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Income Tax Appellate Tribunal, HYDERABAD BENCH “A”, HYDERABAD
Before: SMT P. MADHAVI DEVI & SHRI S. RIFAUR RAHMAN
PER S. RIFAUR RAHMAN, A.M.:
These appeals filed by the revenue and assessee for AYs 2008-09 and 2009-10. The assessee also filed CO for AY 2008-09. Since identical issues are involved in these appeals and CO, they were clubbed and heard together and, therefore, a common order is passed for the sake of convenience.
2 ITA Nos. 1305 & 1493/Hyd/14 & CO No. 13/H/16 Anjani Portland Cement Ltd. ITA No. 1305/Hyd/2014 by the revenue for AY 2008-09
In this appeal, the revenue has raised the following grounds of appeal: “1. In the facts and circumstances of case and in law, the learned CIT(A) erred in directing the AO to re-compute the disallowance of interest and restrict the same to the relatable loan funds of Rs.6,71,70,797/- for making disallowance under section 14A.
In the facts and circumstances of case and in law, the learned CIT(A) erred in directing the AO to allow depreciation on non-compete fees as intangible assets u/s 32(1)(ii) of the !T Act.
In the facts and circumstances of case and in law, the learned CIT(A) erred in directing the AO to allow depreciation on non-compete fees admitting the additional ground/additional evidence without affording an opportunity of being heard to the AO.
Any other ground that may be urged at the time of hearing.”
On perusal of record, we find that there was a delay of 32 days in filing the CO before us. To this effect, the assessee filed an affidavit wherein it was affirmed that due to change in management at the relevant point of time, the delay of 32 days were occurred, hence, the delay has occurred due to unavoidable circumstances and there was no intention to default. As the assessee was prevented by reasonable cause in not filing the CO within the stipulated time, we condone the delay and admitted the CO for adjudication.
As regards ground No. 2 pertaining to disallowance u/s 14A, during the year under consideration, the assessee had purchased shares of M/s Hitech Print Systems Pvt. Ltd (HPSL) for a consideration of Rs. 14 crores. The AO noted that the investment is towards share capital and the dividend is not taxable. He, therefore, proposed to make disallowance by applying section 14A of the Act, In response, assessee submitted that the company’s total net worth as
3 ITA Nos. 1305 & 1493/Hyd/14 & CO No. 13/H/16 Anjani Portland Cement Ltd. on 01/04/2007 was Rs. 29.278 crores and loan funds stood at Rs. 36.54 crores. The amount invested for allocation of shares in HPSL was much less than the net worth and the loan funds available at the commencement of financial year, therefore, there was no need to disallow any part of interest. The assessee further submitted that HPSL has not declared dividend and therefore in the absence of any dividend income, section 14A is not applicable. Assessee relied on certain decisions including the decision of the Hon’ble Supreme Court in the case of SA Builders Ltd. Vs. CIT, 158 Taxman 74.
4.1 After considering the submissions of the assessee, the AO held that all the funds utilized were loan funds and directly linked to investments and hence clause (i) of rule 8D was applicable and not clause (ii). Accordingly, the AO worked out the disallowance u/s 14A at Rs. 1,24,12,329/-. Aggrieved, the assessee preferred an appeal before the CIT(A).
After considering the submissions of the assessee, the CIT(A) held that the investment of Rs. 5,28,29,203/- which includes Rs. 2 crores from working capital loan from cash credit account and investment from other loans to the extent of matching available balance in CC account of SBI of Rs. 3,28,29,203/- is to be excluded from making disallowance under 14A. He, therefore, directed the AO to recompute the disallowance of interest accordingly and restricted it to relatable loan funds of Rs. 6,71,70,797/-.
Aggrieved, the assessee is in appeal before us.
