Samkeet Arya Homes LLP, Ahmedabad V. The Income Tax Officer, Ward-3(3)(5), Ahmedabad

ITA 249/AHD/2024

• Counselvise Citation: [2024] 100 COUNSELVISE.COM (IT) 0932 (ITAT-AHMEDABAD)
• Duration Of Justice: 5 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-07-2024
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Next Hearing Date: 15-05-2024
• Assessment Year: 2018-2019
• Appeal Filed On: 11-02-2024
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: SHRUNJAL SHAH
• Keywords: Source of fund; Tax effect; Capital receipt; Revenue expenditure
• Section: 37; 142(1); 133(6); 251; 143(2); 208; 43

Judgement Text

ITA No.249/Ahd/2024 Assessment Year: 2018-19 Page 1 of 7 IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD “SMC” BENCH, AHMEDABAD BEFORE Ms. SUCHITRA KAMBLE, JUDICIAL MEMBER AND SHRI MAKARAND VASANT MAHADEOKAR, ACCOUNTANT MEMBER ITA No.249/Ahd/2024 Assessment Year: 2018-10 Samkeet Arya Homes LLP, B-604, Shapath IV, Opp. Karnavati Club, S.G. Highway, Ahmedabad – 380 015. [PAN – ACRFS 2181 D] Vs. The Income Tax Officer, Ward – 3(3)(5), Ahmedabad. (Appellant) (Respondent) Assessee by Ms. Shrunjal Shah, AR Revenue by Shri N.J. Vyas, Sr. DR Da t e o f He a rin g 16.05.2024 Da t e o f P ro n o u n ce m e n t 16.07.2024 O R D E R PER SUCHITRA KAMBLE: This appeal is filed by the assessee against order dated 27.12.2023 passed by the CIT(A), National Faceless Appeal Centre (NFAC), Delhi for the Assessment Year 2018-19. 2. The assessee has raised the following grounds of appeal :- “1) The Ld. CIT(A) has erred in law and on facts by considering the non- compete fees amounting to Rs.38,00,000/- to be a capital expenditure without considering the nature of the expenditure. 2) The Ld. CIT(A) has erred in law and on facts by holding that the non- compete fees gives enduring benefit to the Appellant even when looking at the terms of the resolution evidence that only the profit earning apparatus of the Appellant was affected and there was no element of enduring benefit. 3) The Ld. CIT(A) has erred in law and on facts by holding that the judgement of the Hon'ble Gujarat High Court in the case of Income Tax Officer vs. Smartchem Technologies Ltd. (2019) 103 taxmann.com 359 (Guj) has been reversed and is therefore not applicable in the case of the Appellant while only the SLP has been ITA No.249/Ahd/2024 Assessment Year: 2018-19 Page 2 of 7 admitted and the matter is still pending before the Hon'ble Supreme Court. 4) The Ld. CIT(A) has erred in law and on facts by relying on the decision of PCIT vs. Ferromatic Milacron India (P.) Ltd. (2018) 99 taxmann.com 154 (Gujarat) which is on a different question of law arising from an absolutely different factual scenario. 5) The Ld. CIT(A) has erred in law and on facts by not applying the various tests which evidence that the non-compete fees in the case of the Appellant is a revenue expenditure.” 3. The case was selected for complete scrutiny on the issue of income from Real Estate business and unsecured loans in assessee’s case. Notices under Section 143(2) and 142(1) of the Income Tax Act, 1961 were issued from time to time asking the assessee to file the details. The assessee filed the reply dated 15.12.2020 giving the details of purchase of land, source of fund for investment in land, details of project, details of parties and construction material, details of opening, closing balance, details of squared up account and details of unsecured loan. The assessee subsequently furnished part details vide letter dated 23.01.2020. Show cause notice was issued on 23.02.2021. In response to the same, the assessee furnished confirmed copy of ledger account in respect of unsecured loan, squared up account and sundry creditors. Subsequently, the assessee also furnished the details about closing and opening details along with the details of expenses incurred towards WIP and material details, labour charges, copy of ledger account of concerned parties alongwith bills and vouchers. Notice under Section 133(6) of the Act was also issued to verify the squared-up account and sundry creditors. Reply was received in response to the notice under Section 133(6) of the Act. The Assessing Officer observed that the assessee made large payment of Rs.38,00,000/- to the retiring partner Shri Paras C. Pandit and claimed Rs.38,00,000/- as release of right expense in its profit and loss account. However, this expense is not supported by any valuation report towards the market value of such right of Shri Paras C. Pandit nor any computation on the basis of which the assessee has reached to the amount of Rs.38,00,000/-. This payment was made as non-compete payment. As per non- compete clause, Shri Paras C. Pandit has agreed that he shall not start any real estate project in nearly 2 kilometres area of the said scheme upto F.Y. 2017-18. ITA No.249/Ahd/2024 Assessment Year: 2018-19 Page 3 of 7 The Assessing Officer, after taking cognisance of the same, held that non- compete is not allowable since it is not a Revenue expenditure and after examining and considering the assessee’s submissions and documents filed in response to the statutory notice and thereby added on account of disallowance of non-business expenditure relating to release of right under Section 37 of the Act amounting to Rs.38,00,000/- to the income of the assessee. 