Madras High Court
M/S. Sundaram Finance Limited vs The Deputy Commissioner Of Income ... on 25 November, 2021
TCA Nos.429 & 430 of 2009
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED : 25.11.2021
CORAM :
THE HON'BLE MR. JUSTICE R. MAHADEVAN
and
THE HON'BLE MR. JUSTICE MOHAMMED SHAFFIQ
Tax Case Appeal Nos. 429 and 430 of 2009
M/s. Sundaram Finance Limited,
(Formerly M/s.Lakshmi General finance Ltd.,)
21, Patullos Road, ...Appellant in both
Chennai - 600 002. the appeals
Versus
The Deputy Commissioner of Income tax,
Company Circle - III, ...Respondent in
Chennai - 600 034. both the appeals
Tax Case Appeals filed under Section 260A of the Income Tax Act,
1961 against the order of the Income Tax Appellate Tribunal, “B” Bench
Chennai dated 07.05.2008 passed in ITA.Nos.325/Mds/2005 and
2122/Mds/2006.
For Appellant : Mr.R.Venkatanarayanan
for M/s.Subbaraya Aiyar in both appeals
For Respondent : Mrs. Hemalatha,
Senior standing counsel in both appeals
COMMON JUDGMENT
(Judgment of the Court was delivered by R. MAHADEVAN, J.)
These tax case appeals have been filed by the appellant / assessee,
calling in question the correctness of the order dated 07.05.2008 passed by the
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TCA Nos.429 & 430 of 2009
Income Tax Appellate Tribunal, Chennai “B” Bench, in
I.T.A.Nos.325/Mds/2005 & 2122/Mds/2006 respectively, relating to the
assessment years 2001-02 & 2002-03.
2. On 07.07.2009, this Court admitted these two tax case appeals on
the following common substantial questions of law:-
"(i) Whether on the facts and circumstances of the case
the Tribunal was right in law in holding that the amount
received towards restrictive covenant is revenue receipt
chargeable to tax though receipt of compensation for
restraining one's business has been brought only with effect
from 01.04.2003 vide amendment to Section 28 by the Finance
Act, 2002?
(ii) Whether on the facts and circumstance of the case
the Tribunal was right in law in holding that the appellant is
not entitled to deduction of the provision made in respect of
Non performing Assets which are considered irrecoverable?
3.1 The learned counsel for the appellant / assessee submitted that the
first question of law involved in these appeals has already been considered and
decided by this Court by judgment dated 19.06.2019 in TCA No.1938 of 2008
in respect of the assessee's own case. For better appreciation, the relevant
portion of the said judgment is extracted below:
“5. The assessment for the year under consideration,
namely, 2001- 02 was completed by the assessing officer under
Section 143(3) of the Act, vide order dated 31.03.2004. Though
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there were several issues which were dealt with by the assessing
officer, we are concerned only with regard to the finding
pertaining to the amount received by the assessee towards
Restrictive Covenant, whether it is a revenue receipt or capital
receipt?.
6. The assessee is the company engaged in the business of
hire purchase financing, equipment leasing and allied activities.
For the assessment year under consideration, namely, 2001-02,
the assessee filed Return of Income on 31.10.2001 declaring the
total income of Rs.8,58,48,600/-. In the scrutiny assessment,
which was completed on 31.03.2004, the total income was
determined at Rs.120,65,85,728/-. The assessing officer while
completing the assessment disallowed the amount received as
compensation for restrictive covenant. In the agreement entered
into between Royal and Sun Alliance Insurance (RSA), U.K.,
and General Insurance Company, India, the assessee was paid
Rs.16.80 Crores based on the agreement which according to the
assessee is the receipt in the capital field, as it was received as
consideration for restraining the assessee from entering into
insurance business on its own and also restraining itself from
negotiating with any other party for entering into insurance
business.
7. The assessee filed an appeal before the Commissioner
of Income Tax [Appeals]-VI, Chennai ['CIT-(A)' for brevity] .
