DAMANI SWIFT TRADE P.LTD, MUMBAI V. ITO 1(1)(2), MUMBAI

ITA 3541/MUM/2017

• Counselvise Citation: [2018] 118 COUNSELVISE.COM (IT) 9036 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 6 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-12-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Assessment Year: 2013-2014
• Appeal Filed On: 15-05-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AJAY KUMAR KESHRI
• Assessee Lawyers: S C TIWARI
• Keywords: Depreciation; Commercial expediency
• Section: 115JB; 12

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL SMC BENCH, MUMBAI BEFORE SHRI SHAMIM YAHYA, AM AND SHRI PAWAN SINGH, JM ITA NO. 3541/ MUM/ 2017 (ASSESSMENT YEAR: 2013 - 14 ) DAMANI SWIFT TRADE PVT. LTD. 5A & 5B, THAKUR NIWAS, 173, J. TATA ROAD, MUMBAI - 400 020 VS. INCOME TAX OFFICER (IT) AAYKAR BHAWAN, CHURCHGATE, MUMBAI - 400 020 PAN/GIR NO. AACCD 0188 M ( APPELLANT ) : ( RESPONDENT ) APPELLANT BY : SHRI S. C. TIWARI RESPONDENT BY : SHRI AJAY KUMAR KESHRI DATE OF HEARING : 04.10.2018 DATE OF PRONOUNCEMENT : 07.12. 2018 O R D E R PER SHAMIM YAHYA, A. M.: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) - 2, MUMBAI (LD.CIT(A) FOR SHORT) DATED 29.03.2017 AND PERTAINS TO THE ASSESSMENT YEAR (A.Y.) 2013 - 14. 2. THE GROUNDS OF APPEAL READ AS UNDER: 1. THE COMMISSIONER OF INCOME TAX (APPEALS) ['CIT(A)'] HAS ERRED IN CONFIRMING THE ORDER OF THE ASSESSING OFFICER ('AO')FOR DISALLOWING DEPRECIATION OF RS. 5,00 ,000/ - ON NON - COMPETE FEES CONSIDERED AS AN INTANGIBLE ASSET ON THE GROUNDS THAT THE SAME ARE NOT RELATED TO THE PURCHASE OF FACTORY UNIT AND FOR THE PURPOSE OF BUSINESS ACTIVITY OF THE APPELLANT. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE DISALLOWANC E IS OUGHT TO BE DELETED. 2. THE CIT(A) HAS ALSO ERRED IN CONFIRMING THE ACTION OF THE AO ON INCREASING THE BOOK PROFIT COMPUTED U/S 115JB ON ACCOUNT OF DISALLOWANCE OF DEPRECIATION ON NON - COMPETE FEES OF RS. 5,00,000/ - MADE UNDER THE PROVISION OF THE IN COME TAX ACT, 1961.ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE DISALLOWANCE IS OUGHT TO BE DELETED. 