TaxTMI 
TaxTMI 
2014 (9) TMI 1006
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....Appeals) erred in not accepting the contention 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 appellan....
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....ered Accountants of India, was on facts and in law properly allowable in computing he appellant's business 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....
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.... Rs. 61,54,612 Premium on forward contracts Rs. 42,74,160 Rs. 2,22,08,707 iv) In any event the ld CIT(A) ought 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 "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 expend....
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....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)." 3.1 At the time of hearing, the learned Counsel for the assessee did not press the above Ground, and, therefore, the said Ground 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 con....
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....of Income-tax (Appeals) by following their stand in the earlier assessment years, held that the assessee company was entitled for 1/6th deduction as enumerated in section 35AB of the Act. 5.2 Before us, the learned Counsel for the assessee drew our attention to Co-operation Agreement entered into with OSCHATZ GmbH, Germany placed at pages 79 to 84 of the Paper Book and contended that the said agreement is project 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 d....
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....rent year's payment as well as earlier year's payment was to be allowed as a deduction and not the entire amount of Rs. 1,84,28,945/- paid during the year on process know-how fee. 17. Before us, it is not in dispute that the Tribunal in the respective orders dated 23.6.2006 (supra) and 29.1.2009 (supra) for the assessment years 1993-94 and 1994-95 has upheld the stand of the Assessing Officer that the claim of the assessee 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 Engi....
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....d the clauses of the agreements cannot be re-read in the context of the new plea being setup by the assessee. Therefore, in so far as the know-how agreements which have been the subject-matter of consideration in the past, the same cannot be revisited at this stage. So however, in so far as the new process knowhow agreements are concerned, i.e. agreements which have been entered during the year, the law as enumerated by the Hon'ble 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 ....
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....t to have held that the liability in question was of a contingent nature which did not accrue at the time when the appellant made a provision for it. The learned CIT (Appeals) further erred in confirming the view taken by the Assessing Officer that the liability on account of warranty obligation accrued only when a claim is made by the customer and accepted by the appellant." 7.1. The assessee had made a provision of an amount of Rs. 2,13,34,281/- towards 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 fin....
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....f India, was on facts and in law properly allowable in computing he appellant's business 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." 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....
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....ionally assigned to individual components or groups of components. In an indivisible turnkey contract profit emerges only after the satisfactory execution of the contract as a whole and on achieving guaranteed performance. The true progress of any long term contract is not measured in terms of billing made or money received. The true measure of the activity undertaken in a given accounting period is the proportion that costs incurred to date bears to the estimated total cost of the contract. Accounting 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 o....
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....was that some amount of interim invoices have not been received and, therefore, cannot be said to have accrued and be charged to tax in the year under appeal. Against the addition sustained by the CIT(A), assessee is in appeal, whereas against the relief granted, Revenue is in appeal before us. 9.3 Before us, the learned Counsel for the assessee submitted that the CIT (A) has failed to appreciate the real controversy which now stands covered in favour of the assessee by the aforesaid orders of the Tribunal in the case of Thermax 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 ....
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....ned Counsel for the assessee drew our attention to the following observations of the Tribunal allowing the claim of the assessee: "We have considered the rival submissions and perused the facts on record. It is well accepted that it is open to an assessee to decide/adopt a regular method of accounting. If such a method is an acceptable method of accounting, it will follow that the profits can be properly ascertained there from. In the case before us, the assessee has followed constantly for this year (which is first year of operation) and for 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 provis....
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.... Ltd. v. CIT [1997] 225 ITR 802, the Supreme Court reiterated the same principle as enunciated in the case of U.P. State Industrial Development Corporation [1997] 225 ITR 703 (SC). In Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1, the Supreme Court has held that the long-term indivisible contract spread over more than one accounting period, the profit from the contract as a whole is determined with reference to the entire value of the contract against the cost already incurred and the estimated cost yet to be incurred for its completion. This decision of the Supreme Court is of 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 l....
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....the cost of raw material, for the goods in process, finished products and same was likely to result in a distorted picture of the true state of business for the purpose of computing the chargeable income. In the present case, the assessee as pointed above, has adopted one of the acceptable accounting principles and practices sanctified by usage and in line with institute's recommended standard AS-7 and such method does not result in a distorted picture of the true state of business for the purpose of computing the chargeable income. Reliance placed by learned Departmental Representative 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....
