TaxTMI 
TaxTMI 
2014 (1) TMI 588
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.... noted that the assessee has claimed deduction u/s.80HHC amounting to Rs.42,40,416. He observed from the P&L Account of the assessee company that the assessee has shown an amount of Rs.63,91,400 as Miscellaneous income under the head "other income". While computing the deduction claimed u/s.80HHC the assessee has reduced 90% of gross interest received but has not reduced 90% of the Miscellaneous income to arrive at the adjusted profit eligible for deduction u/s.80HHC. He referred to the order for A.Y. 1998-99 in case of the assessee wherein the issue has been discussed elaborately and the claim for the assessee that the Miscellaneous income consists mainly of scrap sale and exchange gain and hence forms a part of eligible business profit was not accepted for the reasons mentioned therein. Since the issue in the instant year is identical to that of assessment year 1998-99 the Assessing Officer relying on the observation made in the A.Y. 1998-99 recomputed the deduction u/s.80HHC by reducing 90% of the Miscellaneous income of Rs.63,91,400 in addition to 90% of interest income. 4. In appeal the learned CIT(A) allowed the claim of the assessee by following the decision of the Tribunal....
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....e consistently held that sales-tax refund goes to reduce the cost of production. Foreign exchange gains form part of eligible turnover and income from scrap sales pertain the character of business income. Useful reference may be made to the decisions of the Bombay High Court in the case of CIT Vs. Bangalore Clothing Co. [260 ITR 371 and Alfa Laval India Ltd. DCIT [266 ITR 418]. The Mumbai Tribunal in the case of Renaissance Jewellery P. Ltd. Vs. ITO [101 ITD 380] has followed the same rule. In assessee's own case for the assessment year 2000-01, the Tribunal has held in ITA No.3588/Mum/2004, that such items are forming part of the business profits for the purpose of Sec. 80HHC. Therefore, this ground is also liable to be dismissed". 5. It is also noticed from the order of the CIT(A) that miscellaneous income consist mainly of scrap sales, sales tax refund and discount. Nowhere it is mentioned that exchange gain is also included. Be that as it may, if there is any exchange gain involved the assessee is entitled for deduction under section 80HHC on the above amount. Respectfully following the above decision the grounds of the Revenue are rejected". 9. Respectfully foll....
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.... of Re. 1. Accordingly, the loss on assignment has been written off in the books of account Rs. 1,34,99,999. Rs.1,35,00,000/- (ii) The Company has entered into a Name License Agreement with M&M for use of trademarks for a one time fee Rs. 75,00,000/- TOTAL Rs.2,09,99,999/- 12. On being questioned by the Assessing Officer to justify the claim of the extraordinary items of expenditure amounting to Rs.1,35,00,000/- as a revenue expenditure the assessee replied as under: "1) Enclosed please find copy of the Agreement dated 18.07.2002 between our Company, Mahindra & Mahindra and GKN Sinter Metals Holdings Ltd., U.K. for Share sale and Purchase. 2) The Company had debts due from various customers on account of sales made to them in the normal course of business. Needless to say, the corresponding amounts had been offered for tax from time to time. In ordinary course therefore if any portion of these debts had wholly or partially bad or irrecoverable, the shortfall would have been allowable as a deduction, as a bad debt u/s.36(1)(vii). 2) The company assigned these debts to Mahindra & Mahindra in terms of an agreement dated 27th September, 2002 (....
