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Facts
Modi Entertainment Ltd. (assessee) received $10 million (Rs. 40.85 crores) from Disney as compensation for the erosion in the value of its investment in a joint venture, Abraxas Media Pvt. Ltd., following the termination of certain merchandising and distribution rights. The Assessing Officer and CIT(A) treated this compensation as business income under Section 28(ii)(b) of the Income Tax Act, 1961. Additionally, the lower authorities characterized a loss of Rs. 41.79 crores incurred by the assessee on the sale of shares as a speculative business loss under Section 73 of the Act.
Held
The tribunal held that the compensation received by the assessee was not taxable under Section 28(ii)(b) as no managing agency relationship, as defined by the section's wide-ranging clauses, existed between Disney and the assessee. The tribunal further held that the loss on the sale of shares was not speculative as the assessee was an investor and not involved in trading shares, based on its balance sheet and previous tribunal decisions.
Key Issues
1. Whether compensation received for erosion in investment value due to termination of rights constitutes business income under Section 28(ii)(b) or a capital receipt. 2. Whether a loss incurred on the sale of shares should be classified as a speculative business loss under Section 73 of the Income Tax Act.
Sections Cited
143(3), 28(ii)(b), 73, 4, 28(va), 254
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCH ‘E’, NEW DELHI
Before: Sh. Satbeer Singh Godara & Sh. M. Balaganesh
ORDER
Per Satbeer Singh Godara, Judicial Member:
This assessee’s appeal for Assessment Year 2004-05, arises against the order of CIT(A)-VIII, New Delhi dated 24.03.2007 in case No. 143/06-07, in proceedings u/s 143(3) of the Income Tax Act, 1961 (in short “The Act”).
Heard both the parties at length. Case file perused.
The assessee pleads the following substantive grounds in the instant appeal:
“1. That the CIT(A) erred on facts and in law in not holding that the compensation of Rs.40,85,84,700 received by appellant from M/s Disney Enterprises Inc. (Disney), for erosion in the value of investment of the appellant in M/s Abraxas Media Pvt. Ltd. (AMPL), on account of termination of the right to merchandise the products and distribute the television products of Disney in India, constituted capital receipt not liable to tax in the hands of the appellant.
2 Modi Entertainment Ltd. 1.1 That the CIT(A) erred on facts and in law in bringing to tax the aforesaid sum under section 28(ii)(b) of the Income-tax Act, 1961 (“the Act”), not appreciating that the said section was not applicable in the appellant’s case, as, there did not exist any managing agency relationship between Disney and the appellant.
That the CIT(A) erred on facts and in law in confirming the action of the assessing officer in holding that the loss on sale of shares of Rs.41,79,00,000 incurred by the appellant was loss from speculation business in terms of Explanation to section 73 of the Act. 2.1 That the CIT(A) erred on facts and in law in not appreciating that the sale and purchase of shares did not form part of the business of the appellant and the shares were held as investment and, therefore, provisions of Explanation to section 73 of the Act were not applicable on the facts of the case.”
Both the learned representatives next take us to the CIT(A)’s detailed discussion affirming the assessment findings making section 28(ii)(b) addition of Rs.40,85,84,700/-, as under:
I have carefully gone through facts of the matter in regard to this issue, the case of AO as per his assessment order, the relevant provisions of the I. T. Act and the various contentions/arguments taken up by the assessee company before AO and before me. Having done that it is dear to me that here it was an agreement for Television Distribution Rights whereby Abraxas was granted various licenses for consumer Product merchandising and distribution of TV programs of Disney in India. The assessee company had made a significant investment in this project where in a joint venture had been formed. Now, before such an agreement with Disney could be executed, the dispute arose due to Disney contending that the said licenses had expired on account of efflux of time and that it was not under an obligation to renew the same in favour of M/s Abraxas Media (P) Ltd. The assessee company filed a petition against this contention of Disney and the Company Law Board decided in favour of the assessee company.
