Gujarat High Court
Pr. Commissioner Of Income Tax-4 ... vs Stovec Industries ... on 4 May, 2017
Author: M.R. Shah
Bench: M.R. Shah, B.N. Karia
O/TAXAP/298/2017 ORDER
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
TAX APPEAL NO. 298 of 2017
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PR. COMMISSIONER OF INCOME TAX-4 AHMEDABAD.....Appellant(s)
Versus
STOVEC INDUSTRIES LTD.....Opponent(s)
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Appearance:
MR NITIN K MEHTA, ADVOCATE for the Appellant(s) No. 1
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CORAM:HONOURABLE MR.JUSTICE M.R. SHAH
and
HONOURABLE MR.JUSTICE B.N. KARIA
Date : 04/05/2017
ORAL ORDER
(PER : HONOURABLE MR.JUSTICE M.R. SHAH) 1.00. Feeling aggrieved and dissatisfied with the impugned judgement and order passed by the learned Income Tax Appellate Tribunal, Ahmedabad dated 24/8/2016 passed in ITA No.2812/MUM/2013 for A.Y. 2007-08, by which the learned tribunal has allowed the said appeal preferred by the assessee and has deleted the disallowance of Rs.2.5 Crores made by the A.O. in respect of payment to sole selling agent and has also treated the receipt of Rs.10 Lacs as receipt in lieu of sale of goodwill and chargeable the same as Long Term Capital Gain, the revenue has preferred the present Tax Appeal with the following proposed questions of law :-
"(i) Whether the Hon'ble ITAT erred in law and on facts in deleting the disallowance of Page 1 of 11 HC-NIC Page 1 of 11 Created On Wed Aug 16 21:26:35 IST 2017 O/TAXAP/298/2017 ORDER Rs.2.5 Crores in respect of payment to sole selling agent?
(ii) Whether the Hon'ble ITAT erred in law and on facts in treating receipt of Rs.10 Lacs as receipt in lieu of sale of goodwill and chargeable the same as Long Term Capital Gain?"
2.00. Facts leading to the present appeal in nutshell are as under :-
2.01. That the assessee filed return of income for A.Y. 2007-08. That the assessee was already having the sole selling agency with M/s. ATE Marketing (P) Ltd., which was for a period of five years. The assessee was also having graphic division. The graphic division was running in loss and therefore, the assessee sold the graphic division for a total consideration of Rs.15.25 Crores. Simultaneously, the assessee also prematurely terminated the sole selling agreement with M/s. ATE Marketing (P) Ltd. The assessee paid Rs.2.5 Crores to M/s. ATE Marketing (P) Ltd. towards compensation, paid to the said sole selling agent, which was required to be paid as terms of agreement for premature termination of the agency. Therefore, the assessee claimed deduction of Rs.2.5 Crores paid to M/s. ATE Marketing (P) Ltd.
as compensation for premature termination of the agency treating it as revenue expenditure. Out of the total sale consideration of Rs.15.25 Crores received by the revenue by selling graphic division, the assessee treated the receipt of Rs.10 Lacs in liue of sale of goodwill and claimed long term Page 2 of 11 HC-NIC Page 2 of 11 Created On Wed Aug 16 21:26:35 IST 2017 O/TAXAP/298/2017 ORDER capital gain on the said sum of Rs.10 Lacs.
2.02. That the A.O. did not accept the claim of the assessee of Rs.2.5 Crores as revenue expenditure by observing that the assessee had not shown valid reasons for terminating the agency prematurely. Therefore, the A.O. treated Rs.2.5 Crores paid to M/s. ATE Marketing (P) Ltd., paid as compensation and disallowed the claim of the assessee of Rs.2.5 Crores treating as capital expenditure. Similarly, the A.O. did not accept the claim of the assessee treating receipt of Rs.10 Lacs as receipt in lieu of sale of goodwill and chargeable the same as Long Term Capital Gain and has treated the same as other income.