4. Being aggrieved by the Assessment Order, the assessee filed appeal before the CIT(A). The CIT(A) dismissed the appeal of the assessee. 5. The Ld. AR submitted that the assessee was incorporated on 11.11.2014 and had undertaken development of a real estate project by the name Samprati Residency in Naranpura, Ahmedabad. Shri Paras C. Pandit was a 20% partner in the said firm till 26.04.2016 after which due to some personal reasons he retired from the partnership. The Ld. AR submitted that the total saleable area of Samprati Residency was 1,12,080 sq. ft. and the year-wise area sold is tabulated as below :- Date Area Sold Percentage of saleable area Till 31.03.2016 0 0 31.03.2016 to 31.03.2017 24505 21.86 31.03.2017 to 31.03.2018 13135 11.71 31.03.2018 to 31.03.2019 16750 14.95 31.03.2019 to 31.03.2020 43965 39.23 31.03.2020 to 31.03.2021 9600 8.60 31.03.2021 to 31.03.2022 4125 3.68 112080 100.00 5.1 The Ld. AR further submitted that the details of various projects undertaken by Shri Paras Pandit evidencing his reputation in the real estate business due to which the non-compete fee was paid to him are as under :- Name of Project Entity Designation of Mr.Paras Pandit Saleable Area (Sq. in Lakhs) Total Units Year of competition/initiation of project ITA No.249/Ahd/2024 Assessment Year: 2018-19 Page 4 of 7 Vedika Exotica, Gandhinagar Sheetal Infrastructure Private Limited (SIPL) Managing Director and Owner 4.63 74 2011 (Completion) Vedika E- Series, Gandhinagar Sheetal Infrastructure Private Limited (SIPL) Managing Director and Owner 2.53 216 2012 (Completion) Vedika Habitat, Gandhinagar Sheetal Infrastructure Private Limited (SIPL) Managing Director and Owner 2.43 120 2013 (Completion) Vedika Happy Valley, Gandhinagar Sheetal Infrastructure Private Limited (SIPL) Managing Director and Owner 3.43 340 2014 (Completion) Vedika Acqua, Shahibaug Sheetal Infrastructure Private Limited (SIPL) Managing Director and Owner 4.95 140 2014 (Initiation) 2019 (Completion) Enigma, Ahmedabad V.M. Procon Pvt. Ltd. Owner and Director of Shareholder SIPL 3.06 150 2015 (Completion) Casa Vyoma (Vastrapur) Sumedha Spacelink LLP Owner and Director of Shareholder SIPL 9.17 554 2014 (Initiation) 2018 (Completion) Total 45.03 2121 Units 5.2 The Ld. AR submitted that from these projects it is clear that the assessee was not merely stating out of proportion while describing about the experience, reputation and eminence of Shri Paras Pandit in real estate business in the reply filed before the Assessing Officer as well as CIT(A) and the same is based on the actual projects of the business. Profit element is involved in respect of future projects. Competitiveness of Shri Paras Pandit in sphere of real estate has categorically established the assessee that the payment given to him for avoiding any near future business competition from him cannot be claimed by the Revenue to be purely stage managed especially when the said payment has also been ITA No.249/Ahd/2024 Assessment Year: 2018-19 Page 5 of 7 offered to tax by Shri Paras Pandit in its return of income filed for A.Y. 2017-18 and A.Y. 2018-19 The Ld. AR further related upon the decision of Hon’ble Apex Court in the case of Shiv Raj Gupta vs. CIT (Civil Appeal No.12044 of 2016 order dated 22.07.2020.) as well as the following decisions:- 1) Income Tax Officer vs. Smartchem Technologies Limited [2019] 103 taxmann.com 359 (Gujarat) 2) Asianet Communications Limited [2018] 96 taxmann.com 399 (Madras) 3) Hatsun Agro Products Limited [2018] 99 taxmann.com 220 (Madras) with SLP withdrawn before the Hon’ble Supreme Court due to low tax effect. 