Dy. Commissioner of Income Tax , Central Circle-2(3), Hyderabad V. Kapil Chits (Kaktiya) Private Limited, Warangal

ITA 804/Hyd/2018

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 0624 (ITAT-HYDERABAD)
• Duration Of Justice: 4 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-09-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 11-09-2018
• Assessment Year: 2011-2012
• Appeal Filed On: 01-05-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ALKA R JAIN
• Assessee Lawyers: S RAMA RAO
• Keywords: Capital asset; Business expenditure; Additional evidence; Revenue expenditure; Capital expenditure
• Section: 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA NOS. 804 TO 806/HYD/2018 ASSESSMENT YEARS: 2011 - 12, 2013 - 14 & 2014 - 15 DCIT, CENTRAL CIRCLE - 2(3), HYDERABAD. VS. KAPIL CHITS (KAKTIYA) PRIVATE LIMITED, WARANGAL. PAN: AADCK4851D (APPELLANT) (RESPONDENT) ASSESSEE BY: SRI S. RAMA RAO REVENUE BY: SMT. ALKA R. JAIN DATE OF HEARING: 11.09.2018 DATE OF PRONOUNCEMENT: 11 .09.2018 ORDER PER BENCH : ALL THE THREE APPEALS ARE REVENUES APPEALS FOR THE ASSESSMENT YEARS 2011 - 12, 2013 - 14 AND 2014 - 15 RESPECTIVELY. 2. IN ALL THESE APPEALS THE REVENUE IS AGGRIEVED BY THE ORDER OF THE CIT(A) - 3, HYDERABAD IN GRANTING RELIEF TO THE ASSESSEE BY DELETING THE ADDITION MADE BY THE A.O. AFTER DISALLOWING THE NON - COMPETE FEES PAID BY THE ASSESSEE TO ITS HOLDING COMPANY BY HOLDING IT TO BE CAPITAL EXPENDITURE . 3. LEARNED DEPARTMENTAL REPRESENTATIVE REL IED UPON THE ASSESSMENT ORDER , WHILE THE LEARNED COUNSEL FOR THE ASSESSEE SUPPORTED THE ORDER 2 OF THE CIT(A) AND ALSO FILED COPY OF THE ORDER OF THE ITAT IN ASSESSEES OWN CASE FOR THE A.Y. 2012 - 13 WHEREIN IT HAS BEEN HELD THAT THE NON - COMPETE FEES PAID BY THE ASSESSEE IS REVENUE EXPENDITURE AND ALLOWED THE CLAIM OF DEDUCTION U/S 37(1) OF THE ACT. THE COPY OF THE ORDER IS ALSO FILED BEFORE US. LD. CIT(A) HAD IN FACT REPRODUCED THE RELEVANT PARAS IN PARA IX OF HIS ORDER WHICH IS REPRODUCED HEREUNDER AGAIN F OR THE SAKE OF READY REFERENCE: - IX. GROUND NOS.3 AND 4 IN APPEAL RELATES TO CAPITALIZATION OF NON - COMPETE FEE. FACTS OF THE CASE, GROUNDS OF APPEAL, ASSESSMENT ORDER AND SUBMISSIONS OF THE APPELLANT WERE PERUSED. THE HON'BLE ITAT VIDE ORDER IN ITA.NO.15 9 /HYD/20 16 ON 31 - 08 - 2017 IN THE APPELLANT'S OWN CASE FOR THE A.Y 2012 - 13 HAD HELD IN FAVOUR OF THE APPELLANT ON SIMILAR FACTS AND CIRCUMSTANCES. THE HON'BLE ITAT HAD HELD IN THE SAID DECISION