TaxTMI 
TaxTMI 
2015 (9) TMI 1186
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....nder Section 37 of the Income Tax Act, 1961? iii) Whether the Income Tax Appellate Tribunal has erred in concluding that the payments made to M/s.Pyramid Saimira Entertainment Ltd., under the Settlement Agreement dated 13.09.2008 is tantamount to a purchase of goodwill? iv) Whether the Income Tax Appellate Tribunal has erred in failing to follow the decisions of this Hon'ble Court in Amarjothi Pictures - CIT (69 ITR 75), CIT - Vs - Gobald Motor Services (100 ITR 240) and CIT - Vs - Associated Electrical Agencies (266 ITR 63)? v) Whether the Income Tax Appellate Tribunal has erred in questioning the genuineness of the payment of Rs. 1,50,00,000/- made by the appellant to M/s.Pyramid Saimira Entertainment Ltd., under the Settlement Agreement dated 13.09.2008, particularly when the same has been attested by the Assessing Officer? vi) Whether the Appellate Tribunal's findings are perverse and therefore liable to be set aside?" 2. The facts, in a nutshell, are as hereunder :- The issue relates to print distribution and the subsequent compensation paid due to the loss incurred by the theater owners in exhibiting the films "Kuselan" and "K....
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....lm 'Kathanayakudu'. It is specifically stated in the said agreement that both these films having not been successful at the box office and the distributors/exhibitors have been making demands for compensation, as a gesture of goodwill, the parties, viz., PSEL and the appellant had held negotiations and had mutually agreed that an amount of Rs. 1,50,00,000/- (Rupees One Crore Fifty Lakhs only) would be paid by the appellant to PSEL. It is also stated in the said agreement that the said amount was paid towards refund to compensate the distributors through PSEL for losses incurred by them from the theatrical release of the two films in Tamil Nadu, Andhra Pradesh and Karnataka. 6. In addition to the above, in the course of argument, it has been pointed out by the learned counsel for the Revenue and accepted by the learned counsel for the assessee that VM has also made certain payment to PSEL, vide agreement dated 8.9.08 in a sum of Rs. 75 Lakhs as a goodwill gesture citing commercial expediency. 7. During the course of scrutiny proceedings, the Assessing Officer called upon the assessee to explain how the amount paid to PSEL in terms of the Settlement Agreement dated 13.9....
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.... a sale has to be taken as revenue. In this case, the assessee even though has received Rs. 40 Crores based on the agreement dated 25.4.2008 but out of the same, Rs. 150 lakhs has been returned to PSEL as his share, by virtue of the subsequent unfolding of events and subsequent agreement dated 17-9-2008. Hence it is not correct to say that Rs. 150 lakhs is a payment of goodwill. As rightly argued by the AR there is no asset acquired to say that the asset has come along with goodwill. In fact, the payment made to PSEL of Rs. 150 lakhs is only a reduction in sale consideration, a payment made to protect the reputation of the assessee and to keep them in good stead in the business. As rightly urged by the AR, there is a substantial difference between "Goodwill" and "Goodwill gesture". The goodwill gesture is one which results in goodwill over a long period of time whereas a goodwill is a crystallised item, price paid in excess of assets over liabilities. Hence a payment made as a goodwill gesture cannot be equated with goodwill, the former is a revenue item and the latter is a capital item as per the accounting methods and the Income Tax Act. Since the payment made of Rs. 150 lakhs on....
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....this premise, the Tribunal allowed the appeal filed by the Revenue against which this appeal is filed by the appellant/assessee. 10. Mr.Suhrith Parthasarathy, learned counsel appearing for the appellant/assessee relied upon the agreement dated 13.9.08 to establish the fact that there was a clear statement in the agreement that those two films have flopped in the box office and PSEL was under compulsion from the theater owners to pay up certain amount and, therefore, based on the discussions between the assessee, the distributors, viz., KPPL and VM and the ultimate distributor, PSEL, the present agreement was signed. For better clarity, the relevant portion of the agreement is extracted hereunder:- "WHEREAS the party of the First Part represents that they have produced the Tamil feature film "Kuselan" with artists Rajinikanth, Pasupathy, Vadivelu, Meena, Nayantara, etc., and directed by P.Vasu and the Telugu film "Kathanayakudu" with artists Rajinikanth, Jagapathy Babu, Sunil, Meena, Nayantara and sold the distribution cum marketing rights of Tamil film "Kuselan" to M/s.Kavithalayaa Productions Pvt. Ltd. vide an agreement dated 16/02/08 and the Telugu film "Kathanayakudu....
