Dandvati Investments & Trading Company Pvt. Ltd. Vs ACIT (ITAT Mumbai)
ITAT Mumbai held that the amount of non-compete fee is taxable under section 28(va) of the Income Tax Act under the head ‘Income from Business & Profession’.
Facts- Apart from other grounds, the assessee has preferred the present appeal on the ground of enhancement of total income holding non-compete fees as business income.
Conclusion- The Co-ordinate Bench of Tribunal in the case of Harshit Finlease & Investment Pvt. Ltd. vs. Addl. CIT (supra), after analyzing the facts and considering various decisions concluded that the Assessing Officer/CIT(A) were right in bringing to tax the amount of non-compete fee under section 28(va) of the Act. We do not find any infirmity in the action of CIT(A) in bringing to tax non-compete fee under the head, “Income from Business & Profession”, resulting in enhancement of taxable income of the assessee.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
ITA No.3638/Mum/2012 and ITA No.1916/Mum/2014 by the assessee, M/s. Dandvati Investments & Trading Co. Pvt. Ltd. are for Assessment Year 2006-07. ITA No.3638/Mum/2012 is arising out of assessment order passed u/s. 143(3) of the Income Tax Act, 1961 [in short ‘the Act’] and ITA No.1916/Mum/2014 is arising out of reassessment proceedings for the same Assessment Year.
ITA NO.3638/MUM/2012 – A.Y. 2006-07:
2. This appeal by the assessee is directed against the order of Commissioner of Income Tax (Appeals) -1, Mumbai [in short ‘the CIT(A)’] dated 09/03/2012 for the Assessment Year 2006-07.
3. The assessee in appeal has assailed the findings of CIT(A) on five grounds. The gist of grounds raised in the appeal is as under:
(i) Ground No.I – Disallowance of expenses Rs.24,20,347/- u/s.14A of the Act.
(ii) Ground No.II -Disallowance of bad debts Rs.1,05,11,296/-.
(iii) Ground No.III – Disallowance of foreign travel expenses Rs.7,10,863/-
(iv) Ground No.IV – Enhancement of total income holding Non-compete Fees as business income.
(v) Ground No.V–Without prejudice to ground No.IV, Non-compete Fee be held as Capital Gains.
3. Shri Yogesh Thar appearing on behalf of the assessee submitted that the assessee is a Private Limited Company engaged in the business of investments. The assessee filed its return of income for Assessment Year 2006-07 declaring total income of Rs.69,99,52,184/-. In scrutiny assessmen, the Assessing Officer vide assessment order dated 31/12/2008 made addition/disallowances on following counts:
(i) Disallowance u/s. 14A r.w.r. 8D Rs.48,03,858/-.
(ii) Capital gains on sale of shares Rs.65,25,00,000/-.
(iii) Disallowance of bad debts Rs.1,05,11,296/-
(iv) Disallowance of foreign travel expenses Rs.14,21,726/-
(v) Unpaid gratuity Rs.4,18,676/-
4. Aggrieved by the aforesaid additions/isallowances, the assessee filed appeal before the CIT(A). The CIT(A) vide impugned order granted part relief to the assessee by deleting some of the additions/disallowances. Further, the CIT(A) issued enhancement notice dated 29/07/2011 to tax Non-compete fee under the head “Income from Business and Profession”. The present appeal by the assessee is against the additions confirmed and enhancement of income by the CIT(A).
