2013 (5) TMI 605 - AT - Income Tax

Slump sale - transfer of undertaking - Transfer of intangible assets of merchant banking business - revenue v/s capital receipt - Held that - Clause 2.2 of the Transfer of Business Agreement suggests that the assessee has received Rs.2.5 million (Rs.25 lacs) as consideration for transfer of the business. Non justifiable reason on the part of the authorities below to consider the transaction as sham which involves colourable device. The impugned receipt is capital in nature and not in the nature of compensation received during the course of business as has been found by the CIT(A) as the assessee has received the impugned receipt for the transfer of its business of merchant banking in the form of employees, contracts in the form of customer and client relationship, a list of ten largest clients and certain know-how related to merchant banking business of the assessee, which necessarily qualify impugned receipt for the transfer of the said intangible assets in the category of capital nature as the subject matter of transfer has resulted in the loss of enduring trading assets. Regarding the possibility of taxing the said impugned capital receipt under the head of capital gains, since no cost of acquisition is involved by the assessee for these assets, the same cannot be taxed under the head capital gains also. It is needless to emphasis that the nature of the transfer does not attract the provision of section 50B in relation to slump sale also as there is no transfer of an undertaking by the assessee. Accordingly, ground no A in favour of the assessee. Non-compete fees - revenue v/s capital receipt - Held that - The perusal of the materials indicate that in the case of the assessee, the sole and main business or revenue earner i.e. merchant banking has been discontinued. The reasoning that of the authorities below that since the agreement is only for a period of 3 years and not absolute is not a relevant factor to determine the receipt as revenue in nature as generally all the non-compete agreements are limited in point of time which prescribes the period of non-competition. In view of that matter, we decide this ground in favour of the assessee and delete the impugned addition. Disallowance of bad debts - Held that - Since these debts are on sale of leased assets i.e. in the course of business the same should be allowed as a business loss in view of the decision of CIT v. Anjani Kumar Co. Ltd. (2002 (7) TMI 44 - RAJASTHAN High Court) wherein it has been held that advance for acquiring land to set up factory being lost, is allowable as business loss. With respect to the bad debt pertaining to expenses incurred for the companies promoted by it & since these companies have not started any activity and is in the process of winding up, the amount is claimed as bad debts qualifies as a business loss under section 28 of the Act. Interest charged for default in the payment of lease rentals could not be recovered from the party written off as bad debts. Advisory services have been rendered to Business India Publication Private Limited for which an amount of Rs.3,00,000/- was billed to the client as consultancy fees. As the interest and advisory fees charged from the clients have been offered for tax in earlier years, the conditions of section 36(2) are fulfilled. As the debts have also been written off, the same should be allowed as a deduction u/s 36(1) in view of the decision of the TRF Ltd. (2010 (2) TMI 211 - SUPREME COURT). The loans given to staff has been written off since the same are irrecoverable in view of transfer of the merchant banking business. The said loans are not taken over by M/s. Arthur Anderson. All the employees had either been taken over or resigned. Since these expenses have been incurred in the normal course of business,the said expenses qualifies as a business loss under section 28. Disallowance on account of pre-paid expense - Held that - It is an admitted fact that the assessee has discontinued the merchant banking business and has also sold off the intangible assets pertaining to the said business. Since these expenses are pertaining to the said business, the Ld.CIT(A) has correctly upheld the impugned addition as there is absolutely no basis for claim of deduction in respect of existing business of the assessee in the absence of any nexus with it. Against assessee. Disallowance of membership and subscription fees - Held that - Once the assessee paid the amount to a club for membership it is a payment once and for all resulting in an enduring benefit to the institution. The mere fact that assessee s representative, like the Managing Director s participation in the club promoted the assesse s business did not change the character of the payment which was made once and for all. See Punjab State Industrial Development Corporation Ltd. vs. CIT 1996 (12) TMI 6 - SUPREME Court . In these circumstances the expenditure was allowed under section 37(1). Moreover neither the AO nor the CIT(A) has gone into the factual matrix of the case for disallowing the claim of the assessee - the matter can be re- examined by the AO after obtaining the details and examining the justification in claiming the impugned expense as business expenditure. In favour of assessee for statistical purpose. Disallowance of depreciation on residential flats - Held that - The issue is covered against the assessee in A.Y. 1998-99 in his own case where the claim of the assessee for depreciation has been rejected. As the assessee has not brought any material differentiating the facts in relation to the assessment year under consideration ground is dismissed. Addition on account of income from house property - Held that - he issue is covered against the assessee in A.Y. 1998-99 in his own case where the claim of the assessee for depreciation has been rejected. As the assessee has not brought any material differentiating the facts in relation to the assessment year under consideration ground is dismissed.

