ITO 16(3)(1), MUMBAI V. METRO MOTOR AUTO DIVISION, MUMBAI

ITA 3216/MUM/2013

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 88209 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 9 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-02-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 05-02-2015
• Assessment Year: 2003-2004
• Appeal Filed On: 26-04-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: LOVE KUMAR
• Assessee Lawyers: CHETAN MOTWANI
• Keywords: Business expenditure; Additional evidence; Revenue expenditure
• Section: 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL 'B' BENCH, MUMBAI BEFORE SHRI D. MANMOHAN, VICE PRESIDENT AND SHRI SANJAY ARORA, ACCOUNTANT MEMBER ITA NO. 3216/MUM/2013 (ASSESSMENT YEAR: 2003-04) INCOME TAX OFFICER-16(3)(1) VS. M/S. METRO MOTOR AUTO DIVISION MATRU MANDIR, TARDEO ROAD MUMBAI 400007 66, N. SITARAM PATAKAR MARG MUMBAI 400047 PAN - AABFM7783R APPELLANT RESPONDENT ITA NO. 3224/MUM/2013 (ASSESSMENT YEAR: 2007-08) INCOME TAX OFFICER-16(2)(2) VS. M/S. METRO MOTOR AUTO DIVISION MATRU MANDIR, TARDEO ROAD MUMBAI 400007 66, N. SITARAM PATAKAR MARG MUMBAI 400047 PAN - AABFM7783R APPELLANT RESPONDENT APPELLANT BY: SHRI LOVE KUMAR RESPONDENT BY: SHRI CHETAN MOTWANI DATE OF HEARING: 05.02.2015 DATE OF PRONOUNCEMENT: 05.02.2015 O R D E R PER D. MANMOHAN, V.P. THESE TWO APPEALS BY THE REVENUE ARE DIRECTED AGAIN ST THE ORDERS PASSED BY THE CIT(A)-5, MUMBAI AND THEY PERTAIN TO AY 2003-04 AND AY 2007-08. ONE OF THE ISSUES BEING COMMON IN BOTH THE YEARS, FOR THE SAKE OF CONVENIENCE WE PROCEED TO DISPOSE OF THESE APPEALS BY A COMMON ORDER. 2. IN THE APPEAL FOR AY 2003-04 THE FOLLOWING GROUNDS WERE URGED BY THE REVENUE: - 1. THE LD. CIT(A) ERRED IN DELETING THE DISALLOWAN CE OF ` 40,00,000/- THE AMOUNT PAID TO BOMBAY METRO MOTORS LTD. AS NON-COMP ETE FEES, WITHOUT APPRECIATING THE FACT THAT THE ASSESSEE HAS DIVERTED ITS INCOME TO A LOSS MAKING COMPANY TO SO AS TO AVOID T HE PAYMENT OF DUE TAX. ITA NO. 32163224/MUM/2013 M/S. METRO MOTOR AUTO DIVISION 2 2. THE LD. CIT(A) ERRED IN FOLLOWING THE DECISION O F HON'BLE ITAT IN THE ASSESSEES OWN CASE FOR A.Y. 2000-01 AND 2001-02 WH EN IT HAS BEEN HELD THAT THIS EXPENDITURE WAS REVENUE IN NATU RE AND HAS TO BE ALLOWED AS A BUSINESS EXPENDITURE FROM THE INCOM E OF THE ASSESSEE. THE DECISION HAS NOT BEEN ACCEPTED BY THE DEPARTMENT AND THE ISSUE IS SUB-JUDICE. 