ACIT, Hyderabad V. M/s Ind-Bharath Power Infra Pvt. Ltd., Hyderabad

ITA 1692/HYD/2008

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 66126 (ITAT-HYDERABAD)
• Duration Of Justice: 3 year(s) 8 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-08-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 13-07-2011
• Assessment Year: 2002-2003
• Appeal Filed On: 25-11-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: K GNANAPRAKASH
• Assessee Lawyers: SAMUEL NAGADEDI
• Keywords: Capital asset; Capital receipt; Capital expenditure
• Section: 37(1); 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER AND SHRI D. KARUNAKARA RAO, ACCOUNTANT MEMBER ITA NO. 1692/HYD/2008 ASSESSMENT YEAR: 2002-03 ASSTT. COMMISSIONER OF INCOME-TAX, APPEL LANT CIRCLE 2(1), HYDERABAD VS. M/S IND-BHARAT POWER INFRA PVT. LTD., RESPONDE NT HYDERABAD. APPELLANT BY : MR. K. GNANA PRAKASH RESPONDENT BY : MR. SAMUEL NAGADEDI DATE OF HEARING : 02/07/2012 DATE OF PRONOUNCEMENT : 03/08/2 012 ORDER PER ASHA VIJAYARAGHAVAN, J.M.: THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAINS T THE ORDER OF THE CIT(A)-III, HYDERABAD DATED 23/09/200 8 FOR THE ASSESSMENT YEAR 2002-03. 2. BRIEFLY, THE FACTS OF THE CASE ARE THAT THE ASSE SSEE COMPANY, EARLIER KNOWN AS M/S KANUMURI HOLDINGS PVT . LTD. (KHPL) WAS IN THE BUSINESS OF SETTING UP AND RUNNIN G OF POWER PROJECTS. THIS COMPANY ALONG WITH M/S ANDHRA FUELS PVT. LTD. (AFPL), FORMED TWO COMPANIES M/S ARKAY ENERGY LTD . FOR THE PURPOSE OF SETTING UP OF POWER PROJECTS IN TAMIL NA DU, AND M/S RVK ENERGY PVT. LTD. FOR SETTING UP POWER PLANTS IN ANDHRA ITA NO. 1692/HYD/2008 M/S IND-BHARATH POWER INFRA PVT. LTD. 2 PRADESH. VIDE AGREEMENT DATED 28/12/2011, AFPL WITH DREW ITS INVESTMENT FROM M/S ARKAY ENERGY PVT. LTD. IN FAVOU R OF THE ASSESSEE COMPANY. IT WAS ALSO AGREED THAT THE ASSES SEE COMPANY SHALL NOT SET UP ANY POWER PROJECT DIRECTLY OR INDIRECTLY IN THE STATE OF AP FOR A PERIOD OF 3 YEA RS. IN VIEW OF SUCH NON-COMPETITION COVENANT, THE ASSESSEE COMPANY WAS PAID COMPENSATION OF RS. 3.25 CR. WHICH WAS CREDITE D TO THE CAPITAL RESERVE ACCOUNT AND WAS CLAIMED AS CAPITAL RECEIPT, NOT LIABLE TO TAX. THE AO TREATED THE ASSESSEES CLAIM AS REVENUE RECEIPT TAXABLE UNDER THE PROVISIONS OF THE IT ACT, BY OBSERVING AS UNDER:- KHPL AND ITS ASSOCIATES ON ONE PART AND AFPL AND IT S ASSOCIATES ON THE SECOND PART HAVE BASICALLY BIFURC ATED THEIR FIELD OF ACTION TO TAMIL NADU AND ANDHRA PRAD ESH RESPECTIVELY. UNDER THESE CIRCUMSTANCES, THE QUESTI ON OF PAYING ANY NON-COMPETITION COMPENSATION BY KHPL TO AFPL OR BY AFPL TO KHPL SHOULD NOT ARISE. PRIOR TO THE AGREEMENT, BOTH THE GROUPS