IN INCOME TAX APPELLATE TRIBUNAL D BENCH, MUMBAI BEFORE SHRI SAKTIJIT DEY, JUDICIAL MEMBER AND SHRI N.K. PRADHAN, ACCOUNTANT MEMBER ITA no.876/Mum./2013 (Assessment Year : 2009 10) Dy. Commissioner of Income Tax Circle 9(2), Aayakar Bhawan . Appellant 101, M.K. Road, Mumbai v/s Shri Deepak Premnarayen 601, Indraprastha Premnarayen Chowk . Respondent Linking Road, Santacruz (W) Mumbai 400 054 PAN AABPP5498E Revenue by : Shri H.P. Mahajani Assessee by : Shri Prakash R. Mane Date of Hearing 02.08.2016 Date of Order 30.09.2016 ORDER PER SAKTIJIT DEY, J.M. Instant appeal by Revenue is directed against order dated 8th November 2012, passed by learned Commissioner (Appeals) 20, Mumbai, for assessment year 2009 10. Effective grounds raised by Department are as under: 1. On facts and in circumstances of case and in law, whether Ld. CT(A) was correct in deleting Rs. 56,872/- disallowed u/s. 14A computed as per Rule 8D, without appreciating that assessee has claimed expenses of Rs. 19.36 lacs under 2 Shri Deepak Premnarayen head "Administrative and Other Expenditure" which are indirect expenses incurred for purpose of earning income. 2. On facts and in circumstances of case and in law, whether Ld. CIT(A) was correct in deleting addition of Rs.2,84,65,000/- ignoring facts that assessee continues to receive income from same sources ,even before and also after "termination of agreement" on basis of letter dated 03.03.2009 issued by First Rand Bank, South Africa, as discussed by Assessing Officer in assessment order. 2. Insofar as ground no.1 is concerned, briefly stated facts are, assessee individual filed his return of income for impugned assessment year on 30th September 2009, declaring total income of ` 40,01,528. During assessment proceedings, Assessing Officer noticing that assessee has earned exempt income by way of dividend amounting to ` 31,232, called upon assessee to explain why disallowance under section 14A r/w rule 8D, should not be made. In reply though, assessee submitted that no expenditure was incurred for earning exempt income but Assessing Officer rejecting contention of assessee disallowed amount of ` 56,872 under rule 8D(2)(iii) r/w section 14A of Act. Being aggrieved, assessee challenged disallowance before learned Commissioner (Appeals). 3. learned Commissioner (Appeals), after considering submissions of assessee, deleted addition made by observing that Assessing Officer has not given any conclusive finding or 3 Shri Deepak Premnarayen established on record that any part of expenditure directly or indirectly related to earning of dividend income. 4. Learned Departmental Representative relying upon observations of Assessing Officer submitted, assessee since has not disallowed any expenditure under section 14A voluntarily in spite of fact he had earned exempt income by way of dividend, Assessing Officer has computed disallowance under section 14A r/w rule 8D and has restricted disallowance to administrative expenditure as contemplated under rule 8D(2)(iii) of rules. 5. Learned Authorised Representative on other hand submitted, assessee having not incurred any expenditure for earning dividend income no disallowance under section 14A is called for. 6. We have considered submissions of parties and perused material available on record. Undisputedly, assessee during relevant previous year has earned exempt income by way of dividend, however, assessee had not made any disallowance under section 14A r/w rule 8D on plea that no expenditure was incurred for earning dividend income. This argument of assessee may be correct insofar as disallowance of direct expenditure and interest expenditure in terms of rule 8D(2)(i) and 8D(2)(ii) are concerned. However, as far as administrative / indirect expenses are 4 Shri Deepak Premnarayen concerned, same has to be disallowed in terms of provisions of section 14A(3) irrespective of fact whether assessee has actually incurred any expenditure in relation to exempt income. Therefore, same disallowance has to be made under section 14A r/w rule 8D(2)(iii). However, in present case, undisputedly, total exempt income earned by assessee during relevant previous year is ` 31,232. Therefore, expenditure relatable to such exempt income cannot exceed quantum of exempt income. Moreover, disallowance to be made under section 14A r/w rule 8D(2) should be of reasonable amount, therefore, considering facts and circumstances of case, we are of view that 5% of dividend income earned should be considered for disallowance under section 14A. 7. As far as ground no.2 is concerned, facts in brief are, while verifying return of income filed by assessee, Assessing Officer noticed that assessee had received compensation of ` 2,48,65,000 from FirstRand Bank Ltd., South Africa, but he has not offered it as income pleading that it is in nature of capital receipt. On Assessing Officer s query to justify such claim, it was submitted by assessee that for purpose of establishing investment banking business in India, FirstRand Bank Ltd., South Africa, had offered assessee preferred partnership on condition 5 Shri Deepak Premnarayen that assessee has to terminate his business / professional engagement in field of investment banking. assessee should completely and exclusively be available for Bank s venture in Indian sub continent; and lastly, assessee should not take up or accept any fresh business or professional commitment in field of investment banking. It was submitted, pursuant to such offer of bank, assessee did not pursue / undertake business activity in field of investment banking for more than two years and kept himself exclusively available for business of bank. However, subsequently, due to unfavourable business environment, Bank reviewed its decision and decided not to have investment banking division in India. To compensate assessee, Bank paid U.S. $ 5 lakh equivalent to ` 2,84,65,000. It was submitted, as amount received was as compensation