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TMI Blog2018 (1) TMI 926X X X X Extracts X X X X X X X X Extracts X X X X ..... sed. - ITA No. 2286/PUN/2014 - - - Dated:- 10-1-2018 - Shri D. Karunakara Rao, AM And Shri Vikas Awasthy, JM Assessee by : Shri R. Murlidhar Revenue by : Shri Rajeev Kumar ORDER Per Vikas Awasthy, JM This appeal by the Revenue is directed against the order of Commissioner of Income Tax (Appeals)-V, Pune dated 25-09-2014 for the assessment year 2005-06 passed u/s. 154 of the Income Tax Act, 1961 (hereinafter referred to as the Act ). 2. The brief facts of the case as emanating from records are: The assessee company is engaged in the manufacture and sale of Air and Gas Compressors, manufacture of Mining equipments and Industrial tools. The assessee entered into agreement dated 21-04-2002 to sell its shares in Revathi Equipment Limited (in short Revathi ) to Utkal Investments Ltd. (in short Utkal ). The consideration received by the assessee from sale of shares of Revathi to Utkal was offered to tax in return of income for the assessment year 2003-04 as Capital Gains. Subsequent, to the execution of Share Purchase Agreement , the assessee entered into Non-solicitation Agreement and Non-compete Agreement, both dated 05-08-2002 with Revathi. In lieu of ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 144 of the Act allowed the claim of assessee. Thereafter, the Assessing Officer initiated proceedings u/s. 154 of the Act to disallow the compensation paid by assessee aggregating to ₹ 22.5 crores to Revathi and Utkal claimed as revenue expenditure. In proceedings u/s. 154 the Assessing Officer held the aforesaid payments are capital in nature and disallowed the same. Aggrieved by the order dated 31-03-2013, passed u/s. 154 the assessee filed appeal before the Commissioner of Income Tax (Appeals). In first appeal, the assessee assailed the action of Assessing Officer in invoking the provisions of section 154 for making such disallowance. Apart from challenging disallowance on ground of jurisdiction, the assessee assailed disallowance on merits, as well. The Commissioner of Income Tax (Appeals) vide impugned order accepted the appeal of assessee on the ground of jurisdiction alone. The Commissioner of Income Tax (Appeals) held that the Assessing Officer exceeded his authority in invoking the provisions of section 154 of the Act for making such disallowance. Against the findings of Assessing Officer the Revenue is in appeal. 3. The solitary ground raised by the Department in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sues are- (a) Whether, under the aforesaid facts and circumstances of the case of the assessee 1company, rectification order u/s. 154 of the Act was justified and tenable as per law, and (b) Whether, under the aforesaid facts and circumstances of the case of the assessee company, the compensation paid for termination of non- compete /non-solicitation agreements to Revathi of ₹ 15 Crores and Utkal towards termination of share purchase agreement (SPA) of ₹ 7.50 Crores could be treated as capital expenditure, denying the assessee's claim of the same as revenue expenditure. 10. (a) Whether , under the aforesaid facts and circumstances of the case of the assessee company, rectification order u/s. 154 of the Act was justified and tenable as per law. (i) The issue had been decided by the Hon'ble Supreme Court in the case of Assistant Commissioner of Income Tax, Rajkot Vs. Saurashtra Kutch Stock Exchange Ltd., [2008] 305 ITR 227 (SC) /[2008] 173 Taxman 322(SC). In this case while deciding the core issue as to whether non consideration of a decision of jurisdictional Court or of the Supreme Court can be said to be a mistake apparent from the reco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment based upon and interpretation or application of law which is ultimately found to be wrong in the light of judicial pronouncement rendered subsequently, discloses a mistake apparent from the records. When the Courts decide a matter it does not make the law in any states, but all it does is that it interprets the law and states what the law has always been and must be understood to have been. When an order is made by an authority on the basis of a particular decision, the reversal of such decision in further proceedings will justify a rectification of the order based on the decision. A subsequent binding decision of the Supreme Court or of the High Court has retrospective operation and overruling is always retrospective- The decision which is overruled was never the law- To apply of subsequent decision of Supreme Court / Jurisdictional High Court, rectification can be made. The above has been decided by a number of High Courts as below- i. Kil Kotagiri Tea and Copy Estates Co. Ltd. Vs. ITAT ( Ker) 174 ITR 579, ii. Mysore Cements Ltd. Vs. Dy. Com. Of Commercial Taxes (Kar) 116 CTR 284, iii. CIT Vs. Alankar BVorewells (Mad.) 177 CTR 560, iv. Pershuram Pottery W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o- seller of shares with Chicago Pneumatic Tool Company, and USA based company (hereinafter CP) with Utkal Investment Ltd. (hereinafter purchaser), it is noticed that as per clause 'E', page 3 of the agreement the sellers had agreed to sale to the purchaser the shares held by the sellers in the company and the purchaser had agreed to purchase the shares. As per clause 6.3.1 (g), it was decided as below- A meeting of the Board shall be held to register the transfer of the CP shares in favour of the Purchase if the same has not been dematerialized and accepting the resignation of directors as provided in sub clause (e) above, approving the appointment of such persons, as the purchase may nominate, to be directors of the Company and thereafter considering and if thought fit, approving a non-compete agreement to the entered into by the Company with the sellers in the form attached herein in Schedule 6.3.1(g) (The Non-Compete Agreement) ; From the above, it is very much clear that in pursuance to the above mentioned share purchase agreement, the Board of Directors of the appellant company had to register the transfer of the CP shares in favour of the purchaser and for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made /compensation paid for termination of non-compete/non-solicitation agreements were, therefore, capital expenditure in nature and could not be claimed as revenue expenditure, as has been allegedly claimed by the appellant. B. Analyses of the Non-Compete Agreement with Revathi Equipment Ltd. dated 17/08/2008. 