AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2014 (9) TMI 1006
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....of the appellant that individual instances of expenditure on entertainment in excess of Rs. 10,000/- alone fell within the ambit of section 37(2) of the I.T. Act, 1961. The learned CIT (Appeals) accordingly ought to have directed inclusion of only such individual instances of expenses on entertainment, as were in excess of Rs. 10,000/- for the purposes of computing disallowance u/s 37(2)." "Without prejudice to the above, the learned CIT (Appeals) erred in not accepting the contention of the appellant that at least 60% of the total expenditure on entertainment related to employees participating in the extension of hospitality and instead confirming exclusion of only 15% thereof while computing disallowance u/s 37(2)." 2. "The learned CIT (Appeals) further erred in confirming rejection of the appellant's claim for deduction of proportionate premium on leasehold land amortised and charged to the Profit & Loss Account of the year in question." 3. "The learned CIT (Appeals) further erred in confirming rejection of the appellant's claim for deduction for the full amount of Rs. 3,63,92,163/- claimed by the appellant, being process know-how fees. The learned CIT (Appeals) ough....
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....iness income and/or was not includible in the appellant's business income. On the facts and in the circumstances of the case and in law and in view of the method of accounting regularly followed by the appellant and accepted by the department in the past, the ld CIT(A) ought to have accepted the aforesaid contention of the appellant that the whole of the said sum of Rs. 1230.11 lacs deductible as claimed by the appellant." 8. "In the matter of appellant's claim for deduction under sec.80-I/80-IA, the learned CIT (A) further erred in confirming that the following items of income were not in the nature of income derived from concerned industrial undertakings so as to be eligible for deduction under sec.80-I/80-IA: Name of the undertaking Particulars Amount disallowed Total amount disallowed 1. Wood-pack a) Other income 1.91 lacs 1.91 lacs 2. Chiller/Heat Pump a) Fluctuation in rate of Exchange 7.79 lacs b) Premium on forward contracts 8.35 lacs c) Service charges 3.92 lacs 20.06 lacs 3) Process Integrated Boiler a) Fluctuation in rate of exchange 1.05 lacs 1.05 lacs 4) Fireside chemicals a) Interest on investment 0.11 lac....
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....to that extent, expenditure must be deemed to have been incurred for earning such income, resulting in a pro tanto reduction in expenditure attributable to "Profit & Gains of business". v) That Rs. 1,54,01,000/- and Rs. 9,85,390 were not eligible for inclusion in 'profits of business' for the purposes of section 80-HHC." vi) not accepting the contention of the Appellant that only 90% of the net income, of the nature of items specified in (iii) above as well as interest income, i.e. income less expenses should be reduced while arriving at the figure of "Profit of Business". 11. The ld CIT(A) further erred in confirming rejection of the appellant's claim for deduction of a sum of Rs. 2 Crores paid by the appellant as a testimonial to Mrs A.R. Aga. Without prejudice to the generality of the above ground, the ld CIT(A) erred in taking a view that the said expenditure was in the nature of ex-gratia and was therefore, not allowable either u/s 37(1) or any other provision of the Act. On the facts and in the circumstances of the case and in law the ld CIT(A) ought to have held the said expenditure was incurred wholly or exclusively for the purpose of the business and was all....
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.... stands dismissed. 3.2 Ground No. 1 (para 2) raised by the assessee is as follows: "Without prejudice to the above, the learned CIT (Appeals) erred in not accepting the contention of the appellant that at least 60% of the total expenditure on entertainment related to employees participating in the extension of hospitality and instead confirming exclusion of only 15% thereof while computing disallowance u/s 37(2)." 3.2.1 At the time of hearing, it was a common ground between the parties that similar issue had come up for consideration before our co-ordinate Bench in the assessee's own case for the assessment years 1994-95 and 1995-96 and the Tribunal vide order dated 29.1.2009 in ITA No 855/PN/2000 for assessment year 1994-95 and in ITA No 252/PN/01 dated 30.6.2011 for assessment year 1995-96 has confirmed the orders of the lower authorities in this regard. Since the action of the lower authorities is in conformity with the precedent in the assessee's own case, therefore, we dismiss the Ground of appeal raised by the assessee. 4. Ground No 2 raised by the assessee reads as under: "The learned CIT (Appeals) further erred in confirming rejection of the appellant's claim for de....
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....roject specific and the claim of the assessee be allowed under section 37(1) of the Act being direct cost of the concerned project. The learned Departmental Representative, on the other hand, supported the orders of the authorities below. 5.3 We have carefully considered the rival submissions. We find that identical issue had come up for consideration before our coordinate Bench in assessee's case for assessment year 1995-96 and the Tribunal vide order dated 30.6.2011 has dealt with this issue in detail and ultimately restored the issue to the file of the Assessing Officer with certain directions. For the sake of brevity, we extract below the relevant observations of the Tribunal: "16. We have carefully considered the rival submissions. Before adjudicating on the dispute raised by the assessee, a brief reference to the background is necessary. In the impugned assessment year, the Assessing Officer noticed that in the computation of income annexed to the return of income, the assessee had claimed a deduction of Rs. 1,84,28,945/- on account of fees paid towards process know-how. However, in the books of account such expenditure incurred on imported technical know-how (including pr....