for cancellation / termination of agreement with bank resulting in loss of source of income, amount is to be treated as capital receipt, hence, not taxable. Assessing Officer, however, was not convinced with submissions of assessee. To further ascertain facts, Assessing Officer summoned assessee under section 131 of Act and recorded statement. On basis of statement recorded from assessee, Assessing Officer concluded that assessee had never been employed in banking related activities before entering into agreement with 6 Shri Deepak Premnarayen FirstRand Bank Ltd., South Africa, nor assessee had been employed in banking related activities after termination of agreement. He observed, there is no change in income earning activities of assessee in years before he entered into agreement and after termination of agreement. Therefore, there is no revenue loss to assessee as result of non fulfillment of employment terms of agreement. He further observed, assessee had also paid tax on compensation amount which demonstrates that assessee himself was not convinced about nature of receipt as capital receipt. He, therefore, disallowing assessee s claim that amount received is capital in nature treated it as income of assessee under head Other Sources . Being aggrieved of such addition to income, assessee preferred appeal before learned Commissioner (Appeals). 8. learned Commissioner (Appeals) considering submissions of assessee was of view that as per letter issued by Bank, amount received by assessee is towards compensation for loss of existing business or competition. Thereafter, learned Commissioner (Appeals) relying upon certain judicial precedent held that amount received by assessee being capital receipt is not taxable. 7 Shri Deepak Premnarayen 9. Learned Departmental Representative strongly relying upon order of Assessing Officer submitted, assessee has not established fact that due to condition imposed by Bank, there was any financial loss to assessee. He submitted, assessee never was into investment banking business and source of income available to assessee remained unchanged during period under reference. Therefore, it cannot be said that amount received by assessee was in nature of compensation for loss of business. He submitted, assessee is professional and he continued to earn income from his professional activities during relevant period. He, therefore, submitted there is no reason to treat amount received by assessee from FirstRand Bank Ltd., South Africa, as capital receipt. 10. Learned Authorised Representative supporting decision of learned Commissioner (Appeals) submitted, assessee is experienced entrepreneur and business leader having vast experience in field of real estate, financial services and hospitality. He submitted, considering assessee s capabilities and leadership quality, FirstRand Bank Ltd., South Africa, vide letter dated 2nd April 2007, has offered assessee preferred partnership for its investment banking business to be set up and established in India. He submitted, in said letter, bank had put certain conditions preventing 8 Shri Deepak Premnarayen assessee from taking up any business / professional engagement in field of investment banking and to make himself completely available for investment banking business of bank. He submitted, as ultimately bank decided not to set up its investment banking business after two years, it decided to compensate assessee for losses he might have suffered during period of negotiation. He submitted, since nature of payment received is compensation for financial loss suffered by assessee, it is capital receipt, hence, not taxable. For such proposition, he relied upon following decision: i) CIT v/s Prabhul Dayal, [1971] 82 ITR 804 (SC); ii) CIT v/s Rao Raja Kalyansingh, [1974] 97 ITR 690 (Raj.); iii) Shyam Telelink Ltd. v/s ITO, [2006] 99 ITD 576 (Del.); and iv) Inter Gold (I) P. Ltd. v/s JCIT, [2010] 37 SOT 45 (T Mum.). 11. We have considered submissions of parties and perused material available on record in light of decision relied upon. issue arising for consideration is whether amount received by assessee from FirstRand Bank Ltd., South Africa, is capital or revenue receipt. While assessee has claimed it as capital receipt, hence, not taxable, Department has treated it as revenue in nature. 9 Shri Deepak Premnarayen 12. Before deciding issue, it is necessary to deal with certain factual aspects. It is claim of assessee that since FirstRand Bank Ltd., South Africa, shelved its investment banking project in India for which assessee was to be considered as preferred partner, compensation was paid due to financial loss assessee suffered on account of non implementation of project in India. In this context, it is necessary to refer to letter dated 2 nd April 2007 of FirstRand Bank Ltd., South Africa, contents of which are as follows: Sub: Preferred Partner for investment banking business in India. Ref: Various meetings and discussions over last few months. Dear Sir, We are very excited with ft, opportunities offered by your country, We are keen to establish our investment banking bU1n ssln India. We value your in-depth understanding and knowledge of India business environment and we are keen to partner you for our investment banking business in India. We would like you to work exclusively with us for this particular venture in Indian subcontinent We request you to kindly terminate a1 your business / professional engagements at earliest in filed of Investment banking so as to make yourself completely and exclusively available for this venture in Indian Subcontinent. We would request you not to take up or accept any fresh business/ professional commitments in field of investment banking as we have committed to invite you as preferred partner in India and by this letter, we reiterate our commitment to you. As discussed and agreed, we will formalize our partnership for investment banking business in India in next few months, wherein you will be allocated appropriate equity stake in India venture and we further confirm that you will be our exclusive partner for this venture in India. 