4) CIT Delhi vs. Eicher Limited [2008] 173 Taxman 251 (Delhi) 5) GKN Driveline India Limited [2017] 88 taxmann.com 208 (Delhi) 6) CIT vs. G.D. Naidu [1986] 24 Taxman 255 (Madras) 7) Empire Jute Co. Ltd. [1980] 3 Taxman 69 (SC) 8) Alembic Chemical Works Co. Ltd. [1989] 43 Taxman 312 (SC) 5.3 The Ld. AR submitted that these aspects were totally ignored by the CIT(A) and the CIT(A) proceeded on the basis of Hon’ble Gujarat High Court decision in case of PCIT vs. Ferromatic Milacron India (P.) Limited [2018] 99 taxmann.com 154 (Guj) but the same is factually distinguishable to the assessee’s case. 6. The Ld. DR submitted that as regards to commercial expediency though the partner Shri Paras C Pandit paid more tax but loss of profit to the Revenue will incur and, therefore, the Assessing Officer as well as the CIT(A) has rightly held that non-compete fees gives enduring benefit to the assessee and thus capital in nature. The Ld. DR relied upon the decision of Hon’ble Supreme Court in the case of Gillanders Case (1964) 53 ITR 283. The Ld. DR relied upon the Assessment Order and the order of the CIT(A). 7. Heard both the parties and perused all the relevant material available on record. It is pertinent to note that the assessee being limited liability partnership firm entered into retiring partner Shri Paras C. Pandit and paid total of Rs.70,00,000/- as non-compete charges for two years i.e. A.Y. 2017-18 & 2018- 19 equally Rs.38,00,000/- approximately for each year. From the perusal of the Assessment Order the Assessing Officer has never disputed that Shri Paras C. Pandit has paid the taxes on the amount received by him through the assessee ITA No.249/Ahd/2024 Assessment Year: 2018-19 Page 6 of 7 i.e. Limited Liability Partnership Firm. The non-compete clause was a strategy clause entered by the assessee LLP with Shri Paras C. Pandit in respect of ensuring the competitive element as well as profit element. The decision relied by the Revenue in case of Gillanders Case has not taken into account the same and in fact the decision of Hon’ble Apex Court in the case of Shiv Raj Gupta clearly set out when the non-compete fee is paid only to the particular person in respect of considerable knowledge, skill, expertise and specialisation of that person in the field of the business of that of the assessee. There is no doubt that this has impact on assessee’s business and its profit for almost two years. The compensation received by Shri Paras C. Pandit for not being the partner to be assessee firm was Revenue receipt whereas compensation received for refraining carried on competitive business was capital receipt but in this case compensation received for refraining from carrying competitive business cannot be taken into account as assessee paid the non-compete fee to the extent of 2 years period and that also on the threshold of retiring of the partner i.e. Shri Paras C. Pandit. Thus, the assessee firm has rightly claimed the same as well. The CIT(A) has totally ignored the unique facts of assessee’s case and relied on the decision of Hon’ble Gujarat High Court in the case of PCIT vs. Ferromatic Milacron India (P.) Limited (supra) which is totally different set of facts. It is further observed that the Department not only received the tax in the very first year from the assessee but also got higher amount of tax from Shri Paras C. Pandit as surcharge payable was higher in individual compared to the firm and thus there was no revenue loss to the Department on account of this transaction. Non-complete consideration under Section 28(VA) of the Act is considered as income and, therefore, the assessee has rightly claimed the same as expenditure as the source of the profit or income of profit-making apparatus remains untouched and unaltered. The decision of Hon’ble Gujarat High Court in the case of Smartchem Technologies Limited (supra) categorically mentions that the expenditure incurred for the purpose which is set out primarily and essentially related to the operation or work of the firm (LLP partnership firm) constituted the profit earning apparatus of the assessee is in the nature of revenue expenditure. Thus, in the present case, the assessee paid the non-compete fees to Shri Paras C. Pandit and, therefore, it is in nature of revenue expenditure. Hence, the disallowance of non-compete fees expenditure by the ITA No.249/Ahd/2024 Assessment Year: 2018-19 Page 7 of 7 Assessing Officer and the CIT(A) is not justified. Thus, appeal of the assessee is allowed. 8. In the result, appeal filed by the assessee is allowed. Order pronounced in the open Court on this 16 th July, 2024. Sd/- Sd/- (MAKARAND VASANT MAHADEOKAR) (SUCHITRA KAMBLE) Accountant Member Judicial Member Ahmedabad, the 16 th July, 2024 PBN/* Copies to: (1) The appellant (2) The respondent (3) CIT (4) CIT(A) (5) Departmental Representative (6) Guard File By order UE COPY Assistant Registrar Income Tax Appellate Tribunal Ahmedabad benches, Ahmedabad