TMI Blog2018 (1) TMI 319X X X X Extracts X X X X X X X X Extracts X X X X ..... .2007, which therein refrained him from practising the profession as a chartered accountant for a period of 5 years, is a ‘Capital receipt’, which however, in the backdrop of our aforesaid observations would not be exigible to tax under Sec. 28(va) of the ‘Act’. That as we have held that the non-compete fee of ₹ 40.50 crore received by the assessee is a ‘Capital receipt’, therefore, the issue raised before us as to whether the same was rightly held by the CIT(A) as chargeable to tax as LTCG, thus, does not survive. Addition under Section 14A r.w.r. 8D - Held that:- In the present case it can safely be concluded that the A.O had failed to arrive at a satisfaction that having regard to the accounts of the assessee, as placed before him, it was not possible for him generate the requisite satisfaction with regard to the correctness of the claim of the assessee that no expenditure had been incurred by him in respect of the exempt income. We therefore in the backdrop of our aforesaid observations are thus unable to persuade ourselves to uphold the disallowance of ₹ 7,60,656/- made by the A.O under Section 14A r.w.r. 8D, which thereafter had been sustained by the CIT(A). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... compete fees to not practice its profession for a period of five years which is evident from the agreement and further in any case there was no transfer of right to carry on business but there was transfer of right to carry on profession which is distinct from business. 5. On the facts and in the circumstances of the case and in law the CIT(A) ought to have appreciated the fact that transfer of right to carry on profession is not covered by the provisions of section 55(2)(a) of the Act and as such the cost of acquisition would be nil and hence the provisions of section 48 of the Act would fail and consequentially there would be no capital gains which could be computed. 6 Without Prejudice to the above on the facts and in the circumstances of the case and in law the sum of ₹ 40,50,00,000/- received by the appellant as non compete fees for refraining from carrying its profession of Chartered Accountant was capital receipts as claimed by the appellant in the course of assessment proceedings and as such not chargeable to tax. 7. On the facts and in the circumstances of the case and in law the CITA) erred in confirming the order of the assessing officer in disall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the case are that the assessee who is a chartered accountant and Chief Executive Officer (for short CEO ) of Ambit Corporate Finance Pvt. Ltd. had filed his return of income for A.Y 2008-09 on 13.09.2008, declaring an income of ₹ 31,16,18,726/. The case of the assessee was taken up for scrutiny assessment under Sec. 143(2) of the Act . 4. That during the course of the assessment proceedings it was observed by the A.O that the assessee besides drawing salary income from Ambit Corporate Finance Pvt. Ltd. was also having income from consultancy and income from investments. The A.O observed that the assessee had in his computation of income disclosed Non Compete Compensation of ₹ 40,50,00,000/- under the head long term capital gain (for short LTCG ), which was set off by him against loss of ₹ 15,73,46,719/- on sale of shares of Ambit investments. The assessee had in his Computation of Income for the year under consideration claimed to have received an amount of ₹ 40.50 crore on sale of his partnership interest in the concern M/s RSM Company. The A.O called upon the assessee to furnish the details of the LTCG of ₹ 40.50 crore which was disclose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applicable in case of the assessee giving up the management of an Indian Company whereas the assessee has not given up the management of any company. 5. The assessee further filed a revised return of income on 23.12.2010, wherein the receipt of ₹ 40.50 crore was claimed by him as not taxable, for the reason that the same as per him was a Capital receipt . However, the A.O after deliberating on the contentions of the assessee did not find favour with the same. The A.O being of the view that the revised return of income filed by the assessee was beyond the time limit contemplated u/s 139(5), therefore, no cognizance of the claim of the assessee that the amount of ₹ 40.50 crore being in the nature of a capital receipt was thus exempt, could be validly drawn on the basis of such non-est return of income. That still further the A.O held a conviction that as the aforesaid revised return of income was filed by the assessee only after the final show cause notice was served upon him, therefore, the attempt of the assessee to manoeuvre his tax liability on the basis of an afterthought could not be facilitated by allowing recourse to Sec. 139(5). The A.O deliberating on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 23,79,380/-. 