TaxTMI 
TaxTMI 
2015 (11) TMI 340
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....re being disposed off by this consolidated order for the sake of convenience and brevity. 3. First we will deal with the appeal of the department and Cross Objections of the assessee for the assessment year 2004-05. In ITA No.3388/Del/2009, following grounds have been raised by the department: "1. On the facts and in the circumstances of the case as well as in law, the Ld. CIT(A) erred in deleting the addition of Rs. 6,80,00,000/- being non-compete fee paid by assessee holding it to be revenue expenditure as against capital treated by the AO. 2. On the facts and circumstances of the case as well as in law, the Ld. CIT(A) has erred in deleting the addition of Rs. 41,62,213/- being expenses incurred in connection with purchase/acquisition of business/assets and valuation thereof holding it to be of revenue nature as against capital treated by the AO. 3. The appellant carves to be allowed to add any fresh grounds of appeal and/or delete or amend any of the grounds of appeal." 4. In the Cross Objection No. 314/Del/2009, the assessee has raised the following grounds: "1. That the issue decided by the Ld. CIT(A) is as per law and therefore appeal of the department is not maintainab....
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....ure question of law, therefore, the additional ground may be admitted. The reliance was placed on the judgment of the Hon'ble Supreme Court in the case of National Thermal Power Company Ltd. Vs CIT reported at 229 ITR 383. 7. In his rival submissions the ld. DR opposed the admission of the additional ground and submitted that the assessee neither raised this issue before the AO nor before the ld. CIT(A), therefore, it should not be admitted. 8. We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, it is an admitted fact that the assessee raised the additional ground relating to depreciation on goodwill after the judgment of the Hon'ble Supreme Court in the case of CIT, Kolkata Vs SMIF Securities Ltd. in SLP(Civil) No. 35600 of 2009 and all the facts are already available on record and this ground goes to the root of the matter. Therefore, additional ground raised by the assessee is admitted. 9. The first issue of the departmental appeal and the only issue agitated by the assessee in its Cross Objection relates to non-compete fee amounting to Rs. 6.80 crores which was directed by the ld. CI....
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.... Net Liquid Assets were finally reworked out totaling Rs. 11.88.29.338/- and therefore final consideration of the slump sale increased from Rs. 75 crore to Rs. 77.85 crore. 2. The sale consideration was based on the valuation of business as a whole and payment of Rs. 62,25,00,000/- was made to ICI Ltd. at completion date and balance amount were to be paid in three equal installments within seven days from the first, second and third anniversary of completion date. 3. The NC business and the trading business was comprised of following items as per agreement:- i) The assets. ii) The liabilities iii)The transferable marketing infrastructure including distribution network. iv) The intellectual property rights including the Technology and the know-how. v) The contracts. vi) The employees and vii) The records. The assets were defined as: "Ownership, freehold, leasehold, user and/or other rights in the property and assets whether tangible or intangible, owned, held and/or currently and/or immediately prior to signing date and/or completion date (as the case may be) used by ICI India relating exclusively to the business and shall include without other terms like net liqui....
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....under: Value of technical know-how Rs. 18,40,00,000/- Value of non compete Rs. 6,80,00,000/- Value of goodwill (residual) Rs. 3,50,00,000/- Total intangibles Rs. 28,60,00,000/- 14. The AO pointed out that the valuation of only fixed assets, working capital was based on tangible assets and since no consideration was separately fixed for intangible assets, the assessee company on its own tried to assign the separate value for intangibles. The AO also pointed out that from the copy of valuation report in respect of know-how following assumptions were noted: "a. Initial Royalty payment was assumed at $1 million b. Royalty rates are assumed as 5% of sales for domestic business and 7% of sales for export business. c. Tax rate of 20% is assumed on royalty payment. d. Thereafter, discount period of 5 years and discount factor of 13.95% was also assumed to arrive at the value of technical know-how of the business which was self generated in this case." 15. The AO was of the view that valuation of non-compete intangible was based on hypothetical situations that if ICI Ltd. would capture a part of the share in the market what would be the fall in the total value ....
