TaxTMI 
TaxTMI 
2012 (8) TMI 769
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.... agreement with RVK Energy Ltd., for sale of gas for the power generation plant at Machilipatnam, Andhra Pradesh. The return of income for A.Y. 2000-01 was filed on 30.11.2000 showing income of Rs. 22,30,301. The assessment was made on 28.3.2003 u/s. 143(3) of the Act on total income of Rs. 49,47,520 by making disallowance of management fee claimed at Rs. 27,17,316. The management fee was paid to three associate companies viz., M/s. Kannumuri Holdings Pvt. Ltd., M/s. Maruti Finance Pvt. Ltd. and M/s. Upanishadik Management Consul Pvt. Ltd. The assessee did not prefer any appeal against the said disallowance and as such, the assessment order became final. The Assessing Officer initiated concealment penalty proceedings u/s. 271(1)(c) of the Act by issuing a show cause notice which was served on, 31.03.2003. A reply to the show-cause notice was filed on 22.09.2003. As per the Profit and Loss account for the year ended on 31.03.2000, sale of gas has been shown at Rs. 2,30,55,664 and interest income of Rs. 42,24,546 from the following: Particulars Amount (Rs.) Bank of Maharashtra 1,44,919 Upanishadik Management Consul Pvt. Ltd. 41,43,032 Maruti Finance Ltd. 41,43....
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....ement Consul Private Ltd., in which Sri K. Raghu Rama Krishna Raju, Sri K. Vijaya Kumar and Sri S. Kishore, directors of the above companies are respectively interested. These three companies have utilised the loan so received for investment in RVK Energy Ltd., as equity capital. The assessee company entered into three separate similar agreements with these three companies for the purpose of above said loan and also for the purpose of management of the portfolio investment in RVK Energy Ltd. 7. When the assessee company was asked to explain as to why the provisions of section 14A may not be invoked as the investment in shares which would yield dividend would be exempt u/s. 10(33) and, therefore, the expenditure relatable to earnings of exempted income would not be allowable, the assessee company took a different stand and filed another note on allowability of management fee as under: 1. The assessee company Andhra Fuels Pvt. Ltd., is carrying on the business of purchase and sale of gas. The company has got allotment of natural gas from GAIL. The company has in turn entered into an agreement with M/s. RVK Energy Pvt. Ltd., for sale of gas for their power generation plant at Ma....
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....e companies and incur the management fee. It is further submitted that the fee has been incurred by the assessee company wholly and exclusively for the purpose of business and has been incurred out of commercial expediency. If the company did not incur the management fee expenditure, then It would have not been able to exploit fully the gas license in its favour and also it would not have been in a position to fulfil its commitments for sale of gas to RVK Energy Private Limited. Therefore it is submitted that the management fee expenditure of Rs. 27,17,315 claimed by the assessee is allowable as an expenditure u/s. 37(1) of the Act. - 6. It is also submitted that the company has deducted TDS @ 5% on the management fee paid by it. Copies of confirmation letters have already been filed. 7. It is further submitted that during the period 02.07.1999 to 19.01.2000 (i.e., during the period the project was under construction and company has not started its business of sale of gas), the company had to carry out various activities like coordination with GAIL authorities for allotment of gas and also to fulfil various procedural and legal formalities connected therewith. The company has....
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....ah. The company got allotment of natural gas from ONGC to be' utilised for the purpose-of domestic consumption. The management of the company was taken over by Sri K. Raghu Rama Krishna Raju, director of M/s. Kannumurl Holdings Private Limited, Sri K.Vijaya Kumar, director of M/s. Maruti Finance Private Limited and Sri S. Kishore, director of M/s. Upanishadik Management Consul Private limited and their associates in the year 1999. Thereafter the company under the new management, applied for and got conversion of the gas allotment to be utilised for power generation. Subsequently, the company entered into an agreement with M/s. RVK Energy Private limited, which company had license for power generation. The promoters of the assessee company/three associates held shares to the extent .of 51% In M/s. RVK Energy Limited and .the balance was invested by M/s. Caterpillar Power Venture International Mautitius Limited. The assessee company borrowed Rs. 8.50 crore from M/s. GE Capital Services Limited on the basis of security offered by M/s. Caterpillar Financial Services Corporation USA. The money so borrowed was utilised by the assessee company initially for advancing loans to three com....
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.... as deduction. 11. The learned AR submitted that during the course of assessment proceedings, the assessee company through oversight in its note dated 27.07.2002 submitted that the management fee is paid for portfolio management of the investment in M/s. RVK Energy Private Limited. However, no such investment in shares of M/s. RVK Energy Private Limited was made by the assessee company and no management fee in pursuance of the agreement for portfolio management was also made. The assessee company clarified the correct nature of the management fee in subsequent note filed by it where it has explained the facts and circumstances, and the basis of which the management fee was paid by it. 12. The AR submitted that the assessee company had claimed expenditure which was bona fide and genuine. The assessee had furnished full particulars of the transaction and has also cooperated during the course of assessment proceedings. The assessee company had also substantiated its explanation with reference to documentary evidence and corroborative material on record. The disallowance made in the assessment is not based on any cogent evidence disproving the claim of expenditure or explanations....
