Income Tax Appellate Tribunal - Chennai
Asianet Communications (P.) Ltd. vs Dy Cit, Media Circle-I on 3 January, 2005
Equivalent citations: [2006]7SOT496(CHENNAI)
ORDER
N. Vijayakumaran, J.M. This appeal by the assessee is directed against the order of the Commissioner of Income-tax Appeals)-VI, Chennai, dated 27-1-2004. It relates to the assessment year 2000-01.
2. The assessee-company claimed Rs. 10,50,00,000 as deduction towards payment of non-compete compensation, The assessee-company has made two agreements on the same day. The details are as under:
Date of Agreement Name of Recipients Amount paid (1) 3-5-1999 (1) Mr. S. Sasikumar Rs. 6,00,00,000 (2) Smt. Radhika Menon (2) 3-5-1999 (1) Mr. Sasikumar (2) Mrs. Radhika Menon Rs. 4,50,00,000 (3) Mr. P. Bhaskaran Both the authorities rejected the claims of the assessee under section 37(1) of the Income Tax Act. Aggrieved on this the assessee is in appeal and this issue is the first issue agitated before us.
3. We have heard the learned counsel for the assessee and the learned Commissioner of Income-tax - departmental Representative Mr. J. Vinay Kumar for the department. We have carefully perused the materials and the precedents relied on. There is no disputes about facts.
4. The expenditure fall on capital field is not allowable under section 37. The expenditure incurred for the purpose of business which is neither capital nor personal are allowable. Now, we have to consider whether this payment made by the assessee is allowable or not. Undoubtedly it was laid out and expended for the purpose of business. That alone is not decisive. It should be a revenue expenditure for the purpose of allowance under section 37(i). The assessee present before us paid this huge sum to ward off the competition in this business by Mr. Sasi Kumar. The restrictive covenant was for the period of five years. Whether this period of five definite years gives ending benefit to the assessee has also to be seen. The decision of the Hon'ble Supreme Court in the case of CIT v. Coal Shipments (P.) Ltd. (1971) 82 ITR 902 (SC) Their Lordships observed:
"Payment made to ward off competition in business to a rival would constitute capital expenditure if the object of making that payment is to derive an advantage by eliminating the competition over some length of time; the same result would not follow if there is no certainty of the duration of the advantage and the same can be put to an end at any time. How long the period of contemplated advantage should be, in order to constitute enduring benefit, would depend on the circumstances and the facts of each individual case.
Although an enduring benefit need not be of an everlasting character it should not be so transitory and ephemeral that it can be terminated at any time at the volition of any of the parties."
5. The Hon'ble Apex Court in the case of Devidas Vithaldas & Co. v. CIT (1972) 84 ITR 277 (SC) observed:
"Payments to ward off competition would constitute capital expenditure provided the object is to derive an advantage by eliminating the competition over some length of time but such a result would not follow if there is no certainty of duration for such an advantage and the same could be put an end to at any time. Thus, what the extent of durability of permanence should be depends on the facts of each case."
6. The Hon'ble Jurisdictional Madras High Court in Chelpark Co. Ltd. v. CIT (1991) 191 ITR 249 (Mad) Their Lordships held (Head note) "that though under the agreement, the benefit of the restrictive Covenant was for a period of five years, from the terms of the dissolution deed as well as from the facts stated in the Tribunal's order that the Partnership which was a potential competitor to the assessee had vanished and that the ex-managing director had also left India, it was clear that the assessee paid the amount to the partnership in order to ward off damaging competition from a Potential Competitor, resulting in the acquisition by the assessee of a right as well as protection to carry on its business activities as a whole for so long as the assessee carried in such business. Consequently, the payment by the assessee was in the nature of a capital expenditure and not revenue expenditure".
7. The facts stood before us are admitted and there is no serious arguments between the rival parties as to the available facts. The assessee's contention was that the payment never gives or gave enduring benefit and it is in the revenue field. To support learned counsel relied on the decision of the Hon'ble Supreme Court of India in the case of CIT v. Coal Shipments (P.) Ltd. (1971) 82 ITR 902 (SC) and the decision of Hon'ble Madras High court in the case of CIT v. G.D. Naidu (1987) 165 ITR 63 (Mad) and the decision of Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. v. CIT (1980) 124 ITR 1 (SC).
8. On careful perusal of the decisions, we are unable to accept the contention of the learned counsel for the assessee. The decision of the Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. (supra) the decision was rendered under a given circumstances whether the expenditure would fall in the side of revenue or in the capital field.
The case of G.D. Naidu (supra) also does not support the case of the assessee. In this, there were two payments and the Hon'ble High Court found that the payment of one given to ward off competition is not in Capital field as there is no enduring benefit. The decision of the Hon'ble Supreme Court in the case of CIT v. Coal Shipments (P) Ltd.(Supra).
