CIT vs. CAREER LAUNCHER INDIA LTD

On 28th July, 20II, this court fiarned the following substantial questions of law in respect of the assessment year 2005-06 in ITA No.9lIl20II: "I. Whether the respondent was not liable to deduct the tax at source for the relevant y.ir on account of the payment made by it to its franchisebs under Section I94C of the Act, as held by the ITAT in the irnpugned order? II. Whether the assessing officer did not rightly reject the claim of the respondent making the addition of Rs.6,38,64,078/- to income of the respondent for the relevant year on account of non-deduction of TDS in terms of section a0(a)(ia) of the Act? m. Whether the ITAT has rightly deleted the addition of Rs.33,22,000/- made by the assessing officer on account of disallowance of bonusi paid to its directors without payment of the dividend in terms of section 36(lxii) of the Act? IV. Whether the claim of the rbspondent for paying interest of Rs.22,07,L88/- in the ieleyantyear to the Noida Authority on account of purchase of land was allowable as revenue expenditure u/s 36(1)(iii) of the Act?"

On 14tl'November, 20L1, the follor,ving substantial questions of law were framed by this court for the asse$sment year 2006-07 in ITA No.92612011: - : rT A 939 /20 t0. 9 | | 1201 | & 926120t 1 Page 2 of36 ,(n ri. ; 2012:DHC:9830-DB

As regards the assessment year 2004-05 (ITA No.939/2010), the j. foilowing substantial questions of law wei'e fiamed by order clated 20tr' , a An { n Septetnber, 20t0: , "

We first take up the question of deductibility of the intcrest paid to Noida Authority on the unpaid instalhdents of the price payable for purchase of land. This question arises,t u, already noticed, in the 1 assessment veafs 2004-05 and 2005-06. I

The brief facts in conne.tion with, the question are these. The assessee is a company. It carries on business in providing education and training for various preparatory exalmipations such as IIM, IIT, .. IT|g3gl2}l0.91ll2011 &92612011 Page 3 of 36 I 2012:DHC:9830-DB

In the course of the assessment procdedings the AO required the assessee to justifii the claim in view of thei,proviso to section 36(lXiii) of the Act inserted with effect from' T",4-2004. According to the proviso, any interest paid on borrowings made for expansion or extension of the existing business *ul. not to be allowed as a ir deduction for the period from the date tbf borrowing till the asset acquired out of the borrowed funds was first put to use. The assessee submitted that it was not a case of expansion or extension of the existing business and that the .land was acquired for the purpose of the business being carried on by it and therefore the proviso wad not atlracted. It was alternatively claimed that if the interest was not allowable under sec.36(1)(iii) in view of the proviso, it was allowable under sec.37(1) as expenditure incurred or laid out wholly and exclusively for the purpose of the business. It was claimed that though acquisition of the land may amount to acquisition of a capital asset, the interest paid did not represent capital expenditure and was allowable. tr A 939/2010. glt /2ot | & 926/201 | Page 4 of36 2012:DHC:9830-DB

These submissions were rejected Uy, ttre AO who disallowed the expenditure. The CIT(A) upheld the disallowance for the assessment year 2004-05. On flirther appeal the disailowance was deleted by the Tribunal. Following the order of the Tribrlnal, the CITA) allowed the clairn for the assessment year 2005-06. Tlie revenue carried the malter in appeal to the Tribunal, rvhich, following its earlier view, confirmed the decision of the CITA). That is how !|re question is before us for both the years at the instance of the revenrie. g. There are three conditions for the lallowance of interest under ,j sec.36(1)(iii). They are: (i) the assessee should have bomowecl capital; (ii) that the capital should have been borrowed for the purpose of the business and (iii) interest should have bedn paid on the borrowing. In the case of Eonrybuy Steum Navigation Ltd. v CtrT, (1965) 56 ITR 52 it was held that in order to clairn allowance in respect of interest, there should be borrowing of capital and that unpaid purchase price of an asset does not amount to borrowing of c4pital, though a debt may be created. It was observed that every bortorving gives rise to a debt, but every debt does not amount to bonowing,. In these premises, the interest paid on the unpaid purchase price of a capital asset was held not deductible under sec.10(2xiii) of the 1g22Act which is similar to I sec.36(1)(iii) of the 1961 Act. On the basis of this judgrnent, it seems to us that the claim of the assessee must fail. The interest was paid to Noida Authority not in respect of any capital borrowed frorn that Authority, but on the price of the plot r'bmaining unpaid as per the rT A 939 /20t0, 9 1 | /201 | & 926t20t 1 1 Page 5 of36 2012:DHC:9830-DB

