TaxTMI 
TaxTMI 
2010 (1) TMI 980
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....I. T. A. No. 1127/Coch/2004 is considered in detail. The grounds raised by the assessee are as under : "1. Current repairs : Rs. 53,90,835 The learned Commissioner of Income-tax (Appeals) erred in confirming the disallowance of expenditure on current repairs amounting to Rs. 53,90,835 holding it as capital expenditure. The learned Commissioner of Income-tax (Appeals) ought to have observed that these expenditure were incurred based on the inspection report of inspection and safety wing and these expenditure had not resulted in bringing into any new asset or benefit of enduring nature in the capital field and hence should have directed the Assessing Officer to treat them as revenue in nature. 2. Feasibility studies : Rs. 22,09,481 The learned Commissioner of Income-tax (Appeals) erred in confirming the disallowance of expenditure on feasibility studies amounting to Rs. 22,09,481 considering it as capital expenditure. The learned Commissioner of Income-tax (Appeals) ought to have found that these expenditure were incurred in connection with the existing business of the appellant and that the same had not resulted in bringing into existence any asse....
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....d replacing of shell top course, bottom overlay and painting of tank No. 390. These two tanks are used for storing furnace oil and kerosene and work of this nature is carried out every 6-7 years. The Commissioner of Income-tax (Appeals) holding that since the assessee is not incurring the expenditure every year and has to be incurred only after a period of 6-7 years he confirmed the expenditure as capital expenditure. With reference to the replacement of slop trays and chimney trays, these items are internal components in the vacuum column. Since these are damaged due to some malfunctioning one slop tray out of the three trays were replaced. The Commissioner of Income-tax (Appeals) considered that slop trays are not items which are frequently replaced by the assessee, hence capital expenditure. Learned counsel submitted that the nature of expenditure is revenue and these are for normal maintenance of plant and machinery and has not resulted in any new asset or benefit of enduring nature in capital field. Reliance is also placed on the decision of the hon'ble Income-tax Appellate Tribunal in I. T. A. No. 252/Coch/2001 in the assessee's own case for the assessment year 1997-98. 4.....
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....s per agreement with IOC, assigned the marketing rights to its production to IOC for which it received Rs. 43 crores. It is claimed to be consideration for transfer of rights and hence capital. IOC has not transferred any capital asset or right to the assessee in lieu of the payment of Rs. 43 crores. The amount paid by IOC is only an additional or estimated price of the assessee's petroleum products to be sold in the market. As such this is only part of the business receipts of the assessee and hence will be assessed as revenue receipts." 8. Before the learned Commissioner of Income-tax (Appeals) the assessee submitted that the assessee has assigned the exclusive marketing rights of the products to the IOC and this amount was received in consideration of the exclusive marketing rights and so the amount was capital in nature. It was the contention of the assessee that consideration towards surrender of rights is a capital receipt representing right foregone to earn future profit not taxable as per the provisions of the Act and relied on various principles of law established judicially on the issue. After considering the issue in detail vide his order from pages 19 to 32 ....
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....akulam, with a capacity to transfer approx 300 mt/hr. of each product. CRL also has facility to transfer products through pipelines to FACTCD and to the installation of other marketing companies. CRL operates a bitumen packing plant, which has capability to fill bitumen at a rate of 1000 drums/day. IOC is engaged in the business of refining, producing and marketing diverse petroleum products and its derivatives, with 7 out of 15 refineries in the country with a current crude thruput capacity of 37.35 MMTPA. IOC has extensive network of 5762 kms of crude and product pipelines. IOC has 185 terminals and depots, 43 LPG bottling plants, 92 aviation fuelling stations, 3 lube blending plants, 4 regional offices, 15 state offices and 18,000 retail selling outlets across the length and breadth of the country to market various products. IOC is the market leader with a market share of about 55 per cent. IOC also has the only comprehensive R and D centre in the petroleum industry, which has done pioneering work in lubricants, refinery processes and pipeline transportation. CRL and IOC (hereinafter referred to as "parties") have agreed to collaborate in IOC marketing the petr....
