TMI Blog2012 (8) TMI 769X X X X Extracts X X X X X X X X Extracts X X X X ..... ce of opinion about the issue. Payment of Non-compete fees - revenue expenditure vs capital expenditure - Held that:- Payment was made to a rival company to ward off competition in business. However, by making this payment, the assessee has not derived any advantage of enduring nature to hold the expenses as capital in nature. The agreement was only for a limited period of 3 years. Said payment was made for the purpose of running the business and not for the purpose of acquiring the business. The expenditure incurred was not related to the acquisition of an asset or a right of permanent character or an advantage of enduring nature. Such expenditure cannot be, therefore, held as capital expenditure and has to be allowed as revenue expenses u/s 37 - Decided in favor of assessee - I.T.A. No. 900/Hyd/2004 & I.T.A. No. 1228/Hyd/2005 - - - Dated:- 8-6-2012 - SHRI CHANDRA POOJARI, AND SMT. ASHA VIJAYARAGHAVAN, JJ. Assessee by: Shri P. Murali Mohana Rao Revenue by: Shri M.S. Rao/Shri B.V. Prasad Reddy O R D E R PER CHANDRA POOJARI, AM: The above two appeals, one by the assessee and another by the Revenue, are directed against the different orders of the CIT(A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7,17,316 paid to three companies viz., M/s. Kannumuri Holdings Pvt. Ltd., M/s. Maruti Finance Pvt. Ltd. and M/s. Upanashadik Management Consul Pvt. Ltd. 5. During the course of assessment proceedings before the Assessing Officer, the assessee company submitted a note on management fee, as follows: 1. Andhra Fuels Private Limited (AFL) has been allotted license by Gas Authority of India Limited (GAIL) for distribution of natural gas and entered into a contract with GAIL. AFL supplies the natural gas to M/s. RVK Energy Private Limited (RVK) for generation of power for its power plant located at Pedana Mandal, Krishna District and entered into a fuel supply agreement with RVK. 2. AFL has approached M/s. Kannumuri Holdings Private Limited (KHPL), Upanishadic Management Counsel Private Limited (SPCL) to manage the portfolio of investments in RVK since AFL does not have the requisite expertise to do so and entered into a loan agreement with the said companies accordingly. Copies of the agreements are enclosed herewith. 3. The Management fees is paid for business purposes and out of commercial expediency. The management fees is incurred for the purposes of earning income by AFL. H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carryout the above services effectively, the company has entrusted the job to three companies namely, 1. M/s. Kannumuri Holdings Pvt. Ltd. 2. M/s. Maruti Finance Private Ltd. 3. M/s. Upanishadik Management Consul Pvt. Ltd. The above said companies have the necessary experience in coordinating with GAIL, have got the necessary administrative and manpower and also have necessary technical expertise to carry out the above said activities on behalf of the company, and hence the company awarded the work to them. Since the company s business prospects are tied up with the commissioning of the power plant of RVK Energy, much efforts have been extended, more in particular during the year 1999-2000. In ensuring that the supply of gas is coordinated with the generation of power. 3. As consideration for such services rendered by these three companies, the assessee company has agreed to pay an amount calculated @ 15.5% of the value of gas mobilised by these three companies on behalf of the assessee company. 4. The assessee company earns profit by purchase and sale of gas to RVK Energy Pvt. Ltd., as against which the management fee paid to these three companies is claimed as expend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said fee paid during the preoperative period is required to be disallowed." 8. The Assessing Officer further noticed that M/s. Kannumuri Holdings Private Limited in its profit and loss account for assessment year 2000-01 has debited expenditure under three heads namely administration expenses of Rs. 10,000/- paid as auditors remuneration, interest and finance charges of Rs. 44,26,560/- payable to assessee company and miscellaneous expenses written off of Rs. 1,635/- only. On the basis of this information, the Assessing Officer came to the conclusion that M/s. Kannumuri Holdings Private Limited has not provided any services as it is not paid or claimed any remuneration to any person employed with it or is engaged in any profession with this company for providing the management services. The Assessing Officer further noticed that management fee has been paid by way of general voucher dated 31.03.2000. In the sameway, the entire interest received or receivable by the assessee company has been credited by way of general voucher entry dated 31.03.2003. On the basis of these facts, the Assessing Officer concluded that management fee is only an afterthought entry in order to evade paym ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny to the said three companies for the purpose of management of portfolio investment in M/s. RVK Energy Private Limited, which is equivalent to 1/3rd of the royalty receivable by the assessee company from M/s. RVK Energy Private Limited. Subsequently, the assessee company entrusted the job of liaison work with GAIL to these three companies as the assessee company itself did not have such capabilities. The assessee company has only taken over for the value of gas allotment by GAIL in its favour and did not have any manpower of expertise to carry out liaison with GAIL. Therefore, it was necessary for the assessee company to entrust such job to an outsider. As consideration for such services rendered by these three companies, the assessee company agreed to pay an. amount calculated .at the rate of 15.5% of the value of the gas mobilised by these three .companies on behalf of the assessee company aggregating to Rs. 1,07,98,331. Out of this, an amount of Rs. 80;31;015 pertain to the period before the commencement of the commercial production and the same was recovered from M/s. RVK Energy Private Limited. The balance amount of Rs. 27,17,315 was debited to the Profit and loss account