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TMI Blog2002 (9) TMI 867X X X X Extracts X X X X X X X X Extracts X X X X ..... nership commenced from 7th April, 1987. 2. In 1986, Sun-n-Sand Hotel (one of the partners of the assessee firm) was negotiating with M/s. Nehru Centre, Worli for conducting restaurant and catering business in the premises owned by Nehru Centre known as "Discovery of India" building. Nehru Centre is a Public Institution set up for advancement of science and other education to the general public and engaged in scientific and industrial research and approved by the prescribed authority for the purpose of section 35(1)(ii) of the Income-tax Act, 1961. It owns various immovable properties wherein a planetarium and science centre is being run by it. In order to facilitate and to meet the requirements of the catering services and of refreshment for the numerous tourists, visitors, customers and clients of Nehru Centre, it was desired by them to have a restaurant and eating establishment in their building. Thus, a Conducting Agreement between Nehru Centre and Sun-n-Sand Hotel was executed on 7th April, 1987 under which Sun-n-Sand Hotel was appointed as conductors. Under the said agreement, Nehru Centre agreed to give on conducting basis, a portion of their premises to undertake ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d was paying the agreed monthly compensation for the premises out of its income. On expiry of 10 years in October, 1996, the assessee gave a notice to the Nehru Centre for renewal of the original Conducting Agreement for a further period of 10 years as provided in the original agreement. The validity of the original Conducting Agreement of 1987 was extended by the owners, M/s. Nehru Centre in terms of Extension Agreement signed on 24-2-1997 with Nehru Centre. Under the above renewal agreement, the validity of the original Conducting Agreement of 1987 was extended for a further period of ten years on same terms and conditions except some changed terms. Under the Extension Agreement, the monthly compensation was agreed at ₹ 3,00,000 (Rs. 1,65,000 towards royalty; ₹ 1,20,000 as licence fees for the areas on ground and third floor and balance ₹ 15,000 towards licence fees for the terrace areas). This compensation was further subjected to increase of 25% from October, 1999 (Rs. 3,75,000 p.m.) and further 25% from October, 2002 (Rs. 4,69,000). 4. Simultaneously, on 24-2-1997, a Supplemental Agreement was signed with Nehru Centre. Under the said Supplemental Agreement, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... portion of the building owned by Nehru Centre as under the original Conducting Agreement of 1987. Thus, according to the assessee, the expenditure claimed on account of payment of goodwill is allowable as revenue expenditure. To support its submission, the assessee placed reliance on the following judgment : (i) Praga Tools Ltd. v. CIT (1980) 123 ITR 773 (AP) (FB) (ii) Empire Jute Co. Ltd. v. CIT (1980) 124 ITR 1(SC) (iii) CIT v. Madras Auto Service (P.) Ltd. (1998) 233 ITR 468(SC) (iv) CIT v. Gemini Arts (P.) Ltd. (2002) 254 ITR 201(Mad.). 8. The learned CIT observed that the payment of goodwill made by the assessee to Nehru Centre appears to be unwarranted and for extraneous considerations. According to him, the assessee has not been able to substantiate the goodwill payment over and above the monthly rent vis-a-vis the benefit derived by it. The learned CIT has further stated that perusal of the records indicate that while making the assessment, the Assessing Officer has not dealt with this issue in depth and has allowed the payment of goodwill without ascertaining the exact nature of the payment and the commercial expediency for incurring such expenditure over and abo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntre from October, 1996 in terms of two renewal agreements. Thus, the total amounts paid by the assessee during the year were ₹ 11,95,086 pertaining to the first six months of the year and ₹ 55,50,000 pertaining to the later six months of the year. Thus, the total compensation and charges paid were to the tune of ₹ 67,45,086. Thus, the learned counsel argued that "Goodwill" was nothing but additional compensation along with licence and royalty for the use of premises. 10. The learned counsel also invited our attention to the written submissions filed before the learned CIT (compilation page 9). It was explained to the CIT that the payment of monthly compensation by way of goodwill was supplemental to and formed part of the Extension Agreement dated 24-2-1997 and was co-terminus as provided in clause 2 of the said agreement. Regarding the query raised by the learned CIT that both the agreements dated 24-2-1997 had not been executed by the assessee, the assessee replied that both the agreements had been signed by the assessee itself in its own name through Mr. Gul R. Advani as Managing Director of Sun-n-Sand Hotel (P.) Ltd. It was also explained to the le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e learned counsel also contended that the provisions of section 263 have been wrongly invoked as the entire information regarding the goodwill was produced before the Assessing Officer and he allowed the same after going through the various documents including the agreements. 