2018 (1) TMI 1480 - AT - Income Tax

Payment of non compete fees - nature of expenses - revenue or capital expenditure - HELD THAT - When the payment was made for elimination of competition but for non-compete for short period and the assessee have not derived any enduring benefit and no new asset was added the payment of non-compete fee was in the nature of restricting Anita Shirodkar and Arjun Sharma in exercising their skill and experience in the similar field cannot be treated as capital expenditure. The decision relied by ld. DR for the Revenue in Taparia Tools Ltd. 2003 (1) TMI 83 - BOMBAY HIGH COURT has been overruled by Hon ble Supreme Court in Taparia Tools Ltd. vs. JCIT 2015 (3) TMI 853 - SUPREME COURT and the decision of Madras Industrial Investment Corporation Ltd. v/s CIT 1997 (4) TMI 5 - SUPREME COURT is not applicable on the facts of the present case as the said case relates to proportionate deduction spread over a period on discount of debenture. Disallowance of license fees - AO disallowed holding it that expenditure is incurred for intangible asset and therefore constitute a capital expenditure the assessee itself capitalized the expenditure as an intangible asset in its books of account also confirmed by CIT-A - assessee argued that assessee paid license fees to leverage its strength and to expand business activities in Middle East market for incoming customer to India. The assessee paid the license fee for expanding its existing business in regions outside India - allowable business expenses u/s 37 - HELD THAT - The Hon ble Apex Court in case of CIT vs. IAEC (Pumps) Ltd. 1997 (4) TMI 14 - SUPREME COURT held that license fee paid for use of patent and design was on revenue account. The fact of the said case was that under an agreement entered by assessee with a foreign company the assessee was granted a license to use its patents and designs exclusively in India. The agreement was for duration of 10 years with the parties having the option to extend or renew the agreement. The foreign company undertook not to surrender its patents without the consent of the assessee and to make available to the assessee any improvements modifications and additions to designs. It had also undertaken to enable the assessee to defend any counterfeit by others - revenue expenditure incurred in a particular year is to be allowed in that year and the department cannot deny the same. It is only in case that assessee himself want to spread the expenditure over a period of ensuring year it can be allowed to be spread over provided the principle of matching concept is satisfied. Thus considering the above discussed factual and legal position the expenditure incurred by assessee on a license fee is revenue expenditure - Decided in favour of assessee. Deduction u/s 80HHD - Disallowance on account of Mis-utilization of Tourism Reserve with reference to section 80HHD(4) - AO disallowed holding that purchase of car and coaches are must be purchased for providing service to the Tourist - assessee argued that the assessee has utilized the amount of reserve created in earlier year for the purpose of purchases of coaches and car - HELD THAT - These issues are against the assessee in assessee s own case for AY 2001-02. DR not disputed the contention of the ld. AR of the assessee. Considering the submission of ld. AR of the assessee the grounds of appeal no.3 and part of ground no.4(iii) to the extent of Mis-utilization of Tourism Reserve is dismissed. Denial of deduction under section 80HHD in respect of interest income - HELD THAT - In assessee s own case for AY 2000-01 & 2001-02 the single issue was restored to the file of AO to decide the claim in accordance with the order of special bench in case of Amway India Enterprises vs. DCIT 2008 (2) TMI 454 - ITAT DELHI-C . Thus considering the decision of co-ordinate bench both the part of this ground of appeal are restored back to the file of AO to decide the same. Disallowance under section 14A - assessee argued that during the year the assessee received dividend and interest on various investments and investments were made out of own funds and not from borrowed fund - HELD THAT - Prior to assessment year 2008- 09 when rule 8D was not applicable Assessing Officer had to enforce provisions of sub-section (1) of section 14A and for that purpose Assessing Officer was duty bound to determine expenditure which had been incurred in relation to income which did not form part of total income under Act by adopting a reasonable basis. Thus considering the fact of the present case and the fact that prior to AY 2008-09 the Superior Courts and the Tribunal had taken a consistent view that prior to insertion of Rule 8D a reasonable disallowance is sufficient