THE ISSUE BEFORE THE BENCH IS - Whether when to clear the way for acquisition of shares by a foreign bank, in compliance with various regulators such as SEBI and RBI, assessee had to transfer its commodity trading business along with its clientele to a new floated company with common promoters, can it be said that profit making apparatus of the assessee is impaired. AND THE VERDICT IS NO.
Facts of the case
The assessee-company, engaged in the business of commodity trading, filed return for the relevant AY. During the assessment proceedings, the AO noticed that the assessee had received an amount of Rs 40 cr from BNP Paribas, a French bank, as compensation for agreeing to discontinue the assessee's business in commodity trading. Such BNP Paribas had invested 27.18% stake in the parent company of the assessee, viz., M/s.Geojit Financial Services Limited (GFSL). BNP Paribas had sought to increase its shareholding in GFSL by giving an open offer to the existing shareholders. However, as per the RBI guidelines, any parent company and its subsidiary companies had to withdraw from the commodity trading business before entering such transaction. Therefore, BNP Paribas approached GFSL to consider discontinuing the commodity brokerage business undertaken by its subsidiary, i.e., the assessee in order to comply with the requirements prescribed in the Indian Banking Regulation Act, 1949, being enforced by the RBI.
In lieu of the assessee discontinuing the commodity brokerage business, BNP Paribas offered compensation of Rs.40 crore based on a valuation report obtained by BNP Paribas, which was accepted by the assessee. Accordingly. in the return of income filed for the AY concerned, the entire compensation of Rs.40 cr received by the assessee from M/s.PNB Paribas for agreeing to discontinue its business in commodity trading was claimed as exempt as capital receipt.
The case of the assessee was taken up for scrutiny and the AO noticed that the assessee had not lost profit making apparatus and the commodity business of the assessee though discontinued, was carried on by another company having similar shareholding pattern and therefore, the amount of Rs.40 crore was liable to be taxed u/s 28(va). On assessee's appeal, the CIT(A) upheld the decision taken by the AO.
The Tribunal held that,
++ the compensation of Rs.40 crore paid by BNP Paribas to the assessee was credited to the profit and loss account of the assessee for the year ending 31.03.2009 and disclosed as an "extraordinary item". In the income-tax return, 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 I.T.Act. For the purpose of computing tax under normal provisions of the Act, the assessee excluded the said compensation as not liable to tax. According to the assessee, compensation received was capital receipts for loss of source of income/profit earning apparatus and hence not liable to tax. The Assessing Officer held 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. Alternatively the Assessing Officer held 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 I.T.Act. The CIT(A) on his part, apart from affirming the order passed by the Assessing Officer, also held that the compensation received by the assessee was taxable u/s 28(ii)(c) of the I.T.Act;
++ the assessee's commodity trading was transferred entirely along with its clientele to the new floated company M/s.Geojit Comtrade Limited. The new company, though not a subsidiary of the assessee or its parent company, was promoted by the promoters of M/s.Geojit BNP Paribas Financial Services Limited, the holding company of the assessee. In the new company, 53.13% of the share belongs to the wife of Shri C.J.George, who is the promoter of the holding company of the assessee. Though the assessee-company had surrendered its license with various commodity exchanges in the month of December 2008, at the very same time, the new company GCL had obtained license, as a member of commodity exchanges where the assessee had surrendered its license. The entire clientele consisting of 6000 clients were transferred in toto to the new company GCL. The credit balance in respect of the clients of the assessee-company were transferred to the books of account of the GCL. The new company, GCL had entered into an agreement with the assessee's parent company for the use of trademark "Geojit" and therefore, as rightly pointed out by the Assessing Officer, in the eyes of the clients, the business is carried on in the same name;
++ the business of the new company was carried out in the same premises of the parent company, making uses of the administrative set up, the equipments and the manpower etc. of the parent company of the assessee. This categorical finding of the Assessing Officer has not been dispelled by the assessee by placing any contra evidence. In this context, the Assessing Officer had come to a conclusion that there is no impairment in the loss of commodity trade to the group concern namely 'Geojit'. Therefore, it was held that the profit making apparatus of the assessee-company/the group company was not impaired by the discontinuance of commodity trade business of the assessee per se. Since there is no sterilization of income/profit earning apparatus from the consolidate perspective of the group concerns, viz., 'Geojit', the amount so received by the assessee as compensation cannot be termed as a capital receipt not liable to be taxed under the provisions of the I.T.Act. Therefore, the finding of the Assessing Officer in this context is upheld.
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