TaxTMI 
TaxTMI 
2015 (11) TMI 340
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....the assessee were heard together, so these are 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 ....
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....y available on the record. It was stated that the depreciation to be allowed on goodwill is a pure 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 Cro....
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....Rs. 75 crore subject to adjustment for net liquid assets. At the time of agreement net liquid assets were estimated at Rs. 9,02,53,634/-. Later 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 cu....
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.... Rs. 3,35,18,994/- Working Capital (Net liquid assets) Rs. 11,88,29,338/- Total Consideration Rs. 77,85,75,704/- 13. The AO further observed that the value of intangibles is divided by the assessee into three parts and further estimates were made as 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 arri....
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.... a lump sum amount for transfer of all the assets, liabilities, employees, records and also for agreeing to conditions of warranty and not to compete for next three years. Therefore, the entire payment was for the purpose of acquiring the business as a going concern and no part of consideration was specifically assigned in the agreement to different types of intangibles or mutually 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 pai....
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.... by the independent experts of the field before it was adopted by the company. The appellant company and ICI India Limited were not the competitors in the business. In fact, ICI India Ltd. has sold the two divisions out of many divisions to the appellant company, who is new in business of Nitro Cellulose and Trading of Chemicals. It was a prudent decision and business expediency to bind the other person (i.e. ICI India Ltd.) so 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 ....
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....hnical person and accordingly, we have taken Valuation Report for the fixed asset from Dalal Mott MacDonald and the intangibles, from KPMG India Pvt. Ltd. Copy of the said valuation reports of fixed assets and intangibles are submitted as Annexure 2 & 3, respectively. 8. Here, we would like to submit that except for value of non-compete, all other values as per the Valuation Reports have been accepted by the learned AO and therefore there 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....
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....odwill had been assigned by the valuer. The AO, in absence of any adverse evidence could not have treated the non-compete payment as goodwill. The reliance was placed on the following case laws: • CIT, Tamil Nadu-IV Vs Official Liquidator (1985) 151 ITR 781 (Mad.) • CIT Vs Srinivasa Setty (1981) 128 ITR 294 (SC) • CIT Vs Chunilal Prabhudas & CO. (1970) 76 ITR 566 (Cal) • Smt. Vindoor Bai Vs CED (1981) 132 ITR 421 22. It was contended that the assessee had purchased the business of Nitrocellulose and Chemical Trading business 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 inde....
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....in this field, namely M/s Dalal Mott McDonald (P.) Ltd. and M/s K.P.M.G. (I) (P.) Ltd. and based on the valuation reports, values were assigned to the Plant & Machinery, other miscellaneous assets and tangible and intangible assets. The ld. CIT(A) pointed out that as per the valuation report of the valuer dated 05.04.2004, the value of non-compete covenant was computed at Rs. 6,80,00,000/- and in the Business Transfer Agreement no separate value had been assigned for this restrictive covenant clause as entire business was taken up on slump sale basis. However, the restrictive covenant was part of the agreement, therefore, the value 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 b....
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....ar to the assessee's case. The ld. CIT(A) observed that the valuer determined the value of non-compete fee at Rs. 6,80,00,000/- which was paid for three years to eliminate the competition from the transferor and for smooth running of the business and that the assessee had not acquired any capital asset by paying this amount, therefore, the non-compete fee has been treated as revenue expenditure. He further observed that the restrictive covenants were only negative agreements, which did not bring into existence of any assets for the assessee and the expenditure could not be treated as capital expenditure as it did not bring any asset 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....
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....were revenue in nature and the ld. CIT(A) rightly directed the AO to allow the same as revenue expenditure. Alternatively, it was submitted that if the non-compete expenses are to be treated to be capital in nature and for goodwill then the benefit of depreciation was to be allowed to the assessee. The reliance was placed on the following case laws: • Guruji Entertainment Network Ltd. (supra) • Kedarnath Jute Mfg. Co. Ltd. (supra) • Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) • Mc Dowell & Co. Ltd. (supra) • Eicher Ltd. (supra) • SMIF Securities Ltd. (supra) 29. 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 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 c....