The appeal was allowed by order dated 13.01.2005. The CIT-
(A) held that the restrictive clause in the agreement for which
amount of Rs.16.80 Crores was paid to the assessee was in view
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of the commitment given by the assessee restraining itself from
negotiating with any other party and restraining itself from
entering into insurance business. Thus, it held that this amount
was paid on account of the restrictive covenant and hence it is a
capital receipt. Furthermore, it held that the payment was
received by the assessee before the commencement of the
business activity and therefore, it opined that the amount
received by the aseessee was a capital receipt and accordingly,
the addition made by the assessing officer was deleted.
8. The assessing officer did not agree with the said
contention primarily on the ground that the assessee was not
paid any money by the U.K.Company towards the restrictive
covenant and only when the assessee subscribed to the share
capital on 19.10.2000, this amount was paid and therefore, it
cannot be treated as a capital receipt. Accordingly, the
assessment is completed.
9. The Revenue filed an appeal before the Tribunal and
the Tribunal after taking note of the finding of the assessing
officer and finding of the CIT-(A), reversed the order passed by
the CIT(A) particularly on the ground that the so called 'Non
compete Fee' is being received by the assessee, which is not for
the business of insurance and the payment is clearly towards
'exploitation of the service and infrastructure' of the assessee and
hence falls under the revenue field. The assessee is before us on
appeal challenging the said finding and we are required to
answer the above framed substantial question of law.
10. The agreement entered into between the assessee and
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the U.K.Company is tiled as “Letter of Intent” agreed and
accepted by the parties on 5th April, 2000 in London. The
following clause is the subject matter of interpretation:
“At the instance of the U.K.Company, assessee
restrained itself from interfering with any other party
and also refrained from itself entering the insurance
business. In consideration of this restraint and the
assurance to join hands only with U.K.Company,
agreed to pay lumpsum of E 2.4 million to the
assessee.”
11. While completing the assessment, the assessing officer
cannot examine the exigency of business as to what would be the
prudent decision from the point of view of the assessee. What is
required to be seen is the interpretation which has to be given to
the covenant in the Letter of Intent. The assessee has been non-
suited on the ground that they were never in the insurance
business and the covenant cannot be considered as a restrictive
covenant. We do not agree with the said finding of the assessing
officer because there is a background which cannot be ignored
by the assessing officer during the relevant point when the
“Letter of Intent” was signed. It was the first time, the
Government of India took a decision to permit foreign insurance
companies to set up general insurance business in India. The
entire matter was regulated by the Government of India under
the relevant regulations. Thus, several competing companies in
India were desirous of starting insurance business with foreign
partnerships / Joint ventures. Therefore, commercial prudence
demanded the U.K.Company to restrain the assessee, preventing
them from entering into insurance business, which they had not
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done earlier, secondly, preventing the assessee from entering into
an agreement with any other foreign insurance company. The
condition is clear and lucid and it is to be treated as a 'restrictive
covenant' and merely because the assessee was not in the
insurance business is not a ground to read down the condition.
Thus, we are of the considered view that the interpretation given
by the CIT(A) to the said covenant is just and proper and we do
not agree with the finding of the assessing officer as well as the
Tribunal in this regard.
12. Mr.T.Ravikumar, learned Senior Counsel for the
respondent / revenue vehemently contended that the factual
finding that the payment was received by the assessee before the
commencement of business is the finding, which stares against
the assessee and the same has not been challenged. In our
considered view, we are afraid that such a finding cannot work
against the assessee. The terms and conditions of the Letter of
Intent is clear, in the sense, that it is the condition which
precedes other conditions, which relates to 'Investment for
allotment of shares'. In fact, this amount which was agreed to be
paid as non-compete has been received by the assessee on
23.10.2000 and immediately invested in the shares of the
company. To be noted that all the transactions are in the same
assessment year, i.e., 2001-2002.