7. Aggrieved, the assessee carried the matter in appeal before the CIT(A). That during the course of the appellate proceedings it was observed by the CIT(A) that the assessee was a chartered accountant by profession and a partner in a well known firm of chartered accountants by the name of RSM. The firm RSM was practising the profession of a Chartered accountant and carrying out the audit, internal audit, accountancy, risk management, direct and indirect tax advisory, regulatory advisory and transfer pricing, including all or any of the following as the circumstances may require: corporate reporting, financial accounting, financial statement audit, independent controls and system process consultancy, internal audit, regulatory compliance and reporting, tax structuring, tax compliance, international taxation, taxation and regulatory advice in relation to merger and acquisition, transfer pricing, financial and tax due diligence and regulatory valuation. The CIT(A) observed that the assessee was one of the main partner of the aforesaid firm having 22% share and was responsible for the development and growth of the said concern. The CIT(A) further observed that RSM duri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anage, operate, finance, control or participate in the ownership, management, operation, financing, or control of, any person engaging in the RSM business, or in any manner connected with the RSM business within the Territory. It is clarified that any RSM business (excluding for the avoidance of doubt any Ancillary Business) sought to be undertaken by Mr. Wadhwa or Ambit or any of their respective Affiliates iii connection with a cross border transaction (including M A transactions) wherein the target or acquirer is in the Territory, or private equity transactions wherein the investor or the entity in which investment is being made, is in the Territory, shall be deemed to be RSM Business within the Territory.) (b). Nothing in this Agreement shall be construed as limiting or resisting in any manner Mr. Wadhwa's and /or Ambit's or their respective Affiliates ability to directly or indirectly, engage in, conduct, undertake or carry out (i) the Ambit Business (including where applicable, together with Ancillary Business) or any other business/activities other than the RSM Business in or outside the Territory; and (II) The RSM Business outside the Territory subject to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rand RSM which Mr. Wadhwa was entitled to use in perpetuity a sum of ₹ 40.5 Crores (Rupees Forty Crores and Fifty Lacs only) all of which is payable at the later of either April 30,2007 or the effective date. Mr. Wadhwa and Ambit hereby acknowledge and agree that the payment of the aforesaid consideration is good, adequate and reasonable consideration for entering into this agreement and providing the covenants given in clauses 3, 3A, 4 and 5 and the indemnity obligations under clause 8 to this agreement which covenants an indemnification obligations are agreed to be fair and reasonable in light of the specific circumstances, specific, knowledge and position of W. Wadhwa and Ambit. All monies payable to Mr. Wadhwa under this agreement shall be subject to the deduction of applicable taxes and other deductions as required under applicable law. 9. The CIT(A) after deliberating on the aforesaid clauses of the transaction agreement, therein observed that as per the terms of the same the assessee had undertaken not to engage or attempt to engage in RSM business directly or indirectly in India. The CIT(A) after circumscribing the scope and gamut of the business of RSM, which th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved, that as per Sec. 28(va)(a), any sum, whether received or receivable, in cash or kind, under an agreement for not carrying out any activity in relation to any business was liable to be booked as the business income of the assessee under the aforesaid statutory provision. The CIT(A) was persuaded to be in agreement with the claim of the assessee that the scope and gamut of Sec. 28(va), which only referred to the term any business , could not be stretched to bring within its sweep the term Profession . The CIT(A) in order to support his aforesaid view relied on the judgment of the Hon ble High Court of Gujarat in the case of G.K. Choksi Vs. CIT (2001) 252 ITR 863 (Guj), wherein the Hon ble High Court had held that Profession and business for the purpose of the Income tax Act were two different connotations. The CIT(A) further observed that the said judgment of the Hon ble High Court of Gujarat had thereafter been confirmed by the Hon ble Supreme Court in the case of G.K. Choksi and Company Vs. CIT (2007) 295 ITR 376 (SC). Thus, the CIT(A) was persuaded to accept the contention of the assessee that as the scope of Sec. 28(va) stood restricted to the term business , theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see had only a right to carry on business and for this he had entered into a non-compete agreement for not carrying on any business which would compete with the business of PWCPL and others. The CIT(A) was of the view that the provision of Sec. 28(va) were attracted only in a case where the assessee was carrying on business , and not where the assessee only had a right to carry on business . The CIT(A) further observed that where the capital asset is in the nature of right to carry on business , then the same would come within the ambit of capital gain tax u/s 55(2)(a) of the Act , which specifically took within its scope and gamut, the right to carry on any business . Thus, the CIT(A) on the basis of his aforesaid observations concluded that where a capital asset is in the nature of right to carry on business , then the same would be liable to be brought to tax under the head Capital gain . The CIT(A) on the basis of his aforesaid conviction, relying on the order of the ITAT E Bench, Mumbai in the case of ACIT Vs. Savita M. Mandhana (ITA No. 3900/Mum/2010; dated 7.10.2011), concluded that the A.O was not justified in characterising the receipt of ₹ 40.50 crore as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xed at all, for the reason that not only the assessee had voluntarily offered the amount for tax under the head LTCG in his return of income, but also for the reason that the aforesaid claim was raised on the basis of an invalid revised return which had no existence in the eyes of law. It was further submitted by the ld. D.R that the