12. The learned counsel argued that the payment of "Goodwill" was recurring and the same was being paid every year, therefore, the same is of revenue nature. In this connection, he invited our attention to the following court cases : (i) CIT v. Gabriel India Ltd. (1993) 203 ITR 108(Bom.) (ii) CIT v. Goyal Private Family Specific Trust (1988) 171 ITR 698(All.). The learned counsel, thus, contended that the assessee filed an explanatory note with the return of income giving details of increased amount of monthly compensation and charges. During the course of assessment proceedings, the Assessing Officer required the assessee to file copies of the renewal agreements signed during the year and also a note explaining the nature of monthly compensation being paid to Nehru Centre. The assessee filed the copies of the new agreements and also a note explaining the nature of monthly compensation paid to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of 25% from October, 1999 and further 25% from October, 2002. He, therefore, contended that further Supplemental Agreement on the same day for payment of goodwill of ₹ 6,25,000 per month subject to further revision to ₹ 7,87,000 per month from October, 1999 and ₹ 9,76,000 per month from October, 2002 cannot be in the nature of compensation. According to him, if the "Goodwill" was in the nature of compensation, there was no need of Supplemental Agreement to be signed on the same day. Moreover, this element of "Goodwill" could have been included in the Extension Agreement. The very fact that two different Agreements had been signed on the same day for two different purposes, the nature of the two amounts cannot be the same. He, thus, contended that "Goodwill" had been paid for acquiring enduring benefit, therefore, the amount paid as "Goodwill" assumes the character of capital payment and the same had been allowed by the Assessing Officer erroneously. He invited our attention to page 84, para 2 of compilation filed by the assessee and contended that it has been clearly mentioned therein that the revision upward made in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... viii) Indian Textiles v. CIT (1986) 157 ITR 112(Mad.) (ix) K.A. Ramaswamy Chettiar v. CIT (1996) 220 ITR 657(Mad.) (x) Naklank Diamond v. Asstt. CIT (2000) 67 TTJ (Ahd.) 388. 14. In reply, the learned counsel contended that the learned CIT has not stated in his order whether the amount of "Goodwill" was of capital nature. In fact, he has apparently accepted the submissions of the assessee that the said expenditure was not capital expenditure as was alleged in his notice under section 263, but he held that such payment appeared to be unwarranted and for extraneous consideration and the assessee had not substantiated its claim for such payment which according to him, was over and above the monthly rent. He further held that the Assessing Officer had not dealt with the issue in depth and allowed the deduction for the same without ascertaining the exact nature of such payment and the commercial expediency for incurring the same. Thus, according to the learned counsel, the conclusion arrived at by the learned CIT were not on the issue covered in his show-cause notice under section 263 but on totally different grounds for which he did not give any opportunity to the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed by the representative of the Revenue may contain mistakes of fact and law which are detrimental to the interest of the Revenue. Therefore, section 263 was enacted to empower the Commissioner to revise such orders. The object is to vest a supervisory jurisdiction in the Commissioner to revise those orders passed by the subordinates, which according to him, are erroneous and against the interests of the Revenue. The Commissioner can suo motu call for and examine the record of any proceedings under the Act and if he considers that any order therein passed by the Assessing Officer is erroneous insofar as it is prejudicial to the interest of the Revenue, he may pass such orders thereon as the circumstances of the case justify which may include enhancement or modification of the assessment order or cancellation of the order with direction to make a fresh assessment. Before passing the aforesaid order, the Commissioner may make or cause to make such enquiries as he considers necessary. The Commissioner must give a hearing to the assessee before passing the order. 16. The Commissioner must pass a speaking order. The powers of the Commissioner are quasi-judicial in nature, that means t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terfered with, if it is not erroneous. Again, the Commissioner should not interfere with an order which is not prejudicial to the interest of the Revenue, even if it is erroneous." 18. What constitutes ';prejudice to the Revenue'; has been the subject- matter of a judicial debate. One view was that ';prejudicial to the interest of Revenue'; does not necessarily mean loss of Revenue. Madras High Court in the case of Venkatakrishna Rice Co. v. CIT (1987) 163 ITR 129held that "The expression ';prejudicial to the interest of Revenue'; is not to be construed in a petty fogging manner, but must be given a dignified construction. The interest of the Revenue is not to be equated to rupees and paise. There must be some grievous error in the order passed by the ITO which might set a bad trend or pattern for similar assessments which, on a broad reckoning, the Commissioner might think to be prejudicial to the Revenue administration. The prejudice must be prejudice to the Revenue administration." 19. The assessment made by the Assessing Officer would be prejudicial to the interest of the Revenue if the Assessing Officer has not made any enquiries or he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yment in question. So, the CIT found the order of the Assessing Officer erroneous insofar as the payment of goodwill of ₹ 37.50 lakhs is concerned and therefore, the order passed by the Assessing Officer was considered as prejudicial to the interest of Reve-nue. According to the learned CIT, goodwill of the business rightfully belongs to the assessee and not to Nehru Centre. Thus, according to him, the payment of goodwill made by the assessee to Nehru Centre was unwarranted and for extraneous considerations. The CIT has further observed that while making the assessment, the Assessing Officer has not dealt with the issue in depth and has allowed the payment of goodwill without ascertaining the exact nature of the payment and the commercial expediency for incurring such expenditure over and above the monthly rent. 21. The first main point for consideration is whether the Assessing Officer made the assessment without causing proper enquiries. The assessee firm commenced business from 7-4-1987. On the same day, Sun-n-Sand Hotel entered into a Conducting Agreement with the Nehru Centre under which the former got the right to carry on and conduct the restaurant and other