Considered the rival submissions and perused the material on record. It is a settled position of law that the provisions of section 14A can be applied to quantify the expenses in relation to exempt income. Since the exempt income is Nil, section 14A will not apply. The Rule 8D can be applied only when there is difficulty in finding the
4 ITA Nos. 1305 & 1493/Hyd/14 & CO No. 13/H/16 Anjani Portland Cement Ltd. expenditure relating to exempt income. The provisions of section 14A and Rule 8D will not apply to the present case. We take support from the following decisions:
7.1 In the case of Madhucon Infra Ltd. (ITA No. 410/Hyd/2015, order dated 20/05/2016 – where both the Members are signatories), the coordinate bench has held as under:
“10. Considered the submissions of both the parties and perused the material facts on record as well as the orders of revenue authorities. We have also gone through the cases cited by the ld. AR. In the case of M/s Alliance Infrastructure Projects Pvt. Ltd., (supra), the coordinate bench of ITAT Bangalore has held as under:
“14. Therefore, unless and until, there is receipt of exempted income for the concerned assessment years, we are of the view, Section 14A of the Act cannot be invoked. In this appeal, the revenue has not dispelled the contention of the assessee before AO that it was not in receipt of any exempt income. Learned CIT(A), has misconstrued the decision of Delhi Bench of this Tribunal in the case of M/s Technopak Advisors (P) Ltd., as that of the Hon' Delhi High Court, without recognizing that after the said decision, there has been a catena of judgments from various High Courts, going in favour of the assessee. Hence according to us, the Assessing Officer has erred in invoking Section 14A of the Act.” 7.2 In the case of ACIT Vs. M/s Mishra Dhatu Nigam Ltd., (supra), the coordinate bench of ITAT, Hyderabad has held as under:
“8. We have considered the submissions of the parties and perused the materials on record. Though, ld. DR relying upon the decision of ITAT Delhi Special Bench in case of Cheminvest Ltd. Vs. ITO (supra), attempted to justify the disallowance made u/s 14A, however, on careful analysis of the decisions cited by assessee including the decision of the Hon’ble P&H High Court in case of CIT Vs. M/s Lakhani Marketing Inc. in ITA No. 970 of 2008 dated 02/04/2014, we find that the principle laid down by different High Courts are to the effect that unless assessee has earned exempt income in a particular FY, provisions of section 14A will not apply. In view of the aforesaid, we do not find any merit in the ground raised by the department. Accordingly, we
5 ITA Nos. 1305 & 1493/Hyd/14 & CO No. 13/H/16 Anjani Portland Cement Ltd. dismiss the same by upholding the order of ld. CIT(A) on this issue.” 7.3 In the case of CIT Vs. Corrtech Energy (P) Ltd., (supra), the Hon’ble Gujarat High Court has held as under:
“4. Counsel for the Revenue submitted that the Assessing Officer as well as CIT (Appeals) had applied formula of rule 8D of the Income Tax Rules, since this case arose after the assessment year 2009-2010. Since in the present case, we are concerned with the assessment year 2009-2010, such formula was correctly applied by the Revenue. We however, notice that sub-section(1) of section 14A provides that for the purpose of computing total income under chapter IV of the Act, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. In the present case, the tribunal has recorded the finding of fact that the assessee did not make any claim for exemption of any income from payment of tax. It was on this basis that the tribunal held that disallowance under section 14A of the Act could not be made. In the process tribunal relied on the decision of Division Bench of Punjab and Haryana High Court in case of CIT v Winsome Textile Industries Ltd. [2009] 319 ITR 204 in which also the Court had observed as under: "7. We do not find any merit in this submission. The judgement of this court in Abhishek Industries Ltd (2006) 286 ITR 1 was on the issue of allowability of interest paid on loans given to sister concerns, without interest. It was held that deduction for interest was permissible when loan was taken for business purpose and not for diverting the same to sister concern without having nexus with the business. The observations made therein have to be read in that context. In the present case, admittedly the assessee did not make any claim for exemption. In such a situation section 14A could have no application." 7.4 In the case under consideration, we find that the investments were made purely on account of commercial necessity and as no exempt income was earned from the investment so made, the provisions of Section 14A will not be applicable in the case of assessee. Therefore, following the said decisions of the coordinate bench as section 14A cannot be invoked without any exempt income, accordingly, we dismiss the grounds raised by the revenue and allow the grounds raised by the assessee in C.O.
