TMI Blog2021 (4) TMI 1021X X X X Extracts X X X X X X X X Extracts X X X X ..... THAT:- We restrict the disallowance u/s 14A of the Act to the extent of exempt income earned by the assessee company during the year.The argument that the Assessing Officer has not recorded satisfaction before the invoking Rule 8D of the Income Tax Rules, 1962 ( Rules ), is not factually correct. On a reading of the assessment order, we find that he Assessing Officer has recorded his satisfaction. In the result, ground of the assessee is allowed in part. Disallowance of non compete fee - Allowable expenditure - HELD THAT:- Coming to the facts in the present case, it is undisputed fact that the consideration is paid to individuals who had experience in the business of consultancy for not to engage themselves in similar kind of business and activities for a period of 3 years. It is also not disputed that such consideration is independent and not part of the cost of acquisition of business paid to shareholders. It is also an admitted fact that both the Share Transfer Agreement and Non-Compete Agreement are separate agreements with different parties, though entered on the same date.The cases relied upon by the assessee above are squarely applicable on the facts of the assessee s c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Learned Commissioner of Income Tax (Appeals) - 14, (hereinafter the ld. CIT(A) ), passed u/s. 250 of the Income Tax Act, 1961 (the Act ), dt. 29/12/2017, for the Assessment Year 2009-10. 2. The assessee is a company and is primarily engaged in the activity of providing management consultancy services and also accounting and business advisory services. It filed its return of income on 29/09/2009 declaring total income of ₹ 22,42,11,130/-. The return was revised twice and in the second revised return of income, the assessee disclosed total income of ₹ 22,64,57,400/-. The Assessing Officer passed an order u/s 143(3) of the Act on 21/03/2013, determining the total income of the assessee at ₹ 155,42,46,330/- interalia disallowing the claim of the assessee of loss incurred on foreign exchange and making disallowance on depreciation on lease assets, disallowance of charges paid to PWC firms and making additions on account of disallowance of non- compete fee and non-refundable grant. 2.1. Aggrieved the assessee carried the matter in appeal without success. The ld. First Appellate Authority gave detailed reasons as to why he has agreed with the order of the As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see on account of five unexpired forex forward contracts i.e is a loss incurred on account of revaluation of contract on last day of accounting period before date of maturity of forward contract. The Ld.CIT-A observed that the assessee has been following a consistent accounting policy for determining loss under AS-11 and AS-30 as required under Companies Act and it is to be noted that the accounting standards were issued by the ICAI which has received judicial recognition. Accordingly the assessee, the gain or loss on revaluation of the outstanding contr cts was booked in the P L a/c as per the mandatory requirements of RBI guidelines. The Hon ble Supreme Court in the case of Woodward Governor India (P) Ltd. (supra) has observed at p. 265 para 17 that the Central Government has made AS-11 mandatory. During the course of first appellate proceedings that the CIT-A noticed that the AO allowed the loss of ₹ 85,70,425/- for 2010-11 which supports to show that the assessee has been following consistently accounting standards and the liability has been accrued for a pending obligation for every year i.e the difference was arising for more than one accounting period. 26. We, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon ble High Court observed as under: 9. In the present case, the AO has not firstly disclosed why the appellant/assessee's claim for attributing ₹ 2,97,440 as a disallowance under s. 14A had to be rejected. Taikisha Engg. India Ltd. (supra) says that the jurisdiction to proceed further and determine amounts is derived after examination of the accounts and rejection if any of the assessee's claim or explanation. The second aspect is there appears to have been no scrutiny of the accounts by the AO-an aspect which is completely unnoticed by the CIT(A) and the Tribunal. The third, and in the opinion of this Court, important anomaly which we cannot be unmindful is that whereas the entire tax exempt income is ₹ 48,90,000, the disallowance ultimately directed works out to nearly 110 per cent of that sum, i.e., ₹ 52,56,197. By no stretch of imagination can s. 14A or r. 8D be interpreted so as to mean that the entire tax exempt income is to be disallowed. The window for disallowance is indicated in s. 14A, and is only to the extent of disallowing expenditure incurred by the assessee in relation to the tax exempt income . This proportion or portion of the ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the expenditure could not be held to be capital expenditure and same had to be allowed as revenue expenditure. c) The Hon ble Madras High Court in the case of Carborandum Universal Ltd. vs. JCIT [26 taxmann.com 268] on similar set of facts, held that the payment of non- compete fees, made for protecting business interest is revenue expenditure. Relevant extracts of the judgment are reproduced below: 19. It is not denied by the Revenue that U. Mohanrao was the Chairman and Managing Director of some of the companies which got me ged with the assessee company. The said U. Mohanrao had access to all information starting from manufacturing process, knowhow to the clientele and the products, including the pricing of the products. By a process of amalgamation, the assessee had acquired the business of the amalgamating companies. However, for the fruitful exercise of its business as a business proposition, the assessee thought it fit to enter into a non-compete agreement with a person who had the knowledge of the entire operations, so as to get the full yield of the amalgamated company's business. In that context, rightly, the assessee took a commercial decision to pay non-co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... five years can be said to be of enduring in nature. This aspect of the matter has been decided by the Madras High Court in CIT v/s Late G. Naidu ORs., [1957] 165 ITR 63 (Mad.), wherein Their Lordships observed and held as under: Held, that so far as the cash compensation paid by the new partners referable to the assets and goodwill of the firm was concerned, the cash took the place of the assets of the partnership and the compensation paid for restrictive covenant not to carry on similar business for a period of five years was in the nature of a separate transaction unconnected with the business of the assets of the partnership. The Tribunal was right in its view that the total compensation paid by the firms to the old partners was for (a) the share in the assets, (b) the share of the goodwill, and (c) for the restrictive covenant and that the part of the amount referable to the acquisition of the share in the assets and the share of the goodwill would be on capital account as it was in the nature of an initial outgoing and the payment towards the restrictive covenant was on revenue account and it would not amount to an acquisition of an advantage of an enduring nature. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which restrained the said third party from carrying out any business with regard to two-wheelers. The assessee's claim of the said expenditure as revenue expenditure was upheld by the Hon'ble High Court which concurred with the views of the Tribunal that the payment is to protect the assessee's business interests, its market position and profitability. No new asset is created thereby nor is the assessee's profit making apparatus expanded or increased. The assessee does not suffer any loss or diminution or erosion in its capital assets. The Court pointed out that the payment of non-compete fees is merely to eliminate competition in the two- wheeler business, for a while. Though there were no records to indicate the duration of the restrictive covenant, but it was neither permanent nor ephemeral. In that sense, the advantage was not of an enduring nature. The Hon'ble Supreme Court dismissed the SLP filed by the Department against the decision of the Hon'ble Delhi High Court (312 ITR(st.) 333). In view of the above discussion, if the non-compete payment does not result in bringing into existence of any capital asset or an advantage which is of enduring nature, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is undisputed fact that the consideration is paid to individuals who had experience in the business of consultancy for not to engage themselves in similar kind of business and activities for a period of 3 years. It is also not disputed that such consideration is independent and not part of the cost of acquisition of business paid to shareholders. It is also an admitted fact that both the Share Transfer Agreement and Non-Compete Agreement are separate agreements with different parties, though entered on the same date. 15.1. Hence reliance on above decisions by the ld. AO/CIT(A) is misplaced, as the above cases are clearly distinguishable on facts as well as the point of law involved. The cases relied upon by the assessee above are squarely applicable on the facts of the assessee s case, Thus, the payment in question is revenue in character and hence allowable as an expenditure. 16. In view of the above discussion, we delete the disallowance made on account of compete fee. 17. Ground Nos. 4 to 4.2: Disallowance of depreciation on leased assets of ₹ 4,36,03,330 and non-grant of claim of principal portion of lease rentals amounting to ₹ 5,37,68,623/- 17.1. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bout the assessee s firm service agreement with the payee M/s PWCD s services as well as its role played as providing central services to the entire PWC group based on cost allocation method keeping in mind the nature of services rendered benefits derived as per pages 117 to 261 of the paper book. The assessee has also prepared a list of services availed via the payee concerned in respect of all member firms of the group involving sample cases of e-learning and education, mandatory foundation programmes, training programmes alloys specific / technical programmes etc. All this has gone unrebutted from the Revenue side whose case is that there is no business link forthcoming from the impugned expenditure. We find no substance in Revenue s instant stand. We make it clear that the assessee- company is engaged in multi functional consultancy services as a group entity of PWCDA organization based in Netherlands. Learned counsel has also filed before us relevant assessment records with regard to the payee entity pertaining to the impugned assessment year itself accepting the returned income without making any addition. Necessary reference regarding Firm Services Agreement is also made t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me. Subsequently, in response to queries raised by the ld. AO in relation to the aforesaid grant, the assessee filed the relevant details and detailed submissions including relevant extracts of bank statement showing receipt of grant amount, copy of grant agreement, treatment accorded in the books of accounts, etc. 22. The AO in his order of assessment, held that assessee had business connection with PwC Services BV, Netherlands pursuant to which it had received the sum. Since the said sum that had been received is nothing but benefit arising from the business and hence the same is taxable u/s 28(iv) of the Act. He further held that the money so received may have been received under the nomenclature non-refundable grant and has been stated to be utilised towards the acquisition of the shares, but the receipt must be considered independently for determining its taxability. 23. The ld. CIT(A) upheld the order of the ld. AO. It was held that the appellant had business connection with PwC Services BV from which the appellant receives various services and hence the non-refundable grant arose from the business of the assessee. He further held that agreement itself shows that at l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e business shall be in the form of benefit or perquisite other than in the shape of money, is not satisfied in the present case. Hence, in our view, in no circumstances, it can be said that the amount of ₹ 57,74,064/- can be taxed under the provisions of Section 28 (iv) of the IT Act. 27. Similar view has also been laid down in the following judgments : i) CIT vs. Santogen Silk Mills Ltd. [(2015) 57 taxmann.com 208 (Bombay HC)] ii) CIT vs. Xylon Holdings (P.) Ltd. [(2012) 26 taxmann.com 333 (Bombay HC)] iii) Ravinder Singh vs. CIT [(1993) 71 Taxman 336 (Delhi HC] iv) Mahindra Mahindra Ltd. vs. CIT [(2003) 128 Taxman 394 (Bombay HC)] v) DCIT vs. Tosha International Ltd. [(2008) 116 TTJ 941 (Delhi Tribunal)] 28. The judgment in the case of M/s. Ramaniyam Homes (supra) relied upon by the ld. CIT(A) stands reversed post the judgment of the Hon ble Supreme Court in the case of Mahindra Mahindra (supra). 29. The ld. Sr. Advocate submitted that, the instant grant was received for the specific purpose of funding the cost of acquiring the shares of ECS Limited (i.e. to meet a capital expenditure) and such an obligation/purpose for whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is that the character of the receipt in the hands of the assessee has to be determined with respect to the purpose for which the subsidy is given. In other words, in such cases, one has to apply the purpose test. The point of time at which the subsidy is paid is not relevant. The source is immaterial. The form of subsidy is immaterial. The main eligibility condition in the scheme with which we are concerned in this case is that the incentive must be utilized for repayment of loans taken by the assessee to set up new units or for substantial expansion of existing units. On this aspect there is no dispute. If the object of the subsidy scheme was to enable the assessee to run the business more profitably then the receipt is on revenue account. On the other hand, if the object of the assistance under the subsidy scheme was to enable the assessee to set up a new unit or to expand the existing unit then the receipt of the subsidy was on capital account. Therefore, it is the object for which the subsidy/assistance is given which determines the nature of the incentive subsidy. The form of the mechanism through which the subsidy is given is irrelevant. .. One more aspect nee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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