Counsel for the assessee however put forth the alternative claim, based on the very same judgment of the Supreme Court, that the interest was allowable under the resicluary section 37(1) as expenditure incurred wholly and exclusively for the purpose of the business as the acquisition of the land from Noida Authority was an integral part of the conduct of the business. In Bombay Steam Navigation (supra) it was no doubt held ithat the interest, if it is not allowable under Section 10(2xiii) of the 1922 Act can be considered for deduction under Section 10(2)(xv) of that Act, provided it was incurred as an integral part of the pr'bfit-earning process of the business and not for acquisition of an asset or a right of a permanent character. In that case the assessee-company was formed for the purpose of taking over the assets from the Scindizrs with which its businesb was to be carried on. It was in that connecticin agreetl with tlre Scindias that a part of the payment rt ollld be made irnmediately and the balance of Rs.51.55 lakhs would tie treated as unpaid price, to be discharged in future with interest. The'debt which gave rise to the interest liability was incurred in connecticin with the very taking over .' of the business from the Scindias and thus fprrned an integral part of the profit-earning process of the business. Strch a nexus is rnissing in rr A 939 t2010, 9 | | l20r 1 & 9261201 1 Page 6 of36 2012:DHC:9830-DB

It is not necessary to discuss the authorities cited by the learned counsel for the assessee. "fCT vs DCIT, (2005) 276 ITF. 1t5 (Cal.) and Depwty CIT v. Core l:Ieatrtlt Care Ltd., (2008) 298 ITR 194 (SC) are cases in which there was an act of boi'rowing of capital and not a mere incurring of a debt otherwise than by way of a borrowing. The judgment of the Punjab & Haryana High Court rn CIT v. Swnil X{umar Sharma, (2002) 254 ITR 103 has no doubt distinguished the judgment of the Supreme Court in Bombay Steam'Navigation Co.Ltd. (sr"rpra) but the decision of the High Court was, rendered in the context of computation of the property income and r,lot:income from business. It did not arise under Section 36(1Xiii) rT A 939 120 10, 9 1 1 l20r | & 926 /20 | 1 Page 7 of36 2012:DHC:9830-DB

The alternative .claim of the assessee for allbwance of the interest liability under Section 37(l) i:s thus not accepted. The expbnditure represents capital expenditure. It is part of the price paid for the Noida land; it is an adjunct to the price and hence part of it. lt is.therefore not allowable as a deduction under Section 37(I).

We accordingly answer the substantial questions of law No.2 for tlre assessment year 2004-05 and No.IV for the assessment year 2005- 06 in favour of the revenue and against the assessee.

The next question that is common to the assessment years 2005- 06 and 2006-07 relates to the allowance of the bonus paid to directors of the assessee-company

In the assessment proceedings for tl3e assessment year 2005-06, the AO took the view that sec.36(lxii) was applicable to the payment of bonus of Rs.32,22,0001- to the directors of the company and it was to be disallowed because it would have b,ben payable to the directors as dividends had it not been paid us bon rs. The assessee explained that the payment of bonus was supported by loard resolutions, that the directors were full-time employees of the company drawing salary, that all of them were managernent graduates:from IIM, Bangalore and therefore it would not be correct to say*that the bonus would hele been payable as dividends so as to attract,section 36(lxii). It was submitted that dividends were not being paid in the guise of bonus and I' in support of the claim it was pointed out that the payrnent of bonus tT A 939 /2010, 9 1 1 1201 1 & 926/201 | Page B of36 2012:DHC:9830-DB

These submissions were however rejected by the AO who held that on a proper reading of the section it rn as clear that if the company could have declared dividend on the shareirolding but had not done so, then any payment of bonus/commission to the directors was hit by the section. He noted that no dividend was declared by the company despite substantial profits. According to him, the company was avoiding 13.5% dividend distribution tax and soilre more tax on income since individuals pay 50% less tax than companies, aird thus the total tax avoided came to about 20% because of the payment of the bonus to the directors. He therefore disalior,ved the entire payment of I bonus. i 17 . In the assessment year 2006-07, ,for substantially the sane reasons the AO disallowed the entire bonus payment of Rs.37,44,000 to the directors.

