TaxTMI 
TaxTMI 
2011 (7) TMI 401
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.... Rs.1,28,96,220/-. Subsequently, the said return was revised declaring the income of Rs.6,60,07,130/- as the income under provision of section 115JA was more than the total income as determined by the assessee under the normal provisions of the Act. However, the assessment after making various disallowances was completed at an income of Rs.29,38,01,950/- vide order dated 30.3.2000 passed under section 143(3) of the Income Tax Act, 1961 (in short the Act). On appeal, the learned Commissioner of Income Tax (A) partly allowed the appeal. 3. Being aggrieved by the orders of the learned Commissioner of Income Tax (A), the assessee and Revenue both are in appeal before us. ITA No. 3596/Mum/2003(by assessee) 4. Ground No.I (1) is against the sustenance of disallowance of Rs.7.25 crores on account of Non Competition Fee. 5. At the time of hearing, the learned Counsel for the assessee fairly submits that this issue is covered against the assessee and in favour of the Revenue by the decision of the Special Bench of the Tribunal in Tecumseh India Pvt. Ltd vs Addl. CIT. He further submits that the Tribunal in the case of M/s Procter and Gamble Home Products Ltd.....
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....In that case, the assessee who was a manufacturer of Cement had paid protection fees to the lessor of quarries for lime stone, on annual payment of Rs.5000/- for the whole period of lease and another sum of Rs.35000/- p.a. as a further protection fees for five years for similar undertaking in respect of the whole district. The issue was whether the payment could be allowed as revenue expenditure. Hon'ble Supreme Court observed that the fact that the payment was recurring was immaterial. It was the nature of asset acquired which was material. The asset required was the right to carry on the business unfettered by any competition which was not a part of working of the business but went on to appreciate the whole of the capital asset and make it more profit yielding. The expenditure was thus hold as capital in nature by the Hon'ble Supreme Court. The Learned AR has not brought on record any distinguishing feature from the facts of Tecumseh (I) (P) Ltd. (supra). Therefore respectfully following the decision of Special Bench in case of Tecumseh (I) (P) Ltd. (supra), we uphold the order of CIT(A) confirming the disallowance as capital expenditure." In the absence of any distingui....
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....ase in Procter and Gamble Distribution Company Limited V/s DCIT in ITA No.846/Mum/2003 (AY-1994-95) order dated 9.5.2008, wherein the Tribunal after examining the issue has deleted the similar disallowance made by the AO. He has also placed on record the copy of the said order of the Tribunal. 11. On the other hand, the learned D.R. supports the order of the AO and the learned Commissioner of Income Tax (A). 12. Having carefully heard the submissions of the rival parties and perusing the material available on record we find merit in the plea of the learned counsel for the assessee that the issue is squarely covered in favour of the assessee and against the Revenue by the decision of the Tribunal in assessee's own case (supra), wherein the Tribunal has held vide paragraph 9 at pages 6 and of its order as under: "9........We find that the payments are staggered over the period of seven years. The rights granted to PGG are non-exclusive rights to use the trademarks. In a sense, the assessee paying the installment as he uses them, which shows that it is in the nature of Revenue only. Accordingly, the same is allowed" Respectfully following the same and a....
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....llowance made by the AO. 15. At the time of hearing, the learned counsel for the assessee submits that the Tribunal in the assessee's appeals (supra) in the earlier years on the similar facts and circumstances of the case has restored the issue to file of the AO, therefore, following the same, the issue may be restored to the file of the AO. 16. On the other hand, the learned D.R. supports the order of the AO and the learned Commissioner of Income Tax (A). 17. Having carefully heard the submissions of the rival parties and perusing the material available on record we find merit in the plea of the learned counsel for the assessee that on the similar issue, the Tribunal in the earlier years has restored back the matter to the file of the AO vide finding recorded in paragraph 13, pages 7 and 8 of its order dated 9.5.2008 (supra) as under: "13. Ld.A.R. for assessee mentioned that the similar payments were made to M/s Asia Today Ltd. and issue came up before the Hon'ble Tribunal in the case of M/s PGHHPL vide ITA No.5153/M/98 for AY 1995-96 and 5687 and 5688/M/99 for AY 1994-95 and 1996-97. In these appeals, on this issue, the Hon'ble ITAT has referred th....
