CERA-CHEM Pvt. Ltd., CHENNAI V. ACIT, CHENNAI

ITA 2213/CHNY/2016

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 6109 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 2 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-09-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 30-08-2017
• Assessment Year: 2009-2010
• Appeal Filed On: 25-07-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ASISH TRIPATHI
• Assessee Lawyers: DR L NATARAJAN
• Keywords: Depreciation; Salary income; Revenue expenditure; Capital expenditure

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL , C B ENCH, CHENNAI . , ! ' . #$ , % & BEFORE SHRI A.MOHAN ALANKAMONY, ACCOUNTANT MEMBER AND SHRI DUVVURU RL REDDY, JUDICIAL MEMBER ./ I.T.A.NO.2213/MDS/2016 ( / ASSESSMENT YEAR: 2009-10) M/S. CERA-CHEM PRIVATE LIMITED 1A, NEW AVADI ROAD, HIGH COURT COLONY, VILLIVAKKAM, CHENNAI 600 049. VS THE ASST. COMMISSIONER OF INCOME TAX, COMPANY CIRCLE -1(3), CHENNAI -34. PAN: AAACC1308C ( /APPELLANT) ( /RESPONDENT) / APPELLANT BY : DR. L. NATARAJAN, CA /RESPONDENT BY : SHRI ASISH TRIPATHI, JCIT /DATE OF HEARING : 30.08.2017 ! /DATE OF PRONOUNCEMENT : 27.09.2017 / O R D E R PER A. MOHAN ALANKAMONY, AM:- THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER PASSED BY THE LEARNED COMMISSIONER OF INCOME TAX (A PPEALS)-1, CHENNAI DATED 24.05.2016 IN ITA NO.97/CIT(A)-1/2013 -14 FOR THE ASSESSMENT YEAR 2009-10 PASSED U/S.250(6) R.W.S. 14 3(3) & 147 OF THE ACT. 2 ITA NO.2213/MDS/2016 2. THE ASSESSEE HAS RAISED SEVERAL GROUNDS IN ITS A PPEAL; HOWEVER THE CRUXES OF THE ISSUE ARE THAT:- (I) THE LD.CIT(A) HAS ERRED IN UPHOLDING THE REOPEN ING OF ASSESSMENT U/S.147 OF THE ACT. (II) THE LD.CIT(A) HAS ERRED IN UPHOLDING THE ORDER OF THE LD.AO WITH RESPECT TO THE DISALLOWANCE OF RS.3,34,00,000/- BEING THE COMPENSATION/REWARD PAID TO SHRI R. RAVIKUMAR, THE DIRECTOR OF THE COMPANY ON H IS RETIREMENT TOWARDS HIS MERITORIOUS SERVICES. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E IS A PRIVATE LIMITED COMPANY, FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR 2009-10 ON 30.09.2009 DECLARING LOS S OF RS.8,01,770/-. INITIALLY THE RETURN WAS PROCESSED U/S.143(1) OF THE ACT. THEREAFTER IT WAS REVEALED THAT THE LOSS DECLARED BY THE ASSESSEE WAS DUE TO THE PAYMENT OF RS.3,36,50,000/- TOWARDS SETTLEMENT MADE TO A DIRECTOR. IT WAS OPINED BY THE LD.AO THAT THE PAYMENT MADE TO THE DIRECTOR WERE EXCESSIVE, TH EREFORE HE REOPENED THE ASSESSMENT BY ISSUANCE OF NOTICE U/S.1 48 OF THE ACT ON 06.03.2012. THEREAFTER THE LD.AO DISALLOWED THE CLAIM OF EXPENDITURE OF RS.3,34,00,000/- BY HOLDING IT TO BE IN THE NATURE 3 ITA NO.2213/MDS/2016 OF NON-COMPETE FEE PAID TO DIRECTORS, WHICH IS NOT ALLOWABLE AS DEDUCTION BECAUSE IT IS CAPITAL EXPENDITURE. 