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TMI Blog2013 (5) TMI 605X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 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 deb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y decision which again defies all logic it is not understandable why the business was transferred for a negligible sum of Rs 25 lakh while the non-compete fee was worked out at Rs 1 cr. 6.1 It may be stated here that in a recently reported decision hon'ble Karnataka High Court in the case of CIT vs Tata Coffee Ltd (2009) 29 DTR 336 (Kar) (AY 1995-96) on identical facts has held that compensation paid towards not carrying on the business activity of the assessee whereby it would be deprived of the revenue that may accrue from carrying on the business, is revenue receipt. Here also the assessee sold its assets etc to one company and as per agreement, the assessee was restrained from manufacturing and selling time pieces for a period of ten years. It was found that the assessee was carrying on several businesses and had sold only one unit while continuing with others, there was no loss of income and therefore, non compete fee was revenue in nature. In yet another case of Tam Tam Pedda Guruva Reddy vs JCI (2007) 291 ITR 44 (Karn), involving construction business where restrictive covenant between the assessee and newly formed limited company was involved. The assessee had disclosed r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subscribed $50 million to the new shares issued by the Transferee Company. The Transferor surrendered its SEBI License on or before the Effect Date i.e. the date on which the transferee received the SEBI license for merchant banking business. The transferor surrendered its SEBI License for merchant banking on 4/12/2000 and the Transferee received its SEBI license for merchant banking on 29/12/2000 which is the "Effective Date". The Transferor has changed its name to IGFT Ltd from Ind Global Financial Trust Ltd and has ceased to use its trademark and transferred the same to the Transferee. For the transfer of the business, the assessee/transferor received the above amount from the Transferee. All above acts have been performed according to the terms and conditions set out in the Transfer of Business Agreement signed by Inc Global Financial Trust Ind (Transferor), Mr. R. Sankaran, Managing Director of the Transferor and Ind Global Corporate Finance Pvt. Ltd. (Transferee) Arthur Andersen Associates, a partnership firm. The said agreement has been signed on 7/12/2000. 2.3 Before us, the Ld.AR has advanced the arguments on the basis of a written submission filed before us and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rts. d) In CIT v. Brithis India Corp. Ltd. 165 ITR 51 (SC) , the issue was as to whether expenditure on technical know-how was revenue expenditure. 7) Decisions relied on by CIT (A) are not applicable to the facts of the appellant's case as in the said cases, only one of the business had been transferred and not the sole and main business. In the case of the appellant, the sole and main business or revenue earner i.e. merchant banking was discontinued. 8) Decision of the hon'ble Supreme Court in the case of McDowell Co. (supra) was considered by the hon'ble Supreme Court in the case of Union of India v. AzadiBachaoAndolan (2003) 263 ITR 706 (SC) and Vodafone International Holdings B. V. v. UOI (2012) 341 ITR (SC), wherein the hon'ble Supreme Court has held that tax planning within the frame work of law is permitted. 9) After discontinuing the merchant banking activities, appellant company did not have any active source of income and its income consisted of income mainly from dividend from shares and mutual funds, profit on sale of shares, interest income and nominal consultancy charges (Refer chart on pate 362). Hence, there was a substantial fall in in profit earning of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eree) has claimed depreciation considering the amount of Rs 25 lakhs as technical know how, which has been rejected by hon'ble Tribunal holding that the payment of Rs.25 lakhs was for transfer of business and contracts. The relevant findings of the Tribunal are extracted hereunder: "We have carefully considered the various aspects of the matter. We find from perusal of the transfer of business agreement that the payment of Rs.25.00 lacs had been made for the sale and transfer of business and contracts as mentioned in para 2.2 of the agreement. The word "business" has been defined in para 1.3 to mean the employees, customer and client relationship, customer and client list, certain know-how related to merchant banking business of the transferor but did not include the excluded assets, the creditors and liabilities. It is thus, clear that the payment had been made for the transfer of business and contracts which included customer and client relationship. Though the definition of "business" referred to certain know-how but there is no material to show that any part of the payment was related to any know-how which can be considered as an intangible asset for the purpose of section 32 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tangible asset as defined in section 32(1)(ii) on which depreciation can be allowed. Since we have held that payment was neither for know-how nor for goodwill, the various decisions relied upon by the assessee in para 5.1 and 5.2 are not applicable. We, therefore, see no infirmity in the order of CIT(A) confirming the disallowance and the same is therefore, upheld". The aforementioned discussion clearly establishes that the assessee has received Rs.2.5 million (Rs.25 lacs) as consideration for transfer of the business and contracts. In view of that matter, we do not find any justifiable reason on the part of the authorities below to consider the transaction as sham which involves colourable device. 