2018 (1) TMI 926 - AT - Income Tax

Rectification of mistake u/s 154 - addition in respect of payment of compensation for violating the terms and condition of non-solicitation and non-compete agreements - whether payment towards non-solicitation and non-compete agreements is revenue in nature? - Held that - Powers conferred u/s. 154 on the Assessing Officer are limited only to rectify the patent mistakes. The Assessing Officer cannot use the canon of section 154 to review its decisions. In the instant case the Assessing Officer has exercised his power u/s. 154 not to rectify any mistake but to thrust his changed opinion. This cannot be permitted under the provisions of section 154 of the Act. The Assessing Officer does not have unfettered powers under the section to play with the assessment of assessee. We do not find any infirmity in the order of Commissioner of Income Tax (Appeals) in rejecting the action of Assessing Officer for making addition. Thus, we concur with the findings of Commissioner of Income Tax (Appeals). Accordingly, the impugned order is upheld and the appeal of Revenue is dismissed.

Summary

Issues Involved:
1. Whether the rectification order u/s. 154 of the Income Tax Act was justified and tenable as per law.
2. Whether the compensation paid for termination of non-compete/non-solicitation agreements could be treated as capital expenditure, denying the assessee's claim of the same as revenue expenditure.

Issue-wise Detailed Analysis:

1. Justification and Tenability of Rectification Order u/s. 154:
The core issue was whether the Assessing Officer (AO) was justified in invoking section 154 to rectify the assessment order by treating the compensation paid as capital expenditure instead of revenue expenditure. The AO initially allowed the assessee's claim of ?22.5 crores as revenue expenditure in the assessment order dated 24-12-2008. However, the AO later initiated rectification proceedings u/s. 154, arguing that the compensation was capital in nature and thus disallowed it.

The Tribunal emphasized that the scope of section 154 is limited to rectifying "mistake apparent from record," which must be an obvious and patent mistake, not something that requires extensive reasoning or debate. The Tribunal referred to the Hon'ble Supreme Court's decision in T.S. Balaram, ITO Vs. Volkart Bros., which held that a debatable point of law is not a mistake apparent from the record. The Tribunal found that the AO's action was based on a change of opinion rather than a clear mistake apparent from the record. Therefore, the AO exceeded his authority under section 154.

2. Nature of Compensation Paid for Termination of Agreements:
The second issue was whether the compensation paid for termination of non-compete/non-solicitation agreements was capital or revenue expenditure. The AO argued that such payments are capital in nature, relying on various judicial precedents and the CBDT's Circular No. 68. The AO contended that the payments originated from transactions involving capital assets (shares), thus making the compensation capital expenditure.

The assessee, on the other hand, argued that the payments were made to release the company from restrictive covenants, enabling it to conduct business more freely and profitably. The assessee claimed that no new asset was created, and the payments were for removing business obstacles, thus should be treated as revenue expenditure. The Tribunal noted that there are conflicting judicial precedents on whether non-compete fees are capital or revenue expenditure, making the issue debatable.

Conclusion:
The Tribunal upheld the Commissioner of Income Tax (Appeals)'s decision, which found that the AO's action under section 154 was beyond his authority as the issue was debatable and not a clear mistake apparent from the record. Consequently, the Tribunal dismissed the Revenue's appeal, maintaining that the AO cannot use section 154 to change his opinion on the nature of the expenditure. Since the jurisdictional issue was upheld, the Tribunal did not delve into the merits of whether the compensation was capital or revenue expenditure.