4. GROUND NO. 2(I) : REOPENING :- AT THE OUTSET, WE FIND THAT THE RETURN WAS INITIA LLY PROCESSED U/S.143(1) OF THE ACT AND THEREAFTER WITHIN 4 YEARS FROM THE END OF THE RELEVANT ASSESSMENT YEAR, THE ASSESSMENT WAS REOPENED BECAUSE THE LD.AO OBSERVED CERTAIN PAYMENTS MADE BY THE ASSESSEE TO BE EXCESSIVE. IN THIS SITUATION, WE AR E OF THE CONSIDERED VIEW THAT THE REOPENING OF THE ASSESSMEN T BY THE LD.AO DOES NOT SUFFER FROM ANY INFIRMITIES BECAUSE HE HAD A VALID GROUND FOR REOPENING AND THE CASE OF THE ASSE SSEE HAD NOT UNDERGONE SCRUTINY ON ANY EARLIER OCCASION BECAUSE EARLIER THE RETURN WAS ONLY PROCESSED U/S.143(1) OF THE ACT. TH EREFORE WE HEREBY UPHOLD THE ACTION OF THE LD.AO ON REOPENING. THUS THIS GROUND RAISED BY THE ASSESSEE IS DEVOID OF MERITS. 5. GROUND NO. 2(II) : DISALLOWANCE TOWARDS PAYMENT OF NON-COMPETE FEES:- DURING THE COURSE OF SCRUTINY ASSESSMENT PROCEEDI NGS IT WAS OBSERVED BY THE LD.AO THAT THE ASSESSEE HAD PAI D HUGE 4 ITA NO.2213/MDS/2016 SUM OF RS.3,34,00,000/- TOWARDS SETTLEMENT TO DIREC TOR SHRI RAVIKUMAR. ON THE ISSUE, THE LD.AO HAD MADE T HE FOLLOWING OBSERVATIONS:- (I) SHRI RAVIKUMAR HAS SPECIALIZED KNOWLEDGE IN THE CONSTRUCTION CHEMICAL INDUSTRY. (II) HE WAS AMONGST ONE OF THE PROMOTER OF THE COMP ANY AND MANAGED THE COMPANY IN THE CAPACITY AS MANAGING DIRECTOR. (III) SHRI RAVIKUMAR WAS THE MAIN MAN BEHIND THE CO MPANYS PRODUCT IN THE FIELD OF BUILDING CHEMICALS AND PLAY ED AN IMPORTANT ROLE IN BUILDING UP THE BRAND NAME CERA CHEM. (IV) SHRI RAVIKUMAR HAD WORKED IN THE COMPANY TIREL ESSLY WITH GREAT AMOUNT OF INTEGRITY AND DEDICATION. (V) WITH HIS TECHNICAL INPUT AND MANAGERIAL SKILLS, HE HAS BROUGHT THE COMPANY TO ITS PRESENT STATURE. (VI) SHRI RAVIKUMAR HAS BEEN DRAWING SALARY OF ONLY RS.2.5 LAKHS PER MONTH UNTIL RETIREMENT. BECAUSE OF THE ABOVE RELATIONSHIP BETWEEN THE ASSESSEE COMPANY AND SHRI RAVIKUMAR, THE LD.AO OPINED THAT T HE HUGE 5 ITA NO.2213/MDS/2016 UNREASONABLE PAYMENT OF RS.3,34,00,000/- TO SHRI RA VIKUMA WHO IS NOT RELATED TO ANY OF THE EXISTING DIRECTORS OF THE COMPANY, WILL DEFINITELY BE ON ACCOUNT OF AN UNWRIT TEN AGREEMENT TOWARDS NON- COMPETE FEE OR AGAINST STARTING RIVAL BUSINESS. IN THIS CIRCUMSTANCES, THE LD.AO FURTHER OPINED THAT T HE BENEFIT OF THE EXPENDITURE INCURRED BY THE ASSESSEE IS OF ENDU RING NATURE, THEREFORE IT WOULD AMOUNT TO CAPITAL EXPENDITURE AN D NOT ALLOWABLE AS DEDUCTION AS REVENUE EXPENDITURE. THE LD.AO ALSO RELIED ON CERTAIN CASE LAWS CITED IN HIS ORDER WHIL E ARRIVING AT HIS DECISION. 