AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2012 (12) TMI 758
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....ay for termination of Toll manufacturing Agreement be treated as Capital Expenditure as held by the DCIT in Draft assessment order and depreciation on the same shall be allowed". Facts of the case: On 29.08.997 the assessee and Colour Chem Ltd.,(CCL) entered into a Toll Manufacturing Agreement (TMA) whereby it was agreed that CCL would undertake the production of textile dyestuffs for and on behalf of the assessee company at CCL's plants. As per clause 13.1 of the said agreement, the agreement was for an initial period of 5 years with effect from 01-09-1997,but could not be terminated before a minimum period of 2 years. After the initial period of 5 years, the agreement was to continue for further period of one year each unless terminated by either party by giving 12 months prior notice that the CCL decided to amalgamate with Clariant India Ltd., Vanavil dyes and Chemicals Ltd., BTP India Private Ltd., and Kundalika Investment Ltd., in to a new company called 'Clariant Chemicals Ltd' (Clariant) with effect from 31-03-2006. Vide an agreement dt. 24-03-2006 TMA was terminated. 2. After considering the submission of the Authorised Representative (AR) with regard to termination of T....
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....d to pay Rs. 2.20 Crores to CCL for the reason that due to the short notice period it might take some time to deploy the employees and assets used for the manufacturing purpose of the assessee for manufacturing of others. From the above facts, it can be observed that the compensation paid by the assessee is not for the termination of toll manufacturing agreement but for shifting the assets which is taken over by the assessee from CCL. Therefore, the compensation paid are in the nature of capital expenses. It is pertinent to mention here that in this case the CCL has approached the assessee for the termination of the agreement as CCL was planning for amalgamation and as such it cannot be said that the assessee has cancelled the agreement without prior notice. As per the Toll Management Agreement, the compensation is to be paid only when the agreement is terminated by either party by giving 12 months notice. In this case the CCL has approached the assessee for terminating the toll agreement and therefore the assessee is not required to pay any compensation. From these facts , it is clear that the assessee has paid the compensation not for the termination of toll agreement but for sh....
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....L decided to amalgamate in a new company called Clariant Chemical Ltd., vii) Assessee terminated TMA w.e.f. 24-03-2006. viii) Assessee paid Rs. 2.20 Crores to CCL on termination of TMA. 5.1 We find that in the TMA (pg.10 of PB) assessee and CCL were termed Principal and Processor.CCL had to manufacture goods as per the specifications determined by the assessee. Under the head "Duration of the Agreement" (pg. 20 of PB) the following terms and conditions were agreed upon: "Either party to the Agreement may terminate the Agreement with immediate notice, if the other party is in breach or default of any stipulation of or obligation under this Agreement and does not discontinue such breach or default and to the extent possible, remedy the consequences thereof within a period of two weeks after having been requested to do so in writing; or It is hereby agreed by and between the parties hereto that on the expiry or termination or sooner determination of the Toll manufacturing Agreement referred to hereinabove, the Principal shall be bound and liable to pay to the Processor remnant cost for discharging personnel and any other costs and liabilities incidental thereto and arising out of....
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....ll cover a period of three months. In these circumstances, if CCL by its own decided to terminate TMA without giving a timely notice to the assessee to arrange alternate processor, then payment made to CCL in violation of terms and conditions of the TMA-cannot be held expenditure incurred wholly and exclusively for business purposes. 7. In the Act phrase wholly and exclusively has been used at more than one places, and it has been defined by the judiciary times and again. Here, we would like to refer to the said concept : i). The adverb wholly in the phrase refers to the quantum of the expenditure and the adverb exclusively refer to the object or motive of the act behind the expenditure. ii). Expenditure laid out or expended wholly and exclusively for the purpose of business or profession alone is allowed in computing the income chargeable under the head 'Profits and gains of business or profession'. The burden is entirely on the assessee to establish that the amount laid out or expended by him is wholly or exclusively used for the purpose of its business. iii). The expression wholly and exclusively used in section 37(1),does not denote necessarily. It refers to quantum of expe....
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....d not be in the nature of capital expenditure or personal expenditure of the assessee and it should be wholly and exclusively laid out for the purposes of the business. It is well-settled that items of expenditure are to be considered from the point of view of a normal, prudent businessman. This test merely means that the court will place itself in the position of a businessman and find out whether the expenses incurred could be said to have been laid out for the purposes of the business. ix). Mere payment by itself would not entitle the assessee to deduction of expenditure unless the same was proved to be paid for commercial considerations. The burden of proof is always upon the assessee. It is for the taxpayer to establish by evidence that a particular allowance is justified. It is not for the AO to independently collect evidence and prove that the deduction claimed by the assessee is baseless. (256 ITR701) 8. We are aware that there cannot be any blanket allowance of the expenditure nor can there be any blanket disallowance. Every case has to be discussed specifically and the expenditure must be found to be of the nature mentioned in the section. So, if the above principles an....
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....ny compensation for the loss of jewellery pledged with it. But such a stand might very well have ruined its business, especially in the rural areas in which it operated. The bank had evidently two courses open : to enforce its rights strictly according to law, and thereby to lose the goodwill it had built up among the constituents, or to compensate the constituents for loss of their jewellery, and maintain its business connections and goodwill. In choosing the second alternative, in our judgment, the bank laid out expenditure for the purpose of its business." In the case under consideration there is neither any danger of dent to the goodwill of the assessee nor adverse affect was looming large over the business carried on by the assessee-breach of agreement was not by the assessee. If CCL without giving stipulated notice terminated the agreement, then goodwill of the CCL would have been at stake. If any step for maintaining confidence had to be taken then that step had to be of CCL. In these circumstances we are of the opinion that if the AO could not find nexus between the expenditure incurred and the purpose of the business in the said transaction, he was justified. 9.1. In the....
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....he assessee. Besides, it is not a case where two sister concerns are involved and for helping one of the sister concern, other entity undertakes some proactive action. 9.2. Now, we would like to discuss the facts of the case of Sales Magnesite (Pvt.)Ltd. In that case assessee had appointed a sole selling agent under agreement subject to termination by either party and the sole selling agency was terminated as a result of amendment of Companies Act. Assessee paid compensation to sole selling agents for loss of agency. It was found that the compensation corresponded to amount of remuneration payable for unexpired period of agency. Premature termination of sole selling agency because of changes in Companies Act cannot be equated with payment made to an assessee who breaches terms of an agreement. 10. Thus facts of circumstances of all the three cases relied upon by the AR are distinguishable from the case under consideration. Business expediency was not established by the assessee at any stage of hearing, including hearing before us, for making payment to CCL in violation of the agreement. If sanctity of agreement can be ignored for the sake of argument, even then the vital questio....