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....orks (supra) has held as under: "The expenditure was incurred with the declared intention of preventing what the parties to the agreement described as annihilation from business. The expenditure would, in all probability, secure a goodwill for the assessee in its field by sterilizing the operation of a competitor for five years, and the benefit would last beyond the period of five years. The profit making apparatus of the assessee was thereby vastly improved. The expenditure in question was, therefore, of a capital nature. " 31. Similarly, the Hon'ble Madras High Court in the case of Chelpark Co. Ltd. (supra) has held as under: "That though, under the agreement, the benefit of the restrictive covenant was for a period of five years, from the terms of the dissolution 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 th....
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....re of the view that 'Goodwill' is an asset under Explanation 3(b) to Section 32(1) of the Act." 33. In view of the above, we hold that the non-compete fee amounting to Rs. 6.80 crores paid by the assessee was capital in nature and goodwill, It was eligible for depreciation u/s 32 of the Act. 34. Accordingly, the Ground No. 1 of the departmental appeal is allowed and Cross Objection of the assessee is partly allowed. 35. The another ground raised by the department i.e. Ground No. 2 relates to the deletion of addition of Rs. 41,62,213/- made by the AO being expenses incurred in connection with purchase/acquisition of business assets. 36. Facts related to this issue in brief are that the assessee had taken over business on slump sale basis and incurred following expenses for acquiring 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 t....
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....ent to give legal and authentic values to each and every item for the user of financial statement and other purposes." 39. The reliance was placed on the following case laws: • CIT Vs Hindustan Zinc. Ltd. (2009) 221 CTR 631(Raj) • Empire Jute Co. Ltd. Vs CIT (1980) 124 ITR 1(SC) • CIT VS Madras Auto Service (P) Ltd. (1998) 233 ITR 468 (SC) • CIT VS Tamil Nadu Industrial Development Corporation Ltd. (2008) 215 CTR 90 (Mad) 40. The ld. CIT(A) after considering the submissions of the assessee observed that the assessee incurred legal and advisory expenses with relation to acquiring the NCT business from ICI India Ltd. and the said expenditure was laid out wholly and exclusively for the purpose of business of the assessee, it had not resulted into the acquisition of any capital asset, so it was deductible as revenue expenditure. 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 suppor....
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....g the course of assessment proceedings noticed that the assessee had debited an amount of Rs. 1,20,00,000/- under the head "Techno Commercial & Licensing fee" stated to be paid to the holding company, namely, M/s Nitrex Mauritius Ltd. The submission of the assessee before the AO was that the fee was paid for the use of brand name of 'Nitrex' alongwith the logo, and information & expertise available with M/s Nitrex Mauritius Ltd. The AO after considering the submissions of the assessee observed that there were two agreements - Brand Licensing Agreement and Techno Commercial Agreement, which were executed on 14.03.2005 for a period of three years effective from 01.04.2004 on annual payment of Rs. 40 lakhs and Rs. 80 lakhs respectively. The AO was of the view that the services to be provided were in the nature of brand building, therefore, the same appears to be capital in nature and M/s Nitrex Mauritius 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 na....
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....s seen that during the year under consideration, the appellant company has entered into an agreement with M/s Nitrex Mauritius Ltd. through itself and its affiliates for obtaining information and expertise available with it or to render any financial assistance requested for time to time for conducting and expanding of the business of the M/s Nitrex Chemicals India Ltd. In consideration of all the services to be rendered by M/s Nitrex Mauritius Ltd. under this agreement as enumerated in the Annexure to this agreement in the form of commercial, marketing, logistics, research results, safety, security, health and environment policy, the Nitrex Chemicals India Ltd. has agreed to pay annually a sum of Rs. 80,00,000/- w.e.f 1st April, 2004 at quarterly rests during the concurrence of this agreement. Vide clause 8 of the agreement, it was made effective from 1st April, 2004 for a period of three years and which may be reviewed by mutual consent 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....
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....er results and also to establish the company's business in international market. Further, it is also seen from the agreement that these agreements were subject to the modifications or terminations at any time. Therefore, these agreements were not perpetual or permanent and payments made on periodic basis in furtherance of such agreement cannot be termed as 'capital expenditure'. The AO has treated the said payments as capital in nature. The word 'capital' connotes permanency and capital expenditure is, therefore, closely akin to the concept of securing something tangible or intangible property, or corporeal/incorporeal right, so that they could be of a lasting or enduring benefit to the enterprise in issue. The capital expenditure must therefore generally mean an acquisition of an asset and the asset must be intended to be of a lasting value. Whereas revenue expenses are generally running expenses incurred in earning profit 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 ....