10 Shri Deepak Premnarayen 13. On careful reading of aforesaid letter, it is clear that FirstRand Bank Ltd., South Africa, in said letter had made offer to assessee to become preferred partner for its investment banking business to be set up in India, with certain terms and conditions. terms and conditions imposed are as under: i) Assessee should exclusively work with investment banking business of bank; ii) Assessee should terminate all his business / professional engagements in field of investment banking; and iii) Assessee should not take up or accept any fresh business / professional commitment in field of professional banking. 14. It is further evident from contents of letter that bank had not only stated of formalizing partnership but also allocating appropriate equity stake in India venture. However, there is nothing on record to show whether assessee had accepted aforesaid offer or whether partnership agreement between bank and assessee was formalized subsequently. Moreover, assessee needs to establish that he has fulfilled all conditions imposed in letter. There is no documentary evidence available on record to establish aforesaid facts. Reference to letter dated 3rd March 2009 of FirstRand Bank Ltd., South Africa, to assessee further reveals, though, assessee was given offer to become preferred partner but ultimately partnership was not formalized and after gap of two 11 Shri Deepak Premnarayen years, bank shelved its plan of setting up its investment banking business in Indian sub continent. To constitute binding contract between parties, there must be offer by one of parties and acceptance of such offer by other. In present case, though, it appears from letter dated 2nd April 2007 and 3rd March 2009 of FirstRand Bank Ltd., South Africa, there was offer to assessee to become preferred partner in investment banking business of Bank in Indian sub continent, however, there is nothing on record to suggest that assessee had accepted offer made by Bank. Though, letter dated 2nd April 2007, speaks of formalization of partnership at future point of time, nothing has been brought on record to demonstrate that there was formal partnership between assessee and bank on terms and conditions stated in letter under reference. Therefore, unless assessee demonstrates with evidence that it accepted offer of bank to become preferred partner and also acted upon conditions imposed by bank for becoming preferred partner, payment received by assessee cannot be treated as compensation towards alleged financial loss suffered by assessee for non establishment of investment banking business in Indian sub continent. In course of hearing, learned Departmental Representative had submitted that assessee neither in past nor in future had any connection with 12 Shri Deepak Premnarayen investment banking business. Therefore, it is all more necessary for assessee to demonstrate that after entering into agreement with FirstRand Bank Ltd., South Africa, assessee had fulfilled conditions imposed in letter dated 2nd April 2007 by terminating business professional engagements in field of investment banking and has not accepted any fresh business / professional commitment in filed of investment banking, though, there might have been such offer from other entities. Unless, these facts are established on record with supporting evidence, it cannot be said that assessee has suffered any financial loss on account of FirstRand Bank Ltd., South Africa, deciding against setting up of investment banking business in India. As it appears, learned Commissioner (Appeals) while accepting assessee s claim has not at all examined these factual aspects and merely relying upon certain case laws cited before him has come to conclusion that payment received from FirstRand Bank Ltd., South Africa, is in nature of compensation on account of financial loss suffered, hence, is capital receipt. Ratio laid down in decision is on basis of certain facts. Unless, facts are established on record and they are similar to facts involved in decision relied upon ratio laid down in decision cannot be applied. Thus, on over all consideration of facts and material on record, we are of considered opinion that entire issue has to be examined afresh by 13 Shri Deepak Premnarayen Assessing Officer. assessee has to demonstrate that there was contract between assessee and bank, either in capacity of preferred partner or otherwise and in pursuance to such contract, assessee has complied to conditions imposed by terminating all his business professional / engagements in field of investment banking or not accepting any offer relating to business / professional commitment in field of investment bank from any other entity. If assessee is able to establish these facts certainly amount received by assessee from FirstRand Bank Ltd., South Africa, can be treated as compensation received for financial loss suffered due to cancellation / termination of contract, thereby, rendering it as capital receipt, hence, not taxable. In view of aforesaid, we are inclined to set aside impugned order of learned Commissioner (Appeals). Assessing Officer shall provide adequate opportunity of being heard to assessee to establish his case. 15. In result, appeal stands allowed for statistical purposes. Order pronounced in open Court on 30.09.2016 Sd/- Sd/- N.K. PRADHAN SAKTIJIT DEY ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED: 30.09.2016 14 Shri Deepak Premnarayen Copy of order forwarded to: (1) Assessee; (2) Revenue; (3) CIT(A); (4) CIT, Mumbai City concerned; (5) DR, ITAT, Mumbai; (6) Guard file. True Copy By Order Pradeep J. Chowdhury Sr. Private Secretary (Dy./Asstt. Registrar) ITAT, Mumbai Dy. Commissioner of Income-tax Circle–9(2), Mumbai v. Deepak Premnarayen