Summary

Issues Involved:
1. Taxation of Rs. 25,00,000 received on transfer of intangible assets of merchant banking business.
2. Taxation of Rs. 1,00,00,000 received as non-compete fees.
3. Disallowance of bad debts amounting to Rs. 23,89,313.
4. Disallowance of prepaid expenses amounting to Rs. 3,86,243.
5. Disallowance of Rs. 5,53,000 on account of membership and subscription fees.
6. Disallowance of depreciation on residential flats amounting to Rs. 61,984.
7. Addition of Rs. 63,000 on account of income from house property.

Detailed Analysis:

1. Taxation of Rs. 25,00,000 Received on Transfer of Intangible Assets of Merchant Banking Business:
The assessee received Rs. 25,00,000 as consideration for the transfer of intangible assets of its merchant banking business and claimed it as a capital receipt. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] treated it as revenue receipt, taxed under business income. The ITAT analyzed the Transfer of Business Agreement and concluded that the amount was indeed for the transfer of business and contracts, and thus, should be treated as a capital receipt. The ITAT rejected the notion of the transaction being a sham or colorable device, stating that the assessee's business was discontinued, and the income post-transfer was mainly from dividends, sales of shares, and nominal consultancy charges, indicating a substantial fall in profit-earning capacity. Consequently, the receipt was classified as capital in nature and not taxable under the head of capital gains due to the absence of a cost of acquisition.

2. Taxation of Rs. 1,00,00,000 Received as Non-Compete Fees:
The assessee received Rs. 1,00,00,000 as non-compete fees for agreeing not to carry on merchant banking activities for three years. The AO and CIT(A) treated it as revenue receipt. The ITAT referred to the Supreme Court's decision in Guffic Chem (P.) Ltd. v. CIT, which held that non-compete fees received before 1-4-2003 were capital receipts and not taxable. The ITAT also noted that in the case of the Chairman Mr. Sankaran, the Tribunal had held that the non-compete fee was not liable to tax. Thus, the ITAT concluded that the non-compete fee received by the assessee was a capital receipt and not taxable under the Act.

3. Disallowance of Bad Debts Amounting to Rs. 23,89,313:
The assessee claimed bad debts amounting to Rs. 23,89,313, which the AO disallowed on the grounds that the debts were not established as bad. The ITAT reviewed the nature of the debts, which included amounts from the sale of leased assets, expenses incurred on behalf of clients, and interest and advisory fees offered for tax in earlier years. The ITAT concluded that the debts were incurred in the normal course of business and fulfilled the conditions of section 36(2) of the Act. Therefore, the bad debts were allowable as business losses.

4. Disallowance of Prepaid Expenses Amounting to Rs. 3,86,243:
The AO disallowed prepaid expenses amounting to Rs. 3,86,243, arguing that the business was transferred and there was no provision in the Act to debit prepaid expenses. The ITAT upheld the disallowance, noting that the expenses were related to the discontinued business and had no nexus with the existing business of the assessee.

5. Disallowance of Rs. 5,53,000 on Account of Membership and Subscription Fees:
The AO disallowed Rs. 5,00,000 towards the entrance fee of Madras Cricket Club and Rs. 33,000 towards the membership fee of Belverdere Club, stating they were not for business purposes. The ITAT referred to various judgments, including those of the Delhi High Court and Gujarat High Court, which allowed such expenses as business expenditures. However, the ITAT remanded the matter to the AO for re-examination to determine if the expenses facilitated the business efficiently and profitably.

6. Disallowance of Depreciation on Residential Flats Amounting to Rs. 61,984:
The AO disallowed depreciation on residential flats, stating they were vacant and not used for business purposes. The ITAT upheld the disallowance, following its earlier decision in the assessee's case for A.Y. 1998-99, where the claim for depreciation was rejected.

7. Addition of Rs. 63,000 on Account of Income from House Property:
The AO treated the flats as deemed to be let out and assessed the income from house property at Rs. 63,000. The ITAT upheld this addition, following its earlier decision in the assessee's case for A.Y. 1998-99.

Conclusion:
The appeal filed by the assessee was partly allowed, with the ITAT providing relief on the issues of the Rs. 25,00,000 received on transfer of intangible assets and the Rs. 1,00,00,000 received as non-compete fees, while upholding the disallowances and additions on other grounds. The matter regarding membership and subscription fees was remanded to the AO for further examination.