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....Paragraph 10.1 to 10.7, pages 12 to 14 of Assessment Order): "10.1 "During the year under consideration the joint venture with Godrej family was terminated as per the terms of the Termination of JV agreement, a copy of which has already been submitted to you in Assessment year 1996-97. The said sum of Rs.12,26,40,000/- has been paid as per the terms of the said agreement as follows: Rs.11,26,40,000/- is towards termination of Manufacturing agreement which was a part of the Joint Venture Agreement and Rs.1,00,00,000/- is towards termination of all other agreements related to the Joint Venture Agreement. As is clear from the agreement this payment is towards termination of existing agreements which expenditure is required by commercial expediency and is not of an enduring nature or is not bringing into existence any capital assets and hence the same is claimed as revenue expenditure in the Return of Income." 10.2 The assessee was again given another opportunity vide letter dated 7th January, 2000 to explain why these expenses should not be treated as capital expenditure since the payments were made on termination of Joint Venture Agreement. 10.3 In res....
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....ent and to make the payment to Godrej Soaps Ltd. 10.7 In response to the above, the assessee vide its letter dated 13th March, 2000 submitted as under: "This refers to the information submitted by us on January, 25, 2000 and January 31, 2000 and the subsequent hearing wherein your good self has requested us to explain specifically as to the allowbility of the deductions claimed by us in respect of the following payments: i) a sum of Rs.11.264 crores to Godrej Soaps Ltd (GSL) for a premature termination of the Manufacturing Agreement, and ii) a sum of Rs. 1 crores to GSL for termination of all other Joint Venture Agreements. As requested, we explain in respect of the above as follows: Re: termination of Manufacturing Agreement: The assessee company had entered into Joint Venture Agreement (JVA) in January 1993 by which the assessee company agreed to purchase 80,000 metric tones of toilet soaps per annum from April, 1993 from GSL on a principal basis. By this JVA GSL also agreed to terminate its manufacturing agreements with third parties for manufacture of toilet soaps. This Manufacturing Agreement was for a period of 10 years.....
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....ents of JVA: This amount was paid to GSL to compensate for the loss on account of premature termination of all other agreements which formed a part of JVA. We submit that payment of compensation for early termination of the other agreement of JVA being a business expenditure is fully deductible as revenue expenditure. In this respect we place reliance on the submissions made above regarding the payment for termination of Manufacturing Agreement" However, the AO did not accept the assessee's explanation. He observed that the assessee has not furnished any basis on which odd figure of Rs.11.264 crores has been worked out for termination of Manufacturing agreement and Rs. 1 crore to be paid towards termination of other Joint Venture Agreements. The AO after considering the certain clause of the agreement including Clause 19 of the Agreement which reads as under: "INDEMNIFICATION 19. In the event of the expiration or termination of this Agreement, none of the parties shall be liable to the other parties for any loss of anticipated sales or prospective profits or because of expenditures related to the performance of this Agreement." distinguished ....
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.... return and even after receiving payments from the assessee company, GSL was not liable to pay any income tax. Thus, it leads to irresistible conclusion that payments were made for termination of Joint Venture between two groups and on convenient understanding, the payments were shown to be made to GSL which will not be liable to pay any income tax. Thus, it was only camaflouging that the payment has been shown to be made for termination of manufacturing agreement of Rs.11.264 crores and only Rs. One crore for all the agreements entered under Joint Venture Agreement. Thus, the payment was related to the change of ownership and management of the company exclusively to PandG Group. Thus, it cannot be said that the payment has been made for any termination of trading agreement but it was made for restructuring of the company and hence, was capital expenditure." 20. On appeal, the learned Commissioner of Income Tax (A) while agreeing with the views of the AO held that the entire payment of Rs.12,26,40,000/- was not incurred by the appellant wholly and exclusively for the purposes of its business as required by the provisions of section 37 (1) of the Act and accordingly he confi....
