2015 (6) TMI 25 - AT - Income Tax

Disallowance of compensation paid to M/s L&T - compensation for not honouring its commitment for procuring seat frame and trim covers from Vendors - revenue v/s capital expenditure - CIT(A) deleted the disallowance - Held that - The nature of payment under settlement is with respect to supplies by vendors to the assessee which are inherently in revenue field. While we have noted that the A.O. has alleged that the assessee company was certainly benefited by enduring nature by the virtue of this agreement. We are unable to see any factual support for this allegation. As the ld. CIT(A) has rightly noted, the existence of such an enduring benefit was merely a presumption and based on nothing on record to demonstrate any such enduring benefit. As to whether the payment is capital or revenue is determined by the purpose for which the payment is made and when, as in this case, the payment is clearly relatable to the revenue field such as supplies by vendors, the purpose of payment is clearly revenue in nature. In these circumstances, unless there is any cogent material or evidence to demonstrate that the payment is capital field, the expenditure in question required to be treated as revenue expenditure. As we have mentioned earlier, there is nothing on record whatsoever, to suggest that the assessee derived any enduring benefit by making the payment for this compensation. Hence the payment in question having been made to enhance the supplies and in connection with supplies receipt during the normal course of business, was revenue in nature. - Decided in favour of assesse.

Summary

Issues Involved:
Challenge to correctness of CIT(A)'s order on disallowance of compensation paid to M/s L&T under section 143(3) of the Income Tax Act, 1961 for the assessment year 2004-05.

Detailed Analysis:

1. Disallowance of Compensation Payment:
The Assessing Officer challenged the deletion of disallowance of Rs. 4 Cr. claimed as compensation paid to M/s L&T by the appellant. The AO argued that the payment was not admissible under section 37(1) and should be treated as capital expenditure. The AO contended that the appellant benefited from the cessation of the agreement and eliminated competition, indicating an enduring benefit. The AO based the decision on the vague terms of the agreement and lack of clarity on actual dues to substantiate the compensation. The AO considered the payment as capital expenditure due to the enduring benefit derived by the appellant.

2. CIT(A)'s Decision:
The CIT(A) upheld the appellant's contentions, reversing the AO's stand. The CIT(A) determined that the compensation paid to the vendor should be treated as revenue expenditure. The CIT(A) observed that a substantial amount was paid for supplies made by the vendor, which was part of the trading account, not capital expenditure. The CIT(A) found the AO's conclusions based on presumptions and conjectures, noting that the appellant did not generate any new capital asset post the cessation of the agreement. The CIT(A) emphasized that the payment was made to eliminate a disadvantageous situation, not to gain an enduring benefit, and hence, considered it a revenue expenditure.

3. Tribunal's Decision:
The Tribunal reviewed the facts and legal aspects of the case. It noted the commercial expediency of the compensation paid to the vendor. The Tribunal focused on whether the expenditure could be treated as revenue or capital in nature. It found that the payment was related to supplies by the vendor and was not supported by any enduring benefit to the appellant. The Tribunal agreed with the CIT(A) that the payment was made to enhance supplies during the normal course of business, indicating a revenue nature. Therefore, the Tribunal upheld the CIT(A)'s decision to delete the disallowance of the compensation payment.

In conclusion, the Tribunal dismissed the appeal, affirming the CIT(A)'s order in considering the compensation payment as a revenue expenditure allowable under section 37(1) of the Income Tax Act, 1961.