A.O had rightly held that the non-compete fees of ₹ 40.50 crore received by the assessee was liable to be brought to tax as the business income of the assessee u/s 28(va) and was not to be assessed as capital gain in the hands of the assessee. The ld. D.R further submitted that the CIT(A) had gravely erred in law by concluding that the amount received by the assessee by way of non compete fees was liable to be assessed under the head capital gain. 15. We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record. We find that our indulgence in the present appeal is sought for adjudicating two issues, viz. (i). the exigibility to tax of the amount of ₹ 40.50 crore received by the assessee; AND (ii). the validity of disallowance under Sec. 14A r.w Rule 8D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the basis of a belated revised return of income. The CIT(A) fortified his aforesaid view by placing reliance on the judgment of the Hon ble Supreme Court in the case of Goetz (India) Ltd. Vs. CIT (284 ITR 323)(SC). 17. We have given a thoughtful consideration to the issue as regards the validity of the refusal on the part of the lower authorities to adjudicate the claim of the assessee, that the amount received by him by way of non-compete fee, being a Capital receipt , was thus not taxable at all. We though are in agreement with the view of the lower authorities, that as observed by the the Hon ble Apex Court in the case of Goetze (India) Ltd. Vs. CIT (2006) 284 ITR 323 (SC), there is no provision under the Act which empowers the A.O to make an amendment in the return of income, except for on the basis of a valid revised return of income, which we find in the case before us the assessee had failed to file. However, we are also not oblivious of the fact that the Hon ble Apex Court had in the case of Goetze (India) Ltd. (supra) specifically observed that the observations recorded in its order were limited to the power of the assessing authority, and does not impinge on the powe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat now when the non-compete fee of ₹ 40.50 crore was received by the assessee pursuant to the restrictive/negative covenant in the agreement entered into between him and Price Water House Cooper Pvt. Ltd. and others on 25.04.2007, as per which he had relinquished his right to practice as a Chartered accountant and Financial consultant in India for a period of 5 years, as well as foregone all his interests in RSM Company and RSM Advisory Services Pvt. Ltd, therefore, the same being clearly in the nature of a compensation received by the assessee for refraining from carrying on his profession, was thus a Capital receipt . 19. We now advert to the issue as to whether the amount of noncompete fee of ₹ 40.50 crore received by the assessee pursuant to the restrictive/negative covenant in the agreement entered into between him and Price Water House Cooper Pvt. Ltd. and others on 25.04.2007, as per which he had relinquished his right to practice as a Chartered accountant and Financial consultant in India for a period of 5 years, as well as foregone all his interests in RSM Company and RSM Advisory Services Pvt. Ltd, was liable to be assessee as the income of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thered from the fact that the legislature in all its wisdom had vide the Finance Act, 2016, with effect from 01.04.2017 made available the term or profession in Sec. 28(va)(a) of the Act . The aforesaid prospective insertion of the term or profession in the aforementioned statutory provision, viz. Sec. 28(va)(a) makes its abundantly clear beyond any scope of doubt that prior to AY: 2017-18 the applicability of Sec. 28 (va)(a) was restricted only in context of amounts which were received or receivable by way of non compete fees in relation to any business, and was not applicable where such sum was received or receivable under an agreement for not carrying out any activity in relation to a profession. We have given a thoughtful consideration to the issue before us, and are of the considered view that the CIT(A) had rightly observed that the provision of Sec. 28(va)(a) were not applicable to the amount of ₹ 40.50 crore which was received by the assessee by way of non-compete fees from PWC and others, in terms of the agreement dated 25.07.2007 for not practising the profession of a Chartered Accountant for a period of 5 years. 20. We thus in the backdrop of our aforesaid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applied the provisions of Section 14A r.w. rule 8D and confirmed the aforesaid disallowance of ₹ 7,60,656/- in the hands of the assessee. 23. We have given a thoughtful consideration to the facts of the case and are of the considered view that the very process of determination of the amount of expenditure incurred in relation to exempt income would be triggered, only if the A.O. returns a finding that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. We are of the considered view that it is only if the A.O. is not satisfied with the correctness of the claim of the assessee that no expenditure had been incurred in relation to the exempt income, therein only after recording cogent reasons as regards the same, that the A.O. can embark upon the determination of the amount of expenditure in accordance with the method prescribed in Section 14A r.w. Rule 8D. We find that our aforesaid view stands fortified by the recent judgment of the Hon ble Supreme Court in the case of : Godrej Boyce Manufacturing Company Limited (supra), wherein the Hon ble Apex Court had held as under:- Whether such determination is to be made on appl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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