a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, it is only a case of assessee's failure to establish its case, it is not a case for levy of penalty. According to the AR, the ratio of the above said Kerala High Court decision is squarely applicable to the facts of the assessee's case. The AR placed reliance on the following judgements: 1. CIT vs. Dharamchand L.. Shah (204 ITR 462 Bom) 2. CIT vs P.M.Shah (203 ITR 792 (Bom) 3. Jomabhai Premchand vs CIT (243 ITR 812 (Guj) 4. CIT vs Traders and Traders (244 ITR 367 (Mad) 5. CIT vs Kerala Spinners Limited (247 ITR 541 (Ker) 6. CIT vs. Mussaddilal Ram Bharose (165 ITR 14) (SC) 7. National Textiles vs. CIT ( 249 ITR 125 ) (Guj) 8. CIT vs. Narayanan ( 238 ITR 905 ) (Ker) 9. CIT vs. Reliance Petro Products Pvt. Ltd., 322 ITR 158 (SC) 13. The learned AR further relied on the order of the Tribunal in the case of Shri P.V. Ramana Reddy vs. ITO in ITA Nos. 1852- 1857/Hyd/2011 dated 6th January, 2012 and in the case of Shri S. Prasada Rao vs. DCIT, in ITA No. 338/Hyd/06 dated 21.11.2008.. 14. On the other hand, the learned DR submitted that initially the assessee-company gave explanation that management fee has been paid in order to manage the portfol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a notice under section 271, he makes the assessee aware that the provisions thereof are to be used against him. These provisions include the Explanation. By reason of the Explanation, where the total income returned by the assessee is less than 80 per cent, of the total income assessed under section 143 or 144 or 147, reduced to the extent therein provided, the assessee is deemed to have concealed the particulars of his income or furnished inaccurate particulars thereof, unless he proves that the failure to return the correct income did not arise from any fraud or neglect on his part. The assessee is, therefore, by virtue of the notice under section 271 put to notice that if does not prove, in the circumstances stated, in the Explanation, that his failure to return his correct income was not due to fraud or neglect, he shall be, deemed to have concealed the particulars of his income or furnished inaccurate particulars thereof and consequently, be liable to the penalty provided by that section. No express invocation of the Explanation to section 271 in the notice under section 271 is, in our view, necessary before the provisions of the Explanation therein are applied. The High Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee failed to give details of nature of service rendered by the three companies, intention of such services, credential or qualification of the person associated with these companies to render such services. Further, because of common management and control of the three companies and assessee company, the Assessing Officer doubted the genuineness of this payment and disallowed the same. The assessee has not filed any appeal against the quantum addition and the assessee had not contested the quantum addition in any appeal before higher forum. Thus, it means that the assessee has accepted the lapse on its part. From this, the Assessing Officer drew the inference that the assessee has claimed bogus expenditure towards management fee and levied penalty u/s. 271(1)(c) of the Act. In our opinion, confirming the quantum addition or acceptance of the quantum addition itself cannot be a reason for levy of penalty. Assessment proceedings and penalty proceedings are two different proceedings and one is not substitute to the other. To levy penalty u/s. 271(1)(c) of the Act, there should be conclusive evidence to prove that there is concealment of income or furnishing of inaccurate particu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terial available on record. The lower authorities relied on proceedings before assessing officer for levying the penalty. The same do not constitute admission for the purpose of levying penalty. The addition made on the basis of more or less on the offer made by the assessee and the Assessing Officer not brought enough incriminating material for concealment and there is no material for establishing the concealment independently in the given facts and circumstances of the penalty is not leviable and the same is deleted. 19. Further in the case of ACIT vs. VIP Industries (112 TTJ 289) (Mum) it was held that in all cases where addition ms made the penalty was not automatically follow. The true effect is that mens rea is not to be proved by the revenue. If the A can successfully prove his bona fide by tendering a valid explanation then, penalty cannot be levied. Hence, in case of genuine difference between AO and the assessee, penalty cannot be levied. 20. In the case of CIT vs. Siddharth Enterprises (184 Taxman 460) the Punjab Haryana High Court held that penalty can be imposts only when there some element of deliberate default and not when there is a mere mistake or bona fide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In the case of Roshan Lal Madan vs. ACIT (67 ITD 33) the Tribunal held that Explanation 1, which is relevant in the instant case, consists of two clauses; clause (A) provides that the assessee fails to offer an explanation or offers an explanation which is found to be false. Clause (B) provides for the situation where the assessee is not able to substantiate the explanation and fails to prove that the explanation is bona fide. In the situations envisaged by the aforesaid clauses, deeming fiction would come into play and the amount added in the total income would be deemed to represent the income in respect of which the particulars have been concealed. This Explanation enacts a rule of evidence which has the effect of shifting the burden of proof on the assessee. It is well settled that the degree of proof required for proving a negative fact would not be as heavy as required for proving a positive fact. In the case of proving a negative fact, the test of preponderance of probabilities would apply. If the assessee is able to furnish a bona fide and plausible explanation in respect of material facts, the burden cast by the Explanation would be discharged and the case would not be hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rishna Raju. Both the parties