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....ually agreed obligations which were part of the composite deal. He further observed that had the consideration for non-compete been agreed upon and received specifically other than as slump sale for transfer of business same would have become a revenue receipts in the hands of the transferor u/s 28(va) of the Act but it was not the case in this agreement. The AO categorically stated that the consideration in this case was paid for acquisition of whole business, hence, the valuation based on several assumption and hypothetical situations could not be considered as payment separately made for the purpose of non-compete or goodwill. He also observed that as per the normal principles of accountancy, if any, business was acquired on going concern basis then after assigning values and working capital, the amount paid in excess of such value is treated as goodwill of the business and in this case also the assessee company had taken the residual amount as goodwill. According to the AO, the assessee on the one hand contended that the running business was acquired out of the many business of ICI Ltd. hence, valuation of goodwill was not possible, on the other hand, the assessee could assign ....
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....o that they cannot continue the same line of business, which was sold to the appellant, at least for 3 years. It was not in the interest of the company to allow the ICI India Ltd. to operate in the same line of business without putting the restricting clause in the business transfer agreement. 2. Restrictive clause was necessary for the business expediency and commercial requirement of the appellant company and mainly to put check on the seller company and its affiliates, so that appellant can efficiently conduct the business without any hurdle at least from the same person or group of persons who has sold the business. In fact, due to that restrictive clause ICI India Ltd. was contractually bounded with the appellant for supportive in the business and not to become competitor for at least 3 years for which they took the price. The restrictive clause was not in any way advantageous of enduring nature as observed by the learned assessing officer. 3. If such kind of clause was not placed in the Business Transfer Agreement then buying a division as slump sale would be disastrous in terms of business and profitability. Therefore, assigning the value of non-compete consideration was a....
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....e should not any doubt for the value of non-compete consideration also. If the learned AO have any doubt, the learned AO could have summoned the Valuer for the verification of the facts or getting information/details in this regard. But he has not done so and therefore the value of non-compete consideration cannot be doubted and should be accepted in toto. In this regard reliance in placed on the advance Ruling given in the case Foster's Australia Ltd. in Re 302 ITR 289, wherein question was answered as under:- "15. Question No. (2): "If the above mentioned receipt is held taxable in India, then whether the applicant is justified in contending the tax should be computed based on the consideration as per the independent valuation adopted by the applicant?. 15.1 It is the case of the applicant that it has obtained an independent valuation report relating to trademarks and Foster's Brand IP as on 30th April, 2006. The values are set out in the penultimate para at attachment (2). However, the report has not been filed. 15.2 We can only answer this question by observing that "Independent valuation report" can certainly be relied upon by the applicant. It is for the concerned....
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....ness without the brand/trade name of ICI India Ltd. and the ownership was also transferred. The assessee further contended that to keep and maintain the reputation intact with customers, employees and associates was a question of subjective nature and could not be valued. It was stated that the assessee had not been able to bar any competition in the market other than restraining the transferor for further producing and supplying the same materials in the market for a limited short period and the assessee had used their trade name 'NITREX' in the business. The assessee further stated that the expert independent valuers were hired for the evaluation of the tangible, intangible assets including the goodwill and the assessee followed the advice of the experts of the field and accordingly segregated the entire consideration impartially. It was submitted that the AO had not applied his mind before suggesting that anything over and above the cost of asset was goodwill, therefore, the valuation of goodwill on the basis of residual value after ascertaining realistic figures to each and every item was correct on the part of the independent valuers as well as on the assessee company.....
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....e of the same was inbuilt in the agreement. The ld. CIT(A) observed that the restrictive clause, forming part of agreement itself, suggested that there was some consideration, which the assessee had paid for keeping the ICI India Ltd. and its affiliates away from doing same or similar business in India for a period of three years from the date of completion of agreement, which was done to protect the business interest of the assessee company and had this been not part of the agreement, then competition with ICI who was market leader in the Nitrocellulose business. The ld. CIT(A) pointed out that there was no separate consideration assigned in the agreement but the restrictive covenant under clause 14 was the part of the agreement which clearly showed that the consideration was paid for this restrictive covenant to protect the business interest of the assessee company and to capture the market and the another purpose of restrictive covenant was to increase the profitability of the assessee company. Therefore, the payment of non-compete fees, the quantum of which was determined later on, upon the valuation of the assets by the professional valuer, was wholly and exclusively for the p....
