TMI Blog2014 (2) TMI 179X X X X Extracts X X X X X X X X Extracts X X X X ..... I 211 - SUPREME COURT] and Director of Income-tax (International Taxation) v. Oman International Bank [2009 (2) TMI 54 - BOMBAY HIGH COURT] - it was sufficient to record in the books as an irrevocable debt and not necessary for the assessee to establish that the debt had become irrevocable - as long as the debt established and written off in the books the assessee is not required to establish that it was a bona fide and not based on commercial wisdom or expediency – Decided against Revenue. Slump sale - Whether slump sale could be treated as 'noncompete fee' and not liable to tax as a capital receipt – Held that:- The decision in CIT v. Real Image P. Ltd [2012 (7) TMI 48 - MADRAS HIGH COURT] and Guffic Chem Pvt. Ltd. v. CIT [2011 (3) TMI 6 - Supreme Court] followed - the receipt in the nature of a non-compete fee should be treated only as a capital receipt and not a revenue receipt – there was no infirmity in the order passed by the Tribunal in setting aside the order of the authorities below and treating the whole non-compete fee as capital receipt not liable to tax – Decided against Revenue. - T. C. (A.) No. 299 of 2008 . - - - Dated:- 9-7-2013 - ELIPE DHARMA RAO A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... setting aside the order of the Commissioner of Income-tax (Appeals) and deleting the disallowance of Rs. 2,18,67,610 on account of bad debts. In their return filed for the assessment year 2000-01, the respondent-assessee claimed bad debts to the tune of Rs. 264.70 lakhs. On scrutiny of the details furnished by the assessee, the assessing authority disallowed a sum of Rs. 2,41,29,784 and added the same to the business income. The Assessing Officer disallowed the said amount on the ground that no evidence has been furnished to show that the said amount, written off as bad debts, has suffered tax earlier and now became irrecoverable and that the debt has become a bad debt. The order of the Assessing Officer disallowing a sum of Rs. 2,41,29,784 was upheld in appeal by the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) was of the view that unless it was proved that the bad debts claimed were the debts in the course of the assessee's business, they could not be allowed as revenue expenditure or revenue loss and, therefore, held that the amounts claimed could not be allowed as bad debts as they were advanced from capital account and could not be allowed as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Supreme Court held as follows (page 933) : "We are in no doubt whatever that the High Court was right in concluding that the amount of Rs. 20 lakhs had been deposited by the assessee with the licensor company for the purpose of securing the licence under which the assessee had acquired the right to work the licensor's cotton mills. This is clear from the fact that the deposit was made pursuant to a clause in the leave and licence agreement. Had a deposit as required by that clause not been made, the assessee would not have secured the licence of the cotton mill. At that time the assessee was doing no business in cotton. The deposit was, clearly, made for the purpose of acquiring a profit-making asset to carry on business in cotton. It cannot, therefore, be held that the deposit was made on the revenue account or that the loss thereof must be treated as a business loss. The loss thereof was a loss suffered on the capital account and could not be deducted on the basis that it was a business loss." (b) Salem Magnesite (P.) Ltd. v. CIT [2010] 321 ITR 43 (Bom). It was held as under (page 47) : "In the present case, there are concurrent findings of three au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. (Rs. 10,00,000) and M/s. Harrison Aquaculture Ltd. (Rs. 28,30,563) could not be recovered and, therefore, the same were written off as bad debt. Learned counsel submitted that the assessee incurred the expenditure to the tune of Rs. 2,88,054 towards formation and other allied activities of M/s. RPG Institute of Retail Management and this expenditure was incurred for the business purpose of the assessee when the assessee had started retail chain store business under the name and style of "Food World Super Market." Learned senior counsel vehemently argued that the amounts given to the subsidiary companies or guarantees given on their behalf were done to run effectively the business of wholly owned subsidiary companies and were mainly for the purpose of business and, therefore, the amount written off as bad debts as against the subsidiary companies was an allowable deduction as bad debts or in the alternative, as a loss arising from normal conduct of a business or a business loss from the business income. Learned senior counsel further argued that the Assessing Officer as well as the Commissioner of Income-tax (Appeals) failed to appreciate the claim in proper perspective and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be