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....s. GKN Sinter Metals Holdings Ltd. (Purchaser) held 49%. By virtue of the agreement dated 28.03.2002, the purchaser acquired the share holding of the Seller for a consideration of Rs.65 Crores. A supplementary agreement dated 18.07.2002 was made to the original agreement dated 28.03.2002, between the same 3 parties mentioned (supra). By virtue of the supplementary agreement dated 18-07-2002, the assessee company assigned Book Debts of Rs.1,35,00,000/- for a consideration of Rs.1 to the Seller." 15. After analyzing the various clauses and schedule attached to the principal agreement the AO confronted the assessee with the following facts: 4(e) In this regard, vide this office letter dated 10-02-2006, the assessee was informed as under: 1. In this regard the undersigned obtained a copy of the share sale and purchase agreement dated 20-03-2002, between Mahindra & Mahindra Ltd. (Seller) and G.K.N. Sinter Metals Holdings Ltd. (Buyer). 2. As per Clause 2 of the said agreement, certain conditions precedent to the closing of the share sale and purchase transaction was laid down. Your attention is drawn mor....
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....s not convinced with the explanation given by the assessee and disallowed the assessee's claim of expenditure amounting to Rs.1,34,99,999 holding the same to be capital expenditure in nature for the following reasons: "4(g) The assessee's various submissions have been considered in depth, however, the same is not accepted for the following reasons: (i) The assessee's contention that the amount of Book Debts assigned to Mahindra & Mahindra would be allowable as a deduction as a Bad Debts u/s.36(1)(vii) is belied by the fact that the assessee is recovering these debts on behalf of Mahindra & Mahindra and remitting the amount collected to Mahindra & Mahindra. Hence, it is not clear how these debts can be considered to be bad in the hands of the assessee company. (ii) From the copies of accounts filed by the assessee in respect of few parties in respect of debts assigned, such as: 1. Hindustan Motors Ltd. 2. Rico Auto Industries Ltd. 3. Lohia Machines Ltd. Munjal Show Ltd. 4. Hero Honda Motors L....
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....upplies made/services rendered to customers. (iv) In most cases the amount is very petty so that any legal proceedings would amount to wasting good money or bad money. (v) Bad debt is mere 1.32% of the total sales. (vi) None of the parties are Government parties. 18.1 The assessee also relied on various decisions. It was submitted that if the bad debt is not allowable as bad debt then the loss suffered on account of assigning such debt has to be allowed as business loss u/s.37. It was submitted that Mahindra & Mahindra Ltd. have confirmed that they have subsequently recovered debts amounting to Rs.79.5 lakhs only which proves that the debt assigned to Mahindra & Mahindra Ltd. was in no way good debt. It was also confirmed by Mahindra & Mahindra Ltd. that the bad debt so recovered has been offered to tax. The observations of the AO that the assignment of book debts is nothing but a colourable device was challenged. It was submitted that for the purpose of share sale one of the commercial terms of the transactions was that any debt which were doubtful for recovery and outstanding for more than 180 days is to be written off by the assessee co....
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....an agreement to write off all debts which are more than 180 days and accordingly the assessee has written off these debts not because they were bad but because there was an agreement with the purchaser of shares. Such claim of loss created by the assessee cannot be regarded as genuine loss and hence they are not allowable as business loss under Section 37(1) of the I.T. Act. The A.O. has proved that these debts are not bad in the sense that Mahindra & Mahindra to whom these debts were assigned has recovered the debts to the extent of Rs. 79.51 Lacs. Hence the loss claimed by the appellant cannot be allowed. In the result, this ground of appeal is dismissed. 8. The authorized representative filed additional ground of appeal during the course of appellate proceedings. In the additional grosund of appeal the appellant has claimed that the A.O. has disallowed the bad debt which is not justified. 9. I find that the assessee has claimed expenditure/loss in the first ground of appeal. However, during the appellate proceedings all submissions were made claiming the loss as bad debt. As such the additional ground of appeal was filed claiming the loss as bad debt.....