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....ntended by the learned counsel for the assessee that the payment in this case was made pursuant to the Settlement Agreement with PSEL having regard to the commercial expediency and in furtherance of the appellant's business. Reliance was placed on the decision of this Court in CIT - Vs - Associated Electrical Agencies (266 ITR 63), wherein this Court held that payments made, having regard to commercial expediency need not necessarily have their origin in contractual obligations. If the assessee, carrying on business, feels that it is commercially expedient to incur certain expenditure directly or indirectly, it would be open to such an assessee to do so, notwithstanding the fact that a formal deed does not precede the incurring of such expenditure. It has also been held in the said decision that payments made in commercial exigency need not necessarily arise out of contractual obligations. 14. It is the further stand of the assessee that at no point of time the genuineness of the payment made to PSEL has been questioned by the Revenue. A finding in this regard is also found in the order of the Tribunal, which has recorded that the facts have not been disputed and the only di....
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....t agreement as that document has not been admitted in accordance with law. Nevertheless, we would like to discuss the issue on the legal plea raised by the learned counsel on either side in the following manner. 19. The primary plea raised by the learned counsel for the appellant is on the premise that due to failure of those two movies in the box office, there was great pressure from the theater owners and distributors, which fact is not dispute, the assessee, in order to sustain its goodwill in the market, as a goodwill gesture, had entered into the agreement. All that the authorities unanimously record that there was no legal obligation on the part of the appellant/assessee to pay this amount. On the contrary, it is the finding of the Tribunal that the payment is in the nature of goodwill gesture, but at the same time, the Tribunal also gives a finding that the assessee made payment in the form of compensation to stay afloat in the business. This, according to the learned counsel for the appellant, establish a case of business expediency and to buttress this argument he relied on the following decisions :- 1) AIR 1966 SC 1053 :: 1966 (60) ITR 52 (SC) 2) AIR 1967 SC 453 ....
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....s supplied) Accordingly, the Supreme Court went on to hold that expenses incurred wholly and exclusively for the improvement of the business and protection of the business is not in the nature of capital expenditure. 22. In Commissioner of Income Tax, U.P. - Vs - Nainital Bank Ltd. AIR 1967 SC 453 :: 1966 (62) ITR 638 (SC), the Supreme Court considered the status of the amount credited to the account of the borrower by the bank against loss of the pledged jewels and the amount paid by way of compensation. The Supreme Court, in the said case, held that the compensation given by the bank to the borrower is for the purpose of maintaining its goodwill and the same was laid out for the purpose of business within the meaning of Section 10 (2) (xv) of the Act. For better appreciation, the relevant portion is extracted hereinbelow :- "7. It was urged by the Commissioner that the bank was under no legal liability to pay to the constituents the value of the jewellery pledged with it. It was said that the bank was, as a pledgee, a bailee of the jewellery and was in law required to take as much care of the pledged jewellery as a person of ordinary prudence would take under simil....
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....oks of account cannot be regarded as forbearance to enforce the claim of the bank to recover the loans advanced. The settlement consisted of two constituent elements--paying by the bank of the value of the jewellery pledged with it against receipt from the constituent the amount which was recoverable by the bank. The first element of the transaction would appropriately be deemed expenditure and such expenditure having been laid out for protecting and furthering the business of the bank was properly admissible under section 10(2)(xv) of the Income-tax Act, 1922." 23. In Commissioner of Income Tax, Delhi - Vs - Delhi Safe Deposit Company Ltd. (AIR 1982 SC 757 :: 1982 (133) ITR 756 (SC), dealing with the expenditure incurred for the purpose of preserving the name of the firm, the Supreme Court held as under :- "..... In British Insulated and Helsby Cables Ltd. v. Atherton [1926] AC 205 ; [1925] 10 TC 155, 193 (HL), Lord Cave observed : "It was made clear in the above cited cases of Usher's Wiltshire Brewery v. Bruce [1915] AC 433 (HL) and Smith v. Incorporate d Council of Law Reporting for England and Wales [1914] 3 KB 674 (KB), that a sum of money expended, n....
