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Income Tax Appellate Tribunal, “B” BENCH, MUMBAI
Before: SHRI G.S.PANNU, AM & SHRI AMARJIT SINGH, JM
सुनवाईकीतारीख / Date of Hearing: 18.10.2016 घोषणाकीतारीख /Date of Pronouncement: 25.01.2017 आदेश / O R D E R
PER AMARJIT SINGH, JM:
The revenue has filed the present appeal against the order dated 08.02.2013 passed by the Commissioner of Income Tax (Appeals)- 21,Mumbai [hereinafter referred to as the “CIT(A)”] relevant to the assessment year 2008-09. The assessee has also filed the Cross Objection.
ITA NO.1385/M/14:-
The revenue has raised the following grounds:-
On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in 1(i). deleting the addition computed by the AO at Rs.4,98,150/- by applying provisions of sec. 14A of the Income Tax Act r.w.Rule 8D of the Income Tax Rules. 1(ii) in restricting the disallowance u/s.14A to the extent of Administrative and managerial expenses at Rs.63,250/- and Rs.4,34,935/- respectively. 1(iii) in not appreciating the fact that the funds of the assessee company were inter-mix of borrowed and owned funds and the assessee had failed to prove that the huge borrowed funds had been fully utilized for the purpose of business only and not for earning the exempt income which is in the manner of dividend of Rs.13,86,407/- received on LIC & C.O.143/M/14 A.Y. 2008-09 Mutual Funds investment which were made at various intervals. 1(iv) in failing to appreciate that Rule 8D is applicable for A.Y.2008-09 for the purpose of computation of disallowance u/s.14A; and that the assessee company did not compute the said disallowance on its own in the Return of income o the year under consideration. 2(i) in holding that the amount of Rs.12.60 Crs. Is a Revenue expenditure without appreciating the fact that the assessee itself has termed it an exceptional item under Sch. – 7 forming part of the Balance Sheet. 2(ii) in failing to appreciate that the assessee itself has submitted (vide submission dated 03/12/2013 filed before the AO during assessment) that the said payment of Rs.12.60 Crs. Is arising out of termination a long term agreement (effective upto Dec. 2009) with Star India Pvt. Ltd. (SIPL) related to Advertising Covenant Agreement which was in the nature of appointment of SIPL as world wide agent for soliciting and procuring all advertising time and programs sponsorship offered on the Radio Station of the assessee company. 2(iii) in failing to appreciate that the said expenditure of Rs.12.60 Crs. Incurred during the year is covered within the meaning of provisions of sec.28(va) of the Act. As such it cannot be admissible as Revenue expenditure. 2(iv) in allowing depreciating on Advertising Covenant agreement of Rs.19.40 Crs. Without appreciating the fact that it had not generated any capital asset as it was paid only to avoid competition. 3(i) in treating the expenses claimed by assessee company under computer software license fees amounting to Rs.1,01,92,000/- as revenue expenditure which otherwise is held by the AO as capital. & C.O.143/M/14 A.Y. 2008-09 3(ii) in not appreciating that the expenses claimed under the head Computer Software license fees amounting to Rs.1,01,92,000/- are capital expenditure and that it is a depreciable asset as per Appendix I and Rule 5 of the Income Tax Rules. 4. in holding that the interest income amounting Rs.1,88,10,000/- on bank FDs is a business income and not income from other sources as considered by the AO during the assessment.