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....t is that the ld. CIT(A) had violated the provisions of Rule 46A of IT Rules, 1962. 53. Facts related to this issue in brief are that the AO during the course of assessment proceedings noticed that the assessee had claimed selling commission of Rs. 3,56,60,672/-. He asked the assessee for genuineness of those expenses. In response the assessee submitted as under: "That aforementioned selling commission comprises of commission paid to commission agents for sale of Nitrex's products in and outside India. During the captioned year, domestic sales commission of Rs. 82,20,656/- and export sales commission of Rs. 2,74,40,015/- were paid. For your perusal a copy of agreement entered for export sales commission and a copy of agreement for domestic sales commission (among others) have been enclosed as Annexure 2." 54. The AO after considering the submissions of the assessee observed that for export sales, the rate of commission was 10% FOB value of the 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 ....
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....commission payment is genuine business expenses, allowable u/s 37 of the Act and therefore the learned AO may be directed to allow the same while computing the total income.' 56. The ld. CIT(A) after considering the submissions of the assessee deleted the impugned addition by observing as under: "I have considered the factual position of the case and copies of various agreement and letters submitted by the appellant in this regard and also the commission payments have been claimed as paid to M/s Asha Exports and other international parties, in F.Y. 2003-04 which ranges from 9.40% to 10.50%, and the same have been allowed by the AO in the assessment finalized u/s 143(3) of the I.T Act. In earlier years also, the commission payment was claimed at same or higher rate, which was never disallowed by the Department. In the instant year also, the commission payment has been claimed to same parities on export sales, which ranges from 8.5% to 10.2% of the Sales made. On 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,....
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....e through the material available on the record. In the present case, it is noticed that the AO did not doubt the incurring of expenses by the assessee, he only considered the commission paid on export sales to M/s Asha Exports as excessive. On the contrary, the contention of the assessee was that the commission was paid at the same rate which was paid by the seller of the business i.e. M/s ICI India Ltd., the said contention had not been rebutted. It is also noticed that M/s Asha Export is not related to the assessee and the commission was paid for the services provided by M/s Asha Export. In the present case, the AO did not bring any material on record to substantiate that the commission paid by the assessee was excessive. We, therefore, do not see any infirmity in the order of the ld. CIT(A) on this issue. It is also noticed that nothing is brought on record to substantiate that any new evidence was furnished by the assessee before the ld. CIT(A) in violation of Rule 46A of the IT 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. T....
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....ills of Rs. 30,64,348/- out of total water charges of Rs. 72,92,206/- . However, before the ld. CIT(A), the details of bills from April 4 to March 5 amounting to Rs. 52,12,320/- were furnished. In the present case, it appears that new evidences were furnished before the ld. CIT(A) which were not before the AO. We, therefore, to meet the ends of justice, deem it appropriate to send this issue back to the file of the AO for proper verification and adjudication after providing due and reasonable opportunity of being heard to the assessee. Accordingly, the appeal of the department is partly allowed for statistical purposes. 64. In the Cross Objection No. 322/Del/2009 for the assessment year 2005-06, the assessee has raised additional ground in the same manner as was raised for the assessment year 2004-05 and another issue relating to depreciation is also same. Therefore, our findings given for the assessment year 2004-05 shall apply mutatis mutandis for this year also. Accordingly, the Cross Objection of the assessee is partly allowed for statistical purposes. ITA No. 3841/Del/2009 and CO No. 367/Del/2009 for the A.Y. 2006-07 65. First issue in this appeal of the department re....