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....an arrangement on this agreement. 3.6 CRL retains the right to market FTPs directly. 3.7 CRL shall market the entire bitumen production from their refinery. 3.8 CRL shall supply the raw material and fuel to CRBL. 3.9 CRL shall also supply to IOC the products from the proposed expanded capacity. 3.10. It is agreed that CRL shall not offer any decontrolled products to any other marketing company during the pendency of this agreement. Article 11 : Pricing 11.1 For the sale of petroleum products to IOC the prices payable to CRL will be as under : (a) For the controlled products the price fixed by the Ministry of Petroleum and Natural Gas and/or the OCC from time to time till the administered pricing mechanism continues and thereafter as stated below for decontrolled products. (b) For the decontrolled products the RGP payable to CRL shall be based on the prevailing market conditions and import partly principles and the price build up as agreed by the industry from time to time. For all such pricing decisions CRL's representative will be associated and CRL's views will be taken into account. Pricing of JP5 w....
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....n written submissions which can be summarised as under : "In 1997, the Government had deregulated the marketing of products and thereafter KRL was free to market its product through any of the 6 PSU marketing companies. It need not continue with IOC. As KRL had 12.5 per cent. market share of petroleum product of the Country, marketing KRL products would constitute major increase in the turnover of any PSU marketing company through which KRL markets its share and hence all of them were interested in tying up the marketing function of KRL product. KRL and IOC had arrived at an agreement whereby IOC agreed to pay approximately Rs. 43 crores per year for a period of 5 years for KRL granting exclusive marketing rights of its product through IOC and agreeing not to market its product through any other PSU marketing company. Any manufacturing unit has two arms, viz., manufacturing and marketing. If there is any restriction on any one of the two arms, it certainly impairs profit making apparatus of the company even though the company may continue with manufacturing or marketing. KRL bound itself by this restrictive covenant of exclusive marketing not to let its p....
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....ital in the prior years. In all the decisions cited in this regard, the Tribunals have held that consideration for transfer of marketing rights is capital receipt. Thus, even though at the first blush it appears to be a mere agreement for sale of products, it is actually an agreement for transfer of a substantive right, viz., right to market the products of KRL and for non-competition by the restrictive covenant that KRL will not market through any other PSU marketing companies. It is not correct to say that the assessee did not have any right or choice for distribution. It had choice for selecting any of the six PSUs. Restriction placed on the right to market through any of the other PSUs is partly extinguishment of a commercial right and hence payment for the same is on the capital field. Reconciliation of compensation received for marketing rights for each of the year is annexed." 13. Learned counsel also during the argument has referred to various case law on the issue of surrender of marketing rights which are as under : (i) CIT v. Panbari Tea Co. Ltd. [1965] 57 ITR 422 (SC). (ii) Maharaja Chintamani Saran Nath Sah Deo v....
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.... received as part of the sale of the product the receipt is revenue in nature. It is further submitted that the assessee is having marketing rights vis-a-vis many other products and relied the following case law : (i) Gammon India P. Ltd. v. CIT [1993] 202 ITR 986 (Bom). (ii) Blue Star Ltd. v. CIT [1996] 217 ITR 514 (Bom). (iii) Asst. CIT v. Hinditron Services P. Ltd. [2006] 99 ITD 479 (Mum). (iv) Indian Engineering and Commercial Corporation P. Ltd. v. CIT [1994] 205 ITR 1 (Bom). 16. Learned counsel was asked to clarify the amounts involved in various issues as the amount of 5 per cent. increase is not exactly tallying to the amounts of claim made in the later two years. Accordingly the following clarification was furnished with reference to the amounts involved : "Computation of marketing rights A. Y. 1999-2000 2000-01 2001-02 Petroleum products 430,000,000 451,500,000 474,075,000 Bitumen mktg. rights Nil 28,822,881 36,565,716 Total 430,000,000 480,322,881 510,640,716 Computation of marketing rights for petroleum products 1999-2000 430,000,000 2000-01....
