SIX SIGMA GASES INDIA P. LTD, MUMBAI V. ADDL CIT 3(3), MUMBAI

ITA 3441/MUM/2012

• Counselvise Citation: 344119914 RSA 2012
• Duration Of Justice: 3 year(s) 3 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-09-2015
• Appeal Filed By: Assessee
• Bench Allotted: E
• Next Hearing Date: 16-12-2014
• Assessment Year: 2006-2007
• Appeal Filed On: 15-05-2012
• Court: TRIBUNAL
• Department Lawyers: NEIL PHILIP
• Keywords: Capital asset; Depreciation; Business expenditure; Question of law; Revenue expenditure; Capital expenditure

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL E , BENCH MUMBAI . . , , BEFORE SHRI R.C.SHARMA , A M & SHRI SANJAY GARG , J M ./ ITA NO .3441 / MUM/20 1 2 ( / ASSESSMENT YEAR : 200 6 - 20 07 ) M/S SIX SIGMA GASES INDIA PVT. LTD., STATIDUM HOUSE, BLOCK NO.1, 6 TH FLOOR, VEER NARIMAN RD., CHURCHGATE, MUMBAI - 400021 VS. ADCIT 3(3), MUMBAI - 20 ./ ./ PAN/GIR NO. : A A ICS 0847 E ( / APPELLANT ) .. ( / RESPONDENT ) /ASSESSEE BY : SHRI DHARMESH SHAH /REVENUE BY : SHRI NEIL PHILIP / DATE OF HEARING : 30 /0 6 / 2015 / DATE OF PRONOUN CEMENT 09/09 /2015 / O R D E R PER R.C.SHARMA (A.M) : TH IS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER OF CIT(A) , MUMBAI , DATED 5 - 6 - 2012 FOR THE ASSESSMENT YEAR 2009 - 10 , IN THE MATTER OF ORDER PASSED U/S.143(3) OF THE I.T.ACT, WHEREIN FOLLOWING GROUNDS HAVE BEEN TAKEN BY THE ASSESSEE : - 1 . ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LEARNED CIT (A) LEGALLY ERRED IN NOT CONSIDERING THE NON - COMPETE FEES PAID OF RS. 2,03,60,737/ - AS AN INTANGIBLE ASSET (CAPITAL EXPENDITURE) AND THEREBY FURTHER ERRED IN NOT ALLOWING THE DEPRECIATION FOR THE CURRENT YEAR AS WELL AS CONSEQUENTIAL EFFECT FOR THE FUTURE YEARS U/S.32(1)(II) OF THE ACT. RELIANCE IS PLACED ON THE DECISION IN THE CASE OF SERUM INSTITUTE OF INDIA LTD. VS. ADDL. CIT[135 ITD 69) ( PUNE BENCH) ITA NO. 3441 /1 2 2 2. W ITHOUT PREJUDICE STRICTLY IN THE ALTERNATIVE THE LEARNED CIT(A) OUGHT TO HAVE ALLOWED 1/5 TH OF THE CAPITAL EXPENDITURE BASED ON THE NUMBER OF YEARS INSTEAD OF NUMBER OF DAYS AS COMPUTED BY THE AO. 3. ON THE FACTS AND IN THE CIRCUMSTANCE S OF THE CASE, THE LEARNED CIT(A) ERRED IN NOT DISPOSING OFF THE GROUND RELATING TO INITIATION OF THE PENALTY PROCEEDINGS U/S.271(1)(C) OF THE ACT. 2. RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORD PERUSED. FACTS IN BRIEF ARE THAT DURING THE PREVIOUS YEAR UNDER CONSIDERATION THE ASSESSEE FILED ITS RETURN OF INCOME AT A LOSS OF RS.2.52 CRORES. IN THIS YEAR, THE ASSESSEE COMPANY PAID NON - COMPETE FEES AMOUNTING TO RS.2,06,55,000/ - TO THE ERSTWHILE PROMOTERS OF THE COMPANY TO WARD OFF ANY COMPETITION IN THE MAN UFACTURE OF GASES (IN THE FIELD OF CO2 AND ORGAN) FROM COMPANIES MANUFACTURING SUCH GASES FROM THE ERSTWHILE PROMOTERS IN THIS PART OF THE COUNTRY. IT WAS CLAIMED THAT THIS EXPENDITURE IS A TOOL OF THE BUSINESS AND NOT FOR ACQUIRING ANY CAPITAL ASSET OF EN DURING BENEFIT. ANY SUM PAID TO WARD OFF COMPETITION TO INCREASE THE PROFITABILITY OF THE COMPANY IS