2019 (5) TMI 548 - HC - Income Tax

Payment of compete fee - nature of expenditure - revenue or capital expenditure - HELD THAT - The payment of non-compete fee was held to be allowable as revenue expenditure. See 2018 (8) TMI 1803 - PUNJAB AND HARYANA HIGH COURT Expenses on account of expansion of business of healthcare division and expansion of Maxxon business, Max Foil Division - HELD THAT - Expenses incurred for starting entirely different line such as health care division and for expansion of business are revenue expenditure. See M/S MAX INDIA LTD. 2016 (1) TMI 784 - PUNJAB AND HARYANA HIGH COURT Disallowance of speculation loss in trading of shares - Explanation to Section 73 - conversion of stock into investment - HELD THAT - . The CIT(A) decided the issue in favour of the assessee by holding that the assessee was at liberty to classify shares received on amalgamation as stock in trade or investment. The Tribunal held the aforesaid conversion from stock in trade to the investment as valid and upheld the order of the CIT(A) treating the loss on sale of investment arising in the assessment year 2001-02 as not speculative business loss. Explanation to Section 73 of the Act invoked by the Assessing Officer was held to be not applicable in relation to sale of investments in the appeal for the assessment year 2001-02. Learned counsel for the appellant-revenue has not been able to show that the findings recorded by the Tribunal are illegal, erroneous or perverse warranting interference by this Court. - answered in favour of the assessee Signing of negative covenant for not carrying out a speciality business - whether it does not amount to transfer of right to carry on business, the consideration of which is liable to be taxed as capital gain - AO held that since the assessee extinguished its right to re-enter the market of plating chemicals and process for general metal finishing and electronics plating for consideration, the same amounted to transfer of right to carry on business and therefore the amount of consideration received was liable to be taxed under the head capital gains - CIT(A) held that undertaking a restrictive convenant not to carry on business without transfer of any business was not in the nature of right to carry on business to be regarded as transfer of capital asset - CIT(A) held non compete fees received as capital receipt not exigible to tax under the provisions of the Act - HELD THAT - Identical issue was considered by the Tribunal in assessee s own case for the assessment year 1998-99 and the Tribunal held that taking over a restrictive obligation did not amount to transfer of right in any business and therefore non compete fee could not be considered as resulting in capital gains. Even Section 55(2)(a) of the Act which was prospective in nature was not held to be applicable to the facts of the present case in the absence of any capital asset being transferred by the assessee in lieu of which the assessee had received the impugned amount of non compete fee. Learned counsel for the appellant has not been able to show that the findings recorded by the Tribunal are illegal or perverse warranting interference by this Court. - answered in favour of the assessee

Issues Involved:
1. Whether payment of non-compete fee is a revenue expenditure and an allowable deduction.
2. Whether expenses incurred for starting a different line of business and for business expansion are revenue expenditures.
3. Whether the conversion of stock into investment to escape provisions of Explanation to Section 73 of the Income Tax Act is valid.
4. Whether the selective conversion of shares resulted in undue benefit and tax avoidance.
5. Whether subsequent losses on the sale of investments are regular losses.
6. Whether signing a non-compete agreement amounts to the transfer of the right to carry on business and is taxable as capital gain.
7. Whether legal and professional expenses are allowable when the assessee fails to discharge its onus with respect to the rendering of services by the payee.
8. Whether no expense is attributable to exempted income under Section 14A, ignoring indirect expenses.

Detailed Analysis:

1. Non-Compete Fee as Revenue Expenditure:
The court addressed whether the payment of a non-compete fee is a revenue expenditure and an allowable deduction. This issue was previously settled against the revenue by the court in ITA No. 193 of 2013, where it was held that the payment of non-compete fees is allowable as revenue expenditure.

2. Expenses for New Business Lines and Expansion:
The court examined whether expenses incurred for starting a new line of business and for business expansion are revenue expenditures. This issue was also previously decided against the revenue in ITA No. 426 of 2010, where such expenses were held to be revenue expenditures.

3. Conversion of Stock into Investment:
The court discussed the conversion of stock into investment to escape the provisions of Explanation to Section 73. The assessee-company had converted shares from stock in trade to investment and claimed a loss on the difference in market value. The Assessing Officer disallowed this, but the CIT(A) and Tribunal upheld the conversion as valid. The court referenced multiple cases, including CIT vs. Yatish Trading Co. Pvt. Ltd., which upheld such conversions as legitimate and not motivated by tax evasion.

4. Selective Conversion and Tax Avoidance:
The court reviewed whether the selective conversion of shares resulted in undue benefit and tax avoidance. It was held that the conversion cannot be deemed a device for tax evasion, and the assessee's prerogative to classify shares as stock in trade or investment was upheld. The court cited the decision in Express Securities Pvt. Ltd., which supported the legitimacy of such conversions.

5. Subsequent Losses on Sale of Investments:
The court evaluated whether subsequent losses on the sale of investments are regular losses. It was determined that losses from the sale of investments, including those converted from stock in trade, are not speculative business losses and are allowable as capital losses. This was supported by the Tribunal's findings and various case laws.

6. Non-Compete Agreement and Capital Gains:
The court addressed whether signing a non-compete agreement amounts to the transfer of the right to carry on business and is taxable as capital gain. The assessee had received a non-compete fee, which was claimed as a capital receipt not liable to tax. The Tribunal held that taking on a restrictive obligation does not amount to the transfer of a right in any business, and such fees are not taxable as capital gains. The court referenced Guffic Chem. P. Ltd vs. CIT, where the Supreme Court held that non-compete fees received before April 1, 2003, were capital receipts and not taxable under the Income Tax Act.

7. Legal and Professional Expenses:
In ITA No. 189 of 2013, the additional question of whether legal and professional expenses are allowable when the assessee fails to discharge its onus was addressed. The issue was settled by the court in ITA No. 186 of 2013, where such expenses were held to be allowable.

8. Expenses Attributable to Exempt Income:
In ITA No. 191 of 2013, the court considered whether no expense is attributable to exempted income under Section 14A, ignoring indirect expenses. This issue was resolved in ITA No. 190 of 2013, where it was held that indirect expenses are attributable under Section 14A.

Conclusion:
All the issues raised by the revenue were dismissed, and the appeals were decided in favor of the assessee. The court upheld the findings of the Tribunal and CIT(A), affirming the legitimacy of the assessee's claims and conversions, and ruled that the non-compete fees and other expenses were correctly treated as capital receipts or allowable deductions.

← Previous Next →