2015 (11) TMI 340 - AT - Income Tax

Non-compete fee - revenue expenditure v/s capital expenditure - Held that - The said amount was difference in the value of tangible/intangible assets of the going concern which was purchased by the assessee and the lump sum amount was paid for taking over the business, so it was in the nature of the goodwill and since the assessee was having the enduring benefit particularly when there was a covenant on the seller for not to run the similar type of business for three years. Therefore, the said amount cannot be considered as revenue in nature as has been held by the ld. CIT(A). Since the amount under consideration was in excess of the value of tangible & intangible asset and was a part of the lump sum consideration for acquiring the business, so it was a goodwill. Thus we set aside the findings of the ld. CIT(A) on this issue and upheld the view taken by the AO that the non-compete fee was nothing but goodwill of the business and a capital expenditure. Whether the assessee is eligible for depreciation on the goodwill? - Held that - As the non-compete fee paid by the assessee was capital in nature and goodwill it was eligible for depreciation u/s 32 of the Act as relying on SMIF Securities Ltd. (2012 (8) TMI 713 - SUPREME COURT) wherein held that the goodwill is eligible for depreciation u/s 32 Addition on expenses incurred in connection with purchase/acquisition of business assets - purchase of division on slump sale - CIT(A) deleted the addition - Held that - In the present case, it is an admitted fact that the impugned expenditure was incurred in connection with the acquiring of assets and since the expenses incurred were related to bring the assets into existence those were capital in nature and not the revenue in nature. We, therefore, reverse the findings of the ld. CIT(A) on this issue and hold that the expenses incurred by the assessee for acquiring the assets were capital in nature, so those to be capitalized and the AO is directed to allow the depreciation as per law on those capitalized expenditure. Payment made to the holding company - Revenue v/s capital expenditure - Held that - In the present case, by incurring the impugned expenses, the assessee had not acquired any tangible/intangible asset which had any lasting and enduring benefit to the assessee s business. The payments were made for using the trade mark of M/s Nitrex Mauritius and to obtain expertise in the field of commerce, finance, manufacturing etc. which were needed for smooth running of the business as the assessee was new in this business and the expenses were paid only for one year. Therefore, we are of the view that the ld. CIT(A) was fully justified in directing the AO to treat those expenses as revenue in nature, we do not see any infirmity in the order of the ld. CIT(A) on this issue. - Decided in favour of assessee. Commission paid on export sales excessive - CIT(A) deleted the addition - Held that - The commission was paid at the same rate which was paid by the seller of the business i.e. M/s ICI India Ltd., the said contention had not been rebutted. It is also noticed that M/s Asha Export is not related to the assessee and the commission was paid for the services provided by M/s Asha Export. In the present case, the AO did not bring any material on record to substantiate that the commission paid by the assessee was excessive. We, therefore, do not see any infirmity in the order of the ld. CIT(A) on this issue. It is also noticed that nothing is brought on record to substantiate that any new evidence was furnished by the assessee before the ld. CIT(A) in violation of Rule 46A of the IT Rules, 1962.- Decided in favour of assessee. Disallowance made by the AO on account of water charges - CIT(A) reduced disallowance admitting fresh evidences - Held that - In the present case, it is noticed that the assessee produced the Bills of ₹ 30,64,348/- out of total water charges of ₹ 72,92,206/- . However, before the ld. CIT(A), the details of bills from April 4 to March 5 amounting to ₹ 52,12,320/- were furnished. In the present case, it appears that new evidences were furnished before the ld. CIT(A) which were not before the AO. We, therefore, to meet the ends of justice, deem it appropriate to send this issue back to the file of the AO for proper verification and adjudication after providing due and