3. THE LD. CIT(A) ERRED IN DELETING THE DISALLOWANC E OF ` 7,87,209/- BEING DEBIT BALANCE WRITTEN OFF SINCE THE AO UNDER RULE 46A HAD NOT BEEN GIVEN REASONABLE OPPORTUNITY TO EXAMINE IN THE EVIDENCE AND FURNISH IN REBUTTAL OF THE ADDITIONAL EVIDENCE PRODUCED BY THE ASSESSEE. IN A.Y. 2007-08 THE ONLY GROUND IS WITH REGARD TO A LLOWABILITY OF EXPENDITURE IN THE FORM OF NON-COMPETE FEES ON THE GROUND THAT THE DECISION OF THE ITAT IN ASSESSEES OWN CASE FOR THE PRECEDING YEAR IS NO T ACCEPTED BY THE DEPARTMENT. 3. FACTS NECESSARY FOR DISPOSAL OF THE APPEALS ARE STA TED IN BRIEF. ASSESSEE IS A PARTNERSHIP FIRM, ENGAGED IN THE ACTI VITY OF DEALERSHIP OF THE PRODUCTS OF HINDUSTAN MOTORS LTD. FOR SALE, DISTRIB UTION AND SERVICES OF THEIR CARS IN MUMBAI. FOR THE PREVIOUS YEAR RELEVANT TO A .Y. 2003-04 ASSESSEE DEBITED A SUM OF ` 40,00,000/- IN ITS BOOKS OF ACCOUNT ON THE GROUND T HAT THIS AMOUNT IS PAYABLE TO M/S. BOMBAY METRO MOTORS LTD. (BMM) TOWARDS NON-COMPETE CHARGES. SIMILARLY, IN A.Y. 2007-08 ASS ESSEE PAID ` 10,00,000/- TOWARDS NON-COMPETE CHARGES. 4. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE AO CALLED UPON THE ASSESSEE TO EXPLAIN AS TO WHY NON-COMPETE FEES BE C ONSIDERED AS REVENUE EXPENDITURE WHOLLY AND EXCLUSIVELY INCURRED FOR THE PURPOSE OF BUSINESS. IN RESPONSE THERETO THE ASSESSEE FURNISHED A COPY OF T HE NON-COMPETE AGREEMENT DATED 3 RD NOVEMBER, 1998 WITH BMM WHEREBY THE BMM IS RESTRICTED TO CARRY ON ANY BUSINESS, WHICH DIRECTLY OR INDIRECTLY COMPETE WITH THE BUSINESS OF THE ASSESSEE, AND IN LIEU THEREOF A SSESSEE AGREED TO PAY A SUM OF ` .40,00,000/- PER ANNUM FOR A PERIOD OF FIVE YEARS. THE ASSESSEE SUBMITTED THAT IT WAS AN EXPENDITURE INCURRED SOLEL Y AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND THEREFORE ALLOWABLE UNDER S ECTION 37(1) OF THE ACT. 5. IT IS NOT IN DISPUTE THAT THE BMM WAS CARRYING ON T HE BUSINESS OF DEALERSHIP OF CARS AND OTHER PASSENGER VEHICLES OF HINDUSTAN MOTORS LTD. AND MAHINDRA & MAHINDRA LTD. AS PER THE AGREEMENT T HE BMM HAD AGREED ITA NO. 32163224/MUM/2013 M/S. METRO MOTOR AUTO DIVISION 3 THAT IT WOULD NOT ON ITS OWN ACCOUNT OR CONJUNCTION WITH OTHERS ESTABLISH, DEVELOP OR CARRY ON ANY ACTIVITY WHICH IS IN THE NA TURE OF COMPETING WITH THE BUSINESS OF THE ASSESSEE. THE SUM IS PAYABLE IN EQU AL INSTALMENTS OF ` 10,00,000/- PER QUARTER. THE AO NOTICED THAT THAT A SSESSEE FIRM PAID TO BMM, WHICH HAS 50% PARTNERSHIP IN ASSESSEES FIRM A ND HENCE FOR ALL PRACTICAL PURPOSES ASSESSEE AND BMM ARE ONE AND THE SAME AND THEREFORE IT IS NOT POSSIBLE TO COMPETE WITH ONESELF. BY APPLYIN G THE