2014 (5) TMI 1042 - AT - Income Tax

Nature of payment made to M/s. Pyramid Saimira Entertainment Ltd. - goodwill v/s goodwill gesture - Revenue v/s capital - Held that - The assessee has not been able to show as to who authorised M/s. Pyramid Saimira Entertainment Ltd., to receive payment from the assessee to be disbursed to the exhibitors who have actually suffered the loss. There is nothing on record to show whether the payments have been actually received by the persons who have suffered losses. Therefore, from the records, we find that M/s. Pyramid Saimira Entertainment Ltd., has no locus standi. The assessee made the said payments to protect its goodwill in the market. The assessee has to operate and do business in the market in future as well, the assessee had to maintain its goodwill. The assessee has not been able to show from the agreements dated February 16, 2008 or supplementary agreement dated July 28, 2008 that the said payment is made in accordance with the covenants of agreement. A perusal of records, as well as the assessee s own admission make it absolutely clear that the payment was not made to discharge any legal liability. The payment was made either voluntarily or out of pressure from the market forces but it was certainly not out of business obligation. The assessee made the payment in the form of compensation to stay afloat in the business The assessee has not been able to show that the payments were actually received by the persons who suffered losses. This casts a shadow over the genuineness of the payment. Even if the payment is believed to be genuine, the same is held to be capital in nature and thus cannot be allowed under section 37 of the Act. - Decided against assessee.

Summary

Issues:
Nature of payment made by the assessee to M/s. Pyramid Saimira Entertainment Ltd.
Classification of the payment as revenue or capital expenditure.
Validity of the deletion of the addition by the Commissioner of Income-tax (Appeals).
Locus standi of M/s. Pyramid Saimira Entertainment Ltd.
Differentiation between goodwill and goodwill gesture.
Applicability of cited case laws in the present scenario.

Analysis:
The appeal before the Appellate Tribunal ITAT Chennai involved a dispute regarding a payment made by the assessee to M/s. Pyramid Saimira Entertainment Ltd. The Revenue challenged the nature of this payment, contending it to be capital expenditure, while the assessee argued it was revenue in nature. The Commissioner of Income-tax (Appeals) had deleted the addition, considering it as a sales return or discount, covered under the Sale of Goods Act and Accounting Standard "9".

The Tribunal noted that the payment was made to compensate exhibitors for losses incurred due to the poor performance of two films. However, discrepancies arose regarding the involvement of M/s. Pyramid Saimira Entertainment Ltd. in the agreements between the assessee and distributors. The Tribunal found that M/s. Pyramid Saimira Entertainment Ltd. lacked standing in the transactions, raising doubts about the genuineness of the payment.

The assessee claimed the payment was a goodwill gesture, not goodwill itself, supported by legal distinctions. Despite referencing relevant case laws, the Tribunal disagreed with this characterization, emphasizing the lack of evidence showing the payments reached the intended recipients. Consequently, the Tribunal deemed the payment as capital in nature, disallowing it under section 37 of the Income-tax Act.

The Tribunal's decision overturned the Commissioner's order, allowing the Revenue's appeal. The judgment highlighted the importance of substantiating the purpose and legitimacy of payments to determine their tax treatment. The ruling underscored the need for clear documentation and adherence to contractual obligations to support expenditure claims under tax laws.