prima facie satisfied based on the information available that the debt is bad and that would be sufficient requirement of the amended provisions . . . Considering the above discussion, in our opinion, to treat the debt as bad debt has to be commercial or business decision of the assessee based on the relevant material in possession of the assessee. Once the assessee records the debt as bad debt in his books of account that would prima facie establish that it is a bad debt unless the Assessing Officer for good reasons holds otherwise. The writing off in the accounts no doubt, has to be bona fide. Once that be the case, the assessee is not called upon to discharge any further burden. In our opinion, therefore, we are in agreement with the view taken by the majority constituting the Bench of the learned Tribunal. The question as framed will have to be answered by holding that after the amendment it is neither obligatory nor is the burden on the assessee to prove that the debt written off by him is indeed a bad debt as long as it is bona fide and based on commercial wisdom or expediency. Appeal disposed of accordingly." On a close scrutiny of the order passed by the authoritie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss expediency of the wholly owned subsidiary companies and when it is not disputed that there existed a business nexus between the assessee and the subsidiary companies, such expenditure should be treated as having been incurred for the purpose of business and directly relatable to the business of the assessee and thus eligible for deduction as business expenditure in their return of business income. The assessing authority and the Commissioner of Income-tax (Appeals) failed to appreciate the claim in proper perspective. The alternative argument of learned senior counsel for the assessee that the claim of written off bad debts should be allowed as business expenditure or business loss, in our considered view, merit acceptance. The Tribunal has given a cogent and convincing reasons for reaching a finding of fact that expenditure incurred was directly relatable to the business of the assessee and should be allowed as business expenditure. Furthermore, the decision in Hasimara Industries Ltd. relied upon by the Revenue pertain to money lent to licensor under leave and licence agreement and it was treated as capital loss. The facts therein are totally distinct from the case on hand. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and non-taxable. It is this finding of the Tribunal which is assailed by the Revenue by raising the aforesaid substantial questions of law. Learned standing counsel for the Revenue argued that the Tribunal erred in holding that the amount of Rs. 5 crores received by the assessee was a capital receipt not liable to tax. Learned counsel submitted that the assessee had already given up its right to compete with the business at the time of entering into a joint venture agreement and therefore, at the time of sale of the business, the assessee had no such right. The amount therefore could not be considered for non-competition. Sustaining the orders of the assessing authority and the Commissioner of Income-tax (Appeals), learned counsel argued that the amount received was in the nature of goodwill and liable to tax. Learned standing counsel argued that the Tribunal erred in overlooking the well-reasoned findings given by the Commissioner of Income-tax (Appeals) in confirming the addition of noncompete fee to taxable income. In support of the contentions raised, learned standing counsel for the Revenue relied on the following decisions : (a) CIT v. Mugneeram Bangur and. Co. (Land De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Coast Chemicals and Industries Ltd. [1962] 46 ITR 135 (SC) and Doughty's case [1927] AC 327 that no part of the slump price is taxable." (b) In CIT v. Electric Control Gear Mfg. Co. [1997] 227 ITR 278 (SC), the honourable Supreme Court has held as under (page 281) : "The High Court has placed reliance on its judgment in Artex Manufacturing Co. v. CIT [1981] 131 ITR 559 (Guj). The said judgment of the High Court has been considered by us in our judgment pronounced today in C. A. No. 2276 (NT) of 1981, CIT v. Artex Manufacturing Co. [1997] 227 ITR 260 (SC). In that case, we have held that section 41(2) was applicable since price attributable to the plant, machinery and dead-stock which were transferred had been disclosed by the assessee during the course of assessment proceedings before the Income-tax Officer and that the said price was as per the value assessed by the valuers at the time of execution of the agreement. In the present case there is nothing to indicate the price attributable to the assets like the machinery, plant or building out of the consideration amount of Rs. 8 lakhs. Merely because a sum of Rs. 3,32,863 had been allowed as depreciation to the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e received for restrictive