2.03. Feeling aggrieved by the assessment order passed by the Assessing Officer, treating Rs.2.5 Crores in respect of payment to sole selling agent as capital expenditure and treating the receipt of Rs.10 Lacs as income from other source, the assessee preferred appeal before the learned CIT(A). That the learned CIT(A) dismissed the appeal and confirmed the order passed by the A.O. 2.04. Feeling aggrieved and dissatisfied with the order passed by the learned CIT(A) confirming the Assessment Order passed by the A.O., the assessee preferred appeal before the learned ITAT. That by the impugned judgement and order the learned ITAT has allowed the said appeal and has deleted the disallowance of Rs.2.5 Crores in respect of payment to sole selling agent and by treating the receipt of Rs.10 Lacs as receipt in lieu of sale of goodwill and chargeable the same as Long Term Capital Gain.
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2.05. Feeling aggrieved and dissatisfied with the
impugned judgement and order passed by the learned ITAT, the revenue has preferred the present appeal with the aforestated proposed questions of law.
3.00. We have heard Mr.Nitin Mehta, learned counsel appearing on behalf of the revenue at length.
3.01. Mr.Nitin Mehta, learned counsel appearing on behalf of the revenue has vehemently submitted that as such by giving cogent reasons and as the assessee failed to justify the reason for terminating agency with M/s. ATE Marketing (P) Ltd., the learned A.O. and the learned CIT(A) are justified in making disallowance of Rs.2.5 Crores in respect of payment to sole selling agent and treating the same as capital expenditure.
3.02. Mr.Nitin Mehta, learned counsel appearing on behalf of the revenue has further submitted that in fact, cogent reasons have been given by the learned CIT(A) while confirming the disallowance of Rs.2.5 Crores made by the A.O. in respect of payment to sole selling agent. It is submitted that the learned CIT(A) rightly appreciated the fact that in fact sole selling agency was with the sister-concern only and the assessee and sole selling agency were having common directors. It is submitted that therefore, the learned tribunal has materially erred in deleting disallowance of Rs.2.5 Crores in respect of payment to sole selling agent.
3.03. Mr.Nitin Mehta, learned counsel appearing on
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behalf of the revenue has further submitted that even the
learned tribunal has also materially erred in treating the
receipt of Rs.10 Lacs as receipt in lieu of sale of goodwill and chargeable the same as Long Term Capital Gain. It is submitted that the assessee sold the entire graphic division and therefore, the assessee could not have considered and/or treated part of sale consideration as receipt in lieu of sale of goodwill. It is submitted that therefore, the learned tribunal has materially erred in treating receipt of sale of goodwill and chargeable the same as Long Term Capital gain.
Making above submissions it is requested to admit / allow th the present appeal.
4.00. Heard Mr.Mehta, learned counsel appearing on behalf of the revenue at length.
4.00. At the outset, it is required to be noted that as such the assessee was already having a sole selling agency with M/s. ATE Marketing (P) Ltd., which was for a period of five years i.e. for the period from 28/11/2002 to 27/11/2007. The said sole selling agreement with M/s. ATE Marketing (P) Ltd. was for sale of its products namely IMD Products, Screen Division Products, Graphic Division Products. That as the graphic division was running in loss, the assessee sold the graphic division for sale consideration of Rs.15.24 Crores. The graphic division came to be sold on 30/6/2006.