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....een transferred alongwith transfer of business. He further observed that as per the provisions of section 36(1)(vii) of the Act, if the assessee writes off any amount in its books of account, recovery of which is doubtful, then such writing off of bad debts is an allowable expenditure. As regards to the insurance claim, the ld. CIT(A) observed that such claim raised in earlier year was shown as income in the books and when the claim actually materialized, the assessee received short claim to the extent of Rs. 3,57,206/- and since it was a business loss relating to the trading business, the same was allowable expenditure u/s 37(1) of the Act. As regards to the annual performance incentive payable to the employees of the trading unit who had been subsequently transferred, the ld. CIT(A) pointed out that it was related till 14.10.2005, which had been offered in the profit and loss account. Therefore, incentive till that date had to be paid by the assessee. The ld. CIT(A) held that all the aforesaid expenses were business expenditure and allowable against the income under the head "business and profession". Accordingly, the AO was directed to allow the same against the assessee's b....
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....aser cannot reject any asset or liability comprised in the business. 4.3 The ETA dated 14.10.2005 does not in any manner whatsoever casts any obligation on the assessee company to buy back the shares held by the outgoing employees or fund the Trust for this purpose. In fact the ETA as per clause 4.4 lays that EAC and/or Newco shall employ the employees from the completion date on terms and conditions of service which are no less favorable than those which the employees enjoyed immediately prior to the completion date with Nitrex India without any interruption or break in service. 4.4 As such the legal onus in cast on EAC/Newco to suitably compensate the employees and no adverse terms of employment is imposed on them on account of the business transfer. The act of funding the buy back of the management shares is an expenditure which is independent of the business transfer and cannot be allowed u/s 48 of the Act for computation of Short Term Capital Gain." 71. Being aggrieved the assessee carried the matter to the ld. CIT(A) and submitted as under: "That the assessee company was formed by Nitrex Mauritius Ltd. after "acquiring Nitrocellulose and Trading business from ICI ....
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....ployees (copy of the said letters are submitted as Annexure 17), were obtained by the company and whereby, the Trading Business had been transferred to EAC, without any hindrances or litigation from the part of the said shareholders. At the time of Parting the aforesaid employee their management holding was bought back by the Trust at following rate. Name Shareholding Management Holding Rate of Buy Back by Trust Paid to them on transfer Mr. Sanjay Gupta 120000 85.00 Rs.10,200,000 Mr. Manish Bahuguna 40000 60.46 Rs.2,418,400 Mr. Murali Duvvuri 32000 30.46 Rs.1,934,720 Mr. Satish Kumar 32000 60.46 Rs.1,934,720 Total 224000 Rs.1,64,87,840 4. That in pursuance to said Business Transfer Agreement and Employee Transfer Agreement, ESOP Scheme, consent of the management employee dated 9th December 2005, the aforesaid buy back was required to be funded by the assessee company and therefore, said amount of Rs. 1,39,76,352/- (Rs. 1,64,87,840 - Rs. 25,11,488), was non-recoverable from the Trust. The amount from the Trust is non-recoverable, as the ultimate loss, on the said acquisition of the shar....
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....e employee by Newco instead of Nitrex India Ltd. 4.4 EAC and/or Newco shall employ the employees from the completion date on terms and conditions of service which are no less favourable than those which the employees enjoyed immediately prior to the completion date with Nitrex India without any interruption and break in service (but excluding employees stock share holding option)". As per the terms and conditions listed above, it was the condition precedent to the completion of transaction contemplated in the BTA that the management staff shall have confirmed to accept the employment in the new company instead of the appellant company. It was also a condition that on acceptance of employment, the new company shall employ the employees on terms and conditions of service which are no less favourable than those which the employees were enjoying immediately prior to completion date of business transfer without any interruption or break up of service. However, in the agreement it is clearly mentioned that in the new company they will not be given any employee stock or share holding options. It is seen that the management employee of the Nitrex were having ESOP which was a....
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....f the shares from the employees, the business transfer of the trading division would not have been possible. It is claimed by the appellant that the amount spent on buy back of shares by the Trust has been incurred wholly and exclusively in connection with the transfer of the capital assets as contemplated in section 48 of the IT Act. Hence, the same has to be allowed as deduction while computing the capital gain in respect of the slump sale of trading business.' 73. While deleting the impugned addition the ld. CIT(A) also observed as under: "On going through the various clauses of Nitrex Chemicals Employees Stock Option Trust and Nitrex Chemicals Employees Stock Option Plan-2004, like objectives, beneficiaries and eligibility as discussed above, it is observed that ESOP-2004 scheme and the Trust were created for attracting the talented management team and retain and reward them for performing services for the growth and profitability of the company and not part of these scheme were meant for the direct benefit of the company and their stock holder. The amount paid to the Trust for retaining the shares of the management team is not going to come back to the company and sh....