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....sset of enduring advantage, the payment was only to restrain the ICI Ltd. for entering into same business for three years. The ld. CIT(A) was of the view that for treating any expenditure as revenue, the following test are essential: "(a) The expenditure to be laid out or expended wholly and exclusively for purpose of business or profession. (b) Expenditure should not be personal expenditure. (c) Expenditure should not be covered under sections 30 to 36. (d) Expenditure should not be capital in nature. (e) Expenditure should have been laid out in the relevant previous year." 25. The ld. CIT(A) pointed out that the above parameters made it clear that payment of non-compete fee was not an expenditure covered by sections 30 to 36, it was also not a personal expenditure as the Directors of the assessee company had not been benefited for this payment, it was also not a capital expenditure as no asset of enduring nature had been acquired by paying the non-compete fee and the payment of non-compete fees was made in the previous year relevant to the assessment year under consideration, it was laid out wholly and exclusively for the purpose, i.e. to protect the business of the company....
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....n the present case, it is an admitted fact that the assessee purchased one division of Nitrocellulose Chemicals Trading (NCT) business which was transferred to the assessee company by way of slump sales. The assessee treated the same as capital expenditure in the books of account and claimed the depreciation. However, for the purpose of computing total income under the Income Tax Act, the assessee treated Rs. 6.80 crores as non-compete fee on the basis of the value of the intangibles determined by the valuers. The said value of non-compete fee was assigned by the assessee. The AO treated the said amount as capital in nature by observing that the amount of Rs. 6.80 crores claimed as fee for non-compete was nothing but goodwill of the business and was capital expenditure. The AO also held that if a business is purchased on a going concern basis, payment in excess of the value of tangible/intangible asset was goodwill of the business. However, the AO did not allow the alternative claim of the assessee for allowing the depreciation. 30. When the matter was taken to the ld. CIT(A), the said amount of Rs. 6.80 crores was directed to be considered as revenue in nature by observing that b....
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.... deed as well as from the facts stated in the Tribunal's order that the partnership which was a potential competitor to the assessee had vanished and that the ex-managing director had also left India, it was clear that the assessee paid the amount to the partnership in order to ward off damaging competition from a potential competitor, resulting in the acquisition by the assessee of a right as well as the assessee carried on such business. Consequently, the payment by the assessee was in the nature of a capital expenditure and not revenue expenditure. " 32. We, therefore, by considering the totality of the facts as discussed hereinabove set aside the findings of the ld. CIT(A) on this issue and upheld the view taken by the AO that the non-compete fee of Rs. 6.80 crores was nothing but goodwill of the business and a capital expenditure. Now question arises as to whether the assessee is eligible for depreciation on the goodwill. In this regard, it is relevant to point out that the Hon'ble Supreme Court in the case of SMIF Securities Ltd. (supra) held that the goodwill is eligible for depreciation u/s 32 of the Act and their lordships in the said case observed as under: "It ....
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....of assets: Payment made for legal advice taken from Wadia Ghandy & Co. in connection with purchase of NCT business Rs.16,01,585 Payment made to Mott MacDonald for valuation of fixed assets Rs. 1,62,000 Payment made to KPMG India Pvt. Ltd. for professional advice taken for the purchase of division Rs. 5,66,810 Dua Associates-professional services in relation with the documentation etc. Rs.11,79,818 Bharat S. Rawat & Co. - payment for advisory services Rs. 6,52,000 Rs.41,62,213 37. The above expenditure were claimed as revenue expenditure. The AO asked the assessee to show cause as to why the expenditure in connection with the acquisition of assets or acquiring of business should not be capitalized and depreciation to be allowed thereon. The contention of the assessee was that the expenditure had not resulted into enduring benefit. The AO however, did not accept the contention of the assessee by observing that the expenses were incurred to bring the assets into existence, resulting in the benefit of enduring nature. He, therefore, treated those expenses as capital in nature, however, he did not allow the depreciation by stating that the expenditure was not incurr....