The brief facts of the case are that the assessee filed e-return on 30.09.2008 declaring total loss to the tune of Rs.78,22,75,709/-. The return was processed u/s.143(1) of the Income Tax Act, 1961( in short “the Act”). Thereafter, the case was selected for scrutiny and statutory notice u/s.143(2) of the Act was issued on 22.09.2009 which was served upon the assessee. Thereafter notice u/s.142(1) of the Act alongwith questionnaire was issued and served upon the assessee. The assessee during the year under consideration was engaged in the business of operating FM radio stations. The Assessing Officer disallowed an amount of Rs 4,98,150 as expenditure to earn the exempt income u/s.14A of the Act and also disallowed an amount Rs.33,00,00,000/- on exceptional item and also disallowed an amount of Rs.40,76,800/- on account of software license fee and disallowed the interest on FDs to the tune of Rs.1,88,10,000/- treated as income from other sources. Thus assessed total loss to the tune of Rs.44,77,90,301/-. Feeling aggrieved the assessee filed an present appeal before the CIT(A) who deleted the disallowance on account of & C.O.143/M/14 A.Y. 2008-09 section 14A of the act and payment of compensation on exceptional items, software expenses etc. and treated the interest received from FD account to the tune of Rs.1,88,10,000/- as income from business and profession despite income from other source. Feeling aggrieved the revenue has filed the present appeal before us:- ISSUE NO.1(i) to 1(iv):- 4. Under these issues the revenue has challenged the deletion of the addition made in view of the provision u/s.14A r.w. Rule 8D of the Act to the extent of Rs 4,34,935. The appellant received dividend of Rs.13,86,407/- from LIC Mutual Funds. The said income was exempted u/s.10(34)of the Act. The appellant did not disallow any expenditure in view of the provision u/s.14A of the Act. The Assessing Officer disallowed the expenditure incurred to earn the exempt income by applying the provision of section 14A r.w.Rule 8D of the Act and computed the expenditure to earn the exempt income to the tune of Rs.4,98,150/-.CIT(A) reduced the to the extent of 4,34,935. in view of decision of Godrej Before going further, it is necessary to advert the finding of the CIT(A) on record “3.3 I have considered the facts of the case. The appellant had invested in LIC mutual funds. The funds required for investments are interest free funds which appellant has received from India Value Fund. The appellant has not ITA No.3532/M/13 & C.O.143/M/14 A.Y. 2008-09 incurred any interest expenditure for the investments. A.O.’s disallowance for interest is deleted. However, Rule 8D of sec. 14A is applicable for A.Y.2008-09 in view of Bombay High Court decision in the case of Godrej & Boyce Mfg. Co. Ltd., 0.5% of the average investment which comes to Rs.63,250/- for administrative & managerial expenses is disallowed. Relief granted to the appellant is Rs.4,34,935/-. This ground of appeal
is partly allowed.”
5. On appraisal of the above said finding it is quite clear that the CIT(A) deleted the expenditure on account of interest because the assessee received the interest free fund from India Value Fund. The assessee used the same to earn the exempt income. In brief interest free funds received from the India Value Fund was applied for the investment in LIC Mutual Fund to earn the dividend income. Since interest free funds were applied, therefore, there is no need to assess the expenditure on account the funds which are interest free. However, the CIT(A) set aside the finding of the Assessing Officer in which the Assessing Officer assessed the expenditure to earn the exempt income by applying the general provision under section 14A. CIT(A) has applied the provision of section 14A read with rule 8D (111) @ 0.5% on the basis of the finding of the Godrej & Boyce Mfg. Co. Ltd. decided by Hon’ble Bombay High Court on account of & C.O.143/M/14 A.Y. 2008-09 administrative and managerial expenses to the tune of Rs.63,250/-. No illegality and infirmity has been seen in the finding of the CIT(A) in question. The CIT(A) has passed the order on this issue judiciously and correctly which is not require to be interfere with at this appellate stage. Hence this issue is decided in favour of assessee against the revenue. ISSUE NO.2(i) to 2(iv):-
