HARSHIT FINLEASE & INVESTMENTS P.LTD,MUMBAI vs. ADDL CIT 1(1), MUMBAI

These are appeals by the assessee both pertaining to assessment year 2006-07. CIT(A) dated 29.01.2009 with respect to assessment order passed under Section 143(3) of the Income Tax Act, 1961 (in short ‘the Act’) and is directed against order of learned CIT(A) dated 06.03.2009 with respect to order passed under Section 154 of the Act.

The grounds raised by the assessee in this appeal read as under :-

On the facts and in the circumstances of the case and in law, the direction of the CIT(A) to recompute the disallowance under Section 14A in the light of the decision of Godrej & Boyce V. DCIT (328 ITR 81) is void ab-initio or/and bad in law as the CIT(A) does not have power to set aside any matter to the file of the AO.

The first issue raised relates to non-compete fee. The assessee is a company and it has mentioned its nature of business as investment in Form 3CD. In the return of income, the nature of business has been stated as financial service sector. The Assessing Officer observed that in Schedule 7 of the Annual Report it is mentioned that assessee sold its investment in Shaw Wallace and Company Ltd. (SWCL). Out of the sale proceeds received from the sale, an amount of Rs.20,66,25,000/- was deposited in a separate Escrow account in accordance with the Share Purchase Agreement, that due to uncertainty with respect to actual amount payable out of the Escrow account, the difference between the total sale value of the said shares and the amount withheld in the Escrow account has been recognised as profit on sale of shares in the Profit & Loss Account.

The Assessing Officer further observed that in the computation of income the assessee has computed Long Term Capital Gains on sale of SWCL shares at Rs.23,86,53,840/-. From the computation submitted, the Assessing Officer noted that assessee has taken per share price of Rs.322.01 for sale

In addition to this, the Acquirer paid Rs. 65/- per share to the promoter group of SWCL representing 25% of the offer of Rs.260/- per share towards a five year worldwide non-compete agreement by the promoter group of SWCL. The Assessing Officer asked the assessee why the non-compete fee should not be treated as ‘income from business and profession’. In response, assessee relied upon the proviso to Section 28(va) of the Act and submitted that his case was falling under the exception carved out in the proviso to that section.

The Assessing Officer asked the assessee to furnish a copy of the Share Purchase Agreement and further show-caused the assessee. The assessee did not submit the Share Purchase Agreement citing reasons of confidentiality. The Assessing Officer rejected the assessee’s argument that its case is covered by the proviso to Section 28(va) of the Act. He observed that as per the non- compete clause, the non-compete fee received by the assessee is not on account of transfer of right to manufacture, produce or process any article or thing but for undertaking five year worldwide non-compete, that assessee’s business is mentioned in Form 3CD as ‘investment’, that assessee-company

Upon assessee’s appeal, the learned CIT(A) referred to the decision of the Hon’ble Supreme Court in the case of CIT vs Coal Shipment (P.) Ltd., 82 ITR 902 (SC) and Hon'ble Madras High Court in the case of CIT vs G.D. Naidu, 165 ITR 63 (Mad). The CIT(A) proceeded to discuss several case laws. He held that a plain reading of the entire agreement as well as provision of law clearly indicates that assessee is not covered by the proviso to Section 28(va) of the Act for the reason that assessee had received the amount for not carrying out any activity in relation to business of the concern, whose share appellant had sold and, secondly, appellant does not have the right to manufacture, produce or process any article or thing or any right to carry on any business which is chargeable under the head ‘Capital Gains’; that the assessee possesses shareholding of SWCL and it cannot be said that it is holding any right as envisaged in proviso to Section 28(va) of the Act. Hence, he upheld the action of the Assessing Officer. Against this order, assessee is in appeal before us.