4.01. It appears that the assessee was of the opinion that the selling agency with M/s. ATE Marketing (P) Ltd. is not viable and therefore, it prematurely terminated the sole selling agreement with M/s. ATE Marketing (P) Ltd. As the agreement Page 5 of 11 HC-NIC Page 5 of 11 Created On Wed Aug 16 21:26:35 IST 2017 O/TAXAP/298/2017 ORDER was terminated prematurely, as per the terms of the agreement, more particularly clause 11.4.3 of the agreement, the assessee was required to pay compensation to M/s. ATE Marketing (P) Ltd. and that as per the formula given in the agreement. Accordingly, the assessee paid Rs.2.5 Crores to M/s. ATE Marketing (P) Ltd. towards compensation for premature termination of the agency which was as per the terms of the sole selling agency agreement. Therefore, the assessee treated it as revenue expenditure. However, the A.O. treated the payment of Rs.2.5 Crores as capital expenditure mainly on the ground that the assessee has not explained as to why the agreement was terminated in its penultimate run and how it was commercially unviable to continue the agreement for a further brief period till its termination in the very near future. It is required to be noted that the learned A.O. has also observed that the agreement was to expire after a period of five months, which, in fact, was to expire after a period of 16 months. The learned tribunal did not agree with the view taken by the A.O. and treated the payment of Rs.2.5 Crores to M/s. ATE Marketing (P) Ltd. as revenue expenditure by observing in para 3.3 as under :-
"3.3. We have heard the rival submissions and perused the material before us. We find that the assessee had entered into sole selling agreement with the ATEMPL for sale of its products namely IMD products, Screen Division Products, Graphic Division Products, that the agreement was for a period of five years i.e. from 28/11/2002 to 27/11/2007, that as per the terms of the agreement the assessee was required to pay commission at the prescribed percentage of Page 6 of 11 HC-NIC Page 6 of 11 Created On Wed Aug 16 21:26:35 IST 2017 O/TAXAP/298/2017 ORDER sales, that clause 11.4.3 of the agreement dealt with the termination of the agreement by the assessee, that as per the agreement in case of termination of termination of agency ATEMPL was entitled to get compensation as per the formula given in the agreement, that assessee terminated the agreement in respect of the Graphic Division Products with effect from 30/6/2006, that it had closed the business of graphic division, that it has incurred a loss of Rs.98,2 lakhs from the graphic division, that it had sold the graphic division, that it was prohibited from carrying out dealing the same or similar products as that of graphic division, that it had paid compensation in pursuance of the clause 11.4.3 of the agreement, that the compensation was paid as per the method prescribed under section 294A(a)to(e) of the Companies Act. It is also a fact that sole selling agency agreement was approved by the Central Government, that ATEMPL had offered the compensation received from the assessee in its return of income and thus taxes have been paid for the amount in question, the AO was not factually correct to hold that the agreement was due to expire in five months from the termination, that the agreement in respect of the sale of graphic division products was to expire on 27.11.2007 i.e. 16 months and 27 days after the termination and not five months as worked out by the AO.
We find that the AO and FAA have questioned the necessity of the payment. In our opinion it is the Page 7 of 11 HC-NIC Page 7 of 11 Created On Wed Aug 16 21:26:35 IST 2017 O/TAXAP/298/2017 ORDER assessee who has to decide as to how much and as to when certain expenditure has to be incurred or not. The AO cannot sit in the proverbial "armchair" of the assessee to decide the incurring of expenditure. It is the prerogative of the assessee to run the business in a particular manner. If the expenditure has been incurred, the AO cannot question the justification of incurring of the expenditure unless and until the said expenditure is incurred for the purposes prohibited by the law. The incurring of expenditure is not in doubt. The assessee took a decision, after selling the graphic division, to compensate the sole selling agent as per the agreement It was a pure commercial decision and the AO had no business to question the intelligence of the assessee in that regard."