6 ITA Nos. 1305 & 1493/Hyd/14 & CO No. 13/H/16 Anjani Portland Cement Ltd. 8. As regards ground Nos. 2 & 3 pertaining to non-compete fee, brief facts relating to these grounds are, during the AY assessee has not claimed non-compete fee paid in the return of income. However, it has treated the same as advance payment and kept it as balance sheet item. In AY 2009-10, assessee has claimed non-compete fee of Rs. 4 crores as revenue expenditure and AO has disallowed the same by observing that the activity of the assessee is manufacture of cement whereas the receivers of non-compete fee are Shri Madhusudhana Rao and Smt. Jayasree who were not anywhere related to cement industry. The agreement of non-compete fee is with reference to paper and print sector which is the business of Hitech, which is subsidiary of the assessee. Therefore, the assessee cannot claim deduction for payment for which subsidiary company is supposed to derive benefit. Further, the payment is not incurred wholly and exclusively for the business of the assesse as there is no commercial expediency in this transaction. Considering the action of the AO, assessee realized that the payment of Rs. 2 crores pertains to AY 2008-09 and accordingly, raised additional grounds before the ld. CIT(A), which are as under: “1) The non-compete fee of Rs.4.00 crores arising out of agreement dated 22nd July 2007 for acquiring 100% control in M/s Hi-tech Print Systems Limited is deductible u/s 28/37 of the Income Tax Act, 1961.
The company during the relevant financial year had entered into an agreement to buy 100% equity of the Hitech Print Systems Limited. The purchase consideration also included non-compete fee amounting to Rs. 4. 00 crores.
The non-compete fee is a deductible expenditure, as it is an expenditure wholly and exclusively incurred for business. The expenditure incurred did not derive any asset that is of enduring nature.
It was submitted before the ld. CIT(A) that purchase consideration of Rs. 14 crores paid towards 100% equity of M/s Hitech Print Systems Ltd., includes non-compete fee of Rs. 4 crores. It was submitted that assessee purchased shares of this Hitech Print
7 ITA Nos. 1305 & 1493/Hyd/14 & CO No. 13/H/16 Anjani Portland Cement Ltd. Systems Ltd. (HPSL) to print the required packing materials in the existing business of the assessee and as per the non-compete fee agreement, two persons in the erstwhile company would not divulge or part with the technical knowledge, information, knowhow, skills, trade secrets etc. by virtue of purchasing 15 lakh shares of HPSL, HPSL became 100% subsidiary of the assessee company . It was submitted that investment of Rs. 4 crores includes Rs. 2 crore payable towards non-compete fee to erstwhile promoters, namely, Shri Madhusudhana Rao and Smt. Jayasree @ Rs. 1 crore each in AY 2008-09. It was further submitted that as per the agreement dated 22/07/2007, assessee has to pay non-compete fee of Rs. 4 crores to the erstwhile promoters as per the schedule Rs. 1 crore each in AY 2008-09 and Rs. 1 crore each in AY 2009-10. It was submitted that this expenditure is wholly and exclusively for the purpose of business and, therefore allowable u/s 28 read with section 37 of the Act. It was also brought to the knowledge of CIT(A) that AO has rejected the claim of this payment of Rs. 4 crores as expenditure in AY 2009-10 on the ground that non-compete fee agreement would benefit to subsidiary company and not assessee company.
9.1 It was further submitted that assessee as a holding company made payment for business purpose and whether is the purpose of holding or subsidiary company would not be relevant as held in the case of SA Builders Vs. CIT, 288 ITR 1 and further relied on other case law. It was also subumitted that in support of filing of additional grounds, which arise directly out of the facts and evidence on record does not require any investigation into the facts and therefore qualify for adjudication.