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....vide article 3.5. In view of this specific clause of quantity of products offered, more so with reference to the limited marketing rights of decontrolled products, it cannot be stated that the IOC has paid an amount of Rs. 43 crores for forgoing exclusive marketing rights of the CRL products. The article 18 : Compensation is as under : "Article 18 : Compensation 18.1 In consideration of exclusive marketing rights of CRL's products assigned to IOC as per article 3 of this agreement, IOC shall pay CRL a lumpsum amount of Rs. 43 crores per annum with escalation of 5 per cent. (compounded) per annum. In addition, IOC shall pay CRL an amount of Rs. 10 crores per annum towards CRL's marketing facilities with escalation of 5 per cent. (compounded) per annum. 18.2 CRL shall raise bill on IOC towards the aforesaid annual compensation in four equal instalments on quarterly basis, at the middle of each quarter. IOC shall make payment to CRL within 3 days of the bill. In regard to compensation for the 3 quarters of the current financial year 1998-99, the amount will be paid to CRL not later than a month after effectuation of the contract and after deducting the finan....
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....d by the assessee by this agreement which when asked for reconciliation the assessee has submitted there was separate agreement for marketing bitumen products for the assessment years 2000-01 and 200102, copy of which was neither placed before the Assessing Officer nor the Commissioner of Income-tax (Appeals), nor before us. It cannot be stated that in these facts of the case that the assessee has exclusive marketing rights of its products and they were assigned to IOC on exclusive basis so as to consider the amount as capital receipts. The facts indicate otherwise. It is to be further considered that this agreement is only for a period of five years and as rightly considered by the Assessing Officer and the Commissioner of Income-tax (Appeals) the IOC was marketing its products earlier and continued with the similar arrangements during this year also. Vide article 18.1 not only the lumpsum amount of Rs. 43 crores was paid in the first year with an escalation of 5 per cent. for the later year the IOC also paid an amount of Rs. 10 crores per annum for utilising the marketing facilities with escalation of 5 per cent. per annum. There is no dispute of this amount being revenue in natu....
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....ould, prima facie, be of the nature of a capital receipt. But there is no evidence that compensation was paid to the appellant as consideration for giving the undertaking not to carry on a competitive business, or as compensation for loss of goodwill.' It is true that the Supreme Court made the aforesaid observation in the above case. But it is also true that the Supreme Court has stated as under in the aforesaid judgment (page 291) : 'There is, in our judgment, no immutable principle that compensation received on cancellation of an agency must always be regarded as capital. In each case the question has to be determined in the light of the attendant circumstances. In the judgment in Kettlewell Bullen and Co. Ltd.'s case [1964] 53 ITR 261 (SC) we have explained that the judgment of the Judicial Committee in CIT v. Shaw Wallace and Co. [1932] 2 Comp Cas 276 (PC) was not intended to, and did not, lay down that in every case cancellation of an agency resulted in a loss of source of revenue or that amounts paid to compensate for loss of agency must be regarded as capital loss.' The fact is that in the said case the assessee was carrying on business in diverse....
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....relied on the decision of the Supreme Court in the case of CIT v. Best and Co. P. Ltd. [1966] 60 ITR 11 in support of its contention that an amount received by an assessee for accepting a restrictive covenant is a capital receipt. In the said case the Supreme Court held that the compensation agreed to be paid was not only in lieu of agency but also for the respondent's accepting a restrictive covenant for a specified period. The Supreme Court further held as per the facts in that case that, that part of the compensation received towards loss of agency was a revenue receipt as the loss of the agency was a normal trading loss. The Supreme Court also found that the restrictive covenant in the said case was an independent obligation which came into operation only when the agency was terminated and hence that part of the compensation which was attributed to the restrictive covenant was a capital receipt. Therefore the Supreme Court held that an apportionment had to be made of the compensation on a reasonable basis between consideration for the loss of agency in the normal course of the business and consideration for the restrictive covenant. At this stage I have to note that payment as ....
