Karnataka High Court
Tam Tam Pedda Guruva Reddy vs Joint Commissioner Of Income Tax ... on 8 September, 2006
Equivalent citations: [2007]291ITR44(KAR), [2007]291ITR44(KARN)
Bench: R. Gururajan, Jawad Rahim
JUDGMENT
1. Appellant is a contractor and handles numerous contracts for the Government and others. Some of these contracts were executed in out of the way places where banking facilities are poor. The first year of dispute is 1992-93. The appellant files his return of income for the assessment year 1992-93 in the status of an individual before the first respondent. First respondent passed an assessment order dtd 31-3-1995. Aggrieved by the same, appellant filed an appeal before the Appellate Commissioner, who in turn gave a partial relief. Thereafter the appellant approached the tribunal. The tribunal also gave a partial relief.
2. Appellant is aggrieved in the matter of addition of Rs. 2,87,000/- pertaining to the credit in the name of Sri Rajareddy. He is also aggrieved by the addition of Rs. l,51,869/-. He is further aggrieved by the addition under Section 40A-3 of the Act in terms of the proceedings in the case on hand.
3. Appellant filed return of income for the year 1994-95 and assessment order was passed on 31-1-1997 and an unsuccessful appeal was filed. Thereafter, the appellant moved the tribunal. The tribunal gave partial relief. Appellant is aggrieved by the taxability of Rs. 8,00,, 000/-towards a restrictive covenant. Appellant is also aggrieved by the disallowance of Rs. 1,00,000/-paid to Konkan Railway Corporation with which the appellant had a contract on account of penalty for exaggerated measurement.
4. Appellant was assessed for the assessment year 1995-96 in terms of an order dtd 25-3-1997. Aggrieved by the order, he filed an appeal. He was not successful. Thereafter he approached the tribunal. Tribunal passed an order. Appellant is aggrieved again on the issue of taxability of Rs. 8,00,000/- received towards restrictive covenant and also with regard to penalty levied in the case on hand.
5. The following questions were framed;
Assessment yer 1992-93
1. Whether the Income Tax Appellate Tribunal was right in confirming the addition of Rs. 2,87,000/- loan advanced by Rajareddy inspite of a clear affidavit from him and holding that the degree of proof required is much higher as the said Rajareddy is related to the appellant?
2. Whether the income tax appellate tribunal was right in upholding the disallownce o Rs. 1,51,869/- being withdrawals made by the appellant and whether such conclusion was perverse and unsupported on facts?
3. Whether the tribunal was right in upholding the disallowance under Section 40A(3) without noting the intention of the legislature; the amendment made to the Act from the assessment year 1996-97; the provisions of Rule 6DD(j) and the circulars of the CBDT; and the fact that the identity of the recipients had been established by the appellant and whether such conclusion was perverse?
Assessment year 1994-95 Whether the tribunal was right in not treating the amount of Rs. 8,00,000/- received by the appellant as compensation for a restrictive covenant as a capital receipt not subject to tax by ignoring the decisions of the Madras High Court in this regard?
Whether the income tax appellate tribunal was right in upholding the disallowance under Section 40A(3) without noting the intention of the legislature; the amendment made to the Act from the assessment year 1996-97; the provisions of Rule 6 DD(j) and the circulars of the CBDT and the fact that the identity of the recipients had been established by the appellant and whether such conclusion was perverse?
Assessment year 1995-96 Whether the tribunal was right in not treating the amount of Rs. 8,00,000/- received by the appellant as compensation for a restrictive covenant as a capital receipt not subject to tax by ignoring the decisions of the Madras High Court in this regard?
Whether the tribunal was right in confirming the disallowance of Ra. l,00,000/- paid on account of penalty for exaggerated measurement although the appellant had not infringed any law?
6. Dr. Krishna, learned Counsel took us through the material on record in the case on hand. He would say that addition of loan deduction is supported by an affidavit and that therefore the addition to this extent, confirmed by the tribunal requires our interference. He would further say that the finding of the tribunal with regard to the addition of Rs. l,51,869/- requires our consideration. In so far as disallowance under Section 40A(3) is concerned, he would invite our attention to the list of expenses and thereafter he would argue that the disallowance on the facts of this case is totally unwarranted. In so far as taxability of Rs. 8,00,000/- received towards restrictive covenant. He would contend that such restrictive covenant is permissible in law and is not taxable. He would further Invite our attention to disallowance under Section 40A3 of the Act to contend that despite material available on record, the authorities have committed a serious error in disallowing such item. He would also say that penalty so levied by the authority is excessive. He would refer to us the Board circular in the matter. Per contra, Sri Seshachala, learned Counsel would support the order.