6. Under these issues the appellant challenged the deletion of the addition to the tune of Rs.12,60,00,000/- and to treat the amount of Rs.19,40,00,000/- as capital receipt. The appellant company relays the radio station in the name of Radio City. The appellant’s income is mainly from the advertising through the intermittent breaks of the programme. For the procuring the advertisement from various clients, appellant had engaged Star India Pvt. Ltd. (SIPL). A dispute arose between them, therefore the assessee company terminated the agreement and on account of termination the appellant company paid compensation to SIPL to the tune of Rs.12,60,00,000/- for advertisement and Agency Sales Termination Agreement (ASTA) of Rs.19,40,00,000/- for Restrictive Covenant Agreement (RCA). The RCA was paid for restricting the SIPL for not competing against the appellant in similar business for another 2 ½ years. The Assessing Officer disallowed the said compensation paid for ASTA and RCA treating the same as capital expenditure within the meaning of section ITA No.3532/M/13 & C.O.143/M/14 A.Y. 2008-09 28(va) of the Act. It is necessary to advert the finding of the CIT(A) on record:- “4.3 I have considered the facts of the case, submission of the appellant and case laws relied upon by the appellant. The appellant had terminated the Agency Agreement which was existing between SIPL and appellant for procuring the advertising from clients. For termination of this agreement appellant had paid Rs.12,60,000/- and for not competing against the appellant for another 2 ½ years appellant paid in the form of RCA Rs.19,40,00,000/- in the form of non compete fees. The A.O. disallowed the same treating it as capital expenditure in view of the provision of sec. 28(va) of the I.T.Act. With regard to termination of ASTA, appellant entered this agreement for procuring advertising from clients with SIPL. Disputes have arisen between them and they have terminated this agreement for which appellant had paid termination compensation. If we examine the nature of the agreement and the form in which it was executed this agreement is for the appellant to earn revenue on every advertisement through the services rendered by SIPL. In providing this services appellant receives 85% of the advertising amount and 15% is parted to the SIPL & C.O.143/M/14 A.Y. 2008-09 for services they have rendered for procuring the advertisements. Here by termination of the agreement appellant had not obtained any capital asset which is of enduring nature neither any right which was not existing with the appellant. This is appellant’s day to day business to augment revenue by exploiting the service of the SIPL. The revenue received here is in the form of income from the appellant every year and the payment to the SIPL for agency commission is also an expenditure incurred for earning this income. The appellant had not obtained the compensation in the nature of enduring nature and the whole process is for the earning of the appellant’s revenue every year, hence, termination of this contract has also to be treated as revenue expenditure as it is paid for the augmenting of the revenue of the appellant. Similar issue has come into consideration in the case of CIT Vs. Glaxo Laboratories India P. Ltd. 197 ITR 110 wherein it was held as under: “Business Expenditure-cancellation of Distribution Agency-Distribution taken up by the assessee himself-amount paid by assessee for Termination of Agency-Intended to ensure smooth transition without interference by agency – precedent of ITA No.3532/M/13 & C.O.143/M/14 A.Y. 2008-09 previous payment termination of such agency- payment by assessee is in business interest and allowable as business expenditure – Indian Income tax Act, 1922,s.10(2)(xv).” Respectfully following the above jurisdictional High Court decision appellant’s claim of revenue expenditure for the termination of agency agreement is allowed. With regard to termination of RCA which is in the name of non compete fees paid by the appellant to SIPL for Rs.19,40,00,000/-, it has to be examined whether this is capital expenditure or revenue expenditure. Here it is to be kept in mind that appellant had paid the compensation for non compete fee and SIPL had received the compensation. SIPL’s receiving of this amount of Rs.19,40,00,000/- will be treated as income in view of sec. 28(va) of the IT Act which is inserted in the Income- tax Act from 01.04.2003. The nature of payments in the hands of the appellant can be decided by the Supreme Court decision in the case of Guffic Chem P. Ltd. 332 ITR 602 (SC) in para 7 it is held as under:- “7. Two questions arose for determination, namely, whether the amounts