TaxTMI 
TaxTMI 
2014 (2) TMI 179
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....ed by the said order, the Revenue filed an appeal before the Income-tax Appellate Tribunal in I. T. A. No. 598/Mds/2004, which was also partly allowed. Challenging the said order, the Revenue has filed Tax Case Appeal No. 299 of 2008. At the time of admitting the above tax case appeal, the following substantial, questions of law were framed : "1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the amounts written off are eligible for deduction as business expenditure even though they are incurred in the capital field? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that advances made to sister concerns, which had already been sold in an earlier year could be treated as business loss/business expenditure in the current financial year ? 3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the amount of Rs. 5 crores received by the assessee in the course of a slump sale could be treated as 'noncompete fee' and not liable to tax as a capital receipt ? 4. Whether, on the facts and....
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.... as bad debts. The finding of the Assessing Officer was upheld by the Commissioner of Income-tax (Appeals). Learned standing counsel submitted that the Tribunal, glossing over the findings of the authorities below, erred in holding the amounts claimed as bad debts to be allowed as business expenditure. It was further submitted that the Tribunal failed to appreciate the amounts written off as bad debts had occurred in the capital field and under section 37 of the Income-tax Act expenditure could be allowed only if it was revenue expenditure. Learned counsel further submitted that the amounts which were advanced to the four subsidiary companies in question and claimed to have been written off as bad debts could not be allowed since under section 36(2) of the Income-tax Act, advances made in the previous year were not offered as income in the earlier years. Learned counsel submitted in the alternative that the amount could not be treated as bad debt as it was not a loss which occurred during the ordinary course of business of the assessee but was only a capital loss and, therefore, could not be written off from the business income arising in the assessment year. Learned counsel submit....
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....e the authorities below, reference was made to the details in the balance-sheets of other parties which clearly showed that the amounts were not recoverable at all. Learned counsel vehemently submitted that writing off if not considered as bad debt, in the alternative the same may be treated, as was rightly done so by the Tribunal, as business expenditure or business loss. Learned senior counsel submitted that the four companies in question, in respect of which the assessee claimed bad debts, are subsidiary companies of the assessee-company. On business exigency and expediency, the respondent-assessee offered guarantees on behalf of the said subsidiary companies. When the Spencer Pharmaceuticals Ltd., one of the subsidiary companies, failed to repay their debt to State Bank of Travancore, the guarantee given by the assessee was invoked by the said bank. When the efforts made by the assessee to recover the money from the Spencer Pharmaceuticals Ltd. were in vain, the assessee realised that there was no chance of recovery. Referring to the relevant details in the balance-sheet of the Spencer Pharmaceuticals Ltd., learned counsel submitted that there was no chance of recovery of the a....
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....ritten off as irrecoverable in the accounts of the assessee. However, in the present case, the Assessing Officer has not examined whether the debt has, in fact, been written off in accounts of the assessee. When a bad debt occurs, the bad debt account is debited and the customer's account is credited, thus, closing the account of the customer. In the case of companies, the provision is deducted from sundry debtors. As stated above, the Assessing Officer has not examined whether, in fact, the bad debt or part thereof is written, off in the accounts of the assessee. This exercise has not been undertaken by the Assessing Officer. Hence, the matter is remitted to the Assessing Officer for de novo consideration of the abovementioned aspect only and that too only to the extent of the write off." (b) In Director of Income-tax (International Taxation) v. Oman International Bank [2009] 313 ITR 128 (Bom), it was held as follows (page 135) : "All this would indicate that when the assessee treats the debt as a bad debt in his books the decision which has to be a business or commercial decision and not whimsical or fanciful. The....
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....diary companies of the respondent-assessee. In so far as the amount claimed as bad debts against M/s. Spencer Pharmaceuticals Ltd., from the materials on record, it was found that the respondent-assessee, which offered guarantee to the State Bank of Travancore, on behalf of the said subsidiary company, on invocation of the guarantee paid the bank the amount payable by the subsidiary company, believing that it could virtually recover anything from the said subsidiary company. The respondent-assessee, therefore, wrote off the amount recoverable from the Spencer Pharmaceuticals Ltd. as bad debts and claimed allowance for the same in their return of business income. In so far as M/s. Kelliq Private Ltd., a fully owned subsidiary company of the assessee is concerned, for business prospects of the subsidiary company, the assessee lent loan but later, due to the Government policy of taking over the business in question, the subsidiary company was closed and the amount let to the subsidiary company could not be recovered by the assessee, which amount was written off as bad debts and allowance was claimed by the respondent in their return of business income. Similar was the situation in res....
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....T. R. F. Ltd., cited supra, held that it was sufficient to record in the books as an irrevocable debt and not necessary for the assessee to establish that the debt had become irrevocable. Similarly in the case of Oman International Bank's case, cited supra, the Bombay High Court held that as long as the debt established and written off in the books the assessee is not required to establish that it was a bona fide and not based on commercial wisdom or expediency. We are in agreement with the above propositions. We find no illegality or infirmity in the findings arrived at by the Tribunal. The Tribunal was, therefore, perfectly right in setting aside the order of the authorities below and deleting the disallowance of Rs. 2,18,67,610 on account of bad debts. The Revenue's challenge to the order of the Tribunal is devoid of merits. For the reasons stated above, these substantial questions of law are answered in favour of the assessee and against the Revenue. Substantial questions of law Nos. 3 and 4 These questions relate to "non-compete fee" of a sum of Rs. 5 crore, claimed by the assessee in their return of income as receipt of non-compete fee, not liable to tax. The assessi....