REVENUE EXPENDITURE. HOWEVER, I N THE BOOKS OF ACCOUNTS, THE ASSESSEE COMPANY TREATED THE NON - COMPETE FEES AS DEFERRED REVENUE EXPENDITURE BY AMORTIZING THE IMPUGNED EXPENDITURE OVER A PERIOD OF FIVE YEARS. ACCORDINGLY DURING THE PREVIOUS YEAR THE ASSESSEE COMPANY AMORTISED RS.2,94,263/ - IN THE PROFIT AND LOSS ACCOUNT. THE AO DID NOT AGREE WITH THE ASSESSEES CONTENTION AND DISALLOWED THE ASSESSEE S CLAIM OF REVENUE EXPENDITURE AND ONLY ALLOWED THE AMOUNT OF RS. 2,94,263/ - AMORTISED IN THE PROFIT AND LOSS ACCOUNT. 3. BY THE IMPUGNED ORDER, THE CIT(A) CONFIRMED THE ACTION OF THE AO, AGAINST WHICH THE ASSESSEE IS IN FURTHER APPEAL BEFORE US. ITA NO. 3441 /1 2 3 4. THE ADDITIONAL GR OUND WAS RAISED BY THE ASSESSEE TO THE EFFECT THAT ASSESSEE SHOULD BE ALLOWED THE EXPENDITURE AS REVENUE RATHER THAN ITS CLAIM OF DEPRECIATION. WE FOUND THAT THIS GROUND WAS ALSO RAISED BEFORE THE CIT(A), WHO HAS REJECTED THE SAME. KEEPING IN VIEW THE DECI SION OF HONBLE SUPREME COURT IN THE CASE OF NATIONAL THERMAL POWER CO. LTD., 229 ITR 383, WE ADMIT THE ADDITIONAL GROUND FOR CONSIDERATION. 5. WE HAVE CONSIDERED RIVAL CONTENTIONS AND CAREFULLY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW AND FOUND F ROM THE RECORD THAT THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURE OF OXYGEN GASES. DURING THE YEAR ON ACCOUNT OF THE NON - COMPETE AGREEMENT WITH THE ORIGINAL PROMOTER OF THE COMPANY THE PRESENT MANAGEMENT PAID A SUM OF RS. 2,06,55,000/ - . IN THE BOOKS OF ACCOUNT THE SAME WAS TREATED AS DEFERRED REVENUE EXPENDITURE, AND DEBITED A SUM OF RS.2,94,263/ - BUT IN COMPUTATION OF INCOME, THE ENTIRE SUM OF RS.2,06,55,000/ - WAS CLAIMED AS DEDUCTION. THE NON - COMPETE FEE WAS PAID FOR NONCOMPETING WITH THE ASSESSEE FOR A PERIOD OF FIVE YEARS. THE ISSUE UNDER CONSIDERATION IS SQUARELY COVERED BY THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF EVEREST ADVERTISING PVT. LTD., INCOME TAX APPEAL NO. 6539/2010, ORDER DATED 4 - 12 - 2012, WHEREIN THE HONBLE HI GH COURT HAS HELD AS UNDER: - 4. THE ITAT IN PARA - 13 OF ITS ORDER HAS RECORDED A FINDING THAT THE OBJECT OF MAKING PAYMENT WAS TO DERIVE AN ADVANTAGE BY ELIMINATING THE COMPETITION OVER A PERIOD OF THREE YEARS AND THE SAID PERIOD CANNOT BE CONSIDERED AS S UFFICIENTLY LONG PERIOD SO AS TO WARD OFF COMPETITION FROM MR. KAPADIA FOR A LONG TIME IN FUTURE OR FOREVER SO AS TO HOLD THAT BENEFIT OF ENDURING NATURE IS RECEIVED FROM SUCH PAYMENT. THE TRIBUNAL HAS RECORDED A FINDING THAT EXIT OF MR. KAPADIA WOULD HAVE IMMEDIATE IMPACT ON THE BUSINESS OF THE ITA NO. 3441 /1 2 4 ASSESSEE - COMPANY AND IN ORDER TO PROTECT THE BUSINESS INTEREST THE ASSESSEE HAD PAID THE SAID AMOUNT TO WARD OFF THE COMPETITION. IN OUR OPINION, THE DECISION OF THE TRIBUNAL IS BASED ON FINDING OF FACTS AND THEREF ORE, FIRST QUESTION CANNOT BE ENTERTAINED. 6. SIMILAR ISSUE WAS DECIDED BY THE HONBLE MADRAS HIGH COURT IN THE CASE OF CARBORANDUM UNIVERSAL LTD., 26 TAXMANN.COM 268(MAD) WHEREIN IT WAS HELD THAT WHERE THE ASSESSEE ENTER S INTO A NON - COMPETE AGREEMENT F OR A PERIOD OF FIVE YEARS, THE PAYMENT SO MADE WAS REVENUE IN NATURE AND NOT ON ACCOUNT OF CAPITAL. 