2.4.1 The perusal of the order of the Ld.CIT(A) raises various issues which are also to be decided for the sake of completeness. Firstly, whether the amount of Rs. 25 lakh is in the nature of compensation to the assessee received in the course of carrying on business activity and has resulted in no loss of capital structure. It is pertinent to mention that according to the judgement of Calcutta High Court in CIT v. Siewart Dholakia (P.) Ltd. [1974] 95 ITR 573 (Cal), compensation to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aise any issue on the adequacy of consideration. Fourthly, as to the applicability of the decision of Karnataka High Court in the case of CIT vs Tata Coffee Ltd (2009) 29 DTR 336 (Kar) relied on by the Ld.CIT(A), the Karnataka High Court has treated the non-compete fees received by the vendor as a revenue receipt for the reason that the discontinuance of the unit has not resulted in the loss of enduring trading asset. Same is the position with the other cases relied by the Ld.CIT(A). However, in the instant case, The perusal of the details available at page 362 of the paper book clearly reveals that after discontinuing the merchant banking activities, assessee company did not have any active source of income and its income consisted of income mainly from dividend from shares and mutual funds, profit on sale of shares, interest income and nominal consultancy charges Hence, there is a substantial fall in profit earning of the assessee after entering into non-compete agreement. As per the relevant agreement, 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 relation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to be sham. 3) On the basis of the very same Transfer of Business Agreement, Ind Global Finance P. Ltd. had claimed depreciation considering the amount of Rs. 25 lakhs as technical know how, which has been rejected by hon'ble Tribunal in (2012) 19 ITR (Trib) 483 (Mum) holding that the payment of Rs. 25 lakhs was for transfer of business and contracts as mentioned in paragraph 2.2 (Refer page 497 of decision). 4) Hon'ble Special Bench of the Tribunal has in the case of ACIT v. Dr. B.V. Raju (2012) 135 ITD (Hyd) (SB) held that prior to amendment to section 55 (2)(a) w.e.f. 1.4.2003, the amount received on transfer of right to carry on business could not be taxed u/s 45. 5) The decisions relied on the AO are not applicable to the facts of the appellant's case (Refer submissions before CIT(A) at pages 193 and 194 of paper book): a) In CIT v. Dr. R. L. Bhargawa (2001) 256 ITR 42 (Del), in addition to use of technology, the assessee therein was also required to render certain services. As there was no absolute parting of technical knowhow, it was held that receipt was a revenue receipt. b) In CIT v. Ralliwolf Ltd. 143 ITR 720 (Bom), the receipt of shares in consideration of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13) The appellant therefore prays that the sum of Rs. 100 lakhs may be held to be a capital receipt not liable to tax. On the other hand, the Ld.DR has relied on the orders of the AO and the Ld.CIT in support of the Revenue's case. 3.3 At the out set, it is relevant to point out that the Hon'ble Supreme Court in the case of Guffic Chem (P.) Ltd. V. CIT [332 ITR 602 (SC)] has held as follows: "Payment received as non-competition fee under a negative covenant was always treated as a capital receipt till the assessment year 2003-04. It is only vide Finance Act, 2002 with effect from 1-4-2003 that the said capital receipt is now made taxable [See : Section 28(va)]. The Finance Act, 2002 itself indicates that during the relevant assessment year compensation received by the assessee under non- competition agreement was a capital receipt, not taxable under the 1961 Act. It became taxable only with effect from 1-4-2003. It is well-settled that a liability cannot be created retrospectively. In the present case, compensation received under Non-Competition Agreement became taxable as a capital receipt and not as a revenue receipt by specific legislative mandate vide section 28(va) an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plicable in this case. Moreover the amounts have been received as non compete fees which is a capital receipt not taxable. Though no compete fees has been made taxable under section 28(va) but the said provisions is applicable only from assessment year 2003-04 and was not applicable in the relevant years. This view is supported by the decision of Amrutsar Bench of Tribunal in case of T.S. Manocha (5SOT 277) and several other decisions of Tribunal. We therefore see no infirmity in the order of CIT(A) deleting the additions made by the AO and the same are upheld". 