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....ssessee was to be governed by section 35AB of the Act. The learned Counsel for the assessee does not dispute this position, but it is submitted that the said precedent is applicable to such payments which have been made in terms of process know-how agreements examined and considered in the course of the proceedings for the assessment years 1993-94 and 1994-95. It is sought to be made out that in so far as the expenditure incurred in terms of the agreements entered during the year under consideration, the claim be revisited in terms of the decision of the Hon'ble Supreme Court in the case of Swaraj Engines Ltd. (supra). 18. In this context, we have carefully examined the rival stands. In the case before the Hon'ble Supreme court, the assessee Swaraj Engines Ltd. had entered into an agreement of transfer of technology know-how and trade mark in terms of which royalty was payable by it as a percentage of net selling price of the licensed products. The said expenditure was claimed as a revenue expenditure by the assessee. A question also arose as to whether such expenditure was liable to be considered in terms of section 35AB of the Act or not? As per the Hon'ble Supreme court befor....
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....e Supreme Court in the case of Swaraj Engines Ltd. (supra) shall govern the efficacy of assessee's claim for deduction and it shall have to be decided, having regard to its terms and conditions whether the same are different than the earlier agreements and as to whether the expenditure is revenue or capital in nature, and depending on the answer to the said question, the applicability of section 35AB of the Act shall be decided. In nutshell in so far as process know-how fee paid in terms of the agreement entered into earlier years, the deduction thereon shall be governed by the provisions of section 35AB, as held by the Tribunal in assessment years 1993-94 and 1994-95 (supra). In so far as the fees paid under the process know-how agreements entered during the year under consideration is concerned, in order to test the efficacy of section 35AB on such claim, it would be imperative to examine as to whether the expenditure is revenue or capital in nature and depending on that answer, the Assessing Officer shall decide the applicability of section 35AB of the Act. On this limited aspect, we deem it fit and proper to restore the matter back to the file of the Assessing Officer to be adj....
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....owards warranty obligations in respect of products/projects sold/executed by it, which formed part of Rs. 2,61,82,607/- debited in the Profit & Loss Account towards FOC expenses. Both the Assessing Officer as well as the Commissioner of Income-tax (Appeals), following their orders for assessment years 1993-94 and 1994-95, decided the issue against the assessee holding the said provision to be contingent in nature. 7.2 It was a common ground between the parties that the Tribunal in the immediately preceding assessment year of 1995- 96 followed its own order for the assessment year 1994-95 on this issue and in principle decided the issue in favour of the assessee. After considering the submissions of both the parties, we find that the precedent in the assessee's own case fully covers the controversy and accordingly the Assessing Officer is directed to give effect to the above precedent as per directions given in assessment years 1994-95 and 1995-96. Accordingly, the assessee succeeds on this Ground as above. 8. Ground No. 6 raised by the assessee is as under: "The learned CIT(A) erred in confirming disallowance of provision for leave encashment of Rs. 23,42,,000/- rejecting the c....
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....by the appellant." 9.1 The facts, in brief in this regard, are that the assessee company is engaged in the business of drawing, designing, engineering, fabrication, erection, installation, and commissioning of various equipments. The products manufactured by the appellant are complex pieces of equipment (boilers etc.) that are designed and fabricated specially according to the requirements of the customer. These are usually nonstandard. The designs are evolved depending upon the total profile of the customer's project of which the equipment manufactured by the assessee forms a part. All the contracts entered into by the aaseessee are fixed price contracts. The difference between the order value and the estimated total cost is the budgeted contribution from that order. During the course of assessment proceedings, the Assessing Officer noted that for the year ended 31st March 1997 the Company has provided a sum of Rs. 1230.11 lacs by way of profit equalization. The Assessing Officer required the assessee to give the particulars of the method followed for recognition of revenue in respect of Long Term contract. The assessee explained in detail as follows. "It was explained by the ....
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....policy of the company is designed to distribute the contribution uniformly and equitably over each stage of the execution of the contract when the execution period spreads two or more accounting years. This objective is achieved by yearly provisioning in the accounts so as to ensure that the yearly contribution for a given stage is in line with the estimated contract contribution spread over all the billable/unbilled components of the Equipment, till such time as the contract is completed, when true profits will emerge for the first time While ordinarily sales minus cost booked would reflect profits, in the case of long term contracts, in order to ensure that there is 'equalization of contribution' over the whole of the progress of the contract; an adjustment is made based on stage of completion. Thus, if the contract is finally expected to result in a profit of Rs. 80 but invoicing and costs booked at an interim stage of completion, say 50%, reflect profit of Rs. 35 or 45, as against Rs. 40 (50% of Rs. 80) adjustment of Rs. 5 to the profits as per the books of account is called for in terms of AS 7. Further, normally, at an early stage of a project, there is less certainty about t....
