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2016 (8) TMI 1198 - AT - Income TaxDisallowance under the head payment to sole selling agent - Held that - It is the assessee who has to decide as to how much and as to when certain expenditure has to be incurred or not. The AO cannot sit in the proverbial armchair of the assessee to decide the incurring of expenditure. It is the prerogative of the assessee to run the business in a particular manner. If the expenditure has been incurred the AO cannot question the justification of incurring of the expenditure unless and until the said expenditure is incurred for the purposes prohibited by the law. The incurring of expenditure is not in doubt. The assessee took a decision after selling the graphic division to compensate the sole selling agent as per the agreement. It was a pure commercial decision and the AO had no business to question the intelligence of the assessee in that regard. The assessee was suffering losses in the graphic division and had sold the said division. Therefore if it decided to pay compensation to its agent in our opinion it had not contravened the provisions of the Act or the Companies Act. Considering the above we are of the opinion that the FAA was not justified in confirming the order of the AO. Therefore reversing his order we are deciding first effective ground of appeal in favour of the assessee. Sale of goodwill - Long-Term Capital Gain(LTCG) OR income from other sources - Held that - Section 55 (2) (a)(ii) of the Act deals with the cost of acquisition in respect of Goodwill of business or a right of manufacture produce or process any article or thing right to carry on business. In our opinion the assessee had rightly contended that assets under consideration were self-created/ generated assets the cost of acquisition was to be taken is nil and the assessee had rightly offered the entire sale consideration as LTCG. It is also a fact that the assessee had not claimed any depreciation under section 32 of the Act with regard to goodwill. Considering these facts we are of the opinion that the amount in question was not assessable under the head income from other sources - Decided in favour of assessee Claim of deduction u/s. 35 DDA - VRS expenses - Held that - FAA had observed that assessee had not filed any details in that regard and the AO had not called for further details before completing the assessment. It had claimed that payment of 43.87 lakhs was made to the employees that were on its pay roll that the AO had wrongly picked up only four employees while making the disallowance. We are of the opinion that the issue needs further verification.
Issues Involved:
1. Disallowance of ?2.5 crores under the head payment to sole selling agent. 2. Classification of ?10 lakhs received on sale of goodwill as income from other sources instead of Long-Term Capital Gain (LTCG). 3. Disallowance of ?12.73 lakhs as VRS expenses for contract employees. 4. Directions given by the First Appellate Authority (FAA) to the Assessing Officer (AO) regarding verification of VRS payments. Detailed Analysis: 1. Disallowance of ?2.5 Crores Under the Head Payment to Sole Selling Agent: - The AO disallowed ?2.5 crores paid to M/s. ATE Marketing Pvt. Ltd. (AMPL) as compensation for early termination of a long-term agreement, deeming it a capital expenditure. The AO relied on the case of TI Diamond Chain Ltd., arguing that the payment was not for the day-to-day running of the business but for a discontinued segment. - The assessee argued that the payment was a revenue expenditure incurred in the normal course of business and relied on various judicial precedents. The FAA upheld the AO's decision, stating the payment was capital in nature and not wholly and exclusively for business purposes given the common directors and the timing of the termination coinciding with the sale of the graphic division. - The Tribunal found that the termination was a commercial decision, the agreement was approved by the Central Government, and the compensation was paid as per the agreement and section 294A of the Companies Act. The Tribunal held that the AO should not question the commercial decisions of the assessee unless prohibited by law. Thus, the Tribunal reversed the FAA’s order and decided in favor of the assessee, allowing the payment as revenue expenditure. 2. Classification of ?10 Lakhs Received on Sale of Goodwill as Income from Other Sources: - The AO treated ?10 lakhs received from TISIPL as income from other sources, arguing that the receipt was not solely for goodwill but for various intangible assets, and there was no reduction in the value of the intangible assets. - The assessee contended that the receipt was for self-generated goodwill, which should be taxed as LTCG under section 55(2)(a)(i) of the Act. - The Tribunal found that the assessee had correctly offered the receipt as LTCG, as the assets were self-generated with a nil cost of acquisition. The Tribunal reversed the FAA’s order, holding that the amount was not assessable under income from other sources but as LTCG. 3. Disallowance of ?12.73 Lakhs as VRS Expenses for Contract Employees: - The AO disallowed ?12.73 lakhs paid as VRS to contract employees, restricting the deduction under section 35DDA. - The FAA directed the assessee to furnish evidence of permanent employees and allowed the AO to verify the details. - The Tribunal noted that the issue required further verification and remanded it to the AO for fresh adjudication, directing the AO to consider the material produced by the assessee and decide accordingly. 4. Directions Given by the FAA to the AO Regarding Verification of VRS Payments: - The AO contended that the FAA could not set aside any issue to the AO post-01/06/2001. - The Tribunal clarified that the FAA did not set aside the issue but directed the AO to verify the facts and make a decision. The Tribunal found no legal infirmity in the FAA’s order and dismissed the AO’s appeal, criticizing the departmental authorities for non-application of mind in filing the appeal. Conclusion: - The appeal filed by the assessee was partly allowed, with the Tribunal reversing the FAA’s orders on the disallowance of ?2.5 crores and the classification of ?10 lakhs, and remanding the issue of VRS expenses for further verification. - The appeal filed by the AO was dismissed, with the Tribunal upholding the FAA’s directions for verification.
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