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.... 41. Now the department is in appeal. The ld. DR strongly supported the order of the AO and reiterated the observation made in the assessment order dated 19.12.2006. In his rival submissions the ld. Counsel for the assessee reiterated the submission made before the authorities below and strongly supported the impugned order passed by the ld. CIT(A). 42. We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, it is an admitted fact that the impugned expenditure was incurred in connection with the acquiring of assets and since the expenses incurred were related to bring the assets into existence those were capital in nature and not the revenue in nature. We, therefore, reverse the findings of the ld. CIT(A) on this issue and hold that the expenses incurred by the assessee for acquiring the assets were capital in nature, so those to be capitalized and the AO is directed to allow the depreciation as per law on those capitalized expenditure. Accordingly, the ground raised by the department is partly allowed. ITA No. 3408/Del/2009 for Assessment Year 2005-06 43. In ITA No. 3408/Del/2009 for assessmen....
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....ritius Ltd. was under obligation to provide services, which were necessary for betterment in the field of manufacture, financial as well as personnel activities of the business. Therefore, the assessee had definitely got benefite of enduring nature and the expenses were capital in nature. The AO accordingly disallowed the expenses of Rs. 1,20,00,000/- and added back to the total income of the assessee. 47. Being aggrieved the assessee carried the matter to the ld. CIT(A) and submitted as under: 'Disallowance of fees of Techno Commercial of Rs. 80,00,000/- and Brand Licensing of Rs. 40,00,000/-, as revenue expenditure. In this regard we also most respectfully submit that the said expenditure is annual payment for the use of Brand Name and it is not towards the purchase of the Brand Name and it is annual outgoings as royalty and this regard clause 2, of the said agreement is relevant, which reads as under: "Subject to the approval of the regulatory authorities in India, if any required, during the currency of this agreement, Nitrex Mauritius shall grant a licence to Nitrex India for using the trademark/brand name and logo, with no territorial limits to the licence and in retu....
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....nt of both the parties. Similarly, the appellant company entered into another agreement with M/s Nitrex Mauritius Ltd. under the head 'Brand Licensing Agreement'. This agreement was made on 14th March, 2005 and was effective from 1st April, 2004. Under this agreements, the Nitrex Mauritius, agreed to allow to the appellant company i.e. M/s Nitrex Chemicals India Ltd. to build an international image to its products under the Nitrex' brand. The Nitrex Mauritius, also agreed to provide all necessary support and expertise to build Nitrex' as an international brand. In consideration of the above services, Nitrex Chemicals India Ltd. agreed to pay Rs. 40,00,000/- per annum for a period of three years at quarterly rests. From the above agreement, it is seen that amount of Rs. 80,00,000/- paid by the appellant company in the form of 'techno commercial fees' was for availing the expertise of M/s Nitrex Mauritius in the field of commercial, marketing, logistics, research results, safety security, health and environment policy and in the areas of expertise which was to be provided by the Nitrex Mauritius described in the Annexure to the Agreement. Such expertise was ....
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....fit or expenses incurred with the primary object of an immediate return or acquisition of assets which are not of lasting value and are likely to get exhausted or consumed in the process of the return. Further revenue expenditure are operational in its perspective and solely intended for the furtherance of the enterprise. In view of the above discussion, it is clear that the payment made by the appellant were only in furtherance of appellant business and none of the payment or part thereof was incurred for acquiring any capital asset or tangible/intangible asset which has any lasting or enduring benefit to the appellant's business. These payments were made for only one year in consideration of using the trade mark of M/s Nitrex Mauritius and to obtain expertise in the field of commercial, marketing, logistics, research results, safety security, health and environment policy. This expertise was necessary for smooth running of the business and to make it technically viable, efficient and profitable unit, with a view to yield larger profits and establish itself in the international market." 49. Now the department is in appeal. The ld. DR strongly supported the order of the AO an....
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.... products and for domestic sales commission was paid @ Rs. 1.50 per kg plus prompt payment discount of Re. 1 per kg. The AO further observed that in the absence of comparative figures of commission paid on export sales, there was no alternative except to estimate the quantum of disallowance to be made. The AO disallowed 50% of such commission paid by the assessee amounting to Rs. 2,73,57,119/- on export sales and accordingly the disallowance of Rs. 1,36,78,560/- was made. 55. The assessee carried the matter to the ld. CIT(A) and submitted that the commission was not paid to the parties covered u/s 40A(2)(b) of the Act and this payment for export commission was being regularly paid by ICI India Ltd. from whom the assessee purchased the business on slump sale basis. It was further submitted as under: 'The company has entered into export agency agreement (Agreement) with Asha Exports ("Asha Exports"), a copy of the agreement is submitted herewith (Annexure 1). As per the agreement, Asha Exports sells company's goods directly and through sub agents, appointed by Asha Exports, for commission. The commission as per percentage agreed upon in the Agreement, is paid directly by th....
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....n this commission payment, TDS wherever applicable, has duly been deducted and deposited into the Treasury by the appellant company. All these facts establish that the commission was paid by the appellant company, in furtherance to the agreement entered by it with M/s Asha Exports and sub agents of Asha Exports, for its business expediency. On the basis of the facts and documents filed by the appellant, it is established that the commission on export has been paid by the appellant for its business purpose. The AO was not justified in disallowing 50% of the commission paid on the ground that the same was excessive. It has been held in plethora of case laws that once it is established that there was nexus between the expenditure and purposes of business, the Department cannot justifiably claim to put itself in the arm chair of the businessman or in the position of Board of Directors and assume the role to decide how much is reasonable expense, having regard to the circumstances of the case. In view of factual position discussed above and plethora of judicial pronouncements on the issue, it is well settled that the commission expenses claimed by the appellant on export sales were g....
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....T Rules, 1962. 60. The last issue vide Ground No. 3 agitated by the department relates to the reduction in disallowance made by the AO on account of water charges by admitting fresh evidences. 61. The facts related to this issue in brief are that the assessee debited water charges of Rs. 72,92,206/- in the profit and loss account. The AO asked the assessee to furnish the Bills of water charges. In response the assessee furnished Bills of Rs. 30,64,348/-and since the Bills in respect of remaining amount of Rs. 42,27,858/-were not furnished, the AO made the addition for those expenses i.e. Rs. 42,27,858/-. When the matter was taken to the ld. CIT(A), the addition to the extent of Rs. 20,79,886/- was confirmed by observing as under: "I have considered the observations of the AO and the submission made by the appellant as well as the supporting documents filed before me. It is seen that the appellant has claimed Water Charges expenses of Rs. 72,92,206/-. Out of this the AO disallowed a sum of Rs. 42,27,858/-, on account of non-furnishing of supporting bills by the appellant. During the course of appellate proceeding, the appellant has filed copy of the bills from April 2004 to March....
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.... 3841/Del/2009 and CO No. 367/Del/2009 for the A.Y. 2006-07 65. First issue in this appeal of the department relates to the direction of the ld. CIT(A) to allow the expenses of Rs. 8,43,000/-, Rs. 3,57,206 and Rs. 6,00,000/- against business income. 66. Facts related to this issue in brief are that the AO during the course of assessment proceedings noticed that the assessee had claimed to have incurred expenses of Rs. 40,90,048/- in connection to the transfer which included following expenses: (a) R. R. Enterprises- Legal Notice issued - Rs. 8,43,500/- (b) Insurance claim not recovered - Rs. 3,57,206/- (c) Performance Incentive for AY 2005-06 - Rs. 6,00,000/- The AO asked the assessee to justify the claim. In response, the assessee submitted that M/s R.K. Enterprises was a trade debtor pertaining to the trading business of the assessee and as per the Business Transfer Agreement, the assessee has to retain the debtors relating to business, whose collectability was in doubt. The AO did not accept the claim of the assessee by observing that the same was not allowable as bad debts u/s 48 of the Act. He added Rs. 8,43,500/-under the head short term ca....
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.... profession". Accordingly, the AO was directed to allow the same against the assessee's business income. 68. Now the department is in appeal. The ld. DR supported the order of the AO and reiterated the observations made in the assessment order. In his rival submissions the ld. Counsel for the assessee reiterated the submissions made before the ld. CIT(A) and strongly supported the impugned order. 69. After considering the submissions of both the parties, we do not see any infirmity in the order of the ld. CIT(A), particularly when the assessee had written off bad debts in its books of account and insurance claim relating to the business was less recovered to the extent of Rs. 3,57,206/- which was allowable as a business loss u/s 37(1) of the Act. Similarly, the annual performance incentive payable was related to the trading business of the assessee which had subsequently been transferred but since the income till 14.10.2005 had been offered by the assessee in the profit and loss account and this performance incentive payable was related to the period ending on 14.10.2005, therefore, it was to be paid by the assessee and was allowable as expenditure. In that view of the matter....
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....uritius Ltd. after "acquiring Nitrocellulose and Trading business from ICI Ltd. vide ETA dated 3rd December 2003. It was agreed that for the smooth running of the business of the company, it would be prudent that the employees of the business acquired by the company may also have stake in the company. Therefore, 5.5% of the shares were subscribed by the Management team. The company also entered into an ESOP scheme under which further shares were to be allotted to the employees (Copy of the said Trust deed is submitted herewith as Annexure 11). An ESOP trust was also created as a custodian of the employees shares. (Copy of the said Trust deed is submitted herewith as Annexure 12). ICI Ltd. also subscribed to 10% of the equity share capital of assessee company with an undertaking to make the shares available to the management team as per the ESOP scheme. 1. Subsequently, the assessee company decided to sell the trading business originally acquired from ICI to EAC vide BTA dated 14.10.2005. As per the employee transfer agreement (ETA) of the even date, it was a condition precedent to the completion of transactions contemplated in BTA that the management staff shall have confirmed to....
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....hares by ESOP Trust, on account of Business Transfer, in pursuance to the BTA and ETA was the contractual liability of the company. Since the buy back of the shares from the employees was necessitated by the transfer of trading business to EAC and the such transfer would not have been possible had such buy back not have been made, the amount paid in respect thereof, is an expense incurred wholly and exclusively in connection with transfer as contemplated under section 48 of the Act and therefore the said amount is required be allowed to be deducted while computation of capital gain in respect of slump sale of trading business." 72. The ld. CIT(A) after considering the submissions of the assessee deleted the addition by observing as under: "I have gone through the observations of the Assessing Officer as contained in the Assessment Order, submissions of the appellant filed during the course of appellate proceeding and various judicial pronouncements relied upon by the appellant on the issue. I have also examined the contents of Business Transfer Agreement (BTA) entered between Nitrex Chemicals India Ltd. and EAC, Industrial Ingredients Pte Ltd., the Employees Transfer Agreement (E....
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....ompany in 2004 as per ESOP 2004 Scheme. As per this, 5.5% of the shares of the company were subscribed by the management team. The company has also entered into ESOP Scheme under which further shares to be allotted to the employees and an ESOP Trust was created on 20th June, 2005 as a custodian of the employees shares. As per the BTA and ETA, certain employees of management team were working with the trading division of the appellant company and in the event of their joining new company, the employees had to divest with their share holding in the company which was in the custody of Trust. As per the ESOP-2004 in the vest of separation of employees for reason other than retirement, the employee had to exercise the option vested on them within three months of the date of resignation. On the joining of the new company, the employee would have lost the benefit of ESOP which would have effected them financially. However, as per the terms and conditions of BTA, the management team has to agree to join the new company which was a pre-condition for business transfer agreement. In such a situation, it became necessary for the appellant company to ensure that the management staff accepts to ....
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....t will be for the benefit and welfare of the employees and management team. Therefore, the amount paid by the appellant company was wholly and exclusively to facilitate the trading business transfer agreement with M/s EAC. If the appellant company has not executed the transfer agreement for the transfer of management team, the transaction of sale of trading business would not have materialized. The transfer of the said employees was a key to the transfer of trading business. It may be also mentioned here that loss on acquisition of shares from management team by the Nitrex Chemicals Employees Stock Option Trust has been transferred to the account of the appellant company and it is a liability for the appellant company. The entries to that effect have been passed in the books of account and same have been examined by the Auditors and copies thereof have been filed before me. Therefore, the expenditure incurred was wholly and exclusively for transfer of trading business to M/s EAC, Thailand. Hence, the same is allowable from the capital gains arisen to the appellant." 74. The reliance was placed on the following case laws: * CIT Vs Bradford Trading Company Pvt. Ltd. (2003) 261 ITR....
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....dings given therein shall apply mutatis mutandis. In that view of the matter, we do not see any merit in this ground of the departmental appeal. 80. The next issue vide Ground No. 4 relates to the deletion of disallowance of Rs. 92,28,471/- made by the AO on account of commission paid on sale. 81. A similar issue has also been decided in the preceding assessment year i.e. 2005-06 in the former part of this order and since the facts for this year are similar to the preceding year, therefore, our findings given in the former part of this order for an identical issue shall apply with the same force for this year also. Accordingly, this ground of the departmental appeal is also dismissed as was done in the preceding year. 82. In the Cross Objection No. 367/Del/2009 for the assessment year 2006-07, the assessee has raised the additional ground in the similar manner as was done for the preceding years 2004-05 & 2005-06, therefore, by considering the similarity in the facts and rival contention the additional ground for this year is also admitted and the AO is directed to allow the claim of depreciation on goodwill u/s 32 of the Act as was directed in the preceding assessment years i.e....
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.... service which are no less favorable than those which the employees enjoyed immediately prior to completion data of business transfer without any interruption or break of service (but excluding employee stock share holding options). Further, as per the employees stock option plan 2004, in the event of separation of the employees for reasons other than retirement, the employees had to exercise the option vested on them within three months of date of resignation. The employees also had to divest with their other share holdings in the company on account of such transfer. It was agreed with the management staff of the Trading business that exercised options of the ESOP shares would be brought back on the price based on the audited PAT of F. Y 2005-06 and would become payable in the month of December, 2006. As a part of this contractual obligation to the management staff holding the ESOPs, the following payments were made in December, 2006:- Name ESOP Rs. Mr. Sanjay Gupta 180000 57,92,092 Mr. Murali Duvvuri 5997 27,710 Mr. Satish Kumar 6193 35,168 Total 58,55,345 In pursuance to the terms of scheme, the payment o....
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....ovisions of section 14A of the Act r.w. Rule 8D of the IT Rules, 1962 and disallowed a sum of Rs. 3,97,880/- under Rule 8D of the IT Rules, 1962. 94. Being aggrieved the assessee carried the matter to the ld. CIT(A) and submitted that the assessee had interest free fund of Rs. 60.59 crores being share capital of Rs. 10 crores, reserves & surplus of Rs. 26.24 crores and depreciation of Rs. 24.07 crores, against the investment of Rs. 1 crore, therefore, there cannot be any disallowance u/s 14A of the Act. The assessee also submitted that the calculations for making the disallowance under Rule 8D, by the AO were wrong. 95. The ld. CIT(A) after considering the submissions of the assessee observed that the dividend income of Rs. 3,77,330/- was exempt u/s 10(35) of the Act. He further observed that the funds of the assessee in the form of share capital, reserves & surplus and interest free funds had been invested in the assets of the assessee company and no part of those funds was available for making investment in mutual funds and that the investment in mutual funds had been made by issuing cheques from the current account of the assessee's bank. The ld. CIT(A) also observed that ....
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....deletion of disallowance of Rs. 55,04,390/- made by the AO out of the selling commission. The similar issue we have already adjudicated in the preceding years in former part of this order. Therefore, our findings given in respect of earlier years on the similar issue shall apply mutatis mutandis for this year also. In that view of the matter, we do not see any merit in this appeal of the department. ITA No. 5801/Del/2012 for the assessment year 2009-10 100. The first issue vide Ground No. 1 in this appeal relates to the deletion of disallowance of Rs. 42,37,552/- made by the AO on account of sale commission. The similar issue was involved in assessment years 2006-07 to 2008-09, which we have already adjudicated in the former part of this order and have upheld the findings of the ld. CIT(A) in deleting the disallowance made by the AO. We, therefore, do not see any merit in this ground of the departmental appeal. 101. The next issue vide Ground Nos. 2 & 3 relates to the deletion of disallowance of Rs. 2,77,72,900/- made by the AO on account of Foreign Exchange Fluctuation loss. 102. Facts related to this issue in brief are that the AO during the course of assessment proceedings ....
