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2006 (9) TMI 146 - HC - Income TaxAddition u/s 40A(3) - taxability towards a restrictive covenant - disallowance on Payment to Konkan Railway Corporation - contract on account of penalty for exaggerated measurement - HELD THAT - For the assessment year 1992-93, We have seen from the affidavit filed by Sri Raja Reddy that he has income from agriculture and from business and he had two fixed deposits which matured during the said period. From the affidavit it is clear to us that the source of income has been clearly spelt out. At this stage, we must also refer to section 68 of the Income-tax Act. Material on record would show that this credit cannot be treated as unexplained credit in terms of the Act. Sri Seshachala, learned standing counsel would rely on C. Kant and Co. v. CIT 1980 (6) TMI 21 - CALCUTTA HIGH COURT in support of his submission. We have carefully perused the said decision. In that case, no doubt the Calcutta High Court has chosen to say that in the case of a cash credit entry in the books of account of the assessee it is necessary for the assessee to prove not only the identity of the creditors but also the capacity of the creditors to advance money and the genuineness of the transactions. Thus, we are of the view that the finding of the authority that the said amount is unexplained income cannot be accepted. Therefore we deem it proper to answer the first question of law in 1992-93 in favour of the assessee. Taxability towards restrictive covenant - HELD THAT - We are of the view that the finding of the Tribunal has to be accepted in the case on hand. Material facts would show that this agreement has been entered into between Tam Tam Pedda Guruva Reddy Constructions (P) Ltd., and Tam Tam Pedda Guruva Reddy. Though restrictive covenant may not always be a negative factor, the facts of this case would show that it is nothing but an income for the purpose of levy of tax. Details with regard to construction are not forthcoming in the agreement and in addition, it cannot be strictly a covenant agreement as understood in law. In fact, Tam Tam Pedda Guruva Reddy had created the Tam Tam Pedda Guruva Reddy Constructions (P) Ltd., in terms of clause (1) of the agreement. Therefore we are of the view that the authorities on the facts are justified in rejecting the contention of the assessee on the material facts. The document would show that the payment that has been made is nothing but an income and it is not a capital receipt in terms of law. Therefore we have no hesitation in accepting the argument of the Revenue in this regard. Section 28(va) also would not be of any assistance to the assessee. On the facts we are satisfied that it was nothing but an income in the case on hand. In these circumstances, we deem it proper to answer the question in this regard in favour of the Revenue. Penalty levied for exaggerated measurement - HELD THAT - We see that all the authorities on facts have chosen to say that penalty was levied on account of exaggerated measurement and that cannot be considered to be an expenditure as sought to be argued. The present set of facts would show that such payment cannot be said to be a mere breach of contractual obligation as rightly ruled by the Tribunal. We accept the finding of the Tribunal. The question of law on this issue is held in the negative and against the assessee. In the result, the following order is passed The questions of law for the year 1992-93 are all answered in favour of the assessee. In so far as questions of 1994-95 are concerned, the first question is answered in favour of the Revenue and the second question is answered in favour of the assessee. In so far as the assessment year 1995-96 is concerned, we answer both the questions against the assessee and in favour of the Revenue.
Issues Involved:
1. Addition of Rs. 2,87,000/- loan advanced by Raja Reddy (Assessment Year 1992-93). 2. Disallowance of Rs. 1,51,869/- being withdrawals (Assessment Year 1992-93). 3. Disallowance under section 40A(3) (Assessment Year 1992-93 and 1994-95). 4. Taxability of Rs. 8,00,000/- received towards restrictive covenant (Assessment Year 1994-95 and 1995-96). 5. Disallowance of Rs. 1,00,000/- penalty paid to Konkan Railway Corporation (Assessment Year 1995-96). Issue-wise Detailed Analysis: 1. Addition of Rs. 2,87,000/- Loan Advanced by Raja Reddy (Assessment Year 1992-93): The Tribunal disallowed the addition of Rs. 2,87,000/- advanced by Raja Reddy, questioning the capacity of Raja Reddy to advance such an amount despite an affidavit proving his identity and income sources. The High Court found the affidavit credible, detailing Raja Reddy's income from agriculture and matured fixed deposits, which justified the loan. The Court referenced section 68 of the Income-tax Act and held that the credit could not be treated as unexplained. The decision of the Tribunal was overturned, and the addition was ruled in favor of the assessee. 2. Disallowance of Rs. 1,51,869/- Withdrawals (Assessment Year 1992-93): The Tribunal upheld the addition of Rs. 1,51,869/- as income, treating bank withdrawals towards expenses as income. The High Court disagreed, noting that the withdrawals were from known sources for legitimate expenses and could not be considered income. The disallowance was ruled in favor of the assessee. 3. Disallowance under Section 40A(3) (Assessment Year 1992-93 and 1994-95): The Tribunal disallowed several payments made in cash exceeding Rs. 10,000/- under section 40A(3). The High Court noted that the assessee provided valid reasons for cash payments, such as the oil company's refusal to accept cheques and the necessity of expeditious settlements. Rule 6DD(j) was considered, which allows exceptions for genuine business needs. The Court referenced judgments from the Supreme Court and other High Courts, emphasizing that genuine and bona fide transactions should not be disallowed. The disallowance under section 40A(3) was ruled in favor of the assessee for both years. 4. Taxability of Rs. 8,00,000/- Received Towards Restrictive Covenant (Assessment Year 1994-95 and 1995-96): The Tribunal taxed Rs. 8,00,000/- received as compensation for a restrictive covenant as income. The High Court reviewed the agreement, noting that the payment was for not competing in certain areas for five years. Despite arguments citing various judgments that such compensation should be treated as a capital receipt, the Court found that the agreement did not substantiate this claim. The payment was deemed income, and the Tribunal's decision was upheld. The taxability of Rs. 8,00,000/- was ruled in favor of the Revenue for both years. 5. Disallowance of Rs. 1,00,000/- Penalty Paid to Konkan Railway Corporation (Assessment Year 1995-96): The Tribunal upheld the disallowance of Rs. 1,00,000/- paid as a penalty for exaggerated measurements. The High Court examined whether the penalty was an allowable business expense under section 37(1). The Court distinguished this case from others where penalties were incidental to business, noting that the penalty for exaggerated measurements could not be considered a mere breach of contract. The disallowance was ruled in favor of the Revenue. Conclusion: - For Assessment Year 1992-93: All questions were answered in favor of the assessee. - For Assessment Year 1994-95: The first question was answered in favor of the Revenue, and the second question was answered in favor of the assessee. - For Assessment Year 1995-96: Both questions were answered against the assessee and in favor of the Revenue.
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