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSING OFFICER (A.O. FOR SHORT) IN THIS CASE NOTE THAT DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAD PURCHASED ASSET/FACTORY 2 ITA NO. 3541/MUM/2017 FROM M/S. HARSHIT POLYMER (PROP. MR. SUNIL KUMAR PHOPHALIA) WHO IS ENGAGED IN THE PRODUCTION OF HIGH DENSITY POLYETHYLENE (HDPE) AND LINER LOW DENSITY POLYETHYLENE (LLDPE). THE PURCHASED ASSET ARE AS UNDER: LAND RS.4,47,600/ - BUILDING RS.19,13,000/ - POLYETHYLENE GRINDING MACHINE RS.33,75,000/ - PLASTIC GRINDING MILL RS.4,24,125/ - THE ASSESSEE HAD TRANSFERRED THE SAID ASSETS IN THE ASSETS SIDE OF BALANCE SHEET AND CLAIMED DEPRECATION ON THE SAME. FURTHER, THE ASSESSEE HAS ALSO ADDED VALUE OF FIXED ASSETS AS AN INTANGIBLE ASSETS UNDER THE BLOCK NON COMPETE FEES OF RS.30,00,000/ - AND CLAIMED DEPRECIATION OF RS.6,00,000/ - AND THE SAME IS DEBITED TO P & L A/C. 4. THE A.O. WAS NOT CONVINCED ABOUT THE NEED TO PAY NON COMPETE FEE TO SHRI ATUL D. MAHESHWARI & SHRI KASHYAP D SHROFF. HE OBSERVED AS UNDER: (A) THE ASSESSEE HAS PURCHASED FULL UNIT OF POLYETHYLENE GRINDING PLASTIC GRINDING MILL ALONGWITH LAND AND STRUCTURE. SINCE M/S. HARSHIT POLYMER IS A PR OPRIETARY CONCERN OF MR. SUSHIL KUMAR PHOPHALIA, HE WHO KNOWS PRODUCTION AS WELL AS BUSINESS ASPECT OF THE SAID BUSINESS AND ALSO FOR THE REASON THAT AFTER SALE OF HIS FACTORY AND LAND, HE WAS VERY MUCH IN CAPACITY TO ESTABLISH NEW SETUP OF THE SAME BUSINE SS WITH THE FINANCE, KNOWLEDGE OF PRODUCTION AND MARKET AND BUSINESS EXPERIENCE, THE ASSESSEE WANTS THAT HE SHOULD NOT BE ITS COMPETITOR IN NEAR FUTURE AND HENCE IT HAD MADE A NON COMPETENCE AGREEMENT WITH MR. SUSHIL KUMA PHOPHALIA ( PROP MR. HARSHIT POLYM ER). THIS IS AGREEABLE CONTRACT IN TERMS OF A BUSINESS STRATEGY OF A PRUDENT BUSINESSMAN, (B) HOWEVER, THE ASSESSEE HAD FURTHER MADE TWO NON COMPETE AGREEMENT ONE WITH SHRI ATUL D MAHESHWARI & SHRI KALPESH D. SHROFF BY PAYING THEM RS.IO,OO,OOO/ - EACH. THE SAID PERSON CLAIMED TO BE BUSINESS ASSOCIATES OF M/S. HARSHIT POLYMER. ON PERUSAL OF THE NON COMPETENCE AGREEMENT AND PURCHASE AGREEMENT MADE WITH M/S. HARSHIT PLOYMER, THE INVOLVEMENT OF THOSE TWO PERSON IN THE BUSINESS OF M/S. HARSHIT POLYMER IS NEVER F OUND IN THE NON COMPETENCE AGREEMENT. ASSESSEE HAS NOT GIVEN ANY DOCUMENTARY EVIDENCE OF ANY KIND OF INFORMATION PURCHASED/ OBTAINED BY THE ASSESSEE OR ANY CLIENTELE TO PROVIDED TO THE BUSINESS OF ASSESSEE COMPANY FROM THE ABOVE NAMED TWO PERSONS. 