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....e effect to the business transfer transaction, it became necessary for the assessee to ensure that the management staff accepts to part with their employment with the assessee company and accept the employment of the new company, as the same was a pre-requisite for consummation of the transactions. At the time of parting share holding from management was bought back which was required to be funded by the assessee company. However, the impugned amount was non-recoverable and was a loss on account of business transfer, so it was required to be deducted from the capital gain in respect of slump sale of trading business. In our opinion the ld. CIT(A) was justified in holding that the impugned amount was allowable from the capital gain arisen to the assessee. We do not see any valid ground to interfere with the findings of the ld. CIT(A) on this issue. 78. Vide Ground No. 3 the grievance of the department relates to the deletion of addition of Rs. 10,00,000/- made by the AO on account of Techno Commercial Licensing Fees. 79. The facts related to this issue are identical to the facts involved in the assessment year 2005-06 which we have already adjudicated in the former part of thi....
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....holders out of funds borrowed from the assessee company and issued these shares to the employees eligible to exercise stock option. The AO observed that the trust had purchased 421,727 shares belonging to the employees of the Trading Business. Out of the above shares 224,000 pertained to the original allotment of shares to these employees and the balance 197,727 shares pertained to share allotted in exercise of options vested on them. The AO asked the assessee to explain the ESOP and to justify as to how the expenses claimed on purchase of shares were revenue expenditure. 86. In response, the assessee submitted as under: "With reference to your query for deducible amount of Rs. 58,55,345/- for ESOP, payments relating to Trading Business, we submit herewith as follows:- During the A.Y 2006-07 (in Dec 05), the assessee company had sold the Trading Business originally acquired from ICI to EAC vide BTA dated 14.10.2005. As per the Employee Transfer Agreement 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 accept the employment in the new company. Further, it was a....
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....al appeal, which we have already adjudicated in the former part of this order. Therefore, our findings given in respect of this issue while deciding the appeal for the preceding assessment year i.e. assessment year 2006-07 shall apply mutatis mutandis for this year also. In that view of the matter, we do not see any merit in this ground of the departmental appeal. 90. Next issue vide Ground No. 2 relates to the deletion of disallowance of Rs. 85,23,127/- made by the AO out of selling commission. 91. The facts related to this issue are similar to the facts involved in the preceding assessment years which we have already adjudicated in the former part of this order. Therefore, our findings given in the former part of this order relating the issue of selling commission shall be applicable with the same force for this year also. In that view of the matter, we do not see any merit in this ground of the departmental appeal. 92. The last issue vide Ground No. 3 relates to the relief allowed to the assessee out of the disallowance made by the AO out of the dividend income. 93. Facts related to this issue in brief are that the assessee during the year, earned dividend of Rs. 3,7....
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....stricting the disallowance to Rs. 37,740/- only as against Rs. 3,97,880/- made by the AO. 97. In his rival submissions the ld. Counsel for the assessee submitted that the AO was not justified in applying Rule 8D while making the disallowance u/s 14A of the Act because the said rule is applicable w.e.f assessment year 2008-09 and not for the assessment year under consideration. The ld. Counsel for the assessee strongly supported the order of the ld. CIT(A). 98. 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 noticed that the assessee earned the dividend income of Rs. 3,77,330/- while the AO worked out the disallowance at Rs. 3,97,880/- which was more than the said income. The disallowance was made by the AO in accordance with Rule 8D of the I.T Rules, 1962. The said rule is applicable for the assessment year 2008-09 while the assessment year under consideration is 2007-08. Therefore, the AO was not justified in working out the disallowance by applying the provisions of Rule 8D. In our opinion, the ld. CIT(A) was fair and reasonable in restricting the disallowance of Rs. 37,740/- ....
