The Bombay High Court in its recent judgment held that income tax cannot be levied on compensation received by Parle for settlement for loss of its bottling rights with Coca Cola Company.
The division bench comprising of Justice Dharmadhikari and Justice Prakash D.Naik were held so while dismissing a departmental appeal against M/s. Parle Bottling Pvt. Ltd.
Assessee, a private company was engaged in the business of manufacturing, bottling and distribution of soft drinks and beverages under several popular brands. During the relevant assessment year, the assesse had shown a sum of Rs.16.05 crores to be a capital receipt not liable to tax and was declared in the accounts as a capital reserve after deducting Rs.10 lakhs for professional fees paid.
Assesse claimed that the aforesaid amount was received as compensation of a settlement for loss of its bottling rights with Coca Cola Company, USA.
During the course of assessment, the AO noted that the payment was made for settlement of dispute between the Coca Cola Company, USA and the respondent assessee. Accordingly AO held that the amount partakes the character of income in terms of section 2(24) of the Act and to be taxed as income from other sources.
The aggrieved assessee went appeal before commissioner to set aside the issue. The commissioner was held that the receipt was taxable as capital gains since section 55(2) (a) covers such a situation as that of the respondent assessee. Aggrieved with the order of commissioner the assessee preferred a further appeal before the tribunal.
Referring the master agreement with Coca Cola Company of September, 1993 wherein the transfer of intellectual property rights in the nature of trademarks, knowhow, franchisee rights etc. in respect of various brands of beverages/soft drinks owned by the Parle Group was explained, the Tribunal held that there was a clear indication regarding the formation of Bangalore subsidiary and this subsidiary would be given the bottling rights. The Tribunal also added respondent company was entitled to receive compensation for breach of the right of first refusal from Coca Cola Company.
Tribunal, therefore, concluded that the assessee has lost the source of its business or trading activity. The compensation received was a capital receipt that was not taxable. It is this order of the Tribunal which is challenged in this appeal.
The division bench dismissed both the appeal of revenue and restored the judgment of tribunal infavour of respondent assessee and relied upon the order of identical issues.
The bench upheld the finding of the Tribunal that the sale proceeds on a capital assets cannot be held to be a revenue receipt and after the sale, the block of assets have been reduced and accordingly whatever is there in the block of assets, deprecation has to be allowed in accordance with the provisions of law.
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