2014 (6) TMI 175 - AT - Income Tax

Addition of non-compete fee as salary income Held that - Following Commissioner of Income-tax XIII Versus Kanwaljit Singh 2012 (12) TMI 168 - DELHI HIGH COURT - the mere fact that two agreements existed does not necessarily imply that the payment made under one agreement is not to be regarded as part of salary, when all the work done under the agreement was performed by the employee for the benefit of the employer Decided against Assessee. Deletion of interest u/s 14A of the Act Held that - The business income declared by the assessee towards receipt of non-compete fees has been taxed by the AO under the head Salaries without granting any deduction for certain expenses which were originally claimed by the assessee - there is no business income left with the assessee and consequently there are no expenses for which any deduction could be allowed under Chapter IV-D of the Act - once there is no expenditure claimed as deduction by the assessee, there can be no question of making any disallowance u/s 14A because the disallowance under the section pre-supposes the claim for deduction of expenses - unless there is a deduction for any expenditure incurred by the assessee, there cannot be any disallowance u/s 14A Decided against Revenue. Levy of interest u/s 234B and 234C of the Act Held that - The assessee has accepted that the addition being the non-compete fees receivable by him from Uzind Corporation should be assessed as salary income - the character of the amount of non-compete fees in the hands of the assessee is not final so far thus, the matter is remitted back to the AO for fresh adjudication Decided in favour of Revenue.

Summary

Issues:
1. Treatment of non-compete fees as business income or salary income.
2. Deletion of addition made under section 14A of the Act.
3. Charging of interest under sections 234B and 234C.

Analysis:

Issue 1: Treatment of non-compete fees
The assessee contested the treatment of non-compete fees as business income by the ld. CIT(A) in relation to the assessment year 2009-10. The Hon'ble Delhi High Court had previously ruled against the assessee on a similar issue in preceding years. The ld. AR acknowledged this and agreed that the appeal should be dismissed based on the High Court's decision. The Tribunal upheld the impugned order, citing the precedent set by the Hon'ble Delhi High Court.

Issue 2: Deletion of addition under section 14A
The Revenue raised an issue regarding the deletion of an addition made under section 14A of the Act. The Assessing Officer had computed a disallowance under Rule 8D(2)(iii) due to exempt income from investments made by the assessee. However, the ld. CIT(A) deleted this addition, noting that no expenditure was claimed by the assessee. The Tribunal observed that since no business income was left with the assessee after taxing the non-compete fees as salary income, there were no expenses for which a deduction could be allowed. As no expenditure was claimed, the Tribunal upheld the deletion of the addition under section 14A.

Issue 3: Charging of interest under sections 234B and 234C
The Revenue's appeal also contested the charging of interest under sections 234B and 234C. The ld. CIT(A) directed the Assessing Officer to exclude the non-compete fees amount from the total income to avoid double taxation. The Tribunal noted that the character of the non-compete fees was not final due to pending legal proceedings. Therefore, the matter was remitted to the Assessing Officer for a fresh decision. The Tribunal found that interest under sections 234B and 234C was not chargeable as the non-compete fees were treated as salary income, which did not require advance tax payment.

In conclusion, the Tribunal dismissed the assessee's appeal and partly allowed the Revenue's appeal for statistical purposes, emphasizing the need for a fresh decision on the treatment of non-compete fees and the consequent tax implications.