3 Modi Entertainment Ltd. Against the order of CLB appeal was filed in Hon'ble Bombay High Court by Disney. So much on the merits of the dispute involving assessee company - and it clearly goes to show that the assessee company was in a favourable position and that the claim of Disney was not correct. Now, the so called termination and settlement agreement came into picture only with a view to avoid prolonged litigation. As per this, "In order to avoid prolonged litigation and resolve all the aforesaid disputes, the assessee entered into a Share Transfer, Termination and Settlement Agreement ('the Agreement^ dated 14.08.2003, with Disney and various other parties. Pursuant to the said Agreement Disney transferred its shareholding in Abraxas to Modi Entertainment Network Mauritius Ltd., a wholly owned subsidiary of the assessee for a consideration of $1. Further, Disney agreed to pay a $10 million (settlement Amount) to be assessee as compensation for erosion in the value of its investment in Abraxas. In return, the assessee agreed to withdraw the petition filed before CLB and issue the NOC to Disney for incorporating and wholly owned subsidiary in India. Further, the 'shareholders Agreement' was terminated pursuant to the said Agreement." Pursuant to this assessee company received a sum of Rs.40.85 crores from Disney which has then been taxed by the AO for the reasoning given by him in his assessment order. The AO has further relied on provisions of section 28(ii)(b) for taxing the same as revenue receipts. In the light of this background I am convinced that this receipt of 10 million US Dollars equivalent to Rs.40.85 crores, which has been called a compensation for erosion in the value of investment in Abraxas, cannot certainly be called a capital receipt as argued by the assessee company. It is quite obvious from the facts of the matter that money has been received by the assessee company as compensation from Disney because the latter Company was interested in incorporating a wholly owned subsidiary in India. And since there were rights and privileges which otherwise belonged to the assessee company and which would not allow Disney to go ahead with its plans, it was necessary for Disney to compensate assessee company for the same and thus 4 Modi Entertainment Ltd. the assessee company received this amount as a compensation for profits which would otherwise accrue to it. The assessee company has countered the argument of AO by saying that provisions of Section 28(ii)(b) are not applicable here as there does not exist any Managing Agency relationship between Disney and the appellant. Notwithstanding that and without going into the discussion as to whether that or similar relationship existed between Disney and the assessee company, it is clear to me that provisions of section 28(ii) are intended to be every wide ranging and that is why the opening line of sub-section(ii) says, "Any compensation or other payments due to or received by a) "any person, by whatever name called, managing the whole or substantially the whole of the affairs of an Indian company, at or in connection with the termination of his management or the modification of the terms and conditions relating thereto; b) Any person, by whatever name called, managing the whole or substantially the whole of the affairs in India of any other company, at or in connection with the termination of his office or the modification of the terms and conditions relating thereto; c) Any person, by whatever name called, holding an agency in India for any part of the activities relating to the business of any other persons, at or in connection with the termination of the agency or the modification of the terms and conditions relating thereto; It would be worthwhile to add here that opening line of all the 3 clauses reproduced above includes the expression 'by whatever name called' and the subsequent lines in each of the clauses are again of a very wide ranging nature covering not only the termination of Management/Office/agency etc. but also the modification of terms and conditions relating thereto. In this back ground I am absolutely convinced that the agreement involved in this case would surely be covered by these wide ranging provisions of Section 28(ii) and that the said receipt cannot be said to be a capital receipt as argued by the assesses company. The case laws relied upon are of a general nature and do 5 Modi Entertainment Ltd. not really cover the specific facts and circumstances of the case so as to take it out of the purview of section 28. The said receipt of Rs.40.85 crores is surely in lieu of profits/gains which would otherwise accrue to the assessee company on account of the rights it had and that is precisely the reason that a settlement agreement has been brought into picture by Disney Ltd. Any other interpretation would surely defy the basic principles of taxing of a revenue receipt like this. As such, the action of the AO is hereby confirmed.”
We now advert to the basic relevant facts. The assessee herein namely M/s Modi Entertainment Ltd. (with its related group parties) had joined hands with M/s Disney Enterprises to form a new venture in the name and style of M/s Abraxas Media Pvt. Ltd. (is known as WB India Pvt. Ltd.) vide agreement dated 10.06.1992. It is in this factual backdrop that the assessee’s stake in the said JV reached as it 49% i.e. remaining stake from group concerns/persons by way of a supplementary agreement dated 29.05.2002. Balance 51% equity in the said JV remained with “Disneys”. Learned Assessing Officer even is very fair in his assessment discussion at page 2 that on 18.10.1992 and 13.04.1993, the foregoing Disney group entered into a marketing license agreement and television distribution agreement with “Abraxas” wherein the latter was granted various licenses qua consumer products merchandising and distribution of television programs of “Disneys” in India. The said license(s) allegedly expired in the month of February 2003. The assessee’s stand adopted throughout is that the said alleged termination of license by M/s Disney was in violation of the agreement regarding “Abraxas”. It appears to have filed a petition before the Company Law Board (predecessor to the National Companies Law Tribunal Law) and got an interim order on 21.02.2003 against “Disneys”. The said other entity thereafter went the appeal before the hon’ble Bombay high court.
6 Modi Entertainment Ltd.
Now comes the dispute between the parties before us. The assessee and M/s Disney entered into an agreement dated 14.08.2003 wherein the latter entity transferred its shareholding in “Abraxas” @ 51% (supra) to M/s Modi Entertainment Network Mauritius Ltd., (a wholly owned assessee’s subsidiary) for US $1 and further agreed to pay it an amount of US $10 million as compensation for erosion in the value of its investment in Abraxas. Suffice to say, it is this compensation received by the assessee from M/s Disney has been assessed under the head business income u/s 28(ii)(b) in the assessment findings at page 4 and upheld in the CIT(A)’s detailed discussion hereinabove.