4.02. We are in complete agreement with the view taken by the learned tribunal. It is required to be noted that there was a valid reason for the assessee to terminate the sole selling agreement prematurely. The graphic division was sold w.e.f. 30/6/2006 as the graphic division was running in loss. That was the reason why the assessee thought it fit to terminate the sole selling agency and as the same was not viable and therefore, it discontinued the sole selling agency prematurely. As rightly observed by the learned tribunal, it was not for the A.O to consider the sufficiency of the reasons and/or to consider whether to continue or not the agency and whether the agency was viable or not. The learned tribunal has rightly observed that the A.O. cannot sit in the proverbial "armchair" of the assessee to decide the incurring of expenditure. As rightly observed by the learned tribunal, it Page 8 of 11 HC-NIC Page 8 of 11 Created On Wed Aug 16 21:26:35 IST 2017 O/TAXAP/298/2017 ORDER was the prerogative of the assessee to run the business in a particular manner. Under the circumstances, making above observations in para 3.3 when the learned tribunal has treated and considered the payment of Rs.2.5 Crores paid to sole selling agency - M/s. ATE Marketing (P) Ltd. as revenue expenditure, it cannot be said that the learned tribunal has committed any error.
We are in complete agreement with the view taken by the learned tribunal.
4.03. Now, so far as the impugned order passed by the learned tribunal treating the receipt of Rs.10 Lacs as receipt in lieu of sale of goodwill and chargeable the same as Long Term Capital Gain, is concerned, at the outset it is required to be noted that against the total sale consideration received by the assessee of Rs.15.24 Crores received by sale of graphic division, the learned A.O. claimed receipt of Rs.10 Lacs only as on transfer of goodwill and claimed Long Term Capital Gain on the same. The break-up of the consideration of Rs.15.24 Crores included the amount of Rs.10 Lacs under the head of goodwill, marketing division, know how and approvals etc. While treating the receipt of Rs.10 Lacs under the head of goodwill and treating it as Long Term Capital Gain, the learned tribunal observed in para 4.3 as under :-
"4.3. We have heard the rival submissions and perused the material before us. We find that the assessee had offered the receipt of Rs.10 Lakhs, on transfer of goodwill, under the head LTCG, that the AO assessed the same as Income from Other Sources, that the assessee was carrying out business of Page 9 of 11 HC-NIC Page 9 of 11 Created On Wed Aug 16 21:26:35 IST 2017 O/TAXAP/298/2017 ORDER manufacturing and marketing Pre-Sensitised Offset Plates (PS Plates), that on 30.06.2006 it disposed off assets of the PS Plates for a total consideration of Rs.15.24 Crores, that the breakup of the consideration included and amount of Rs.10 lakhs under the head Goodwill. Marketing Information, Know-How, and Approvals. Section 55(2)(a)(ii) of the Act deals with the cost of acquisition in respect of Goodwill of business or a right of manufacture, produce or process any article or thing right to carry on business. In our opinion, the assessee had rightly contended that assets under consideration were self-created / generated assets the cost of acquisition was to be taken is nil and the assessee had rightly offered the entire sale consideration as LTCG. It is also a fact that the assessee had not claimed any depreciation under section 32 of the Act with regard to goodwill. Considering these facts, we are of the opinion that the amount in question was not assessable under the head income from other sources. Therefore, reserving the order of the FAA, we allow the second ground, raised by the assessee."
4.04. We are in complete agreement with the view taken by the learned tribunal, more particularly when against the total sale consideration of Rs.15.24 Crores, a sum of only Rs.10 Lacs only was treated on sale under the head of goodwill and that sale consideration of Rs.15.24 Crores included the amount of Rs.10 Lacs under the head of goodwill.
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It is also required to be noted that in fact, the assessee had offered entire sale consideration as Long Term Capital Gain, however, out of the aforesaid, only Rs.10 Lacs was claimed on sale under the head of goodwill.
Considering the aforesaid facts and circumstances of the case, it cannot be said that the learned tribunal has committed any error in treating the receipt of Rs.10 Lacs on sale of goodwill and treating the same as Long Term Capital gain.
5.00. In view of the above and for the reasons stated above, no substantial question of law arise and the present appeal fails and the same deserves to be dismissed and is accordingly dismissed.
Sd/-
(M.R. SHAH, J.) Sd/-
(B.N. KARIA, J.) Rafik..
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