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....rmax Babcock & Wilcox Ltd. v. DCIT vide ITA Nos 157 & 158/PN/95 dated 11.5.2001 for assessment years 1990-91 & 1991-92. In particular, our attention was drawn to the following observations of the Tribunal in paras 1-19: "The first grievance of the assessee relates to addition of Rs. 60,30,000 on account of provisioning made on account of revenue recognition on percentage of completion method. The year under consideration is the first year of assessee's business and for arriving at the portion of the profit of the long-term contracts, whose execution is spread over more than one accounting period, the company maintained accounts on the percentage of completion method, now formally recognised as accounting standards 7(AS-7) of the Institute of Chartered Accountants of India". "The assessee contended before the Assessing Officer that the provision of Rs. 60,36,000 was liable to be allowed as the company regularly followed percentage of completion method and amount of revenue recognized is determined by reference to stage of completion at the end of the accounting period. It was further stated that for convenience of execution of job and supplies of various components required....
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....the subsequent years a method which is one of the accepted accounting principles and practices sanctified by usage and in line with Institute's recommended standard which is known as AS-7. No doubt, AS-7 was issued in the year 1983, but AS-7 is merely a codification of existing accounting practices for which evidence of commentaries of various authors have already been referred to in paragraph 5 (page 32). Further,AS-7 has been made mandatory from April 1, 1991. From the chart reproduced on para. 4 (page 31), it is noted that the books of account, especially trading account has been accepted, save and except the addition of provisioning. As pointed above, the assessee is engaged in long-term contracts and the provisioning was made for the purposes of finding the profits on the basis of percentage of completion method as the provisioning is by way of distribution of profit for the contract in various previous years for which the contract was in progress. Thus, provisioning is in the nature of profit rationaliser, divider and allocator in order to determine profit each year during which contract was in progress. In the year of completion of contract, ultimately true profit emerge....
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.... direct help to the assessee and this was also accepted by the Departmental Representative, but he tried to distinguish it. According to the Departmental Representative in the said case, the assessee had offered for taxation the total receipts and claimed for deduction on account of liability, which the assessee had to incur in subsequent years in order to fulfil the contractual agreement. According to the learned Departmental Representative under these particular circumstances, the Supreme Court allowed the deduction on account of liabilities to be incurred in subsequent year. However, according to the learned Departmental Representative, in the instant case the receipts have been received by the assessee during the assessment year and that these receipts have been earned by assessee by performing the object as envisaged in the contract. This distinction given by the learned Departmental Representative has no relevance because the assessee's reliance is for limited purpose that a deduction is allowable not only on the basis of incurrence of a liability under section 37 and that section 28 is the real repository of all the deductions unless negated by the Legislature. Further, ....
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.... on the judgment of the Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. [1997] 227 ITR 172 is also of no assistance to the Revenue. This decision of the apex court nowhere falls foul of the accounting principles which have found acceptance in several cases. Here, in this case, the business was not started, yet the company earned income by way of interest from the available surplus fund. Accounting practice is such that when the project is in construction stage, interest should be set off against the capital cost of the project. However, the Institute's guidelines of pre-construction accounting clearly states that even that income earned during the construction period is to be set off against the project cost yet in the profit and loss account tax provision is required to be made. Further, there is a specific provision which charges such income under section 56. Obviously, therefore, here accounting principles fractures specific provision of section 56 and, therefore, the court ruled that such interest income is liable to be taxed in this context. Here, it is noteworthy that the Supreme Court refers to the observations of their Lordships in B.S.C.....
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....Phool Chand [1987] 166 ITR 180 (SC). The judgment in the case of Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 (SC) would not apply since in that case, the assessee had offered for taxation the total receipts and claimed deductions on account of liability, which that assessee had incurred in subsequent years in order to fulfil the contractual agreement. However, in the instant case, the receipts had been received by the assessee during the assessment year and that these receipts have been earned by the assessee by performing the job as envisaged in the contract. For earning the receipts, whatever expenses have to be incurred as for the contract, have already been incurred as per the terms of payment; payments are to be made only after production of the certificate that the relevant work has been done. Further, the judgment of the Supreme Court in the case of CIT v. British Paints India Ltd. [1991] 188 ITR 44 was applicable because the method adopted by the assessee is one which does not give correct position of accounts and the correct profits cannot be deduced there from. The learned Counsel further submitted that the issue, whether profits as arrived at in accordance with the manda....
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....I; which has become mandatory, then what was occasion for the A.O. to overlook the same and also to change the method of accounting regularly followed year after year. In short, according to AS-7, no revenue is to be recognized when the percentage completion of contract is less than 25%. This was followed, hence assessee was not recognizing the income on such project where percentage completion was less than 25%. Further, the accepted position is that the contracts entered into by the assessee were fixed price contract. The entire cost used to be carried forward as the contract got progressed and once the threshold was crossed at the time the entire revenue was recognized by offering the profit for the purpose of tax. Several calculations and year-wise charts are part of the compilation. Since this is the background of the addition, hence according to us the issue seems to be more or less covered by the decision of Third Member in assessee's own case reported in 79 ITD 63 (T.M.). 255 ITR 20(AT) only for the proposition that AS-7 is an accepted guidelines so a tax payer is right in consistently following the same. An another fact has also been placed on record that in the past i.e. ....