DECISION OF THE APEX COURT IN THE CASE OF MCDOWELLS LTD. 154 ITR 148 AN D ALSO UPON ANALYSING THE FACTS OF THE CASE THE AO OBSERVED THAT NON-COMP ETE FEES IS SOUGHT TO BE PAID SO AS TO ABSORB THE ACCUMULATED LOSSES OF EARL IER YEARS OF BMM, WHICH IS NOT PERMISSIBLE IN LAW. IT APPEARS THAT SIMILAR VIEW WAS TAKEN BY THE AO IN EARLIER ASSESSMENT YEARS, I.E. AY 2000-01 AND AY 2001-02 AND FOR THE REASONS GIVEN THEREIN THE AO CONCLUDED THAT THE CLA IM MADE BY THE ASSESSEE IN BOTH THE YEARS IS NOT ALLOWABLE AS DEDUCTION. IN THE ASSESSMENT ORDER FOR A.Y. 2007-08 THE AO ALSO NOTICED THAT THE ITAT, MUM BAI BENCH HAS ALLOWED ASSESSEES APPEALS FOR A.Y 2000-01 AND A.Y. 2001-02 BUT THE DEPARTMENT HAVING FILED AN APPEAL BEFORE THE HON'BLE HIGH COUR T, HE PROCEEDED TO DISALLOW THE CLAIM, CONSISTENT WITH THE VIEW TAKEN BY HIS PREDECESSOR IN EARLIER YEARS. 6. ON AN APPEAL FILED BY THE ASSESSEE THE LEARNED CIT( A) FOLLOWED THE DECISION OF THE ITAT IN ASSESSEES OWN CASE FOR A.Y . 2000-01 AND A.Y. 2001- 02 AND ALLOWED THE PLEA OF THE ASSESSEE. AGGRIEVED, REVENUE IS IN APPEAL BEFORE US. 7. AT THE OUTSET IT MAY BE NOTICED THAT THE AGREEMENT FOR PAYMENT OF NON-COMPETE FEES WAS ONLY FOR A PERIOD OF FIVE YEAR S, TO BE PAID IN QUARTERLY INSTALMENTS, IN WHICH EVENT THE FIRST INSTALMENT IS PAYABLE IN THE MONTH OF FEBRUARY/MARCH, 1999 AND THE LAST INSTALMENT IS PAY ABLE IN THE MONTH OF FEBRUARY OR MARCH, 2003, WHICH IS RELEVANT FOR A.Y. 2003-04. HOWEVER, THE ASSESSEE APPEARS TO HAVE PAID A SUM OF ` 10,00,000/- EVEN IN THE PREVIOUS YEAR RELEVANT TO A.Y. 2007-08 AND THE AO SOUGHT TO DISALLOW ONLY ON THE GROUND THAT THE ORDERS OF THE ITAT IN RESPECT OF A. Y. 2000-01 AND A.Y. 2001- 02 ARE NOT ACCEPTED BY THE DEPARTMENT AND THE APPEA LS ARE PENDING BEFORE THE HON'BLE HIGH COURT. IN OTHER WORDS, THE FACTS O F THE CASE ARE NOT IN ITA NO. 32163224/MUM/2013 M/S. METRO MOTOR AUTO DIVISION 4 DISPUTE. SINCE THE LEGAL ISSUE WAS ALREADY DISPOSED OF BY THE ITAT AND NO MATERIAL WAS PLACED BY THE REVENUE TO CONTRADICT TH E FACTUAL MATRIX OF THE CASE, WE PREFER TO FOLLOW THE DECISION OF THE ITAT AND HOLD, IN PRINCIPLE, THAT NON-COMPETE FEES PAID BY THE ASSESSEE IS ALLOWABLE AS REVENUE EXPENDITURE, THEREBY THE ONLY GROUND URGED BY REVENUE IN A.Y. 20 07-08 AND GROUND NOS. 1 &2 FOR A.Y. 2003-04 ARE REJECTED. 