Andhra Fuels Private Limited, Hyderabad V. DCIT, Hyderabad

ITA 900/HYD/2004

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 61905 (ITAT-HYDERABAD)
• Duration Of Justice: 7 year(s) 8 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-06-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 07-07-2011
• Assessment Year: 2000-2001
• Appeal Filed On: 28-09-2004
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAO SHRI B V PRASAD REDDY
• Assessee Lawyers: P MURALI MOHANA RAO
• Keywords: Capital asset; Depreciation; Business expenditure; Wrong claim; Commercial expediency; Onus to prove; Revised return; Revenue expenditure; Capital expenditure
• Section: 143(3); 14A; 37(1); 32; 144

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B', HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER ITA NO. 900/HYD/2004 ASSESSMENT YEAR 2000-01 M/S. ANDHRA FUELS (P) LTD. HYDERABAD PAN/GIR NO. A-1 VS. DY. COMMISSIONER OF INCOME - TAX, CIRCLE-1(1) HYDERABAD APPELLANT RESPONDENT ITA NO. 1228/HYD/2005 ASSESSMENT YEAR 2002-03 DY. COMMISSIONER OF INCOME-TAX, CIRCLE-1(1) HYDERABAD VS. M/S. ANDHRA FUELS (P) LTD. HYDERABAD PAN/GIR NO. A-1 APPELLANT RESPONDENT ASSESSEE BY: SHRI P. MURALI MOHANA RAO REVENUE BY: SHRI M.S. RAO/ SHRI B.V. PRASAD REDDY DATE OF HEARING: 23. 0 4 .2012 DATE OF PRONOUNCEMENT: 08.06.2012 O R D E R PER CHANDRA POOJARI, AM: THE ABOVE TWO APPEALS, ONE BY THE ASSESSEE AND ANOT HER BY THE REVENUE, ARE DIRECTED AGAINST THE DIFFERENT ORD ERS OF THE CIT(A) FOR ASSESSMENT YEARS 2000-01 AND 2002-03. 2. FIRSTLY, WE WILL TAKE UP ITA NO. 900/HYD/2004 BY TH E ASSESSEE. IN THIS APPEAL THE GRIEVANCE OF THE ASSE SSEE IS WITH REGARD TO CONFIRMING LEVY OF PENALTY OF RS. 9,51,10 0 U/S. 271(1)(C) OF THE INCOME-TAX ACT, 1961. 3. BRIEF FACTS OF THE CARE ARE THAT THE ASSESSEE IS A PRIVATE LIMITED COMPANY INCORPORATED IN THE YEAR 1995. IT IS CARRYING ON I.T.A. NO. 900/HYD/2004 I.T.A. NO. 1228/HYD/2005 M/S. ANDHRA FUELS (P) LTD. ==================== 2 THE BUSINESS OF PURCHASE AND SALE OF GAS. THE COMP ANY HAS GOT ALLOTMENT OF NATURAL GAS FROM M/S. GAS AUTHORITY OF INDIA LTD. (GAIL). THE COMPANY HAS, IN TURN, ENTERED INTO AN AGREEMENT WITH RVK ENERGY LTD., FOR SALE OF GAS FOR THE POWER GENE RATION PLANT AT MACHILIPATNAM, ANDHRA PRADESH. THE RETURN OF INCOM E FOR A.Y. 2000-01 WAS FILED ON 30.11.2000 SHOWING INCOME OF R S. 22,30,301. THE ASSESSMENT WAS MADE ON 28.3.2003 U/ S. 143(3) OF THE ACT ON TOTAL INCOME OF RS. 49,47,520 BY MAKING DISALLOWANCE OF MANAGEMENT FEE CLAIMED AT RS. 27,17,316. THE MA NAGEMENT FEE WAS PAID TO THREE ASSOCIATE COMPANIES VIZ., M/ S. KANNUMURI HOLDINGS PVT. LTD., M/S. MARUTI FINANCE PVT. LTD. A ND M/S. UPANISHADIK MANAGEMENT CONSUL PVT. LTD. THE ASSESS EE DID NOT PREFER ANY APPEAL AGAINST THE SAID DISALLOWANCE AND AS SUCH, THE ASSESSMENT ORDER BECAME FINAL. THE ASSESSING OFFICE R INITIATED CONCEALMENT PENALTY PROCEEDINGS U/S. 271( 1)(C) OF THE ACT BY ISSUING A SHOW CAUSE NOTICE WHICH WAS SERV ED ON, 31.03.2003. A REPLY TO THE SHOW-CAUSE NOTICE WAS F ILED ON 22.09.2003. AS PER THE PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED ON 31.03.2000, SALE OF GAS HAS BEEN SHOWN AT RS. 2,30,55,664 AND INTEREST INCOME OF RS. 42,24,546 FROM THE FOLLOWING: PARTICULARS AMOUNT (RS.) BANK OF MAHARASHTRA 1,44,919 UPANISHADIK MANAGEMENT CONSUL PVT. LTD. 41,43,032 MARUTI FINANCE LTD. 41,43,032 KANNUMURI HOLDINGS PVT. LTD. 41,43,032 GAS AUTHORITY OF INDIA LTD. 9,98,342 1,35,72,357 LESS: INTEREST INCOME SET OFF AGAINST PRE-OPERATIVE EXPENSES 93,47,811 42,24,546 4. AFTER CLAIMING COST OF PURCHASE OF GAS OF RS. 1,99, 92,852, ADMINISTRATIVE AND OTHER EXPENSES OF RS. 27,71,936, PRELIMINARY EXPENSES OF RS. 5,280 AND INTEREST AND FINANCE CHAR GES OF RS. I.T.A. NO. 900/HYD/2004 I.T.A. NO. 1228/HYD/2005 M/S. ANDHRA FUELS (P) LTD. ==================== 3 31,57,475, THERE IS A NET PROFIT OF RS. 13,52,667. THE ADMINISTRATIVE AND OTHER EXPENSES CLAIMED AT RS. 27 ,71,936 INCLUDED MANAGEMENT FEE OF RS. 27,17,316 PAID TO TH REE COMPANIES VIZ., M/S. KANNUMURI HOLDINGS PVT. LTD., M/S. MARUTI FINANCE PVT. LTD. AND M/S. UPANASHADIK MANAGEMENT C ONSUL PVT. LTD. 5. DURING THE COURSE OF ASSESSMENT PROCEEDINGS BEFORE THE ASSESSING OFFICER, THE ASSESSEE COMPANY SUBMITTED A NOTE ON MANAGEMENT FEE, AS FOLLOWS: 1. ANDHRA FUELS PRIVATE LIMITED (AFL) HAS BEEN ALL OTTED LICENSE BY GAS AUTHORITY OF INDIA LIMITED (GAIL) FO R DISTRIBUTION OF NATURAL GAS AND ENTERED INTO A CONT RACT WITH GAIL. AFL SUPPLIES THE NATURAL GAS TO M/S. RVK ENER GY PRIVATE LIMITED (RVK) FOR GENERATION OF POWER FOR I TS POWER PLANT LOCATED AT PEDANA MANDAL, KRISHNA DISTRICT AN D ENTERED INTO A FUEL SUPPLY AGREEMENT WITH RVK. 2. AFL HAS APPROACHED M/S . KANNUMURI HOLDINGS PRIVATE LIMITED (KHPL), UPANISHADIC MANAGEMENT COUN SEL PRIVATE LIMITED (SPCL) TO MANAGE THE PORTFOLIO OF INVESTMENTS IN RVK SINCE AFL DOES NOT HAVE THE REQU ISITE EXPERTISE TO DO SO AND ENTERED INTO A LOAN AGREEMEN T WITH THE SAID COMPANIES ACCORDINGLY. COPIES OF THE AGRE EMENTS ARE ENCLOSED HEREWITH. 3. THE MANAGEMENT FEES IS PAID FOR BUSINESS PURPOSE S AND OUT OF COMMERCIAL EXPEDIENCY. THE MANAGEMENT F EES IS INCURRED FOR THE PURPOSES OF EARNING INCOME BY AFL. HENCE THE FEES IS WHOLLY AND EXCLUSIVELY INCURRED FOR THE PURPOSE OF BUSINESS AND IS ALLOWABLE AS A DEDUCTION U/S. 37(1) OF THE INCOME-TAX ACT, 1961. 6. AS PER THE LOAN AGREEMENT DATED 28.3.1999, THE ASSE SSEE COMPANY BORROWED RS. 8.50 CRORES FROM M/S. GE CAPIT AL SERVICES LTD., FOR MAKING INVESTMENT IN THE EQUITY CAPITAL O F RVK ENERGY LTD., ON THE BASIS OF SECURITY OFFERED BY M/S. CATE RPILLAR POWER VENTURE INTERNATIONAL LTD., USA. THE MONEY SO BORR OWED WAS UTILISED BY THE ASSESSEE COMPANY INITIALLY FOR ADVA NCING LOANS TO I.T.A. NO. 900/HYD/2004 I.T.A. NO. 1228/HYD/2005 M/S. ANDHRA FUELS (P) LTD. ==================== 4 THREE COMPANIES VIZ., M/S. KANNUMURI HOLDINGS PVT. LTD., M/S. MARUTI FINANCE PVT. LTD. AND M/S. UPANISHADIK MANAG EMENT CONSUL PRIVATE LTD., IN WHICH SRI K. RAGHU RAMA KRI SHNA RAJU, SRI K. VIJAYA KUMAR AND SRI S. KISHORE, DIRECTORS OF TH E ABOVE COMPANIES ARE RESPECTIVELY INTERESTED. THESE THREE COMPANIES HAVE UTILISED THE LOAN SO RECEIVED FOR INVESTMENT I N RVK ENERGY LTD., AS EQUITY CAPITAL. THE ASSESSEE COMPANY ENTE RED INTO THREE SEPARATE SIMILAR AGREEMENTS WITH THESE THREE COMPAN IES FOR THE PURPOSE OF ABOVE SAID LOAN AND ALSO FOR THE PURPOSE OF MANAGEMENT OF THE PORTFOLIO INVESTMENT IN RVK ENERG Y LTD. 7. WHEN THE ASSESSEE COMPANY WAS ASKED TO EXPLAIN AS T O WHY THE PROVISIONS OF SECTION 14A MAY NOT BE INVOKED AS THE INVESTMENT IN SHARES WHICH WOULD YIELD DIVIDEND WOU LD BE EXEMPT U/S. 10(33) AND, THEREFORE, THE EXPENDITURE RELATAB LE TO EARNINGS OF EXEMPTED INCOME WOULD NOT BE ALLOWABLE, THE ASSESSE E COMPANY TOOK A DIFFERENT STAND AND FILED ANOTHER NOTE ON AL LOWABILITY OF MANAGEMENT FEE AS UNDER: 1. THE ASSESSEE COMPANY ANDHRA FUELS PVT. LTD., IS CARRYING ON THE BUSINESS OF PURCHASE AND SALE OF GA S. THE COMPANY HAS GOT ALLOTMENT OF NATURAL GAS FROM GAIL. THE COMPANY HAS IN TURN ENTERED INTO AN AGREEMENT WITH M/S. RVK ENERGY PVT. LTD., FOR SALE OF GAS FOR THEIR POW ER GENERATION PLANT AT MACHILIPATNAM, A.P. 2. EVEN THOUGH THE COMPANY HAS GOT A FIRM ALLOTMEN T OF GAS FROM GAIL, THE COMPANY HAS TO COORDINATE ON A D AY-TO- DAY BASIS WITH GAIL AUTHORITIES FOR ENSURING