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....nition and accrual of profits: (i) Gresham Life Assurance Society ( 3 TC 185)(HL)(referred to in 57 ITR 521 at 526); (ii) Poona Elecrity Supply Co. Ltd. 57 ITR 512, 526)(SC) (iii) Badridas Daga 34 ITR 10,15 (SC); (iv) Calcutta Co. Ltd. 37 ITR 1(SC); (v) H.M. Kashiparekh & Co 39 ITR 706 (Bom); (vi) Indo Nippon Co. (I) Ltd. 261 ITR 275 (SC); (vii) Aruna Mills Ltd 31 ITR 153 (Bom); (viii) Challapali Sugars Ltd 98 ITR 167 (SC); (ix) Madras Industrial Investment Corpn Ltd 225 ITR 802 (SC); (x) Bokaro Steel Ltd 236 ITR 311 (SC) (xi) U P Industrial Dev. Corpn. 225 ITR 703; (xii) United Commercial Bank 240 ITR 355 (SC); (xiii) Otis Elevator Co (I) Ltd 99 ITD (Mum); (xiv) M N Dastur & Co Ltd 61 ITD 167 (Cal); (xv) Metal Box Co of India Ltd 73 ITR 53 (SC); (xvi) Advance Consttruction C. L Ltd 275 ITR 30 (Guj); (xvii) Bilahari Invetments (P) Ltd 299 ITR 1 (SC); (xviii) Hyndai Heavy Industries Ltd; (xix) Triveni Engg & Industries Ltd (Del); (xx) Jacobs Engg India P Ltd; and, (xxi) Dredging International N.V. 9.4 Having considered the rival submissions and material on record, we find that a similar issue came before coordinate Bench in the case of Thermax Babcock & Wilcox ....
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....avour of the assessee by following the findings in the order of the Tribunal for the assessment year 1995-96, vide para 45 in ITA No 252/PN/01 (supra). Thus, the assessee succeeds on this issue. 10.4 It was a common point between the parties that the issue relating to fluctuation in exchange rate had been subjectmatter of consideration by the Tribunal in assessment year 1995- 96 (supra) and the Tribunal has restored the matters to the file of the Assessing Officer to follow the directions given therein. Following the same, we hold so and restore the issues to the file of the Assessing Officer to adjudicate the issues afresh in the light of precedent referred to above. 11. Ground No. 9 relating to 'Retention money' was not pressed at the time of hearing and, therefore, the same stands dismissed as not pressed. 12. Ground No. 10 of assessee's appeal reads thus : "In the matter of deduction under sec.80-HHC, the CIT (Appeals) erred in confirming - a) reduction from profits derived from export of manufactured goods the loss suffered from export of trading goods. The learned CIT (Appeals) ought to have accepted the contention of the appellant that such loss from export of tra....
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....ing items of income from the total turnover for the purpose of computing deduction u/s.HHC of the Act. i) Insurance claim of Rs. 16,55,961/- ii) Bad debts recovered of Rs. 50,76,710/- iii) Amount written back Rs. 74,40,301/- iv) Custom duty refund Rs. 3,12,299/- v) Credit balance appropriated Rs. 46,46,943/- vi) Sale of scrap Rs. 2,67,38,194/- We find that the aforesaid issue of exclusion of the aforesaid receipts from total turnover for the purpose of computing deduction u/s.80HHC of the Act has been decided in favour of the assessee by the Tribunal for A.Ys. 1995-96 and 1996-97 by observing as under: "49. We have considered the rival submissions carefully. So far as Ground No. 14 (a) is concerned, the issue is liable to be decided against the assessee in view of decision of the Hon'ble Supreme Court in the case of Ipca Laboratories Ltd 266 ITR 521 (SC). We hold so. 50. The issues relating to exclusion of Excise Duty and Sales tax collected from total turnover contained in Ground No. b(i) and (ii) respectively are concerned, they are decided in favour of the assessee in view of the decision of the Hon'ble Supreme Court in the case of Lakshmi Machine Works 2....
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..../- may constitute independent incomes excludible in terms of Explanation (baa) of section 80HHC of the Act. Apart therefrom, it has also been pointed out that the issue may be decided in the light of the recent judgment of the Hon'ble jurisdictional High Court in the case of CIT v. Pfizer Ltd. 233 CTR 521 (Bom). 56. On the other hand, the learned Departmental Representative has defended the orders of the authorities below. 57. Having considered the rival submissions, we deem it fit and proper to set aside the issue to the file of the Assessing Officer to be adjudicated in the light of the judgment of the Hon'ble Bombay High Court in the case of Pfizer Ltd., (supra) except to the extent of lease rental, mesne profits and franchisee fees, which are liable to be excluded in terms of Explanation (baa) to section 80HHC of the Act. The Assessing Officer shall re-adjudicate the controversy after allowing the assessee an opportunity of being heard in the matter. 58. The various issues involved in Ground 14(d), were not pressed by the learned Counsel for the assessee and, therefore, they are dismissed as not pressed. Accordingly, Ground No. 14 is partly allowed." Facts being simi....