3 ITA NO. 3541/MUM/2017 5. HE N OTED THE ASSESSEES RESPONSE AS UNDER: WE WOULD ONCE AGAIN LIKE TO MENTION THA T NON ENTERING INTO NON COMPETE AGREEMENT WOULD HAVE EXPOSED THE AS S ESSEE COMPANY IN THE PROCESS OF MANUFACTURE GOING IN T O THE HANDS OF EXISTING AND POTENTIAL COMPETITORS AS WE LL A S IT MIGHT HAVE LED T O THE CUSTOMERS BEING LURED BY T HE COMPETITOR S. SINCE MR. SHROFF AND MR. MAHESHWARI WERE CLOSE BUSINESS ASSOCIATES O F HARSHIL POLYMER AND HAD THOROUGH KNOWLEDGE O F THE MANUFACTURING PROCESS AS WELL AS THEY WERE ACTIVELY IN CONTACT WI T H CUSTOMERS OF HARSH IT POLYMER ..... THUS THE ASSESSEE ENTERED INTO NON COMPE TE AGREEMENT TO SAFEGUARD ITS COMMERCIAL INTEREST AND CAPITALIZED THE AMOUNT S O PAID AS INTANGIBLE ASSETS FROM THE ABOVE, IT IS CORROBORATED THAT THE SAID EXPENDITURE WAS IN CURRED OWING TO COMMERCIAL EXPEDIENCY AND THERE FORE THE CLAIM OF DEPRECIATION OUGHT TO BE ALLOWED. 6. HOWEVER, HE WAS NOT CONVINCED. HE MADE THE IMPUGNED DISALLOWANCE BY HOLDING AS UNDER: (F) THE SUBMISSION OF THE ASSESSEE IS CAREFULLY CONSIDERED BUT NOT ACCEPTABLE FOR THE FOLLOWING REASONS. AN EMPLOYEE ALONE WITH THE KNOWLEDGE OF PRODUCTION CAN NOT BE SAID AS COMPETITOR OF THE BUSINESSMAN. ALSO A AGENT WHO ONLY KNOWS THE CUSTOMERS CANNOT BE STATED AS COMPETITOR OF THE BUSINESSMAN. THERE IS NO POSSIBIL ITY THAT A EMPLOYEE & A AGENT CAN COMPETE WITH THE BUSINESS ONLY ON THE KNOWLEDGE OF THE PRODUCTION AND KNOWLEDGE/DATA OF CUSTOMERS. THE PURCHASE OF GOODS BY THE BUYER PARTIES DEPENDS ON THEIR REQUIREMENT, QUALITY OF GOODS, COMPETITIVE PRICE IN THE MARKET AND THE SERVICES GIVEN. THUS A AGENT CAN NOT HAVE CONTROL OVER ALL THESE ASPECTS AND HENCE CAN NOT BE A COMPETITOR OF ANY BUSINESS. THE BUSINESS IN TOTALITY HAVE MANY FACTORS LIKE HUGE CAPITAL, OFFICE, LAND, BUILDING, FACTORY, EXPERIENCE OF THE BUSINESS ET C. WITHOUT ALL THESE FACTORS TOGETHER AN EMPLOYEE OR A AGENT CAN NOT BE A COMPETITOR. HENCE PAYMENTS MADE TO MR. ATUL MAHESHWARI & MR. KASHYAP D. SHROFF ARE UNCALLED FOR AND NOT RELATED TO THE PURCHASE OF FACTORY UNIT AND ALSO NOT RELATED TO THE BUSINESS O F THE ASSESSEE. 5. CONSIDERING THE FACTS NARRATED ABOVE, THE PAYMENT MADE BY THE ASSESSEE AS NON COMPETE FEES TO MR. KASHYAP D SHROFF RS. 10,00,000/ - AND MR. ATUL D. MAHESHWARI RS.10,00, 000 / - IS NOT AN ALLOWABLE EXPENSE AND CONSEQUENTLY DEDUCTION OF DEPRECIATION OF AN INTANGIBLE A S SETS OF RS.4, 00 , 000 / - IS DISALLOWED . AND ADDED BACK TO THE TOTAL INCOME OF THE ASSESSEE . 7. UPON THE ASSESSEES APPEAL, THE LD. CIT(A) AFFIRMED THE A.O.S ACTION. 