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....ng allowability of the same as bad debt, the same can be allowable only if the same is written off in conformity with the provisions of the I.T. Act. Further any recovery subsequent to write off is taxable under the provisions of section 41(4) of the I.T. Act and the assessee does not lose the ownership over the debt since the ownership remains with the assessee when the debt is written off. However, in the instant case the ownership has been transferred by assignment. 20.2 So far as the loss on account of assignment of the debt is concerned he submitted that in such a case the assignor assigns the debts to the assignee for the collection of the same. The assignee acting as the agent of the assignor recovers the debts from the debtors and remit to the assignor or principal. The assignor pays the assignee some commission as per agreement towards the services. Therefore, in case of assignment of debt the assignee acts as collector of debt and after collecting the money hand it over to the assignor. Relating to the facts of the case he submitted that here the assessee has collected the debt and has sent the amount collected to Mahindra & Mahindra Ltd. He submitted that the assessee, ....
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....gly submitted that the order of the Ld. CIT(A) be upheld. 20.4 We have considered the rival arguments made by both the sides, perused the orders of the AO and CIT(A) and the Paper Book filed on behalf of the assessee. We have also considered the various decisions cited before us. The only question to be decided here is as to whether the amount of Rs.1,34,99,999/- is allowable as bad debt or business loss as claimed by the assessee or the same is not allowable u/s.36(i)(vii) r.w.s. 36(2) or u/s.37(1) as held by the AO and upheld by the CIT(A). From the various details furnished by the assessee we find the assessee has assigned the debts to Mahindra & Mahindra Ltd. for Rs.1/-. The copy of the assignment of debt filed in Paper Book at Pages 63 & 64 is undated. We find the first sentence of the agreement reads as under: "This deed of assignment is made at Mumbai on this ________day of September 2002". 20.5 The first proposition made by the Ld. Counsel for the assessee is that the same should be allowed as bad debt in view of the decision of Hon'ble Supreme Court in the case of TRF Ltd. However, we find no force in the above submission of the Ld. Counsel for the assessee since the as....
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....ount of Rs.1,34,99,999/- should be allowed either as a bad debt or a business loss. Rather, we find force in the argument of the Ld. Departmental Representative that the assessee has adopted a colourable device to compensate Mahindra & Mahindra for the surrender of their 51% shareholding and therefore this is a capital expenditure. We accordingly dismiss the ground raised by the assessee. 21. Grounds of appeal 3, 4 and 5 by the assessee read as under: "3. The Ld. CIT(Appeals) erred in holding that the amount of Rs.75,00,000/- paid for use of Trade Name for a period of two years constitutes capital expenditure." 4. Without prejudice to Ground No.3 above, the Ld. CIT(Appeals) further erred in enhancing the assessment, by treating the entire amount of Rs.75,00,000/- paid for use of the Trade Name for two years as payment for purchase of goodwill. 5. Without prejudice to Ground Nos.3 and 4 above, the Ld. CIT(Appeals) further erred in not allowing depreciation on the said amount of Rs.75,00,000/". 21.1 Facts of the case, in brief, are that the extraordinary items of Rs.2,09,99,999/- debited to the profit and loss account includes an amount of ....
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....g a sum of Rs. 75 Lacs the assessee has used the name of Mahindra alongwith the name of the company. This expenditure is revenue expenditure in view of the fact that no new asset was acquired by the assessee. There is no enduring benefit derived by paying a sum of Rs. 75 Lacs for a limited period of two years. Hence the expenditure is required to be allowed in full. It was submitted that there is no concept of deferred revenue expenditure in Income tax. Hence the A.O. is not justified in allowing only 50% of the expenditure in this year. The following case laws were relied upon: i. Empire Jute Co.Ltd. vs. C.I.T. 124 ITR pg. 1 ii. Alembic Chemicals Works Ltd. vs. CIT 177 ITR pg. 377 21.4 However, the CIT (A) also was not convinced with the explanation given by the assessee. He issued notice for enhancement u/s. 251(1) to show cause as to why the entire expenditure of Rs. 75 Lacs should not be disallowed as the assessee has acquired good will of Mahindra which is a capital expenditure and not allowable as revenue expenditure. No depreciation is also allowable in respect of goodwill. 21.5 It was reiterated that the company has paid a sum of Rs.75 Lacs to ....
