2017 (5) TMI 787 - HC - Income Tax

Disallowance in respect of payment to sole selling agent - revenue or capital expenditure - Held that - It is required to be noted that there was a valid reason for the assessee to terminate the sole selling agreement prematurely. The graphic division was sold w.e.f. 30/6/2006 as the graphic division was running in loss. That was the reason why the assessee thought it fit to terminate the sole selling agency and as the same was not viable and therefore, it discontinued the sole selling agency prematurely. As rightly observed by the learned tribunal, it was not for the A.O to consider the sufficiency of the reasons and/or to consider whether to continue or not the agency and whether the agency was viable or not. The learned tribunal has rightly observed that the A.O. cannot sit in the proverbial armchair of the assessee to decide the incurring of expenditure. As rightly observed by the learned tribunal, it was the prerogative of the assessee to run the business in a particular manner. Under the circumstances, making above observations in para 3.3 when the learned tribunal has treated and considered the payment of ₹ 2.5 Crores paid to sole selling agency - M/s. ATE Marketing (P) Ltd. as revenue expenditure, it cannot be said that the learned tribunal has committed any error. Receipt in lieu of sale of goodwill - LTCG - Held that - We are in complete agreement with the view taken by the learned tribunal, more particularly when against the total sale consideration of ₹ 15.24 Crores, a sum of only ₹ 10 Lacs only was treated on sale under the head of goodwill and that sale consideration of ₹ 15.24 Crores included the amount of ₹ 10 Lacs under the head of goodwill. It is also required to be noted that in fact, the assessee had offered entire sale consideration as Long Term Capital Gain, however, out of the aforesaid, only ₹ 10 Lacs was claimed on sale under the head of goodwill. Considering the aforesaid facts and circumstances of the case, it cannot be said that the learned tribunal has committed any error in treating the receipt of ₹ 10 Lacs on sale of goodwill and treating the same as Long Term Capital gain.

Summary

Issues Involved:
1. Deletion of disallowance of ?2.5 Crores in respect of payment to sole selling agent.
2. Treatment of receipt of ?10 Lacs as receipt in lieu of sale of goodwill and chargeable as Long Term Capital Gain.

Issue-wise Detailed Analysis:

1. Deletion of disallowance of ?2.5 Crores in respect of payment to sole selling agent:

The assessee filed a return of income for A.Y. 2007-08 and had a sole selling agency agreement with M/s. ATE Marketing (P) Ltd. for five years. The assessee prematurely terminated this agreement and paid ?2.5 Crores as compensation to M/s. ATE Marketing (P) Ltd. for the premature termination, treating it as revenue expenditure. The A.O. did not accept this claim, treating the ?2.5 Crores as capital expenditure, asserting that the assessee did not provide valid reasons for the premature termination. The CIT(A) upheld the A.O.'s decision.

Upon appeal, the ITAT allowed the assessee's claim, stating that the payment was made as per the terms of the agreement and should be treated as revenue expenditure. The tribunal emphasized that it was the assessee's prerogative to decide how to run its business and incur expenditures. The High Court agreed with the ITAT, noting that the A.O. cannot question the business decisions of the assessee unless the expenditure is prohibited by law. The court concluded that the tribunal did not err in treating the ?2.5 Crores as revenue expenditure.

2. Treatment of receipt of ?10 Lacs as receipt in lieu of sale of goodwill and chargeable as Long Term Capital Gain:

The assessee sold its graphic division for ?15.24 Crores and treated ?10 Lacs of this amount as receipt in lieu of sale of goodwill, claiming it as Long Term Capital Gain. The A.O. treated this ?10 Lacs as income from other sources. The CIT(A) upheld the A.O.'s decision.

The ITAT reversed this decision, stating that the assessee had rightly treated the ?10 Lacs as Long Term Capital Gain. The tribunal noted that the breakup of the sale consideration included ?10 Lacs under the head of goodwill, and the assessee had not claimed any depreciation under section 32 of the Act regarding goodwill. The High Court agreed with the ITAT, concluding that the tribunal did not err in treating the ?10 Lacs as Long Term Capital Gain.

Conclusion:
The High Court dismissed the appeal, agreeing with the ITAT's decisions on both issues. The court held that the ?2.5 Crores paid to the sole selling agent was correctly treated as revenue expenditure and that the ?10 Lacs received in lieu of sale of goodwill was rightly treated as Long Term Capital Gain. No substantial question of law arose, and the appeal was dismissed.