We have heard both the Counsels and perused the records. The learned counsel of the assessee, Shri J.D. Mistry firstly submitted that the entire amount received was towards purchase consideration and no part was attributable to non-compete fee. He further submitted that even if a part is treated as non-compete fee, the assessee would fall under the proviso to Section 28(va) of the Act. He submitted that the assessee is an investment

We have carefully considered the submissions and perused the records. Firstly, we shall address the decision of the authorities below that the assessee’s case doesn’t fall under the proviso to Section 28(va) of the Act. In 8 M/s. Harshit Finlease & Investments Pvt. Ltd. & 4991/Mum/2011 this regard, we may gainfully refer to the provisions of Section 28(va) of the Act as under :-

The proviso to Section 28(va) of the Act brings an assessee out of the ambit of above said provision of Section 28(va) of the Act if the same is on account of transfer of any right to manufacture, produce, process or right to carry on any business which is chargeable under the head ‘Capital Gains’. Here, we note that by no stretch of imagination it can be said that by way of these clauses the assessee is transferring its right to invest in such type of 11 M/s. Harshit Finlease & Investments Pvt. Ltd. & 4991/Mum/2011 business. Assessee has sold the shares and assessee is plainly undertaking not to engage in such activity and it is not at all transferring its right to invest in such business to anybody whatsoever. In this view of the matter, in our considered opinion, the assessee’s case doesn’t fall under proviso to Section 28(va) of the Act. Hence, the authorities below are correct in holding that the non-compete fee received by the assessee doesn’t fall under the proviso to Section 28(va) of the Act.

Now we refer to the argument of the learned counsel of the assessee that no part of the sale consideration has been received as non-compete fee. We find that the submission is not at all acceptable in view of the express provisions of the agreement under the article ‘non-compete’ reproduced herein above. The above agreement makes it amply clear that 20% of the sale consideration was towards a specified non-compete agreement. This is further supported by the Assessing Officer’s finding from the SEBI website where he found that open offer was made to all shareholders of SWCL by Vijaya Mallaya group of companies to purchase share @ 260/- per share. That in addition to it, the Acquirer paid Rs.65/- per share to the promoter group of SWCL representing 25% of the offer of Rs. 60/- per share towards five year worldwide non-compete agreement by promoter group of SWCL.

In this regard, the Assessing Officer had asked the assessee why the non- compete fee should not be treated as ‘income from business’. To this, the assessee’s response was that assessee’s case was falling under the exception to the provisions of Section 28(va) of the Act provided in the proviso thereof. The above makes it amply clear that the impugned amount was received as non-compete fee as per the agreement. We further note that the principle of 12 M/s. Harshit Finlease & Investments Pvt. Ltd. & 4991/Mum/2011 approbate and reprobate debars the assessee from taking shifting stand on the purport of a document which is being relied upon by the assessee itself. The assessee is relying upon the sale agreement in support of the sale, but at the same time rejecting the non-compete clause mentioned therein in denying that the sale price did not contain non-compete fee. This is not permissible under the aforesaid legal maxim. This principle of approbate and reprobate was reiterated by the Hon'ble Apex Court in the case of Suzuki Parasrampuria Suitings Pvt. Ltd. vs The Official Liquidator of Mahendra Petrochemicals Ltd. (In Liquidation) and Others in Civil Appeal no. 10322 of 2017 dated 08.10.2018. To conclude, as found out by us hereinabove, assessee had factually received the impugned amount of sale consideration as ‘non-compete fee’ as made obvious by the reading of the specified clauses of the agreement under the head “non-compete”.

As regards the decisions referred by the learned counsel for the assessee, we find that they do not fructify the case of the assessee on the facts of this case. As referred herein above, the agreement in this case clearly provided for part of the sale consideration as non-compete fee. This was duly corroborated by Assessing Officer’s finding from SEBI website mentioned above.

The Hon'ble Delhi High Court in the case of CIT vs Shiv Raj Gupta, 52 Taxmann.com 425 has given a finding that “on the true and real nature of the transaction camouflaged as 'non-compete fee', we have no hesitation and reservation that the respondent assessee had indulged in tax avoidance”. In the present case, it is not at all the case that the non-compete fee is a camouflaged. Even the assessee never said so before the authorities below.

In the case of Hon'ble Jurisdictional High Court decision in CIT vs Govindlal C. Mandhana (HUF), it was a case where no specific consideration was paid as non-compete fee and the Assessing Officer had carried out an exercise to determine non-compete fee. As mentioned above, this is not at all the case here.

In the case of Shuklendu A. Baji vs DCIT (supra), the SMC Bench of the Tribunal had lost sight of the word ‘transfer’ in the proviso to Section 28(va) of the Act. Hence, this decision looses any value as precedent.