business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement has been termed as "Goodwill". If the entire amount payable to Nehru Centre was only compensation charges, then in our opinion, there was no need of preparing two separate agreements, one for compensation of ₹ 3,00,000 per month and the other one for goodwill of ₹ 6,25,000 per month and that too on the same day. It is quite obvious that the nature of payments by both the agreements cannot be the same. There must be some specific purpose for preparing the two agreements. The Assessing Officer, no doubt, called for the various details but he failed to make any further enquiries which he could have made in view of the facts of this case. The Assessing Officer has passed the cryptive order without mentioning anything about these two agreements signed on the same day. Therefore, the order passed by the Assessing Officer is without causing any enquiries regarding the nature of the payment made to Nehru Centre by the assessee as per two separate agreements. Therefore, the order passed by the Assessing Officer was erroneous and prejudicial to the interest of Revenue as has been laid down by the Hon';ble Delhi High Court in the case of Gee Vee Enterprises (su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the last ten years. In our opinion, the assessee never wanted to leave the place because of the goodwill which they have already earned and because of that, they were getting good turnover of the business carried on by them. Perhaps, because of this reason, the assessee had to pay heavy amount of ₹ 6,75,000 per month to save the goodwill and to continue their roaring business. Now the question arises, what would be the nature of the amount paid for securing the goodwill of the business. In our opinion, the amount paid would be of capital nature as the same has been paid for protecting and safeguarding business asset of the assessee (Goodwill). Goodwill belongs to the assessee and the expenditure has been incurred for the procurement of the goodwill, therefore, the expenditure has been incurred for acquiring an enduring benefit for its business. Hon';ble Supreme Court in the case of Assam Bengal Cement Co. Ltd. v. CIT (1955) 27 ITR 34has laid down that "If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business, it is purely attributable to capital and is of the nature of capital expenditure. If ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or was made periodically. The contention of the learned counsel that the CIT has not stated whether the payment is of capital nature, is also without any substance. The learned CIT has set aside the assessment on the limited issue of allowability of the payment in question. Therefore, he has directed the Assessing Officer to find out the nature of the payment of "Goodwill" as the Assessing Officer has not dealt with the issue in his order. So it is for the Assessing Officer to decide whether the payment is of capital nature or of revenue nature. Therefore, the question of giving specific findings by the learned CIT does not arise. Madras High Court in the case of CIT v. Seshasayee Paper &; Board Ltd. (2000) 242 ITR 490has laid down that the powers of the Commissioner are very wide in exercising the powers of revision under section 263. The only limitation on his power is that he must have some material which would enable him to form a prima facie opinion that the order passed by the Assessing Officer was erroneous insofar as it is prejudicial to the interest of Revenue. Once he forms such an opinion, the Commissioner is empowered to pass an order as the circumstances of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Court came to the conclusion that setting aside done by the Tribunal of the order of the CIT passed under section 263 was fully justified. In the present case, the CIT has given his findings to indicate how the order of the Assessing Officer was erroneous. Therefore, this case also is not relevant to the facts of the present case. In the case of Late Sunderlal, the Hon';ble High Court held that the order passed by the Commissioner under section 33B without giving any reasons for it is vitiated in law. The facts of this case are entirely different from the facts of the present case. In the present case, the Commissioner of Income-tax has given detailed reasons for resorting to the provisions of section 263 of the Act. Therefore, this case is also not relevant to the facts of the present case. In the case of R.K. Metal Works, the Hon';ble High Court held that there was no indication in the order as to the basis on which the Commissioner came to the prima facie conclusion that the capital borrowed by the firm was utilized for the business other than that of the firm';s business. Therefore, the High Court found full justification of setting aside the order by the Tribuna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not the issue for consideration. In the present case, the main question is whether the goodwill paid by the assessee was of capital nature or revenue nature. As we have discussed in detail that the goodwill resulted into enduring benefit to the assessee, therefore, the same was of capital nature. The facts of the present case are entirely different from the above case relied upon by the learned counsel for the assessee. Again Madras Auto Services Pvt. Ltd.';s case (supra) pertains to whether a particular expenditure incurred is of capital or revenue nature. In this case, the assessee took premises on lease for 39 years. The premises were demolished and new building was constructed by the assessee at its own expenses. New building was belonging to the lessor but the assessee was using it by making the payment of very low rent. The Hon';ble Court held that the assessee did not acquire a capital asset but only a business advantage. The amount spent on construction was deductible as revenue expenditure. We do not understand how this case is relevant to the facts of the present case. In the present case, the assessee acquired a durable advantage by making the payment of good ..... X X X X Extracts X X X X X X X X Extracts X X X X
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