7. After hearing, we have carefully perused the material on record.
8. For the assessment year 1992-93, we see from the order of the tribunal that a sum of Rs. 2,87,000/- was disallowed by the assessing authority. The tribunal has accepted this addition. Let us see as to whether the finding of the tribunal is acceptable or not on the facts of this case. The tribunal holds that Raja Reddy could not have saved or advanced such a. huge sum of Rs. 2,87,000/- to the assessee. The tribunal was of the view that merely proving the identity of the creditor does not automatically prove the source of loan. The tribunal also would hold that assessee and Rajareddy are relatives. In that view of the matter the tribunal has rejected the case of the assesse. We have seen from the affidavit filed by Sri Rajareddy that he has income from agriculture and from business and he had two fixed deposits which matured during the said period. From the affidavit it is clear to us that the source of income has been clearly spelt out. At this stage, we must also refer to Section 68 of the Income Tax Act. Material on record would show that this credit cannot be treated as un-explained credit in terms of the Act. Sri Seshachala, learned standing counsel would relay on 126 ITR 63 in support of his submission. We have carefully perused the said decision. In that case, no doubt the Calcutta High Court has chosen to say that in case of cash credit entry in the books of accounts of the assessee it is necessary for the assesses to prove not only the identity of the creditors but also the capacity of the creditors to advance money and the genuineness of the transactions.
9. In these circumstances, we are of the view that the finding of the authority that the said amount is unexplained income cannot be accepted. Therefore we deem it proper to answer the first question of law in 1992-1993 in favour of the assessee.
10. The next dispute between the parties is with regard to addition of a sum of Rs. 1,51,869/-in the case on hand. The tribunal has chosen to hold against the assessee. The assessing authority had treated withdrawal made from bank account towards drawing and expenses out of the known sources credited to bank account as an income. From the material record it is seen that the assessee has withdrawn the same from his bank account towards expenses. That cannot be treated as income as argued by Dr. Krishna, learned Counsel for the assessee. We are therefore of the view that disallowance in this regard also has to be answered in favour of the assessee.
11. The assessee is also aggrieved by the order with regard to disallowance of a sum of Rs.l7,51,515/- in terms of the order of the tribunal. Admitted facts would reveal that the assessee had made a number of payments in violation of Section 40-A(3) of the Act. The assessee was asked to explain as to why these payments should not be disallowed. The assessee has chosen to file a reply in this regard. The tribunal has chosen to say that the assessee has failed to satisfy the assessing officer as to the genuineness of the payment and the identity of the payee. Let us see as to whether the finding of the tribunal is correct or not. Annexure-F is the statement filed by the assessee. In the said statement, the assessee has chosen to provide the details of the cash payment to various persons. The assessee has also chosen to give the reason for cash payment in the case on hand- The assessee has stated that the oil company did not accept cheque form dealers. They deal with only cash sales. Assessee has also explained as to why cash payments have been made in each transaction. It is not as though no explanation is offered by the assessee. A reading of annexure-F in detail would show that some valid explanation is available in the case on hand.
12. Section 40-A(3) would read as under;
Where the assessee incurs any expenditure in respect of which payment is made, after such date (not being later than the 31st day of March 1969) as may be specified in this behalf by the Central Government by notification in the official gazette, in a sum exceeding (ten thousand) rupees otherwise than by a crossed cheque drawn on a bank or by a crossed bank drat (such expenditure shall not be allowed as a deduction).
13. We must also notice Rule 6DDJ which has some relevance in the matter of liability in scuh cases. The said rule reads as under;
(j) in any other case, where the assessee satisfies the assessing officer that the payment could not be made by a crossed cheque drawn on a bank or by a crossed bank draft--
(1) due to exceptional or unavoidable circumstances or (2) because payment in the manner aforesaid was not practicable, or would have caused genuine difficulty to the payee, having regard to the nature of the transaction ans the necessity for expeditious settlement thereof.