8. THIS LEAVES US WITH GROUND NO. 3 IN APPEAL FOR A.Y. 2003-04. FACTS IN THIS REGARD ARE AS UNDER. ASSESSEE HAD WRITTEN OFF CERTAIN DEBIT BALANCES REFERABLE TO ICICI COMMISSION RECEIVABLE, HDFC PAYM ENT, NEW INDIA INSURANCE, ETC. THE AO OBSERVED THAT THE ASSESSEE H AS NOT OFFERED ANY EXPLANATION FOR WRITING OFF THE SAME AND HENCE DID NOT ALLOW THE CLAIM OF DEDUCTION TO THE TUNE OF ` 7,87,209/-. BEFORE THE LEARNED CIT(A) ASSESSEE CONTENDED THAT DETAILED LEDGER ACCOUNT WAS FURNISHE D BEFORE THE AO TO SUPPORT ITS CLAIM FOR THE EXPENSES BUT THE AO DISAL LOWED THE CLAIM WITHOUT ASKING FOR FURTHER DETAILS. IT WAS ALSO POINTED OUT BEFORE THE CIT(A) THAT CERTAIN COMMISSION WAS RECEIVABLE FROM THE ABOVE ME NTIONED DEBTORS WHICH WAS WRONGLY RECORDED AS INCOME BY ASSESSEE COMPANY DURING A.Y. 2003-04. IN FACT THIS COMMISSION WAS NEVER RECEIVABLE AND WA S RECORDED BASED ON WRONG ESTIMATES PROVIDED BY THE SALES TEAM. DURING THE AUDIT THE ERROR WAS RECOGNIZED AND THE ENTRIES REVERSED. HOWEVER, INSTE AD OF REDUCING THE COMMISSION INCOME, THE ASSESSEE DEBITED THE ACCOUNT HEAD DEBIT BALANCE WRITTEN OFF. IT WAS ALSO SUBMITTED THAT THE NET IM PACT ON THE P & L ACCOUNT WAS THE SAME; THEREFORE THE ASSESSEE DID NOT PASS A NY FURTHER RECTIFICATION ENTRIES IN THE BOOKS OF ACCOUNT. UPON VERIFICATION OF THE FACTS THE LEARNED CIT(A) ACCEPTED THE PLEA OF THE ASSESSEE WITH A RID ER THAT THE AO MAY VERIFY THE FACTS. REVENUE IS IN APPEAL BEFORE US. 9. AS CAN BE NOTICED FROM THE ORDER PASSED BY THE CIT( A) IT WAS NOT AN AMOUNT RECEIVABLE BY THE ASSESSEE AND IT WAS WRONGL Y SHOWN AS INCOME. IT WAS ALSO PLEADED THAT LEDGER ACCOUNT WAS FURNISHED BEFORE THE AO WHO HAS NOT EXAMINED IT PROPERLY. EVEN BEFORE US THE LEARNE D D.R. COULD NOT PLACE ANY MATERIAL TO CONTRADICT THE CLAIM OF THE ASSESSE E. AT ANY RATE, THE LEARNED CIT(A) ACCEPTED THE PLEA OF THE ASSESSEE SUBJECT TO VERIFICATION OF FACTS BY THE AO AND HENCE WE DO NOT FIND ANY INFIRMITY IN THE OR DER OF THE CIT(A). WE ITA NO. 32163224/MUM/2013 M/S. METRO MOTOR AUTO DIVISION 5 MAY REITERATE THAT THE AO IS DIRECTED TO VERIFY THE FACTS AND IF THE PLEA OF THE ASSESSEE IS FOUND TO BE CORRECT THERE CANNOT BE ANY ADDITION OF ` 7,87,209/-. WITH THIS OBSERVATION GROUND NO. 3 OF THE REVENUE I S REJECTED. 10. IN THE RESULT, APPEALS FILED BY THE REVENUE ARE DIS MISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 5 TH FEBRUARY, 2015. SD/- SD/- (SANJAY ARORA) (D. MANMOHAN) ACCOUNTANT MEMBER VICE PRESIDENT MUMBAI, DATED: 5 TH FEBRUARY, 2015 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) 5, MUMBAI 4. THE CIT 16, MUMBAI CITY 5. THE DR, B BENCH, ITAT, MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI N.P.