TIMELY AND ADEQUATE SUPPLY OF GAS. IT ALSO HAS TO CARRY OUT C OORDINATION OF THE GAS REQUIREMENTS WITH RVK ENERGY PRIVATE LTD ., AND THE ACTUAL AVAILABILITY OF GAS FROM GAIL. THIS COO RDINATION ALSO REQUIRES TALKING TO VARIOUS AUTHORITIES VIZ., MINISTRY OF PETROLEUM &NATURAL GAS, ONGC AND GAIL (BOTH AT THE FILED LEVEL AS WELL AS AT THE ADMINISTRATIVE AND CORPORAT E OFFICE). IN ORDER TO CARRYOUT THE ABOVE SERVICES EFFECTIVELY , THE COMPANY HAS ENTRUSTED THE JOB TO THREE COMPANIES NA MELY, I.T.A. NO. 900/HYD/2004 I.T.A. NO. 1228/HYD/2005 M/S. ANDHRA FUELS (P) LTD. ==================== 5 1. M/S. KANNUMURI HOLDINGS PVT. LTD. 2. M/S. MARUTI FINANCE PRIVATE LTD. 3. M/S. UPANISHADIK MANAGEMENT CONSUL PVT. LTD. THE ABOVE SAID COMPANIES HAVE THE NECESSARY EXPERIENCE IN COORDINATING WITH GAIL, HAVE GOT THE NECESSARY ADMINISTRATIVE AND MANPOWER AND ALSO HAVE NECESSARY TECHNICAL EXPERTISE TO CARRY OUT THE ABOVE SAID ACT IVITIES ON BEHALF OF THE COMPANY, AND HENCE THE COMPANY AWARDE D THE WORK TO THEM. SINCE THE COMPANYS BUSINESS PROSPEC TS ARE TIED UP WITH THE COMMISSIONING OF THE POWER PLANT O F RVK ENERGY, MUCH EFFORTS HAVE BEEN EXTENDED, MORE IN PA RTICULAR DURING THE YEAR 1999-2000. IN ENSURING THAT THE SU PPLY OF GAS IS COORDINATED WITH THE GENERATION OF POWER. 3. AS CONSIDERATION FOR SUCH SERVICES RENDERED BY T HESE THREE COMPANIES, THE ASSESSEE COMPANY HAS AGREED TO PAY AN AMOUNT CALCULATED @ 15.5% OF THE VALUE OF GAS MO BILISED BY THESE THREE COMPANIES ON BEHALF OF THE ASSESSEE COMPANY. 4. THE ASSESSEE COMPANY EARNS PROFIT BY PURCHASE AN D SALE OF GAS TO RVK ENERGY PVT. LTD., AS AGAINST WHI CH THE MANAGEMENT FEE PAID TO THESE THREE COMPANIES IS CLA IMED AS EXPENDITURE AND THE REMAINING SURPLUS, IS OFFERED A S INCOME. DURING THE YEAR UNDER CONSIDERATION, THE A SSESSEE COMPANY HAS EARNED A GROSS PROFIT ON PURCHASE AND S ALE OF GAS OF RS. 30,62,812 AS AGAINST WHICH IT HAS INCURR ED MANAGEMENT FEE EXPENDITURE OF RS. 27,17,315. 5. IT IS SUBMITTED THAT THE ABOVE SAID MANAGEMENT F EE INCURRED BY THE ASSESSEE IS IN RELATION TO ITS BUSI NESS OF PURCHASE AND SALE OF GAS AND IS ESSENTIAL FOR EARNI NG THE INCOME FROM SALE OF GAS. FURTHER THE ASSESSEE COMP ANY DOES NOT HAVE NECESSARY MANPOWER AND EXPERTISE TO C ARRY OUT DAY-TO-DAY MANAGEMENT OF THE GAS ALLOTMENT AND HENCE IT HAD TO ENGAGE THESE THREE COMPANIES AND INCUR TH E MANAGEMENT FEE. IT IS FURTHER SUBMITTED THAT THE FE E HAS BEEN INCURRED BY THE ASSESSEE COMPANY WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND HAS BEE N INCURRED OUT OF COMMERCIAL EXPEDIENCY. IF THE COMP ANY DID NOT INCUR THE MANAGEMENT FEE EXPENDITURE, THEN IT W OULD HAVE NOT BEEN ABLE TO EXPLOIT FULLY THE GAS LICENSE IN ITS FAVOUR AND ALSO IT WOULD NOT HAVE BEEN IN A POSITIO N TO FULFIL ITS COMMITMENTS FOR SALE OF GAS TO RVK ENERGY PRIVA TE LIMITED. THEREFORE IT IS SUBMITTED THAT THE MANAGEM ENT FEE EXPENDITURE OF RS. 27,17,315 CLAIMED BY THE ASSESSE E IS I.T.A. NO. 900/HYD/2004 I.T.A. NO. 1228/HYD/2005 M/S. ANDHRA FUELS (P) LTD. ==================== 6 ALLOWABLE AS AN EXPENDITURE U/S. 37(1) OF THE ACT. - 6. IT IS ALSO SUBMITTED THAT THE COMPANY HAS DEDUC TED TDS @ 5% ON THE MANAGEMENT FEE PAID BY IT. COPIES O F CONFIRMATION LETTERS HAVE ALREADY BEEN FILED. 7. IT IS FURTHER SUBMITTED THAT DURING THE PERIOD 02.07.1999 TO 19.01.2000 (I.E., DURING THE PERIOD T HE PROJECT WAS UNDER CONSTRUCTION AND COMPANY HAS NOT STARTED ITS BUSINESS OF SALE OF GAS), THE COMPANY HAD TO CARRY OUT VARIOUS ACTIVITIES LIKE COORDINATION WITH GAIL AUTH ORITIES FOR ALLOTMENT OF GAS AND ALSO TO FULFIL VARIOUS PROCEDU RAL AND LEGAL FORMALITIES CONNECTED THEREWITH. THE COMPANY HAS SUCH SERVICES AND HAS PAID AN AMOUNT OF RS. 80,31,0 15 AS CONSIDERATION FOR SUCH SERVICES. THE COMPANY HAS I N TURN GOT THE ABOVE SAID AMOUNT REIMBURSED FROM M/S. RVK ENERGY PRIVATE LIMITED (ACCOUNTED AS ROYALTY AND GU ARANTEE CHARGES RECEIVED IN OUR BOOKS OF ACCOUNTS), SINCE I T IS THE ULTIMATE BENEFICIARY OF THE SALE OF GAS AND THE COMMISSIONING OF ITS POWER PROJECT HAS EXTENDED TIL L JANUARY 2000. THEREFORE DURING THE PREOPERATIVE PERIOD THE COMPANY HAS NOT MADE ANY PROFIT OR LOSS ON ACCOUNT OF THE A BOVE SAID TRANSACTIONS. WE THEREFORE SUBMIT THAT NO PART OF T HE ABOVE SAID FEE PAID DURING THE PREOPERATIVE PERIOD IS REQ UIRED TO BE DISALLOWED.' 8. THE ASSESSING OFFICER FURTHER NOTICED THAT M/S. KAN NUMURI HOLDINGS PRIVATE LIMITED IN ITS PROFIT AND LOSS ACC OUNT FOR ASSESSMENT YEAR 2000-01 HAS DEBITED EXPENDITURE UND ER THREE HEADS NAMELY ADMINISTRATION EXPENSES OF RS. 10,000/ - PAID AS AUDITORS REMUNERATION, INTEREST AND FINANCE CHARGES OF RS. 44,26,560/- PAYABLE TO ASSESSEE COMPANY AND MISCELL ANEOUS EXPENSES WRITTEN OFF OF RS. 1,635/- ONLY. ON THE B ASIS OF THIS INFORMATION, THE ASSESSING OFFICER CAME TO THE CONC LUSION THAT M/S. KANNUMURI HOLDINGS PRIVATE LIMITED HAS NOT PRO VIDED ANY SERVICES AS IT IS NOT PAID OR CLAIMED ANY REMUNERAT ION TO ANY PERSON EMPLOYED WITH IT OR IS ENGAGED IN ANY PROFES SION WITH THIS COMPANY FOR PROVIDING THE MANAGEMENT SERV ICES. THE ASSESSING OFFICER FURTHER NOTICED THAT MANAGEMENT F EE HAS BEEN PAID BY WAY OF GENERAL VOUCHER DATED 31.03.2000. IN THE SAME I.T.A. NO. 900/HYD/2004 I.T.A. NO. 1228/HYD/2005 M/S. ANDHRA FUELS (P) LTD. ==================== 7 WAY, THE ENTIRE INTEREST RECEIVED OR RECEIVABLE BY THE ASSESSEE COMPANY HAS BEEN CREDITED BY WAY OF GENERAL VOUCHER ENTRY DATED 31.03.2003. ON THE BASIS OF THESE FACTS, THE ASSESS ING OFFICER CONCLUDED THAT MANAGEMENT FEE IS ONLY AN AFTERTHOUG HT ENTRY IN ORDER TO EVADE PAYMENT OF TAXES. THE ENTIRE TRANSAC TIONS OF RECEIVING INTEREST AND PAYMENT OF MANAGEMENT FEE TO THREE COMPANIES WAS HELD TO BE A COLOURABLE DEVICE IN VIE W OF DECISION OF SUPREME COURT IN THE CASE OF MCDOWELL & CO. VS. CIT , 154 ITR 148 (SC). THE ASSESSING OFFICER HAS FURTHER NOTICE D THAT NO MANAGEMENT FEE HAS BEEN PAID IN SUBSEQUENT YEARS TH OUGH IT SHOULD HAVE BEEN PAID YEAR TO YEAR. 9. ON APPEAL, THE CIT(A) CONFIRMED THE ORDER OF THE AS SESSING OFFICER. AGAINST THIS THE ASSESSEE IS IN APPEAL BE FORE US. 10. THE LEARNED AR SUBMITTED THAT THE ASSESSEE COMPANY WAS INITIALLY SET UP BY A GROUP OF PROMOTERS LED BY MR. RAMAIAH. THE COMPANY GOT ALLOTMENT OF NATURAL GAS FROM ONGC TO B E' UTILISED FOR THE PURPOSE-OF DOMESTIC CONSUMPTION. THE MANAGEMENT OF THE COMPANY WAS TAKEN OVER BY SRI K. RAGHU RAMA KRISHNA RAJU, DIRECTOR OF M/S. KANNUMURL HOLDINGS PRIVATE LIMITED , SRI K.VIJAYA KUMAR, DIRECTOR OF M/S. MARUTI FINANCE PRIVATE LIMI TED AND SRI S. KISHORE, DIRECTOR OF M/S. UPANISHADIK MANAGEMENT CO NSUL PRIVATE LIMITED AND THEIR ASSOCIATES IN THE YEAR 1999. THER EAFTER THE COMPANY UNDER THE NEW MANAGEMENT, APPLIED FOR AND G OT CONVERSION OF THE GAS ALLOTMENT TO BE UTILISED FOR POWER GENERATION. SUBSEQUENTLY, THE COMPANY ENTERED INTO AN AGREEMENT WITH M/S. RVK ENERGY PRIVATE LIMITED, WHICH COMPANY HAD LICEN SE FOR POWER GENERATION. THE PROMOTERS OF THE ASSESSEE COMPANY/T HREE ASSOCIATES HELD SHARES TO THE EXTENT .OF 51% IN M/S . RVK ENERGY LIMITED AND .THE BALANCE WAS INVESTED BY M/S. CATER PILLAR POWER VENTURE INTERNATIONAL MAUTITIUS LIMITED. THE ASSESS EE COMPANY I.T.A. NO. 900/HYD/2004 I.T.A. NO. 1228/HYD/2005 M/S. ANDHRA FUELS (P) LTD. ==================== 8 BORROWED RS. 8.50 CRORE FROM M/S. GE CAPITAL SERVIC ES LIMITED ON THE BASIS OF SECURITY OFFERED