The CIT(A) in his consolidated order for the two years upheld the disallowance. In the further appeald preferred by the assessee before the Tribunal, it was held, agreeing'with the assessee, that if the assessee had paid dividend on the shareh.olding of the directors then such payment would have been rnoreiithan the bonus paid and trA 93912010,91112011 & 9261201r Page 9 of36 2012:DHC:9830-DB

The revenue's contention that the Ttibunal erred in allowing the bonus payment to the directors cannot be accepted. It has not disputed the facts viz., (a) that the payment was sufported by board resolutions and (b) that none of the directors would hlve received a lesser amount of dividend than the bonus paid to them, having regard to their shareholding. Further, the directors are full-tirne ernployees of the company receiving salary. They are i all graduates from IIM, Bangalore. Taking all these facts into consideration, it would appear that the bonus was a reward for their work, in addition to the salary paid. to them and was in no way related. to their shareholding. The bonus payment cannot be characterised,, as, a dividend payrnent in disguise. The Tribunal has found ,T"l ; having regard to the shareholding of each of the directors, !t.y would have got much higher amounts as dividends than as bonus and there was no tax avoidance motive. The quantum of the bbnus payment was linked to the services rendered bv the directors. It cannot therefore be said that I rr A 939 /20 r0. 9 1 1 /201 | & 926/201'l Page t0 of36 I i r 2012:DHC:9830-DB

The issr-re has been considered by this Court in 'AMD Metplast Pvt. I-td vs DCtrT (2012) 341 ITR 563 in;the light of the judgrnent of the Bombay High Court in tr oysl Motqr Service Co. tr-td vs CIT (1946) 14 ITR 647.It was observed that the judgment of the Bombay High Court (supra) does not assist the revenue and that so long as the bonus or commission is paid to the directors for services renclered and as par1 of their terms of employment I it has to be allowed and sec.36(1)(ii) does not apply. g 2I. Having regard to the above legal position and the factual findings recorded by the Tribunal, wo .are unable to say that the Tribunal erred in holding that the bonus payment was allowable u/s.36(1)(ii) of the Act. The substantial qrfiestions of law are answered in the affirmative, against the revenue anQ,in favour of the assessee for both the years.

The next issue, which is common to the assessment years 2005- 06 and 2006-07 relates to the applicability cif Section aO(a)(ia) of the Act. According to the Section any interest, comlnission or brokerage, rent, royalty, fees' for professional services or fees for technical services payable to a resident or amounts qaVable to a contractor or sub-contractor, being resident, for carrying: out any work including supply of labour for carrying out any work, bn which tax is deductible , ll tTA 93912010,911/2011 & 926/2011 Page ll of36 i' 3i 2012:DHC:9830-DB

Since the facts are common for 9ot1t the years, we at'e referring to the facts for the assessment year 2005-06. As already noted, the assessee is a company engaged in providing education and training for various preparatory examinations like IIN-I, IIT, fashion designing etc. These services are provided across the, country through education centres run by the assessee itself or by its fianchisees. While completing the assessrnent, the Assessing Officer noted that the assessee had debited a sum of <6,38,64,018/- to the profit and loss account as payment made to franchise;es. On a. perusal of the agr""m"it betrn een the assessee and one r:f its franchisees, which, was apparently taken as a specimen agreement, the Assessing Officer took the view that the payrnent made by thp assessee carre within the provisions of Section I94(C) of the Abt as a payment madg for carrying out a work in pursuance of a coniract and accordingly the assessee ought to have deducted tax i,from the payment at the applicable rates. He further took the view that since the assessee failed to deduct the tax as contemplated l3y Section I94C, the amount cannot be allowed as a deduction in vierv of the embargo placed by Section a0(a)(ia). IT A 939 12010, 9 tl 1201 r & 926/201 1 Page l2 of36 2012:DHC:9830-DB

