2012 (8) TMI 769 - AT - Income Tax

Tribunal cancels penalty under Section 271(1)(c) and upholds non-competition fee as revenue expense.

The Tribunal allowed the assessee's appeal regarding the penalty under Section 271(1)(c) and deleted the penalty. It also dismissed the Revenue's appeal ... Penalty u/s 271(1)(c) - dis-allowance of management fee - business expediency - Held that:- Confirming the quantum addition or acceptance of the quantum addition itself cannot be a reason for levy of penalty. Assessment proceedings and penalty proceedings are two different proceedings and one is not substitute to the other. To levy penalty u/s. 271(1)(c), there should be conclusive evidence to prove that there is concealment of income or furnishing of inaccurate particulars of income. Where the assessee came forward with additional income though after deduction on account of that the assessee was not in a position to explain properly, and express remorse, in its conduct un-hesitantly, the Assessing Officer might have to exercised the discretion in favour of such assessee as otherwise the expression ‘may’ in section 271(1)(c) of the Act remains redundant. If it is to be understood that in a case of admitted concealment penalty is not automatic. The case before us is most befitting case to exercise such discretion, particularly there is divergence of opinion about the issue. Payment of Non-compete fees - revenue expenditure vs capital expenditure - Held that:- Payment was made to a rival company to ward off competition in business. However, by making this payment, the assessee has not derived any advantage of enduring nature to hold the expenses as capital in nature. The agreement was only for a limited period of 3 years. Said payment was made for the purpose of running the business and not for the purpose of acquiring the business. The expenditure incurred was not related to the acquisition of an asset or a right of permanent character or an advantage of enduring nature. Such expenditure cannot be, therefore, held as capital expenditure and has to be allowed as revenue expenses u/s 37 - Decided in favor of assessee Issues Involved:1. Levy of penalty under Section 271(1)(c) of the Income-tax Act, 1961.2. Deletion of addition towards non-competition fee (NCF).Issue-wise Detailed Analysis:1. Levy of Penalty under Section 271(1)(c) of the Income-tax Act, 1961:The assessee, a private limited company engaged in the purchase and sale of gas, was penalized Rs. 9,51,100 under Section 271(1)(c) for concealment of income. The penalty arose from the disallowance of a management fee of Rs. 27,17,316 paid to three associate companies. The assessee did not appeal against the disallowance, and the assessment order became final. The Assessing Officer initiated concealment penalty proceedings, concluding that the management fee was a colorable device to evade taxes, referencing the Supreme Court decision in McDowell & Co. Vs. CIT. The CIT(A) confirmed the penalty.The assessee argued that the management fee was paid for business purposes and out of commercial expediency, claiming it as a deduction under Section 37(1). The assessee provided explanations and documentary evidence, asserting that the fee was essential for earning income and managing gas allotment coordination. However, the Assessing Officer found no evidence of services rendered by the three companies and deemed the fee a bogus claim.The Tribunal noted that penalty proceedings are distinct from assessment proceedings and require conclusive evidence of concealment or furnishing inaccurate particulars. The Tribunal emphasized that the Assessing Officer must exercise discretion judiciously and consider the assessee's bona fide explanations. The Tribunal found that the assessee accepted the quantum addition to avoid litigation and expressed remorse, indicating no conclusive proof of concealment. Citing various judicial precedents, the Tribunal concluded that the levy of penalty was not justified and deleted the penalty.2. Deletion of Addition towards Non-Competition Fee (NCF):The assessee paid Rs. 3.25 crores to M/s. Kannumuri Holdings Private Ltd. (KHPL) as a non-competition fee to prevent competition in setting up new power projects in Andhra Pradesh for three years. The Assessing Officer disallowed the expense as capital in nature, without bringing any depreciable asset into existence, and did not allow depreciation.The assessee argued that the payment was made to ward off competition and was essential for running the business, not for acquiring an enduring advantage. The agreement was for a limited period, and the payment was made to enable the assessee to derive more profits without hindrance from the parting director. The assessee cited judicial precedents where similar payments were treated as revenue expenses.The Tribunal agreed with the assessee, noting that the payment did not result in acquiring a capital asset or an enduring advantage. The Tribunal referenced the Supreme Court's decision in CIT vs. Coal Shipments Pvt. Ltd., which held that payments to eliminate competition, if not for a fixed term, should be treated as revenue expenses. The Tribunal concluded that the non-competition fee was a revenue expense and upheld the CIT(A)'s decision to allow the deduction.Conclusion:The Tribunal allowed the assessee's appeal regarding the penalty under Section 271(1)(c) and deleted the penalty. It also dismissed the Revenue's appeal concerning the non-competition fee, confirming the CIT(A)'s decision to treat the fee as a revenue expense. The Tribunal's decision emphasized the need for conclusive evidence in penalty proceedings and recognized the business necessity of the non-competition payment.