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....ciples of accounting, receipts minus expenses will give the profits of assessee. Therefore, in the present case, profits have accrued to the assessee. The principle of commercial accounting is that a notional profit or a notional loss cannot enter into the computation of profits in a year. That principle is subject to exception in regards to stock-intrade. Accountancy principle would not overrule the provisions of income-tax. Reliance placed on Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT [1997] 227 ITR 172 (SC). Profits cannot be shifted from one unit to other unit. Supported was derived from CEPT v. Kalyan Mal 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 ea....
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.... not recognizing revenue from contracts that had not progressed beyond 25% of the Contract Value, which is another facet of AS 7. In this context, the Tribunal has dealt with this issue in Para 6.2 of its order which reads as under: "We have heard both sides. We have devoted time to know what was the reason given by the A.O. to enhance the income in this year by departing from the accepted past history of this assessee. We have not found any convincing reason; rather such departure from the accepted principle of law needs to be discouraged./ Once it is and admitted position that the assessee is following AS-7 as issued by ICAI; 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 carri....
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....f the Gujarat High Court in the case of Advance Construction P. Ltd (275 ITR 30)(Guj) in this regard. The Counsel submitted that Accounting Standard 1 issued by the Central Board of Direct Taxes under section 145 of the Act also enjoins that prudence should be one of the major considerations governing selection and application of accounting policies. This demands that provision should be made for all known liabilities and losses, even though the amount cannot be determined with certainty and represents only a best estimate in the light of the available information. Further reliance was made on the following judgments dealing with recognition 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)....
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....12 lacs c) Interest on investment 0.11 lacs d) Interest - others 1.59 lacs 151.63 lacs" 10.1 Before us, the learned Counsel for the assessee did not press the issues relating to other income; interest on investments; and interest others and therefore, these issues are dismissed as not pressed. 10.2 Fluctuation in rate of exchange. In so far as the issue relating to Premium on forward Contracts is concerned, the same is decided against the assessee by following the findings in the order of the Tribunal for the assessment year 1996-97, vide para 99 in ITA No 482/PN/01 (supra). Thus, the assessee fails on this issue. 10.3 In so far as the issue relating to Service Charges is concerned, the same is decided in favour 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 mat....
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....ributable to "Profit & Gains of business". ix) 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." 12.1 We have considered the rival submissions carefully. So far as Ground No. 10 (i) 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. (2004) 266 ITR 521 (SC). We hold so. 12.2 The issues relating to exclusion of Excise Duty and Sales tax collected from total turnover contained in Ground No. 10(ii) (a) & (b) 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 (2007) 290 ITR 667 (SC). 12.3 Ground No.10 sub-ground (ii) has been raised by the assessee to exclude the following 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) C....
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....value of export turnover since in terms of section 80HHC the same is to be taken at FOB value of exports. In our view, only component of fluctuation which is on sales is liable to be included in total turnover and not the balance, if any. The Assessing Officer is directed to recompute the deduction under section 80HHC of the Act accordingly. 55. In so far as the issues involved in Ground No. 14(c) are concerned, the same relate to exclusions from the "profits of the business" as per Explanation (baa) for the purposes of section 80HHC of the Act. The plea set-up by the assessee is that the aforesaid items of income are not excludible in terms of Explanation (baa), inasmuch as the same are not independent incomes, but are otherwise inextricably related to the main business of the assessee. Quite fairly the learned Counsel pointed out that at best income by way of lease rental - Rs. 69,600/-, Mesne profit - Rs. 1,32,751/- and Franchisee fees - 1,500/- 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'....
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....endent 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). 12.5.1 On the other hand, the learned Departmental Representative has defended the orders of the authorities below. 12.5.2 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, which is 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. 12.6 Ground No. 10(iv) reads as follows: "In any event, the ld CIT(A) ought 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....