Both the parties reiterate the respective stands before us against and in support of taxability of the impugned compensation. We are of the considered view that although the assessee’s stand is that the said compensation as capital receipt not chargeable to tax u/s 4 itself by quoting the catena of case law, we are of the considered view that our focus is only qua applicability of section 28(ii)(b) of the Act as once the same is held as not attracted, all other aspects thereof would indeed stand rendered infructuous.
Faced with this factual position, we deem it appropriate to advert to section 28(ii) of the Act wherein, the relevant clause (a) to (c) read as under:
(a) any person, by whatever name called, managing the whole or substantially the whole of the affairs of an Indian company, at or in connection with the termination of his management or the modification of the terms and conditions relating thereto; (b) any person, by whatever name called, managing the whole or substantially the whole of the affairs in India of any other company, at or in connection with 7 Modi Entertainment Ltd. the termination of his office or the modification of the terms and conditions relating thereto; (c) any person, by whatever name called, holding an agency in India for any part of the activities relating to the business of any other person, at or in connection with the termination of the agency or the modification of the terms and conditions relating thereto;”
We invited learned CIT-DR’s attention to the fact that the assessee is not “managing the whole or substantially the whole of the affairs of an Indian company” in clause (a) to (b) or otherwise in clause (c) so as to render its compensation as taxable under the head business income. Ms. Kaur invited our attention to the assessee’s agreement clause (10) at page 8 that both the above parties had decided about “expert professional, technical and managerial advice and services” by the former to the latter entity. We are of the considered view that neither the agreement clause between assessee and “Disneys” nor the assessment order and the CIT(A), as the case may be, have proved the assessee to be a managing agency qua “whole or substantially whole…….” in the foregoing terms. This is indeed coupled with the fact that case law (1978) 115 ITR 190(AP) J.R. Kimtee & Sons Vs. CIT and (1999) 239 ITR 471 (Mad.) CIT Vs. Seshasayee Bros. (P) Ltd have settled the issue in assessee’s favour and against the department that foregoing statutory provision covers the specified managing agency(ies) under clauses (a) to (c) than having any general applicability in all situations.
Learned CIT-DR at this stage also sought to buttress the point that the assessee had infact received “non-compete fee” as per clause (9) in para 18 of the agreement which is taxable u/s 28(va) of the Act as inserted by the Finance Act 2002 w.e.f. 01.04.2003. We wish to reiterate here that there is no such addition made by both the learned lower authorities.
8 Modi Entertainment Ltd. Learned counsel at this stage also quotes (2009) 309 ITR 434 (SC) Mcorp Global Pvt. Ltd. Vs. CIT and Mahindra & Mahindra Ltd. Vs. DCIT (2009) 313 ITR 263 (Bom.) that the relevant assessment findings could not be revisited so as to add a new head upon in section 254 proceedings before the tribunal. We find merit in the assessee’s instant technical objection; and, more particularly, in light of the fact that the learned lower authorities have neither specified any actual non-compete fee paid by M/s Disney Group nor the same forms subject matter of addition in their respective findings. We accordingly invoke stricter interpretation as per Commissioner Vs. Dilip Kumar (2018) 9 SSC 1 (SC) and hold that the assessee impugned compensation is not assessable u/s 28(ii)(b) of the Act once it is not the managing agency in the foregoing terms. The assessee’s former twin substantive grounds raised in the instant appeal are accepted therefore. This being the outcome qua applicability of section 28(ii) of the Act against the department, we further conclude that the assessee’s endeavour to make the impugned sum is rendered academic in nature.
We now come to the assessee’s latter twin substantive grounds wherein both the learned lower authorities have invoked section 73 Explanation to disallow its loss on sale of shares amounting to Rs.41.79 Cr. as speculative in nature. We note that this tribunal in assessee’s case itself in A.Y. 2002-03 has settled the issue in para 23 that it is not involved in trading of shares. Learned counsel has taken us to its balance sheet as well as books of account again reiterating the very factual position. Learned CIT-DR could hardly rebut the fact that the assessee has enclosed his P&L account at page 201 and balance sheet at page 204 wherein there is no such business income or loss arising from the 9 Modi Entertainment Ltd. specified business so as to attract the foregoing Explanation. We thus accept the assessee’s instant latter substantive ground as well and direct the learned Assessing Officer to frame his consequential computation as per law.
11.1 No other ground or arguments has been pressed before us.
This assessee’s appeal is allowed in above terms. Order Pronounced in the Open Court on 10/12/2024.