7. THE COORDINATE BENCH OF ITAT IN THE CASE OF M/S CLARIANT CHEMICALS (I) LTD., ITA NO.7428/MUM/2011, ORDER DATED 19 - 11 - 2014 HELD AS UNDER : - 18. AFTER CO NSIDERING THE RIVAL SUBMISSIONS AND ON PERUSAL OF FACTS AS RECORDED BY THE A.O. AND LD. CIT(A), WE FIND THAT THE ASSESSEE HAD PAID NON - COMPETE FEE TO ITS EX - MANAGING DIRECTOR FOR RESTRICTING HIM TO SHARE HIS EXPERTISE OR TO JOIN ANY OTHER COMPANY IN A SIMI LAR LINE OF BUSINESS OF CHEMICALS FOR A PERIOD OF THREE YEARS ON A CONSIDERATION OF RS. 154.20 LAKHS. SINCE THE AGREEMENT FOR RESTRICTIVE COVENANT WAS ONLY FOR THE PERIOD OF THREE YEARS TO WARDOFF A POTENTIAL THREAT OR COMPLETION, WE ARE OF THE OPINION THA T, THERE CAN NO QUESTION OF ENDURING BENEFIT FOR A LONG PERIOD. THOUGH THE HONBLE SUPREME COURT IN CIT VS. COAL SHIPMENTS PVT. LTD. (1971) 82 ITR 902(SC), HELD THAT THE PERIOD FOR WHICH THE RESTRICTIVE COVENANT SHOULD BE IN OPERATION TO MAKE IT REVENUE EX PENDITURE IS A MATTER OF JUDGMENT AND SUCH A JUDGMENT SHOULD BE EXERCISED HAVING REGARD TO THE FACTS AND CIRCUMSTANCES OF THE CASE. IF THE RESTRICTIVE COVENANT IS FOR A INDEFINITE PERIOD OR FOR A VERY LARGE PERIOD, THEN TECHNICALLY IT CAN BE SAID THAT THE ADVANTAGE IS FOR ENDURING CHARACTER AND HENCE, CAN BE TERMED AS CAPITAL EXPENDITURE. RELYING ON THE SAME JUDGMENT, THE HONBLE MADRAS HIGH COURT IN CIT VS. LATE G.NAIDU & OTHERS, 165 ITR 63 (MAD), HELD THAT IF THE RESTRICTIVE COVENANT GIVEN IN THE NON - C OMPETE AGREEMENT IS FOR A PERIOD OF 5 YEARS, THEN IT IS ON REVENUE ACCOUNT. THIS PROPOSITION HAS BEEN RETREATED BY THE SAME HIGH COURT IN CARBORANDUM UNIVERSAL LTD. VS. JCIT, TAX APPEAL NO. 244 0F 2006, ORDER DATED 10.09.2012 IN DETAIL AFTER ANALYZING THE AFORESAID SUPREME COURT JUDGMENT AND OTHER SEVERAL JUDGMENTS. 8. THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF D CIT VS. MCDOWELL & COL. LTD. , 291 ITR 107 ( KAR ) HELD THAT NON - COMPETE FEE IS ITA NO. 3441 /1 2 5 REVENUE IN NATURE. THE PRECISE OBSERVATION OF THE HONBLE COURT WAS AS UNDER : - NON - COMPETITION FEE : THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE CLAIMED AN AMOUNT OF RUPEES 1 CRORE AS NON - COMPETITION FEE PAID TO UB ENGINEERING LTD., FOR ACQUIRING A DISTILLERY AT NASIK. IT WAS IN THE LIGHT OF THE JUDGMENT OF THE MADRAS HIGH COURT IN THE CASE OF CIT V. LATE G. D. NAIDU [1987] 165 ITR 63 . THE ANNUAL REPORT ALSO TREATED THIS AS DEFERRED REVENUE EXPENDITURE. THE ASSESSING OFFICER BEING SATISFIED ALLOWED ONLY RS. 20 LAKHS AND REJECTED RS. 80 LAKHS IN TERMS OF HIS ORDER. THE APPELLATE COMMISSIONER, ON CHALLENGE, HELD IN FAVOUR OF THE ASSESSEE. THE TRIBUNAL WOULD HOLD AGAINST THE REVENUE IN THE APPEAL PREFERRED BY THE REVENUE AGAINST THE ALLOWANCE OF THE ENTIRE AMOUNT BY THE APPELLATE AUTHORITY. FROM THE MATERIAL ON RECORD IT IS SEEN THAT THE AGREEMENT WITH REGARD TO ALLOWING OF RS. 20 LAKHS IN THE CASE ON HAND. ALL THAT THE COMMISSIONER HAS