Advance received from distributors not taxable unless commercial activities started: ITAT

Case Details: Sanvitha Biotechnologies (P.) Ltd. v. DCIT - [2022] 136 taxmann.com 163 (Hyderabad - Trib.)

Judiciary and Counsel Details

• • Satbeer Singh Godara , Judicial Member and Laxmi Prasad Sahu, Accountant Member
  • P. Murali Mohana Rao for the Appellant.
  • Y.V.S.T. Sai for the Respondent.

The assessee submitted that it had entered into a marketing agreement with company ‘BI’, to sell all animal health products. It would manufacture the product in future with global partner ‘BI’ with conditions as mentioned in the agreement and for the assignment of global exclusive distribution rights for its products. It had received an amount of Rs. 22.50 crores from ‘BI’, which was non-refundable.

The assessee contended that it was foregoing its rights in respect of trademark, fixing of price of the product, and to have incurred expenditure towards the package, export transport and other related expenditure. In this process, the assessee would incur huge losses for a long period and to compensate for those losses; it had received an amount of Rs. 22.50 crores.

However, the AO rejected the assessee’s contention and held that money was received in the business transaction process and thus liable to tax as business income.The CIT(Appeals) also upheld the AO’s order. Aggrieved-assessee filed the instant appeal before the Tribunal.

ITAT Held

The Tribunal held that the crux of the issue is whether the receipt of Rs. 22.50 crores received by the assessee as advance can be treated as business receipt under section 28(i) or not.

It was clear that the assessee had not undertaken any business activity, and he had received only advance for setting off losses for future years, which commence from 1-4-2016. Further, it was clear from the audited financial statements that no commercial activity had been started.

Therefore, the agreement in this regard for treating it as a revenue income cannot arise. On perusal of the agreement, the agreement will be in force when the commercial activity starts. Accordingly, the advance received of Rs. 22.50 crores is not revenue in nature for the year under consideration. Therefore, AO was directed to delete the addition.

Case Review

• • Siddheshwar Sahakari Sakhar Karkhana Ltd. v. CIT [2004] 139 Taxman 434/270 ITR 1 (SC) (para 11.3) followed.

List of Cases Referred to

• • Siddheshwar Sahakari Sakhar Karkhana Ltd. v. CIT [2004] 139 Taxman 434/270 ITR 1 (SC) (para 9.6)
  • CIT v. Shoorji Vallabhdas & Co. [1962] 46 ITR 144 (SC) (para 9.6)
  • CIT v. Lok Housing Construction Ltd. [2016] 70 taxmann.com 2/240 Taxman 1 (SC) (para 9.6)
  • Amrutha Power Projects (P.) Ltd. v. ITO [IT Appeal No. 1944 (Hyd.) of 2017, dated 4-8-2020] (para 15)
  • CIT v. E-Funds International India [2007] 162 Taxman 1 (Delhi) (para 16)
  • Western India Vegetables Products Ltd. v. CIT [1954] 26 ITR 151 (Bom.) (para 17)
  • CIT v. Saurashtra Cement & Chemical Industries Ltd. [1973] 91 ITR 170 (Guj.) (para 17.1)
  • Sarabhai Management Corpn. Ltd. v. CIT [1976] 102 ITR 25 (Guj.) (para 17.2)
  • Carefour WC & C India (P.) Ltd. v. Dy. CIT [2015] 53 taxmann.com 289/228 Taxman 261/[2014] 368 ITR 692 (Delhi) (para 17.3)
  • Reliance Gems & Jewels Ltd. v. Dy. CIT [IT Appeal No. 3855 (Mum.) of 2013, dated 28-10-2015] (para 17.4).