TaxTMI 
TaxTMI 
2012 (10) TMI 178
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....id to Sri.U.Mohan Rao was capital expenditure without appreciating that such expenditure has not resulted in an enduring benefit? 4. Whether on the facts and circumstances of the case, the Tribunal was right in confirming the disallowance of depreciation claimed under Section 32 by relying on the decision of Supreme Court in the case of M/s. Escorts vs. UOI (199 ITR 43), when the appellant has not claimed doubt deduction under Section 35AB and 32 on technical knowhow? The assessee is on appeal before this Court. The assessee is engaged in the manufacture of abrasives, industrial ceramics and electro minerals. 2. As far as the first and second questions raised before this Court are concerned, both these questions are covered by the decisions of this Court. The first question regarding the includability of scrap sales in total turnover is covered by the decision reported in [2007] 293 ITR 108 (Commissioner of Income Tax vs. Shiva Distilleries Limited) and [2008] 297 ITR 107 (CIT vs. Ashok Leyland Ltd.) in favour of the assessee. Consequently, the question has to be held against the revenue and the order of the Tribunal, to that extent, is incorrect. 3. ....
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....osition to influence the business of manufacture, sale and distribution of the products held by the said company. In the circumstances, in order that the said Mohanrao's expertise in that field did not, in any manner, prejudice the good prospects of the business of the assessee company in future, the parties agreed that in respect of the products, namely, phenol formaldehyde resin (in liquid and powder forms), saturated polyester resin, unsaturated polyester resin, modified alkalyd and any other resin, all having application in coated and bonded abrasives manufacture, shall not be dealt with by the said U.Mohanrao. In consideration of the same, the said U.Mohanrao would be paid a sum of Rs.50,00,000/- as a non-compete fee. The agreement laid down the restrictive covenants that the said U.Mohanrao shall not manufacture directly or indirectly any of the products mentioned above and shall not deal with the said products in any manner or advise, assist, aid, either directly or indirectly, any competitor or any other person in either establishing, managing, promoting or developing the business of the said products or any product similar thereto; he shall not act as a Consultant or use a....
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....ess. Consequently, the Officer held that the expenditure was in the capital field and not as revenue. 8. Aggrieved by this, the assessee went on appeal before the Commissioner of Income Tax (Appeals), who upheld the decision of the Assessing Authority. Aggrieved by this, the assessee went on further appeal before the Income Tax Appellate Tribunal. Referring to the decision reported in [1991] 191 ITR 249 (Chelpark Company Ltd. vs. Commissioner of Income Tax) and [1999] 239 ITR 142 (Tamilnadu Dairy Development Corpn. Ltd. vs. Commissioner of Income-Tax), the Tribunal, by a cryptic order, rejected the assessee's claim. There is hardly any discussion in the order, particularly with reference to the non-compete fee agreements, referred to above. Aggrieved by this, the assessee is on appeal before this Court. 9. Learned counsel appearing for the assessee placed reliance on the decision of the Apex Court reported in [1971] 82 ITR 902 (CIT vs. Coal Shipments P. Ltd (S.C.), [1980] 124 ITR 1 (Empire Jute Co. Ltd. vs. Commissioner of Income Tax (S.C.) and [1989] 177 ITR 377 (Alembic Chemical Works Co. Ltd. and pointed out to the guiding factor in the matter of considering the claim as t....
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....nditure in its accounts and the amount paid was to ward off any competition in the business of the assessee, the expenditure made was only a capital expenditure; hence, not entitled to deduction. 13. Heard learned counsel appearing for both sides and perused the materials placed on record. 14. As far as the question as to whether an expenditure could be a capital expenditure or revenue expenditure is concerned, the concept that the expenditure yielding an advantage of an enduring nature would be only a capital expenditure, has been fine-tuned, that even when expenditure was incurred for obtaining advantage of enduring benefit, nonetheless, the same can be taken as one of revenue account. In the decision reported in [1980] 124 ITR 1 (Empire Jute Co. Ltd. vs. Commissioner of Income Tax (S.C.), the Apex Court pointed out that the test of enduring benefit is not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case. In a transaction of transfer of allotment of loom hours, on the question as to whether it is a revenue expenditure or a capital expenditure, the Apex Court pointed out th....
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....ssession of which is a condition of carrying on its trade at all?" It is clear from the above discussion that the payment made by the assessee for purchase of loom hours was expenditure laid out as part of the process of profit earning. It was, to use Lord Sumner's words, an outlay of a business "in order to carry it on and to earn a profit out of this expense as an expense of carrying it on". [John Smith and Son v. Moore [1921] 12 TC 266, 296 (HL)]. It was part of the cost of operating the profit-earning apparatus and was clearly in the nature of revenue expenditure." 16. Thus the question as to whether an expenditure is revenue or not has to be seen from the context of an expenditure forming "part of the cost of the income-earning machine or structure" as opposed to part of "the cost of performing the income-earning operations". - [1971] 82 ITR 902 (CIT vs. Coal Shipments P. Ltd. (S.C.). 17. Thus, the consistent guiding principles in matters of understanding an expenditure as a capital or revenue, as held by the Apex Court, is to find out the aim and object of the expenditure and the commercial necessities of making such an expenditure. The question has to be considered in ....