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....ught to have directed that the "Profits of the Business" should be increased by 10% of all income assessed under the head "other sources" inasmuch as to that extent, expenditure must be deemed to have been incurred for earning such income, resulting in a pro tanto reduction in expenditure attributable to "Profits & Gain of business". Before us, the learned Counsel for the assessee relied upon the decision of Mumbai Bench of the Tribunal in the case of Surendra Engineering Corporation 78 TTJ (Bom) for the proposition that indirect costs should be reduced and hence, profits should be increased by 10%. Further reliance was placed on the judgment in the case of Hero Exports 295 ITR 454. On the other hand, the learned Departmental Representative supported the orders of the authorities below. 12.6.1 After considering the submissions of both sides, we set aside the order of the Commissioner of Income-tax (Appeals) and restore the matter back to the file of the Assessing Officer to be adjudicated afresh in the light of the aforesaid judgments and according to law, after affording an opportunity of being heard to the assessee. 12.7 Ground No. 10(v) is as follows: "That Rs. 1,54,01,000....
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....n was passed by the Board of Directors: "RESOLVED THAT in recognition of late Mr. R. D. Aga's personal quality -qualities of heart and head - and to honour his memory, the Company do pay, out of the Company's funds, a sum of Rs. two crores, as a testimonial and, in his absence, Mrs. Anu Aga be entitled to receive the said sum for herself such that she will have full domain over the said sum" 13.2 During the course of assessment proceedings, the company claimed this amount as business expenditure and the same was also charged to the Profit and Loss Account of the year ended 31st March, 1997. These accounts were approved by the shareholders at the Annual General Meeting. The Assessing Officer rejected the claim of the assessee. In the view of the Assessing Officer, the payment was not in the nature of 'expenditure' since the late Mr. Aga died on 16.2.96 and therefore he could not have rendered any service to the assessee during the financial year 1996-97; that no services have been offered to the assessee by anybody; that the payment is voluntary in nature, there being no contractual obligation to make the payment; that the payment could be, alternatively, called as appropriation....
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....bility and entrepreneurship which none was likely to ever equal in Thermax; that the payment recognizes and acknowledges all that Mr. Aga had done for the company in the past way beyond his call of duty. He had after all devoted the best years of his life in the service of the company. It was also made by way of a testimonial in recognition of his personal qualities of heart and head and to honour his memory. In sum and substance, it was submitted that there was commercial expediency involved in the impugned payment. 13.5 The learned Counsel for the assessee then proceeded to put-forth his submissions In regard to allowability of the claim under section 37(1) of the Act. According to him, the payment in question is an expenditure incurred wholly and exclusively for the purposes of the business of the assessee and motivated entirely on grounds of commercial expediency and is hence allowable as a business expenditure under section 37(1) of the Act. It was incurred by the assessee in its capacity as a trader and was a payment which was incidental to the trade carried by the company. As per him, it is not the case of the AO that the amount paid is either excessive or has any personal ....
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....o. In this regard, the learned Authorized Representative for the assessee has submitted that Central Board of Direct Taxes has issued Circular No.573 dated 21.08.1990 clarifying that any such gratuitous lump sum payment will not be taxable as income in the hands of the recipient widow under the Income Tax Act. The lump sum gratuitous payment is a testimonial of the nature of a gift and not remuneration to the employee for his services. The purpose for which the amount was paid was to express gratitude for what he had done and in appreciation of his personal qualities. Obviously the terms of the employment of the deceased director Mr. Aga did not entitle him to such a benefit. The lump sum gratuitous payment made after death to the widow therefore cannot be said to be wholly and exclusively incurred by the assessee for the purpose of its business. It is pertinent to mention that in the light of the clarification given by the CBDT in Circular No.573 the testimonial in the nature of gratuitous lump sum payment is not taxable under the Act in the hands of the widow Mrs. Aga. One and the same outgoing would not be eligible for tax relief twice in such circumstances. Accordingly, ground ....