AS FOLLOWS : 7. THE LEARNED DR HAD RELIED UPON THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF ASSAM BENGAL CEMENT CO. LTD VS. CIT REPORTED IN (1955) 27 ITR 34 (S.C) IN SUPPORT OF HIS CONTENTION THAT SUCH PAYMENT WAS CAPITAL IN NATURE WHILE THE LEARNED COUNSEL FOR THE ASSESSEE HAD RELIED UPON VARI OUS OTHER CASES IN SUPPORT OF HIS CONTENTION. LET US, THEREFORE, CONSIDER THE ITA NO 159 OF 2016 KAPIL CHITS KAKATIYA P LTD WARANGAL PAGE 5 OF 11 APPLICABILITY OF THE DECISIONS RELIED UPON BY BOTH THE PARTIES TO THE FACTS OF THE CASE BEFORE US. (I) IN THE CASE OF ASSAM BENGAL CEMENT CO. LTD (CITED SUPRA), THE HON'BLE SUPREME COURT WAS CONSIDERING THE CASE OF A COMPANY WHICH ACQUIRED A LEASE OF CERTAIN LIMESTONE QUARRIES FROM THE STATE GOVT. FOR THE PURPOSE OF CARRYING ON MANUFACTURE OF CEMENT FOR A PERIOD O F 20 YEARS WITH A CLAUSE FOR RENEWAL FOR A FURTHER TERM OF 20 YEARS AND IN ADDITION TO THE PAYMENT OF RENT AND ROYALTY, TWO FURTHER SUMS WERE PAYABLE UNDER THE SPECIAL COVENANTS TERMED AS PROTECTION FEES. THE HON'BLE SUPREME COURT HELD THAT IF THE EXPENDIT URE IS MADE FOR ACQUIRING OR BRINGING INTO EXISTENCE AN ASSET OR ADVANTAGE FOR THE ENDURING BENEFIT OF THE BUSINESS, IT IS PROPERLY ATTRIBUTABLE TO CAPITAL AND IS OF THE NATURE OF THE CAPITAL EXPENDITURE AND THAT IF, ON THE OTHER HAND, IT IS MADE NOT FOR T HE PURPOSE OF BRINGING INTO EXISTENCE ANY SUCH ASSET OR ADVANTAGE BUT IS FOR RUNNING THE BUSINESS WITH A VIEW TO PRODUCE THE PROFITS, IT IS A REVENUE EXPENDITURE. IT WAS HELD THAT THE CHARACTER OF THE PAYMENT CAN BE DETERMINED BY LOOKING AT WHAT IS THE TRU E NATURE OF THE ASSET WHICH HAS BEEN ACQUIRED AND NOT BY THE FACT WHETHER IT IS A PAYMENT IN LUMP SUM OR BY INSTALLMENTS. THE HON'BLE SUPREME COURT HELD THAT THE ASSET WHICH THE COMPANY HAD ACQUIRED IN THE SAID CASE WAS IN THE NATURE OF A CAPITAL ASSET AS THE RIGHT TO CARRY ON ITS BUSINESS WAS UNFETTERED BY ANY COMPETITION FROM OUTSIDERS WITHIN THE AREA AND IT WAS A PROTECTION ACQUIRED BY THE COMPANY FOR ITS BUSINESS AS A WHOLE AND NOT A PART OF THE WORKING OF THE BUSINESS BUT WENT ON TO APPRECIATE THE WHOL E OF THE CAPITAL ASSET AND MAKE IT MORE YIELDING. IN THESE CIRCUMSTANCES, THE HON'BLE SUPREME COURT HELD ITA NO 159 OF 2016 KAPIL CHITS KAKATIYA P LTD WARANGAL PAGE 6 OF 11 THAT THE EXPENDITURE INCURRED BY THE COMPANY IN ACQUIRING SUCH ADVANTAGE CERTAINLY HAS AN ENDURING ADVANTAGE AND IS NOT IN THE NATURE OF CAPITAL EXPENDITURE AND WAS NOT ALLOWABLE AS A