In the case of Tecumseh India (P.) Ltd. vs Addl. CIT (supra), there was a finding that it was apparent from record that non-compete agreement was part and parcel of whole transaction, it could be concluded that non-compete fee was paid as part of initial outlay and therefore it was to be disallowed being in the nature of capital expenditure. Here, as noted above, non-compete fee has been specially identified and carved out in the agreement itself. Moreover, as a matter of fact, that case was for assessment year 1998-99, when Section 28(va) of the Act was not at all in the statute book.

In the background of aforesaid discussion, we hold that the authorities below are correct in bringing to tax the impugned amount under Section 28(va) of the Act.

On this issue, the Assessing Officer noted that assessee has taken loan of Rs.15,40,00,000/- from Dandvati Investments and Trading Co. Pvt. Ltd. and paid interest of Rs.26,86,883/-. The assessee explained that the purpose of loan was to make investment in bond to claim benefit under Section 54EC of the Act on the Long Term Capital Gains. The Assessing Officer held that the interest is to be disallowed as it has not been taken for the purpose of the business of assessee, but for the purpose of availing benefit under Section 54EC of the Act. Hence, the Assessing Officer disallowed the said expenditure. Upon assessee’s appeal, the CIT(A) upheld the action of the Assessing Officer that the purpose of loan was not to do any business, rather, to take advantage of the provisions of Section 54EC of the Act. Further, he held that assessee cannot get double deduction, i.e. deduction under Section 54EC as well as under Section 37 of the Act, hence, he upheld the addition. The learned counsel for the assessee in this regard contended that while interest on borrowings has not been allowed, the income has been taxed as ‘business income’. In this regard, he referred to page 13 of the Paper Book, and referred to the Profit & Loss Account where the interest on Capital Gain bond has been taken as income for computing the profits for the year.

Upon hearing both the counsel and perusing the records, we are of the opinion that if interest from the impugned bonds have been taxed as business income, then the interest expenditure for funds to make those investment ought to be allowed as being expenditure. We direct accordingly.

Against this order, assessee is in appeal before us. The learned counsel for the assessee referred to the powers of CIT(A) provided in Section 250 of the Act and submitted that the CIT(A) has no power whatsoever to remand the matter to the file of Assessing Officer and hence, the CIT(A)’s action is not at all sustainable. However, the learned counsel fairly agreed that disallowance of 0.5% may be done to meet the ends of justice.

We agree with the contention of the learned counsel for the assessee that the CIT(A) has no power to remand the matter and hence, his order is not 16 M/s. Harshit Finlease & Investments Pvt. Ltd. & 4991/Mum/2011 at all sustainable. However, to meet the ends of justice, we direct that 0.5% may be disallowed for earning the exempt income.

Another ground relates to addition of amount deposited in the Escrow account to book profit under Section 115JB of the Act. On the issue of income under Section 115JB of the Act, the Assessing Officer held as under :-

Upon assessee’s appeal, the learned CIT(A) upheld the action of the Assessing Officer. Against this order, assessee is in appeal before us.

The learned counsel for the assessee relied upon the orders of Hon’ble Supreme Court in the case of Apollo Tyres Ltd. vs CIT, 255 ITR 273 (SC), which was duly followed by the Hon'ble Jurisdictional High Court in the case of CIT vs Adbhut Trading Co. (P.) Ltd., 338 ITR 94 (Bom) for the proposition that the 17 M/s. Harshit Finlease & Investments Pvt. Ltd. & 4991/Mum/2011 Assessing Officer cannot tinker with the book profit shown in the Profit & Loss Account which is duly audited and accepted in the AGM. Hence, the learned counsel prayed that this addition should be deleted. The learned DR, on the other hand, relied upon the orders of the authorities below.

Upon careful consideration, we find that the proposition canvassed by the learned counsel for the assessee is correct. As held by the Hon’ble Apex Court and Hon'ble Bombay High Court referred above, the Assessing Officer has no power to tinker with the book profit which has been audited and adopted in the Annual General Meeting except as provided in the Act. The Assessing Officer, in the present case, is doubting the correctness of the book profit, which is not sustainable. Hence, we set-aside the order of authorities below on this issue.

The issues raised in read as under :-

As regards ground no. 1, we hold that this is a factual issue and the Assessing Officer shall give effect to the same after verifying the record.

As regards ground no. 2, we have already held in Section 28(va) of the Act. Hence, the ground stands dismissed on same reasoning.

In the result, this appeal is partly allowed.

In the result, both the appeals of the assessee are partly allowed.