BY M/S. CATERPILLAR F INANCIAL SERVICES CORPORATION USA. THE MONEY SO BORROWED WAS UTILISED BY THE ASSESSEE COMPANY INITIALLY FOR ADVANCING LOANS TO T HREE COMPANIES NAMELY, M/S. KANNUMURI HOLDINGS PVT. LIMITED, M/S. MARUTI FINANCE PRIVATE LIMITED AND M/S. UPANISHADIK MANAGE MENT CONSUL PRIVATE LIMITED. THESE THREE COMPANIES HAVE UTILISED THE LOANS SO RECEIVED FOR INVESTMENT IN M/S. RVK ENERGY LIMITED AS EQUITY CAPITAL. THE ASSESSEE COMPANY ENTERED INTO T HREE SEPARATE SIMILAR AGREEMENTS WITH THESE THREE COMPANIES FOR T HE PURPOSE OF THE ABOVE SAID LOAN AND ALSO FOR THE PURPOSE OF MAN AGEMENT OF THE PORTFOLIO INVESTMENT IN M/S. RVK ENERGY PRIVATE LIM ITED. THE SAID AGREEMENT ENVISAGED PAYMENT OF MANAGEMENT FEE BY TH E ASSESSEE COMPANY TO THE SAID THREE COMPANIES FOR THE PURPOSE OF MANAGEMENT OF PORTFOLIO INVESTMENT IN M/S. RVK ENER GY PRIVATE LIMITED, WHICH IS EQUIVALENT TO 1/3 RD OF THE ROYALTY RECEIVABLE BY THE ASSESSEE COMPANY FROM M/S. RVK ENERGY PRIVATE L IMITED. SUBSEQUENTLY, THE ASSESSEE COMPANY ENTRUSTED THE JO B OF LIAISON WORK WITH GAIL TO THESE THREE COMPANIES AS THE ASSE SSEE COMPANY ITSELF DID NOT HAVE SUCH CAPABILITIES. THE ASSESSEE COMPANY HAS ONLY TAKEN OVER FOR THE VALUE OF GAS ALLOTMENT BY G AIL IN ITS FAVOUR AND DID NOT HAVE ANY MANPOWER OF EXPERTISE TO CARRY OUT LIAISON WITH GAIL. THEREFORE, IT WAS NECESSARY FOR THE ASS ESSEE COMPANY TO ENTRUST SUCH JOB TO AN OUTSIDER. AS CONSIDERATIO N FOR SUCH SERVICES RENDERED BY THESE THREE COMPANIES, THE ASS ESSEE COMPANY AGREED TO PAY AN. AMOUNT CALCULATED .AT THE RATE OF 15.5% OF THE VALUE OF THE GAS MOBILISED BY THESE THREE .COMPANIE S ON BEHALF OF THE ASSESSEE COMPANY AGGREGATING TO RS. 1,07,98,331 . OUT OF THIS, AN AMOUNT OF RS. 80;31;015 PERTAIN TO THE PERIOD BE FORE THE COMMENCEMENT OF THE COMMERCIAL PRODUCTION AND THE S AME WAS RECOVERED FROM M/S. RVK ENERGY PRIVATE LIMITED. THE BALANCE AMOUNT OF RS. 27,17,315 WAS DEBITED TO THE PROFIT A ND LOSS I.T.A. NO. 900/HYD/2004 I.T.A. NO. 1228/HYD/2005 M/S. ANDHRA FUELS (P) LTD. ==================== 9 ACCOUNT AND CLAIMED AS A DEDUCTION. FROM THE ABOVE DETAILS OF MANAGEMENT FEE PAID TO THREE COMPANIES, IT MAY .BE NOTICED THAT THE MANAGEMENT FEE IS BASED UPON VERIFIABLE PARAMET ERS AND WAS PAID FOR -THE WORK ACTUALLY CARRIED OUT BY THE THRE E COMPANIES IN ENABLING THE ASSESSEE TO UTILISE THE GAS ALLOTMENT FULLY. THE UTILISATION OF THE GAS ALLOTMENT FULLY AND TO THE M AXIMUM EXTENT POSSIBLE IS NECESSARY SINCE THE ASSESSEE HAS TO KEE P ITS COMMITMENT' FOR SALE OF. GAS TO M/S. RVK ENERGY PRI VATE LIMITED AND DERIVED ITS INCOME ON SUCH SALE. THE MANAGEMEN T EXPENSES THUS ESSENTIAL FOR EARNING INCOME FROM SALE OF GAS HAS BEEN CLAIMED AS DEDUCTION. 11. THE LEARNED AR SUBMITTED THAT DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEE COMPANY THROUG H OVERSIGHT IN ITS NOTE DATED 27.07.2002 SUBMITTED THAT THE MAN AGEMENT FEE IS PAID FOR PORTFOLIO MANAGEMENT OF THE INVESTMENT IN M/S. RVK ENERGY PRIVATE LIMITED. HOWEVER, NO SUCH INVESTMEN T IN SHARES OF M/S. RVK ENERGY PRIVATE LIMITED WAS MADE BY THE ASS ESSEE COMPANY AND NO MANAGEMENT FEE IN PURSUANCE OF THE A GREEMENT FOR PORTFOLIO MANAGEMENT WAS ALSO MADE. THE ASSESSE E COMPANY CLARIFIED THE CORRECT NATURE OF THE MANAGEMENT FEE IN SUBSEQUENT NOTE FILED BY IT WHERE IT HAS EXPLAINED THE FACTS A ND CIRCUMSTANCES, AND THE BASIS OF WHICH THE MANAGEMENT FEE WAS PAID BY IT. 12. THE AR SUBMITTED THAT THE ASSESSEE COMPANY HAD CLAI MED EXPENDITURE WHICH WAS BONA FIDE AND GENUINE. THE AS SESSEE HAD FURNISHED FULL PARTICULARS OF THE TRANSACTION AND H AS ALSO COOPERATED DURING THE COURSE OF ASSESSMENT PROCEEDI NGS. THE ASSESSEE COMPANY HAD ALSO SUBSTANTIATED ITS EXPLANA TION WITH REFERENCE TO DOCUMENTARY EVIDENCE AND CORROBORATIVE MATERIAL ON RECORD. THE DISALLOWANCE MADE IN THE ASSESSMENT IS NOT BASED ON ANY COGENT EVIDENCE DISPROVING THE CLAIM OF EXPENDI TURE OR I.T.A. NO. 900/HYD/2004 I.T.A. NO. 1228/HYD/2005 M/S. ANDHRA FUELS (P) LTD. ==================== 10 EXPLANATIONS OFFERED BY THE ASSESSEE. IT HAS, THERE FORE, BEEN SUBMITTED THAT THERE IS NO WILFUL DEFAULT ON THE PA RT OF THE ASSESSEE IN FURNISHING THE PARTICULARS AND THERE IS NO CONCEALMENT OF INCOME WITHIN THE MEANING OF EXPLANATION 1 TO SE CTION 271(1)(C). HE RELIED ON THE JUDGEMENT OF KERALA HIG H COURT IN THE CASE OF CIT VS KERALA SPINNERS LIMITED 247 ITR 541 WHEREIN HELD THAT FROM EXPLANATION TO SECTION 271(L((C) ITSELF P ROVIDES THAT WHERE ALL THE FACTS RELATING TO THE ADDITION HAD BEEN DIS CLOSED BY THE ASSESSEE AND THE EXPLANATION IN RESPECT OF ENTRIES IN THE BOOKS ARE BONA FIDE AND, IT IS ONLY A CASE OF ASSESSEE'S FAIL URE TO ESTABLISH ITS CASE, IT IS NOT A CASE FOR LEVY OF PENALTY. ACCORD ING TO THE AR, THE RATIO OF THE ABOVE SAID KERALA HIGH COURT DECISION IS SQUARELY APPLICABLE TO THE FACTS OF THE ASSESSEE'S CASE. THE AR PLACED RELIANCE ON THE FOLLOWING JUDGEMENTS: 1. CIT VS. DHARAMCHAND L.. SHAH (204 ITR 462 BOM) 2. CIT VS P.M.SHAH (203 ITR 792 (BOM) 3. JOMABHAI PREMCHAND VS CIT (243 ITR 812 (GUJ) 4. CIT VS TRADERS AND TRADERS (244 ITR 367 (MAD) 5. CIT VS KERALA SPINNERS LIMITED (247 ITR 541 (KER) 6. CIT VS. MUSSADDILAL RAM BHAROSE (165 ITR 14) (SC) 7. NATIONAL TEXTILES VS. CIT ( 249 ITR 125 ) (GUJ) 8. CIT VS. NARAYANAN ( 238 ITR 905 ) (KER) 9. CIT VS. RELIANCE PETRO PRODUCTS PVT. LTD., 322 ITR 158 (SC) 13. THE LEARNED AR FURTHER RELIED ON THE ORDER OF THE T RIBUNAL IN THE CASE OF SHRI P.V. RAMANA REDDY VS. ITO IN ITA N OS. 1852- 1857/HYD/2011 DATED 6 TH JANUARY, 2012 AND IN THE CASE OF SHRI S. PRASADA RAO VS. DCIT, IN ITA NO. 338/HYD/06 DATE D 21.11.2008.. 14. ON THE OTHER HAND, THE LEARNED DR SUBMITTED THAT IN ITIALLY THE ASSESSEE-COMPANY GAVE EXPLANATION THAT MANAGEME NT FEE HAS BEEN PAID IN ORDER TO MANAGE THE PORTFOLIO OF INVES TMENT IN M/S. RVK ENERGY PVT. LTD. SINCE THE ASSESSEE-COMPANY DI D NOT HAVE THE REQUIRED EXPERTISE TO DO SO AND ENTERED INTO A LOAN AGREEMENT I.T.A. NO. 900/HYD/2004 I.T.A. NO. 1228/HYD/2005 M/S. ANDHRA FUELS (P) LTD. ==================== 11 WITH THE SAID COMPANY ACCORDINGLY. SUBSEQUENTLY, T HE ASSESSEE- COMPANY CAME FORWARD WITH ANOTHER EXPLANATION THAT THE MANAGEMENT FEE WAS PAID TO THREE COMPANIES IN ORDER TO CO- ORDINATE ON A DAY TO DAY BASIS WITH GAIL AUTHORITIE S FOR ENSURING TIMELY AND ADEQUATE SUPPLY OF GAS. HOWEVER, ON BOTH GROUNDS, THE ASSESSEE COMPANY FAILED TO PROVIDE ANY DOCUMENTARY EVIDENCE TO SHOW THAT THE THREE COMPANIES HAVE PROVIDED ANY SER VICES FOR WHICH THEY BECAME ENTITLED TO MANAGEMENT FEE. ON T HE OTHER HAND, THE ASSESSING OFFICER HAS CLEARLY ESTABLISHED THAT THESE THREE COMPANIES DID NOT HAVE THE REQUISITE FACILITI ES OR CAPABILITIES TO PROVIDE ANY PROFESSIONAL SERVICES E NABLING THE ASSESSEE COMPANY TO ENSURE TIMELY AND ADEQUATE SUPP LY OF GAS TO M/S. RVK ENERGY PRIVATE LIMITED. THE ASSESSING OFFI CER CLEARLY ESTABLISHED FROM THE EXAMINATION OF ASSESSMENT RECO RDS OF M/S KANNUMURI HOLDINGS PRIVATE LIMITED THAT THE CLAIM O F MANAGEMENT FEE WAS A BOGUS CLAIM AND IT WAS A COLOU RABLE DEVICE TO EVADE PAYMENT OF TAX AND SUBMITTED THAT THE RATI O OF THE JUDGEMENT OF THE HON'BLE SUPREME COURT IN THE CASE OF MCDOWELL & CO. VS. CIT REPORTED IN 154 ITR 148 (SC) IS APPLI CABLE. HE SUBMITTED THAT IF THE MANAGEMENT FEE PAID TO THREE COMPANIES WAS A GENUINE ONE AND IT WAS ALLOWABLE AS DEDUCTION U/S . 