5. In respect of ground No.1, the ld. Authorized Representative for the assessee submitted that the Assessing Officer erred in applying the provisions of Rule 8D to the Assessment Year 2006-07. The ld. Authorized Representative for the assessee submitted that the provisions of Rule 8D apply w.e.f. assessment year 2008-09. To buttress his submissions, the ld. AR placed reliance on the decision of Hon’ble Jurisdictional High Court in the case of Godrej & Boyce Mfg. Co. Ltd. vs. DCIT, 328 ITR 81. The CIT(A) granted part relief to the assessee by accepting that provisions of Rule 8D would not apply and restricted the disallowance to 5% of the dividend income earned. The ld. Authorized Representative for the assessee submitted that estimation of disallowance by CIT(A) is on higher side, he prayed that disallowance u/s. 14A of the Act should be restricted to 1% of the exempt income earned during the relevant period. In support of his submissions the ld. Authorized Representative for the assessee placed reliance on the following decisions:
(i) CIT vs. HSBC Invest Direct (India) Ltd. in Income Tax Appeal No.1026 of 2014 decided by Hon’ble Bombay High Court vide order dated 19/12/2016.
(ii) Allahabad Bank vs. ACIT in ITA No.2175/Kol/2009 for Assessment Year 2006-06 decided by Kolkata Bench of the Tribunal vide order dated 16/03/2016.
5.1 In respect of ground No.II of appeal, the ld. Authorized Representative for the assessee submits that assessee had acquired debts of other companies aggregating to Rs.1,95,11,296/-. During the period relevant to the assessment year under appeal the assessee could recover debts only to the tune of Rs.90.00 lacs in full and final settlement. The shortfall of Rs.1,05,11,296/- was claimed as bad debts. In support of his submissions the ld. Authorized Representative for the assessee referred to the P&L Account for the Financial Year ended 2006-07 at page 14 of the paper book. The ld. Authorized Representative for the assessee submits that the shortfall in recovery of debts is business loss, hence, the same is allowable. The ld. Authorized Representative for the assessee further pointed that in the P&L Account, where the assessee has earned profit on assigning debts, the same has been offered to tax and the Department accepted the same. Whereas, the loss on recovery of debts written off by the assessee has been disallowed. The Revenue cannot adopt two different scales for treating the income and loss from the same business activity. The ld. Authorized Representative for the assessee in support of his submissions placed reliance on the following decisions:
(i) TRF Ltd. vs. CIT, 323 ITR 397(SC);
(ii) CIT vs. Walfort Share and Stock Brokers Pvt. Ltd., 326 ITR 1(SC);
(iii) Dr. T.A. Qureshi Vs. CIT, 287 ITR 547.
5.2 In respect of ground No.III of appeal, the ld. Authorized Representative of the assessee submits that during the period relevant to assessment year under appeal assessee had claimed foreign travel expenses to the tune of Rs.14,21,726/-. The aforesaid expenses were incurred for travel of Directors and other employees. He submitted that the Directors of the assessee company are operating from Dubai, therefore, Directors and professionals/ Sr. Consultants had to travel to Dubai for business purpose. During the course of assessment proceedings the assessee had furnished details of foreign travels in respect of each of the person/officials and the purpose of travel. The said details are at page 175 of the legal paper book. The CIT(A) after examining the facts restricted the disallowance to 50%. The ld. Authorized Representative for the assessee prayed that the disallowance made by the CIT(A) is on the higher side. He prayed for deleting the disallowance in toto and in alternate to make reasonable disallowance.
5.3 In ground No. IV and V of appeal, the assessee has assailed enhancement of income made by CIT(A) by way of notice dated 29/07/2011. The ld. Authorized Representative for the assessee submits that enhancement has been made by the CIT(A), holding Non-compete fees received by the assessee as “Income from Business and Profession”. The enhancement has been made on the basis of new records. Therefore, order of enhancement by the CIT(A) is bad in law. The provisions of the Act does not permit CIT(A) to enhance income of the assessee by finding a new source. In support of his submissions the ld. Authorized Representative for the assessee placed reliance on the decision in the case of LokenathTolaram vs. CIT, 161 ITR 82(Bom). The ld. Authorized Representative submits that enhancement has been triggered by the assessment order in the case of Harshit Finlease and Investment Pvt. Ltd. for Assessment Year 2006-07 and the order of First Appellate Authority dated 23/12/2008 upholding said assessment order. The ld. Authorized Representative for the assessee referred to the written submissions made at page 176 of the paper book to further support his submissions on enhancement of income. The ld. AR fairly admitted that in case of Harshit Finlease (supra) the Tribunal in ITA No. 4989/Mum/2011 vide order dated 03/12/2019 has upheld the findings of lower authorities in taxing non-compete fee u/s. 28(va) of the Act.