5.1 ON APPEAL, THE LD.CIT(A) TAKING CUE FROM THE DE CISION OF THE HONBLE KERALA HIGH COURT IN THE CASE MRS. OBER AN TRADING CORPORATION VS. ITO REPORTED IN 360 ITR 19 HELD THA T THE PAYMENT MADE TO THE DIRECTOR TOWARDS SETTLEMENT DID NOT RESULT IN A TANGIBLE OR INTANGIBLE ASSET WHICH IS ELIGIBLE FOR DEPRECIATION. HE FURTHER OBSERVED THAT THE APPELLANT COMPANY IS IN THE BUSINESS OF MANUFACTURE OF CONSTRUCTION CHEMICALS AND COMPENSAT ING RETIRING PARTNERS IN PURSUANCE OF SETTLEMENT OF DIRECTORS ARRIVED AT BY WAY OF AGREEMENT RESOLVED BY THE BOARD CANNOT SAID TO BE F OR THE PURPOSES OF THE BUSINESS OF THE APPELLANT. THE CLAIM DOES NOT SATISFY THE TEST OF 6 ITA NO.2213/MDS/2016 BEING LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY F OR THE PURPOSE OF BUSINESS OF THE APPELLANT. ALL PAYMENTS DO NOT QUAL IFY TO BE ALLOWED AS EXPENDITURE AND TO THAT EXTENT CANNOT BE A CHARGE O N THE PROFIT OF THE BUSINESS. TO THAT EXTENT A PAYMENT AS THIS BEING E X-GRATIA IN NATURE DOES NOT QUALIFY TO BE ALLOWED. REAPPOINTMENT OF T HE RIGHT OF DIRECTS IN THE ASSETS OF THE COMPANY DOES NOT AFFECT THE BUSIN ESS OF THE COMPANY AND THE PROFIT AND LOSS OF THE COMPANY. IF AT ALL IT ONLY LIMITS THE RIGHT OF EACH OF THE CONTINUING DIRECTORS OVER THE ASSETS OF THE COMPANY. IN VIEW OF THE ABOVE THE LD.CIT(A) UPHELD THE ORDER OF THE LD.AO. 5.2 BEFORE US THE LD.AR ARGUED BY REITERATING HIS S UBMISSION MADE BEFORE THE LD.CIT(A). THE SAME IS EXTRACTED H EREIN BELOW FROM THE ORDER OF THE LD.CIT(A) FOR REFERENCE:- A) THE PAYMENTS MADE TO THE RETIRING DIRECTOR EMPLOYE ES WHO ARE WORKING MORE THAN FIFTEEN YEARS, AT THE TIME OF RET IREMENT ARE RETIREMENT BENEFIT FOR THEIR LONG AND MERITORIOUS S ERVICES. B) THIS PAYMENT WAS NOT MADE AS A COMPENSATION FOR REL INQUISHING ANY RIGHTS OR INTEREST IN THE ASSETS AND LIABILITIE S OF THE COMPANY. BECAUSE OF THIS PAYMENT, THERE WAS NEITHER RELINQUI SHMENT OF ANY RIGHTS, TITLES, INTEREST IN THE SHAREHOLDING OR STA KES IN FAVOUR OF ANYBODY NOR ANY TRANSFER OF RIGHTS OR OWNERSHIP OF SHARES IN FAVOUR OF ANY SHAREHOLDERS WERE TAKEN PLACE. 