2012 (9) TMI 183 - AT - Income Tax

Compensation from a German Company for termination of rights - capital receipt not chargeable to tax OR liable to be assessed as business income - Held that - In terms of mechanics of the Product Support Agreement KHD Germany & the Clause in the termination agency reveals that the caveat on the assessee is not to act as an independent merchant of Deutz spare parts and approved exchange parts, and also not to compete with Deutz in any manner whatsoever as was being done hitherto - thus it is quite clear that the impugned amount of receipt was not for loss of agency, but it is attributable to negative or restrictive covenants put on the assessee - as decided in Guffic Chem (P) Ltd. versus C.I.T. and Others 2011 (3) TMI 6 - SUPREME COURT any compensation received for the loss of agency is a revenue receipt, whereas compensation which is attributable to restrictive covenants is a capital receipt - in favour of assessee. Disallowance of expenditure for earning dividend - Held that - As per the CIT (A) the assessee was found to have received 17 dividend cheques during the year and the relatable expenditure on employees cost, etc, attributable to such activity has been pegged at Rs 75,000/-, which, is reasonable as against 10% by AO and the action of the CIT (A) is accordingly affirmed - partly in favour of assessee. Disallowance out of telephone expenses - Held that - In a case of a limited company expenditure incurred on telephone, vehicle etc., which are certified by the statutory auditors under the Companies Act, 1956 as well as under the Act cannot be disallowed - in favour of assessee. Disallowance out of interest claimed - Held that - As identical issue has been restored back to the file of the AO in the assessee s own case for the earlier assessment years, the same need also to be restored for the year in question- in favour of assessee for statistical purposes. Disallowance prior period expenses - Held that - As decided in Saurashtra Cement & Chemical Industries Ltd 1994 (10) TMI 30 - GUJARAT HIGH COURT claim of the assessee is need to be accepted - in favour of assessee. Allowance of Loss on sale of units of mutual funds - Revenue appeal - Held that - The assessee did not make a claim in the return of income for a loss claimed to have been suffered on the sale of units of mutual funds and was made only during the course of assessment proceedings and not by way of a revised return which was admitted by CIT (A) - no reasons to interfere with the directions of the CIT (A) as powers of an appellate authority includes to admit fresh claims, which were hitherto not considered by the AO - against revenue. Disallowance of research and development expenditure - CIT (A) allowed it - Held that - CIT(A) allowed the claim comprehensively dealing with the issue by apprising the activities carried out by the assessee on the basis of detailed applications made by the R & D unit to seek recognition from the Ministry of Science & Technology which have not been negated by the Revenue - with regard to the capital expenditure in question the nature of such expenditure has not been examined by the Assessing Officer on the basis of the details of expenditure but merely on the basis of the Directors report - against revenue.

Summary

Issues Involved:

1. Taxability of Rs 5,00,000/- received as compensation.
2. Claim of debit balances written off.
3. Disallowance of expenditure for earning exempt dividend income.
4. Disallowance of aircraft expenses.
5. Disallowance of telephone expenses.
6. Disallowance of lease-hold money.
7. Disallowance of miscellaneous expenses.
8. Disallowance of interest claimed.
9. Disallowance of prior period expenses.
10. Additional claim of loss on sale of units of mutual funds.
11. Disallowance of research and development expenditure.

Detailed Analysis:

1. Taxability of Rs 5,00,000/- received as compensation:
The assessee received Rs 5,00,000/- as compensation from a German company for termination of rights assigned. The assessee contended that this amount is a capital receipt not chargeable to tax, while the Revenue argued it should be assessed as business income under section 28(ii)(c) of the Income-tax Act, 1961. The Tribunal examined the Product Support Agreement and concluded that the assessee acted as an independent merchant, not as an agent. Hence, the compensation was for restrictive covenants and should be treated as a capital receipt, not business income. The Tribunal relied on the Supreme Court judgment in Guffic Chem. P. Ltd v. CIT and set aside the addition made by the Assessing Officer.

2. Claim of debit balances written off:
The assessee's claim of Rs 72,415/- for debit balances written off was not pressed during the hearing and was dismissed accordingly.

3. Disallowance of expenditure for earning exempt dividend income:
The assessee contested the disallowance of Rs 75,000/- retained by the Commissioner of Income-tax (Appeals) for expenditure incurred to earn exempt dividend income. The Tribunal found that the Assessing Officer's estimate of 5% of the dividend income as expenditure was based on presumptions without establishing any nexus. The Tribunal upheld the Commissioner's decision to retain only Rs 75,000/- as a reasonable estimate of related expenses.

4. Disallowance of aircraft expenses:
The assessee conceded that the issue of disallowance of Rs 4,16,271/- for aircraft expenses had been decided against it in previous years. The Tribunal followed the precedent and dismissed this ground of appeal.

5. Disallowance of telephone expenses:
The Tribunal noted that similar disallowances had been decided in favor of the assessee in previous years. The Tribunal directed the Assessing Officer to delete the disallowance of Rs 68,144/- for telephone expenses, following the precedent set by the Bombay High Court in CIT v. Kirloskar Ferrous Industries Ltd.

6. Disallowance of lease-hold money:
The assessee did not press the issue of Rs 45,000/- representing lease-hold money during the hearing, and it was dismissed accordingly.

7. Disallowance of miscellaneous expenses:
The Tribunal found that similar disallowances had been decided in favor of the assessee in previous years. The Tribunal directed the Assessing Officer to delete the ad hoc disallowance of Rs 2,00,000/- for miscellaneous expenses.

8. Disallowance of interest claimed:
The Tribunal restored the issue of disallowance of Rs 68,58,000/- out of interest claimed to the Assessing Officer for fresh adjudication. The Tribunal directed the Assessing Officer to ascertain whether the advances to related companies were made out of borrowed funds and decide the issue as per law.

9. Disallowance of prior period expenses:
The Tribunal found that similar issues had been decided in favor of the assessee in previous years. The Tribunal directed the Assessing Officer to allow the claim of Rs 1,77,72,857/- for prior period expenses, following the precedent set by the Gujarat High Court in Saurashtra Cement & Chemical Industries Ltd.

10. Additional claim of loss on sale of units of mutual funds:
The Tribunal upheld the Commissioner of Income-tax (Appeals)'s direction to the Assessing Officer to consider the assessee's additional claim of Rs 64,27,236/- for loss on sale of units of mutual funds. The Tribunal noted that the Supreme Court's judgment in Goetze (India) Ltd. v. CIT did not restrict the appellate authority's power to admit fresh claims.

11. Disallowance of research and development expenditure:
The Tribunal upheld the Commissioner of Income-tax (Appeals)'s decision to allow the claim of Rs 35,59,293/- for capital expenditure on scientific research. The Tribunal found that the R&D unit was recognized by the Ministry of Science & Technology and that the research activities were related to the assessee's business.

Conclusion:
The Tribunal partly allowed the assessee's appeal and partly allowed the Revenue's appeal, addressing each issue based on precedents and detailed examination of facts and law.