received by the & C.O.143/M/14 A.Y. 2008-09 appellant for loss of agency was in normal course of business and therefore whether they constituted revenue receipts? The second question which arose before this Court was whether the amount received by the assessee (compensation) on the condition not to carry on a competitive business was in the nature of capital receipt? It was held that the compensation received by the assessee for loss of agency was a revenue receipt whereas compensation received for refraining from carrying on competitive business was a capital receipt. This dichotomy has not been appreciated by the High Court in its impugned judgment. The High Court has misinterpreted the judgment of this court in Gillanders Arbuthnot & Co. Ltd.’s case (supra). In the present case, the Department has not impugned the genuineness of the transaction. In the present case, we are of the view that the High Court has erred in interfering with the concurrent findings of fact recorded by the CIT(A) and the Tribunal. One more aspect needs to be highlighted. Payment received as non-competition fee under a negative covenant was always treated as a capital receipt till the assessment year 2003- ITA No.3532/M/13 & C.O.143/M/14 A.Y. 2008-09
4. It is only vide Finance Act, 2002 with effect from 1-4-2003 that the said capital receipt, not taxable under the 1961 Act. It became taxable only with effect from 1-4-2003. It is well settled that a liability cannot be created retrospectively. In the present case, compensation received under non-competition Agreement became taxable as a capital receipt and not as a revenue receipt by specific legislative mandate vide section 28(va) and that too with effect from 1-4-2003. Hence, the said section 28(va) is amendatory and not clarificatory. Lastly, in CIT Vs. Rai Bahadur Jairam Valji [1959] 35 ITR 148 it was held by this court that if contract is entered into in the ordinary course of business, any compensation received for its termination (loss of agency) would be a revenue receipt. In the present case, both CIT(A) as well as the Tribunal, came to the conclusion that the agreement entered into by the assessee with Ranbaxy led to loss of source of business; that payment was received under the negative covenant and therefore the receipt of Rs.50 lakhs by the assessee from Ranbaxy was in the nature of capital receipt. In fact, in order to put an end to the & C.O.143/M/14 A.Y. 2008-09 litigation, Parliament stepped into specifically tax such receipts under non-competition agreement with effect from 1-4-2003”. 7. On perusal of the above case Hon’ble Supreme Court held that in ordinary course of business any compensation received for its termination would be revenue receipt and if an agreement is entered into by the appellant which led to the loss of source of business, that payment received under negative covenant as it is in this case and therefore, the receipt by appellant was in the nature of capital receipt. On examining this case law Hon’ble Supreme Court held has cleared that negative covenant is in the nature of source of loss of business and it is capital asset. This capital asset will be by recipient i.e. SIPL but the capital nature of this receipt will not change in the hands of the appellant i.e. Music Broadcast P. Ltd. so appellant had acquired a right from SIPL. This right in the form of capital asset which is eligible for depreciation u/s.32(1)(ii) of the I.T.Act is in the nature of commercial right. Hence A.O.’s treating the payment to the negative covenant in the form of a capital expenditure is confirmed. However, as appellant has acquired the right it has to be right in the nature of commercial right, appellant is eligible for depreciation u/s.32. ITA No.3532/M/13 & C.O.143/M/14 A.Y. 2008-09
In concluding the whole discussion, appellant’s compensation payment for the agency termination by the appellant to SIPL should be treated as revenue expenditure. This non compete fees paid by appellant to SIPL for Rs.19,40,00,000/- has to be payment for acquiring the capital asset. The A.O. is directed to allow depreciation on this asset as per law. As it is a capital expenditure appellant is not eligible to claim deduction as revenue expenditure. In view of the above an amount of Rs.12,60,00,000/- is allowed and an amount of Rs.19,40,00,000/- paid as RCA is treated as capital receipt in the hands of the appellant is confirmed. Relief granted to the appellant is Rs.12,60,00,000/-. This ground of appeal
is partly allowed.