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....cence fee paid to the owner for granting to the user, the licence to continue to use the trade mark as per the name licence agreement dated 18-07-2002. We find the assessee treated the same as Revenue expenditure in the books. However, the AO allowed only 50% of the expenses as allowable during the year and the balance 50% in subsequent year since the licence was obtained for a period of 2 years. We find the Ld. CIT(A) enhanced the amount and disallowed the entire expenditure on the ground that the same is for acquiring of goodwill for 2 years and on which no depreciation can be allowed. It is the submission of the Ld. Counsel for the assessee that the entire amount should be allowed as Revenue expenditure. Alternatively it is the argument of the Ld. Counsel for the assessee that depreciation should be allowed in case it is held to be acquisition of goodwill in view of decision of Hon'ble Supreme Court in the case of SMIFS Securities Ltd. reported in 348 ITR 302 (SC). We find the alternate contention of the assessee that depreciation should be allowed is acceptable in view of decision of Hon'ble Supreme Court in the case of CIT Vs. SMIFS Securities Ltd. reported in 348 ITR 302 wher....
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....-closure charges to the Bank. 3. The objects of debenture issue was for general corporate purposes. The assessee company utilized the debenture proceeds by placing the amount received as fixed deposit with Standard Chartered Bank. 4. The expenditure incurred for raising money for the purpose of business has been held to be allowable expenditure u/s. 37 in view of various decision of the Courts. However, in present case, expenditure is not being incurred to raise the money but is being incurred to return the money already raised. Moreover, this expenditure is not contractual but purely voluntary in the sense that there is no such provision in the terms of issue of the debenture payment of this pre-closure charges. This payment is purely a discretionary decision by the assessee company, who is under no legal compulsion to make this payment." 22.3 Before CIT(A) the assessee reiterated the same arguments as made before the Assessing Officer. However, the CIT(A) was also not convinced with the arguments advanced by the assessee and upheld the action of the Assessing Officer by holding as under: "I have duly considered the submissi....
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....ourt in the case of CIT Vs. Ashok Leyland Ltd. reported in 86 ITR 549 he drew the attention of the Bench to the following: "It is obvious from the facts set out earlier that the compensation paid for termination of the services of the managing agents was a payment made with a view to save business expenditure in the relevant accounting year as well as for a few more years. It was not made for acquiring any enduring benefit or income yielding asset. We agree with the High Court that the Tribunal was right in its conclusion that the expenditure in question was a revenue expenditure". 22.6 Referring to the decision of Chennai Bench of the Tribunal in the case of Overseas Sanmar Finance Ltd. Vs. JCIT reported in 86 ITD 602 he submitted that deduction claimed for foreclosure premium paid on loan taken in earlier year which was repaid prematurely in full in previous year was held to be revenue expenditure. Relying on various other decisions he submitted that since the assesses incurred the expenditure of prepayment charges to relieve it from future financial burden, therefore, the same should be allowed as a revenue expenditure. 22.7 The Ld. Departmental Representative on....
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....ess expenditure, the company can be said to have acquired enduring benefits or acquired any income yielding asset. To quote the illustration given by Rowlatt J. in B. W. Noble Ltd. v. Mitchell, in the ordinary case a payment to get rid of a servant when it is not expedient to keep him in the interest of trade would be a deductible expenditure. A payment made to remove the possibility of a recurring disadvantage cannot be considered as a payment made to acquire an enduring advantage. In Noble's case, Rowlatt J. had to examine the question whether the item of expenditure concerned in that case was a revenue expenditure. Briefly stated the facts of that case were: Under its articles of association the management of a company of insurance brokers registered in England was vested in its board of directors in London, with powers of delegation. One of the directors was appointed resident director in France. He conducted the French business of the company from an office in Paris under a power of attorney from the company. The company claimed as a deduction from its profits for income tax purposes a sum of pound 19,200 payable (by instalments) to a retiring direc....