reasonable opportunity of being heard to the assessee. Accordingly, the appeal of the department is partly allowed for statistical purposes. Disallowance of expenses against business income - CIT(A) allowed the claim - Held that - No infirmity in the order of the ld. CIT(A), particularly when the assessee had written off bad debts in its books of account and insurance claim relating to the business was less recovered to the extent of ₹ 3,57,206/- which was allowable as a business loss u/s 37(1) of the Act. Similarly, the annual performance incentive payable was related to the trading business of the assessee which had subsequently been transferred but since the income till 14.10.2005 had been offered by the assessee in the profit and loss account and this performance incentive payable was related to the period ending on 14.10.2005, therefore, it was to be paid by the assessee and was allowable as expenditure. In that view of the matter, we do not see any valid ground to interfere with the findings of the ld. CIT(A).- Decided in favour of assessee. Disallowance of expenses on account of ESOP expenses - whether expenses not related to slump sale - CIT(A) allowed the claim - Held that - In order to give effect to the business transfer transaction, it became necessary for the assessee to ensure that the management staff accepts to part with their employment with the assessee company and accept the employment of the new company, as the same was a pre-requisite for consummation of the transactions. At the time of parting share holding from management was bought back which was required to be funded by the assessee company. However, the impugned amount was non-recoverable and was a loss on account of business transfer, so it was required to be deducted from the capital gain in respect of slump sale of trading business. In our opinion the ld. CIT(A) was justified in holding that the impugned amount was allowable from the capital gain arisen to the assessee. We do not see any valid ground to interfere with the findings of the ld. CIT(A) - Decided in favour of assessee. Disallowance made by the AO out of the dividend income - CIT(A) restricted part disallowance - Held that - In the present case, it is noticed that the assessee earned the dividend income of ₹ 3,77,330/- while the AO worked out the disallowance at ₹ 3,97,880/- which was more than the said income. The disallowance was made by the AO in accordance with Rule 8D of the I.T Rules, 1962. The said rule is applicable for the assessment year 2008-09 while the assessment year under consideration is 2007-08. Therefore, the AO was not justified in working out the disallowance by applying the provisions of Rule 8D. In our opinion, the ld. CIT(A) was fair and reasonable in restricting the disallowance of ₹ 37,740/- - Decided in favour of assessee in part. Disallowance on account of Foreign Exchange Fluctuation loss - CIT(A) allowed the claim - Held that - In the present case, it is noticed that the ECB loan taken by the assessee was old one and in preceding and subsequent year, there was gain on account of increase in exchange rates which had been accepted by the AO but the loss on account of the decrease in exchange rate had been disallowed. It is well settled that no one can blow hot and cold from the same windpipe. However, in the present case, the AO accepted the gains but disallowed the loss which is not permissible. CIT(A) was fully justified in directing the AO to delete the impugned addition.- Decided in favour of assessee. Disallowance u/s 14A - assessee suo motu disallowed a sum of ₹ 2,85,288/- in accordance with the provisions contained u/s 14A of the Act r.w Rule 8D - CIT(A) deleted addition - Held that - AO without establishing the nexus between the expenses claimed and the tax free income was not justified in making the disallowance of ₹ 12,09,198/-as against the disallowance of ₹ 2,85,288/- suo motu made by the assessee. It is also not the case of the AO that the disallowance worked out suo motu by the assessee u/s 14A of the Act r.w. Rule 8D of I.T Rules at ₹ 2,85,288/- was wrong since no discrepancy was pointed out in the said working of the assessee. We, therefore, are of the view that the ld. CIT(A) rightly deleted the disallowance made by the AO. We do not see any valid ground to interfere with the findings of the ld. CIT(A). - Decided in favour of assessee.