7 ITA NO.2213/MDS/2016 C) BECAUSE OF THE ABOVE SAID PAYMENT OF RETIREMENT BEN EFIT, THERE WAS NO BAR WAS IMPOSED ON THE PART OF THE RETIRED D IRECTOR EMPLOYEES EITHER TO START A SIMILAR BUSINESS OF THE APPELLANT COMPANY AFTER RETIREMENT OR TO BE A COMPETITOR TO T HE APPELLANT COMPANY IN FUTURE. D) THE RETIREMENT BENEFITS WERE FIXED BASED ON THE RET IRED EMPLOYEES PERIOD OF EMPLOYMENT, INTEGRITY, DEVOTIO N, HONESTY, MANAGERIAL SKILLS, MARKETING ABILITY AND DEDICATION . E) QUANTUM OF RETIREMENT BENEFITS ARE NEITHER EXCESSIV E NOR UNREASONABLE, IF THE FACTORS SUCH AS MARKET VALUE O F THE FIXED ASSETS OF THE COMPANY, TURNOVER AND RETURNED INCOME OF THE PAST YEARS, GOODWILL, PRIVILEGES GAINED IN THE MARKET AN D ABOVE ALL THE MERITORIOUS, DEDICATED SERVICES RENDERED BY THE RET IRED DIRECTOR EMPLOYEES WHILE IN EMPLOYMENT ARE CONSIDERED JUDICI OUSLY. F) TDS HAS BEEN DEDUCTED ON THE ABOVE REFERRED RETIREM ENT BENEFITS U/S.192 OF INCOME TAX ACT. THE RECIPIENT RETIRED E MPLOYEE DIRECTORS ALSO RETURNED THIS RETIREMENT BENEFITS RECEIVED BY THEM UNDER THE HEAD SALARY AND IF IT WAS IN THE N ATURE OF NON- COMPETE FEE. THEN THEY COULD HAVE TREATED IT AS B USINESS INCOME U/S.28(VA) OF INCOME TAX ACT AND ALSO MIGHT HAVE CLAIMED DEDUCTION OF EXPENDITURE INCURRED THEREON U /S.28 TO 44 OF INCOME TAX ACT. INSTEAD THEY HAVE CLAIMED THE S AME UNDER THE HEAD SALARY AS SALARY INCOME. G) FURTHER, THE APPELLANT CONTESTED THAT IT HAS ESTABL ISHED BEFORE THE AO THAT THE CASE LAWS RELIED UPON BY THE ASSESSING OFFICER ARE WITH RESPECT TO PAYMENT MADE TO RETIRING PARTNER BY THE FIRM AND NOT APPLICABLE FOR THE RETIREMENT BENEFITS MADE TO RETIRED EMPLOYEE DIRECTS BY COMPANY. FURTHER, THE APPELLAN T SUBMITTED 8 ITA NO.2213/MDS/2016 THAT THE CASE LAW M/S. SHARP BUSINESS SYSTEMS (SUPR A) RELIED UPON BY THE AO ARE ENTIRELY DIFFERENT AND DISTINGUI SHABLE FROM THE FACTS OF THE CASE. H) IT IS FURTHER SUBMITTED THAT IF THE RETIRED DIRECTO R EMPLOYEES OF THE APPELLANT COMPANY IF WILLS, CAN COMMENCE ANY SIMILA R BUSINESS OF THE APPELLANT COMPANY AND ALSO COMPETE THE APPEL LANT COMPANY. THE APPELLANT COMPANY HAVE NO LEGAL RIGHT S TO BAR THEM TO DO SO. HENCE THE PAYMENT MADE TO THE RETIR ED DIRECTOR EMPLOYEES ARE RETIREMENT BENEFIT ONLY AND NON-COMPE TE FEE. THE LD.DR ON THE OTHER HAND ARGUED IN SUPPORT OF TH E ORDERS OF THE LD.REVENUE AUTHORITIES AND PLEADED FOR CONFIRMI NG THE SAME. 5.3 WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFUL LY PERUSED THE MATERIALS ON RECORD. FROM THE FACTS OF THE CAS E, IT IS APPARENT THAT THE PAYMENT MADE TO THE DIRECTOR AS F INAL SETTLEMENT IS DUE TO THE APPRECIATION OF HIS HARD W ORK