mutually agreed to withdrew their investments from the respective groups/individual companies controlled by each other. The assessee company claimed that to stop Sri Raghu Ramakrishna Raju from setting up a power plant in Andhra Pradesh, the payment is unavoidable. The assessee's argument that they can ward off the competition by stopping one person from setting up of the power plants in Andhra Pradesh, is not convincing. There are so many power plants, which are coming up in Andhra Pradesh day in and day out. At present, setting up of power projects in Andhra Pradesh is a very competitive field and so many power projects are coming up. In such a situation, there is no basis for the assessee to claim that they warded off competition by paying substantial amount to one person. Therefore, it cannot be said that by keeping one person away from the project the assessee can stop competition for their business. It may also be stated that the assessee did not make any such payment either in earlier years or in subsequent years to any persons to stall them from competing with the assessee in their business. The assessee further mentioned that Sri Raghu Ramakri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... felt that if Sri Raghu Ramakrishna Raju competes with the business of the assessee company, it would lead to serious repercussions affecting the profitability of the assessee company. Therefore, to stall the immediate potential threat, the assessee company entered into an agreement to keep him away from all his contacts with the suppliers, funding agencies and other business associates of the assessee company and also to stop him from creating any legal problems, it was decided to enter into an agreement of noncompetition. The non-competition agreement was only for a limited period of 3 years to ward off the competition in the territory of Andhra Pradesh. 29. He submitted that as evident from the facts of the case that the payment was made by the assessee company to a rival company to ward off competition in business. However, by making this payment, the assessee has not derived any advantage of enduring nature to hold the expenses as capital in nature. The agreement was only for a limited period of 3 years. The main object was to stall the immediate potential threat on the parting away of the other director by keeping him away from all his contacts with the suppliers, funding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on bus business for five years. On these facts, the Hon'ble Court held that the payment towards the restrictive covenant was on revenue account and it would not amount to an acquisition of an advantage of an enduring nature. 33. The AR submitted that the Hon'ble Supreme Court in the case of Bombay Steam Navigation Company Private Limited vs. CIT (56 ITR 52) held that the question whether a particular expenditure is revenue expenditure incurred for the purposes of business must be determined by the application of principles of commercial trading. The question must be viewed in the larger context of business necessity or expediency. 34. Further he relied on in the case of CIT vs. Eicher Ltd. 302 ITR 249 (Delhi), Smartchem Technologies Ltd. vs. ITO (2005) 97 TTJ (Ahd) 818 and JCIT vs. Synergy Credit Corpn. Ltd. 9 SOT 75 (Mum). 35. We have heard both the parties and perused the material on record. The issue in dispute before us is whether the expenditure incurred by the assessee paid to M/s. KHPL is in the nature of revenue expenditure or capital expenditure. As seen from the facts of the case narrated elsewhere in this order, the payment was made by the assessee-company to M/s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that, even though the benefit from the arrangement to the respondent may not be of a permanent or enduring nature, the payments made in pursuance of that arrangement would still be capital expenditure." 37. The Delhi High Court in the case of CIT vs. Eicher Ltd. (302 ITR 249) held as follows: 10. Learned counsel for the assessee pointed out, and we think rightly, that the length of time for which the competition was eliminated was important in the facts of that case, but that is not always so. What is more necessary to appreciate is the purpose of the payment and its intended object and effect. In CIT vs. Coal Shipments (P) Ltd. 1972 CTR (SC) 151 (1971) 82 ITR 902 (SC), the Supreme Court noted the contention of the Revenue to the effect that payments made to eliminate competition were capital expenditure. Rejecting this contention, it was held on p. 909 of the report as follows: "The case which has been set up on behalf of the Revenue is that, as the object of making the payments in question was to eliminate competition of a rival exporter, the benefit which ensured to the respondent was of an enduring nature and, as such, the payment should be treated as capital expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l expenditure or not. The Supreme Court held that insofar as the assessee is concerned, he did not acquire any separate business nor was any competition eliminated by such an acquisition. Since there was no acquisition of any business by payment of the amount referable to the restrictive covenant and no benefit of an enduring nature was acquired, the Tribunal was correct in holding that the payment could only be treated as revenue outlay and not capital in nature. 14. In Alembic Chemical Works Co. Ltd. vs. CIT (1989) 77 CTR (SC) 1 ; (1989) 177 ITR 377 (SC), the Supreme Court observed as follows: "There is also no single definitive criterion which, by itself, is determinative as to whether a particular outlay is capital or revenue. What is relevant is the purpose of the outlay and its intended object and effect, considered in a common sense way having regard to the business realities. In a given case, the test of enduring benefit might breakdown." 15. In CIT vs. Madras Auto Service (P) Ltd. (1998) 148 CTR (SC) 398 : (1998) 233 ITR 468 (SC), the Supreme Court referred to Assam Bengal Cement Co. Ltd. (supra) and summarized the tests for determining whether an outlay is revenue o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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