TaxTMI 
TaxTMI 
2016 (8) TMI 559
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed by the assessee. During the course of assessment proceedings, the Assessing Officer had noticed that the assessee-company, which was formerly known as "Arlem Investment & Finance Ltd" had during the previous year relevant to Assessment Year 2001-02, acquired an Industry/Plant Manufacturing Nitric Acid (NA) & Ammonium Nitrite (AN) belonging to another company styled as M/s. VBC Industries Ltd. for a total consideration of Rs. 29 crores. The Industry/Plant so purchased was to include entire business undertaking situated at Ponada including movable and immovable properties and all other tangible and intangible assets relating to the business of manufacturing of aforesaid chemicals. In addition to payment of Rs. 29 Crores paid for purchase of the so-called Industry/Plant Manufacturing Unit, by whatever name it may be called, the assessee entered into another 'Non Compete Agreement' with VBC and its founder Shri MVVS Murthy as a result of which the assessee paid a lumpsum of Rs. 6 Crores to them. The relevant part of the Agreement so entered into has been discussed by the Revenue Authorities in their respective order and, therefore, need not to be reproduced here. In the book....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ecitals contained herein shall constitute an integral operative part of this Agreement. 2. This agreement and the covenants recited hereunder shall be effective and binding on both the parties for a period of five years. 3. Covenant The Assignors' and Individual hereby agree with the Assignees that:- (i) the Assignors' and Individual shall not directly or indirectly own, manage, operate, join, have an interest in, control or participate in the ownership, management, operation or control of, or be otherwise connected in any manner with, any corporate, partnership, proprietorship, trust, estate, association or other business entity which directly or indirectly engages, as a commercial activity anywhere in the World in the Business or any business similar to the Business; (ii) The Assignors' and Individual shall not in any manner whatsoever render, sell, supply, market or distribute, advise, assist, aid in establishing, managing, providing or developing or act as Consultant or professional advisor in respect of the Business or any products or services constituting part of the Business or similar thereto either on its own account....
X X X X Extracts X X X X
X X X X Extracts X X X X
....gned the genuineness of the transaction. In the present case, we are of the view that the High Court has erred in interfering with the concurrent findings of fact recorded by the CIT(A) and the Tribunal. One more aspect needs to be highlighted. Payment received as non-competition fee under a negative covenant was always treated as a capital receipt till the assessment year 2003-04. It is only vide Finance Act, 2002 with effect from 1.4.2003 that the said capital receipt is now made taxable [See: Section 28(va)]. The Finance Act, 2002 itself indicates that during the relevant assessment year compensation received by the assessee under non-competition agreement was a capital receipt, not taxable under the 1961 Act. It became taxable only with effect from 1.4.2003. It is well settled that a liability cannot be created retrospectively. In the present case, compensation received under Non-Competition Agreement became taxable as a capital receipt and not as a revenue receipt by specific legislative mandate vide Section 28(va) and that too with effect from 1.4.2003. Hence, the said Section 28 (va) is amendatory and not clarificatory. Lastly, in Commissioner of Income- Tax, Nagpur v. Rai B....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital." This test, as the parenthetical clause shows, must yield where there are special circumstances leading to a contrary conclusion and, as pointed out by Lord Radcliffe in Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd. [1965] 58 ITR 241 (PC), it would be misleading to suppose that in all cases, securing a benefit for the business would be, prima facie, capital expenditure so long as the benefit is not so transitory as to have no endurance at all. There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage cons....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s and not infrequently, as pointed out by Lord Radcliffe in Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd. [1965] 58 ITR 241 (PC), the line of demarcation is difficult to draw and leads to subtle distinctions between profit that is made " out of " assets and profit that is made " upon " assets or " with " assets. Moreover, there may be cases where expenditure, though referable to or in connection with fixed capital, is nevertheless allowable as revenue expenditure. An illustrative example would be of expenditure incurred in preserving or maintaining capital assets. This test is, therefore, clearly not one of universal application. But even if we were to apply this test, it would not be possible to characterise the amount paid for purchase of loom hours as capital expenditure, because acquisition of additional loom hours does not add at all to the fixed capital of the assessee. The permanent structure of which the income is to be the produce or fruit remain, the same; it is not enlarged. We are not sure whether loom hours can be regarded as part of circulating capital like labour, raw material, power, etc., but it is clear beyond doubt that they are not part of fixe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f taxation law, analogies are apt to be deceptive and misleading, but in the present context, the analogy of quota right may not be inappropriate. Take a case where acquisition of raw material is regulated by quota system and in order to obtain more raw material the assessee purchases the quota right of another. Now, it is obvious that by purchase of such quota right, the assessee would be able to acquire more raw material and that would increase the profitability of his profit-making apparatus, but the amount paid for purchase of such quota right would indubitably be revenue expenditure, since it is incurred for acquiring raw material and is part of the operating cost. Similarly, if payment has to be made for securing additional power every week, such payment would also be part of the cost of operating the profit-making structure and hence in the nature of revenue expenditure, even though the effect of acquiring additional power would be to augment the productivity of the profit-making structure. On the same analogy payment made for purchase of loom hours which would enable the assessee to operate the profit-making structure for a longer number of hours than those permitted under ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing allocation of expenditure between the capital and income accounts, it is almost unavoidable to argue from analogy ". There are always cases falling indisputably on the one or the other side of the line and it is a familiar argument in tax courts that the case under review bears close analogy to a case falling on the right side of the line and must, therefore, be decided in the same manner. If we apply this method, the case closest to the present one that we can find is Nchanga Consolidated Copper Mines'case [1965] 58 ITR 241 (PC). The facts of this case were that three companies which were engaged in the business of copper mining formed a group and consequent on a steep fall in the price of copper in the world market, this group decided voluntarily to cut its production by 10 per cent. which for the three companies together meant a cut of 27,000 tons for the year in question. It was agreed between the three companies that for the purpose of giving effect to this cut, company B should cease production for one year and that the assessee-company and company R should undertake between them the whole group programme for the year reduced by the overall cut of 27,000 tons and shou....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the expenditure incurred for obtaining the revised charter eliminating these features which operated as impediments to the profitable development of the assessee-company's business was in the nature of revenue expenditure since it was incurred for facilitating the day-to-day trading operations of the assesseecompany and enabling the management and conduct of the assessee-company's business to be carried on more efficiently. Lord Reid emphasised in the course of his speech that the expenditure was incurred by the assessee-company " to remove antiquated restrictions which were preventing profits from being earned " and on that account held the expenditure to be of revenue character. It must follow on an analogical reasoning that expenditure incurred by the assessee in the present case for the purpose of removing a restriction on the number of working hours for which it could operate the looms, with a view to increasing its profits, would also be in the nature of revenue expenditure. We are, therefore, of the view that the payment of Rs. 2,03,255 made by the assessee for purchase of loom hours represented revenue expenditure and was allowable as a deduction under s. 10(2)(xv) ....