WERE COMBINDLY DOING THE IR BUSINESS ACTIVITIES IN TAMIL NADU AND ANDHRA PRADES H. SUBSEQUENT TO THE AGREEMENT, IT WAS DECIDED THAT KH PL WILL CONFINE ITSELF TO TAMIL NADU AND AFPL WILL CON FINED TO AP. IT IS ONLY A SHARING OF NORMAL BUSINESS ACTIVIT Y BETWEEN THE TWO PARTIES WITHOUT ANY MONOPOLY RIGHTS OVER THE SPECIFIC BUSINESS ACTIVITY WITH ANY COPY R IGHT OR PATENT RIGHT. THE NATURE OF BUSINESS UNDERTAKEN BY BOTH THE PARTIES IS OF A KIND OF BUSINESS WHICH ANY ONE CAN DO. KHPL AND AFPL ARE NOT THE ONLY PERSONS WHO ARE HAVI NG ANY COPY RIGHT OR PATENT RIGHT OVER THEIR BUSINESS ACTIVITIES. THIS KIND OF BUSINESS CAN BE DONE BY AN YBODY WHO HAS INTEREST AND CAPACITY. IT MEANS, THE COMPET ITION SAID TO HAVE BEEN THERE BETWEEN KHPL AND AFPL IS NO T BETWEEN THESE TWO PARTIES BUT AMONG SO MANY BUSINES S PERSONS/ORGANIZATION IS IN THAT KIND OF BUSINESS. THEREFORE, IT CAN BE CONCLUDED THAT THERE IS NO EXI STENCE OF ANY COMPETITION BETWEEN KHPL AND AFPL. HENCE, PAYING OR RECEIVING ANY NON-COMPETITION COMPENSATIO N FEE IS NOT A GENUINE TRANSACTION. SO, IT IS DETERMI NED THAT THE TRANSACTION BETWEEN THESE TWO PARTIES FOR NON- ITA NO. 1692/HYD/2008 M/S IND-BHARATH POWER INFRA PVT. LTD. 3 COMPETITION COMPENSATION IS NOT A REAL ONE BUT A SH AM TRANSACTION AND A COLORABLE DEVICE JUST FOR CLAIMIN G THE SAME AS CAPITAL RECEIPT WHICH IS ACTUALLY A REVEN UE RECEIPT TAXABLE UNDER THE PROVISIONS OF IT ACT, 196 1. HENCE, SAME IS ADDED TO THE INCOME ALREADY ASSESSED . 3. AGGRIEVED, THE ASSESSEE CARRIED THE MATTER IN AP PEAL BEFORE THE CIT(A). 4. BEFORE THE CIT(A), THE LEARNED AR OF THE ASSESSE E FILED WRITTEN SUBMISSIONS WHEREIN STATED THAT THE SUM OF RS. 3.25 CR. WAS RECEIVED AS COMPENSATION BY THE ASSESSEE CO MPANY FOR AGREEING TO NOT SET UP ANY POWER PROJECT DIRECTLY O R INDIRECTLY IN THE STATE OF AP FOR A PERIOD OF 3 YEARS COMMENCI NG FROM 28/12/2001. THE SAID COMPENSATION WAS SETTLED BY WA Y OF A SWAP OF INVESTMENTS HELD BY AFPL IN M/S ARKAY ENERG Y PVT. LTD. IT WAS FURTHER SUBMITTED THAT PRIOR TO THE AME NDMENT IN SEC. 28 OF THE INCOME TAX ACT, BY INSERTING CLAUSE (VA) EFFECTIVE FROM AY 2003-04, THE SAID COMPENSATION RE CEIVED FOR NON-COMPETING IN BUSINESS IS A CAPITAL RECEIPT AND MORE SO AS THE SAME IS SETTLED BY SWAP OF INVESTMENTS IN SHARE S IN THE REORGANIZATION AND CONSOLIDATION OF EXISTING BUSINE SS TO PROTECT MUTUAL INTEREST OF THE PROMOTERS. 5. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSE E, EXAMINING THE FACTS, CONSIDERING THE AGREEMENT BETW EEN THE ASSESSEE(KFPL) AND M/S AFPL ENTERED INTO ON 28/12/2 001 AND RELYING ON THE CASE LAWS, NAMELY, I) BEST & CO. PVT . LTD., 60 ITR 11, II) KETTLEWELL BULLEN & CO. LTD., VS. CIT, 53 ITR 261, III) CIT VS. TI& M SALES LTD., 259 ITR 116, IV) G.D . NAIDU, 165 ITA NO. 1692/HYD/2008 M/S IND-BHARATH POWER INFRA PVT. LTD. 4 ITR 63, V) N. SANDEEP REDDY, 95 ITD 33, AND VI) SAU RABH SRIVASTAVA, 19 SOT 74, THE CIT(A), INTER-ALIA, HELD AS UNDER:- 2.6 IT IS PERTINENT TO MENTION HERE THAT PAYMENT OF AFORESAID NON-COMPETE FEES OF RS. 3.25 CRS. WAS EXAMINED BY THE AO DURING THE COURSE OF ASSESSMENT PROCEEDINGS IN THE CASE OF AFPL FOR AY 2002-03. THE AO NEVER DOUBTED THE GENUINENESS OF TRANSACTION AND HE LD THAT PAYMENT WAS MADE TO KMPL TO WARD OFF THE COMPETITION IN BUSINESS. HOWEVER, HE HELD THAT BY T HIS NON-COMPETE AGREEMENT, AFPL GOT AN ENDURING BENEFIT AND THEREFORE THE PAYMENT WAS TREATED AS CAPITAL EXPENDITURE. IN APPEAL, THE LD. CIT(A) VIDE HIS ORD ER DATED 30/09/2005 IN ITA NO. 0072/CC-I, HYD/CIT(A)- I/05-06 WHILE UPHOLDING THE GENUINENESS AND THE NAT URE OF THE PAYMENT, OBSERVED IN PARA 4.5 AS UNDER:- 4.5 IT IS EVIDENT FROM THE ABOVE FACTS THAT THE PAYMENT WAS MADE BY THE APPELLANT COMPANY TO A RIVAL COMPANY TO WARD OFF COMPETITION IN BUSINESS. HOWEVER, BY MAKING THIS PAYMENT, THE APPELLANT HAS NOT DERIVED ANY ADVANTAGE OF ENDURING NATURE TO HOLD THE EXPENSES AS CAPITAL IN NATURE. THE AGREEMENT WAS ONLY FOR A LIMITED PERIOD OF 3 YEARS. THE MAIN OBJECT WAS TO STALL THE IMMEDIATE POTENTIA L THREAT ON THE PARTING AWAY OF THE OTHER DIRECTOR BY KEEPING HIM AWAY FROM ALL HIS CONTACTS WITH THE SUPPLIERS, FUNDING AGENCIES AND OTHER BUSINESS ASSOCIATES AND ALSO TO STOP HIM FROM CREATING ANY LEGAL PROBLEMS FOR THE APPELLANT COMPANY. THUS, THE SAID PAYMENT WAS MADE IN ORDER TO ENABLE THE APPELLANT COMPANY TO DERIVE MORE PROFITS IN THE BUSINESS WITHOUT ANY HINDRANCE FROM THE PARTING DIRECTOR AND HIS GROUP COMPANIES. THE SAID PAYMENT WAS MADE FOR THE PURPOSE OF RUNNING THE BUSINESS AND NOT FOR THE PURPOSE OF ACQUIRING THE BUSINESS. THE EXPENDITURE INCURRED WAS NOT RELATED TO THE ACQUISITION OF AN ASSET OR A RIGHT OF PERMANENT CHARACTER OR AN ADVANTAGE OF ENDURING NATURE. SUCH EXPENDITURE CANNOT BE THEREFORE HELD AS CAPITAL EXPENDITURE. SINCE THE PAYMENT WAS MADE WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS, T HE SAME HAS TO BE ALLOWED AS REVENUE EXPENSES IN TERMS OF PROVISIONS OF SECTION 37(1) OF THE ACT. ITA NO. 1692/HYD/2008 M/S IND-BHARATH POWER INFRA PVT. LTD. 5 IN VIEW OF THE AFORESAID FINDINGS GIVEN BY AO & CIT(A) IN THE CASE OF AFPL, I DO NOT AGREE WITH THE OBSERVATION OF THE AO IN THIS CASE THAT THE PAYMENT OF NON-COMPETE FEES WAS A SHAM TRANSACTION OR A COLOURABLE DEVICE TO EVADE THE TAX. 6. AGGRIEVED BY THE ORDER OF THE CIT(A), THE REVENU E IS IN APPEAL BEFORE US RAISING THE FOLLOWING GROUNDS O F APPEAL: 1. THE ORDER OF THE LEARNED CIT(A) IS ERRONEOUS IN LAW AND IN THE FACTS AND CIRCUMSTANCES OF THE CASE IN ALLOWING THE ASSESSEES APPEAL. 