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....he matter was taken in appeal to the Court of Appeal. The next case which may be usefully referred to is the decision in Anglo Persian Oil Co. Ltd. v. Dale. Therein the assessee company by agreement made in 1910 and 1914 had appointed another limited company as its agents in Persia and the East for a period of years, upon the terms that the agents should be remunerated by commission at specified rates. With the passage of time the amounts payable to the agents by way of commission increased far beyond the amounts originally contemplated by the company, and, after negotiations between the parties, the agreements were cancelled in 1922, the agent company agreeing to go into voluntary liquidation and the company agreeing to pay to the agents pound 300,000 in cash. This sum was in fact paid and the company contended before the Special Commissioners that it was an admissible deduction in computing the company's profits for purposes of income tax and corporation profits tax. The Special Commissioners rejected this contention and the company appealed. Rowlatt J., sitting in the King's Bench Division, allowed the appeal and held that the payment to the agents was an admissibl....
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....venue expenditure. Further, the court observed that the principle that capital receipt spells capital expenditure or vice versa is simple but it is not necessarily sound. Whether a sum is received on capital or revenue account depends or may depend upon the character of the business of the recipient. Whether a payment is or is not in the nature of capital expenditure depends or may depend upon the character of the business of the payer and upon other factors related thereto. It is obvious from the facts set out earlier that the compensation paid for termination of the services of the managing agents was a payment made with a view to save business expenditure in the relevant accounting year as well as for a few more years. It was not made for acquiring any enduring benefit or income yielding asset. We agree with the High Court that the Tribunal was right in its conclusion that the expenditure in question was a revenue expenditure." 22.10 We find the Hon'ble Delhi High Court in the case of CIT Vs. Gujarat Guardian Ltd. reported in 222 CTR 516 has held as under: "14. Briefly, the assessee in its profit and loss account has debited a sum of Rs 8 crores as p....
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....tions that a claim for deduction by an assessee be spread over as deduction in one year would distort the picture of profits, cannot be applied to the instant case, as the mechanism for claiming deduction on account of "interest" paid on loans obtained by the assessee from a public financial institution, is specifically provided for in the statute under Section 43B(d) of the Act. Therefore, in terms of Section 43B(d) once it is ascertained that the payment is in the nature of "interest" in terms of Section 36(1)(iii) read with Section 2(28A) of the Act, and the assessee fulfills the conditions provided in Section 43B(d), that is, it is the interest paid in respect of loans obtained from public institutions, it follows that, the interest will have to be allowed as a deduction only in the year of payment, notwithstanding the fact that, the liability to pay such sum was incurred in an earlier year based on the method of accounting regularly employed by the assessee. In these circumstances, in our opinion the Assessing Officer failed to appreciate the ratio of the judgment of the Supreme Court in Madras Industrial Corporation (supra), which is, really an application of the principle of....
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.... goes to show that the guarantee charges paid for a loan that is to run for a few years is allowable on the basis of the contract being effected in the year. In the other case, Madras Auto Service (P.) Ltd. (supra), the lessee demolished the entire building that was taken on a lease of 39 years and constructed a new building in its place on the understanding that on expiry of the lease the building as reconstructed would be handed over to the lessor for which consideration a lower rent was agreed to by the lessor. The court ruled that by constructing a new structure in place of the old structure the assessee only derived a business advantage and no asset of enduring nature was acquired and hence, the entire cost of construction is allowable as revenue expenditure in the year itself. We are therefore of the opinion that the claim for deduction for the entire amount of foreclosure premium in the assessment year is justified and we accordingly uphold the claim. This issue is decided in favour of the assessee and against the revenue." 22.12 So far as the decision relied on by the CIT(A) in the case of Associated Hotels India Ltd. Vs. CIT reported in 23 ITR 134 we find th....