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Income Tax Appellate Tribunal, “D” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI N.K. PRADHAN
Instant appeal by the Revenue is directed against the order dated 8th November 2012, passed by the learned Commissioner (Appeals)–20, Mumbai, for the assessment year 2009–10.
Effective grounds raised by the Department are as under:–
On the facts and in the circumstances of the case and in law, whether the Ld. CT(A) was correct in deleting Rs. 56,872/- disallowed u/s. 14A computed as per Rule 8D, without appreciating that the assessee has claimed expenses of Rs. 19.36 lacs under the 2 Shri Deepak Premnarayen
head "Administrative and Other Expenditure" which are indirect expenses incurred for the purpose of earning income. On the facts and in the circumstances of the case and in 2. law, whether the Ld. CIT(A) was correct in deleting the addition of Rs.2,84,65,000/- ignoring the facts that the assessee continues to receive the income from the same sources ,even before and also after the "termination of agreement" on the basis of letter dated 03.03.2009 issued by First Rand Bank, South Africa, as discussed by Assessing Officer in the assessment order.
Insofar as ground no.1 is concerned, briefly stated the facts are, assessee an individual filed his return of income for the impugned assessment year on 30th September 2009, declaring total income of ` 40,01,528. During the assessment proceedings, the Assessing Officer noticing that the assessee has earned exempt income by way of dividend amounting to ` 31,232, called upon the assessee to explain why disallowance under section 14A r/w rule 8D, should not be made. In reply though, the assessee submitted that no expenditure was incurred for earning exempt income but the Assessing Officer rejecting the contention of the assessee disallowed an amount of ` 56,872 under rule 8D(2)(iii) r/w section 14A of the Act. Being aggrieved, assessee challenged the disallowance before the learned Commissioner (Appeals).
The learned Commissioner (Appeals), after considering the submissions of the assessee, deleted the addition made by observing that the Assessing Officer has not given any conclusive finding or 3 Shri Deepak Premnarayen established on record that any part of the expenditure directly or indirectly related to earning of dividend income.
Learned Departmental Representative relying upon the observations of the Assessing Officer submitted, the assessee since has not disallowed any expenditure under section 14A voluntarily in spite of the fact he had earned exempt income by way of dividend, the Assessing Officer has computed disallowance under section 14A r/w rule 8D and has restricted the disallowance to administrative expenditure as contemplated under rule 8D(2)(iii) of the rules.
Learned Authorised Representative on the other hand submitted, the assessee having not incurred any expenditure for earning dividend income no disallowance under section 14A is called for.
We have considered the submissions of the parties and perused the material available on record. Undisputedly, the assessee during the relevant previous year has earned exempt income by way of dividend, however, the assessee had not made any disallowance under section 14A r/w rule 8D on the plea that no expenditure was incurred for earning the dividend income. This argument of the assessee may be correct insofar as the disallowance of direct expenditure and interest expenditure in terms of rule 8D(2)(i) and 8D(2)(ii) are concerned. However, as far as the administrative / indirect expenses are 4 Shri Deepak Premnarayen concerned, the same has to be disallowed in terms of the provisions of section 14A(3) irrespective of the fact whether the assessee has actually incurred any expenditure in relation to the exempt income. Therefore, the same disallowance has to be made under section 14A r/w rule 8D(2)(iii). However, in the present case, undisputedly, the total exempt income earned by the assessee during the relevant previous year is ` 31,232. Therefore, the expenditure relatable to such exempt income cannot exceed the quantum of exempt income. Moreover, the disallowance to be made under section 14A r/w rule 8D(2) should be of a reasonable amount, therefore, considering the facts and circumstances of the case, we are of the view that 5% of the dividend income earned should be considered for disallowance under section 14A.