37(1) OF THE INCOME TAX-ACT, THE ASSESSEE COMPANY OUGHT TO HAVE FILED AN APPEAL BEFORE THE CIT(A) AGAINST THE SAID DISALLOWA NCE OF MANAGEMENT FEE. THE FACT THAT NO APPEAL WAS FILED A GAINST THE ASSESSMENT ORDER CLEARLY ESTABLISHED THAT THE EXPEN DITURE WAS NOT A GENUINE ONE. THE CONCEALMENT OF INCOME WAS CLEARL Y ESTABLISHED IN THIS CASE. THE EXPLANATION FURNISHED BY THE ASSE SSEE COMPANY WAS NOT CORRECT AND HENCE THE PENALTY IS LEVIABLE I N VIEW OF THE EXPLANATION 1 TO SECTION 271(1)(C) OF THE INCOME-TA X ACT. HE RELIED ON THE JUDGEMENT OF THE SUPREME COURT IN THE CASE O F K.P. MADHUSUDAN VS. CIT (251 ITR 99) HAS HELD THAT IN SU CH CASES I.T.A. NO. 900/HYD/2004 I.T.A. NO. 1228/HYD/2005 M/S. ANDHRA FUELS (P) LTD. ==================== 12 PENALTY MUST BE IMPOSED. THE OBSERVATIONS MADE BY T HE HON'BLE SUPREME COURT ARE REPRODUCED BELOW: 'WE FIND IT DIFFICULT TO ACCEPT AS CORRECT THE TWO JUDGEMENTS AFOREMENTIONED. THE EXPLANATION TO SECTI ON 271(1)(C) IS A PART OF SECTION 271. WHEN THE INCOME TAX OFFICER OR THE APPELLATE ASSISTANT COMMISSIONER ISSUES TO AN ASSESSEE A NOTICE UNDER SECTION 271, HE MAKES THE ASSESSEE AWARE THAT THE PROVISIONS THEREOF ARE TO BE USED AGAINST HIM. THESE PROVISIONS INCLUDE THE EXPLANATION. BY REASON OF THE EXPLANATION, WHERE TH E TOTAL INCOME RETURNED BY THE ASSESSEE IS LESS THAN 80 PER CENT, OF THE TOTAL INCOME ASSESSED UNDER SECTIO N 143 OR 144 OR 147, REDUCED TO THE EXTENT THEREIN PROVIDED, THE ASSESSEE IS DEEMED TO HAVE CONCEALED THE PARTICULARS OF HIS INCOME OR FURNISHED INACCURATE PARTICULARS THEREOF, UNLESS HE PROVES THAT THE FAIL URE TO RETURN THE CORRECT INCOME DID NOT ARISE FROM ANY FR AUD OR NEGLECT ON HIS PART. THE ASSESSEE IS, THEREFORE, BY VIRTUE OF THE NOTICE UNDER SECTION 271 PUT TO NOTICE THAT IF DOES NOT PROVE, IN THE CIRCUMSTANCES STATED, IN THE EXPLANATION, THAT HIS FAILURE TO RETURN HIS CORRECT INCOME WAS NOT DUE TO FRAUD OR NEGLECT, HE SHALL BE, DEEMED TO HAVE CONCEALED THE PARTICULARS OF HIS INCOME OR FURNISHED INACCURATE PARTICULARS THEREOF AND CONSEQUENTLY, BE LIABLE TO THE PENALTY PROVIDED BY THAT SECTION. NO EXPRESS INVOCATION OF THE EXPLANATION TO SECTION 271 IN THE NOTICE UNDER SECTION 271 IS, IN OUR VIEW, NECESSARY BEFORE THE PROVISIONS OF THE EXPLANATION THEREIN ARE APPLIED. THE HIGH COURT AT BOMBAY WAS, THEREFORE, IN ERROR IN THE VIEW THAT IT TOOK AND THE DIVISION BENCH IN THE IMPUGNED JUDGEMENT WAS RIGHT. LEARNED COUNSEL FOR THE ASSESSEE THEN DREW OUR ATTENTION TO THE JUDGEMENT OF THIS COURT IN SIR SHADILAL SUGAR AND GENERAL MILLS LIMITED VS. CIT (1987) 168 ITR 705. HE SUBMITTED THAT THE ASSESSEE HAD AGREED TO THE ADDITIONS TO HIS INCOME REFERRED TO HEREIN ABOVE TO BUY PEACE AND IT DID NOT FOLLOW THEREFROM THAT THE AMOUNT THAT WAS AGREED TO BE ADDED WAS CONCEALED INCOME. THAT IT DID NOT FOLLOW THAT THE AMOUNT AGREED TO BE ADDED WAS CONCEALED INCOME IS UNDOUBTEDLY WHAT WAS LAID DOWN BY THIS COURT IN THE CASE OF SIR SHADILAL SUGAR AND GENERAL MILLS LIMITED ( 1987) 168 705 AND THAT, THEREFORE, THE REVENUE WAS REQUIRED TO PROVE THE MENS REA OF A QUASI - CRIMINAL OFFENCE. BUT IT WAS BECAUSE OF THE I.T.A. NO. 900/HYD/2004 I.T.A. NO. 1228/HYD/2005 M/S. ANDHRA FUELS (P) LTD. ==================== 13 VIEW TAKEN IN THIS AND OTHER JUDGEMENTS THAT THE EXPLANATION TO SECTION 271 WAS ADDED. BY REASON OF THE ADDITION OF THAT EXPLANATION, THE VIEW TAKEN IN THIS CASE CAN NO LONGER BE SAID TO BE APPLICABLE. THE APPEAL IS, THEREFORE, DISMISSED WITH COSTS.' 15. THE LEARNED DR ALSO PLACED RELIANCE ON TWO DECISIONS OF ALLAHABAD AND DELHI BENCHES OF ITAT IN THE FOLLOWING CASES: (1) ITO VS. R.K. BROS (2003) 87 ITD 649 (ALL.). (2) A.P. SAHGAL VS. ASST. CIT (2004) 89 ITD 580 (D EL) 16. THE LEARNED DR SUBMITTED THAT MERELY BECAUSE THE ASSESSEE ADMITS THE CONCEALMENT AND FILES A REVISED RETURN, THAT WOULD NOT ABSOLVE THE ASSESSEE FROM THE PROVISIONS OF SECTION 271(1)(C). PENALTY FOR CONCEALMENT IS LEVIAB LE BASED ON THE ORIGINAL RETURN WHEREIN THE ASSESSEE HAS DELIBERATELY CLAIMED WRONG DEDUCTION. 17. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIAL ON RECORD. IN THE PRESENT CASE THE ASSESSEE MADE A CL AIM TOWARDS MANAGEMENT FEE AT RS. 27,17,316. IT WAS SAID TO HA D BEEN PAID TO M/S. KANNUMURI HOLDINGS PVT. LTD., M/S. MARUTI FINA NCE PVT. LTD., AND M/S. UPANISHADIK MANAGEMENT CONSUL PVT. L TD. IT WAS MENTIONED THAT THE ASSESSEE-COMPANY SHOULD PAY THAT AMOUNT TO THE ABOVE THREE COMPANIES TOWARDS MANAGEMENT FEES D URING THE TENURE OF THE LOAN, AN AMOUNT EQUAL TO 1/3 RD OF THE ROYALTY RECEIVED BY THE ASSESSEE FROM M/S. RVK ENERGY PVT. LTD. THE CONTENTION OF THE ASSESSEE IS THAT IT WAS INCURRED FOR THE PURPOSE OF CARRYING OUT THE BUSINESS OF THE ASSESSEE. HOWE VER, THE ASSESSEE FAILED TO EXPLAIN HOW IT WAS RELATED TO TH E BUSINESS OF THE ASSESSEE. FURTHER THE ASSESSEE FAILED TO GIVE DETA ILS OF NATURE OF SERVICE RENDERED BY THE THREE COMPANIES, INTENTION OF SUCH SERVICES, CREDENTIAL OR QUALIFICATION OF THE PERSON ASSOCIATED WITH THESE COMPANIES TO RENDER SUCH SERVICES. FURTHER, BECAUSE OF I.T.A. NO. 900/HYD/2004 I.T.A. NO. 1228/HYD/2005 M/S. ANDHRA FUELS (P) LTD. ==================== 14 COMMON MANAGEMENT AND CONTROL OF THE THREE COMPANIE S AND ASSESSEE COMPANY, THE ASSESSING OFFICER DOUBTED THE GENUINENESS OF THIS PAYMENT AND DISALLOWED THE SAME. THE ASSES SEE HAS NOT FILED ANY APPEAL AGAINST THE QUANTUM ADDITION AND T HE ASSESSEE HAD NOT CONTESTED THE QUANTUM ADDITION IN ANY APPEA L BEFORE HIGHER FORUM. THUS, IT MEANS THAT THE ASSESSEE HAS ACCEPTED THE LAPSE ON ITS PART. FROM THIS, THE ASSESSING OFFICE R DREW THE INFERENCE THAT THE ASSESSEE HAS CLAIMED BOGUS EXPEN DITURE TOWARDS MANAGEMENT FEE AND LEVIED PENALTY U/S. 271( 1)(C) OF THE ACT. IN OUR OPINION, CONFIRMING THE QUANTUM ADDIT ION OR ACCEPTANCE OF THE QUANTUM ADDITION ITSELF CANNOT BE A REASON FOR LEVY OF PENALTY. ASSESSMENT PROCEEDINGS AND PENALT Y PROCEEDINGS ARE TWO DIFFERENT PROCEEDINGS AND ONE IS NOT SUBSTI TUTE TO THE OTHER. TO LEVY PENALTY U/S. 271(1)(C) OF THE ACT, THERE SHOULD BE CONCLUSIVE EVIDENCE TO PROVE THAT THERE IS CONCEALM ENT OF INCOME OR FURNISHING OF INACCURATE PARTICULARS OF INCOME. THE ASSESSING OFFICER IS REQUIRED TO SATISFY HIMSELF ABOUT THE CO NCEALMENT OF INCOME OR FURNISHING INACCURATE PARTICULARS OF SUCH INCOME. IT GIVES DISCRETION TO THE ASSESSING OFFICER TO EXONER ATE THE ASSESSEE FROM LEVY OF PENALTY EVEN IN CASE WHERE THE ASSESSE E HAS CONCEALED THE INCOME OR FURNISHED INCORRECT PARTICULARS OF IN COME. THE EXPRESSION IN SECTION 271(1)(C) READS AS FOLLOW S: IF THE ASSESSING OFFICER ............ IS SATISFIED THAT IN PERSON ........ (C) HAS CONCEALED THE PARTICULARS OF HIS INCOME OR FURNISHED INACCURATE PARTICULARS OF SUCH INCOME; HE MAY DIRECT ....... 