2. THE LEARNED CIT(A) ERRED IN HOLDING THAT THE COMPENSATION/NON-COMPETE FEE RECEIVED BY THE ASSESSEE WAS A CAPITAL RECEIPT NOT LIABLE TO TAX. 3. THE LEARNED CIT(A) FAILED TO APPRECIATE THE FACT THAT THE SO CALLED AGREEMENT BETWEEN THE ASSESSEE AND M/S ANDHRA FUELS PVT. LTD. IS ONLY A SHARING OF NORMAL BUSINESS ACTIVITY BETWEEN THE TWO PARTIES WITHOUT ANY MONOPOLY RIGHT OVER THE SPECIFIC BUSINESS ACTIVITY WITH ANY COPY RIGHT OR PATENT RIG HT. MOREOVER, THE NATURE OF THE BUSINESS UNDERTAKEN BY BOTH THE PARTIES IS OF A KIND OF BUSINESS WHICH ANY ONE CAN DO. 4. THE LEARNED CIT(A) OUGHT TO HAVE APPRECIATED THE FACT THAT THE COMPETITION SAID TO HAVE BEEN BETWEEN THE PARTIES IS NOT BETWEEN THESE TWO PARTIES ONLY B UT AMONG SO MANY BUSINESS PERSONS/ORGANIZATIONS IN THAT KIND OF BUSINESS. 7. WE HAVE HEARD THE ARGUMENTS OF BOTH THE PARTIES AND PERUSED THE RECORD AS WELL AS GONE THROUGH THE ORDE RS OF THE AUTHORITIES BELOW. WE REFER TO THE TERMS AND CONDIT IONS OF THE AGREEMENT ENTERED BY THE ASSESSEE (KFPL) AND M/S AF PL ON 28/12/2001, WHICH ARE AS UNDER:- ITA NO. 1692/HYD/2008 M/S IND-BHARATH POWER INFRA PVT. LTD. 6 1. IT IS AGREED MUTUALLY BY RAGHU AND KHPL ON THE O NE PART AND AFPL ON THE OTHER PART THAT, EFFECTIVE FRO M 28 TH DECEMBER, 2001, AFPL SHALL EXECUTE POWER PROJECTS I N ANDHRA PRADESH AND RAGHU/KHPL AND THEIR ASSOCIATE COMPANIES SHALL SET UP POWER PROJECTS IN TAMIL NADU . 2. AFPL SHALL WITHDRAW ITS INVESTMENT FROM ARKAY EN ERGY LTD., AND TRANSFER THE SAME TO RAGHU/KHPL OR THEIR NOMINEES. 3. THE INVESTMENT IN SHARE APPLICATION MONEY OF ARK AY ENERGY LTD., BY AFPL SHALL BE RETURNED WITHIN 90 DA YS AND RAGHU/KHPL SHALL CONTRIBUTE THEIR MONEY TO ARKAY EN ERGY LTD., TO ENABLE SUCH REPAYMENT. 4. RAGHU/KHPL SHALL CONTINUE THE EXECUTION OF POWER PROJECT UNDER IMPLEMENTATION BY ARKAY ENERGY LTD., WITHOUT ANY INTERFERENCE OR OBJECTION OR WHATSOEVER FROM AFPL. 5. RAGHU/KHPL AGREE THAT THEY SHALL NOT SET UP ANY POWER PROJECT DIRECTLY OR INDIRECTLY IN THE STATE OF ANDH RA PRADESH FOR A PERIOD OF 3 YEARS COMMENCING FROM 28 TH DECEMBER, 2001. AFPL AGREES THAT IN VIEW OF SUCH NO N- COMPETITION CONVENAT THEY SHALL PAY COMPENSATION OF RS. 325 LAKHS TO KHPL. 8. AS IS EVIDENT FROM CONDITION NO. 5 MENTIONED ABO VE IS A RESTRICTIVE COVENANT BARRING THE ASSESSEE COMPANY F OR SETTING UP ANY POWER PROJECT DIRECTLY OR INDIRECTLY IN THE STATE OF AP FOR A PERIOD OF THREE YEARS. THE COMPENSATION OF RS . 