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....th March, 1997 (Paper Book page no 85 - 108). TCWTL was a 50:50 Joint Venture between Thermax and Culligan International Company, USA.In consideration of such transfer the Company received a sum of Rs. 3 crores. During the course of assessment proceedings, itt was contended before the AO that this sum was a capital receipt not exigible to tax. 14.1 As regards the Non-compete Agreement (NCA), it was explained that on 29th March 1997 itself the Company also entered into a separate 'Non-Competition Agreement' with TCWTL (NCA) in terms of which it agreed to, inter-alia, give up, part with and desist from carrying on the Water treatment Product business anywhere in India. (Paper Book page no 109 - 111) for a period of 25 years. In consideration of such restrictive covenant, the Company was paid a further sum of Rs. 3 crores. The Company contended that this sum was also a capital receipt not exigible to tax. 14.2 The Assessing Officer, however, brought the said two receipts to tax as business income holding that the assesseet has not sold any undertaking and, therefore, it cannot be called price realized on sale of business undertaking; that the Appellant has not transferred any undert....
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....red to be clubbed with the other amount of Rs. 3 crores received by the Appellant separately under Business Transfer Agreement. Therefore, the entire amount is taxable under section 28(iv) of the Act. Alternatively, according to the AO, the entire receipt of Rs. 6 crores is taxable as short-term capital gains in view of the provisions of section 50 of the Act. The assessee itself has offered these amounts for tax in the computation of income. Without prejudice to the above, the AO has taken a view that the sale and transfer of the business undertaking had not been completed by 31st March 1997 and accordingly the income arising therefrom should be taxable in the hands of the appellant in assessment year 1998-99 but, since the Appellant itself has offered these amounts for tax in assessment year 1997-98, he has brought them to tax on protective basis. Being aggrieved, the assessee carried the matter in appeal to the CIT(A). 14.4 The CIT(A) after considering the submissions of the assessee held that consideration for non compete covenant is nothing but a different expression for transfer of business activity and therefore he confirmed the view of the AO that the entire compensation w....
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....ustomer orders and all other information, material/relevant for the conduct of the said business, as detailed in the BTA. b. The above transfers were effected as part and parcel of the Business/Business Undertaking which changed hands on a going concern basis. It was thus a case of 'slump sale' of the Water Treatment Product business. It was the contention of the appellant that, in terms of the law as it then stood, a slump sale was not exigible to tax even under the head Capital gains. This view is supported by a plethora of case law including of the Supreme Court c. The Income tax Act of the relevant time did not contain any definition of a 'slump sale'. Finance Act, 1999 introduced section 50B containing special provisions for computation of capital gains in case of slump sale. This subsequent amendment itself is supportive of the Appellant's contention that, consideration receivable in the event of a slump sale is a capital receipt and not a business income. This view is supported by a plethora of case law including of the Supreme Court. Following the decision of the Supreme Court in the case of since the business or undertaking, which was undoubtedly a capital asset, has....
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....1995 15.72 31.3.1996 16.97 31.3.1997 18.18 These figures are independently available in the Company's books of account to disprove the contention of the AO that there was no independent Product business. d. The Product Division also had dedicated infrastructure and manpower. e. The AO/CIT(A) however concede that what has been transferred is a 'business' which should suffice to make the sale a 'slump sale' as judicially understood and as subsequently defined in the Act. f. Since a 'business' has been transferred, there is no basis for the AO to say that no income earning source has been transferred. g. It is now settled law that 'business' and 'business undertaking' constitute a capital asset. This is so because, a capital asset has been defined in section 2(14) to mean 'property of any kind'. Business is a source of income. The figures of turnover of the Product Business as given above are sufficient to confirm this factual position. h. The other contention of the AO is that liabilities and encumbrances have not been transferred. i. Unlike the definition of de-merger (s 2(19AA) introduced by the Finance Act, 1999 with effect from assess....
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....eciable assets. In the present case the entire undertaking/business, a non-depreciable asset, was transferred. No separate consideration has been assigned to the depreciable assets transferred incidental to the transfer of the whole of the undertaking/business. The provisions of s 50 do not therefore apply to a slump sale. If s 50 was applicable even in the case of a slump sale there was no need to introduce s 50B; a slump sale could involve transfer of depreciable assets as well as is clear from Explanation 2 to s 50B explaining how the net worth of the undertaking has to be computed. The contention of the AO/CIT(A) that the receipt of Rs. 6 crores was a short term capital gains chargeable u/s 50 is contrary to both facts and the position in law. o. The AO has alternatively brought the receipt to tax under section 28(iv) of the Act. Section 28(iv) reads as follows: The value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession p. It is a settled position that receipt of money cannot be brought to tax under 28(iv) and only a benefit or perquisite received in kind can be the subject matter of charge under....
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.... common causa causans viz. sale of the business. g. The other stand of the AO is that the consideration is taxable in AY 1997-98 only on a protective basis though in his view the transaction would be taxable in AY 1998- 99 because certain depreciable assets were effectively transferred after 31.3.1997. h. The BTA defines 'Effective Date' as the date of closure of Business by the Transferor i.e. March 31, 1997 or such other effective date as may be agreed by the parties. Clause 5 of the BTA defines completion of the sale and transfer of the Business Undertaking shall take place on the Effective Date. It is respectfully submitted that mere facts that some attendant formalities etc. are delayed beyond 31st March, 1997 would not defeat the intention of the parties particularly when the Transferee has already paid the full consideration of Rs. 6 crores before 31st March, 1997 acknowledging compliance with at least the substantive portion of the BTA. i. It is therefore respectfully submitted that the character of both the receipts has to be decided in AY 1997-98 itself and not AY 1998-99 as alternatively held by the AO. j. Finally the AO has said that the amount is taxable be....