to meet the requirement of section 14A. Hence we direct the AO to restrict the disallowance @ 2% of the exempt income for disallowance under section 14A for the year under consideration. Deduction u/s 80HHD - addition in respect of training fees - whether training fees are derived in the course of business of Tour & Travels of the assessee and ought to be considered for the purpose of deduction under section 80HHD? - CIT(A) held that training fees form part of business income and has been assessed by AO under the head Profit & Gain from Business and Profession and therefore said income is eligible deduction under section 80HHD - HELD THAT - Co-ordinate bench of Mumbai Tribunal in ACIT vs. Eastern International Hotels 2005 (11) TMI 180 - ITAT BOMBAY-I held that where interest income received by assessee had been assessed under the head Profit & Gain from Business and Profession same cannot be treated as non-business income for the purpose of deduction under section 80HHD of the Act. The co-ordinate bench relied upon the decision of Alfa Lavel India Ltd. 2003 (9) TMI 43 - BOMBAY HIGH COURT on contest of interpretation of section 80HHC holding that where the AO had assessed interest received by assessee as a part of business profit under the head Profit & Gain from Business and Profession he cannot treat the said amount as Income from Other Sources so as to exclude it from the business profit. Thus in view of the above factual and legal discussion we do not find any illegality and infirmity in the order passed by ld. CIT(A). Addition of retention money as written back claimed as deduction under section 80HHD - retention money is not derived from the business activity of the assessee - HELD THAT - AO has assessed the said amount under the head Profit & Gain from Business and Profession . We have further noted that the co-ordinate bench of Mumbai Tribunal in ACIT vs. Eastern International Hotels (supra) held that where interest income received by assessee had been assessed under the head Profit & Gain from Business and Profession same cannot be treated as non-business income for the purpose of deduction under section 80HHD of the Act. The co-ordinate bench relied upon the decision of Alfa Lavel India Ltd. (supra) on contest of interpretation of section 80HHC holding that where the AO had assessed interest received by assessee as a part of business profit under the head Profit & Gain from Business and Profession he cannot treat the said amount as Income from Other Sources so as to exclude it from the business profit. Thus in view of the above factual and legal discussion we do not find any illegality and infirmity in the order passed by ld. CIT(A). Deduction under section 80HHD in respect of foreign exchange fluctuation - AO disallowed the deduction on gain from foreign exchange fluctuation holding that it does not emanate from the services provided by the assessee to foreign tourist - CIT(A) allowed the deduction holding that foreign exchange gain forms part and partial of foreign exchange sale proceed and cannot be excluded while computing deduction under section 80HHD - HELD THAT - The Hon ble Bombay High Court in case of CIT vs. Syntel Limited 2009 (12) TMI 689 - BOMBAY HIGH COURT held that when assessee received sale consideration in dollars which were to receive on date of sale. But on account of fluctuation in conversion rate the assessee received more in term of Rupee. In Rachana Udyog (2010 (1) TMI 38 - BOMBAY HIGH COURT) held that exchange rate difference is allowable deduction under section 80IB of the Act which is directly related to the transaction involving the export of goods of eligible industrial undertaking. Exclusion of receipts passed onto other hoteliers and receipts being unrealized tour receipts for computing deduction under section 80HHD - HELD THAT - By following the decision of Lotus Trans Travels 2010 (12) TMI 126 - DELHI HIGH COURT wherein it was held that for the amounts the assessee has issued certificate in Form 10CCAC cannot be treated as a receipt for the purpose of total business and accordingly directed the AO to exclude the receipt of Rs. 31, 30, 99, 313/- passed on by the assessee to other hotel and travel agent. For second/other receipt of Rs. 66, 39, 877/- it was held that the said amount of foreign currency realized after 30.09.2009 have not entered the numerator i.e. receipt earned by assessee from rendering service to foreign tourist which would not enter the denominator in the formula and directed the AO to exclude the same. We have noted that finding of ld. CIT(A) in accordance with Explanation 1 to sub-section (2) sub-section (2) and sub-section (3) of section 80HHD. No contrary material is brought to our notice to take any contrary view