DEDUCTION. THE FACTS OF THIS CASE ARE SLIGHTLY DIFFERENT FROM THE FACTS OF THE CASE BEFORE US. IN THE CASE OF ASSAM BENGAL CEMENT CO. LTD (CITED SUPRA), TH E AGREEMENT WAS BETWEEN A COMPANY AND THE STATE GOVT. AND WAS 3 TO PREVENT THE COMPETITION FROM ALL THE COMPETITORS FOR A PERIOD OF 20 YEARS AND FOR A FURTHER TERM OF 20 YEARS. THEREFORE, THE COMPETITION FROM ALL QUARTERS HAS BEEN EXTINGUISHED AND NOT FROM A NY PARTICULAR COMPANY AND THE PERIOD IS ALSO QUITE A LONG PERIOD AS AGAINST THE CASE OF THE ASSESSEE BEFORE US AS THE COMPETITION TO BE AVOIDED IS ONLY FROM ITS PARENT COMPANY AND IS ALSO INITIALLY FOR A PERIOD OF 5 YEARS ONLY. THEREFORE, IN OUR OPINION, T HE DECISION OF THE HON'BLE SUPREME COURT IS NOT APPLICABLE TO THE FACTS OF THE CASE BEFORE US. (II) THE LEARNED COUNSEL FOR THE ASSESSEE HAD RELIED UPON THE FOLLOWING CASE LAW: (A) CIT VS. COAL SHIPMENT P LTD REPORTED IN (1971) 82 ITR 902 (S.C) WHEREIN THE HON'BLE SUPREME COURT WAS CONSIDERING THE CASE OF AN ASSESSEE WHICH HAD ENTERED INTO AN AGREEMENT WITH ANOTHER EXPORTER, WAS NOT TO EXPORT COAL BUT TO ASSIST THE ASSESSEE IN PROCURING COAL FOR SHIPMENT IN RETURN OF PAYMENT FROM THE ASSESSEE AND THE AGREEM ENT COULD BE TERMINATED AT ANY TIME. THE HON'BLE SUPREME COURT HELD THAT THE PAYMENT RELATED TO THE ACTUAL SHIPMENT OF COAL AND THEREFORE, SUCH EXPENDITURE IS ALLOWABLE AS A DEDUCTION. (B) CIT VS. ANDHRA FUELS (P) LTD REPORTED IN (2016) 70 TAXMANN.COM 271 (A .P). IN THIS CASE THE HON'BLE JURISDICTIONAL HIGH COURT WAS CONSIDERING THE CASE OF AN ASSESSEE WHO HAD ENTERED INTO A NON - COMPETE FEE AGREEMENT FOR A PERIOD OF 3 YEARS TO WARD OFF COMPETITION IN THE TERRITORIES OF THE A.P AND THE CONSIDERATION PAID FOR SU CH NON COMPETITION WAS CLAIMED AS A DEDUCTION AS THE REVENUE EXPENDITURE. THE HON'BLE HIGH COURT HELD THAT THE RESTRICTIVE COVENANT OF NON COMPETITION FOR A PERIOD OF 3 YEARS FROM THE DATE OF AGREEMENT WAS NEITHER PERMANENT NOR WAS AN ADVANTAGE OF AN ENDUR ING NATURE DERIVED BY THE ASSESSEE AND THEREFORE, THE PAYMENT WAS ALLOWABLE AS A DEDUCTION. (C) CRYSTAL CHEMIE (P) LTD VS. ACIT REPORTED IN (2010) 42 DTR 0197 WHEREIN THE COORDINATE BENCH OF THE TRIBUNAL AT AHMEDABAD HELD THAT THE COMMISSION PAID BY THE ASSES SEE TO ANOTHER COMPANY BASED ON THE QUANTITY OF SPECIFIED PRODUCT SOLD BY THE ASSESSEE, FOR VARIOUS SERVICES RENDERED BY THAT COMPANY TO THE ASSESSEE, TO ENABLE IT TO UPGRADE ITS MACHINERY AND TO USE BETTER METHODS OF PRODUCTION, IS REVENUE