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TMI Blog2006 (9) TMI 146X X X X Extracts X X X X X X X X Extracts X X X X ..... n to say that in the case of a cash credit entry in the books of account of the assessee it is necessary for the assessee to prove not only the identity of the creditors but also the capacity of the creditors to advance money and the genuineness of the transactions. Thus, we are of the view that the finding of the authority that the said amount is unexplained income cannot be accepted. Therefore we deem it proper to answer the first question of law in 1992-93 in favour of the assessee. Taxability towards restrictive covenant - HELD THAT:- We are of the view that the finding of the Tribunal has to be accepted in the case on hand. Material facts would show that this agreement has been entered into between Tam Tam Pedda Guruva Reddy Constructions (P) Ltd., and Tam Tam Pedda Guruva Reddy. Though restrictive covenant may not always be a negative factor, the facts of this case would show that it is nothing but an income for the purpose of levy of tax. Details with regard to construction are not forthcoming in the agreement and in addition, it cannot be strictly a covenant agreement as understood in law. In fact, Tam Tam Pedda Guruva Reddy had created the Tam Tam Pedda Guruva Reddy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lant approached the Tribunal. The Tribunal also gave a partial relief. 2. The appellant is aggrieved in the matter of addition of Rs. 2,87,000/- pertaining to the credit in the name of Sri Raja Reddy. He is also aggrieved by the addition of Rs. 1,51,869/-. He is further aggrieved by the addition under section 40A(3) of the Act in terms of the proceedings in the case on hand. 3. The appellant filed return of income for the year 1994-95 and assessment order was passed on January 31, 1997, and an unsuccessful appeal was filed. Thereafter, the appellant moved the Tribunal. The Tribunal gave partial relief. The appellant is aggrieved by the taxability of Rs. 8,00,000/- towards a restrictive covenant. The appellant is also aggrieved by the disallowance of Rs. 1,00,000/- paid to Konkan Railway Corporation with which the appellant had a contract on account of penalty for exaggerated measurement. 4. The appellant was assessed for the assessment year 1995-96 in terms of an order dated March 25, 1997. Aggrieved by the order, he filed an appeal. He was not successful. Thereafter he approached the Tribunal. The Tribunal passed an order. The appellant is aggrieved again on the issue of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld say that addition of loan is supported by an affidavit and that therefore the addition to this extent, confirmed by the Tribunal requires our interference. He would further say that the finding of the Tribunal with regard to the addition of Rs. 1,51,869/- requires our consideration. In so far as disallowance under section 40A(3) is concerned, he would invite our attention to the list of expenses and thereafter he would argue that the disallowance on the facts of this case is totally unwarranted. In so far as taxability of Rs. 8,00,000/- received towards restrictive covenant, he would contend that such restrictive covenant is permissible in law and is not taxable. He would further invite our attention to disallowance under section 40A(3) of the Act to contend that despite material available on record, the authorities have committed a serious error in disallowing such item. He would also say that penalty so levied by the authority is excessive. He would refer to us the Board circular in the matter. Per contra, Sri Seshachala, learned counsel would support the order. 7. After hearing, we have carefully perused the material on record. 8. For the assessment year 1992-93, we see ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore of the view that disallowance in this regard also has to be answered in favour of the assessee. 11. The assessee is also aggrieved by the order with regard to disallowance of a sum of Rs. 17,51,515/- in terms of the order of the Tribunal. The admitted facts would reveal that the assessee had made a number of payments in violation of section 40A(3) of the Act. The assessee was asked to explain as to why these payments should not be disallowed. The assessee has chosen to file a reply in this regard. The Tribunal has chosen to say that the assessee has failed to satisfy the Assessing Officer as to the genuineness of the payment and the identity of the payee. Let us see as to whether the finding of the Tribunal is correct or not. Annexure F is the statement filed by the assessee. In the said statement, the assessee has chosen to provide the details of the cash payments to various persons. The assessee has also chosen to give the reason for cash payments in the case on hand. The assessee has stated that the. oil company did not accept cheque from dealers. They deal with only cash sales. The assessee has also explained as to why cash payments have been made in each transacti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re intended to regulate the business transactions and to prevent the use of unaccounted money or reduce the chances to use black money for business transactions. 15. The Kerala High Court in CIT v. Eastern Condiments P. Ltd. [2003] 261 ITR 76 has noticed that the assessee has started business only in the year 1991 and that the assessee has clearly stated that suppliers were not inclined to receive payment by cheque and the further fact that the Assessing Officer had observed that all the purchases were genuine and the two appellate authorities were justified in, holding that the assessee had satisfied the provisions of rule 6DD(j) of the Rules and in allowing the claim for deduction of expenditure. 16. The Calcutta High C6urt in Goenka Agencies v. CIT [2003] 263 ITR 145 has noticed the circular dated May 31, 1977 and thereafter it has chosen to held as under: That the payments were made under unavoidable circumstances only to keep harmonious business relationship with the payee. The genuineness of the business relationship between the payee and the assessee, in the instant case, had not been doubted by any authority, namely, the Assessing Officer, the Commissioner (Appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions (P) Ltd., in terms of clause (1) of the agreement. Therefore we are of the view that the authorities on the facts are justified in rejecting the contention of the assessee on the material facts. Dr. Krishna, places before us the various judgments of the Supreme Court and High Court to contend that such restrictive covenant cannot be considered as income but it has to be considered as a capital receipt. CIT v. A. S. Wardekar [2006] 283 ITR 432 is a judgment of the Calcutta High Court wherein it is ruled that the amount received for not engaging in competitive business is a capital receipt. The Madras High Court in CIT v. Saraswathi Publicities [1981] 132 ITR 207 has chosen to say that compensation for agreeing to refrain from carrying on competitive business is a capital receipt not liable to tax. Oberoi Hotel P. Ltd. v. CIT [1999] 236 ITR 903 is a judgment of the Supreme Court in which the Supreme Court has ruled that the amount received for giving up first option of purchase or lease of hotel is a capital receipt. Law is fairly well settled that it would depend upon the facts of each case. A reading of the agreement in the case on hand would show that it is not a compensation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 1,00,000/- for exaggerated measurement. Section 37(1) provides for allowing the expenses in computing the income chargeable under the head profits or gains of business or profession . The Explanation states that for the purpose of removal of doubts, it is hereby declared that any expenditure incurred by the assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure. The argument before us is that penalty is not on account of any offence or it is not prohibited in law. 22. CIT v. Indo Asian Switch-Gears P. Ltd. [1996] 222 ITR 772 (P H) is pressed into service by the assessee. We have carefully gone through the said judgment. In that case, the court noticed that a sum of Rs. 4,950/- was paid by the assessee to the Punjab Electricity Board. The same was explained. The Assessing Officer declined to allow deduction on the ground that it was in the nature of damages and penalty. The assessee went in appeal and succeeded. The Tribunal agreed with the view. The Punjab High Court after noticing the facts of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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