Summary

Issues Involved:
1. Non-compete fees treatment.
2. License fees treatment.
3. Utilization of Tourism Reserve.
4. Deduction under Section 80HHD.
5. Disallowance under Section 14A.
6. Training fees deduction.
7. Retention money deduction.
8. Foreign exchange fluctuation deduction.
9. Exclusion of certain receipts for deduction computation.

Detailed Analysis:

1. Non-Compete Fees Treatment:
The assessee paid Rs. 50 lakh each to Anita Shirodkar and Arjun Sharma as non-compete fees. The AO treated these payments as capital expenditures, allowing depreciation. The CIT(A) upheld the disallowance for Anita Shirodkar but allowed the payment to Arjun Sharma to be deducted over two years. The Tribunal, referencing cases like CIT vs. Eicher Ltd. and CIT vs. Career Launcher India Ltd., concluded that the payments were for restricting competition for a short period and did not result in an enduring benefit or acquisition of a new asset. Hence, the payments were treated as revenue expenditures.

2. License Fees Treatment:
The assessee paid Rs. 1,05,00,000/- for using the "Tour Club" brand. The AO and CIT(A) treated this as a capital expenditure, considering it an intangible asset. However, the Tribunal, citing cases like CIT vs. IAEC (Pumps) Ltd., held that the payment was for leveraging the brand for a limited period without acquiring ownership, thus qualifying as a revenue expenditure.

3. Utilization of Tourism Reserve:
The AO disallowed Rs. 88,37,957/- for not utilizing the Tourism Reserve as per Section 80HHD(4). The CIT(A) upheld this disallowance. The Tribunal noted that similar issues were decided against the assessee in earlier years and dismissed this ground.

4. Deduction under Section 80HHD:
- Interest Income: The Tribunal restored the issue of interest income eligibility under Section 80HHD to the AO, directing adherence to the Special Bench decision in Amway India Enterprises vs. DCIT.
- Training Fees: The AO disallowed Rs. 38,02,104/- as training fees, not derived from foreign tourists. The CIT(A) allowed it, considering it part of business income. The Tribunal upheld this, referencing cases like CIT vs. Alfa Lavel (India) Ltd.
- Retention Money: The AO disallowed Rs. 10,74,050/- retention money written back, not derived from services to foreign tourists. The CIT(A) allowed it, and the Tribunal upheld this, referencing similar cases.
- Foreign Exchange Fluctuation: The AO disallowed Rs. 1,85,88,507/- from foreign exchange gains. The CIT(A) allowed it, and the Tribunal upheld this, referencing cases like CIT vs. Syntel Limited, where such gains were considered part of business profits.

5. Disallowance under Section 14A:
The AO disallowed Rs. 21,62,346/- for expenses related to tax-free income. The CIT(A) upheld this. The Tribunal directed the AO to restrict the disallowance to 2% of the exempt income, considering precedents that allowed reasonable disallowance prior to Rule 8D.

6. Training Fees Deduction:
The AO disallowed Rs. 38,02,104/- as training fees. The CIT(A) allowed it, considering it part of business income. The Tribunal upheld this, referencing cases like CIT vs. Alfa Lavel (India) Ltd.

7. Retention Money Deduction:
The AO disallowed Rs. 10,74,050/- retention money written back. The CIT(A) allowed it, and the Tribunal upheld this, referencing similar cases.

8. Foreign Exchange Fluctuation Deduction:
The AO disallowed Rs. 1,85,88,507/- from foreign exchange gains. The CIT(A) allowed it, and the Tribunal upheld this, referencing cases like CIT vs. Syntel Limited.

9. Exclusion of Certain Receipts for Deduction Computation:
The AO included Rs. 31,30,99,313/- passed to other hotels and Rs. 66,39,877/- unrealized receipts in the total receipts for computing Section 80HHD deduction. The CIT(A) directed exclusion of these amounts, aligning with the formula in Section 80HHD and precedents like Lotus Trans Travels. The Tribunal upheld this decision.

Conclusion:
The Tribunal allowed the assessee's appeal partly, treating non-compete fees and license fees as revenue expenditures, directing reasonable disallowance under Section 14A, and restoring the interest income issue to the AO. The Revenue's appeal was dismissed, upholding CIT(A)'s decisions on training fees, retention money, foreign exchange gains, and exclusion of certain receipts in Section 80HHD computation.