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....98 (Rs.in crore) Particulars Financial Year 1996-97 1995-96 1994-95 a. Sales 175.08 364.55 351.49 b.Purchase cost 100.12 316.43 315.05 c.Purchase Cost as % of Sales 57.18% 86.80% 89.62% d.Profit before tax 22.85 (34.05) 15.4 (Year under appeal) Quantity purchased was lower in Year 1994 (46,000 tonnes) and Year 1995 (38,000 tonnes), as against Annual Commitments of 80,000 tones. 2. Whether termination affected Profit making apparatus of the Company i) Appellant continued selling its major soap brand 'Camay' even after termination of JV, therefore the Profit making apparatus was not affected. 3. Compensation was given for loss of sales and profits and idle capacity of GSL resulting from termination i) Although original agreement did not envisage such compensation, an agreement can always be modified by consent of both parties. Hence, to the extent the confined agreement was not acted upon, it was overridden by new termination agreement. ii) In any case, Clause 19 of JV agreement applied and in cases of termination mentioned in paragraph 14 of the JV Agreement and this is not such a termination. &nb....
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....agazines are for the relevant assessment year but the same were not filed before the AO as observed by the AO in paragraph 10.14 of the assessment order. Now the assessee is filing the same as an additional evidence, in view of the observations of the Tribunal in the case of M/s PGHPL (supra), wherein it has been held in Paragraph 2.5.5 that "There is also no material produced to show that there were any difficulties between the two parties regarding the working of the manufacturing agreement". However, keeping in view that the above additional evidence is for the relevant assessment year which according to the learned counsel for the assessee goes to the very root of the matter, we admit the same. 26. We further find that on the similar facts and circumstances of the case, the Tribunal in the case of M/s PGHPL (supra), has considered the above issue in detail and after considering all the decisions relied on by the learned counsel for the assessee has held vide paragraphs 2.5.4 to 2.5.13 as under: "2.5.4 We have perused the records and considered the rival contentions carefully. The dispute is regarding the nature of expenditure incurred by the assessee by way of p....
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....o enter into a separate termination agreement. The termination agreement dated 30.7.96 was only a formality. There is also no material produced to show that there were any difficulties between the two parties regarding the working of the manufacturing agreement. Merely because the GP rate in the subsequent period had improved, it cannot be the basis to conclude that the manufacturing agreement had been terminated because of any commercial constraints when no such material has been placed on record. It has been submitted that sale and profit had improved after the termination. But we find from the details given at page 37 of the paper book that sales of soap and detergent had fallen down to Rs.284 crore in F.Y.1996-97 compared to Rs.299 crore in F.Y.1995-96. GP rate in respect of soap and detergent is not given. No such plea was raised before lower authorities and therefore cannot be entertained at this stage as it will require going into fresh facts. Moreover the manufacturing agreement was not terminated because of any constraints in the working of the manufacturing agreement but because of the termination of the JVA as on the termination of J.V. the manufacturing agreement automa....
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.... said view is supported by the judgment of Hon'ble Supreme Court in case of Empire Jute Co. (124 ITR 1). We have already held that the payment in this case was in relation to restructuring and reorganization of business frame work and profit earning apparatus of the P and G group. The payment was not wholly and exclusively for termination of manufacturing agreement between the assessee and the GSL. Therefore in our view the expenditure has to be treated as capital in nature. The Learned AR for the assessee has argued that the manufacturing agreement was like one of several agencies taken during the course of business and therefore expenditure on termination of one agency has to be treated as revenue in nature. We are unable to accept the argument. Firstly this is not a case of termination of one of several agencies. The JVA as we have discussed earlier provided for long term business framework and profit earning apparatus of the P and G group. Secondly, payment made for cancellation of an agency can be considered as revenue expenditure only when it does not affect the trading or profit earning structure of the business. In the present case we have already held that the termination ....