As far as ground no.2 is concerned, facts in brief are, while verifying the return of income filed by the assessee, the Assessing Officer noticed that the assessee had received compensation of ` 2,48,65,000 from the FirstRand Bank Ltd., South Africa, but he has not offered it as income pleading that it is in the nature of a capital receipt. On Assessing Officer’s query to justify such claim, it was submitted by the assessee that for the purpose of establishing investment banking business in India, FirstRand Bank Ltd., South Africa, had offered the assessee preferred partnership on the condition
5 Shri Deepak Premnarayen that the assessee has to terminate his business / professional engagement in the field of investment banking. The assessee should completely and exclusively be available for the Bank’s venture in Indian sub–continent; and lastly, the assessee should not take up or accept any fresh business or professional commitment in the field of investment banking. It was submitted, pursuant to such offer of the bank, assessee did not pursue / undertake business activity in the field of investment banking for more than two years and kept himself exclusively available for the business of the bank. However, subsequently, due to unfavourable business environment, Bank reviewed its decision and decided not to have investment banking division in India. To compensate the assessee, Bank paid U.S. $ 5 lakh equivalent to ` 2,84,65,000. It was submitted, as the amount received was as compensation for cancellation / termination of agreement with the bank resulting in loss of source of income, the amount is to be treated as capital receipt, hence, not taxable. The Assessing Officer, however, was not convinced with the submissions of the assessee. To further ascertain the facts, the Assessing Officer summoned the assessee under section 131 of the Act and recorded a statement. On the basis of statement recorded from the assessee, the Assessing Officer concluded that the assessee had never been employed in banking related activities before entering into agreement with 6 Shri Deepak Premnarayen FirstRand Bank Ltd., South Africa, nor assessee had been employed in banking related activities after termination of the agreement. He observed, there is no change in the income earning activities of the assessee in the years before he entered into agreement and after the termination of the agreement. Therefore, there is no revenue loss to the assessee as a result of non–fulfillment of the employment terms of the agreement. He further observed, the assessee had also paid tax on the compensation amount which demonstrates that the assessee himself was not convinced about the nature of receipt as capital receipt. He, therefore, disallowing assessee’s claim that the amount received is capital in nature treated it as income of the assessee under the head “Other Sources”. Being aggrieved of such addition to the income, the assessee preferred appeal before the learned Commissioner (Appeals).
The learned Commissioner (Appeals) considering the submissions of the assessee was of the view that as per the letter issued by the Bank, the amount received by the assessee is towards compensation for loss of existing business or competition. Thereafter, the learned Commissioner (Appeals) relying upon certain judicial precedent held that the amount received by the assessee being a capital receipt is not taxable.
7 Shri Deepak Premnarayen
Learned Departmental Representative strongly relying upon the order of the Assessing Officer submitted, the assessee has not established the fact that due to the condition imposed by the Bank, there was any financial loss to the assessee. He submitted, the assessee never was into investment banking business and source of income available to the assessee remained unchanged during the period under reference. Therefore, it cannot be said that the amount received by the assessee was in the nature of compensation for loss of business. He submitted, the assessee is a professional and he continued to earn income from his professional activities during the relevant period. He, therefore, submitted there is no reason to treat the amount received by the assessee from FirstRand Bank Ltd., South Africa, as capital receipt.
Learned Authorised Representative supporting the decision of the learned Commissioner (Appeals) submitted, the assessee is an experienced entrepreneur and business leader having vast experience in the field of real estate, financial services and hospitality. He submitted, considering assessee’s capabilities and leadership quality, the FirstRand Bank Ltd., South Africa, vide letter dated 2nd April 2007, has offered the assessee preferred partnership for its investment banking business to be set–up and established in India. He submitted, in the said letter, the bank had put certain conditions preventing the 8 Shri Deepak Premnarayen assessee from taking up any business / professional engagement in the field of investment banking and to make himself completely available for the investment banking business of the bank. He submitted, as ultimately the bank decided not to set–up its investment banking business after two years, it decided to compensate the assessee for the losses he might have suffered during the period of negotiation. He submitted, since the nature of payment received is compensation for financial loss suffered by the assessee, it is a capital receipt, hence, not taxable. For such proposition, he relied upon the following decision:–
i) CIT v/s Prabhul Dayal, [1971] 82 ITR 804 (SC); ii) CIT v/s Rao Raja Kalyansingh, [1974] 97 ITR 690 (Raj.); iii) Shyam Telelink Ltd. v/s ITO, [2006] 99 ITD 576 (Del.); and iv) Inter Gold (I) P. Ltd. v/s JCIT, [2010] 37 SOT 45 (T–Mum.).
We have considered the submissions of the parties and perused the material available on record in the light of the decision relied upon. The issue arising for consideration is whether the amount received by the assessee from FirstRand Bank Ltd., South Africa, is capital or revenue receipt. While the assessee has claimed it as capital receipt, hence, not taxable, the Department has treated it as revenue in nature.
9 Shri Deepak Premnarayen
Before deciding the issue, it is necessary to deal with certain factual aspects. It is the claim of the assessee that since FirstRand Bank Ltd., South Africa, shelved its investment banking project in India for which the assessee was to be considered as a preferred partner, the compensation was paid due to the financial loss the assessee suffered on account of non–implementation of project in India. In this context, it is necessary to refer to the letter dated 2nd April 2007 of FirstRand Bank Ltd., South Africa, the contents of which are as follows:–
“Sub: Preferred Partner for investment banking business in India. Ref: Various meetings and discussions over the last few months. Dear Sir, We are very excited with ft, opportunities offered by your country, We are keen to establish our investment banking bU1nèssln India. We value your in-depth understanding and knowledge of the India business environment and we are keen to partner you for our investment banking business in India. We would like you to work exclusively with us for this particular venture in Indian subcontinent We request you to kindly terminate a1 your business / professional engagements at the earliest in the filed of Investment banking so as to make yourself completely and exclusively available for this venture in Indian Subcontinent. We would request you not to take up or accept any fresh business/ professional commitments in the field of investment banking as we have committed to invite you as preferred partner in India and by this letter, we reiterate our commitment to you. As discussed and agreed, we will formalize our partnership for the investment banking business in India in the next few months, wherein you will be allocated appropriate equity stake in the India venture and we further confirm that you will be our exclusive partner for this venture in India.”
