ITAT Considers Business Income from Termination Compensation Received by Piramal Enterprises

Piramal Enterprises faced a setback by categorizing the compensation of Rs. 92.7 crores from termination as ‘business income’ instead of ‘capital gain’, The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) concluded.

In the related year, the taxpayer company obtained Rs. 92,76,62,688 from Roche Diagnostics Gmbh ( RDG ) of Germany as per the settlement agreement for the termination of agency, distribution, and manufacturing rights granted by RDG via an agreement on 30.06.1997. The taxpayer reported this amount as capital gains for tax purposes.

Taxpayer M/S Primala Enterprises Limited representative Mr Priyank Gala, challenged the CIT(A)’s determinations, claiming that the amount obtained was for the transfer of a capital asset, i.e., the business, and therefore should be taxed as capital gains. He argued that the compensation was towards the transfer or termination of business rights under the AMDA 1997 agreement.

Mr. P.D. Chogule, representing the Revenue, noted that the amount was obtained via taxpayer for the termination of the agency, invoking Section 28(ii)(c) of the Income Tax Act, 1961, and claimed that it compensated the taxpayer for abstaining prospective future profits from the agency business of RDG products.

Mr. Chogule’s opinion for the provision under Section 28(va) claims that the current provisions were restrictive and that compensation correlated to business and employment must be levied to tax, which was considered unsustainable via the ITAT. It was not the case of the taxpayer before the AO or CIT(A) that the compensation was for business loss or employment.

The two-member bench, S. Rifaur Rahman ( Accountant member ) and Kuldip Singh (Judicial member) ruled that the compensation the taxpayer received from RDG in the out-of-court settlement was business income and not capital gains that the taxpayer claimed.

The provisions under section 28(ii)(c) read with section 28(va)(a) of the Income Tax Act were applicable. Accordingly, the decision of CIT(A) to ensure the addition of Rs. 92,76,62,688 as business income was maintained.

Consequently, the ITAT ruled against the taxpayer.