EXPENDITURE. (D) C IT VS. EICHER LTD REPORTED IN (2008) 302 ITR 249 (S.C) WHEREIN THE HON'BLE DELHI HIGH COURT WAS DEALING IN A CASE OF AN ASSESSEE WHO HAD NEGOTIATED A NON - COMPETE FEE AGREEMENT WITH A COMPETITOR AND AN EX - EMPLOYEE OF THE ASSESSEE SO THAT THEY WOULD NOT CARR Y OUT ANY BUSINESS ACTIVITY WITH REGARD TO ITA NO 159 OF 2016 KAPIL CHITS KAKATIYA P LTD WARANGAL PAGE 8 OF 11 TWO WHEELERS AND THE ASSESSEE CLAIMED THIS AMOUNT AS A BUSINESS EXPENDITURE. THE HON'BLE HIGH COURT, AFTER CONSIDERING THE DECISION OF THE HON'BL E SUPREME COURT IN THE CASE OF CIT VS. MADRAS AUTO SERVICE (P) LTD REPORTED IN (1998) 233 ITR 468 (S.C), HAS HELD THAT THE ASSESSEE DID NOT ACQUIRE ANY CAPITAL ASSET BY ENTERING INTO A NON COMPETE AGREEMENT AND THEREFORE, PAYMENT OF NON - COMPETE FEE MADE BY THE ASSESSEE PURSUANT TO THE RESTRICTIVE COVENANT WAS REVENUE EXPENDITURE AND NOT A CAPITAL EXPENDITURE. THE DELHI HIGH COURT HAD CONSIDERED THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF ASSAM BENGAL CEMENT CO. LTD (CITED SUPRA) BEFORE COMING T O THE ABOVE CONCLUSION. (E) ORCHID CHEMICALS & PHARMACEUTICALS LTD VS. ACIT REPORTED IN (2011) 7 ITR 0601 (TRIB.) WHEREIN IT WAS HELD THAT THE NON COMPETE FEE PAID BY THE ASSESSEE ON ACQUISITION OF PHARMACEUTICAL BUSINESS WHICH CONSTITUTE A NEW LINE OF PRODUC T IS NOT ALLOWABLE AS A REVENUE EXPENDITURE IN ONE - GO 4 BUT WAS TO BE TREATED AS A DEFERRED REVENUE EXPENDITURE AND IS ALLOWABLE OVER A PERIOD OF 4 YEARS PRO RATA, STARTING FROM THE RELEVANT YEAR. 8. FROM THE ABOVE DECISIONS, IT IS SEEN THAT THE NATURE AND CHARACTER OF THE PAYMENT IN THE HANDS OF THE ASSESSEE WOULD DEPEND UPON THE PURPOSE OF THE PAYMENT AND THE NATURE OF THE BENEFIT ENSURED TO THE ASSESSEE BY SUCH PAYMENT. ON FORMATION OF ASSESSEE COMPANY, THE HOLDING COMPANY WANTED THE ASSESSEE COMPANY TO B ENEFIT BY TAKING OVER ITS BUSINESS IN NORTHERN TELANGANA DISTRICTS. BY VIRTUE OF THE NON - COMPETE AGREEMENT, THE HOLDING COMPANY HAS LOST PART OF ITS TERRITORY AND CONSEQUENTLY A SOURCE OF INCOME AND IT IS COMPENSATED BY RECEIPT OF 1% OF THE ANNUAL TURNOVER . WHAT IS TO BE SEEN IN THIS CASE IS WHETHER THE ASSESSEE HAS GAINED ANYTHING BY VIRTUE OF THIS AGREEMENT. THE ASSESSEE HAS GAINED THE BUSINESS OF THE HOLDING COMPANY I.E. THE INCOME GENERATING AREA AND ALSO NOT HAVING ITS HOLDING COMPANY AS ITS COMPETITOR . WHETHER THIS BENEFIT IS ENDURING IN NATURE. PERHAPS NOT. BECAUSE, BY THE AGREEMENT DATED 10.04.2010, THE PERIOD OF NON - COMPETING WAS 5 YEARS ONLY. IT WAS FURTHER EXTENDED BY A FURTHER PERIOD OF 5 YEARS BY AGREEMENT DATED 10.04.2015 AND THE PAYMENT IS PAY ABLE EVERY YEAR. THUS, THE PAYMENT IS FOR WARDING OFF COMPETITION FROM ITS HOLDING COMPANY IN A PARTICULAR AREA AND THEREBY GENERATING REVENUE THEREFROM. 