2019 (10) TMI 1075 - AT - Income Tax

Quantum of Deduction u/s 80-O - HELD THAT - After going through the cited order of Tribunal, we find that the factual matrix in those years was different since the relevant agreements were approved by Chief Commissioner of Income Tax Act as opposed to the facts of present year in which Ld. AO has noted that agreements were not approved by Chief Commissioner of Income Tax or by the Board. Secondly, as noted by first appellate authority in the impugned order, the assessee could not provide the requisite details to establish the exact nature of services being rendered by the assessee and failed to demonstrate that the said receipts squarely fall within the ambit of Section 80-O. Nevertheless, keeping in view the submissions made, we restore this matter back to the file of Ld. first appellate authority to adjudicate the same de-novo after reappreciating the factual matrix including the stand taken by the department in earlier years. The assessee, in turn, is directed to substantiate his claim with requisite details and evidences that the receipts qualified for deduction u/s 80-O. Thereafter, the question of allocation of expenditure against the same may be adjudicated as per factual matrix including the basis of allocation mechanism devised / adopted in earlier years. Accordingly, this ground of appeal stands allowed for statistical purposes. Disallowance of entertainment expenditure - HELD THAT - We no infirmity in the order of first appellate authority in restricting the same to 50% and therefore, confirm the same. Similarly, no serious arguments have been advanced with respect to disallowance of local travelling expenses u/r 6D and therefore, we confirm the order of Ld. AO, in this regard. Ground Nos. 3 4 stand dismissed. Deduction non-compete fees - HELD THAT - It is quite evident from records that the assessee has paid a sum of ₹ 8 Crores to DSP primarily as non-compete fees under an agreement. In its books of accounts, the assessee has written-off the same in 5 equal installments and accordingly, the assessee had debited a sum of ₹ 1.60 Crores in the Profit Loss Account during the year under consideration. The said write-off was suo-moto disallowed and added back by the assessee while computing the income for year under consideration. The assessee, by way of note to computation of income, asserted that the said expenditure, being revenue in nature, was allowable in full during the year itself. The Ld. first appellate authority, after examining assessee s claim, observed that as per the terms of the agreement, it was quite clear that that the benefit which accrue to the assessee was ever lasting since there was no time stipulation. In the above factual matrix, the decision in Hindustan Pilkington Glass Works 1981 (4) TMI 26 - CALCUTTA HIGH COURT was found to be squarely applicable to the facts of the case wherein Hon ble Court had observed that the profit-making apparatus had improved. The improvement was to last beyond the year in question and the business was to be carried on unfettered by rival competitors which would endure and the benefit would last beyond five years. Since the assessee had already acquired the membership of NSE in 1994 to undertake the Competing business, the assessee had not acquired any new business. The profit-making apparatus had remained the same, the assets used to run the business remained the same and there was no new business or no new source of income, which accrue to the assessee on account of the payment of non-compete fee. The payment of the non-compete fee would only enable the existing business of the appellant to run smoothly and to remove difficulties which may arise. The payment was expected to result in synergy and in turn lead to profitability for the business. Upon careful consideration of the terms of agreement, undisputedly the agreement is for perpetuity and the covenantor i.e. M/s DSP is restrained forever from carrying out its business in the segment of broking in wholesale market and distribution of units of mutual funds and there is complete annihilation of competitive business in a particular segment. Upon consideration of Rectial-5 of the agreement, it also transpires that M/s Merrill Lynch Co. Inc. USA agreed to acquire the shares representing 40% of assessee s capital at a substantial value, inter-alia, on the condition that the covenantors refrain from carrying on the competitive businesses. The terms of the agreement would establish that the benefits of restrictive covenants were foreseen over a longer period of time rather than immediate benefits which would justify the investment at substantial value. This would also negate the arguments of Ld. AR that the assessee would receive immediate benefit by avoiding possible competition from DSP and the benefit would not endure for a longer period of time. If that be so, there would have been no necessity for the assessee to put restrictions on competitor in perpetuity rather the benefits were perceived to have accrued to the assessee over longer period of time. Therefore, we find the arguments of Ld. AR to be contradictory to the terms of the agreement. Moreover, nothing emanates as well as nothing has been brought on record by the assessee to fortify the submissions of immediate benefit and therefore, this argument could not be termed as more than mere submissions. Therefore, we do not find much force in the theory of immediate benefit as advanced by Ld. AR before us. Rather, we are of the considered opinion, that by entering into the said agreement, the assessee acquired valuable business right in perpetuity which was designed to bring enduring benefits to the assessee over indefinite period of time. The same was the perception while entering the said agreement. It is also noted that the assessee had recently acquired the membership of NSE and it was contemplating entering into a particular segment of business. This activity proposed to be carried out by the assessee was at nascent stage and the terms of the agreement led to complete annihilation of its competitor business segment forever. Therefore, we find substantial force in the arguments of Ld. DR, in this regard. Non-compete fees paid by the assessee to ward-off the rival competition in perpetuity would partake the character of capital expenditure in the hands of the assessee and the deduction of the same has rightly been denied by the lower authorities. This ground stands dismissed.

Summary

Issues Involved:
1. Disallowance of non-compete fees.
2. Quantum of Deduction under Section 80-O.
3. Disallowance of entertainment expenditure.
4. Disallowance of traveling expenditure under Rule 6D.

Issue-wise Detailed Analysis:

1. Disallowance of Non-Compete Fees:
The assessee entered into an agreement with D.S. Prabhodas & Co. (DSP) to pay ?8 Crores as non-compete fees to ward off competition in the business of broking in the wholesale debt market and distribution of mutual funds. The assessee claimed this expenditure as a revenue expense. However, both the Assessing Officer (AO) and the Commissioner of Income-Tax (Appeals) [CIT(A)] treated it as capital expenditure, citing that the benefit derived was of an enduring nature without any time stipulation, thus improving the profit-making apparatus of the assessee. The Tribunal upheld this view, referencing several judicial precedents, including Hindustan Pilkington Glass Works [139 ITR 581], which supported that payments made to eliminate competition, resulting in enduring benefits, are capital in nature.

2. Quantum of Deduction under Section 80-O:
The assessee claimed a deduction under Section 80-O for ?192.69 Lacs on account of fees received in convertible foreign exchange. The AO restricted the eligible amount to ?56.92 Lacs, deducting allocable expenditure, resulting in an allowable deduction of ?1.57 Lacs. The CIT(A) upheld this restriction, noting that the agreements with service recipients lacked necessary approvals and the information provided was general and vague. The Tribunal restored the matter to the lower authorities for re-evaluation, directing the assessee to substantiate its claim with requisite details and evidence.

3. Disallowance of Entertainment Expenditure:
The AO disallowed 75% of business meeting expenses as entertainment expenditure, which the CIT(A) reduced to 50%. The Tribunal found no infirmity in the CIT(A)'s order and confirmed the 50% disallowance.

4. Disallowance of Traveling Expenditure under Rule 6D:
The AO reworked the traveling expenditure disallowance, resulting in ?1.64 Lacs, which the CIT(A) did not address specifically. The Tribunal confirmed the AO's disallowance as no serious arguments were advanced against it.

Conclusion:
The Tribunal upheld the disallowance of non-compete fees as capital expenditure and confirmed the 50% disallowance of entertainment expenditure and the traveling expenditure disallowance under Rule 6D. The issue of deduction under Section 80-O was remanded back to the lower authorities for re-evaluation. The appeal was partly allowed for statistical purposes.