18. THAT ABOVE PROVISION SHOWS THAT THE ASSESSING OFFIC ER IS VESTED WITH A DISCRETIONARY POWER TO LEVY OR NOT TO LEVY ANY PENALTY IN A DESERVING CASE. IN THE CASE OF HINDUSTAN STEEL LTD VS. STATE OF ORISSA (83 ITR 26) (SC), HELD THAT PENALTY SHOULD N OT BE IMPOSED I.T.A. NO. 900/HYD/2004 I.T.A. NO. 1228/HYD/2005 M/S. ANDHRA FUELS (P) LTD. ==================== 15 MERELY BECAUSE IT IS LAWFUL TO DO SO. THE ASSESSIN G OFFICER HAS TO EXERCISE HIS DISCRETION JUDICIOUSLY. IF AN ASSESSEE FILES THE REVISED RETURN THOUGH AT A LATER STAGE OR DISCLOSED TRUE IN COME, PENALTY NEED NOT BE LEVIED. NO DOUBT, MERELY OFFERING ADDIT IONAL INCOME WILL NOT AUTOMATICALLY PROTECT THE ASSESSEE FROM LE VY OF PENALTY BUT IN A GIVEN CASE WHERE THE ASSESSEE CAME FORWARD WIT H ADDITIONAL INCOME THOUGH AFTER DEDUCTION ON ACCOUNT OF THAT TH E ASSESSEE WAS NOT IN A POSITION TO EXPLAIN PROPERLY, AND EXPR ESS REMORSE, IN ITS CONDUCT UN-HESITANTLY, THE ASSESSING OFFICER MI GHT HAVE TO EXERCISED THE DISCRETION IN FAVOUR OF SUCH ASSESSEE AS OTHERWISE THE EXPRESSION MAY IN SECTION 271(1)(C) OF THE AC T REMAINS REDUNDANT. IF IT IS TO BE UNDERSTOOD THAT IN A CASE OF ADMITTED CONCEALMENT PENALTY IS NOT AUTOMATIC. THE DISCRETIO N VESTED IN THE OFFICER SHOULD BE USED NOT TO LEVY THE PENALTY. IN OUR OPINION, THE CASE BEFORE US IS MOST BEFITTING CASE TO EXERCISE S UCH DISCRETION, PARTICULARLY THERE IS DIVERGENCE OF OPINION ABOUT T HE ISSUE. IT SHOWS THAT THERE IS NO CONCLUSIVE PROOF THAT THE AS SESSEE CONCEALED INCOME OR FURNISHED INACCURATE PARTICULAR S OF INCOME. FURTHER AS SEEN FROM THE FACTS OF THE CASE, TO AVOI D LITIGATION THE ASSESSEE ACCEPTED THE ADDITIONS OR MADE FRESH OFFER IN THE COURSE OF THE PROCEEDINGS BEFORE THE LOWER AUTHORITIES. AF TER THE ASSESSING OFFICER HAD THE CLINCHING EVIDENCE OF CONCEALMENT T HEN THE OFFER MAY NOT HAVE BEEN ACCEPTED AND THE SAME SHOULD HAVE BEEN PROCEEDED ON THE BASIS OF MATERIAL AVAILABLE ON REC ORD. THE LOWER AUTHORITIES RELIED ON PROCEEDINGS BEFORE ASSESSING OFFICER FOR LEVYING THE PENALTY. THE SAME DO NOT CONSTITUTE ADM ISSION FOR THE PURPOSE OF LEVYING PENALTY. THE ADDITION MADE ON TH E BASIS OF MORE OR LESS ON THE OFFER MADE BY THE ASSESSEE AND THE A SSESSING OFFICER NOT BROUGHT ENOUGH INCRIMINATING MATERIAL FOR CONCE ALMENT AND THERE IS NO MATERIAL FOR ESTABLISHING THE CONCEALME NT INDEPENDENTLY IN THE GIVEN FACTS AND CIRCUMSTANCES OF THE PENALTY IS NOT LEVIABLE AND THE SAME IS DELETED. I.T.A. NO. 900/HYD/2004 I.T.A. NO. 1228/HYD/2005 M/S. ANDHRA FUELS (P) LTD. ==================== 16 19. FURTHER IN THE CASE OF ACIT VS. VIP INDUSTRIES (11 2 TTJ 289) (MUM) IT WAS HELD THAT IN ALL CASES WHERE ADDITION MS MADE THE PENALTY WAS NOT AUTOMATICALLY FOLLOW. THE TRUE EFFE CT IS THAT MENS REA IS NOT TO BE PROVED BY THE REVENUE. IF THE A CAN SUCCESSFULLY PROVE HIS BONA FIDE BY TENDERING A VALID EXPLANATIO N THEN, PENALTY CANNOT BE LEVIED. HENCE, IN CASE OF GENUINE DIFFERE NCE BETWEEN AO AND THE ASSESSEE, PENALTY CANNOT BE LEVIED. 20. IN THE CASE OF CIT VS. SIDDHARTH ENTERPRISES (184 T AXMAN 460) THE PUNJAB & HARYANA HIGH COURT HELD THAT PENA LTY CAN BE IMPOSTS ONLY WHEN THERE SOME ELEMENT OF DELIBERATE DEFAULT AND NOT WHEN THERE IS A MERE MISTAKE OR BONA FIDE CLAIM . IN THE CASE OF CIT VS. RELIANCE PETRO PRODUCTS PVT. LTD. (322 I TR 158) (SC) WHEREIN IT WAS HELD THAT 'PARTICULARS' MEANS DETAIL S OF THE CLAIM MADE WHERE INFORMATION GIVEN IS NOT FOUND TO BE INC ORRECT, ASSESSEE CANNOT BE HELD GUILTY OF FURNISHING INACCU RATE PARTICULARS OF INCOME FOR THE PURPOSE OF LEVY OF PENALTY U/S. 2 71(1)(C) OF THE ACT. IT WAS FURTHER HELD THAT MERE MAKING A WRONG C LAIM DOES NOT AMOUNT TO FURNISHING INACCURATE PARTICULARS OF INCO ME. IN THE ABSENCE OF FINDING THAT ANY DETAILS SUPPLIED BY THE ASSESSEE IS INCORRECT OR FALSE PENALTY CANNOT BE LEVIED. 21. IN THE CASE OF MAHAVIR IRRIGATION PVT. LTD. VS. CIT [314 ITR 150 (AT)] WHEREIN IT WAS HELD THAT SINCE ASSESSMENT PROCEEDINGS AND PENALTY PROCEEDINGS WERE SEPARATE AND DISTINCT, THE FINDING IN THE ASSESSMENT PROCEEDINGS COULD NOT BE REGARDED AS CONCLUSIVE FOR THE PURPOSES OF PENALTY PROCEEDINGS AND COULD N OT BE TAKEN AS CONCLUSIVE FOR THE PURPOSE OF HOLDING THE ASSESSEE LIABLE FOR CONCEALMENT AND IMPOSING PENALTY UNDER SECTION 271( 1)(C) OF THE ACT. SINCE NEITHER OF THE TWO EVENTS, I.E., SIGNING OF CONTRACT BETWEEN THE DTC AND DMIL OR PLACEMENT OF ORDER BY D TC ON DMIL FOR THE SUPPLY OF BUSES HAD TAKEN PLACE DURING THE YEAR UNDER I.T.A. NO. 900/HYD/2004 I.T.A. NO. 1228/HYD/2005 M/S. ANDHRA FUELS (P) LTD. ==================== 17 CONSIDERATION, THE ASSESSEE COULD REASONABLY CLAIM THAT NO FEES HAD BECOME PAYABLE TO THE ASSESSEE FOR THE YEAR UND ER CONSIDERATION AND THERE WAS NO ACCRUAL OF INCOME ON ACCOUNT OF SUCH FEES. THE CLAIM OF THE ASSESSEE WAS BASED ON A N INTERPRETATION GIVEN TO THE RELEVANT CLAUSES AND HA VING BEEN ACCEPTED BY THE ASSESSING OFFICER WHILE COMPLETING THE ASSESSMENT, THE INTERPRETATION GIVEN BY THE ASSESSE E WAS A POSSIBLE ONE. MOREOVER, ALL THE RELEVANT PARTICULAR S RELATING TO THE SAID CLAIM WERE DULY FURNISHED BY THE ASSESSEE ALON G WITH ITS RETURN OF INCOME INCLUDING A COPY OF THE MEMORANDUM OF UNDERSTANDING. THE CLAIM OF THE ASSESSEE TREATING T HE AMOUNT OF RS. 3 CRORES RECEIVED FROM DMIL AS SECURITY DEPOSIT WAS BONA FIDE AS IT WAS BASED ON THE INTERPRETATION GIVEN TO THE MEMORANDUM OF UNDERSTANDING AND ALTHOUGH THE CLAIM WAS NOT FOUND TO BE ACCEPTABLE IN THE QUANTUM PROCEEDINGS ON THE MERITS , IT WAS NOT A CASE OF CONCEALMENT AS ENVISAGED IN SECTION 271(1)( C) OF THE ACT ATTRACTING LEVY OF PENALTY ESPECIALLY WHERE ALL THE MATERIAL FACTS RELEVANT TO THE SAID CLAIM WERE DULY FURNISHED BY T HE ASSESSEE BEFORE THE ASSESSING OFFICER. (THE PENALTY IMPOSED WAS SET ASIDE). 22. IN THE CASE OF ROSHAN LAL MADAN VS. ACIT (67 ITD 33 ) THE TRIBUNAL HELD THAT EXPLANATION 1, WHICH IS RELEVANT IN THE INSTANT CASE, CONSISTS OF TWO CLAUSES; CLAUSE (A) PROVIDES THAT THE ASSESSEE FAILS TO OFFER AN EXPLANATION OR OFFERS AN EXPLANAT ION WHICH IS FOUND TO BE FALSE. CLAUSE (B) PROVIDES FOR THE SITUATION WHERE THE ASSESSEE IS NOT ABLE TO SUBSTANTIATE THE EXPLANATIO N AND FAILS TO PROVE THAT THE EXPLANATION IS BONA FIDE. IN THE SIT UATIONS ENVISAGED BY THE AFORESAID CLAUSES, DEEMING FICTION WOULD COM E INTO PLAY AND THE AMOUNT ADDED IN THE TOTAL INCOME WOULD BE DEEME D TO REPRESENT THE INCOME IN RESPECT OF WHICH THE PARTIC ULARS HAVE BEEN CONCEALED. THIS EXPLANATION ENACTS A RULE OF EVIDEN CE WHICH HAS THE EFFECT OF SHIFTING THE BURDEN OF PROOF ON THE A SSESSEE. IT IS WELL I.T.A. NO. 900/HYD/2004 I.T.A. NO. 1228/HYD/2005 M/S. ANDHRA FUELS (P) LTD. ==================== 18 SETTLED THAT THE DEGREE OF PROOF REQUIRED FOR PROVI NG A NEGATIVE FACT WOULD NOT BE AS HEAVY AS REQUIRED FOR PROVING A POS ITIVE FACT. IN THE CASE OF PROVING A NEGATIVE FACT, THE TEST OF PR EPONDERANCE OF PROBABILITIES WOULD APPLY. IF THE ASSESSEE IS ABLE TO FURNISH A BONA FIDE AND PLAUSIBLE EXPLANATION IN RESPECT OF MATERI AL FACTS, THE BURDEN CAST BY THE EXPLANATION WOULD BE DISCHARGED AND THE CASE WOULD NOT BE HIT BY THE MISCHIEF OF THE SAID EXPLAN ATION. FURTHER, MERELY BECAUSE THE EXPLANATION FURNISHED BY THE ASS ESSEE WAS CONSIDERED UNSATISFACTORY OR UNREASONABLE WOULD NOT IPSO FACTO JUSTIFY THE INVOCATION OF CLAUSE (A) TO LEVY PENALT Y UNDER SECTION 271(1)(C). FURTHER IT WAS HELD BY THE SUPREME COUR T IN THE CASE OF RELIANCE PETRO PRODUCTS PVT. LTD. (SUPRA) THAT MERE LY BECAUSE ASSESSEE CLAIMED DEDUCTION OF EXPENDITURE WHICH HAS NOT BEEN ACCEPTED BY THE REVENUE, PENALTY U/S. 271(1)(C) OF THE ACT IS NOT ATTRACTED; MERE MAKING OF CLAIM, WHICH IS NOT SUSTA INABLE IN LAW, WILL NOT AMOUNT TO FURNISHING INACCURATE PARTICULAR S REGARDING INCOME OF THE ASSESSEE. 23. IN VIEW OF THE ABOVE DISCUSSION, WE ARE OF THE OPIN ION THAT LEVY OF PENALTY IS NOT JUSTIFIED AND WE DELETE THE SAME. 24. NOW WE TAKE UP THE APPEAL IN ITA NO. 1228/HYD/2005 . THE ISSUE IS WITH REGARD TO DELETION OF ADDITION TO WARDS NON- COMPETITION FEE (NCF) OF RS. 3.25 LAKHS. 