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....enditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business." 9. In the instant case, the assessee incurred the expenditure in question to avoid any adverse effect on its reputation, to protect the managing agency which was an income earning apparatus and for retaining it with the reconstituted firm in which the interest of the assessee was the same as before. It was likely that but for the expenditure, the fair name of the assessee would have been tarnished or rendered suspicious and the managing agency would have been terminated. The expenditure incurred on the preservation of a profit earning asset of a business has always been held to be a deductible expenditure by courts. In the circumstances, it is difficult to hold that the expenditure incurred by the assessee was either gratuitous or one incurred outside the trading activities of the assessee. The expenditure was, therefore, rightly held to be deductible under s. 37. We, therefore, reject the contention of the revenue that the amount in question could not be claimed as a deduction under s. 37 of the Act." 24. In Commissioner ....
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....marily that of acting as agents for the sale of the products manufactured by the company, and by agreeing to share any sum of the expenditure which was necessary for the company to incur for promoting the products manufactured by it and marketed by the assessees they were in effect advancing the cause of their own business. It also accepted the assessees' claim that the expenditure incurred was commercially expedient for the assessees. It also accepted the assessees' case that the expenditure in fact had been incurred as necessary entries had been made in the books of account. 11. The Tribunal also took note of the fact that these amounts had been shown in the books of account of the company and that there had been no disallowance of expenditure by the Assessing Officer. The Tribunal concluded with the finding that the expenses as claimed by the assessees were allowable as they were incurred indirectly to facilitate the carrying on of the business or to preserve their existing source of income with a view to safeguarding the business and also increasing their profits in future. * * * * * * * * * 15. The reasons given by the Tribunal, for taking th....
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.... to consider several earlier decisions of the Supreme Court, particularly, Madhav Prasad Jatia - Vs - CIT (1979 (118) ITR 200 (SC), CIT - Vs - Malayalam Plantations Ltd. (1964 (53) ITR 140 (SC)), CIT - Vs - Birla Cotton Spinning & Weaving Mills Ltd. (1971 (82) ITR 166 (SC)). The terms "commercial expediency" and "for the purpose of business" were considered in-depth and the Supreme Court came to hold that if the assessee was able to prove that there was a case of commercial expediency, it did not matter whether the expenditure has been incurred for any legal obligation or contractual obligation. If there is an element of commercial expediency established in such a claim, assessee is entitled to claim such a deduction. In the said decision, reliance was also placed on the decision of the House of Lords in Atherton (H.M. Inspector of Taxes) - Vs - British Insulated & Helsby Cables Ltd. (1925 (10) TC 155 (HL)) wherein the House of Lords pointed out that even voluntary payment on the ground of commercial expediency and in order to indirectly facilitate doing of business could be considered as a claim for deduction. That principle has been approved by the Supreme Court in the case of Ea....
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.... is a subsidiary of the assessee) as a measure of commercial expediency, and if it was, it should have been allowed. 26. The expression "commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency. 27. No doubt, as held in Madhav Prasad Jatia v. CIT [1979] 118 ITR 200 (SC), if the borrowed amount was donated for some sentimental or personal reasons and not on the ground of commercial expediency, the interest thereon could not have been allowed under section 36(1)(iii) of the Act. In Madhav Prasad' s case [1979] 118 ITR 200 (SC), the borrowed amount was donated to a college with a view to commemorate the memory of the assessee' s deceased husband after whom the college was to be named. It was held by this court that the interest on the borrowed fund in such a case could not be allowed, as it could not be said that it was for commercial expediency. 28. Thus, the ratio of Madhav Prasad Jatia&#....
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.... accepted the contention of the Revenue had there been little clarity in the order of the Tribunal. But we are afraid that the reasoning given by the Tribunal at paras 7 and 8 of its order appears to be mutually contradictory. For better clarity, the relevant paragraphs are quoted hereinbelow:- "7. As regard the nature of payment is concerned, the assessee has tried to explain that the payment is in the nature of goodwill gesture and not goodwill. The assessee has tried to distinguish between goodwill and goodwill gesture by relying on certain decisions. As per the contentions of the assessee, since the payment is in the form of goodwill gesture, it is revenue in nature. In our considered opinion the assessee made the said payments to protect its goodwill in the market. The assessee has to operate and do business in the market in future as well, the assessee had to maintain its goodwill. The assessee has not been able to show from the agreements dated February 16, 2008 or supplementary agreement dated July 28, 2008 that the said payment is made in accordance with the covenants of agreement. A perusal of records, as well as the assessee's own admission make it absolutel....