TaxTMI 
TaxTMI 
2013 (5) TMI 605
X X X X Extracts X X X X
X X X X Extracts X X X X
....as revenue in nature thereby taxed the same under the head business income. On appeal, the Ld.CIT(A) upheld the order of the AO. The relevant findings of the Ld.CIT(A) is extracted hereunder: "6.I have carefully considered the above facts. It is evident that the business of the appellant was not hampered forever but for a very limited period of three years. The amount of Rs. 25 lakh prima facie appears to be in the nature of compensation to the appellant received in the course of carrying on business activity. There is no loss of capital structure at all. Business of the appellant is going on as usual as evident from the annual accounts of subsequent years which are placed on record. The AO is fully justified in observing that the whole exercise was a colorable device. He has rightly pointed out that it defies all business prudence of the appellant to transfer its business of merchant banking earning more than Rs. 7.50 cr for a negligible sum of Rs 1.25 cr. There is absolutely no justification stated by the appellant for entering into such a business arrangement. Moreover, there is no basis stated either before the AO or before the undersigned for arriving at the figure of Rs 25....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s relevant issues which clearly show that entire exercise was done for the purpose of reducing the tax liability. The business expediency and prudence for such part transfer of human resources and some other assets have not been clearly brought out. Thus, by giving different nomenclature to the above tow sums, the appellant cannot alter the real nature of the income which is apparently revenue in character. The addition made is, therefore, upheld". Aggrieved by the impugned order, the assessee has raised this ground in the appeal before us. 2.2 The relevant facts are that Arthur Andersen & Associates, a partnership firm wanted to invest as strategic investor in a company engaged in the business of merchant banking. The assessee M/s. Ind Global Financial Trust Ltd (Transferor) and Mr. R. Sankaran incorporated a wholly owned subsidiary in the name and style of M/s. Ind Global Corporate Finance Pvt Ltd (Transferee) on 11/10/2000 to induct Arthur Andersen & Associates as strategic investor in the company. Arthur Andersen & Associates (AA) purchased the shares of the Transferee company from the sellers (Transferor and Mr. Sankaran, Managing Director of the Transferor) and to compl....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed to be sham. 5) On the basis of the very Transfer of Business Agreement, Ind Global Finance P. Ltd. had claimed depreciation considering the amount of Rs 25 lakhs as technical know how, which has been rejected by hon'ble Tribunal in (2012) 19 ITR (Trib) 483 (Mum) holding that the payment of Rs.25 lakhs was for transfer of business and contracts as mentioned in paragraph 2.2 (Refer page 497 of decision). 6) The decisions relied on by the AO are not applicable to the facts of the appellant's case (Refer submissions before CIT (A) at pates 193 and 194 of paper book): a) In CIT v. Dr. R. L. Bhargawa (2001) 256 ITR 42 (Del), in addition to use of technology, the assessee therein was also required to render certain services. As there was no absolute parting of technical know how, it was held that receipt was a revenue receipt. b) In CIT v. Ralliwolf Ltd. 143 ITR 720 (Bom), the receipt of shares in consideration of drawings, designs and technical know-how supplied was held to be capital in nature. c) In CIT v. Ciba of India Ltd. 69 ITR 692 (SC) the reimbursement of expenses on research was held to be not allowable as a business expenditure as the assessee was not entitled....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rinivasaSetty's Case (supra), the same may be held to be not liable to tax. On the other hand, the Ld.DR has relied on the orders of the AO and the Ld.CIT(A) in support of the Revenue's case. 2.4 We have heard both the parties on this ground and perused the material on record. It is pertinent to mention that clause 2.2 of the Transfer of Business Agreement dated 07.12.2000 suggests that the assessee has received Rs.2.5 million (Rs.25 lacs) as consideration for transfer of the business. Clause 1.3 of the definition clause in the said agreement reads 'business means the Employees (as set out in Schedule 4) and certain know-how related to the merchant banking business of the Transferor but does not include the Excluded assets, Creditors and Liabilities'. Clause 1.8 states that 'Excluded assets means, the real Estate of the transferor located at 91/92, Bajaj Bhawan, Nariman Point, Mumbai-400 021 and any other tangible assets of the transferor'. A combined reading of the said relevant clauses indicates that the receipt of Rs.25 lakhs is for transfer of business and contracts. The same fact is strengthened by the decision of the Tribunal in ITA No.1258 & 1656/M/08 wherein on the ba....