25. BRIEF FACTS OF THE ISSUE ARE THAT ASSESSEE-COMPANY PAID A SUM OF RS. 3.25 CRORES TO M/S. KANNUMURI HOLDINGS P RIVATE LTD. (KHPL) FOR NOT TO COMPETE WITH THE ASSESSEE-COMPANY IN SETTING UP OF NEW POWER PROJECTS IN ANDHRA PRADESH FOR A PERIO D OF 3 YEARS COMMENCING FROM 28.02.201. THE SAID PAYMENT MADE I N TERMS OF AGREEMENT DATED 28.12.2001 WAS CLAIMED AS REVENUE E XPENSES AND DEBITED TO THE PROFIT AND LOSS A/C. THE ASSESS ING OFFICER, HOWEVER, HELD THAT THE EXPENDITURE CLAIMED BY THE A SSESSEE IS OF I.T.A. NO. 900/HYD/2004 I.T.A. NO. 1228/HYD/2005 M/S. ANDHRA FUELS (P) LTD. ==================== 19 CAPITAL NATURE WITHOUT BRINGING ANY DEPRECIABLE ASS ET INTO EXISTENCE. HE, THEREFORE, DISALLOWED THE EXPENSES AS CAPITAL EXPENSES BUT DID NOT ALLOW THE DEPRECIATION THEREON . 26. THE DR SUBMITTED THAT THERE IS NO BUSINESS EXPEDIE NCY TO INCUR THIS EXPENDITURE. THE NON-COMPETITION FEE MA TTER AROSE AT THE TIME OF PARTING OF THE WAYS OF THE DIRECTORS AN D WHEN THEY WERE SEVERING THEIR BUSINESS RELATIONSHIP, SRI RAG HU RAMAKRISHNA RAJU AND SRI VIJAY KUMAR WERE JOINTLY CARRYING ON T HE BUSINESS OF THE ASSESSEE COMPANY IN THEIR CAPACITY AS DIRECTORS . WHILE PARTING THEIR WAYS THEY MUTUALLY DECIDED TO COME TO AN AGREEMENT WITH REGARD TO VARIOUS ASPECTS LIKE OUTSTANDING AMO UNTS DUE FROM EACH OTHER OR FROM THEIR GROUP COMPANIES. IN THAT PROCESS, ONE OF THE ITEMS THAT CROPPED UP IS PAYMENT OF NON-COMPETI TION FEES. BUT THE POINT THAT REQUIRED CONSIDERATION IS WHETHE R THE ASSESSEE COMPANY IS UNDER ANY OBLIGATION TO MAKE SUCH SUBSTA NTIAL PAYMENT TO SRI RAGHU RAMAKRISHNA RAJU. BOTH THE PAR TIES MUTUALLY AGREED TO WITHDREW THEIR INVESTMENTS FROM THE RESPECTIVE GROUPS/INDIVIDUAL COMPANIES CONTROLLED BY EACH OTHE R. THE ASSESSEE COMPANY CLAIMED THAT TO STOP SRI RAGHU RAM AKRISHNA RAJU FROM SETTING UP A POWER PLANT IN ANDHRA PRADES H, THE PAYMENT IS UNAVOIDABLE. THE ASSESSEE'S ARGUMENT TH AT THEY CAN WARD OFF THE COMPETITION BY STOPPING ONE PERSON FRO M SETTING UP OF THE POWER PLANTS IN ANDHRA PRADESH, IS NOT CONVINCI NG. THERE ARE SO MANY POWER PLANTS, WHICH ARE COMING UP IN ANDHRA PRADESH DAY IN AND DAY OUT. AT PRESENT, SETTING UP OF POWE R PROJECTS IN ANDHRA PRADESH IS A VERY COMPETITIVE FIELD AND SO M ANY POWER PROJECTS ARE COMING UP. IN SUCH A SITUATION, THERE IS NO BASIS FOR THE ASSESSEE TO CLAIM THAT THEY WARDED OFF COMPETIT ION BY PAYING SUBSTANTIAL AMOUNT TO ONE PERSON. THEREFORE, IT CA NNOT BE SAID THAT BY KEEPING ONE PERSON AWAY FROM THE PROJECT TH E ASSESSEE CAN STOP COMPETITION FOR THEIR BUSINESS. IT MAY ALSO BE STATED THAT THE I.T.A. NO. 900/HYD/2004 I.T.A. NO. 1228/HYD/2005 M/S. ANDHRA FUELS (P) LTD. ==================== 20 ASSESSEE DID NOT MAKE ANY SUCH PAYMENT EITHER IN EA RLIER YEARS OR IN SUBSEQUENT YEARS TO ANY PERSONS TO STALL THEM FR OM COMPETING WITH THE ASSESSEE IN THEIR BUSINESS. THE ASSESSEE F URTHER MENTIONED THAT SRI RAGHU RAMAKRISHNA RAJU DID NOT S ET UP ANY POWER PROJECTS IN ANDHRA PRADESH SINCE THE DATE OF AGREEMENT. HOWEVER, IT IS TO BE MENTIONED THAT SRI RAGHU RAMAK RISHNA RAJU IS ALREADY CONNECTED WITH THE PROJECT OF M/S ARKAY ENERGIES LTD, WHICH IS GIVING COMPETITION TO THE ASSESSEE COMPANY . FURTHER, SRI RAGHU RAMAKRISHNA RAJU IS VERY MUCH INTERESTED IN S ETTING UP OF PROJECTS IN TAMIL NADU AND THEREFORE, HE READILY AG REED TO CONFINE HIMSELF TO THE PROJECTS THOSE ARE GOING TO BE SET U P IN TAMIL NADU. THEREFORE, THE EXPENDITURE CLAIMED TO HAVE BEEN INC URRED CANNOT BE SAID TO HAVE BEEN INCURRED ACTUALLY FOR THE PURP OSE OF BUSINESS AND ALLOWED UNDER SECTION 37(1) OF THE INCOME TAX A CT, 1961. IN THE COURSE OF HEARING, A POINT AROSE WITH REGARD TO NATURE OF EXPENDITURE, IF IT IS NOT REVENUE EXPENDITURE, WOUL D IT CONSTITUTE CAPITAL EXPENDITURE ENTITLING THE ASSESSEE FOR DEPR ECIATION. HOWEVER, NON-COMPETITION FEE CANNOT BE IDENTIFIED A S AN INTANGIBLE ASSET AS LAID OUT IN EXPLANATION 3(B) OF SECTION 32 . IT MAY ALSO TO BE MENTIONED THAT THE ASSESSEE COMPANY ITSELF IS NO T HAVING ANY 'OWNERSHIP'. WHICH IS PREREQUISITE FOR ALLOWING DEP RECIATION. THEREFORE, THE EXPENDITURE CLAIMED BY THE ASSESSEE IS OF CAPITAL NATURE WITHOUT BRINGING ANY DEPRECIABLE ASSET INTO EXISTENCE. HENCE. THE CLAIM OF THE ASSESSEE FOR DEDUCTION OF R S 3.25 CRORES IS DISALLOWED. 27. THE DR RELIED ON THE FOLLOWING JUDGEMENTS: A. CIT VS. MOTILAL HIRABHAI SPG. AND WVG. CO. LTD., 11 3 ITR 173 (GUJ.) B. BHARAT DEVELOPMENT (P) LTD. VS. CIT, 133 ITR 470 (D ELHI) C. CIT VS. ROCKMAN CYCLE INDUSTRIES PVT. LTD., 331 ITR 401 (P&H). D. JK TRADERS LTD. V. CIT, 271 ITR 69 (ALL). E. RAM BAHADUR THAKUR LTD. V. CIT, 261 ITR 390 (KERALA ) F. CIT VS. GEMINI CASHEW SALES CORPORATION, 65 ITR 643 (SC) I.T.A. NO. 900/HYD/2004 I.T.A. NO. 1228/HYD/2005 M/S. ANDHRA FUELS (P) LTD. ==================== 21 G. SESHASAYEE BROS. (TRAVANCORE) PVT. LTD. VS. CIT, 82 ITR 442 (KERALA) 28. ON THE OTHER HAND, THE LEARNED AR SUBMITTED THE ASS ESSEE COMPANY WAS INITIALLY PROMOTED BY THREE COMPANIES I NCLUDING M/S. KANNUMURI HOLDINGS PRIVATE LIMITED AND ASSOCIA TES, REPRESENTED BY SRI K.RAGHU RAMAKRISHNA RAJU. DUE T O CERTAIN DISPUTES AMONG THE DIRECTORS, IT WAS DECIDED THAT S RI RAGHU RAMAKRISHNA RAJU WOULD EXIT FROM THE COMPANY AND SE T UP HIS OWN POWER PROJECT. SRI RAGHU RAMAKRISHNA RAJU WAS ALREADY SETTING UP A POWER PROJECT IN TAMIL NADU UNDER THE BANNER OF GROUP COMPANY M/S. R.K. ENERGY LIMITED. IN THE ABOV E BACKGROUND, THE ASSESSEE COMPANY FELT THAT IF SRI R AGHU RAMAKRISHNA RAJU COMPETES WITH THE BUSINESS OF THE ASSESSEE COMPANY, IT WOULD LEAD TO SERIOUS REPERCUSSIONS AFF ECTING THE PROFITABILITY OF THE ASSESSEE COMPANY. THEREFORE, T O STALL THE IMMEDIATE POTENTIAL THREAT, THE ASSESSEE COMPANY EN TERED INTO AN AGREEMENT TO KEEP HIM AWAY FROM ALL HIS CONTACTS WI TH THE SUPPLIERS, FUNDING AGENCIES AND OTHER BUSINESS ASSO CIATES OF THE ASSESSEE COMPANY AND ALSO TO STOP HIM FROM CREATING ANY LEGAL PROBLEMS, IT WAS DECIDED TO ENTER INTO AN AGREEMENT OF NON- COMPETITION. THE NON-COMPETITION AGREEMENT WAS ONLY FOR A LIMITED PERIOD OF 3 YEARS TO WARD OFF THE COMPETITION IN TH E TERRITORY OF ANDHRA PRADESH. 29. HE SUBMITTED THAT AS EVIDENT FROM THE FACTS OF THE CASE THAT THE PAYMENT WAS MADE BY THE ASSESSEE COMPANY TO A R IVAL COMPANY TO WARD OFF COMPETITION IN BUSINESS. HOWEVE R, BY MAKING THIS PAYMENT, THE ASSESSEE HAS NOT DERIVED ANY ADVA NTAGE OF ENDURING NATURE TO HOLD THE EXPENSES AS CAPITAL IN NATURE. THE AGREEMENT WAS ONLY FOR A LIMITED PERIOD OF 3 YEARS. THE MAIN OBJECT WAS TO STALL THE IMMEDIATE POTENTIAL THREAT ON THE PARTING AWAY OF THE OTHER DIRECTOR BY KEEPING HIM AWAY FROM ALL HIS CONTACTS WITH I.T.A. NO. 900/HYD/2004 I.T.A. NO. 1228/HYD/2005 M/S. ANDHRA FUELS (P) LTD. ==================== 22 THE SUPPLIERS, FUNDING AGENCIES AND OTHER BUSINESS ASSOCIATES AND ALSO TO STOP HIM FROM CREATING ANY LEGAL PROBLEMS F OR THE ASSESSEE COMPANY. THUS, THE SAID PAYMENT WAS MADE IN ORDER T O ENABLE THE ASSESSEE COMPANY TO DERIVE MORE PROFITS IN THE BUSI NESS WITHOUT ANY HINDRANCE FROM THE PARTING DIRECTOR AND HIS GRO UP COMPANIES. THE SAID PAYMENT WAS MADE FOR THE PURPOSE OF RUNNIN G THE BUSINESS AND NOT FOR THE PURPOSE OF ACQUIRING THE B USINESS. THE EXPENDITURE INCURRED WAS NOT RELATED TO THE ACQUISI TION OF AN ASSET OR A RIGHT OF PERMANENT CHARACTER OR AN ADVANTAGE O F ENDURING NATURE. SUCH EXPENDITURE CANNOT BE THEREFORE HELD A S CAPITAL EXPENDITURE. SINCE THE PAYMENT WAS MADE WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS, THE SAME HAS TO B E ALLOWED AS REVENUE EXPENSES IN TERMS OF PROVISIONS OF SEC. 37( 1) OF THE ACT. A) 30. THE LEARNED AR PLACED RELIANCE ON THE DECISION OF H ON'BLE ANDHRA PRADESH HIGH COURT IN THE CASE OF CIT VS. BO WRISANKARA STEAM FERRY COMPANY (87 ITR 650) WHERE THE MONEY WA S PAID TO SOME PROSPECTIVE BIDDERS AT AUCTION TO PREVENT THEM FROM COMPETITION WITH ASSESSEE. IT WAS HELD THAT FROM TH E CONTEXT OF BUSINESS NECESSITY OR EXPEDIENCY, THE AMOUNT WAS PA ID IN ORDER TO ENABLE THE ASSESSEE TO DERIVE MORE PROFITS BY REDUC ING THE LEASE AMOUNTS PAYABLE TO THE GOVERNMENT FOR OPERATING THE FERRY AND THAT IT WAS IN THE NATURE OF REVENUE EXPENDITURE WH ICH WAS DEDUCTIBLE FROM THE ASSESSEE'S TOTAL INCOME.' 