IN THE COMPANY DURING THE PAST WHICH RESULTED IN THE ADVAN CEMENT OF THE COMPANY. DUE TO THE EFFORT OF THE DIRECTOR, TH E COMPANY HAD EARNED ENORMOUS REVENUE AND GOODWILL IN THE MARKET. FURTHER THE DIRECTOR OF THE COMPANY WHO IS IN RECEIPT OF TH E SETTLEMENT HAS DISCLOSED THE AMOUNT RECEIVED FROM THE COMPANY AS HIS INCOME AND PAID TAX ACCORDINGLY. IT IS ALSO PERTIN ENT TO MENTION 9 ITA NO.2213/MDS/2016 THAT THERE IS NO CONTRACTUAL OBLIGATION ON THE PART OF THE DIRECTOR FOR NON-COMPETING OR INVOLVE IN ANY RIVAL COMPETITI ON. THUS THE PAYMENT MADE TO THE DIRECTOR HAS NOT RESULTED IN AN Y ENDURING BENEFIT TO THE ASSESSEE COMPANY. FURTHER AS POINTE D OUT BY THE LD.AR, THERE WAS NEITHER RELINQUISHMENT OF ANY RIGH TS, TITLES, INTEREST IN THE SHAREHOLDINGS OR STAKES IN FAVOUR O F ANYONE NOR TRANSFER OF ANY RIGHTS OR OWNERSHIP OF SHARES IN FA VOUR OF ANY SHAREHOLDERS. IN THIS SITUATION, IT CAN BE ONLY CO NSTRUED THAT THE PAYMENT MADE TO THE DIRECTOR IS RETIREMENT BENEFIT BESTOWED ON HIM BASED ON HIS PERFORMANCE IN THE COMPANY. THOUG H THE LD.AO HAS STATED IN HIS ORDER THAT THE PAYMENT MADE TO THE DIRECTOR IS EXCESSIVE, HE HAS NOT REASONED AS TO HO W THE PAYMENT IS EXCESSIVE. FURTHER IT IS AN ACCEPTED PR OPOSITION THAT THE LD.AO CANNOT SIT ON JUDGMENT WITH RESPECT TO TH E ADMINISTRATIVE AND BUSINESS DECISIONS OF THE ASSESS EE. THE ASSESSEE HAS COMPUTED THE RETIREMENT BENEFITS OF TH E DIRECTOR BASED ON HIS SKILLS, INTEGRITY, MARKETING ABILITY E TC., AND THE REVENUE EARNED BY THE COMPANY. IT IS THE PREROGATI VE OF THE ASSESSEE COMPANY TO DETERMINE AS TO HOW MUCH IT SH OULD PAY TO COMPENSATE ITS DIRECTORS OR EMPLOYEES. THE ASSE SSEE HAS ALSO DEDUCTED TAX AT SOURCE TOWARDS THE PAYMENT MAD E TO THE 10 ITA NO.2213/MDS/201 6 DIRECTOR. CONSIDERING ALL THESE FACTS, WE ARE OF T HE CONSIDERED VIEW THAT THE EXPENSE INCURRED BY THE ASSESSEE COMP ANY IS REVENUE IN NATURE AND THEREFORE ALLOWABLE AS DEDUCT ION UNDER THE PROVISIONS OF THE ACT. HENCE, WE HEREBY DIRECT THE LD.AO TO DELETE THE ADDITION OF RS.3,34,00,000/- MADE IN THE HANDS OF THE ASSESSEE TOWARDS SETTLEMENT AMOUNT PAID TO ITS DIRE CTOR. 6. IN THE RESULT THE APPEAL OF THE ASSESSEE IS ALLO WED. ORDER PRONOUNCED ON THE 27 TH SEPTEMBER, 2017 AT CHENNAI. SD/- SD/- ( ! ' . #$ ) ( . ) ( DUVVURU RL REDDY ) ( A. MOHAN ALANKAMONY ) ' #$ /JUDICIAL MEMBER #$ / ACCOUNTANT MEMBER %' /CHENNAI, &# /DATED 27 TH SEPTEMBER, 2017 RSR # () *) /COPY TO: 1. /APPELLANT 2. /RESPONDENT 3. - ( )/CIT(A) 4. - /CIT 5. )./ 0 /DR 6. /1 /GF