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....00000 32674000 Reinstatement of loan as on 31.3.2009 Others 76067 Total 72874037 103. From the above details, the AO noticed that the substantial portion was on account of reinstatement of loan as on 31.03.2009. He also observed that on account of regular sale/purchase transactions, the assessee had accrued a gain on account of increase in exchange rates. However, out of forex loss of Rs. 7,28,74,037/-, a sum of Rs. 3,26,74,000/- pertained to ECB Loan of US dollar 31,00,000. The AO asked the assessee to show cause as to how the forex loss on ECB loans, availed for capital expenditure was allowable as revenue expenditure. In response the assessee submitted as under: "The purpose of taking the foreign loans is to get the benefit of interest cost as compared to loan taken from India as the interest on this loans are much lesser. Mainly, the difference between cost of funds, including the forex loss or gain is much lower than interest rate in India and therefore same is in interest only, as defined under Sec. 2(28A) of the Act. Without prejudice to the above, if any part of the said loss is treated as capital in nature then subse....
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....rs i.e. it has been transferred to the profit and loss account and same was allowed in the earlier years by the Ld. AO. In the earlier year there was foreign exchange gain which was shown in the profit and loss account and thus was offered for taxation. Therefore, following the principle of consistency the loss should be allowed this year. Supporting evidences in this regard are submitted herewith as Annexure 2. In this regard, reliance is placed on the decision of Hon'ble Delhi High Court in CIT Vs Indian Toners and Developers Limited (2010) 326 ITR 435 (Delhi) wherein it was held that "such gains were assessed as business income in the earlier assessment years. If this was the case then the assessee would be entitled to treat the said increased liability on account of foreign exchange fluctuation in the revenue account." (d) In AS-11 (Revised) - Accounting for effects of Changes in Foreign Exchange Rates, it has been clearly stated that exchange differences arising on repayment of liabilities incurred for purchase of fixed assets shall be expensed through profit and loss account. Copy of the same is submitted here with as Annexure 3. (e) Section 43A of the Act, saying to gi....
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....e ld. DR strongly supported the order of the AO and further submitted that ECB loan had been availed for acquisition of capital asset, so it was capital in nature. Therefore, the AO rightly disallowed the foreign exchange fluctuation loss claimed as revenue expenditure by the assessee and the ld. CIT(A) was not justified in deleting the addition made by the AO. 109. In his rival submissions the ld. Counsel for the assessee reiterated the submissions made before the authorities below and strongly supported the impugned order. 110. 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 noticed that the ECB loan taken by the assessee was old one and in preceding and subsequent year, there was gain on account of increase in exchange rates which had been accepted by the AO but the loss on account of the decrease in exchange rate had been disallowed. It is well settled that no one can blow hot and cold from the same windpipe. However, in the present case, the AO accepted the gains but disallowed the loss which is not permissible. 111. On a similar issue the Hon'ble Jurisdictional High....
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....he AO was of the view that as per sub-section (2) of section 14A of the Act, expenses connected with the exempt income (received or receivable) have to be necessarily disallowed regardless of whether they were direct or indirect, fixed or variable and managerial or financial. The AO worked out the disallowance of Rs. 12,09,198/- by observing as under: (i) the amount of expenditure directly relating to income which does not form part of total income. Rs. 2,85,288 (ii) in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely:- A - Interest : 1,92,21,813/- B - Average investment : Rs. 5,70,57,500/- A x B/C C - Average Assets : Rs. 118,70,73,412/- A- Amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year: = A x B/C B- The average of value of investment, income from which does not or shall nor form part of the total income as appearing in the balance sheet of the assessee, on the first day and t....
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....ant that the Assessing Officer has not given any finding that there was any nexus of any part of the expenses claimed by the appellant with the tax free income. In the absence of any such findings and in view of the judgment of Hon 'ble Courts relied upon by the appellant, the Assessing Officer is directed to delete the addition made to income on this account. This ground of appeal is also allowed." 122. 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. 123. In his rival submission the ld. Counsel for the assessee submitted that the assessee gave the working for disallowance u/s 14A of the Act r.w. Rule 8D of the I.T Rules, 1962 to the AO who had not given any findings for non-satisfaction for the amount disallowed by the assessee. Therefore, the disallowance made by the AO was not justified and the ld. CIT(A) rightly deleted the same. 124. 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 noticed that the assessee earned the dividend income of Rs. 1,06,498/-. However, the AO made ....