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....assets. Secondly, he says, relying on the passage already cited above from Doughty's case [1927] AC 327 that the vendor's business was a business of purely buying and selling land. In our opinion, on the facts of this case, it cannot foe said that the vendors were carrying on the business of purely buying and selling land. In this case the vendors were engaged in buying land, developing it and then selling it. The agreement itself shows that the vendors had already incurred debts and liabilities for development expenses such as opening out roads, laying out drains and sanitary, arrangements, providing electricity and providing for a school. It seems to us that in the case of a concern carrying on the business of buying land, developing it and then selling it, it is easy to distinguish a realisation sale from an ordinary sale, and it is very difficult to attribute part of the slump price, to the cost of land sold in the realisation sale. The mere fact that in the schedule the price of land is stated does not lead to conclusion that part of the slump price is necessarily attributable to the land sold. There is no evidence that any attempt was made to evaluate the land on the date ....
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....e of Rs. 5 crores separately. Learned senior counsel submitted that the payment of non-compete fee was due to the fact that the assessee at the relevant time was strong in retail business. The non-compete agreement between the joint venture parties was independent of the non-compete agreement between the assessee and Food World Supermarket Ltd. Food World Supermarket Ltd. paid the non-compete fee since either of the partners could have left Food World any time and, therefore, the non-compete agreement between the companies was independent and was supported by separate non-compete fee. Learned senior counsel further submitted with emphasis that the amount received for non-compete fee was assessed by the assessing authority as goodwill but the appellate authority, the Commissioner of Income-tax (Appeals) had directed the same to be assessed as part of the capital receipt for the sale of the on-going business. The Revenue has not filed any appeal against this direction. Nor any cross-objection filed. Learned counsel submitted that this would mean that the Revenue has accepted that the receipt of this amount was not to be treated as goodwill and was to be taken as only capital recei....
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.... Technologies Pvt. Ltd. (purchaser) within the territory of Mumbai suburbs. The finding of the Tribunal that there is no evidence that the said agreement is sham is accepted by the Revenue. The Department's argument before the Tribunal and before us that after having transferred his clientele by the first agreement, dated November 25, 1994, the assessee had nothing left with him to make any further transfer under the second agreement and, therefore, the second agreement was only for transfer of the goodwill for which the assessee received Rs. 11 lakhs and which ought to be taxed is untenable and baseless. It is very clear that under the first agreement the assessee transferred his entire clientele (business) to M/s. Aasia Industrial Technologies Pvt. Ltd. (purchaser) for a consideration of Rs. 12,50,000 and under the second agreement undertook not to compete with the said company in future, in the suburbs for a consideration of Rs. 11 lakhs which amount admittedly cannot be made taxable under the heading 'Capital gains'." (b) In CIT v. Real Image P. Ltd. [2013] 359 ITR 606 (Mad) ; [2012] (4) CTC 303, it was held (page 611 of 359 ITR):  ....
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....on that the compensation received by the outgoing partners or the old partners in respect of their share in the partnership cannot be taxed as revenue receipts nor can it be said that there was any element of capital gains arising merely because of the valuation of his share on the retirement of the assessee from the firm resulted in an excess over the book value of the net assets of the firm referable to his share. The above two decisions are directly applicable to the facts of this case and we confirm the finding of the Tribunal and accordingly we answer the first five questions referred to above relating to the recipients in the affirmative and in favour of the assessee." (d) In CIT v. Ambadi Enterprises Ltd. [2004] 267 ITR 702 (Mad), it has been held as follows (page 704) : "One test for ascertaining as to whether what was received was a capital receipt or a revenue receipt is to find out whether the assessee had snapped his link with the profit-making apparatus, that was transferred. In this case, in pursuance of the termination agreement, the source of income is totally severed whereby the profit-earning appar....
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....002, itself indicates that during the relevant assessment year compensation received by the assessee under non-competition agreement was a capital receipt, not taxable under the 1961 Act. It became taxable only with effect from April 1, 2003. It is wellsettled that a liability cannot be created retrospectively. In the present case, compensation received under the non-competition agreement became taxable as a capital receipt and not as a revenue receipt by specific legislative mandate, vide section 28(va) and that too with effect from April 1, 2003. Hence, the said section 28(va) is amendatory and not clarificatory. Lastly, in CIT v. Rai Bahadur Jairam Valji reported in [1959] 35 ITR 148 (SC) it was held by this court that if a contract is entered into in the ordinary course of business, any compensation received for its termination (loss of agency) would be a revenue receipt. In the present case, both the Commissioner of Income-tax (Appeals) as well as the Tribunal, came to the conclusion that the agreement entered into by the assessee with Ranbaxy led to loss of source of business ; that payment was received under the negative covenant and therefore the receipt of Rs. 50 lakhs by ....