9. In fact the decision of the Hon'ble Madras High Court in the case of Chelpark Co. Ltd. (supra) discussed the all case laws and decided the same in favour of the revenue. In the case of Coal Shipments (P.) Ltd. (supra) Hon'ble Supreme Court held that when there is uncertainty of the duration of the advantage and the same can be put to end at any time the elastic word of 'enduring benefit' would depend on the circumstances and the facts of each Individual case. Hence, the reliance of the counsel to support the claim of the assessee that its claim would fall under revenue field is not supporting or convincing to us. Considering the contention of the revenue found to us convincing. The payment admittedly was incurred to ward off the competition. It was for a period of definite five years. By the two covenants dated 3-5-1999 Mr. Sasikumar and brothers were restrained. It runs as follows :-
1. In pursuance of and in consideration of the ACL Shares Purchase Agreement and an additional amount of Rs. 4,50,00,000 (Rupees Four crores fifty lakhs only) payable by ACL to Mr. Sari Kumar Group of which Rs. 4,50,00,000 (Rupees Four crores Fifty lakhs only) is paid along with signing of the agreement, Mr. Sasi Kumar Group hereby undertakes and covenant with the ACL Group and with the company for the benefit of the Company jointly and severally that Mr. Sasi Kumar Group for a period of 5 (five) years from the date hereof shall not within the State of Kerala:
(i) either alone or jointly with or as manager/ agent/ consultant or employee or otherwise directly or indirectly by themselves or through any of their relatives or associates and/or group companies or firms do any business of, and/or provide any service, assistance or support of any nature whatsoever related to any business which may directly or indirectly compete with the said Business, either to any competing party or any other person or entity,
(ii) share, sell or use any information or knowledge in their possession regarding the business of the Company its customers, its subagents, its business characteristics, trends, history, prospect list and related and incidental information of any manner whether directly or indirectly, to or with any person or entity, in any manner detrimental to the Company, without the specific prior written permission of the person authorised in writing to represent the ACL Group who shall in his/her discretion be entitled to refuse,
(iii) directly or indirectly in any manner entice the employees of the Company above and inclusive of the rank of officer for the benefit of any other Company, firm or concern is a business competing with that of the Company,
(iv) directly or indirectly in any manner apply for or compete in obtaining right of way on the electric poles of the Kerala State Electricity Board (KSEB)."
The amount of Rs. 4,50,00,000 and Rs. 6,00,00,000 was also paid by the assessee admittedly,
10. The restrictive covenant was thus for a period of five definite years. The payment also made by the assessee to ward off the Competition for a definite period of five years. Which accordingly to the revenue gave enduring benefit to the assessee. Therefore, the expenditure clearly falls in Capital field is the vehement argument of the learned departmental Representative's Mr. J. Vinay Kumar Commissioner departmental Representative's reliance of the number of decisions supports the order of the learned Commissioner (Appeals). We are of the view that the assessee who is saddled with the duty to establish that the expended amount falls in the revenue field. Admittedly the payment was for the purpose of business of the assessee. The payment was expended to ward off the Competition in the field of assessee's business. Admittedly this restriction to compete or in other words the non-compete fee was paid by the assessee to Mr. Sasikumar Group to retrain them from the competitive business for the definite period of five years. In our view, the contention of the learned Commissioner Departmental Representative have to be accepted. The decisions relied on by the learned Departmental Representative clearly supports the stand of the revenue's authorities. We are also of the view that the non-compete fee payment made by the assessee to Mr. Sasikumar group gave enduring benefit to the assessee in its business. The decision of the Hon'ble Jurisdictional High Court in the case of Chelpark & Co. comes to the help of revenue. The decision of the Hon'ble Madhya Pradesh High Court in the case of Grover Soap (P.) Ltd. v. CIT (1996) 221 ITR 299 (MP) also reinforces the claim. While deciding the same the Hon'ble Madras High Court considered all the case laws which the assessee now pressed before us and finally the Hon'ble Jurisdictional High Court held that under the circumstances of the facts the expenditure falls on capital field. The Hon'ble Madhya Pradesh High Court also took the same view. In our view, the facts which the learned representative of the parties pleaded and put forth tends us to take the firm view that the payment of non-compete fee falls within the capital field which is not an allowable expenditure. The order of the authorities are well supported by the cantena of decisions of Hon'ble Supreme Court and the Hon'ble High Courts. We therefore, confirm the order of the authorities. The assessee's claim therefore, fails.
11. Now, we will go to the other issue which is on the disallowance of the claim of the credit of the tax deducted at source relating to the transponder charges. The ground urged by the assessee is quite elaborate. The assessing officer while making the disallowance which runs Rs. 15,68,69,040. The assessee claimed this as deduction under section 40(a)(i) of the Income Tax Act. This amount was paid to Mr. Menon U.K. Limited in respect of transponder charges provided in the accounts of 1994-95. Tax has now been deducted before remitting the payments to Mr. Menon U.K. Ltd. The assessing officer found that the assessee stands is legally and factually incorrect. In the assessment year 1995-96, the assessee-company won the case that the payment to Mr. Menon U.K. Ltd. as transponder hire charges are not hit by the purview of the provisions of section 40(a)(i). Under the circumstances, by quoting the Commissioner (Appeals)'s order dated 29-7-2002 referred by the assessing officer, the assessing officer was of the opinion that the assessee's claim of TDS payments of this year is not permissible and therefore, he disallowed it.
12. On appeal, on this issue before the Commissioner (Appeals), the assessee has not proved the case as observed by the learned Commissioner (Appeals). Before us also the learned counsel for the assessee could not controvert the finding of the learned Commissioner (Appeals). Therefore, we reject the arguments of the learned counsel and the grounds urged on this.
13. The other issue on the deduction of Rs. 11,33,588 being the sale of vehicles. The assessing officer observed that this sale has been considered separately by the assessee-company, therefore, he disallowed. The same thing was affirmed by the learned Commissioner (Appeals), we see no reason to the order of the authorities below.
14. The last issue on the payment of Rs. 76,046 being the fees for increasing the capital structure of the company by issuing shares. Both parties admit before us that on this issue of the shares there increased of their capital base of the assessee. That being the case, the decision of the Hon'ble Supreme Court in the case of Brooke Bond (India) Ltd. v. CIT (1997) 225 ITR 798 is squarely applicable to the case present before us. Therefore, we decline to interfere on this finding of the authorities below.
15. The interest under sections 234B and 234C are consequential which also requires no interference by us.
16. In the result, the appeal of the assessee is dismissed.