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.... claimed it to be a capital receipt. The Supreme Court held that whether the receipt was a capital or revenue had to be determined from the facts of the case. Analysing the facts of the case the Supreme Court held as under (page 907) : '...... as provided in article XVIII of the first agreement the assessee was having an option or right or lien, if the owner desired to transfer the hotel or lease all or part of the hotel to any other person, the same was required to be offered first to the assessee (operator) or its nominee. This right to exercise its option was given up by a supplementary agreement which was executed in September, 1975, between the receiver and the assessee. It was agreed that the receiver would be at liberty to sell or otherwise dispose of the said property at such price and on such terms as he may deem fit and was not under any obligation requiring the purchaser thereof to enter into any agreement with the operator (assessee) for the purpose of operating and managing the hotel or otherwise, and in its return, agreed consideration was as stated above in clause X. On the basis of the said agreement, the assessee has received the amount in question. The am....
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....e was engaged in distributing the products of three companies on principal to principal basis. In other words the assessee was not acting as agent of any principal company but was distributing the goods of the company on principal to principal basis. The distribution agreement entered into in 1964 was terminated in 1984, as a result of which the assessee received a lumpsum amount of Rs. 42 lakhs. The assessee claimed it to be a capital receipt. The Madras High Court upheld this contention saying that the amount paid to the assessee was compensation for impairment of the profit making apparatus of the assessee and for the sterilisation of the very source of its income because the assessee had agreed not to act as distributor, stockist, dealer or agent of any other manufacturer or dealer of products similar to or competing with those of the companies. The assessee in that case had a large sales organisation, a large dealership network of sub-dealers of various industrial products. The assessee has transferred the entire establishment including the dealership network established by the assessee. It is in this background that the Madras High Court held that the amount received was a ca....
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....n at CRL's wagon loading and truck loading. This does not mean that there is any transfer of any marketing facilities by the CRL to IOC. Article 3.3 of the agreement shows that the CRL can put up some Jubilee retail outlets in line with the approval of the Government and that the CRL can supply motor spirit and HSD to these outlets directly. It is also agreed that the quantities so supplied will be set off from the quantities of these products offered to the IOC. The claim of the appellant that the appellant has conferred the exclusive right of marketing to the IOC is hence not correct. What the appellant transferred to the IOC is the marketing rights of controlled products and decontrolled products totalling to 6871000 MT of petroleum products generated out of 7.5 MMTP per annum of crude oil. It is also stated in article 3.9 that the CRL shall supply to the IOC the products from the proposed expanded capacity. As stated already, all the rights transferred relate to stock-in-trade and are hence not capital rights. The claim of the appellant that the marketing rights should be construed as a property forming part of the capital asset of the company is hence not correct. The marketin....
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....o relied on the decision in the case of CIT v. B. C. Srinivasa Setty [1981] 128 ITR 294 (SC) to claim that the appellant has no liability to any capital gains. It is said that the capital asset namely the marketing rights is a self generated asset and no cost can be attributed to it. It is, therefore, said that the transfer of the same is not chargeable to capital gains tax. The appellant has further relied on the legislative amendments made to section 55 of the Act subsequent to the Supreme Court's decision. It is said that the scope of section 55(2) has been enlarged from time to time to provide that the cost of acquisition in the case of assets such as goodwill of assets, tenancy rights, loom hours, stage carriage permits and the right to manufacture, produce or process any article or thing shall be nil. It is therefore said that the marketing right is also a self generated asset other than those provided in section 55(2) would continue to be exempt in view of the decision of the Supreme Court in the case of CIT v. B. C. Srinivasa Setty [1981] 128 ITR 294. (m) I have examined the above claims of the appellant. It has been already held that the marketing right transferre....
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.... conclude that the said receipt is revenue in nature. We submit that ratio of this decision is not applicable on the facts of the present case. In the captioned case, the assessee received a certain amount as compensation for the premature termination of the contract. It was held that when a contract was entered into the ordinary course of business, any compensation received for its termination would be a revenue receipt, irrespective of whether its performance was to consist of a single act or a series of acts spread over a period, and in this respect, it differs from an agency agreement. We submit that this case is conceptually different from the appellant's case. In the case of the appellant, compensation was received for surrendering the marketing rights, which is capital asset. As per the agreement, the appellant shall not offer the said products to any other marketing company during the pendency of this agreement. In view of this, it is submitted that the ratio of the decision of CIT v. Rai Bahadur Jayram Valji [1959] 35 ITR 148 (SC) does not apply to the appellant's case. (b) Further the learned Commissioner of Income-tax (Appeals) has rel....