9. IN ALL THE DECISIONS RELIED UPON BY THE LEARNED COUNSEL FOR THE ASSESSEE, THE COVENANT OR RESTRICTION FOR NON COMPETITION WAS FOR A LIMITED PERIOD AND IT WAS IN THESE CIRCUMSTANCES THAT THE HON'BLE COURTS HAVE HELD THAT THE PAYMENT MADE FOR SUCH RESTRIC TIVE COVENANTS IS REVENUE IN NATURE. COMING TO THE FACTS OF THE CASE BEFORE US, IT IS SEEN THAT THE AGREEMENT IS FOR A PERIOD OF 5 YEARS AND THE ASSESSEE HAS ALSO FILED A COPY OF THE AGREEMENT DATED 10.04.2015 BY WHICH THE AGREEMENT HAS BEEN EXTENDED BY A FURTHER PERIOD OF FIVE YEARS. THE SECOND AGREEMENT ALSO CONTAINS THE SAME TERMS & CONDITIONS AS IN THE FIRST AGREEMENT. WITHOUT GOING INTO THE SECOND AGREEMENT, WHICH IS ADDITIONAL EVIDENCE FILED BEFORE US, WE FIND THAT VARIOUS CLAUSES IN THE FIRST AGREEME NT ITSELF DEMONSTRATE THAT THE AGREEMENT WAS INITIALLY FOR A PERIOD OF 5 YEARS AND EVEN THE CONSIDERATION IS AN ANNUAL PAYMENT BASED ON THE ANNUAL TURNOVER. THEREFORE, IT APPEARS TO BE A PAYMENT FOR LOSS OF REVENUE TO KAPIL CHIT FUNDS (P) LTD AND IS DEPEND ENT UPON THE BUSINESS CARRIED ON BY THE ASSESSEE. THEREFORE, IN OUR OPINION, THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF ANDHRA FUELS (P) LTD (CITED SUPRA) IS CLEARLY APPLICABLE TO THE FACTS OF THE CASE BEFORE US. THE RESTRICTIVE COVENANT IS ONLY FOR A PERIOD OF 5 YEARS AND IS EXTENDABLE BY A FURTHER PERIOD AS MUTUALLY AGREED TO BY BOTH THE PARTIES. THE AGREEMENT IS ALSO LIABLE TO BE TERMINATED WITH PRIOR NOTICE OF 10 MONTHS. THE AGREEMENT ALSO INCLUDES VARIOUS OTHER SERVICES TO BE PROVIDED BY KAPIL CHIT FUNDS (P) LTD TO THE ASSESSEE COMPANY AND THE PAYMENT WAS NOT JUST FOR NON COMPETITION. IN THIS VIEW OF THE MATTER ALSO, WE ARE SATISFIED THAT THE PAYMENT MADE BY THE ASSESSEE TO KAPIL CHIT FUNDS (P) LTD IS REVENUE EXPENDITURE AS WITHOUT THE SAID PAYMENT, THE ASSESSEE COULD NOT HAVE CARRIED ON ITS BUSINESS MORE EFFICIENTLY AND PROFITABLY. THEREFORE, WE AGREE WITH THE CONTENTION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE PAYMENT IS IN THE NATURE OF REVENUE EXPENDITURE AND IS AN ALLOWABLE DEDUCTION U/S 37(1) OF THE I.T. ACT. 10. IN THE RESULT, ASSESSEES APPEAL IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 