11.2 Now, from the Agreement dated 17/08/2002 entered into by and between the appellant company Atlas Copco India Ltd. (hereinafter Atlas) and with Chicago Pneumatic Tool Company, and USA based company (hereinafter CP) with Revathi Equipment Ltd. (hereinafter REL). It is seen that Atlas and CP together held 12.80,200 equity shares of ₹ 10 each fully paid up in REL constituting 39.88% of the total paid up capital of REL and had transferred their entire shareholding in REL to Utkal Investment Ltd. and consequent to their divestment in REL, Atlas and CP had agreed not to solicit customers and employees of REL on the terms provided in this Agreement (Clause B C, page no. 2). Restrictions have also been imposed vide Article-2, page no. 3 of the said agreement wherein in clause 2.2 it has been enumerated as below- 2.2 In the event that CP group o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay the appellant company that is Atlas a sum of ₹ 1 crore as non-compete sum. Therefore, since the entire payment of compensation for termination of non-compete/non-solicitation agreement dealt with the transaction capital in nature, any payment made for this purpose by the appellant company could not be claimed as revenue expenditure and, therefore, as the appellant failed to disclose the true and correct income in the return of income filed and such an assessment was made u/s. 143(3) of the Act, subsequently in pursuance to the decisions of the Hon'ble Courts holding that such payments were capital in nature, a rectification order u/s. 154 of the Act could be passed by the Assessing Officer rectifying such a mistake as an apparent mistake. 4.1 The various case laws on which the ld. DR placed reliance are as under : i. Commissioner of Income Tax Vs. Coal Shipments (P.) Ltd., 82 ITR 902 (SC); ii. Kettlewell Bullen Co. Ltd. Vs. Commissioner of Income Tax, 53 ITR 261 (SC); iii. Commissioner of Income Tax Vs. Best and Co. (Private) Ltd., 60 ITR 11 (SC); iv. Assistant Commissioner of Income Tax Vs. Saurashtra Kutch Stock Exchange Ltd., 305 ITR 227 (S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven at the time of scrutiny assessment proceedings u/s. 143(3) of the Act. Such proceedings are enormously outside the scope of section 154 of the Act, therefore, the Assessing Officer has clearly exceeded jurisdiction u/s. 154 of the Act. The ld. AR contended that powers of Assessing Officer under the provisions of section 154 are limited to rectify the mistake apparent from record. The ld. AR pointed that the Hon ble Supreme Court of India in the case of T.S. Balaram, ITO Vs. Volkart Bros. reported as 82 ITR 50 has explained the meaning of mistake apparent from record . The ld. AR submitted that the Hon ble Apex Court has held that a mistake apparent from record must be an obvious and patent mistake and not something which can be established by a long-drawn process of reasoning to points on which there may be conceivable two opinions. A decision on a debatable point of law is not a mistake apparent from the record. To further strengthen his submissions the ld. AR placed reliance on the following decisions : i. Mepco Industries Ltd. Vs. Commissioner of Income Tax, 185 Taxman 409 (SC); ii. Commissioner of Income Tax Vs. Nathpa Jhakri Joint Venture, 358 ITR 233 (Bom); ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Tax, 299 ITR 92 (P H); iv. Commissioner of Income Tax Vs. S.A. Builders (P.) Ltd., 299 ITR 88 (P H). The ld. AR submitted that thus, in view of the facts of the case and various case laws the action of Assessing Officer in making disallowance of expenditure towards payment of compensation holding it to be capital in nature is beyond the scope of proceedings u/s. 154 of the Act. The ld. AR prayed for upholding the order of Commissioner of Income Tax (Appeals) and dismissing the appeal of Revenue. 6. We have heard the submissions made by the representatives of rival sides and have perused the orders of the authorities below. We have also considered various decisions on which rival sides have placed reliance to support their respective contentions. The first issue before us is, Whether the Assessing Officer is justified in assuming jurisdiction u/s. 154 of the Act to make addition of ₹ 22.50 crores in respect of payment of compensation for violating the terms and condition of non-solicitation and non-compete agreements. 7. Before proceeding with the issue it would be relevant to mention the provisions of section 154 of the Act : 154. [(1)] With a view to re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re as a capital in nature. Facts on record clearly indicate that the proceedings u/s. 154 have been initiated by the Assessing Officer merely on account of change of opinion. The law does not permit the Assessing Officer to assume jurisdiction u/s. 154 to impress upon his change of opinion. The scope of section 154 is very narrow. The provisions of section permits Assessing Officer only to rectify the mistake apparent on record. 10. Both the sides have placed on record various decisions supporting their respective view. We find that in some cases non-compete fee has been held to be capital in nature, whereas, there are other set of cases where non-compete fee has been held to be revenue expenditure. This of course results in making the issue debatable. The Jodhpur Bench of the Tribunal in the case of Banswara Syntex Ltd. Vs. Assistant Commissioner of Income Tax reported as 108 ITD 48 has held that a decision on debatable point of law is not mistake apparent from record. 11. The 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 cas ..... X X X X Extracts X X X X X X X X Extracts X X X X
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