9.2 Alternatively, it was also submitted that the above payment should be treated as capital expenditure and depreciation thereon should be allowed. In support of this submission, the assessee relied on the following cases:
8 ITA Nos. 1305 & 1493/Hyd/14 & CO No. 13/H/16 Anjani Portland Cement Ltd. 1. ACIT Vs. Real Image Tech (P) Ltd., 120 TTJ 983 2. ITO Vs. Medicorp Technologies India Ltd., 30 SOT 506 3. Bunge Agribusiness (India) (P) Ltd., Vs. DCIT, 132 ITD 549 (Mum.) 4. M/s Scott Glass India Pvt. Ltd. Vs. DCIT, 1698/Mum/2003. 5. Serum Institute India Ltd. Vs. ACIT, 147 Ui 594 (TM Pune)
Considering the submissions of the assessee, the CIT(A) allowed the claim of the assessee by observing as under: 7.4 I have carefully considered the appellant's submissions an·j perused the case laws. I have considered the additional ground put forth by the appellant with regard to treatment of non- compete fee. The AO also has opined that the non-compete agreement entails enduring benefit to the appellant's subsidiary. The only objection of the AO is that the non-compete agreement relates to the business of its subsidiary but not to the appellant's business. But, the Apex Court held in the case of S A Builders Vs. CIT (288 ITR 1) that "The correct view in our opinion was whether the amount advanced to the subsidiary or associated company or any other party was advanced as a measure of commercial expediency. We are of the opinion that the view taken by the Tribunal in Phaltan Sugar Works Ltd (supra) that the interest was deductible as the amount was advanced to the subsidiary company as a measure of commercial expediency is the correct view, and the view taken by the Bombay High Court which set aside the aforesaid decision is not correct. We agree with the view taken by the Delhi High Court in CIT vs. Dalmia Cement (Bhart) Ltd. (2002) 254 ITR 377 that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize its profit." Basing on the decisions quoted supra, it is clear that the criterion for allowing expenditure is the expenditure made is for commercial expediency or not. It does not matter whether it is holding company or its subsidiary. I, therefore, hold that the payment of non-compete fee is made for commercial expediency in this case and is eligible to claim as deduction. The appellant has claimed non-compete fee as deduction as revenue expenditure or alternatively claimed depreciation in his written submissions. But, it cannot be revenue expenditure as claimed by the appellant. The expenditure incurred for the acquisition of Non-compete Right is not revenue expenditure
9 ITA Nos. 1305 & 1493/Hyd/14 & CO No. 13/H/16 Anjani Portland Cement Ltd. since the same has been incurred for the acquisition of a capital asset. It is pertinent to point out in this regard that the appellant has acquired the Right of no competition in printing business. It has resulted in the acquisition of an unrivaled and no competed business domain / territory for the appellant for a specific period. The acquisition of such a business domain / territory with no competition has brought advantages in the capital field. The transaction resulting in the acquisition of the Right to do printing business without any competition is final and irreversible. This Right has become the ownership right of the appellant. It is this expenditure which has bought this ownership right to the appellant. Under the circumstances, it is held to be an expenditure on capital account incurred for the acquisition of the Non-compete Right, a capital asset. The Non-compete Right is an intangible capital asset for the purposes of section 32(1)(ii) of the Act and is eligible for depreciation at the admissible rates. The alternate plea of the appellant that the same be allowed as revenue expenditure has already been disposed here in before. As per the plea of the appellant in additional ground, following the decisions mentioned supra, on allowing depreciation on non-compete fee, I hold that non- compete fee as any other business or commercial right of a similar nature and therefore eligible for depreciation u/s.32(1)(ii). The Assessing Officer is directed to treat the same as intangible capital asset and allow depreciation as per rules. Accordingly the ground of the appellant claiming depreciation on non-compete fee is allowed.”
Aggrieved, the revenue is in appeal before us.