31ST AUGUST, 2017. FROM THE FACTS, ISSUES AND CIRCUMSTANCES, IT IS SEEN THAT THE APPELLANT M/S. KAPIL CHITS (KAKATIYA) PRIVATE L IMITED HAD ENTERED INTO AN AGREEMENT WITH M/S. KAPIL CHIT FUNDS PRIVATE LIMITED. ACCORDING TO THE AGREEMENT THE APPELLANT HAD TO MAKE PAYMENT OF 1% OF THE TURNOVER FOR A PERIOD OF 5 YEAR 5 TOWARDS NON - COMPETE FEE. THE APPEAL WAS AGAINST THE DISALLOWANCE OF NON - COMPETE FEED PAID BY THE APPELLANT TO M/S. KAPIL CHIT FUNDS PRIVATE LIMITED. THIS NON - COMPETE FEES RECEIVED BY M/S. KAPIL CHIT FUNDS PRIVATE LIMITED WAS ADMITTED AS ITS INCOME. THE PAYMENTS ARE TO BE MADE ON YEARLY BASIS ON THE TURNOVER OF THE APPEL LANT. HENCE, TOTAL INCOME WAS CONTENDED THAT THE AMOUNT REPRESENTS REVENUE ITEM OF EXPENDITURE. THE VIEW OF THE APPELLANT WAS SUPPORTED BY THE DECISION OF THE HONBLE ITAT IN THE APPELLANTS OWN CASE FOR THE ASST. YEAR 2012 - 13 WHICH HAS BEEN REFERRED TO SUPRA. THE HONBLE ITAT, HYDERABAD WHILE DECIDING THE APPELLANTS OWN CASE HAD STATED THAT THE PAYMENT MADE BY THE APPELLANT TO M/S. KAPIL CHIT FUNDS PRIVATE LIMITED WAS REVENUE EXPENDITURE AS WITHOUT THE SAID PAYMENT THE APPELLANT COULD NOT HAVE CARRIED ON ITS BUSINESS MORE EFFICIENTLY AND PROFITABLY. HENCE, THE HONBLE ITATHAD HELD THAT THE PAYMENT WAS REVENUE EXPENDITURE AND ALLOWABLE AS A DEDUCTION U/S 37(1) OF THE INCOME TAX ACT. RESPECTFULLY FOLLOWING THE DECISION OF THE HONBLE ITAT, HYDERABAD IN THE APPELLANTS OWN CASE FOR THE SAME ISSUE OF NON - COMPETE FEE, GROUNDS NO. 3 & 4 IN APPEAL ARE ALLOWED. 4. HAVING REGARD TO THE RIVAL CONTENTIONS AND ON PERUSAL OF THE MATERIAL ON RECORD, WE FIND THAT THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE COORDINATE BENCH OF THIS TRIBUNAL IN ASSESSEES OWN CASE FOR THE A.Y. 2012 - 13 (TO WHICH BOTH OF US ARE SIGNATORIES) AND SINCE THE CIT(A) HAS ALSO PASSED THE ORDER BY FOLLOWING THE TRIBUNALS ORDER, WE DO NOT SEE ANY REASON TO INTERFERE WITH THE SAME. 5. IN THE RESULT, REVENUES APPEALS ARE DISMISSED. PRONOUNCED IN THE OPEN COURT ON 11 TH SEPTEMBER, 2018. SD/ - SD/ - (S. RIFAUR RAHMAN) (P. MADHAVI DEVI) ACCOUNTANT MEMBER JUDICIAL MEMBER HYDERABAD, DATED: 11 TH SEPTEMBER, 2018 OKK 6 COPY TO: - 1) DCIT, CENTRAL CIRCLE - 2(3), 6 TH FLOOR, AAYAKAR BHAVAN, BASHEERBAGH, HYDERABAD. 2) M/S. KAPIL CHITS (KAKATIYA) PRIVATE LIMITED, H.NO. 2 - 5 - 760, KAPIL HOUSE, SUBEDARI HANAMKONDA, WARANGAL. 3) THE CIT(A) - 3, HYDERABAD 4) THE PR. CIT - 3, HYDERABAD 5) THE DR, ITAT, HYDERABAD 6) GUARD FILE