8. AGAINST ABOVE ORDER ASSESSEE IS IN APPEAL BEFORE THE ITAT 4 ITA NO. 3541/MUM/2017 9. WE HAVE HEARD BOTH THE COUNSEL AND PERUSED THE RECORDS. LEARNED COUNSEL OF THE ASSESSEE SUBMITTED THAT ASSESSEE HAS DULY PAID THE NON - COMPETE FEE. HE SUBMITTED THAT THERE IS NO DISPUTE THAT THE FEE HAS NOT BEEN PAID. HE SUBMITTED THAT THE A.O.S V IEW THAT THERE WAS NO NEED TO PAY THE NON - COMPETE FEE. LEARNED COUNSEL OF THE ASSESSEE SUBMITTED THAT IT IS SETTLED LAW THAT THE NEED OF THE BUSINESS HAS TO BE DECIDED FROM THE POINT OF VIEW OF THE BUSINESSMAN. HE SUBMITTED THAT IT IS THE SETTLED LAW THAT THE A.O. SHOULD NOT SIT INTO THE SHOES OF THE BUSINESSMAN. IN SUPPORT OF HIS PROPOSITION , THE LEARNED COUNSEL OF THE ASSESSEE PLACED RELIANCE UPON FOLLOWING CASE LAWS : 1 CIT VS. WALCHAND & CO. (P) LTD. (1967) 65 ITR 381 (SC) 2 CIT VS. DHANRAJGIRJI RAJA NARASINGIRJI (1973) 91 ITR 544 (SC) 3 SASSOON J. DAVID & CO. P. LTD. VS. CIT (1979) 118 ITR 261 (SC) 4 MS/. CHEMICAL SALES AND SERVICES VS. ITO ITA NO. 3589/DEL/2014 (ITAT) 10. P ER CONTRA , THE LD. DEPARTMENTAL REPRESENTATIVE (LD. DR FOR SHORT) RELIED UPON THE ORDER'S OF THE AUTHORITIES BELOW. 11. UPON CAREFUL CONSIDERATION , WE FIND THAT ASSESSEE IN THIS CASE HAS PAID NON - COMPETE FEE TO THE PERSONS IN CONNECTION WITH PURCHASE OF BUSINESS. THE A.O. H AS ALLOWED THE PAYMENT OF NON - COMPETE FEE TO ONE PERSON. BUT HE IS OF THE OPINION THAT THE PAYMENT OF NON - COMPETE FEE WITH THE OTHER TWO PERSONS WAS NOT REQUIRED. IT IS NOTED THAT THERE IS NO DISPUTE ABOUT THE FACT OF PAYMENT AND RATE OF DEPRECIATION . IN OUR CONSIDERED OPINION , THERE IS CONSIDERABLE COGE NCY IN THE SUBMISSION OF THE LD. COUNSEL OF THE ASSESSEE THAT THE A.O. SHOULD NOT TRY TO S I T INTO THE SHOES OF THE BUSINESSMAN. WE FIND THAT IT IS UNDISPUTED THAT THESE TWO PERSONS WERE ALSO ASSOCIATED WITH BUSINESS ASSETS HAVE ACQUIRED. HENCE , N ON - COMPETE FEE PAID TO THEM PURSUANT TO ACQUISITION OF BUSINESS CANNOT B E SAID TO BE A GRATUITOUS PAYMENT. FURTHERMORE THE CASE LA WS AS CITED HERE INABOVE DULY 5 ITA NO. 3541/MUM/2017 SUPPORTED THE PROPOSITION OF THE LD. COUNSEL OF THE ASSESSEE . HENCE , IN THE BACKGROUND OF AFORESAID DISCUSS ION AND PRECEDEN TS, WE SET ASIDE THE ORDER'S OF AUTHORITIES BELOW AND DECIDE THE ISSUE IN FAVOUR OF ASSESSEE . 12. I N THE RESULT , THE ASSESSEE'S APPEAL STANDS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 0 7 . 1 2 . 2 0 1 8 S D / - S D / - ( PAWAN SINGH ) (SHAMIM YAHYA) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI ; DATED : 0 7 . 1 2 . 2 0 1 8 ROSHANI , SR. PS COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) 4. CIT - CONCERNED 5. DR, ITAT, MUMBAI 6. GUARD FILE BY ORDER, (DY./ASSTT. REGISTRAR) ITAT, MUMBAI