The assessee's submission'was that the agreelnent was not a pure anci simple agreement for carrying out any work within the meaning of Sectio n I94-C,that it was an i,gr""m.nt for perrnitting the payee to utilize the name and copyright of the assessee in the study material and in running the coaching oentres, that there were mutual rights, duties and obligations envisaged by the agreement, that a holistic appraisal of the agreement woulcl show that it is a business arrangement and contemplates a sharing of the profits frotn the business between the assessee and the frpnchisee, that the franchisee was neither a contractor nor a sub-conti:actor for carrying out any work for the assessee and that in these ciri:umstances the assessee was not responsible for deducting any tax under Section 194C. It was therefore submitted that the Section 40(a')(ia) was not applicable and the payment should be allowed as a o-eduction in computing the business income of the assessee. These submissions' \ryere not accepted by the Assessing Officer. He held that the words "?ny worl<" appearing in section 1 94C were defined 'in an inclusive manner. He opined that the agreement entered into bptWeen the assessee and the franchisee was a contract enforceable in liiw and it is in the uature of a service contract. According to the Assess'ing Officer, the assessee and the franchisee cannot be said to be partners in arry business. He also relied on the Clause in the agreement that the entire fees were collectecl fiom the students by the fran,;hisee and deposited in the bank account of the assessee, which rnilitated against the claim of the rT A 939 12010, 9 11 /20r | & 926/201 1 Page l3 of36 2012:DHC:9830-DB

For the same reasons he disallowed the payment of <1I,24,07,07g1-made by the assessee in the assessment year 2006-07. 26. The assessee appealed to the ClT(Appeals) who disposed of the appeals by a comffIon order dated 16.11 .2009. The ClT(Appeals) examined the agreernent between the assessee and the fianchisee and noted that the franchisee has to provide various services to the assessee in accordance with the agreement and that the assessee retained overall control of the educational centres. The arrangement was not a joint venture arrangemenif and both parties were indepenclent contractors. The franchisee,{rad no power to appoint the assessee in any manner nor represent the aSSeSSee. The rvords "any work" have been widely defined in. Seotio n 794C and the services rendered by the franchisee fell'within the,definition. According to the ClT(Appeals) the franchisee carried out specific work for the assessee in terms of the agreement and also colleoted the fees on behalf of the tTA 939/2010,911/2011 & 92612011 Page l4 of36 i r- ', 2012:DHC:9830-DB

The assessee carried the matter in further appeal before the Tribunal, which also passed a coinmon o..F"t for both the years on27tt' December,2010. The Tribunal had before it the sample agreement dated 1.10.2007 between the assessee and MA Sphere Academy of Ahmedabad. It appears that a statement rxlas made before the Tribunal on behalf of assessee that all the agreemi:nts with the franchisees are identically worded. In view of the staternent, the Tribunal proceeded to decide the appeals on the basis of the aforesaid agreement, taking it as representatirre of all the agreements errtered into by the assessee with the franchisees. Before us also, the arguments proceeded on the basis of a specimen agreement dated 1 .10.2005 entered into between tl the assessee and \zils Career Solutions' of, Trivandrum and it was agreed by both the sides that this agreem"nt may be taken as representative of all the agreements between the assessee and its various franchisees. :

The Tribunal, after noting the various clauses of the agreement, held that the tenor and purport of the various terms of the agreement 1T A 939 /2010, 9 1 | /201 | & 926/201 | I Page l5 of36 2012:DHC:9830-DB

It is against the aforesaid decision of the Tribunal that the Revenue has come in appeal under Sectic,n 260Abefore us. We have gone through the model or specimen 'agr..tn.nt dated 1.10.2005 between the assessee and \zVs Career Solutions of Trivandrunl, a copy of which was filed before us in the .burr. of the hearing. The agreement is a comprehensive agreement. It provides for several aspects of the arrangement. The preamble narrates that the assessee is engaged in the business of offering professional learning to the members of the public for becoming proficient in competitive entrance examinations, personality development related programmes as per norms and methods developed by -it and that the assessee also t. owns or has access to various copyrighted material, preparatory information and substantial body of technical larowhow relating to the location, design and operation of profe$sional learning centres. It further states that the assessee (describi:d in the agreernent as the licensor) has established a high position legarding quality of services available at the learning centres run by it and recognizes the benefit to be run it. The licensee or the franchisee, it is further stated in the preamble, "recognizes the benefit to be dprived fi'om being identified tr A 939 12010, 9 1 1 1201 1 & 926 1201 1 Page l7 of36 2012:DHC:9830-DB