Considered the rival submissions and perused the material on record. We notice that assessee has acquired 100% holding in the company HPSL and will control the business of the subsidiary co. By acquiring 100% holding in subsidiary company, it is in the interest of holding company to control the business of the subsidiary company, the promoters of the erstwhile company having technical and marketing skills, it is in the interest of the group not to allow them to compete. Accordingly, Holding company (i.e. assessee) entered into non-compete agreement with the promoters of erstwhile company. It is relevant to note that the agreement is with the assessee and erstwhile shareholders of promoters. In our view, the payment for the purpose of non-compete is in the interest of the assessee (as 100%
10 ITA Nos. 1305 & 1493/Hyd/14 & CO No. 13/H/16 Anjani Portland Cement Ltd. holding company). Since the assessee has not claimed this payment of Rs. 2 crore as revenue expenditure in the return of income nor claimed any depreciation treating it as capital expenditure, the payment is made for the purpose of business and assessee legally elgibile to claim it as expenditure in the current AY under consideration. The next question is whether CIT(A) is empowered to allow the claim of the assessee without remitting it back to AO. We notice that in the plethora of cases, the courts have held that CIT(A) and ITAT have power to allow deduction for expenditure to assessee to which it was otherwise entitled even though no claim was made in the return of income. The assessee is entitled to a particular claim, which it missed in the return of income, may claim during appellate proceedings. However, the assessee should ensure that all necessary evidences are submitted during appellate proceedings and available on record. The case to refer in particular is CIT vs. Pruthvi Brokers & Shareholders P. Ltd., 349 ITR 336 (Bom.). In the case under consideration, the assessee has submitted all relevant information on record relevant to claim the non-compete payment and it is not in dispute. The only issue is, it is not claimed in the return of income. Since, CIT(A) has power to allow the claim as per the above decisions of higher courts, it is within the powers of CIT(A) to allow the claim of the assessee. Therefore, ground raised by the department is dismissed.
C.O. No. 13/Hyd/2016 by assessee
The assessee has filed the following cross objections in its C.O:
“1. The Learned CIT(A) failed to note that the entire income was deductible U/s. 36(1)(iii) of the I.T Act, 1961 as no borrowed funds have been utilised for investments in exempted income yielding assets.
The learned CIT (A) failed to note that no disallowance U/s. 14A of I.T Act, 1961 can be made in a year in which
11 ITA Nos. 1305 & 1493/Hyd/14 & CO No. 13/H/16 Anjani Portland Cement Ltd. no exempt income has been earned or received by the Appellant Company.
Without prejudice to Cross objection No: 2 the learned CIT (A) erred in confirming the disallowance in part by holding that the provisions of Section 14A are to be applied to interest to be computed on a sum of Rs. 6,71,70,797.
The learned CIT(A) failed to note that the entire investments were made out of the funds available out of share capital and reserves and therefore ought to have clearly held that no portion of working capital or borrowed funds were utilised for investments of shares in M/s. Hitech Print System (P) Ltd.
The learned CIT(A) failed to note that the entire borrowed funds were utilised for business purposes and therefore erred in holding that the disallowance of interest is to be restricted to relatable loan funds of Rs, 6,71,70,797.
The entire working of disallowance U/s 14A r.w rule 8D is disputed.
Any other ground or grounds that may be urged at the time of hearing.’”
Since the appeal of the revenue is dismissed, the grounds raised in CO are relating to disallowance u/s 14A, the grounds raised in CO are allowed.
ITA No. 1493/Hyd/2014 by the assessee for AY 2009-10
There was a delay of 106 days in filing the appeal before us and to this effect the assessee filed an affidavit wherein the reasons affirmed for delay were similar to as mentioned in filing the CO with a delay of 32 days (supra). Therefore, we condone the said delay and admit the appeal for adjudication.
In this appeal, the assessee has raised the following grounds of appeal:
12 ITA Nos. 1305 & 1493/Hyd/14 & CO No. 13/H/16 Anjani Portland Cement Ltd.
“1. The learned CIT(A)-3, Hyderabad (CIT(A) erred in not allowing the non compete fee of Rs.4.00 crores as an expenditure incurred u/s.37 of the I.T. Act, 1961. The expenditure was incurred wholly and exclusively in the course of carrying on the business.