3.3.1 We also find merits in the contention of the assessee that the decisions relied on by Ld.CIT(A) are not applicable to the facts of the assessee's case as in the said cases only one of the businesses had been transferred and not the sole and main business. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee has to written off the amount in the books of accounts. 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 the Hon'ble Rajasthan High Court in the case of CIT v. Anjani Kumar Co. Ltd. (2003) 259 ITR 114 (Raj) wherein it has been held that advance for acquiring land to set up factory being lost, is allowable as business loss. (ii) The assessee has claimed the expenses on behalf of clients to the tune of Rs.2,59,167/- in the normal course of business. (iii) With respect to the bad debt pertaining to Ind Global Asset Management Fund Ltd.- Ind Global Trusteeship Ltd.- Rs.6,16,297/- Rs.1,12,691/- respectively, the assessee has incurred the above expenses for the companies promoted by it. These companies have been promoted as its subsidiaries to carry on the business incidental to the main business of the assessee. Since these companies have not started any activity and is in the process of winding up, the amount is claimed as bad debts. Thus, these expenses have been incurred in the normal course of business, in our view, the said expenses qualifies as a business loss under sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrent year and hence, the AO rectified his order to that effect and allowed relief of Rs.1,66,667/-. Hence, the disallowance was restricted to Rs.3,86,243/-. The break up of the said prepaid expenses amounting to Rs.3,86,243/- is as follows: Insurance Rs. 3,530 Repairs and Maintenance Rs. 9.021 Membership and Subscription Rs. 45,459 Office Upkeep Rs. 1,800 SEBI Fees paid on 16/03/2000 Rs. 5,00,000 Less: Claimed for year ending 31.03.2000 Rs. 6,900 Less: Allowed by AO u/s. 154 Rs. 1,66,667 Rs.3,26,433 Total Rs. 3,86,243 On appeal, the Ld.CIT(A) confirmed the disallowance made by the AO. Aggrieved by the impugned decision, assessee has raised this ground in the appeal before us. 7.2 Before us, the Ld.AR has stated that since the business has been transferred and sold off of the intangible assets pertaining to the business, the assessee could no more get the benefit of the expense in the subsequent years. Hence, the amount was allowable as loss in the current year. Since the amounts were incurred in the normal course of business and they ceased to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Bombay High Court) 195 ITR 682 b. ACIT v. Jyoti Industries (ITA No. 1567/Mum/1998) c. DCIT v. LN Engineering Works Private Limited (ITA No 1484/Mum/1999) On the other hand, the Ld.DR has relied on the orders of the AO and Ld.CIT(A). 8.3 We have heard both the parties on this ground and perused the material on record. In order to allow the expenditure, what is required to be seen is whether the expenditure has resulted into an advantage in the revenue field or in the capital field. In the case the expenditure has not resulted in creation of any capital asset or any new source of income and it has not been changed the capital structure of the company and had been incurred only for conduct of the business more efficiently and profitably then it will be revenue expenditure. The judgment of Hon'ble Bombay High Court in the case of Otis Elevators Co. (India) Ltd. 195 ITR 682 has held that where the issue was with reference to the reimbursement of expenditure spent in the club and not the fee paid for obtaining the membership. However, there is a judgment of the Hon'ble Gujrat High Court in the case of Gujarat State Export Corporation Ltd., 209 ITR 649 in which the lump sum entra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9. Ground No J relates to disallowance of an amount of Rs.61,984/- on account of depreciation on residential flats. 9.1 The assessee had given certain assets on lease to Singhal Swaroop Ispat Limited. As the said party defaulted in payment of lease rentals, the lessee transferred 3 flats at Mira Road and a motor car to the assessee in lieu of the lease rentals. The assessee had claimed that the said flats were used purpose of the business and hence claimed depreciation on these flats. The AO disallowed the depreciation on these flats following the decision of his predecessor in A.Y. 1998-99. The AO in A.Y. 1998-99 had held that the flats were vacant and hence, depreciation was not allowable. The Ld.CIT(A) confirmed the order of the AO. Aggrieved by the said decision, the assessee has raised this ground in the appeal before us. 9.2 At the outset, it is observed that the issue is covered against the assessee in A.Y. 1998-99 by the order of the ITAT in ITA No 2950/Mum/2004 in the assessee's 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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