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.... must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before this court. A decision of this court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, the courts must carefully try to ascertain the true principle laid down by the decision of this court and not to pick out words or laid down by the decision of this court and not to pick at words or sentences from the judgment, divorced from the context of the questions under consideration by this court, to support their reasoning" j. In the case of BEST AND COMPANY relied upon by the CIT (A) compensation was expressly received for giving up the managing agency. The Counsel for the assessee had sought to contend that it was wholly for the restrictive covenant, which contention was, on facts, rejected by the SC. The Court noted that the restrictive covenant was an independent obligation undertaken for a specified period which came into operation only after the managing agency was terminated. It was wholly unconnected with the compensation attributable to the termination of agency. Th....
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....duct business transferred by it was one of the many activities of different business carried on by it. He then proceeds to conclude, because of this fact situation, that the trading structure of the appellant company was not affected. It is respectfully submitted that giving up of one managing agency out of the several held by an assessee was considered by the SC as a normal incidence of trade since it did not affect the trading structure. The Court noted that "compensation received by the appellant was for cancellation of the agency which was terminable at will. The appellant was to be paid an amount which was to be computed on the basis of the profits of the business". On the aspect of multiple agencies the Court held "there is not even a suggestion that by the determination of the agency held by the appellant ----the trading structure of the assessee was impaired. It is manifest that the agencies of the companies conducted by the appellant must have been obtained at different times. There is no evidence that these agencies were of any fixed duration. It is reasonable to infer that some of the agencies may be canceled and fresh agencies obtained". The Court went on to conclude....
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....anybody's consideration that the Rs. 3 crore consideration received under the BTA was for transfer of depreciable assets. The consideration was for transfer of the entire business on a going concern basis at an agreed enterprise value. t. The following decisions, which at times overlap between consideration for sale of a business and attendant non compete covenant, support the case of the Appellant. Copies of these decisions are part of the paper book of case law on record: NAME OF THE CASE FACTS AND RATIO IN BRIEF 1 Mafatlal Gangbhai & Co. (219 ITR 644)(SC) Cash payments do not come within the ambit of perquisites 2 Mahindra & Mahindra Ltd (261 ITR 501)(Bom) S 28(iv) does not apply to benefits in case or money 3 Padamshi Meghji (48 ITD 127)(Bom) Cash receipts not covered by s 28(iv) 4 Alchemic Private Limited (130 ITR 168)(Guj) 28(iv) applies only to non-monetary perquisites - therefore cannot apply to the amounts in question 5 Kettlewell Bullen and Co Ltd (53 ITR 261)(SC) Compensation for loss of agency - Capital 6 Gillanders Arbuthnot and Co. Ltd (53 ITR 283)(SC) Compensation for loss of agency - revenue 7 Best and Co. (P) Ltd (60 ITR 11....
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....f PNB Finance Ltd. reported in (2008) 307 ITR 75 (SC) has held that Business undertaking can consist of not only tangible items but also intangible items and in a case of sale of business undertaking on a going concern basis where the slump price was not capable of being attributed to item-wise earmarking of assets and when there was no cost of acquisition of the undertaking sold as a going concern, it was not possible to compute capital gains and the receipt on sale of undertaking was not chargeable to tax. Hon'ble Supreme Court has observed that the charging section and the computation provisions together constitute an integrated Code and when in a case the computation provisions fail, such case would not fall within the ambit of Section 45. Hon'ble Supreme Court has inter alia distinguished its decision in the case of Artex Manufacturing Co. reported in 227 ITR 262 by observing that itemized sale was involved in that case and therefore it was held that surplus on sale of assets was chargeable to tax under provisions of Section 41 (2). It is only by prospective amendment to section 50B with effect from 01.04.2000, that cost of acquisition has come to be notionally fixed in case o....
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.... During the course of assessment proceedings, the Assessing Officer noticed that the assessee had claimed deduction under section 80M on gross dividend of Rs. 3,66,10,003/-. The Assessing Officer rejected the assessee's contention that as per section 80M deduction is available on gross dividend received if the same and therefore expenses are not to be considered while computing dividend income. As per the Assessing Officer, the expenses have to considered and for this, he derived support from the judgment of the Hon'ble Supreme Court in the case of Distributors (Baroda) P. Ltd. 155 ITR 120. Since the assessee failed to furnish detail of expenses incurred, the A.O estimated the same on ad hoc basis at the rate of 5% of gross dividend received. He accordingly treated the sum of Rs. 18,30,500/- as expenses allocable to dividend earned and further held that deduction u/s 80M will be accordingly reduced. As a consequence, the business income of the assessee will be increased correspondingly. In appeal, the CIT(A) restricted the expenses attributable for earning the dividend to 2.5% instead of 5% estimated by the AO. Still aggrieved, assessee is in appeal before us. 15.1 Before us, the....