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....y, the agreement was only in connections with obtaining finance required for the purpose of business and any payment in connection with the finance, for the working of business is a revenue expenditure. The termination of agreement did not have any impact on the profit earning apparatus. The Hon'ble High Court held that payment had been made only to remove difficulty in the smooth running of business. The case is obviously distinguishable as the payment did not relate to the profit earning apparatus. 2.5.10 In case of CIT vs Motor Industries Co. Ltd. (223 ITR 112), the assessee was manufacture and distributor of automobile parts. The assessee had an agreement with the sole distributor which expired on 9.2.72. The assessee entered into a fresh agreement with the sole distributor on 18.3.72 as per which the distributorship was restricted to certain areas. The agreement was limited to five years till 9.2.77 without any right of renewal to the distributor. Instead of renewing the agreement in 1977, the assessee decided to take on the remaining territory from the distributor on payment of Rs.99 lacs over a period of three years and the issue was whether the expenditure could be ....
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....ture as capital expenditure. The order of CIT (A) is accordingly upheld." 27. As regards the decision of the Hon'ble Supreme Court in Senairam Doongarmall (supra), we are of the view that there is no quarrel on the ratio of the principle laid down by their Lordships. However, keeping in view the decision of the Tribunal in M/s PGHPL (supra), indemnification clause No.19 of the agreement (supra), we are of the view that the said decision relied on by the learned counsel for the assessee is distinguishable and not applicable to the facts of the present case. 28. In the absence of any other distinguishing feature brought on record by the learned counsel for the assessee, keeping in view indemnification clause No.19 of the Agreement (supra) and in the absence of any documentary evidence in support of the Article published in the magazines, we respectfully following the order of the Tribunal (supra) hold that the expenditure of Rs.12,26,40,000/- is in the nature of capital expenditure not allowable as revenue expenditure under section 37(1) of the Act. Accordingly, we are inclined to uphold the order of the learned Commissioner of Income Tax (A) in confirming the disallo....
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.... on record we find merit in the plea of the learned counsel for the assessee that the Tribunal in assessee's own case (supra) following the decision of the Hon'ble Apex Court in Bharat Earth Movers Ltd. (supra) has allowed the claim of the assessee vide paragraph 22 of the order. In the absence of any distinguishing feature brought on record by the Revenue, we respectfully following the same uphold the order of the learned Commissioner of Income Tax (A) in allowing the claim of the assessee. The ground No.1 taken by the Revenue is, therefore, rejected. 37. Ground No.2 is against the deletion of Obsolete Material Written Off of Rs.73,42,784/- 38. Brief facts of the above issue are that from the details of miscellaneous expenses, the AO noted that the amount of Rs.73,42,784/- has been debited on account of Obsolete Material Written Off. In response to show cause notice as to why the same should not be added to the income of the assessee, the assessee furnished the reply interalia stating that the expenditure incurred under the head Obsolete Material Written Off consists of raw material and packing material which has become obsolete and hence cannot be used after that ....
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....e of the assessee. On appeal, the learned Commissioner of Income Tax (A) following the appellate orders for the assessment years 1994-95 to 1996-97, wherein he has deleted the similar disallowance, deleted the disallowance made by the AO. 45. At the time of hearing, the learned D.R. supports the order of the AO. 46. On the other hand, the learned counsel of the assessee while relying on the order of the learned Commissioner of Income Tax (A) submits that this issue is also covered in favour of the assessee by the order of the Tribunal for the assessment year 1996-97 in ITA No.861/Mum/2003 order dated 9.5.2008 (supra). He, therefore, submits that following the same the order passed by the learned Commissioner of Income Tax (A) in deleting the disallowance be upheld. 47. Having carefully heard the submissions of the rival parties and perusing the material available on record we find merit in the plea of the learned counsel for the assessee that the Tribunal on the similar facts and circumstance of the case has upheld the order of the learned Commissioner of the Income Tax (A) deleting the disallowance made by the AO vide paragraph 28 of the order (supra). Foll....