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....rming 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 allowable as such." 13.1 The facts, in brief, in relation to this Ground are that Mr. R. D. Aga was the Managing Director of the company when he died in harness on February 16, 1996. He was in Bombay on a business trip when he suffered a massive heart attack and died soon thereafter. The Board of Directors of the company at its meeting held on 16/04/1996 decided to pay his widow Mrs. Anu Aga an amount of Rs. 2,00,00,000/- by way of a testimonial. In this context, following Resolution 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....
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....ined the contributions made by Mr Aga to Thermax that it was because of him that Thermax achieved such fame as an engineering major. He pioneered new products covering a wide spectrum of water treatment equipment, pollution control equipment, energy saving devices, co-generation systems etc. During Mr Aga's tenure (1981 to 1995-96) the turnover of Thermax increased manifold reflecting Mr. Aga's contribution to the growth of Thermax. During this period its product range also increased manifold from mere boilers to water treatment, pollution control, chemicals, waste management etc. He was also instrumental in bringing about a lot of foreign partners for Thermax to tie-up leading to diversification of its product profile. Mr. Aga was a captain par excellence. No corporeal gesture could ever reflect the true intrinsic and intangible worth of the man to the company. According to the learned Counsel, the direct concern and purpose of this testimonial was to appreciate his contribution to the growth of the company, his personal qualities of leadership, ability and entrepreneurship which none was likely to ever equal in Thermax; that the payment recognizes and acknowledges all that Mr. Ag....
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....ss purpose' and it must be germane to the business and must not be de hors the business. The learned Counsel submitted that it should reflect a genuine transaction and must not have been entered into for collateral purposes or for indirect or improper motive or for some consideration not aligned with the business needs of the assessee. He concluded by submitting that the mere fact that the recipient of the money contends that the receipt is of capital nature in her hands would not be determinative of the character of the expenditure in the hands of the company. In support of his varied submission, the learned Counsel placed reliance on various decisions of judicial forums. The learned Departmental Representative, on the other hand, supported the orders of the authorities below and submitted that no interference is called for in the order of the CIT(A). 13.6 The issue before us is with regard to taxability of lump sum payment made gratuitously to the widow Mrs. Arnawaz Aga. A similar issue was raised in the Revenue's Appeal in ITA No. 946/PN/2001 also. In this regard, the learned Authorized Representative for the assessee has submitted that Central Board of Direct Taxes has issue....
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....he arguments advanced before him and held that the amounts were not in any circumstances taxable as income of the appellant." The relevant facts, as explained by the learned Counsel for the assessee, are that the Company was inter-alia in the business of designing, engineering, procurement, distribution, marketing, and sale of water treatment conditioning and purification products especially related to industrial applications. During the course of this water treatment business of twenty years the Company had acquired considerable know-how, technologies, and trademarks. It had also acquired a strong market presence and had established related infrastructure which could cater to the potential growth of the business. It transferred, on a going concern basis, this Business Undertaking consisting of all assets, Products, Goodwill, Manpower, Intellectual Property, pending customer orders and all other information, material/relevant for the conduct of the said business, as detailed in the Business Transfer Agreement (BTA) entered into with Thermax Culligan Water Technologies Limited (TCWTL) on 29th March, 1997 (Paper Book page no 85 - 108). TCWTL was a 50:50 Joint Venture between Therm....
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....f its continuing Division. Whatever has been received by the Appellant can be called a benefit derived during the course of business and, therefore, taxable under section 28(iv) of the Act. 14.3 As regards the non-compete agreement, the Assessing Officer held that receipt of Rs. 3 crores towards sale of the undertaking are not on account of foregoing any income-earning source; that the appellant only agreed not to compete with TCWTL in areas of Water Treatment Product Division; but it continues to operate its Project Division. This non-competition agreement is valid only for 25 years. The assessee has artificially created a difference between Water Treatment Product Division and Water Treatment Project Division. The technology required for manufacturing Water Treatment Product Division and Water Treatment Project Division is the same. Therefore, the appellant has not parted with any income-earning source. According to the AO, further amount of Rs. 3 crores received by the assessee under NCA is nothing but consideration for sale of part of business of Water Treatment Product Division and is required to be clubbed with the other amount of Rs. 3 crores received by the Appellant sep....