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... contained only facts of regulations and procedures which are otherwise available in the market in the form of books and manual contained nothing other than what is available to anyone dealing in the line of merchant banking. He has, therefore, not considered the manual as know-how. We do not see any infirmity in the conclusion drawn by the CIT(A). It has not been explained before us as to why assessee would pay for rules and regulations and procedures which are available in the market and, therefore, we have to conclude that the payment of Rs.25.00 lacs had been made for the transfer of business and contracts including clients and client relationship which can not be considered as know-how. The ld. AR has also argued that even if the payment was considered as made for acquisition of goodwill, depreciation was allowable on goodwill in view of the decision of the Tribunal in the case of Kotak Forex Brokerage Ltd. (supra). CIT(A) has not accepted the finding of the AO that payment was for goodwill nor any material has been produced before us to show that any part of the payment related to acquisition of goodwill. As we have held earlier, the payment was for transfer of business an....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ch defies all business prudence. It is relevant to point out that a transaction can be regarded as a sham or colourable when the document is not bona fide nor intended to be acted upon, but is only used as a cloak to conceal a different transaction or where it is intended to give to third parties the appearance of creating between the parties legal rights and obligations which are different from the actual legal rights and obligations which the parties intend to create. In the facts of the case, the Revenue has not shown as to how the assessee has resorted to a 'device', which is otherwise 'colourable'. Thus, we do not agree with the findings of the Ld.CIT(A) on this count. Thirdly, as to the observation of the Ld.CIT(A) that there is no basis for arriving at the figure of Rs.25 lacs and Rs. 1 Crore which appears to be completely arbitrary decision which again defies all and it is not understandable why the business was transferred for a negligible sum of Rs 25 lakh while the non- compete fee was worked out at Rs 1 cr, it may be pointed out that it is for the transferor and the transferee to fix the consideration for the subject matter of transfer. In facts and circumstances of the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....assessee also entered into a non-compete agreement whereby the assessee company was restricted from carrying on the merchant banking activities for a period of three years for which it received a sum of Rs. 1 crores towards non-compete fees. In the assessement framed, the AO treated the impugned receipt as revenue receipts and assessed the tax under the head business income. On confirming the same by the Ld.CIT(A), the assessee has raised this ground in the appeal before us. 3.2 Before us the Ld.AR of the assessee has advanced the arguments on the basis of the written submission filed before us and contended that the impugned non- compete fees is to be treated as capital receipt not liable for tax. The relevant portion of the written submission is reproduced hereunder: 1) Agreement is with an unknown and unrelated party has been acted upon by both sides. Hence, agreement cannot be considered to be sham. 2) On the basis of the very same Transfer of Business Agreement and for the same period of 3 years, the hon'ble Tribunal has in the case of the Chairman Mr. Sankaran held that the non-compete fee was not liable to tax (Refer pages 357 to 361). Hence, the agreements in the p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d main business or revenue earner i.e. merchant banking was discontinued. 8) After discontinuing the merchant banking activities, appellant company did not have any active source of income and its income consisted of income mainly from dividend from shares and mutual funds, profit on sale of shares, interest income and nominal consultancy charges (Refer chart on pate 362). Hence, there was a substantial fall in in profit earning of the appellant after entering into non-compete agreement. 9) Hon'ble Supreme Court has in the case of GufficChem P. Ltd. V. CIT 332 ITR 602 (SC) held that non compete fees received before 1.04.2003 was a capital receipt not liable to tax. 10) Hon'ble Special Bench has in the case of ACIT v. Dr. B. V. Raju (supra) held that prior to amendment to section 28 (va)(a) w.e.f. 1.4.2003, compensation received for not carrying on any activity in relation any business was also not liable to tax, being a capital receipt. 11) Following the above decisions, amount of Rs. 1 crore received by appellant towards non-compete fees is not liable to tax. 12) Without prejudice to the above, the AO having accepted that the amount in on transfer of merchant bankin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ble under the Act. It is also pertinent to mention that on the basis of the very same Transfer of Business Agreement and for the same period of 3 years, the Tribunal has in the case of the Chairman Mr. Sankaran in ITA Nos 4951 & 4952/m/2009 held that the non- compete fee was not liable to tax. The relevant findings of the ITAT are reproduced hereunder:- "We have heard the Ld.DR who placed reliance on the order of AO, perused the records and considered the matter carefully. The dispute is regarding taxability of amounts received by the assessee from the firm AA as a non compete fees. The non compete fees had been received for the restrictive covenant imposed on the assessee not the compete with AA. The assessee was not an existing employee of AA nor he was former employee of the AA. The assessee was Managing Director of IND Global Corporate Finance Pvt. Ltd. Which was a separate legal entity. The provisions of section 17(3) (i) are applicable only when the compensation is received from employer or former employer in connection with termination of employment or the modification of the terms and conditions relating thereto. In this case there is no employer employee relation betwee....
