2022 (7) TMI 587 - AT - Income Tax

Allowability of non-compete fee paid in terms of the consultancy agreement entered by the appellant company - AO had doubted the sum and substance transactions and held that the payment was made as part and parcel of purchase of shares of the appellant company - AO was of the opinion that this non-compete fee was paid as part of obligation stipulated in the agreement to purchase of shares of the appellant company - HELD THAT - As the case of the Assessing Officer appears to be that the non-compete consideration is nothing but a part of the consideration payable for acquisition of shares of the appellant company and, therefore, any consideration paid for acquisition of shares cannot be allowed as revenue deduction while computing the business profits as taxable. This finding made by the Assessing Officer remains uncontroverted by leading necessary evidence on record. Further, admittedly, the expenditure was incurred in terms of the agreement entered between Shri Ajay Pitre and the appellant company on 09.04.2013. Therefore, in terms of the said agreement, the liability had clearly crystallized during the financial year 2013-14 relevant to the assessment year 2014-15 and had not incurred during the assessment year 2017-18. Thus, the assessee company had also failed to satisfy the conditions precedent to claim as revenue expenditure, as the expenditure was incurred during the previous year relevant to the assessment year under consideration, therefore, the claim made by the assessee cannot be allowed as deduction for the reasons stated above. Accordingly, the grounds of appeal raised by the assessee stands dismissed.

Issues:
1. Assessment of total income against returned loss
2. Disallowance of non-compete fee
3. Depreciation on non-compete fees
4. Set off of brought forward losses
5. Charge of interest under sections 234B and 234D
6. Initiation of penalty proceedings under Section 271(1)(c)

Assessment of total income against returned loss:
The appeal challenged the final assessment order under sections 143(3) r.w.s. 144C(13) r.w.s. 144B of the Income Tax Act, 1961 for the assessment year 2017-18. The appellant contested the assessment of total income at Rs 2,14,38,066 instead of the returned loss of Rs 7,82,44,744. The grounds of appeal were based on the assertion that the Assessing Officer erred in assessing the income against the reported loss.

Disallowance of non-compete fee:
The dispute centered around the disallowance of a non-compete fee claimed as revenue expenditure. The appellant argued that the fee should be treated as revenue expenditure, while the Assessing Officer contended it was capital in nature. The disagreement arose from a consultancy agreement where a significant amount was paid to prevent competition. The Assessing Officer deemed this payment as part of the share acquisition agreement, leading to the disallowance.

Depreciation on non-compete fees:
The appellant also raised concerns about the depreciation on the non-compete fees, arguing it should be allowed as per section 32 of the Act. However, the Assessing Officer did not permit this depreciation, further complicating the treatment of the non-compete fee.

Set off of brought forward losses:
The issue of setting off carry forward losses against the assessed income was contested. The appellant claimed that the losses from earlier years should have been offset against the current income, which the Assessing Officer allegedly failed to do.

Charge of interest under sections 234B and 234D:
The appellant challenged the imposition of interest under sections 234B and 234D of the Act. The grounds of appeal questioned the validity and application of these interest charges in the given circumstances.

Initiation of penalty proceedings under Section 271(1)(c):
Lastly, the appellant objected to the initiation of penalty proceedings under Section 271(1)(c) of the Act concerning disallowances and additions made during the assessment. The grounds of appeal raised concerns about the correctness and legality of initiating penalty proceedings in this context.

In the final judgment, the Tribunal dismissed the appeal, upholding the Assessing Officer's decisions regarding the disallowance of the non-compete fee as revenue expenditure. The Tribunal found that the fee was part of the share acquisition agreement and not eligible for deduction as revenue expenditure. The decision was based on the crystallization of the liability in a previous year and the lack of evidence supporting the fee's treatment as revenue expenditure. The Tribunal also addressed other issues raised in the appeal, ultimately leading to the dismissal of the appeal.

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