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....any services for which they became entitled to management fee. On the other hand, the Assessing Officer has clearly established that these three companies did not have the requisite facilities or capabilities to provide any professional services enabling the assessee company to ensure timely and adequate supply of gas to M/s. RVK Energy Private limited. The Assessing Officer clearly established from the examination of assessment records of M/s Kannumuri Holdings Private Limited that the claim of management fee was a bogus claim and it was a colourable device to evade payment of tax and submitted that the ratio of the judgement of the Hon'ble Supreme Court in the case of McDowell & Co. vs. CIT reported in 154 ITR 148 (SC) is applicable. He submitted that if the management fee paid to three companies was a genuine one and it was allowable as deduction u/s. 37(1) of the Income tax-Act, the assessee company ought to have filed an appeal before the CIT(A) against the said disallowance of management fee. The fact that no appeal was filed against the assessment order clearly established that the expenditure was not a genuine one. The concealment of Income was clearly established in this c....
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....concealed income is undoubtedly what was laid down by this court in the case of Sir Shadilal Sugar and General Mills Limited (1987) 168 705 and that, therefore, the Revenue was required to prove the mens rea of a quasi - criminal offence. But it was because of the view taken in this and other judgements that the Explanation to section 271 was added. By reason of the addition of that Explanation, the view taken in this case can no longer be said to be applicable. The appeal is, therefore, dismissed with costs." 15. The learned DR also placed reliance on two decisions of Allahabad and Delhi benches of ITAT in the following cases: (1) ITO vs. R.K. Bros (2003) 87 ITD 649 (All.). (2) A.P. Sahgal vs. Asst. CIT (2004) 89 ITD 580 (Del) 16. The learned DR submitted that merely because the assessee admits the concealment and files a revised return, that would not absolve the assessee from the provisions of Section 271(1)(c). Penalty for concealment is leviable based on the original return wherein the assessee has deliberately claimed wrong deduction. 17. We have heard both the parties and perused the material on record. In the present case the assessee made a claim towards man....
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....ate particulars of such income; He may direct ......." 18. That above provision shows that the Assessing Officer is vested with a discretionary power to levy or not to levy any penalty in a deserving case. In the case of Hindustan Steel Ltd vs. State of Orissa (83 ITR 26) (SC), held that penalty should not be imposed merely because it is lawful to do so. The Assessing Officer has to exercise his discretion judiciously. If an assessee files the revised return though at a later stage or disclosed true income, penalty need not be levied. No doubt, merely offering additional income will not automatically protect the assessee from levy of penalty but in a given case 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 discretion vested in the officer should be used not ....
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....false penalty cannot be levied. 21. In the case of Mahavir Irrigation Pvt. Ltd. vs. CIT [314 ITR 150 (AT)] wherein it was held that since assessment proceedings and penalty proceedings were separate and distinct, the finding in the assessment proceedings could not be regarded as conclusive for the purposes of penalty proceedings and could not be taken as conclusive for the purpose of holding the assessee liable for concealment and imposing penalty under section 271(1)(c) of the Act. Since neither of the two events, i.e., signing of contract between the DTC and DMIL or placement of order by DTC on DMIL for the supply of buses had taken place during the year underconsideration, the assessee could reasonably claim that no fees had become payable to the assessee for the year under consideration and there was no accrual of income on account of such fees. The claim of the assessee was based on an interpretation given to the relevant clauses and having been accepted by the Assessing Officer while completing the assessment, the interpretation given by the assessee was a possible one. Moreover, all the relevant particulars relating to the said claim were duly furnished by the assessee al....
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....ustainable in law, will not amount to furnishing inaccurate particulars regarding income of the assessee. 23. In view of the above discussion, we are of the opinion that levy of penalty is not justified and we delete the same. 24. Now we take up the appeal in ITA No. 1228/Hyd/2005. The issue is with regard to deletion of addition towards noncompetition fee (NCF) of Rs. 3.25 lakhs. 25. Brief facts of the issue are that assessee-company paid a sum of Rs. 3.25 crores to M/s. Kannumuri Holdings Private Ltd. (KHPL) for not to compete with the assessee-company in setting up of new power projects in Andhra Pradesh for a period of 3 years commencing from 28.02.201. The said payment made in terms of agreement dated 28.12.2001 was claimed as revenue expenses and debited to the Profit and Loss A/c. The Assessing Officer, however, held that the expenditure claimed by the assessee is ofcapital nature without bringing any depreciable asset into existence. He, therefore, disallowed the expenses as capital expenses but did not allow the depreciation thereon. 26. The DR submitted that there is no business expediency to incur this expenditure. The non-competition fee matter arose at the ....