9. On appraisal of the said order it came into the notice that the CIT(A) has dealt both the transactions separately, in view of the law mentioned above. The first transaction was in connection with the payment of Rs.12,60,00,000/- on account of termination of agreement with SIPL. The Assessing Officer dealt the said transaction as capital in nature. The appellant entered into an agreement with SIPL for procuring advertisement from clients. Dispute arose, therefore, the said agreement was terminated in view of the termination. The appellant company paid an amount of Rs.12,60,00,000/- as compensation. It is to be decided what should be nature of this kind & C.O.143/M/14 A.Y. 2008-09 of payments. The CIT(A) dealt the matter in view of the law settled in CIT Vs. Glaxo Laboratories India P. Ltd. 197 ITR 110 wherein such type of transaction was held to be business expenditure. The assessee also relied upon the law settled in J & S (P) Limited (149 ITR 581) (Delhi High Court) and Empire Jute Co. Ltd. Vs. CIT (124 ITR 1) (Supreme Court) and CIT Vs. D. Mondal (175 ITR 440)(Calcutta HC) and CIT Vs. Motor Industries Co. Ltd. (223 ITR 112) (Karnataka HC) and Alembic Chemical Works (177 ITR 377)(SC).No authority contrary to the said law has been produced before us. The factual position is quite same which has been dealt by the CIT(A) in question. No doubt in the said circumstances, we are of the view that the CIT(A) has decided the matter judiciously and correctly on this point. Now coming to the transaction in connection with the payment of Rs.19,40,00,000/- on account of non competing the business of the appellant for another 2½ years. This controversy has also been adjudicated by the CIT(A) on the basis of the finding in case of Guffin Chem P. Ltd. 332 ITR 602 (SC). The relevant para has been produced above while enumerating the finding of the CIT(A) in which this type of transaction has been dealt as capital receipt. Depreciation has rightly allowed accordingly. Therefore in view of the said circumstances, we are of the view that the said transaction has also been dealt by the CIT(A) in accordance with law specifically in view of the circumstances when no distinguishable facts and law have been produced before us. In view of the observations made above, we & C.O.143/M/14 A.Y. 2008-09 are of the view that the CIT(A) has decided the said issues judiciously and correctly which is not require to be interfere with at this appellant stage. Accordingly, these issues are decided in favour of the assessee against the revenue. ISSUE NO.3(i) to 3(ii):- 10. Under these issues the revenue has challenged the treatment of computer software license fees amounting to Rs.1,01,92,000/- as revenue expenditure. The contention of the Revenue is that it should be treated as capital expenditure. Before going further, it is necessary to advert the finding of the CIT(A) on record:- “5.1 I have considered the facts of the case. This issue has come into consideration in CIT(A) order for A.Y.2009- 10 wherein in para 2.3 it is held as under:- 2.3 I have considered the facts of the case. The appellant has satisfactorily explained that the charge paid to Netmagic Solutions P. Ltd. Rs.24,28,069/-, Quantumlink Communications P. Ltd. Rs.3,56,870/-, Indialinks Web Hosting P. Ltd. Rs.2,11,618/-, license fees paid to Government of India Rs.20,24,936/- are recurring business expenses payable every year and therefore, the same are revenue in nature. Since the appellant ITA No.3532/M/13 & C.O.143/M/14 A.Y. 2008-09 has to pay these amounts every year, therefore, the appellant has not derived any benefit of enduring nature by incurring these expenses. These expenses were revenue in nature. The A.O. is directed to allow these expenses u/s.37(1) of the Act. In respect of payment of Rs.1,07,24,394/- paid to Radio Computing Services (I) Ltd. (RCS), these expenses were also annual maintenance charges for radio software. Being annual maintenance charges, these expenses were also recurring expenses and revenue in nature. In the appeal order of A.Y.2006-07 the undersigned in para 5.3 of the appeal order has made detailed discussion on this issue as under:- “5.3 I have considered the facts of the case. The nature of EDP software expenses, as mentioned above, shows that the expenditure incurred were revenue expenses. The expenses incurred supported the existing asset (i.e. computer) and allowed the benefit of efficiency to the appellant in terms of use of existing asset. & C.O.143/M/14 A.Y. 2008-09 The expenses incurred included annual charges and also for software for protecting the existing computer asset. Out of the total expenses of Rs.35,44,156/- expenditure of Rs.30,41,372/- was in respect of support service and updation charges of basic software purchased from RCS. This RCS system had already been capitalized by the appellant. Therefore, this expenditure of Rs.30,41,372/- incurred on the existing asset, will not add to the actual cost of that asset. In the facts and circumstances, by incurring such expenses no new asset came into existence. In the facts and circumstances the A.O. was not justified in treating the aforesaid expenses as capital in nature. The A.O. is directed to allow deduction of such expenses treating the same as business expenses. The A.O. is also directed to allow expenditure of Rs.1,07,24,395/- as revenue expenditure. & C.O.143/M/14 A.Y. 2008-09 In the result, this ground of appeal is allowed. Following the above order appellant’s claim of software license fee is allowed as revenue expenditure. This ground of appeal is allowed.”