6. Per contra, Shri Hoshang Boman Iranirepresenting the Department vehemently supporting the findings of CIT(A) submitted that in assessment year 2007-08 and 2008-09 the Tribunal confirmed the disallowance u/s. 14A of the Act @5% of exempt income earned during the relevant period. The assessee raised grounds assailing disallowance u/s 14A of the Act @5% in appeal, however, the same were not pressed. Thus, the disallowance u/s. 14A of the Act @ 5% confirmed by the CIT(A) attained finality. The ld. Departmental Representative further submits that similar was the situation with respect to foreign travel expenses. The CIT(A) disallowed 50% of foreign travel expenses and the same was accepted by the assessee. The assessee did not press the ground raised before the Tribunal. In respect of disallowance of bad debts, the ld. Departmental Representative supported the findings of the CIT(A). The ld. Departmental Representative asserted that it is fictitious loss through arrangement of the debt within the group companies. It is not a trading debt as claimed by the assessee.
6.1 In so far as enhancement made by the CIT(A), the ld. Departmental Representative submits that the CIT(A) has co-terminus and extensive powers with that of the Assessing Officer. The CIT(A) issued show cause notice before enhancing the assessment. Due opportunity was granted to the assessee to make its submissions. The CIT(A) after considering the submissions of the assessee passed the order of enhancement. The ld. Departmental Representative further pointed that the issue of Non-compete fees was not examined by the Assessing Officer although the assessee had mentioned the same in its books, thus, source of income was already before the Assessing Officer. The Assessing Officer failed to examine bifurcation of source of income. This issue was examined by CIT(A) and accordingly enhancement was made following the due process of law. The ld. Departmental Representative in support of his submissions placed reliance on the following decisions:
(i) CIT vs. Nirbhayram Deluram, 224 ITR 610 (SC)
(ii) Mega Trends vs. CIT, 388 ITR 16(Mad).
(iii) Rallies IndiaLtd. Vs. CIT, 56 taxmann. com 282 (Bom)
7. We have heard the submissions made by rival sides and have examined the orders of authorities below. We have also considered the decisions on which the respective sides have placed reliance to buttress their arguments. The first issue in appeal by the assessee is with respect to disallowance u/s. 14A of the Act. The CIT(A) has estimated disallowance u/s. 14A of the Act at the rate of 5% of the exempt income earned. We find similar disallowance was made in assessment years 2007-08 and 2008-09. The assessee though carried the issue in appeal before Tribunal in ITA No.7262-7263/Mum/2011 but did not press the ground of appeal. The provisions of Rule 8D were introduced w.e.f. assessment year 2008-09, prior to assessment year 2008-09 disallowance u/s. 14A of the Act was made on mere estimation. The only criteria was reasonableness. The ld. Authorized Representative of the assessee has placed reliance on the decision of Tribunal and the Hon’ble Bombay High Court, wherein disallowance has been restricted to 1%. A perusal of the impugned order reveals that the assessee before the CIT(A) has prayed for restricting the disallowance to 2% of the exempt income by placing reliance on the decision in the case of Godrej Agrovet Ltd. vs. ACIT reported as 2010 TOIL 616 (ITAT-Mum). We are of considered view that restricting disallowance u/s. 14A of the Act to 2% of the total exempt income earned during the relevant period would meet the ends of justice. We hold and direct accordingly. The ground No.1 of the appeal is partly allowed.
8. In ground No.2 of appeal, the assessee has assailed disallowance of bad debts. The assessee is an Investment Company. The assessee has purportedly taken over inter corporate deposits from following companies:
