TaxTMI 
TaxTMI 
2014 (1) TMI 975
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng the VRS payment in the ratio of 1.6 & 6.8. 2.1 The facts leading to the issue as culled out from the assessment/appellate orders are that the assessee company had in the past been rationalizing its manpower costs by way of Voluntary Retirement Schemes. A scheme of VRS was announced by the company during FY 98/99 wherein 43 employees of its Valsad plant were retired by making payment of Rs.1.99 crores. This scheme was approved by the CCIT in terms of section 10(10C) of the Act and full deduction of the outgoing amount was claimed in the return of income and was also allowed to the assessee in the assessment proceedings. During the period under consideration also the assessee announced a VRS which began from 15.06.1999. Approval of the CCIT in terms of section 10(10C) of the Act was taken on 23.09.1999 mentioning the eligibility of 328 employees for the scheme. As part of the scheme of Voluntary Separation, the assessee retired 71 employees of the Valsad plant who opted for the scheme and the total outgo on this account was Rs.3,61,34,164/- including payment on account of ex gratia of Rs.34,08,539/-. In view of the past accounting policy as well as the treatment in the assessme....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s and it can not be said that the events of January 2000 came as a surprise to the assessee who in June, 1999 retired part of its man force in an innocent attempt to reduce its future wage bill. In view of the above stated reasons as recorded in the assessment order, the AO held that it was clear that the payments made as part of the VRS were not allowable as revenue expenditure and should be capitalised. 2.1.2 On appeal, the Ld.CIT(A) while holding the payment of VRS to the employees in the current year had only been made in order to obtain maximum capital receipt for the sale of the plant and this out going is required to be considered for working out the capital gain as well as reduction in WDV from the block of assets consequent to the sale of plant. According to the Ld.CIT(A), as the impugned expenditure had been incurred to make the Valsad plant more marketable, it would be in the fitness of thing if the said VRS payment is bifurcated in the ratio of 1.6 & 6.8 and necessary re-computation of capital gain and adjustment of the WDV is made after reducing the resultant sum from the consideration receipt. In the result, the Ld.CIT(A) directed the AO to reduce the consideration....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of the assessee is allowed and Grounds No 1 & 2 of the revenue are dismissed. 3. Ground no. 2 raised by the assessee relates to the decision of the Ld.CIT(A) confirming the disallowance made by the AO on account of non compete fees amounting to Rs.36.75 crores paid to M/s Agrimore Ltd. 3.1 The relevant facts culled out from the assessment/appellate orders are that the assessee company sold its insecticides plant at Atul, Valsad to M/s Agrimore Limited close to December 1999 vide Agreement dated 31st December, 1999. The assessee company entered into an agreement with Agrimore Limited restricting it from selling and distribution of the three fast selling major products i.e. THIMET, MALATHION AND ABATE and also from parting with the specialized knowledge and expertise in relation to these products for seven/fourteen years. In consideration thereto the assessee company agreed to pay a lump sum fee of Rs.36.75 crores payable in accordance with the agreed schedule of payment. For its book purpose, the assessee company had shown the said fee of Rs.36.75 crores as deferred revenue expenditure to be amortised over a period of five years. Accordingly, the assessee company debited Rs.1,....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the adoption of non-commercial, colorable devices which encumber the P/L account with payments which are so blatantly excessive and un-necessary. The assessee has made feeble attempts during the assessment/appellate proceedings to explain to the inordinately large financial outgo on the grounds of reorganization of the group at a global level. The explanations do not address the obvious non commercial considerations at play in the process. Further, the Ld.DR has stated that the Ld.CIT(A) correctly relied on the decision of the Hon'ble Apex Court in the case of CIT Vs. Coal Shipment Pvt. Ltd. (supra) for confirming the said disallowance and thus the same is justified. 3.3 We have heard both the sides and perused the material on record on this ground. It is pertinent to mention that the supply agreement has been entered on 3rd January, 2000 wherein it is stipulated that Cyanamid Agro would purchase its actual requirements of thimet, malathion and abate. The company would give forecasting in respect of every quarter of the desired quantity manufactured and all the material produced subject to there being passing the quality control test would be purchased by Cyanamid Agro Ltd. It ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... compensation would be payable but the non-compete agreement would continue and Agrimore Ltd. would not be in a position to produce or market these chemicals although under different brand on account of non-competitive agreement. Therefore, we agree with the observation of the Ld.CIT(A) that the supply agreement has nothing to do with the competition fees agreement as the same has been paid on account of Agrimore not engaging in the production of these four items for seven years and fifteen years. In the context of the facts as aforementioned, the Hon'ble Apex in the case of CIT vs. Coal Shipment Pvt. Ltd. (supra), which has been relied by the Ld.CIT(A), has held that payment made to ward of competition in the business of arrival would constitute capital expenditure of the object of making that payment is to derive an advantage by eliminating the competition over some length of time; the same result would not follow if there is no uncertainty of the duration of the advantage and the same can be put on an end any time. Although an enduring benefit need not be everlasting character it should not be so transitory and ephemeral that it can be terminated at any time at the volition of a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....grieved by the impugned decision the assessee and the revenue have raised these grounds in their respective appeal before us. 4.2 Having heard both the sides and perused the material on record, it is pertinent to note that the Hon'ble Supreme Court in the case of TRF Limited Vs. CIT [(2010) 323 ITR 397 (SC)] has held that after 01.04.1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It has further been laid down that if the bad debt has been written off as irrecoverable in the accounts of the assessee it is enough for claiming deduction u/s.36(1)(vii). Similar view has been canvassed by the Hon'ble jurisdictional High Court in the case of CIT Vs. Star Chemicals (Bombay) Pvt. Ltd. [(2009) 313 ITR 126 (Bom.)]. In this case, the Hon'ble High Court held that once the assessee has written off debt as bad, requirement of section 36(1)(vii) is satisfied and the claim for deduction of bad debt is allowable. From the above discussed two judgments, it becomes manifest that the deduction on account bad debt is to be allowed in the year in which the amount is written off in its books of account provided the conditions of section 36(2) ....