We may now take a brief survey of the various terms and conditions of the agreement. The territories of the fianchisees were defined and they were prohibited from opelating beyond the marlced territories. It was agreed (clause 3) that the grant of the license is lirnited in the sense that it is given to the licensee only for the permitted use, which means the running of the learning centres and for the purpose of marketing the right to use th.e technical knowhow and the copyrighted material owned by the qFsqssee. It was also agreed that after the termination of the agreemen!, tlle licensee shall not malce lT A 939 /20 10. 9 | | /201 | 8. 926/2011 Page lB of36 2012:DHC:9830-DB

Clause 5 provided for "financial oonsideration". It stated that in consideration of the licensor agreeing to provide the 'technical knowhow belonging to the licensor and the trade name for use at the professional learning centre, the licensee ilgrees to pay the licensor at the signing of the agreement a certain amount of fee as mentioned in Annexure 5 to the agreement. The fee wbs to be non-refundable and non-adjustable and was valid for a period of 3 years from the date of the first receipt. Clause 5.6 is important and it provided for "recurring fianchise fees" in addition to the depo$it mentioned above. This clause provides that the licensee shall pa)/ recllrring fianchise fees to the licensor at 25% of the net revenue parned fiom the operations. The net revenue meant gross revenue minus service tax as applicable.

Clause 6 made detailed provisions regarding the services to be provided by the licensor. The licensor sliall provide all confidential, all procedural manuals to the licensee. It shall also give marketing rT A 939 12010. 911 l20rr & 9261201r Page 20 of36 I 2012:DHC:9830-DB

Clause B provides for "limitations ef license". The gist of it is that the licensee cannot have any right or,interest in the licensor's trademarks, designs, copyrights, trade, names or the goodwill belonging to it and that the licensee shpll rnaintain confidence and secrecy of their secrets and procedures. iClurm" 10 provides for the obligation of the assessee to talce out a policy of insurance to cover Page 2l of36 2012:DHC:9830-DB

There are various other provisiolrs made in the agreement regarding indemnification, consequences of default, change in the ownership of licensee etc. Clause 13 provides for an administrator to be appointed by the licensor at the professional learning centre run by the licensee in the event of non-payment of any monies due from the licensee, default in payment of any other charges, non-adherence or !i violation of any terms and conditions. bgreed upoll and prolonged disruption of the infrastructure which in the opinion of the licensor is not justified. The licensee, iir case an aifministrator is appointed by the licensor is obliged to provide him adequate working space and is also liable to bear the cost of the posting of the adrninistrator. The licensee shall reimburse the licensor, the salary paid to the administrator. Claus'e 17 provides for "Lbitration and juri iction". i The annexures to the agreement contain t!. details which are required to be mentioned therein by the various claluses of the agreement. i

There can be no dispute with regar,d to the general proposition that in ascertaining the true effect of a document it has to be read as a whple and in the context of the surrounding circumstances. The assessee is undoubtedly in the business of imparting coaching or trA 939/2010,9r1/2011 & 926/2011 Page22 of36 2012:DHC:9830-DB