It provides for a satisfaction in terms of the Rule as it stood then. If there is some satisfaction, the authority ought to accept.
14. The Supreme Court has considered the rigor of Section 40-A(3) in the judgment reported in 1991 59 Tax Reports 11. The Supreme court in para 7 has ruled as under;
The terms of Section 40A(3) are not absolute. Consideration of business expediency and other relevant factors are not excluded. The genuine and bonafide transactions are not taken out of the sweep of the section. It is open to the assessee to furnish to the satisfaction of the assessing officer the circumstances under which the payment in the manner prescribed in Section 40A(3) was not practicable or would have caused genuine difficulty to the payee. It is also open to the assessee to identify the person who has received the cash payment. Rule 6DD provides that an assessee can be exempted from the requirement of payment by a crossed cheque or crossed bank draft in the circumstances specified under the rule. It will be clear from the provisions of Section 40A(3) and Rule 6DD that they are intended to regulate the business transactions and to prevent the use of unaccounted money or reduce the chances to use black money for business transactions.-- 1973(92) ITR 519
15. Kerala High Court in 2003 (261) ITR 76 has noticed that the assessee has started business only in the year 1991 and that the assesses has clearly stated that suppliers were not inclined to receive payment by cheque and the further fact that the assessing officer had observed that all the purchases were genuine and the two appellate authorities were justified in holding that the assessee had satisfied the provisions of Rule 6DD(j) of the Rules and in allowing the claim for deduction of expenditure.
16. Calcutta High Court in 2003 (263) ITR 145 has noticed the circular dtd 31-5-1977 and thereafter it has chosen to hold as under;
That the payments were made under unavoidable circumstances only to keep harmonious business relationship with the payee. The genuineness of the business relationship between the payee and the assessee in the instant case, had not been doubted by any authority, namely, the assessing officer, . the Commissioner(appeals) or the tribunal. The amount paid in cash was Rs. 4,83,000/- which was quite small comnared to the total amount involved in the entire transaction which was over Rs. 2 crores. The assessee came within the exceptions as provided in Rule 6DD(j). The payments could not be disallowed.
17. From these judgments what is clear to us is that there should be a satisfaction in the matter of transaction in terms of Rule 6DDJ as it stood then. To our mind, the details in terms of annexure-F would show that satisfactorily the assessee had placed the material. Therefore we deem it proper to set aside the finding with regard to disallowance in terms of the material on record and we answer the question No. 3 as well in favour of the assessee.
18. In so far as the assessment year 1994-95 is concerned/ the question of law which are referred to us refer to taxability of Rs. 8,00,000/- towards restrictive covenant in the case on hand.
19. In this regard we have to notice the agreement dtd 17-3-1993 entered into between Tarn Tarn Pedda Guruvareddy Constructions Pvt Ltd., and Tarn Tarn Pedda Guruva Reddy. A clause in the said agreement would show that w.e.f. 17-3-1993, Tarn Tam Pedda Guruva Reddy, was not to compete with Tarn Tam Pedda Guruvareddy Constructions Pvt Ltd., in the local limits of Turuvekere, Tumkur, Kunigal for a period of 5 years in consideration of this covenant Tam Tam Pedda Guruva Reddy was paid a sum of Rs. 8,00,000/- by way of compensation. The authorities have not accepted the case of the assessee. As we mentioned earlier, the matter reached the tribunal. Tribunal was of the view that the assessing officer was right in directing to tax Rs. 8,00,000/- as income of the assessee. We are also of the view that the finding of the tribunal has to be accepted in the case on hand. Material facts would show that this agreement has been entered into between Tam Tam Pedda Guruvareddy Constructions Pvt Ltd., and Tam Tam Pedda Guruva Reddy: Though restrictive covenant may not always be a negative factor, the facts of this would show that it is nothing but an income for the purpose of levy of tax. Details with regard to construction are not forthcoming in the agreement and in addition, it cannot be strictly a covenant agreement as understood in law. In fact Tarn Tarn Pedda Guruva Reddy, had created the Tarn. Tarn Pedda Guruvareddy Constructions Pvt Ltd., in terms of Clause (1) of the agreement. Therefore we are of the view that the authorities on facts are justified in rejecting the contention of the assessee on the material facts. Dr. Krishna, places before us the various judgments of the Supreme court and High Court to contend that such restrictive covenant cannot be considered as income but it has to be considered as a capital receipt. 2006 (283) ITR 432 is a judgment of the Calcutta High Court wherein it is ruled that the amount received for not engaging in competitive business is a capital receipt. Madras High court in 1961 (132) ITR 206 has chosen to say that compensation for agreeing to refrain from carrying on competitive business is a capital receipt is a capital receipt not liable to tax. 236 ITR 903 is a judgment of the Supreme Court in which the Supreme Court has ruled that the amount received for giving up first option of purchase or lease of hotel is a capital receipt. Law is fairly well settled that it would depend upon the facts of each case. A reading of the agreement in the case on hand, would show that it is not a compensation as under stood in terms of the material documents available on record. The document would show that the payment that has been made is nothing but an income and it is not capital receipt in terms of law. Therefore we have no hesitation in accepting the argument of the revenue in this regard. Section 285A also would not be of any assistance to the assessee. On facts we are satisfied that it has nothing but an income in the case on hand. In these circumstances, we deem it proper to answer the question in this regard in favour of the revenue.