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.... observed that as per the exchange regulations in India, ECB is strictly prohibited for the purpose of utilization for working capital, general corporate purpose or repayment of existing loans, for on-lending or investment in capital market or acquiring a company or part thereof in India and investment in real estate. The AO also observed that there was no evidence on record to prove that the assessee had obtained any specific approval from the RBI for utilizing this ECB for the purposes which were otherwise not allowed by the Indian exchange regulations. He, therefore, held that reinstatement of ECB which was utilized for the purpose of capital or investing activities shall not be allowed as a revenue expenditure u/s 37(1) of the Act. The AO also observed that foreign exchange fluctuation loss would be of capital nature and allowed depreciation @ 15% which worked out at Rs. 49,01,100/-. The AO accordingly disallowed a sum of Rs. 2,77,72,900/- (Rs. 3,26,74,000 - Rs. 49,01,100). The reliance was placed on the following case laws: * CIT Vs Woodward Governor India (P) Ltd. and Honda Siel Power Products Ltd. 312 ITR 254 (SC) * Sutlej Cotton Mills Ltd. Vs CIT reported in 116 ITR 1 (....
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....a foreign suppliers credit. In our case, the loan under consideration is not for the purpose of import of Fixed assets. Therefore, in case the asset is not imported then section 43A would not be applicable. Section 43A provides generally for modification of the actual cost of the asset consequent on the variation in exchange rate in the year in which the increase or reduction in liability arises. (f) Since Section 43A is not applicable and there is no provision in the Income Tax Act relating to the Foreign exchange loss incurred on a foreign currency loan taken to purchase an indigenous asset; hence Accounting Standards may be followed. Therefore following AS 11, foreign exchange fluctuation has to be debited/credited to Profit and Loss Account." 106. The reliance was placed on the following case laws: * Prakash Leasing Ltd. Vs DCIT, ITA Nos. 301, 302 & 491 of 2007 (Kar) order dated 27.02.2012 * MKB Asia (P) Ltd. Vs CIT (2007) 294 ITR 655 (Gau) * CIT Vs State Bank of Indore (2005) 196 CTR 153 (MP) * CIT Vs Virtual Soft Systems Ltd. (2012) 341 ITR 593 (Del.) * Oil and Natural Gas Ltd. Vs CIT 322 ITR 180 (SC) * CIT Vs Woodward Governor India (P) Ltd. 312 ITR 254 (SC) ....
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....in the rate of foreign exchange as on the date of the balance-sheet is an item of expenditure under section 37(1) of the Income-tax Act, 1961." 113. As regards to the nature of the loss occurred due to foreign exchange fluctuation, the Hon'ble Jurisdictional High Court in the case of Goyal M. G. Gases Ltd. (supra) held as under: "That the amount was utilized by the assessee for its business of money-lending and bill discounting. Though the assessee might have originally borrowed the amount for the purpose of import of capital goods or setting up of a plant, at the time when the amount was utilized the loan amount had undergone a change and had assumed a new character of stock-in-trade or circulating capital and, therefore, any loss suffered by the assessee on account of foreign exchange fluctuation would have to be treated as revenue loss and not capital loss." 114. We, therefore, considering the totality of the facts and the ratio laid down by the Hon'ble Courts in the various judicial pronouncement as discussed hereinabove, are of the view that the ld. CIT(A) was fully justified in directing the AO to delete the impugned addition. We do not see any infirmity in the ord....
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....nvestment : Rs. 5,7,57,500 =0.5% of Rs. 5,70,57,500 = Rs. 2,85,288 - For the purposes of this Rule, the 'total assets' shall mean, total assets as appearing in the balance sheet excluding the increase on account of revaluation of assets but including the decrease on account of revaluation of assets Disallowance under Rule 8D = Aggregate of (i) + (ii) + (iii) = 2,85,288 + 9,23,910 + 2,85,288 = Rs. 14,94,486/- The assessee has suo motu disallowed Rs. 2,85,288/-in the computation of income and therefore, the balance amount of Rs. 12,09,198/- (Rs. 14,94,486 -Rs. 2,85,288) is added back to the income of the assessee for the year under consideration. (Disallowance under Rule 8D : Rs. 12,09,198/-) 118. Being aggrieved the assessee carried the matter to the ld. CIT(A) and submitted as under: "The ld. Assessing Officer has erred in law and facts by disallowing a sum of Rs. 12,09,198/- u/s 14A r.w Rule 8D. The assessee has suo motu made a disallowance of Rs. 2,85,288/- on the said account in the computation of income. The AO has straightaway disregarded the claim of the assessee, made his own computation by applying Rule 8D, without recording any satisfaction as to....