X X X X Extracts X X X X
X X X X Extracts X X X X
....clients 6,16,297/- 5. Ind Global Trusteeship Ltd. Expenses incurred on behalf of clients 1,12,691/- 6. Singhal Swaroop Ispat Ltd. Outstanding interest 5,08,960/- 7. Business India Publications Pvt. Ltd. Advisory Fees 2,85,000/- 8. Various employees Loans to staff 83,348/- Total 23,89,313/- However, in the assessment completed, the AO disallowed the claim as the assessee had not established that the debts under consideration were bad. On appeal the Ld.CIT(A) confirmed the order of the AO. Aggrieved by the impugned decision, the assessee has raised this ground in the appeal before us. 5.2 We have heard the rival submissions on this ground and perused the material on record. (i) As regards the the bad debt of Rs.2,50,000/- & Rs.2,73,850/- in relation to Kalyani Steel Ltd and Singhal Swaroop Ispat Ltd respectively, the assessee has given plant and machinery to the said parties on lease. On expiry of the lease term the assessee has sold the plant and machinery to the above parties for the said amount on 31.03.1999. Since the amount has become irrecoverable, the assessee has to written off the amount in th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ff has been written off since the same are irrecoverable in view of transfer of the merchant banking business. The said loans are not taken over by M/s. Arthur Anderson. All the employees had either been taken over or resigned. Since these expenses have been incurred in the normal course of business, in our view, the said expenses qualifies as a business loss under section 28 of the Act. In the above said line of discussions, ground no D is decided accordingly. 6. Ground No E is alternate ground to Ground No D which requires no adjudication in view of the disposal of Ground No D as aforementioned. 7. Ground No F relates to the disallowance on account of pre-paid expenses to the tune of Rs,5,52,877/-(Sic). 7.1 During the year under consideration, the assessee had debited membership & subscription account and credited prepaid expenses by Rs.5,52,877/- being prepaid payment for SEBI fees, insurance, repairs and maintenance etc. The AO disallowed the amount since the business was transferred. The AO also noted that there is no provision in the Act to debit prepaid expenses. Out of the said amount, Rs.1,66,667/- pertained to SEBI fees of current year and hence, the AO rectified....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e towards entrance fees of Madras Cricket Club and Rs.33,000/- towards membership fees of Belverdere Club. The AO held that the same was not for the purpose of assessee's business. Moreover, since the business was transferred, the expense could not be allowed. The Ld.CIT(A) upheld the order of AO. Aggrieved by the impugned decision, the assessee has raised this ground in the appeal before us. 8.2 Before us, the Ld.AR has stated that the membership acquired by the assessee is in the nature of corporate membership. The membership has been acquired prior to transfer of merchant banking business. Hence, the membership acquisition does not have any relation to the transfer of business. Hon'ble Delhi High Court in the case of Commissioner of Income Tax vs. Samtel Color Ltd. (2010) 326 ITR 425 has held that the expenditure on membership of clubs is allowable one. The Hon'ble Court has held that membership fees are not a capital expenditure and the same is for the purpose of business as well. Reliance has also been placed on the following decisions: a. Otis Elevator (Bombay High Court) 195 ITR 682 b. ACIT v. Jyoti Industries (ITA No. 1567/Mum/1998) c. DCIT v. LN Engineering Wor....
X X X X Extracts X X X X
X X X X Extracts X X X X
....opment Corporation Ltd. vs. CIT 225 ITR 792 in arriving at the above decision. There is no jurisdictional High Court judgment on this issue though the judgment in the case of Otis Elevators Co. (India) Ltd is in the contest of reimbursement of membership fees of the employees paid by the company. Even in the case of Hon'ble Delhi High Court judgment in the case of Samtel Color Ltd. 180 Taxman 82 (Del) the facts indicate that the assessee company nominated employees who would avail the benefit of corporate membership given to the assessee. In those circumstances the expenditure was allowed under section 37(1). Moreover neither the AO nor the Ld.CIT(A) has gone into the factual matrix of the case for disallowing the claim of the assessee. In view of that matter, we are of the opinion that the matter can be re- examined by the AO after obtaining the details and examining the justification in claiming the impugned expense as business expenditure. The matter is restored to the file of AO for considering accordingly. The ground is considered allowed for statistical purpose. 9. Ground No J relates to disallowance of an amount of Rs.61,984/- on account of depreciation on residential fla....