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.... excluded while calculating indirect costs of trading goods u/s 80HHC(3), directed relief to the assessee for the year under consideration. Before us, it was submitted that pursuant to the directions of the CIT(A), the AO has already accepted the reworking of indirect expenses as in the earlier years and has recomputed the deduction u/s 80HHC. It is also found that on similar issue for the assessment year 1995-96, the Tribunal had held that no interference was called for with such directions of the CIT(A). For the sake of brevity, the relevant observations of the Tribunal are extracted below: "71. Before parting, we may refer to an Additional Ground raised by the Revenue vide application dated 25.4.2001, which reads as under: "Whether while computing indirect costs attributable to export of trading goods all indirect costs that are not relevant/attributable to trading activity should be ignored." 72. At the time of hearing, the learned Counsel for the respondent-assessee submitted that assessee has no objection to the admission of the said Additional Ground. In this view of the matter and, also noticing that the said Ground raised by the Revenue arises from the orders of th....
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....port of the proposition advanced by the Commissioner of Income-tax (Appeals): (i) Snowcem India Ltd. 12 SOT 333 (Mum); (ii) Khimji Vishram & Sons 1 SOT 618 (Mum); (iii) MMTC Ltd. 112 TTJ 15 (Del); and, (iv) Glaxo Smithkline Asia 6 SOT 113 (Del). 76. We have considered the rival submissions and find that in principle the direction of the Commissioner of Income-tax (Appeals) does not require any interference. We also have taken note of the statement made by the learned Counsel for the assessee at Bar that while giving effect to the direction of the Commissioner of Income-tax (Appeals) for the year under consideration, the Assessing Officer had accepted the computation of indirect costs attributable to trading exports excluding costs that had no nexus with such trading exports. In our view, it would be in the fitness of things that the Assessing Officer reviews the working already accepted by him so as to be in conformity with the aforesaid decisions and also directions of the Tribunal contained in its order for the assessment year 1994-95 (supra). As a result thereof, on this Ground, the Revenue succeeds for statistical purposes only." On the parity of reasoning, the....
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.... also relied on the decisions in the case of Lala Lakshmipat Singhania (104 ITR 466)(All); J.Dalmia (138 ITR 653)(Del); Narhari Dalmia (80 ITR 454)(Del) for the proposition that the receipt in question was chargeable to tax under s 2(24)(iv) of the Act. 21.2 In appeal, the CIT(A) decided the issue in favour of the assessee. According to him, in the case of Thermax the payment has been held to be gratuitous and hence not in the nature of expenditure and therefore did not qualify for allowance u/s 28 to 43B of the Act; that the CBDT Circular No. 573 applies since there existed a contract of between Thermax and Mr Aga; Mr Aga has been disclosing income from salary from Thermax which has also been brought to tax under that head of income. Against the said decision of the CIT(A), Revenue is in appeal before us. 21.3 The learned departmental Representative assailed the decision of the CIT(A) and submitted that the Assessing Officer was justified in charging to tax the amount of Rs. 2 crores received by the assessee from M/s Thermax Ltd. 21.4 The learned Counsel for the respondent-assessee, on the other hand, submitted that the late Mr Aga was an employee of the company notwithstandin....
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....); v) Kanan Devan Hills Produce Co Ltd 119 ITR 431; vi) G Venkataraman 111 ITR 444 (Mad); vii) Ravinder Singh v CIT 205 ITR 353 (Del); and, viii) V Kasturi & Sons Ltd 237 ITR 24 (SC). Finally, the learned Counsel argued that the view that payments by way of a testimonial or tribue are not taxable in the hands of the recipient is supported by the following decisions: i) Dilip Kumar Roy 94 ITR 1 (Bom); ii) Mahesh Anantrai Pattani 41 ITR 481 (SC); iii) Padamraje Kadambande 195 ITR 877 (SC); iv) H H Maharani Shri Vijaykuverba Saheb of Morvi & Anr. 49 ITR 594 (Bom); v) P H Divecha 48 ITR 222 (SC); vi) Rajalakshmi Venkatakrishnan 215 ITR 596 (Mad); vii) Reed V Seymour 11 T.C 625 (HL); viii) R Parthepan 72 ITD 289 (Mad); ix) Beynon V Thorpe 14 TC 1 (KBD); x) G R Vishwanath 29 ITD 142 (Bgl) xi) M Balamurlikrishna 171 ITR 447 (Mad); xii) Dr B M Sundaravadanam 148 ITR 333 (Mad); xiii) K K Roy 84 ITR 701 (SC); xiv) Mrs lakshmi M Aiyar (ITA No 5892/Mum/02; and xv) Mrs Jaya Bhaskaran 168 ITR 256 (PAT) The learned Counsel summed up his argument by submitting that the order of the CIT(A) be confirmed and departmental appeals be dismissed. 21.5 Having considered the rival submi....