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....ts over two of the products. Even though bitumen has also entered into later years, but the fact that the assessee has retained the marketing rights at the initial stage itself for which compensation was paid cannot be considered as compensation for surrendering of exclusive marketing rights. Various case law relied upon by learned counsel/assessee are given in support of the facts as applicable to them. In fact the same was also considered by the co-ordinate Bench in the case of BASF India Ltd. v. Addl. CIT [2009] 119 ITD 337 (Mum) relied upon by learned counsel. In that case it was held as under : "There is no conclusive test for drawing a line of demarcation between the capital and revenue receipts, yet certain general principles have been laid down by the courts which work as a guiding light. If the receipt relates to the 'loss of income', it has been held to be of the revenue character and if, however, it relates to the 'loss of source of income', then it will partake the character of the capital receipt. From the decisions laid down in CIT v. Prabhu Dayal [1971] 82 ITR 804 (SC) ; CIT v. Ambadi Enterprises Ltd. [2004] 267 ITR 702 (Mad) ; 139 Taxman 96 (Mad) and CIT v.....
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....ties at the time of assessment as well as at the time of appeal before the Commissioner of Income-tax (Appeals). Since the said certificate was received by the declaration dated February 23, 2006, it is the assessee's request that this issue can be set aside to the file of the Assessing Officer for doing the needful. There was an alternate plea also that the Assessing Officer or the Commissioner of Income-tax (Appeals) should have allowed depreciation on the assets taken over from the said CRBL on their original cost as claimed by the assessee during the assessment proceedings. The alternate plea need not be considered now as the assessee has got the relevant declaration under section 72A(2) of the Income-tax Act. In view of this the Assessing Officer is directed to examine the above issue keeping in view the certificate and consider the set-off of unabsorbed depreciation and business loss and also allowance of depreciation at the written down value as per law for this purpose. The issue in the ground is restored to the file of the Assessing Officer. The assessee should be given an opportunity before deciding the matter afresh by the Assessing Officer. 24. Ground No. 5 is n....
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....orporation Ltd. [2001] 252 ITR 43 (Bom) wherein it was held that reimbursement of club expenses does not constitute contribution to any funds under section 40A(9) of the Act so as to attract restricted provisions of this section. Respectfully following the above said decision we hold that the payments to staff club are not covered by the provisions of section 40A(9) and accordingly they are to be allowed as expenditure incurred wholly and exclusively for the purpose of business under section 37(1). The Assessing Officer is directed to allow the expenditure. Ground No. 3 is allowed. 30. Ground No. 4 pertains to writing back of provisions for bad and doubtful debts to the book profit of Rs. 6,34,74,000. The facts in this ground is that in computing the book profit under section 115JB the assessee had excluded an amount of Rs. 6,34,74,000 from the book profits representing the provisions made for doubtful debts in the assessment year 1998-99, now withdrawn and credited to the profit and loss account this year. The facts indicate that this amount of provision was added back in the regular computation of income for the assessment year 1998-99 and there was no computation under sectio....
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.... from the book profits to be computed under section 115JB under Explanation (i) thereto. 32. The learned Departmental representative in reply submitted that the assessee should not be permitted to withdraw the amount when the same was not originally offered to tax and accordingly the Assessing Officer's orders are correct. He relied on the decision of the hon'ble Delhi High Court in the case of Indo Rama Synthetics (I) Ltd. v. CIT [2010] 320 ITR 340 to submit that for the purpose of computing book profit under section 115JB the amount withdrawn from revaluation reserve created after April 1, 1997 and credited to the profit and loss account is not to be reduced from net profit as per profit and loss account unless book profit had been increased by amount of reserve in year of creation of such reserve. 33. We have considered the arguments of learned counsel and the learned Departmental representative. It is an admitted fact that the provision for bad and doubtful debts was made in the financial year relevant to the assessment year 1998-99 and the same amount was added back in the regular computation. By virtue of law, it is the duty of the Assessing Officer to compute the norma....