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....t term capital gains u/s 50 of the Act. 14.5 Before us, the learned Counsel for the assessee assailed the order of the CIT(A) and filed written submissions which are extracted below for the sake of brevity: "SUBMISSIONS: GENERAL a. Thermax and Culligan had initially entered into a Shareholders' Agreement on 17th December, 1996 with the intention of forming a joint venture for manufacturing products, systems and services for water treatment for commercial, household, industrial and other markets and also for manufacture etc. of purified and bottled drinking water. TCWTL was to be a 50:50 Joint Venture.This Agreement was followed by the Business Transfer Agreement (BTA) and the Non-Competition Agreement (NCA) between the JV Company, TCWTL and Thermax.Under the BTA Thermax transferred on a going concern basis its Business Undertaking consisting of all tangible and intangible assets, Products, Goodwill, Manpower, Intellectual Property (proprietary information, trademarks, copyrights etc) licenses, permits, know how ( processes, techniques, confidential information, trade secrets, etc), pending customer orders and all other information, material/relevant fo....
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....ation to s 2(19AA) - part of undertaking etc - the contention of the AO that only Product Division has been transferred by culling it out from the Project Division is contrary to the subsequent legislation. The activity of manufacturing Water Treatment Products was all along a distinct business activity of the Water Treatment Division. So was the case with the Project activity. As a matter of fact, in FY 1993-94 the Water Treatment business was segregated into two subdivisions namely Projects and Products. Project Division focused on large turn-key projects involving site erection and installation. The value of Project Division jobs was also comparatively large. Product division focused essentially on standard products along with small to medium sized plants which use standard products in a modular form. Standard products include softeners, dosers, filters, demineralization plants, reverse osmosis plants and colour removal systems. b. It is thus not as if the Appellant has done some notional exercise occasioned by the BTA. c. The following figures of the product business may be noted: Year ended Turnover Rs. (crores) 31.3.1994 10.77 31.3.1995 ....
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....sets and all liabilities in the event of demerger do not lay down transfer of employees. In any event the list of 66 persons selected for transfer has been annexed to the BTA. k. The other contention of the AO is that even after transfer of the Business and attendant transfer of intangibles like know how, intellectual property rights and proprietary information the Appellant continues to be used in the water treatment project business and hence there is no effective transfer of these intangibles. l. This is pure conjecture. What have been transferred are intangibles relating to the Product Business. The entire technology relating to the Product Business is not the same as that required for the Project Business. Even if for the time being it is presumed that there is some overlapping technology, it cannot be denied that there has indeed been a transfer as agreed between the parties. Further, this BTA has to be read in the context of the NCA which effectively prevents the Appellant from using the intangibles in manufacture of specified Products. m. The AO's alternate stand is that the consideration received is taxable as short term capital gains in view of ....
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....ggestive of the character of the receipt as a capital receipt. c. Since the right to carry on business is a valuable right it constitutes 'property of any kind' within the meaning of section 2(14) of the Act and is thus a capital asset. Once again, since this capital asset did not have a cost of acquisition the ratio of the decision of the Supreme Court in B.C.Srinivasa Setty (128 ITR 294) squarely applies and the receipt is a capital receipt not exigible to tax. d. The amendment to section 55(2) covering 'right to carry on any business' has been introduced only with effect from AY 2003-04 and hence has no application to the year under appeal. Similarly s 28(va) providing for taxation of a sum received for 'not carrying out any activity in relation to any business' has also been introduced only with effect from AY 2003-04. e. Regarding the alternate contention of the AO that the receipt under NCA should also be reckoned as part of sale consideration of the business it is respectfully submitted that since both are in the nature of capital receipts the end result would be same. f. In any event both receipts arise out of independent agreements which....
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....cording to the learned CIT(A) one without the other is meaningless. It is respectfully submitted that one can enter into a non compete covenant only after giving up the business or other right against which the transferor agrees not to compete. As a matter of fact, non compete without giving up any valuable asset or right is meaningless. f. S 55(2) brings to charge transfer of 'right to carry on business' which can happen only when the transferor gives up the business which he has agreed not to compete. Similarly s 28(va) would apply when the right to carry on any activity in relation to any business is given up. g. The argument of the CIT(A) is therefore legally and factually untenable. There is no commercial and legal justification for the stand of the CIT (A)/AO h. Even in the cases where non compete compensation was held to be a capital receipt the non compete had arisen out of or incidental to the transfer of a business or other similar right (please see tabulation of case law at the end of these submissions). i. Reliance placed by the learned CIT (A) on the decision of the SC in the case of BEST & COMPANY tantamount to losing sight....