31. THE LEARNED AR SUBMITTED THAT THE HON'BLE AP HIGH C OURT RELIED ON THE DECISION OF PRIVY COUNSEL IN THE CASE OF COMMISSIONER OF TAXES VS. NCHANGA CONSOLIDATED COPPER MINES LIMI TED (58 ITR 241) WHERE THE PAYMENT WAS MADE BY THE ASSESSEE COM PANY TO ANOTHER COMPANY TO SEIZE PRODUCTION FOR CERTAIN PER IOD SO AS TO INCREASE ITS PROFITABILITY. IT WAS HELD BY THE HON' BLE COURT THAT THE PAYMENT RESEMBLED AN OUTLAY OF A BUSINESS 'IN ORDER TO CARRY IT ON I.T.A. NO. 900/HYD/2004 I.T.A. NO. 1228/HYD/2005 M/S. ANDHRA FUELS (P) LTD. ==================== 23 AND TO EARN A PROFIT OUT OF THIS EXPENSE AS AN EXPE NSE OF CARRYING IT ON.' THE SAME WAS THEREFORE ALLOWED AS A REVENUE EX PENSE. 32. THE LEARNED AR SUBMITTED THAT THE ASSESSEE'S CASE I S SQUARELY COVERED BY THE DECISION OF HON'BLE MADRAS HIGH COURT IN THE CASE OF CIT VS. LATE G.D. NAIDU & OTHERS (165 I TR 62, 76-77). THE FACTS OF THIS CASE WERE THAT THE ASSESSEE AND S ON WERE PARTNERS WITH OTHERS IN FIRMS CARRYING ON TRANSPORT BUSINESS. NEW PARTNERS TOOK OVER THE FIRMS AND PAYMENTS WERE MADE TO ASSESSEE AND SON FOR NOT CARRYING ON BUS BUSINESS FOR FIVE Y EARS. ON THESE FACTS, THE HON'BLE COURT HELD THAT THE PAYMENT TOWA RDS THE RESTRICTIVE COVENANT WAS ON REVENUE ACCOUNT AND IT WOULD NOT AMOUNT TO AN ACQUISITION OF AN ADVANTAGE OF AN ENDU RING NATURE. 33. THE AR SUBMITTED THAT THE HON'BLE SUPREME COURT IN THE CASE OF BOMBAY STEAM NAVIGATION COMPANY PRIVATE LIM ITED VS. CIT (56 ITR 52) HELD THAT THE QUESTION WHETHER A PA RTICULAR EXPENDITURE IS REVENUE EXPENDITURE INCURRED FOR THE PURPOSES OF BUSINESS MUST BE DETERMINED BY THE APPLICATION OF P RINCIPLES OF COMMERCIAL TRADING. THE QUESTION MUST BE VIEWED IN THE LARGER CONTEXT OF BUSINESS NECESSITY OR EXPEDIENCY. 34. FURTHER HE RELIED ON IN THE CASE OF CIT VS. EICHER LTD. 302 ITR 249 (DELHI), SMARTCHEM TECHNOLOGIES LTD. VS. IT O (2005) 97 TTJ (AHD) 818 AND JCIT VS. SYNERGY CREDIT CORPN. LT D. 9 SOT 75 (MUM). 35. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIAL ON RECORD. THE ISSUE IN DISPUTE BEFORE US IS WHETHER THE EXPENDITURE INCURRED BY THE ASSESSEE PAID TO M/S. KHPL IS IN TH E NATURE OF REVENUE EXPENDITURE OR CAPITAL EXPENDITURE. AS SE EN FROM THE FACTS OF THE CASE NARRATED ELSEWHERE IN THIS ORDER, THE PAYMENT WAS MADE BY THE ASSESSEE-COMPANY TO M/S. KHPL REPRESENT ED BY MR. I.T.A. NO. 900/HYD/2004 I.T.A. NO. 1228/HYD/2005 M/S. ANDHRA FUELS (P) LTD. ==================== 24 RAGHU RAMAKRISHNA RAJU. AS EVIDENT FROM THE FACTS OF THE CASE THE PAYMENT WAS MADE BY THE ASSESSEE COMPANY TO A R IVAL COMPANY TO WARD OFF COMPETITION IN BUSINESS. HOWEVE R, BY MAKING THIS PAYMENT, THE ASSESSEE HAS NOT DERIVED ANY ADVA NTAGE OF ENDURING NATURE TO HOLD THE EXPENSES AS CAPITAL IN NATURE. THE AGREEMENT WAS ONLY FOR A LIMITED PERIOD OF 3 YEARS. THE MAIN OBJECT WAS TO STALL THE IMMEDIATE POTENTIAL THREAT ON THE PARTING AWAY OF THE OTHER DIRECTOR BY KEEPING HIM AWAY FROM ALL HIS CONTACTS WITH THE SUPPLIERS, FUNDING AGENCIES AND OTHER BUSINESS ASSOCIATES AND ALSO TO STOP HIM FROM CREATING ANY LEGAL PROBLEMS F OR THE ASSESSEE COMPANY. THUS, THE SAID PAYMENT WAS MADE IN ORDER T O ENABLE THE ASSESSEE COMPANY TO DERIVE MORE PROFITS IN THE BUSI NESS WITHOUT ANY HINDRANCE FROM THE PARTING DIRECTOR AND HIS GRO UP COMPANIES. THE SAID PAYMENT WAS MADE FOR THE PURPOSE OF RUNNIN G THE BUSINESS AND NOT FOR THE PURPOSE OF ACQUIRING THE B USINESS. THE EXPENDITURE INCURRED WAS NOT RELATED TO THE ACQUISI TION OF AN ASSET OR A RIGHT OF PERMANENT CHARACTER OR AN ADVANTAGE O F ENDURING NATURE. SUCH EXPENDITURE CANNOT BE, THEREFORE, HELD AS CAPITAL EXPENDITURE. SINCE THE PAYMENT WAS MADE WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS, THE SAME HAS TO B E ALLOWED AS REVENUE EXPENSES IN TERMS OF PROVISIONS OF SEC. 37( 1) OF THE ACT. 36. THE APEX COURT IN THE CASE OF CIT VS. COAL SHIPMENT S PVT. LTD. (82 ITR 902)(SC) HELD AS FOLLOWS: 'THE CASE WHICH HAS BEEN SET UP ON BEHALF OF THE REVENUE IS THAT, AS THE OBJECT OF MAKING THE PAYMENTS IN QUESTION WAS TO ELIMINATE COMPETITION OF A RIVAL EXPORTER, THE BENEFIT WHICH ENSURED TO THE RESPONDENT WAS OF AN ENDURING NATURE AND, AS SUCH, THE PAYMENT SHOULD BE TREATED AS CAPITAL EXPENDITURE. WE FIND OURSELVES UNABLE TO ACCEDE TO THIS CONTENTION BECAUSE WE FIND THAT THE ARRANGEMENT BETWEEN THE RESPONDENT AND M/S H.V. LOWE & CO. LTD. WAS NOT FOR ANY FIXED TERM BUT COULD BE TERMINATED AT ANY TIME AT THE VOLITION OF ANY OF THE PARTIES. I.T.A. NO. 900/HYD/2004 I.T.A. NO. 1228/HYD/2005 M/S. ANDHRA FUELS (P) LTD. ==================== 25 ALTHOUGH AN ENDURING BENEFIT NEED NOT BE OF AN EVERLASTING CHARACTER, IT SHOULD NOT, AT THE SAME TIME, BE SO TRANSITORY AND EPHEMERAL THAT IT CAN BE TERMINATED AT ANY TIME AT THE VOLITION OF ANY OF THE PARTIES. ANY OTHER VIEW WOULD HAVE THE EFFECT OF RENDERING THE WORD ENDURING TO BE MEANINGLESS. NO COGENT GROUND OR VALID REASON HAS BEEN GIVEN TO US IN SUPPORT OF THE CONTENTION THAT, EVEN THOUGH THE BENEFIT FROM THE ARRANGEMENT TO THE RESPONDENT MAY NOT BE OF A PERMANENT OR ENDURING NATURE, THE PAYMENTS MADE IN PURSUANCE OF THAT ARRANGEMENT WOULD STILL BE CAPITAL EXPENDITURE.' 37. THE DELHI HIGH COURT IN THE CASE OF CIT VS. EICHER LTD. (302 ITR 249) HELD AS FOLLOWS: 10. LEARNED COUNSEL FOR THE ASSESSEE POINTED OUT, AND WE THINK RIGHTLY, THAT THE LENGTH OF TIME FOR WHICH TH E COMPETITION WAS ELIMINATED WAS IMPORTANT IN THE FACTS OF THAT C ASE, BUT THAT IS NOT ALWAYS SO. WHAT IS MORE NECESSARY TO AP PRECIATE IS THE PURPOSE OF THE PAYMENT AND ITS INTENDED OBJE CT AND EFFECT. IN CIT VS. COAL SHIPMENTS (P) LTD. 1972 CTR (SC) 151 (1971) 82 ITR 902 (SC), THE SUPREME COURT NOTED THE CONTENTION OF THE REVENUE TO THE EFFECT THAT PAYMEN TS MADE TO ELIMINATE COMPETITION WERE CAPITAL EXPENDITURE. REJECTING THIS CONTENTION, IT WAS HELD ON P. 909 OF THE REPOR T AS FOLLOWS: 'THE CASE WHICH HAS BEEN SET UP ON BEHALF OF THE RE VENUE IS THAT, AS THE OBJECT OF MAKING THE PAYMENTS IN QU ESTION WAS TO ELIMINATE COMPETITION OF A RIVAL EXPORTER, T HE BENEFIT WHICH ENSURED TO THE RESPONDENT WAS OF AN ENDURING NATURE AND, AS SUCH, THE PAYMENT SHOULD BE TREATED AS CAPITAL EXPENDITURE. WE FIND OURSELVES UNABLE TO AC CEDE TO THIS CONTENTION BECAUSE WE FIND THAT THE ARRANGEMEN T BETWEEN THE RESPONDENT AND M/S H. V. LOWE & CO. LTD . WAS NOT FOR ANY FIXED TERM BUT COULD BE TERMINATED AT ANY TIME AT THE VOLITION OF ANY OF THE PARTIES. ALTHOUG H AN ENDURING BENEFIT NEED