10 Shri Deepak Premnarayen
On a careful reading of the aforesaid letter, it is clear that FirstRand Bank Ltd., South Africa, in the said letter had made an offer to the assessee to become a preferred partner for its investment banking business to be set–up in India, with certain terms and conditions. The terms and conditions imposed are as under:–
i) Assessee should exclusively work with the investment banking business of the bank; ii) Assessee should terminate all his business / professional engagements in the field of investment banking; and iii) Assessee should not take up or accept any fresh business / professional commitment in the field of professional banking.
It is further evident from the contents of the letter that bank had not only stated of formalizing the partnership but also allocating appropriate equity stake in India venture. However, there is nothing on record to show whether the assessee had accepted aforesaid offer or whether the partnership agreement between the bank and the assessee was formalized subsequently. Moreover, the assessee needs to establish that he has fulfilled all the conditions imposed in the letter. There is no documentary evidence available on record to establish the aforesaid facts. Reference to letter dated 3rd March 2009 of FirstRand Bank Ltd., South Africa, to the assessee further reveals, though, the assessee was given an offer to become a preferred partner but ultimately the partnership was not formalized and after a gap of two
11 Shri Deepak Premnarayen years, the bank shelved its plan of setting–up its investment banking business in Indian sub–continent. To constitute a binding contract between the parties, there must be an offer by one of the parties and acceptance of such offer by the other. In the present case, though, it appears from the letter dated 2nd April 2007 and 3rd March 2009 of FirstRand Bank Ltd., South Africa, there was an offer to the assessee to become a preferred partner in the investment banking business of the Bank in Indian sub–continent, however, there is nothing on record to suggest that the assessee had accepted the offer made by the Bank. Though, the letter dated 2nd April 2007, speaks of formalization of partnership at a future point of time, nothing has been brought on record to demonstrate that there was formal partnership between the assessee and the bank on the terms and conditions stated in the letter under reference. Therefore, unless the assessee demonstrates with evidence that it accepted the offer of the bank to become a preferred partner and also acted upon the conditions imposed by the bank for becoming a preferred partner, the payment received by the assessee cannot be treated as compensation towards alleged financial loss suffered by the assessee for non–establishment of the investment banking business in Indian sub–continent. In the course of hearing, the learned Departmental Representative had submitted that the assessee neither in the past nor in the future had any connection with 12 Shri Deepak Premnarayen investment banking business. Therefore, it is all the more necessary for the assessee to demonstrate that after entering into agreement with FirstRand Bank Ltd., South Africa, the assessee had fulfilled the conditions imposed in the letter dated 2nd April 2007 by terminating business professional engagements in the field of investment banking and has not accepted any fresh business / professional commitment in the filed of investment banking, though, there might have been such offer from other entities. Unless, these facts are established on record with supporting evidence, it cannot be said that the assessee has suffered any financial loss on account of FirstRand Bank Ltd., South Africa, deciding against setting–up of an investment banking business in India. As it appears, learned Commissioner (Appeals) while accepting assessee’s claim has not at all examined these factual aspects and merely relying upon certain case laws cited before him has come to a conclusion that the payment received from FirstRand Bank Ltd., South Africa, is in the nature of compensation on account of financial loss suffered, hence, is a capital receipt. Ratio laid down in a decision is on the basis of certain facts. Unless, facts are established on record and they are similar to the facts involved in the decision relied upon the ratio laid down in the decision cannot be applied. Thus, on over all consideration of facts and material on record, we are of the considered opinion that the entire issue has to be examined afresh by 13 Shri Deepak Premnarayen the Assessing Officer. The assessee has to demonstrate that there was a contract between the assessee and the bank, either in the capacity of a preferred partner or otherwise and in pursuance to such contract, the assessee has complied to the conditions imposed by terminating all his business professional / engagements in the field of investment banking or not accepting any offer relating to business / professional commitment in the field of investment bank from any other entity. If the assessee is able to establish these facts certainly the amount received by the assessee from FirstRand Bank Ltd., South Africa, can be treated as compensation received for financial loss suffered due to cancellation / termination of the contract, thereby, rendering it as a capital receipt, hence, not taxable. In view of the aforesaid, we are inclined to set aside the impugned order of the learned Commissioner (Appeals). The Assessing Officer shall provide adequate opportunity of being heard to the assessee to establish his case.
In the result, appeal stands allowed for statistical purposes. Order pronounced in the open Court on 30.09.2016