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....rtaken by the Appellant consideration for which was also independently agreed upon between the parties. The lower authorities went about arbitrarily combining the two considerations and arriving at conclusions contrary to the intentions of the parties. l. The other reason adduced by the CIT (A) was that the assessee carried on multiple activities of an assessee and if one of them is transferred for a non compete covenant it cannot be said that such an agreement takes away the source of income of the assessee. For like reason he held that the trading structure of the Appellant cannot be said to have been affected. He further observed that there was nothing on record to suggest that transfer has affected the trading structure. m. In the earlier part of these submissions following figures of the product business have been reproduced: Year ended Turnover Rs. (crores) 31.3.1994 10.77 31.3.1995 15.72 31.3.1996 16.97 31.3.1997 18.18 n. These figures unequivocally suggest impairment of the water treatment product business. These figures which are available in the annual accounts of the company hav....
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....t observed " the circumstance that the agency was determinable at the will of the principal company which maintained a large staff at their expense justifies the inference that upon cancellation of the agency appellants business organization was not substantially impaired"; This was because the managed company had its own business infrastructure independent of the managing agency In the absence of any evidence from the appellant the Court was swayed by these general considerations and trade practices. q. In the present case a business of substance has been sold lock, stock and barrel including sizable number of employees, IPR, know how, licenses etc. Thus the decision in the case of GILANDERS turned on its own facts. In fact, in other cases involving surrender of managing agency business the SC itself has held in favor of the assessee (please see tabulation of case law at the end of these submissions. r. Reliance placed by the CIT(A) on the decision of the SC in the case of ARTEX MANUFACTURING CO (227 ITR 262) is also completely misplaced. In that case, during the course of assessment proceedings the AO was made aware of the sale consideration at....
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.... Capital 14 Lyka Labs Ltd (310 ITR 427)(TBom) Non Compete - 5years - Capital receipt; part of arrangement for transfer of marketing information etc 15 TTK Healthcare Ltd (306 ITR 19)(Mad) Non Compete Capital receipt; 28 (va) prospective; Particular source must be given up and not the entire business; 16 Max India Ltd (112 TTJ 726)(ASR) Slump sale of business division; not necessary that all assets and all liabilities should be transferred; 50B applies only from AY 2000-01; Capital receipt; Non compete Capital receipt; 17 Narendra Desai (214 CTR 190)(Bom) Non Compete - Capital receipt; 28(va) prospective; Instruction 1964 referred to 18 Basf India Limited Non compete- Capital receipt; transfer of Marketing rights - capital receipt ; 19 Rohitasava Chand (306 ITR 242)(Del) Sale of Shareholding accompanied by Non Compete; less than 2 years; 20 Saurabh Srivastava (300 ITR 113)(Del)(SB) Non Compete - 18 months - no capital gains; s 28va prospective 21 Guffic Chem Pvt. Ltd. Vs. CIT (SC) No compete as part of transfer of Trade Mark; 20 years; loss of source of income; capital receipt; 28(va) applies prospectively....
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....wer, proprietary information, trademark, licences, know how, customer orders and all other information/material relevant for the conduct of business. For that purpose the assessee has entered into Business Transfer Agreement and Non Competition Agreement under a negative covenant for 25 years. The business undertaking has been transferred by the assessee on a going concern basis for a lump sum price without values assigned to the individual assets in the previous year relevant to the A.Y. 1997-98. In the light of the attendant facts and circumstances the transfer of the business undertaking does not involve itemised sale of assets and provisions of Section 50 are therefore not attracted. The said transfer of business undertaking is for a lump sum price involving monetary consideration and therefore provisions of Section 28 (iv) are also not applicable in such a case. We draw support in this regard from the decision of Hon'ble Bombay High Court in the case of Mahindra & Mahindra Limited (2003) 261 ITR 501 (Bom). We find that the provisions of Section 50 B and 28 (va) being prospective in nature as held by the Hon'ble Apex Court are not applicable to the impugned capital receipts on ....