NOT BE OF AN EVERLASTING CHAR ACTER, IT SHOULD NOT, AT THE SAME TIME, BE SO TRANSITORY AND EPHEMERAL THAT IT CAN BE TERMINATED AT ANY TIME AT THE VOLITION OF ANY OF THE PARTIES. ANY OTHER VIEW WOUL D HAVE THE EFFECT OF RENDERING THE WORD ENDURING TO BE MEANING LESS. NO COGENT GROUND OR VALID REASON HAS BEEN GIVEN TO US IN SUPPORT OF THE CONTENTION THAT, EVEN THOUGH THE BEN EFIT FROM THE ARRANGEMENT TO THE RESPONDENT MAY NOT BE O F A PERMANENT OR ENDURING NATURE, THE PAYMENTS MADE IN PURSUANCE OF THAT ARRANGEMENT WOULD STILL BE CAPITA L EXPENDITURE. I.T.A. NO. 900/HYD/2004 I.T.A. NO. 1228/HYD/2005 M/S. ANDHRA FUELS (P) LTD. ==================== 26 11. DEALING WITH THE CONTENTION THAT ELIMINATING CO MPETITION OVER SOME LENGTH OF TIME IS IMPORTANT, THE SUPREME COURT HELD AS FOLLOWS : 'ALTHOUGH WE AGREE THAT PAYMENT MADE TO WARD OFF COMPETITION IN BUSINESS TO A RIVAL DEALER WOULD CON STITUTE CAPITAL EXPENDITURE IF THE OBJECT OF MAKING THAT PA YMENT IS TO DERIVE AN ADVANTAGE BY ELIMINATING THE COMPETITI ON OVER SOME LENGTH OF TIME, THE SAME RESULT WOULD NOT FOLL OW IF THERE IS NO CERTAINTY OF THE DURATION OF THE ADVANT AGE AND THE SAME CAN BE PUT TO AN END AT ANY TIME. HOW LONG THE PERIOD OF CONTEMPLATED ADVANTAGE SHOULD BE IN ORDER TO CONSTITUTE ENDURING BENEFIT WOULD DEPEND UPON THE CIRCUMSTANCES AND THE FACTS OF EACH INDIVIDUAL CASE .' 12. IT IS QUITE CLEAR FROM THE ABOVE THAT TO DECIDE WHETHER AN EXPENDITURE OF THIS NATURE IS A CAPITAL EXPENDITURE OR NOT WOULD DEPEND ON THE FACTS OF THE CASE. HOWEVER, IT IS NECESSARY TO KNOW WHETHER THE ADVANTAGE DERIVED BY THE PAYER IS OF AN ENDURING NATURE, AND FOR THIS ONE OF THE CONSIDERATIONS IS THE LENGTH OF TIME FOR WHICH THE NON- COMPETE AGREEMENT WOULD OPERATE ALTHOUGH THAT IS NO T DECISIVE. WHILE THE LENGTH OF TIME FOR WHICH COMPET ITION IS ELIMINATED MAY NOT STRICTLY BE DECISIVE IN ALL CASE S, YET, AT THE SAME TIME, IT SHOULD NOT BE SO BRIEF AS TO VIRT UALLY BE TRANSITORY. 13. IN CIT VS. LATE G.D. NAIDU BY LRS (1986) 51 CTR (MAD) 256 : (1987) 165 ITR 63 (MAD), COMPENSATION PAID TO THE ASSESSEE WAS REFERABLE TO A RESTRICTIVE COVENANT IN AN AGREEMENT BETWEEN THE ASSESSEE AND ANOTHER PARTY. T HE QUESTION THAT AROSE WAS WHETHER THE AMOUNT WAS A CA PITAL EXPENDITURE OR NOT. THE SUPREME COURT HELD THAT INS OFAR AS THE ASSESSEE IS CONCERNED, HE DID NOT ACQUIRE ANY S EPARATE BUSINESS NOR WAS ANY COMPETITION ELIMINATED BY SUCH AN ACQUISITION. SINCE THERE WAS NO ACQUISITION OF ANY BUSINESS BY PAYMENT OF THE AMOUNT REFERABLE TO THE RESTRICTI VE COVENANT AND NO BENEFIT OF AN ENDURING NATURE WAS ACQUIRED, THE TRIBUNAL WAS CORRECT IN HOLDING THAT THE PAYMENT COULD ONLY BE TREATED AS REVENUE OUTLAY AND NOT CAPITAL IN NATURE. 14. IN ALEMBIC CHEMICAL WORKS CO. LTD. VS. CIT (198 9) 77 CTR (SC) 1 ; (1989) 177 ITR 377 (SC), THE SUPREME C OURT OBSERVED AS FOLLOWS: 'THERE IS ALSO NO SINGLE DEFINITIVE CRITERION WHICH , BY ITSELF, IS DETERMINATIVE AS TO WHETHER A PARTICULAR OUTLAY IS CAPITAL OR REVENUE. WHAT IS RELEVANT IS THE PURPOSE OF THE OUTLAY AND ITS INTENDED OBJECT AND EFFECT, CONSIDERED IN A COMMON SENSE WAY HAVING REGARD TO THE BUSINESS REALITIES. IN A I.T.A. NO. 900/HYD/2004 I.T.A. NO. 1228/HYD/2005 M/S. ANDHRA FUELS (P) LTD. ==================== 27 GIVEN CASE, THE TEST OF ENDURING BENEFIT MIGHT BREA KDOWN.' 15. IN CIT VS. MADRAS AUTO SERVICE (P) LTD. (1998) 148 CTR (SC) 398 : (1998) 233 ITR 468 (SC), THE SUPREME COU RT REFERRED TO ASSAM BENGAL CEMENT CO. LTD. (SUPRA) AN D SUMMARIZED THE TESTS FOR DETERMINING WHETHER AN OUT LAY IS REVENUE OR CAPITAL BY GIVING THE FOLLOWING THREE PR INCIPLES: 1. OUTLAY IS DEEMED TO BE CAPITAL WHEN IT IS MADE F OR THE INITIATION OF A BUSINESS, FOR EXTENSION OF A BUSINE SS, OR FOR A SUBSTANTIAL REPLACEMENT OF EQUIPMENT. 2. EXPENDITURE MAY BE TREATED AS PROPERLY ATTRIBUTA BLE TO CAPITAL WHEN IT IS MADE NOT ONLY ONCE AND FOR ALL, BUT WITH A VIEW TO BRINGING INTO EXISTENCE AN ASSET OR AN ADVA NTAGE FOR THE ENDURING BENEFIT OF A TRADE. IF WHAT IS GOT RID OF BY A LUMP SUM PAYMENT IS AN ANNUAL BUSINESS EXPENSE CHARGEABLE AGAINST REVENUE, THE LUMP SUM PAYMENT SH OULD EQUALLY BE REGARDED AS A BUSINESS EXPENSE, BUT IF T HE LUMP SUM PAYMENT BRINGS IN A CAPITAL ASSET, THEN THAT PU TS THE BUSINESS ON ANOTHER FOOTING ALTOGETHER. 3. WHETHER FOR THE PURPOSE OF THE EXPENDITURE, ANY CAPITAL WAS WITHDRAWN, OR, IN OTHER WORDS, WHETHER THE OBJE CT OF INCURRING THE EXPENDITURE WAS TO EMPLOY WHAT WAS TA KEN IN AS CAPITAL OF THE BUSINESS. AGAIN, IT IS TO BE SEEN WHETHER THE EXPENDITURE INCURRED WAS PART OF THE FIXED CAPITAL OF THE BUSINESS OR PART OF ITS CIRCULATING CAPITAL. 16. IN MADRAS AUTO SERVICE, THE ASSESSEE HAD SPENT SOME AMOUNT TO CONSTRUCT A NEW BUILDING AFTER DEMOLISHIN G THE OLD BUILDING IN WHICH THE ASSESSEE WAS A LESSEE. THE AS SESSEE HAD THE BENEFIT OF THE EXISTING LEASE IN RESPECT OF THE NEW BUILDING AT AN AGREED RENT FOR A PERIOD OF 39 YEARS . THE RENT AS STIPULATED IN THE LEASE WAS EXTREMELY LOW BUT IT WAS FOUND THAT THE CONCESSIONAL RENT WAS ON ACCOUNT OF THE FACT THAT THE NEW BUILDING WAS CONSTRUCTED BY THE LESSEE AT ITS OWN COST. THE SUPREME COURT HELD THAT THE ADVANTAGE THAT THE ASSESSEE DERIVED BY SPENDING THE MONEY WAS THAT IT GOT THE LEASE OF A NEW BUILDING AT A LOW RENT. FROM A B USINESS POINT OF VIEW, THEREFORE, THE ASSESSEE GOT THE BENE FIT OF REDUCED RENT AND THE EXPENDITURE MUST, CONSEQUENTLY , BE TREATED AS A REVENUE EXPENDITURE. 17. APPLYING ALL THESE PRINCIPLES TO THE PRESENT CA SE, A FEW FACTS STAND OUT QUITE CLEARLY. THE ASSESSEE DID NOT ACQUIRE ANY CAPITAL ASSET BY MAKING THE PAYMENT OF NON-COMP ETE FEE. IT MERELY ELIMINATED COMPETITION IN THE TWO-WH EELER BUSINESS, FOR A WHILE. FROM THE RECORD, IT IS NOT C LEAR HOW LONG THE RESTRICTIVE COVENANT WAS TO LAST, BUT IT W AS NEITHER PERMANENT NOR EPHEMERAL. IN THAT SENSE, THE ADVANTA GE WAS NOT OF AN ENDURING NATURE. THERE IS ALSO NOTHING TO SHOW THAT I.T.A. NO. 900/HYD/2004 I.T.A. NO. 1228/HYD/2005 M/S. ANDHRA FUELS (P) LTD. ==================== 28 THE AMOUNT OF RS. 4 CRORES WAS DRAWN OUT OF THE CAP ITAL OF THE ASSESSEE. ON A CUMULATIVE APPRECIATION OF THESE FACTS, IT MUST BE HELD THAT THE CIT(A) AND THE TRIBUNAL DID N OT ERR IN CONCLUDING THAT THE PAYMENT OF NON-COMPETE FEE BY T HE ASSESSEE WAS A BUSINESS EXPENDITURE AND NOT A CAPIT AL EXPENDITURE. 38. APPLYING THE ABOVE RATIO TO THE PRESENT CASE, IN OU R OPINION, THE ASSESSEE DID NOT ACQUIRE ANY CAPITAL ASSET BY M AKING THE PAYMENT OF NON-COMPETITION FEE. IT MERELY ELIMINAT ED COMPETITION IN ITS BUSINESS FOR A WHILE FOR WHICH IT IS SO PAID . ON CUMULATIVE APPRECIATION OF THE FACTS, WE ARE OF THE OPINION TH AT THE CIT(A) IS JUSTIFIED IN ALLOWING THE GROUND OF THE ASSESSEE. WE CONFIRM THE ORDER OF THE CIT(A) ON THIS ISSUE. 39. IN THE RESULT, ASSESSEES APPEAL IS ALLOWED AND REV ENUE APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 8 TH JUNE, 2012. SD/ - (ASHA VIJAYARAGHAVAN) JUDICIAL MEMBER SD/ - (CHANDRA POOJARI) ACCOUNTANT MEMBER HYDERABAD, DATED THE 8 TH JUNE, 2012 COPY FORWARDED TO: 1. THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-1( 1), 4 TH FLOOR, AAYAKAR BHAVAN, BASHEERBAGH, HYDERABAD. 2. M/S. ANDHRA FUELS P. LTD., 6-3-1110, 11 & 12 AMR UTHA MAL, SOMAJIGUDA, HYDERABAD. 3. THE CIT(A)-I, HYDERABAD. 4. THE CIT (CENTRAL), HYDERABAD. 5. THE DR B BENCH, ITAT, HYDERABAD. TPRAO