SBS-I-1st-Edition

#1 08/17 SBS‘’UPDATESCOVERED:1.Revenue&CapitalRecipet

RevenueReceiptandCapitalExpenditur -OnePayment,DifferentTreatments -ContributedbyCARamprasadTBriefofUpdate: Non-competing fee from businessaccrued orreceived bythe assesse though capitalin natureischargeabletotaxasperSection28oftheIncomeTaxAct,1961.Thisjudgement throwslightonnatureofreceiptofnon-competingfeefrom businessbasedonfactsandcir- cumstancesratherthangoing bythe termsofthe agreement.InthisJudgementthe High Courttooknoteoftheeventshappenedaftertheagreementhasbeenenteredwhiledecid- ingthenatureofthereceipt.CITvsR.Radikaa,M/SRadaanMediaWorksIndiaLtd-HighCourtofMadras: Facts: Assesseisanartistandfilm director.Sheenteredintoanagreementwithacompanytopro- videherserviceandintellectualcapacitytoiton03.04.2000.Theagreementinteraliapro- videsthatshewouldnotcompetewiththebusinessofcompanyinIndiaorelsewhereand wouldtakecompanyconsentbeforeacceptinganengagementasanactorbesidespay- mentof5%ofherindividualearningstothecompany. TheagreementwasforaconsiderationofRs.75,00,000/-bywayofallotmentof75,000shares ofRs.100/-.Apartfrom thisassesseeindividualbusinesswastakenoverbythecompanyfora considerationofRs.4.37crinMarch2000.Theassetstransferredtothecompanyincludes brandequityatavalueofRs.75,00,000/- Assesseeowns99%ofthesharesason02.04.2000.Thecompanywenttopublicinyear2003. Assessmentswereframedinthecaseofboththeindividualaswellasthecompany. TheAO wasoftheview thattheamountofRs.75,00,000/-wasinthenatureofremuneration paidtotheindividualforlossofbusinessoftheassessee. AO hasreliedonJudgementofMadrasHCincaseofK.Ramasamy vsCIT261ITR358 AO hasobservedthattherehasbeendropinbusinessrevenuefrom soleproprietorshipthat stoodcompensatedbyarrangementfornon-competefee.AO thusheldthatnon-compete feeisrevenuereceipt. TheamountofRs.75,00,000/-wasaddedtotheincomeoftheassesseeandinthehandsof the companydepreciationwasdisallowed onnon-competing fee paid aswellasbrand equitycontendingthatitisnotanybusinessorcommercialrightsofasimilarnaturetoqualify asintangibleasset. CIT(A)andITATconcludedthattheamountofRs.75Lakhspaidformakingavailableassessee intellectualcapability,capacityand experience.Itwasa non-compete fee and held that compensationrelatedtotherestrictivecovenantsiscapitalreceiptandnotchargeableto tax.Theadditionwasdeletedanddepreciationonnon-competingfeewasallowedinthe handsofthecompany.

HighCourtJudgement: TheArtistwhowasmanagingthebusinessasaproprietaryconcerncontinuedtobepartof corporatestructureemployingsameskillsetaswasemployedbyher. Theassesseewasandcontinuestobethefaceofthebusinessasproprietorandthereafteras adirectorwithsubstantialholdingswithfirm holdingondecisionmaking.Thecompanywent topublicissueinFeb2003andshareholdingoftheassesseeafterpublicissuewas51.33%. PiercingtheveiltheHighCourtheldthattheburdenisontheassesseetoestablishthatthe transactionisbonafideandgenuine.ItupheldtheAO findingstotheextentofchargeability ofnon-competingfee. Relying onthe judgementsofMadrasHighCourtinPenta Media Graphicsand DelhiHigh CourtinSharpBusinessSystemsvsCITheldthatbrandequityconstitutesanintangibleassetin termsofsection32(1)(ii)anddepreciationisgranted.TakeAway: TheissuerelatedtoAY2001-02andlawapplicabletotherelevantassessmentyeardonotpro- videfortaxabilityofnon-competingfeebeingacapitalreceipt.TheFinanceAct2002haspro- vided thatnon-competing fee received orreceivable in relation to businessactivitiesis chargeabletotaxundertheheadPGBP.Thisamendmentwillapplyfrom AY2002-03. TheCBDTvidenotificationdated12/01/1977notifiestheprofessionoffilm artistforthepurpose ofsection44AA.Theterm film artistinteraliameansfilm actor. TheFinanceAct2016hasprovidedthatnon-competingfeereceivedorreceivableinrelation toprofessionischargeabletotaxundertheheadPGBP.Thisamendmentwillapplyfrom AY 2017-18. BeforetheamendmentbyFinanceAct2016non-competingfeereceivedbyprofessionalis nottaxable.Asaresult,thedifferencebetweenbusinessandprofessionisremovedinrelation totaxationofnon-competingfee. TheupdatesarecontributedbyCARamprasadT. HeisPartneratSBSandCompanyLLP.Hecanbereachedat Email:[email protected] 1.ConsideringtheJudgementofMadrasHighCourtincaseofRamasamy 2.CBDTcircular8/2002dated27/08/2002

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