Summary

Issues Involved:
1. Non-compete fee treatment
2. Expenses incurred in connection with purchase/acquisition of business assets
3. Payment made to the holding company
4. Disallowance of excessive commission
5. Disallowance on account of water charges
6. Expenses against business income
7. Cost of purchase of shares
8. Techno Commercial Licensing Fees
9. Disallowance of commission paid on sale
10. Foreign Exchange Fluctuation loss
11. Disallowance under Section 14A of the Income Tax Act

Detailed Analysis:

1. Non-compete Fee Treatment:
The primary issue was whether the non-compete fee of Rs. 6.80 crores paid by the assessee should be treated as revenue expenditure or capital expenditure. The CIT(A) treated it as revenue expenditure, emphasizing that the fee was for warding off competition temporarily and did not result in any enduring benefit. However, the Tribunal held that the non-compete fee was capital in nature, considering it as goodwill and thus eligible for depreciation under Section 32 of the Act, following the Supreme Court judgment in the case of SMIF Securities Ltd.

2. Expenses Incurred in Connection with Purchase/Acquisition of Business Assets:
The assessee claimed Rs. 41,62,213 as revenue expenditure for legal and professional services related to acquiring business assets. The AO treated these expenses as capital in nature. The CIT(A) allowed the expenses as revenue, but the Tribunal reversed this, holding them as capital expenditure, directing the AO to allow depreciation on these capitalized expenses.

3. Payment Made to the Holding Company:
The AO treated Rs. 1,20,00,000 paid for Techno Commercial & Licensing fee as capital expenditure, considering it as brand building. The CIT(A) reversed this, treating it as revenue expenditure, noting that the payments were annual and no asset or enduring benefit was acquired. The Tribunal upheld the CIT(A)'s decision.

4. Disallowance of Excessive Commission:
The AO disallowed 50% of the commission paid on export sales, considering it excessive. The CIT(A) deleted the disallowance, noting that the commission was paid at the same rate as in previous years and was necessary for business. The Tribunal upheld the CIT(A)'s decision, finding no material evidence from the AO to substantiate the excessiveness.

5. Disallowance on Account of Water Charges:
The AO disallowed Rs. 42,27,858 for water charges due to lack of supporting bills. The CIT(A) allowed Rs. 51,12,320 based on bills provided and confirmed the disallowance of Rs. 20,79,886 as provision. The Tribunal remanded the issue back to the AO for verification.

6. Expenses Against Business Income:
The AO disallowed certain expenses related to bad debts, insurance claims, and performance incentives, treating them as not related to business transfer. The CIT(A) allowed these expenses as business expenditure. The Tribunal upheld the CIT(A)'s decision, noting that these were legitimate business expenses.

7. Cost of Purchase of Shares:
The AO disallowed Rs. 1,39,76,352 as expenses incurred for buying back shares from employees, treating it as independent of business transfer. The CIT(A) allowed the expenses, considering them necessary for the business transfer agreement. The Tribunal upheld the CIT(A)'s decision.

8. Techno Commercial Licensing Fees:
The AO treated Rs. 10,00,000 paid as Techno Commercial Licensing Fees as capital expenditure. The CIT(A) reversed this, treating it as revenue expenditure. The Tribunal upheld the CIT(A)'s decision.

9. Disallowance of Commission Paid on Sale:
The AO disallowed Rs. 92,28,471 as excessive commission. The CIT(A) deleted the disallowance, and the Tribunal upheld this decision, finding no material evidence from the AO to substantiate the excessiveness.

10. Foreign Exchange Fluctuation Loss:
The AO disallowed Rs. 2,77,72,900 as foreign exchange fluctuation loss, treating it as capital in nature. The CIT(A) allowed the loss as revenue expenditure. The Tribunal upheld the CIT(A)'s decision, noting that the AO had accepted gains from exchange rate fluctuations in other years.

11. Disallowance Under Section 14A of the Income Tax Act:
The AO disallowed Rs. 12,09,198 under Section 14A r.w. Rule 8D, which was more than the dividend income earned by the assessee. The CIT(A) restricted the disallowance to 10% of the dividend income. The Tribunal upheld the CIT(A)'s decision, noting that the AO did not establish a nexus between the expenses claimed and the tax-free income.

Conclusion:
The Tribunal provided a detailed analysis on each issue, often upholding the CIT(A)'s decisions, and emphasized the necessity for the AO to provide substantial evidence when making disallowances. The Tribunal's decisions reflect a balanced approach, considering both the legal provisions and the factual matrix of each case.