Let us examine the real nature of,the agreement between the assessee and the franchisees and considgr the question whether the agreernent or contract is for "carrying out any work" by the franchisee, so as to affract the provisions of section I94C relating to tax deduction at source and consequently the disallowance under 'section a0(a)(ia) of the Act. Or q careful;consideration of the issue, it seems to us that it would not be possible. to view the agreetnent as a contract for carrying out any work by the franchisee. The terrns of contract which we have referred to show that the arrangement consists of mutual obligations and rights. It ii not a simple case of an agreement under which a person is. engaged to carry out any work for the other. The essence of the contract appears to us to be one under which the trade name or reputation or knowhow belonging to the assessee in the business of running learning centres, where studenls are coached for writing competitive examinations, is permitted to be made use of by the franchisees in diffdrent places for a tnonetary consideration. In the case of a contractlfor the carrying out of any work as is envisaged by Section I94C, there cannot be any use of a person's trade name or goodwill or knbu'how by the other. The contract envisaged by the Section would be one under which one person merely renders certain services to the other person for consideration. It is no doubt true that the word "work" has been defined in a broad and inclusive manner in th9 Section. Nevertheless its essential feature remains the same namely that it should be a work rT A 939 12010, 9 1r 1201 | & 9261201 1 Page24 of36 l 2012:DHC:9830-DB

In consideration of the assessee permitting the use of its trade i name by the fianchisees for the purpo,:e of running the learning centres, the franchisee/licensee is obligell to pay under clause 5.6 of the agreement, recurring franchise fees to the licensor at 25% of the net revenue which means gross revenue the service tax as applicable. This is in addition to the non-refundablg deposit to be macle by'the licensee with the assessee. The 'fees are to be collectecl by the tT A 939 /201 0, 9 tt l20t | & 926/20 | 1 Page 25 of36 {i 2>o ,.-) 2012:DHC:9830-DB

The income tax authorities, we cannot help observing, have not been'able to show clearly how the contract between the assessee and the franchisees can be interpreted to be one for carrying out any work by. the licensees. They have failed to appreciate that merely because some work is to be carried out by the licensees in conducting the learning centres it cannot be said that the agreement embodies a contract for carrying out a work. The inclusive definition of the word "work" given in clause (iv) of the Expliuration below section Ig4.C gives a clue to the interpretation of the wgrrd, notwithstanding that it is an inclusive definition. The clause is as under : '; "(iv) "work" shall include - (a)advertising; (b)broadcasting and telecasting including production of programmes for such broadcasting or telecasting; : (c)carriage of goods or passengers by any mode of transport other than by railways;' (d)catering; (e)manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer, but does not include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased fi'om'a person, other than such custorrrer." 'i rT A 939 12010. 9 11 l20rl & 926120 | | \ lage 2z ofl6 -, r' I 2012:DHC:9830-DB

A perusal of the extended definitiofi of the word "worl(" shows that it covers a simple cas'e of engaging a person to render services of the kind mentioned in the definition. ptherwise every composite transaction which also has an element'iof work will be covered. Clause (e) is illustrative that this is not the intention of the legislature. ' A case of an arrangement under which both sides have joined together by mutu al arcangement ancl to share the profits of the joint enterprise carried on by them is not covered by the definition. They mutually undertake the profit making activity with a stipulation to divide the gains of their collective efforts. The worlc is underlaken jointly by thern for third parties who pay consideration which is shared. Parties do not work for each other. Therefore, the mere fact that the definition of the word "work" is an extended or inclusive definition does not automatically justify the conclusion of the income tax authorities that the activities carried + by thg licencees of the assessee in running learning centres amount to the carrying out of any work for the assessee in pursuance of the iontract.

In Commissioner of Gift-Tax vs. .nf., ^9" Getti Chettisr, (I97I) 82 ITR 599, Hegde J. elucidated the functi,on of an inclusive definition in the following words (at page 605): "As observed in Craies on Statute Law, (sixth edi'tion, page 213), an interpretation clause whic.h extends th,e ttteaning of a word does not talce away its 'ordi.nqry nxeaning. An rr A g3g l2o t o, g 1 1 l20l 1 &. 926120 11 Page 28 of36 2012:DHC:9830-DB

For the above reasons we hold that the conclusion arrived at by the Tribunal cannot be disturbed. The Tribunal was right in law in holding that the provisions of Section 19,1C and section 40(a)(ia) are not applicable to the facts of the case. We accordingly, answer the substantial question of law in favour of the assessee and against the Revenue for both the years.