covenants was integral part of the sale consideration for transfer of the business undertaking. Learned senior counsel reiterated with emphasis that the restrictive covenants imposed in the joint venture agreement and business purchase agreement were distinct and different. While the joint venture agreement stipulated restrictive covenants on both the parties on reciprocal basis which constituted consideration for each other, the covenants contained in the business purchase agreement were applicable only to the respondent-assessee. Therefore, when only one party was subjected to restrictive covenants, it was required to be compensated for accepting such covenants. Learned senior counsel submitted that the Tribunal on a proper appreciation of the issue in the light of the covenants contained in the joint venture agreement and business purchase agreement has rightly concluded that the whole compensation received towards the restrictive covenant for carrying on the retail business was capital receipt not liable to tax. The order of the Tribunal does not call for any interference in this appeal. In support of his arguments, learned senior counsel relied on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture of the transaction to the effect that the goodwill has also been transferred along with the business of the assessee-company, is not applicable to the facts of the case as the agreement entered into between the parties have amply made it clear that the payment received by the assessee-company was only towards non-compete fee and not towards the goodwill. For the aforesaid reasons, the substantial question of law raised in this appeal is answered against the Revenue and in favour of the assessee. Accordingly, the tax case appeal is dismissed. No costs." (c) In CIT v. Late G. D. Naidu [1987] 165 ITR 63 (Mad), this court held as follows (page 77) : "So far as the amount received by the old partners referable to their share in the partnership and the goodwill is concerned, though they are received on capital account as held by the Supreme Court in Malabar Fisheries Co. v. CIT [1979] 120 ITR 49 (SC), it is only a distribution of the assets of the partnership among the partners involving no transfer of an asset and, therefore, there could be ho question of any capital gains also. The question whether the compensation received for restrictive covenant, can be, taxed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s follows (page 607) : "Two questions arose for determination, namely, whether the amounts received by the appellant for loss of agency was in normal course of business and therefore whether they constituted revenue receipt? The second question which arose before this court was whether the amount received by the assessee (compensation) on the condition not to carry on a competitive business was in the nature of capital receipt ? It was held that the compensation received by the assessee for loss of agency was a revenue receipt whereas compensation received for refraining from carrying on competitive business was a capital receipt. This dichotomy has not been appreciated by the High Court in its impugned judgment. The High Court has misinterpreted the judgment of this court in Gillanders' case [1964] 53 ITR 283 (SC). In the present case, the Department has not impugned the genuineness of the transaction. In the present case, we are of the view that the High Court has erred in interfering with the concurrent findings of fact recorded by the Commissioner of Income-tax (Appeals) and the Tribunal. One more aspect needs to be highlighted. Payment received as non-competition fee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee entered into a joint venture agreement with DFI Mauritius Ltd. for opening retail outlets in the form of supermarkets in India. The said agreement contained a clause regarding non-compete fee. When a company was floated under the name and style of "Food World Supermarket Ltd.", the assessee entered into a business purchase agreement with the said new company for sale of retail business as a going concern. The said business purchase agreement contained various covenants to be observed by the parties. Under the said business purchase agreement, the assessee was restricted from carrying on competing business, for which the assessee which was by then successfully running more than 30 retail outlets with a turnover of more than 80 crores, was eligible and justified to claim some compensation for not carrying on competing business. The new company floated pursuant to the joint venture agreement was, therefore, a separate and independent legal entity distinct from the assessee company. In the facts and circumstances of the matter, we are of the considered view that when the assessee, who was successfully running business of retail supermarket stores, sold their profitable running retai ..... X X X X Extracts X X X X X X X X Extracts X X X X
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