13. In the light of the above, we are of the clear view that
the CIT(A) was fully justified in holding that the amount
received by the assessee was a capital receipt and was right in
deleting the addition made by the assessing officer. Further, we
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note that the amount has been credited to the capital receipt
account in the balance sheet for the year ending 31.03.2001 and
the amount does not come anywhere within the inclusive
definition of Income as envisaged in Section 2(24).
14. At this juncture, it will be beneficial to refer to the
decision of Hon'ble Supreme Court in Guffic Chem (P) Ltd., V.
Commissioner of Income Tax & Another reported in (2011)
332 ITR 0602. The Hon'ble Supreme Court has held that
'payment received as non-competition fee under a negative
covenant has to be treated as a capital receipt till the Assessment
Year 2003-04'. The said decision supports the case of the
assessee.
15. The learned counsel appearing for the assessee
referred to the decision of the assessee's own case in TCA
No.159 of 2009 dated 06.03.2019, which pertains to the capital
subsidy received by the assessee from the U.K.Company.
16. It is the submission of Mr.Ravikumar, learned Senior
Standing Counsel for the respondent / revenue that the
substantial question of law No.1 pertains to capital subsidy and
in fact, the decision would enure in favour of the Revenue. We
do not agree with the said submission as the Letter of Intent
provides “additional investment” at the instance of the assessee
and the condition stated 'if at the time of finalisation of
shareholders agreement it is found that assessee is required to
further infuse equity during the initially agreed pay-back period,
U.K.Company will make a compensatory payment to assessee in
an amount to be mutually agreed, before the finalisation of the
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shareholders agreement'.
17. Thus, we are of the clear view that the order passed by
the Tribunal dated 31.07.2007 reversing the order passed by
CIT(A) calls for interference. In the light of the above, the appeal
filed by the assessee is allowed and the order passed by the
tribunal is set aside and the order passed by the CIT(A) dated
13.01.2005 is restored and the substantial question of law
framed is answered in favour of the assessee. No costs.”
Therefore, the learned counsel sought to allow these appeals in respect of the
first question of law raised herein.
3.2 On the other hand, the learned Senior Standing Counsel appearing
for the respondent/Revenue has opposed the submissions made on the side of
the appellant / assessee, by referring to the decision of the High Court of Delhi
in the case of Sharp Business System vs. Commissioner of Income - tax -
III, reported in 24/5 CTR 233, wherein similar issue was decided against the
assessee and in favour of the Revenue and in paragraph 10, it was held as
under:
"10. In the present case, the appellant is a joint - venture
between M/s.Sharp & L&T. Apparently, the agreement entered
into with the L&T in view of the changed relationship ensures
that the latter does not enter into the same business. Although it
is contended that the advantage is only by way of facilitation of
the appellant's business and ensuring greater efficiency as well as
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profitability, on the other side, what can be seen is that the
arrangement is to endure for a substantial period, i.e.7 years.
Coupled with the fact that the L&T has its own presence in
consumer goods sector and would be, if it chooses - able to put
up an effective competition for business engaged in by the
assessee, there is no doubt that the amount is to ensure a certain
position in the market by keeping - out L&T. Applying the test
indicated in the Empire Jute Co. Ltd (supra), Alembic Chemical
Works Co. Ltd. (supra) and Coal Shipments (P) Ltd. (Supra),
this Court is the opinion that the deduction cannot be claimed as
a revenue expenditure; it clearly falls within the capital field.
The first two questions are, therefore, answered against the
assessee and in favour of the Revenue.”
Stating so, the learned counsel prayed for dismissal of these tax case appeals,
by confirming the order passed by the Tribunal, insofar as this issue is
concerned.
3.3 It is evident from the records that there was a shareholders
agreement, as per which, a non-compete restriction was imposed to the effect
that “the assessee received the amount as consideration with an undertaking to
restrain themselves from entering into insurance business either on their own or
joining with others”. Due to the said restriction, it has lost its right to transact
with other companies and hence, the same was compensated by the lump sum,
which cannot be brought to tax as revenue receipt, but is a capital receipt.