The learned CIT (A) failed to note that the payment made to Mr.P.Ram Raju of Rs.10 lakhs was towards business promotion ad not as commission, and therefore, ought to have clearly held that the TDS provisions relating to commission U/s.194H was not applicable and therefore ought to have deleted the above amount.
The learned C1T(A) erred in confirming the payment of Rs.10 lakhs to P.Rama Raju u/s 40a(ia) of I.T. Act, 1961 thereby failing to note that the disallowance was unwarranted as it was a payment made for business promotion and hence ought to have allowed the sum of Rs.10lakhs.
Any other ground that may arise at the time of hearing.”
Ground No. 1 is similar to the ground raised in AY 2008-09 (supra), therefore, following the conclusions drawn therein, we allow the ground raised by the assessee. (Refer Para No. 12).
As regards ground Nos. 2 & 3 regarding payment of commission to Shri P. Ramaraju without deducting TDS, it is observed that the assessee has shown Rs. 10,00,000/- as special discount in case of Shri P. Ramaraju. The assessee had appointed consignment agent for developing market outside AP. Shri P. Ramaraju was instrumental in developing good market in Karnataka and the amount paid to him relating to market development was debited as special discount to profit and loss a/c. The AO held that the expenditure incurred is genuine, the deduction was not allowed as no TDS was deducted u/s 40(a)(ia) of the Act on the ground that the discount given to Shri Ramaraju was in the nature of commission which is liable to TDS u/s 194H.
13 ITA Nos. 1305 & 1493/Hyd/14 & CO No. 13/H/16 Anjani Portland Cement Ltd. 19. On appeal, the CIT(A) confirmed the action of the AO by holding that it is a common practice to call the commission paid as discount to avoid TDS provisions, therefore, the AO is correct in applying the provisions of section 40(a)(ia) and accordingly upheld the disallowance of Rs. 10,00,000/- u/s 40(a(ia).
Aggrieved, the assessee is in appeal before us.
Considered the rival submissions and perused the material on record. Ld. AR submitted that the assessee has developed market in Karnataka with the help of consignment agents for market development. Accordingly, in a short span of 2 years with the support of Mr. Rama Raju, market in Karnataka was developed. Accordingly, the amount paid to Mr. Rama Raju is in connection with the work of market development and debited to special discount account. Therefore, this is a genuine expenditure and it should be allowed. This is relating to market development and it cannot be treated as commission payment, hence, provisions of section 194H will not apply. We notice that this payment was made as appreciation of market development and the persons involved are consignment agents,m the assessee has not brought on record to show that how much consignment sales were recorded by such consignment agents and how the special discount was calculated. In the absence of such crucial information and it is fact that a lumpsum payment was made, it could be termed as sales commission or additional incentive awarded to the consignment agents. Either way, it will attract TDS. Therefore, the assessee may treat the expenditure on the basis of accounting followed by it, but, the nature of expenditure cannot change. Therefore, we sustain the disallowance made by the AO. Accordingly, ground raised by the assessee is dismissed.
14 ITA Nos. 1305 & 1493/Hyd/14 & CO No. 13/H/16 Anjani Portland Cement Ltd. 22. In the result, appeal of the revenue in ITA No. 1305/Hyd/2014 is dismissed, C.O. filed by the assessee is allowed and appeal of the assessee in ITA No. 1493/Hyd/2014 is partly allowed.
Pronounced in the open Court on 11th May, 2018.
Sd/- Sd/- (P. MADHAVI DEVI) (S. RIFAUR RAHMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, Dated: 11th May, 2018 kv
Copy to:-
1) M/s Anjani Portland Cement Ltd., 6-3-553, Unit No. E3 and E4 4th Floor, Quena Square, Off. Taj Deccan Road, Erramanjil, Hyd – 82. 2) DCIT, Circle – 1(1), Hyderabad. 3) Addl. CIT, Range -1, Hyd 4) CIT(A) –II, Hyderabad. 5) CIT(A) – V, Hyd. 6) CIT - 1, Hyd. 5) The Departmental Representative, I.T.A.T., Hyderabad. 6) Guard File