2016 (5) TMI 855 - AT - Income Tax

Assessee's Treatment Upheld: Capital Gains, Bad Debts Allowed, TDS Certificates Approved, Share Issue Expenses Disallowed

The Tribunal upheld the assessee's treatment of the Rs. 12.92 crores received from M/s Sunlife Assurance Company of Canada as Long-term Capital Gains, ... Premium amount receipt - Nature of receipt - revenue’s view is that the same is a business receipt chargeable under the head Income from business - assessee’s contention is that it is a capital receipt not taxable at all, even though it initially offered the same as goodwill chargeable under the head Capital Gains - Held that:- Joint Venture would give benefits to the new company due to the large scale presence of Birla Group in the Indian Markets, since the Birla group is also well versed with the nuances of the Indian Markets. Hence, in our view, the impugned premium amount of ₹ 12.92 crores is nothing but a payment given by M/s Sunlife in exploit the business expertise held by M/s Birla group, which is nothing but a payment towards “good will” only. We have taken this view on account of one more reasoning, i.e., in the case of joint venture agreements, normally the parties to the agreement share the responsibilities in proportion to their respective share. The responsibilities shared would depend upon the core expertise of each of the parties and the difference, if any, is usually compensated through the variation in the profit sharing ratio. Under this principle of business, a prudent businessman would not agree to give any amount to a novice on account of strategic relationship. In fact, the all joint venture agreements are various types of strategic relationship only and they are normally entered for carrying an activity jointly by using expertise of each of the parties. M/s Sunlife Canada is aware of the strengths of M/s Birla group and hence the impugned amount has been given by it as premium for establishing strategic relationship. The undisputed fact remains that M/s Sunlife Canada is a new entrant in the Indian markets and it would take considerable time for it to under the complexities of the Indian market. On the contrary, M/s Birla group is an established player with interests in various types of financial markets and other field. Further, it has got branches all over the India and hence it is specifically provided in the joint venture agreement that the business expertise in all the fields shall be contributed by the Birla group to the Joint venture. Hence, the Birla group was considered to have an edge over M/s Sunlife, Canada. The business expertise, experience or edge, in our view, is considered as good will. Accordingly, we are of the view that the impugned payment of ₹ 12.92 crores received by the assessee is in the nature of goodwill only and hence we uphold the decision rendered by Ld CIT(A) on this issue. - Decided in favour of assessee Disallowance of bad debts claimed - Held that:- AO as well as Ld CIT(A) took the view that this claim is not allowable as the assessee has not disclosed the same as income in any of the years. In the first round of proceeding, the ITAT has taken the view that the facts relating to this claim are identical with the claim relating to Mafatlal securities Ltd and accordingly allowed the claim. We notice that the assessee has given the advance to various parties for purchase of securities in the course of carrying on business of non-banking finance company. Accordingly, we are of the view that this claim is allowable as trading loss, if not as bad debts. Accordingly we set aside the order of Ld CIT(A) on this issue and direct the AO to allow the claim. Disallowance of claim relating to TDS certificates - Held that:- Non-allowance of TDS credit for want of TDS certificates can be claimed as normal business loss. Consistent with the view taken therein, we set aside the order of Ld CIT(A) on this issue and direct the AO to allow this claim also. Disallowance of share issue expenses claimed u/s 35D - Held that:- We notice that this disallowance was confirmed by the Tribunal relating to AY 1994-95 and also in AY 1995- 96 on the reasoning that the provisions of sec. 35D are not applicable to a finance company and further the same is capital in nature in view of the decision of Hon’ble Supreme Court rendered in the case of Brooke Bond India Ltd (1997 (2) TMI 11 - SUPREME Court ). Issues Involved:1. Taxability of Rs. 12.92 crores received by the assessee from M/s Sunlife Assurance Company of Canada.2. Disallowance of bad debts claimed by the assessee.3. Disallowance of claim relating to TDS certificates.4. Disallowance of share issue expenses claimed under Section 35D of the Income Tax Act.Detailed Analysis:1. Taxability of Rs. 12.92 Crores Received from M/s Sunlife Assurance Company of Canada:The primary issue in this appeal was the taxability of Rs. 12.92 crores received by the assessee from M/s Sunlife Assurance Company of Canada. The assessee initially treated this amount as a receipt towards 'Goodwill' and offered it for taxation under the head Long-term Capital Gain. However, the Assessing Officer (AO) assessed it as a business receipt under the head 'Income from Business.' The CIT(A) agreed with the assessee and directed the AO to assess it as Long-term Capital Gains. The revenue challenged this decision, and the assessee later contended that the receipt was a Capital receipt and not taxable under the Income Tax Act.The Tribunal noted that the assessee had entered into a Joint Venture Agreement with M/s Sunlife Assurance Company of Canada, which included a payment of CDN $7 million as 'Premium' for establishing a strategic relationship. The Tribunal held that the impugned amount was a payment towards goodwill, considering the business expertise provided by the assessee to the Joint Venture. The Tribunal upheld the CIT(A)'s decision, concluding that the Rs. 12.92 crores received by the assessee was in the nature of goodwill and assessable as Long-term Capital Gains.2. Disallowance of Bad Debts Claimed by the Assessee:The AO disallowed the assessee's claim of bad debts amounting to Rs. 22,43,625 (Investment in Government securities), Rs. 15,88,988 (Investment in Shares), and Rs. 25,00,000 (TDS receivable). The CIT(A) allowed the claim of Rs. 22,43,625 but confirmed the disallowance of Rs. 15,88,988 and Rs. 25,00,000. The revenue contested the allowance of Rs. 22.43 lakhs, which was subsequently recovered and offered as income in AY 2007-08. The Tribunal upheld the CIT(A)'s decision, allowing the claim as a normal business loss.For the disallowance of Rs. 15.88 lakhs, the Tribunal noted that the amounts were given towards the purchase of securities in the course of carrying on the business of a non-banking finance company. The Tribunal allowed the claim as a trading loss, setting aside the CIT(A)'s order on this issue.3. Disallowance of Claim Relating to TDS Certificates:The AO disallowed the assessee's claim of Rs. 25 lakhs related to TDS certificates, and the CIT(A) suggested seeking remedy under Section 264 of the Act. The assessee argued that the tax was deducted by clients from business receipts, and due to mismatch or other reasons, the TDS claim was not allowed. The Tribunal referred to similar cases where non-allowance of TDS credit was considered a normal business loss and directed the AO to allow this claim, setting aside the CIT(A)'s order.4. Disallowance of Share Issue Expenses Claimed Under Section 35D:The CIT(A) confirmed the disallowance of share issue expenses claimed under Section 35D, consistent with previous Tribunal decisions for AY 1994-95 and AY 1995-96. The Tribunal upheld the CIT(A)'s order, referencing the Supreme Court's decision in the case of Brooke Bond India Ltd, which held that such expenses are capital in nature and not applicable to a finance company.Conclusion:The Tribunal partly allowed the assessee's appeal and dismissed the revenue's appeal, providing a detailed analysis of each issue and upholding the CIT(A)'s decisions where justified. The order was pronounced in the Open Court on 17.5.2016.