20. The next question that arises for our consideration is with regard to disallowance of a sum of Rs. 8,07,204/-. Disallowance has been accepted right up to the level of the tribunal. The tribunal has chosen to accept the claim of the expenses in the case on hand. Annexure-M has been filed wherein the assesses has chosen to give various details with regard to cash payment in the case on hand. Those reasons have to be accepted in the light of the avocation of the assessee and in the light of non-challenging of the details in terms of Annexure-M. We have already given the reason for not accepting the allowance while considering the question No. 3 for the assessment year 1992-93. Those findings would cover this issue as well. Hence we deem it proper to accept the case of the assessee and answer the question of law in favour of the assessee in so far as disallowance of Rs. 8,07,204/- is concerned.
21. In so far as the assessment year 1995-96 is concerned, two questions arise for our consideration.
One is with regard to taxability of Rs. 8,00,000/- received towards restrictive covenant. The said question has been considered by us for the assessment year 1994-95 and we have answered the same in negative on the facts of this case. Those findings would covery this issue as well. The question with regard to Rs. 8,00,000/- for the year 1995-96 on the facts of this case is answered against the assessee.
The other question is with regard to penalty levied for exaggerated measurement. Let us see as to whether the assessee is entitled for removal of penalty as sought to be argued before us. According to the tribunal, the reason given by the assessing officer for disallowing the claim of the assessee is well founded. From the material on record we see that Konkan Railway Corporation has levied a penalty of a sum of Rs. 1,00,000/- for exaggerated measurement. Section 37(1) provides for allowing the expenses in computing the income chargeable under the head profits or gains of business or profession. The explanation states that for the purpose of removal of doubts, it is hereby declared that any expenditure incurred by the assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business . or profession and no deduction or allowance shall be made in respect of such expenditure. Argument before us is that penalty is not on account of any offence or it is not prohibited in law.
22. 222 ITR 772 is pressed into service by the assessee. We have carefully gone through the said judgment. In that case, the court noticed that a sum of Rs.4950/- was paid by the assessee to the Punjab Electricity Board. The same was explained. The assessing officer declined to allow deduction on the ground that it was in the nature of damages and penalty. Assesses went in appeal and succeeded. The tribunal agreed with the view. The Punjab High Court after noticing the facts of this case would show that it was incidental to business and it cannot be disallowed.
23. The decision of the Calcutta High court in (decision please) stands on a totally different circumstances. Ultimately, each case has to be decided on the facts of that case. In the case on hand, we see that all the authorities on facts have chosen to say that penalty was levied on account of exaggerated measurement and that cannot be considered to be an expenditure as sought to be argued. The present set of facts would show that such payment cannot be said to be a mere breach of contractual obligation as rightly ruled by the tribunal. We accept the finding of the tribunal. The question of law on this issue is held in negative and against the assessee.
24. In the result, the following order is passed;
The question of law for the year 1992-93 are all answered in favour of the assessee. In so far as questions of 1994-95 are concerned, the first question is answered in favour of the revenue and the second question is answered in favour of the assessee. In so far as the assessment year 1995-96 is concerned, we answer both the questions against the assessee and in favour of the revenue.