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Further, it is to be noted that the introduction of sub clause (va) to section 28 to
tax this kind of receipt is applicable only from the assessment year 2003-04.
That apart, there is no material to show that the said compensation amount
received by the assessee during the years in question, was diverted for any
other purpose, except for being invested in the share capital of the joint venture
company. Therefore, following the earlier orders of this court in TCA
No.159/2009 dated 06.03.2019 and TCA No.1938/2008 dated 19.06.2009, we
answer this issue in favour of the assessee and against the Revenue.
4.1 Regarding the second question of law, it is submitted by the
learned counsel on both sides that the same is covered in favour of the
assessee, as per the decision of the Delhi High Court in the case of
Commissioner of Income Tax v. Vasisth Chay Vyapar Limited reported in
(2011) 330 ITR 044, which was subsequently confirmed by the Honourable
Supreme court in the order dated 13.12.2017 passed in Civil Appeal No.
5811 of 2012 etc., batch. The relevant paragraphs of the said decision of the
Delhi High Court can profitably be extracted hereunder:-
"17. In this scenario, we have to examine the strength in
the submission of learned counsel for the Revenue that whether
it can still be held that income in the form of interest though not
received had still accrued to the assessee under the provisions of
Income Tax Act and was, therefore, eligible to tax. Our answer
is in the negative and we give the following reasons in support:-
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(1) First of all we would discuss the matter in the light of
the provisions of Income Tax Act and to examine as to whether
in the given circumstances, interest income has accrued to the
assessee. It is stated at the cost of repetition that admitted
position is that the assessee had not received any interest on the
said ICD placed with Shaw Wallce since the assessment year
1996-97 as it had become NPAs in accordance with the
Prudential norms which was entered in the books of accounts as
well. The assessee has further successfully demonstrated that
even in the succeeding assessment years, no interest was
received and the position remained the same until the
assessment years 2006-07. Reason was adverse financial
circumstances and the financial crunch faced by Shaw Wallace.
So much so, it was facing winding up petitions which were filed
by many creditors. These circumstances, led to an uncertainty in
so far as recovery of interest was concerned, as a result of the
aforesaid precarious financial position of Shaw Wallace. What to
talk of interest, even the principal amount itself had become
doubtful to recover. In this scenario it was legitimate move to
infer that interest income thereupon has not "accrued". We are in
agreement with the submission of Mr. Vohra on this count,
supported by various decisions of different High Courts
including this court which has already been referred to above.
(2) In the instant case, the assessee company being NBFC
is governed by the provisions of RBI Act. In such a case, interest
income cannot be said to have accrued to the assessee having
regard to the provisions of section 45Q of the RBI and
Prudential Norms issued by the RBI in exercise of its statutory
powers. As per these norms, the ICD had become NPA and on
such NPA where the interest was not received and possibility of
recovery was almost nil, it could not be treated to have been
accrued in favour of the assessee.
18. As noted above, Mr. Sabharwal, argued that the case
of the assessee was to be dealt with for the purpose of taxability
as per the provisions of the Act and not the RBI Act which was
the accounting method that the assessee was supposed to follow.
We have already held that even under the Income Tax Act,
interest income had not accrued. Moreover, this submission of
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Mr. Sabharwal is based entirely on the judgment of the Supreme
Court in the case of Southern Technology (supra). No doubt, in
first blush, reading of the judgment gives an indication that the
Court has held that RBI Act does not override the provisions of
the Income Tax Act. However, when we examine the issue
involved therein minutely and deeply in the context in which that
had arisen and certain observations of the Apex Court contained
in that very judgment, we find that the proposition advanced by
Mr. Sabharwal may not be entirely correct. In the case before the
Supreme Court, the assessee a NBFC debited Rs.81,68,516 as
provision against NPA in the profit and loss account, which was
claimed as deduction in terms of Section 36 (1) (vii) of the Act.
The assessing officer did not allow the deduction claimed as
aforesaid on the ground that the provision of NPA was not in the
nature of expenditure or loss but more in the nature of a reserve,
and thus not deductible under Sectrion 36 (i) (vii) of the Act.