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....urred cannot be said to have been incurred actually for the purpose of business and allowed under section 37(1) of the Income Tax Act, 1961. In the course of hearing, a point arose with regard to nature of expenditure, if it is not revenue expenditure, would it constitute capital expenditure entitling the assessee for depreciation. However, non-competition fee cannot be identified as an intangible asset as laid out in Explanation 3(b) of section 32. It may also to be mentioned that the assessee company itself is not having any "ownership". which is prerequisite for allowing depreciation. Therefore, the expenditure claimed by the assessee is of capital nature without bringing any depreciable asset into existence. Hence. the claim of the assessee for deduction of Rs 3.25 crores is disallowed. 27. The DR relied on the following judgements: a. CIT vs. Motilal Hirabhai Spg. and Wvg. Co. Ltd., 113 ITR 173 (Guj.) b. Bharat Development (P) Ltd. vs. CIT, 133 ITR 470 (Delhi) c. CIT vs. Rockman Cycle Industries Pvt. Ltd., 331 ITR 401 (P&H). d. JK Traders Ltd. v. CIT, 271 ITR 69 (All). e. Ram Bahadur Thakur Ltd. v. CIT, 261 ITR 390 (Kerala) f. CIT vs. Gemini Cashew Sale....
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....r or an advantage of enduring nature. Such expenditure cannot be therefore held as capital expenditure. Since the payment was made wholly and exclusively for the purposes of the business, the same has to be allowed as revenue expenses in terms of provisions of Sec. 37(1) of the Act. 30. The learned AR placed reliance on the decision of Hon'ble Andhra Pradesh High Court in the case of CIT Vs. Bowrisankara Steam Ferry Company (87 ITR 650) where the money was paid to some prospective bidders at auction to prevent them from competition with assessee. It was held that from the context of business necessity or expediency, the amount was paid in order to enable the assessee to derive more profits by reducing the lease amounts payable to the Government for operating the ferry and that it was in the nature of revenue expenditure which was deductible from the assessee's total income." 31. The learned AR submitted that the Hon'ble AP High Court relied on the decision of Privy Counsel in the case of Commissioner of Taxes Vs. Nchanga Consolidated Copper Mines Limited (58 ITR 241) where the payment was made by the assessee company to another company to seize production for certain period s....
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....tacts with the suppliers, funding agencies and other business associates and also to stop him from creating any legal problems for the assessee company. Thus, the said payment was made in order to enable the assessee company to derive more profits in the business without any hindrance from the parting Director and his group companies. The 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. Since the payment was made wholly and exclusively for the purposes of the business, the same has to be allowed as revenue expenses in terms of provisions of Sec. 37(1) of the Act. 36. The Apex Court in the case of CIT vs. Coal Shipments Pvt. Ltd. (82 ITR 902)(SC) held as follows: "The case which has been set up on behalf of the Revenue is that, as the object of making the payments in question was to eliminate competition of a rival exporter, the benefit which ensured to the respondent was of an enduring nature and, as suc....
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....ord enduring to be meaningless. No cogent ground or valid reason has been given to us in support of the contention that, even though the benefit from the arrangement to the respondent may not be of a permanent or enduring nature, the payments made in pursuance of that arrangement would still be capital expenditure." 11. Dealing with the contention that eliminating competition over some length of time is important, the Supreme Court held as follows : "Although we agree that payment made to ward off competition in business to a rival dealer would constitute capital expenditure if the object of making that payment is to derive an advantage by eliminating the competition over some length of time, the same result would not follow if there is no certainty of the duration of the advantage and the same can be put to an end at any time. How long the period of contemplated advantage should be in order to constitute enduring benefit would depend upon the circumstances and the facts of each individual case." 12. It is quite clear from the above that to decide whether an expenditure of this nature is a capital expenditure or not would depend on the facts of the case. However, it is nec....
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....hargeable against revenue, the lump sum payment should equally be regarded as a business expense, but if the lump sum payment brings in a capital asset, then that puts the business on another footing altogether. 3. Whether for the purpose of the expenditure, any capital was withdrawn, or, in other words, whether the object of incurring the expenditure was to employ what was taken in as capital of the business. Again, it is to be seen whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. 16. In Madras Auto Service, the assessee had spent some amount to construct a new building after demolishing the old building in which the assessee was a lessee. The assessee had the benefit of the existing lease in respect of the new building at an agreed rent for a period of 39 years. The rent as stipulated in the lease was extremely low but it was found that the concessional rent was on account of the fact that the new building was constructed by the lessee at its own cost. The Supreme Court held that the advantage that the assessee derived by spending the money was that it got the lease of a new building at a low rent. From a bus....