11. On appraisal of the above mentioned findings, it is not in dispute that the revenue has already dealt this issue while deciding the matter in the A.Y.2009-10 in which the said transaction has been treated as revenue expenditure. On the basis of the said decision, the present issue has been decided by the CIT(A) in favour of the assessee in the present A.Y. i.e. 2008-09. Nothing came into the notice that the finding of the CIT(A) for the A.Y.2009-10 on this issue is under challenged or not. No distinguishable facts have been produced before us to which it can be assumed that the said transaction is capital in nature. No law contrary to the law relied by the CIT(A) has been produced before us. Therefore, in view of the said circumstances, we are of the view that the CIT(A) has decided the matter judiciously and correctly which is not require to be interfere with at this appellate stage. Accordingly this issue is being decided in favour of assessee against the revenue. ISSUE NO.4:- & C.O.143/M/14 A.Y. 2008-09
Under this issue the revenue has challenged the order of the CIT(A) in which he held that the interest income amounting to Rs.1,88,10,000/- is a business income whereas the Assessing Officer has rightly treated the said income as income from other sources. On verification of P&L Account the Assessing Officer noticed that the assessee has credited the interest on bank’s F.D. amounting to Rs.1,88,10,000/-. Since the income was received from F.D.’s therefore the Assessing Officer treated the said income as income from other sources. In appeal before the CIT(A), the CIT(A) treated the issue on the basis of the finding of the CIT(A) for the A.Y.2009- 10. Before going further, it is necessary to advert the finding of the CIT(A) on record:- “6.1 I have considered the facts of the case. This issue has come into consideration of CIT(A) for A.Y.2009-10 wherein in para 3.3 it is held as under:- “3.3 I have considered the facts of the case. This issue was also there in appellant’s case in A.Y.2007-08 wherein the undersigned held that the interest income earned on FDs made with the bank as margin money for obtaining bank guarantee, etc. was assessable under the head business income. Following the appeal order of A.Y.2007-08, & C.O.143/M/14 A.Y. 2008-09 the A.O. is directed to assess the interest income under the head business income. Incidentally this issue is academic in nature since there is not tax implication whether the interest income is assessed under the head income from other sources or under the head business income. This ground of appeal
is also allowed. Following the above decisions, this ground of appeal is allowed.”
13. In view of the above said finding it is quite clear that the CIT(A) has relied on the order of the CIT(A) who decided the case of the assessee for the A.Y.2009-10. The finding of the CIT(A) has already been quoted above. The revenue has accepted the income as business income. The facts are not differentiated. No tangible material has been produced before us to which it can be assumed that the finding of the CIT(A) is wrong against law and facts. The CIT(A) followed the order of the CIT(A) passed in subsequent year i.e. for the A.Y.2009-10. In view of the said discussion we are of the view that the CIT(A) has passed the order on this issue judiciously and correctly which is not required to be interfere with at this appellate stage. Accordingly, this issue is decided in favour of the assessee against the revenue. & C.O.143/M/14 A.Y. 2008-09
In the result appeal filed by the revenue is hereby Dismissed. C.O.85/M/15:- 15. The assessee has raised the following grounds:- “1. The learned CIT(A) erred in law and on facts in holding that on payments made under the Restrictive Covenant Agreement (RCA), the appellant has acquired a right from Star India Private Limited (SIPL) which capital in nature. The appellant prays that the payments made by the company to SIPL under the RCA be allowed as revenue expenses”.