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....aroda) P. Ltd. (1985) 155 ITR 120 (SC) has held that it is only net dividend which is to be considered for the purpose of deduction under Section 80 M in the light of the provisions of Section 80 AA of the Income Tax Act. The learned CIT Appeals has attributed expenses for earning the dividend income at 2.5% instead of 5% of gross dividend amount considered by the Assessing Officer as against the assessee's plea that no expenditure can be considered to be attributable for earning the dividend income. In the light of the facts and circumstances of the case we do not find it necessary to interfere with the finding of CIT Appeals in this regard. The amount of expenditure at 2.5% of the gross dividend income can be considered attributable to earning the dividend income to meet the ends of justice. We order accordingly. 16. The last Ground relating to levy of 234B of the Act being consequential in nature. 17. In the result, assessee's appeal vide ITA No 970/PN/01 is partly allowed. 18. We now take up Revenue's appeal for assessment year 1997-98 vide ITA No 947/PN/01, wherein Ground No. 1 reads as follows: "On the facts and circumstances of the case, the ld CIT(A) e....
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....o be excluded while calculating indirect cost of trading goods for the purposes of section 80HHC(3) of the Act. The said direction of the Commissioner of Income-tax (Appeals) has been challenged by the Revenue by way of aforesaid Ground. 75. Before us, the learned Departmental Representative has submitted that the Commissioner of Income-tax (Appeals) has erred in directing the re-computation of indirect cost of trading goods. On the other hand, the learned Counsel for the assessee pointed out that the Assessing Officer, while giving effect to the direction of the Commissioner of Income-tax (Appeals), has accepted the computation of indirect cost attributable to trading exports excluding the costs that had no nexus with such trading exports. The learned Counsel for the assessee pointed out that in the assessment year 1994-95, the Tribunal had also set aside the matter to the Assessing Officer and in doing so, a reference was also made to the judgment of the Hon'ble Supreme Court in the case of Hero Exports v. CIT 295 ITR 454(SC). Dwelling further on this aspect, it was pointed out that the issue before the Hon'ble Supreme Court was confined to costs which were not to be att....
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....erein the only issue involved in this appeal relates to charging to tax the amount of Rs. 2 crores received by the appellant from M/s Thermax Ltd. The relevant facts have been stated in earlier part of this order while dealing with assessee's Ground No. 11 in appeal No. 970/PN/2001. To recapitulate the facts, the respondent-assessee, Mrs Anu Aga is the wife of the late Mr. R. D. Aga. Mr Aga, who was the Managing Director of Thermax Limited, died in harness on February 16, 1996 while on a business trip to Bombay when he suffered a massive heart attack and died soon thereafter. The Board of Directors at its meeting held on 16/04/1996 decided to pay Respondent-widow an amount of Rs. 2,00,00,000/- by way of a testimonial. This amount was claimed by the Respondent to be a capital receipt not chargeable to tax. 21.1 The AO brought this amount to tax assigning the following reasons: 1. Receipt is in the nature of income as defined in section 2(24)(iv) of the Act being in the nature of a benefit or a perquisite. 2. Being a Director of the Company it is immaterial how such benefit or perquisite is derived; every conceivable benefit is taxable. 3. Even a testimo....
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....of exercise of any profession or vocation by either the assessee herself or her late husband; and therefore, the receipt was not taxable as income under the Act. He also canvassed that in view of the submissions made in the appeal of the company M/sThermax Ltd. it is a capital receipt. The learned Counsel further contended that de hors the Circular also the payment was in the nature of a capital receipt in the hands of the widow. Regarding the observation of the CIT(A) while allowing the appeal that in the hands of the company disallowance of this payment was upheld being gratuitous in nature and therefore not eligible for deduction in computing its income from business, the learned counsel submitted that characterization of payment and its allowability in the hands of the payer cannot determine the taxability thereof in the hands of the recipient. As regards the stand of the AO that, since the assessee was a Director/shareholder of Thermax, the sum was taxable in the hands of the assessee u/s 2(24)(iv) as being in the nature of a benefit or perquisite, it was submitted that the same is contrary to the plain text of the section and the decided case law. According to the Counsel, se....