DONE IS TO ALLOW THE REMAINING AMOUNT ON TH E GROUND THAT THE SAID CLAIM IS BASED ON THE DECISION OF THE MADRAS HIGH COURT IN CIT V. LATE G. D. NAIDU [1987] 165 ITR 63 . THE TRIBUNAL AFTER NOTICING THE RIVAL CONTE NTIONS CAME TO THE CONCLUSION TH AT THE EXPENDITURE INCURRED IS REVENUE IN NATURE. IF THE DEPARTMENT IS SATISFIED THAT RS. 20 LAKHS SPENT BY THE COMPANY AMOUNTS TO EXPENDITURE, THEN HOW CAN THEY QUESTION THE REMAINING RS. 80 LAKHS IN TERMS OF THE PROCEEDING S. THE LAW IS THE SAME WHETHER IT IS RS. 20 LAKHS OR RS. 80 LAKHS. IN THESE CIRCUMSTANCES, AND IN THE LIGHT OF THE ACCEPTANCE OF RS. 20 LAKHS AS EXPENDITURE, WE DEEM IT PROPER TO ANSWER THIS QUESTION OF LAW IN FAVOUR OF THE ASSESSEE. 9. SIMILAR VIEW HAS B EEN TAKEN BY THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. EICHER LTD., 302 ITR 249 (DEL) WHEREIN IT WAS HELD AS UNDER : - IN ORDER TO PROTECT ITS BUSINESS INTERESTS, MARKET POSITION AND PROFITABILITY, THE ASSESSEE PAID AN AMOUNT OF RS.4 CRORES TO RES TRAIN VCPL AND V, ONE OF ITS FULL TIME EMPLOYEES, FROM BECOMING ITS POTENTIAL BUSINESS RIVALS AND CLAIMED THIS AMOUNT AS BUSINESS EXPENDITURE. THE ASSESSING OFFICER DISALLOWED THE CLAIM. THE COMMISSIONER (APPEALS) AND THE TRIBUNAL HELD THAT THE PAYMENT MAD E WAS TO PROTECT THE ASSESSEES BUSINESS INTERESTS WITH NO NEW ASSET BEING CREATED, THAT ITS PROFIT - MAKING APPARATUS WAS NOT EXPANDED OR INCREASED AS IT DID NOT SUFFER ANY LOSS OR EROSION IN ITS CAPITAL ASSETS, AND THAT THE PAYMENT WAS ALLOWABLE AS A BUSIN ESS EXPENDITURE. ON FURTHER APPEAL : HELD, DISMISSING THE APPEAL, THAT THE ASSESSEE DID NOT ACQUIRE ANY CAPITAL ASSET BY MAKING THE PAYMENT OF NON - COMPETE FEE BUT MERELY ELIMINATED COMPETITION IN THE TWO - WHEELER BUSINESS, FOR A WHILE. IT ITA NO. 3441 /1 2 6 WAS NOT CLEAR F RO M THE RECORD, FOR HOW LONG THE RESTRICTIVE COVENANT WAS TO LAST . I T WAS NEITHER PERMANENT NOR EPHEMERAL AND THE ADVANTAGE WAS NOT OF AN ENDURING NATURE. THERE WAS NOTHING TO SHOW THAT THE AMOUNT WAS DRAWN OUT OF THE CAPITAL OF THE ASSESSEE. T HE COMMISSION ER (APPEALS) AND THE TRIBUNAL WERE RIGHT IN CONCLUDING THAT THE PAYMENT OF NON - COMPETE FEE BY THE ASSESSEE WAS A BUSINESS EXPENDITURE AND NOT A CAPITAL EXPENDITURE. 10 . APPLYING THE PROPOSITION OF LAW LAID DOWN BY THE HONBLE JURISDICTION AL HIGH COURT AND OTHER HIGH COURTS/TRIBUNAL, WE HOLD THAT NON - COMPETE FEE PAID BY THE ASSESSEE DID NOT CREATE ANY CAPITAL ASSETS, THE SAME WAS REVENUE IN NATURE. ACCORDINGLY, THE AO IS DIRECTED TO ALLOW THE SAME AS REVENUE EXPENDITURE. 11 . IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED. O RDER PRONOUNCED IN THE OPEN COURT ON THIS 09/09 / 201 5 . SD/ - SD/ - ( ) ( SANJAY GARG ) ( . . ) ( R.C.SHARMA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI ; DATED 09/09 /201 5 . . /PKM , . / PS / COPY OF THE ORDER FORWARDED TO : / BY ORDER, / ( ASSTT. REGISTRAR) , / ITAT, MUMBAI 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE CIT(A), MUMBAI. 4. / CIT 5. , , / DR, ITAT, MUMBAI 6. / GUARD FILE. //TRUE COPY//