The assessing officer, however, did not bring to tax
Rs.20,34,605 as income (being income accrued under the
mercantile system of accounting). The dispute before the Apex
court centered around deductibility of provision for NPA. After
analyzing the provisions of the RBI Act, their Lordships of the
Apex Court observed that in so far as the permissible deductions
or exclusions under the Act are concerned, the same are
admissible only if such deductions/exclusions satisfy the relevant
conditions stipulated therefor under the Act. To that extent, it
was observed that the Prudential Norms do not override the
provisions of the Act. However, the Apex Court made a
distinction with regard to "Income Recognition" and held that
income had to be recognized in terms of the Prudential Norms,
even though the same deviated from mercantile system of
accounting and/or Section 45 of the Income Tax Act. It can be
said, therefore, that the Apex Court approved the 'real income"
theory which is engrained in the Prudential Norms for
recognition of revenue by NBFC. The following passage from
the judgment of the Apex Court would bring out the distinction
noticed by the Apex Court between permissible
deductions/exclusions, on the one hand, and income recognition
on the other:-
........
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TCA Nos.429 & 430 of 2009
40. At the outset, we may state that in essence RBI
Directions 1998 are Prudential/Provisioning Norms issued
by RBI under Chapter IIIB of the RBI Act, 1934. These
Norms deal essentially with Income Recognition. They
force the NBFCs to disclose the amount of NPA in their
financial accounts. They force the NBFCs to reflect "true
and correct" profits. By virtue of Section 45Q, an overriding
effect is given to the Directions 1998 vis-a-vis "income
recognition" principles in the Companies Act, 1956. These
Directions constitute a code by itself. However, these
Directions 1998 and the IT Act operate in different areas.
These Directions 1998 have nothing to do with computation
of taxable income. These Directions cannot overrule the
"permissible deductions" or "their exclusion" under the IT
Act. The inconsistency between these Directions and
Companies Act is only in the matter of Income Recognition
and presentation of Financial Statements. The Accounting
Policies adopted by an NBFC cannot determine the taxable
income. It is well settled that the Accounting Policies
followed by a company can be changed unless the AO
comes to the conclusion that such change would result in
understatement of profits. However, here is the case where
the AO has to follow the RBI Directions 1998 in view of
Section 45Q of the RBI Act. Hence, as far as Income
Recognition is concerned, Section 145 of the IT Act has no
role to play in the present dispute."
19. We have also noticed the other line of cases wherein the
Supreme Court itself has held that when there is a provision in
other enactment which contains a non-obstante clause, that would
override the provisions of Income Tax Act. TRO Vs. Custodian,
Special Court Act (supra) is one such case apart from other cases
of different High Courts. When the judgment of the Supreme
Court in Southern Technology (supra) is read in manner we have
read, it becomes easy to reconcile the ratio of Southern
Technology with TRO Vs. Custodian, Special Court Act.
20. Thus viewed from any angle, the decision of the
Tribunal appears to be correct in law. The question of law is thus
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TCA Nos.429 & 430 of 2009
decided against the Revenue and in favour of the assessee. As a
result, all these appeals are dismissed."
4.2 In the light of the above decision, the second question of law
framed for consideration in these appeals is also answered in favour of the
assessee and against the revenue.
5.In the result, both the appeals filed by the assessee stand allowed. No
costs.
[R.M.D., J.] [M.S.Q., J.]
25.11.2021
av/rsh
Internet : Yes
Index : Yes / No
To
1. The Deputy Commissioner of Income Tax,
Company Circle - III,
Chennai - 600 034.
2. The Income Tax Appellate Tribunal,
“B” Bench, Chennai.
https://www.mhc.tn.gov.in/judis
TCA Nos.429 & 430 of 2009
R. MAHADEVAN, J
and
MOHAMMED SHAFFIQ, J
av/rsh
TCA Nos.429 & 430/2009
25.11.2021
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