic Chem Pvt. Ltd. no substantial question of law arises for our consideration.

We find that for the Explanation to Section 115JA of the Act to be invoked it is necessary that the amount which has been carried to the reserves should have necessarily been first debited to the Profit and Loss account resulting in a reduction in the profit declared by the Respondent / Assessee Company. This issue stands settled in view of the Apex Court decision National Hydroelectric Power Corpn. Ltd. Vs Commissioner of Income Tax wherein it has been held that to invoke clause (b) of the Explanation below Section 115JB (identical to Section115JA) of the Act, two conditions must be satisfied cumulatively viz. there must be a debit of the amount to the Profit and loss account and the amount so debited must be carried to Reserves. Admitted position in this case is that there is no debit to the Profit and loss account of the amount of Reserves. The impugned order has in view of the self evident position taken a view that in the absence of the amount being debited to Profit and Loss account and taken directly to the reserve account in the balance sheet, the book profits as declared under the Profit and Loss account cannot be tampered with. In view of the fact that the impugned order has followed the decisions of the Apex Court in Apollo Tyres and is in accordance with the decision in National Hydroelectric, the Explanation to Section 115JA of the Act would not be triggered.

For complete text of judgement, click here BISLERI SALES