In respect of assessment year 2004-05 in ITA No.939/2010 there is anothel substantial question of liiw which has to be decided. I'his is in respect of the non-compete'fee of {5,40,0001- payable by the assessee to Mr. Vijay I(alyan Jha, and Mr. Sujit as revenue expenditure. The substantial question of law frarned by this Court is somewhat restrictive in the sense that it appears to limit the scrutiny II I t, IT A 939 12010, 9 tl 1201 | & 926/201 | Page 30 of36 2012:DHC:9830-DB

The brief facts in this connection are that.the assessee paicl a suln of {5,40,000/- during the relevant accounting year as non- compete fees to I\{r. Vrjay Kalyan fna ariA Mr. Sujit. The stipulation was that they should not enter into a business similar to the assessee's business up to 31.L2.2005. The Assessing Officer was of the view that the amount representecl capital expenditure and accordingly called upon the assessee to justifii the claim. It was explained by the assessee. that the amount represented proportionate amount for 9 months during the relevant previous yeal r,vhich ended on 3I.3.2004 and that it was paid under an agreement with the two persons. A copy of the agreement was also filed with the Assessing Officer. It was claimed that the non-compete fee *ur paid in respect of a very short period of non-competition and therefore the assessee cannot be said to have derived any enduring advantage. It was thus claimecl that the payment represented revenue expenditure.

These submissions did not find,fworrr with the Assessing . Officer. He perused the agreement and found that N4r. Vrjay I(alyan Jha and iVIr. Sujit were to be paid a sum of t15 lakhs over I period from 1.3.2003 to 30.11.2003 and that out of the total amount, 60% amounting to t9 lakhs shall be paid both for services rendered by them as faculty, trainer etc. and the balance of t6 lakhs shall be IT A 939 120 10, 9 tr /201 | & 926 /20 | | Page 31 of36 * 2012:DHC:9830-DB

On appeal the ClT(Appeals) uphe{d the disallowance. In the fuither appeal to the Tribunal, it was contended that the payment was necessitated for the smooth running of the assessee's business and was hence revenue expenditure. The Tribunal on a perusal of the agreement entered into between the assessee on the one hand and Mr. Vtjay Kalyan Jha and Mr. Sujit on the other, held that these persons had agreed not to enter the MBA Education Preparation market either individually, jointly or in association with other persons, either in the capactty of running their own business or joining any other competitor in tlre faculty, managerial or consulting,capacity for a period of 3 years ending on 3I.3.2005. The Tribunal further noticed that fiorn I.1.2004 to 30.12.2004 Mr. Vijay Kalyan'Jha was to deliver 21.00 hours of classes and was required to design and develop contacts with the assessee. The payment for this was fixed at<3,20,000/-. Similarly, Mr. Sujit was also to be available to the assessee for taking 425 hours of classes for the period from I.5.2004 t6 3Q.9.2004 and also require to design and develop contacts for the adsessee, for which he was to IT A 939 12010, 9 tl /201 1 & 926/201 1 Page 32 of36 2012:DHC:9830-DB

It may be seen from the above that the Tribunal gave two primary reasons for allowing the expenditure as revenue expenditure. First, that the period for which the assessee sought to elirninate competition from Mr. Vrjay I(alyan Jha,and Mr. Sujit was only 12 months which was too short a period to be considered as conferring an enduring benefit to the assessee. Second, the Tribunal relied on the fact that the non-compete fee was to be paid to the above persons iu equal installments over a period of time. In the case of h4r. Vijay I(alyan Jha, the payment of {3,20,000/- was to paid in 10 equal monthly instaliments of <32,0001- each from 1.3.2004 to 1.12.2004. l: In the case of Mr. Sujit, the payment was {2,02,5001- which was to be paidin 5 equal monthly installments of <42,5001- each from 1.6.20A4 to 1 . 10.2004. 48. too These reasons given by the Tribunal, though brief, are however germane to the conclusion may appear to be that there was no Page 33 ol36 rrA 93912010.9n12011 & 926120rr !t t' 2012:DHC:9830-DB

In the result, the first three substantiaf questions of larry in ITA No.91 Il20I1 answered in favour of the assessee and against the t Revenue and the forth substantial questio,n of law is answered against the assessee and in favour of the Revenue.

In ITA No.92612011 both the substantial questions ol law are answered in favour of the assessee and against the R.evenue. In Il'A tr A 939 12010. 91r 1207r & 9261201 1 Page 35 of36 *'' 2012:DHC:9830-DB