3.25 CRORES WAS PAID TO THE ASSESSEE COMPANY FOR ACCEPTI NG THE SAID RESTRICTIVE COVENANT FOR A PERIOD OF 3 YEARS. THE AMOUNT WAS THUS RECEIVED BY THE ASSESSEE COMPANY FOR IMPAI RMENT OF INCOME EARNING APPARATUS, STERILIZATION OF SOURCE OF INCOME AND TRANSFER OF A CAPITAL ASSET. SUCH RECEIPTS FALL IN THE CATEGORY OF CAPITAL RECEIPTS. MOREOVER, AS HELD BY THE CIT(A), IN THE CASE OF AFPL FOR AY 2002-03, THE AFORESAID P AYMENT OF ITA NO. 1692/HYD/2008 M/S IND-BHARATH POWER INFRA PVT. LTD. 7 NON-COMPETE FEES OF RS. 3.25 CRORES WAS TREATED BY THE AO AS CAPITAL EXPENDITURE, WHICH WAS CONFIRMED BY THE CIT (A) VIDE HIS ORDER DATED 30/09/2005 (SUPRA). 9. IN THE CASE OF ACIT VS. LATE DR. B.V. RAJU IN IT A NO. 1034/HYD/2004 FOR AY 2000-01, THE ITAT, HYDERABAD B ENCH VIDE ITS ORDER DATED 13/02/2012, HELD THAT AS PER S. 28(VA)( A) THE AMOUNT RECEIVED FOR NOT CARRYING OUT ANY ACTIVITY IN RELA TION TO ANY BUSINESS TAXABLE ONLY FROM A.Y. 2003-04. IN THE CASE OF GU FFIC CHEM. P. LTD. V. COMMISSIONER OF INCOME-TAX, 320 ITR 602 (SC) THE HO NBLE SUPREME COURT HELD THAT PAYMENT RECEIVED AS NON-COMPETITION FEE UNDER A NEGATIVE COVENANT WAS ALWAYS TREATED AS A CAPITAL R ECEIPT TILL THE ASSESSMENT YEAR 2003-04. IT IS ONLY VIDE THE FINANC E ACT, 2002 WITH EFFECT FROM APRIL 1, 2003 THAT RECEIPT BY WAY OF NO N-COMPETE FEE WAS MADE TAXABLE U/S. 28(VA)). THE HONBLE COURT ALSO H ELD THAT IT WAS WELL SETTLED THAT A LIABILITY CANNOT BE CREATED RETROSPE CTIVELY. THE HONBLE COURT HELD THAT THE AMENDMENT BY INSERTION OF CLAUS E (A) TO SECTION 28(VA) WAS AMENDATORY AND NOT CLARIFICATORY. 10. IN THE PRESENT CASE, THE ASSESSMENT YEAR UNDER CONSIDERATION IS ASSESSMENT YEAR 2002-03. IN VIEW OF THE ABOVE DISCU SSION, WE ARE OF THE VIEW THAT THE CIT(A) HAS RIGHTLY TREATED THE COMPENSATION/NON-COMPETE FEES RECEIVED BY THE ASSES SEE AS A CAPITAL RECEIPT NOT LIABLE TO TAX. ACCORDINGLY, WE UPHOLD THE ORDER OF THE CIT(A) AND DISMISS THE GROUNDS OF APPE AL RAISED BY THE REVENUE ON THIS COUNT. ITA NO. 1692/HYD/2008 M/S IND-BHARATH POWER INFRA PVT. LTD. 8 11. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISS ED. PRONOUNCED IN THE OPEN COURT ON 3 RD AUGUST, 2012. SD/- SD/- (D. KARUNAKARA RAO) (ASHA VIJAYARAGHAVAN ) ACCOUNTANTMEMBER JUDICIAL MEMBER HYDERABAD, DATED: 3 RD AUGUST, 2012 KV COPY TO:- 1) M/S IND-BHARATH POWER INFRA PVT. LTD., (FORMERLY KANUMURI HOLDINGS PVT. LTD.) P.NO. 30-A, ROAD NO. 1, FILM NAGAR, JUBILEE HILLS, HYDERABAD. 2) ACIT, CIRCLE 2(1), 8 TH FLOOR, B BLOCK, IT TOWERS, AC GUARDS, HYDERABAD. 3) CIT(A)-III, HYDERABAD 4) CIT-II, HYDERABAD 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HDE RABAD