AI Drafter 
TaxTMI 
TaxTMI 
2012 (2) TMI 594
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....ed damages for non-fulfilment of the contractual obligations by AIK Germany due to which the Appellant could not implement the project, and since there was sterilization of the profit earning sources of the Appellant, such compensation or damages awarded for breach of contract fell in the category of a capital receipt not chargeable to income tax, as clearly held by a number of direct judicial pronouncements of the Hon'ble Supreme Court and various High Court. (2) That the learned CIT(A) erred in law and on facts in confirming the disallowance of Rs. 46,040/- out of expenditure for gift and presentation articles. (3) That the learned CIT(A) erred in law and on facts in confirming the disallowance of Rs. 6,92,595/- out of Sales Commission paid by the Appellant. The learned CIT(A) further erred in not admitting additional evidence under Rule 46-A of the I.T. Rules, although the Appellant had explained the circumstances under which the same could not be produced before the A.O. The learned CIT(A) further erred in not even appreciating the Appellant's contention and prayer that out of Rs. 6,92,595/- while Rs. 3,16,629/- represented commission actually paid, the remain....
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.... of Rs. 4,53,86,124/- as a revenue receipt by the Ld. CIT(A). 3.1 The relevant facts as per assessment order are that the assessee company was incorporated in 1974 with its primary object of manufacturing sea water desalting kit for the Indian Air Force and Indian Navy. In early 1980, it diversified its operation by entering into the manufacturing of non-toxic non-pollutant water treatment chemicals. The assessee has having 2 Divisions/Plants - one at Bhosari and the other at Pirangude. The assessee company entered into an agreement dated 23.12.1989 with AIK - Germany, for supply of technical knowhow for manufacture of fire retardant chemicals. The company was keen to expand its activity and thought that fire retardant chemical have a good market potential. The company decided to set up the project at Pirangude. It made out its expansion project and got it approved from SICOM and WMDC for project loan and sales-tax benefits of Government of Maharashtra. As per the agreement with AIK - Germany, the assessee company paid first installment of technical know how fees and it received certain technical information and drawings from AIK. Since the information provided by AIK was not su....
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....G ISOLIER-Undqunststoff GMBH, a German company was licensor and the assessee was referred as licence. As per this agreement, the "contract work" was meant and included the items described in Annexure 1, manufactured by licensor. As per the agreement, licensor granted to licensee the non-exclusive, non-transferrable right to reproduce contract products in its own manufacturing facilities in India by using documentation, and to use and sell. As per the clause (3) of the agreement, the licensor had to furnish to licence the documentation which was in licensor's possession on the effective date of the agreement within 3 months in the form of copies or blue prints. The Ld. A.R. submitted that the agreement was for the supply of knowhow to the assessee in the form of documentation defined in the agreement for the purpose of the assessee's reproduced contract products in India. The licensor AIK failed to provide knowhow to the assessee as agreed upon and thus the assessee was having no option but to invoke arbitration clause of the agreement for compensation of damages caused due to non-performance of contractual obligation by the licensor AIK. After considering the case of the parties, a....
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....ance on the following decisions : 1) CIT Vs Bombay Burmah Trading Corporation, 161 ITR 386 (SC) 2) Senairam Doongarmall Vs CIT, 42 ITR 392 (SC) 3) CIT Vs. Barium Chemicals Ltd., 168 ITR 164 (A.P) 4) CIT Vs. Abbasbhoy A. Dehgamwalla and Others, 195 ITR 28 (Bom) 5) CIT Vs. J. Vajantizies and Others, 91 ITR 345 (Bom) 6) Spaco Carburetors (I) (P.) Ltd. Vs Additional CIT, 127 ITD 153 (Bom) 7) Ms. Payal Kapur Vs. Asst. CIT, 98 ITD 19 (Del) 8) Spaco Carburators (I) (P.) Ltd. Vs. Addl. CIT, 127 TTJ 637 (Mum.) 3.2.2. The Ld. A.R. further pointed out that 2 agreements were entered into, the one with assessee (75%) and other with Delhi party (25%) for marketing the product. He referred page No. 5, 289 to 294 of the paper book No. 2 i.e. copy of certificate and of agreement with M/s. A.R.K Industrial Product Pvt. Ltd. Delhi. He submitted that according to the said agreement M/s. A.R.K. Industrial Products Pvt. Ltd., Delhi were appointed as sole selling agent for fire product system. The assessee had made marketing arrangements with the said company of Delhi. The Ld. A.R. also referred page No. 295 of the paper boo....
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....oncurrence of the licensor and licensee. Thus the production of contracted products could be assigned to any other manufacturing facilities by the assessee. 3.3.1 The Ld. D.R. further pointed out that as per the clause 8.1.1, the licensee assessee was entitled and obliged to provide the containers of re-produced contract products, with the designation "licensed by AIK", as approved by licensor and in any other language. The designation could also be used by the assessee in sales promotion activity etc. to claim that the contracted products were manufactured with technical support provided by AIK, Germany. 3.3.2. The Ld. D.R. drew our attention to the contents of para no.7.8 at page 5, and para no. 10.2.9.5 at page 17 of the ICA award, a copy whereof has been made available in the paper book volume 1 dated 17.11.2005 filed by the assessee. With the assistance of these paragraphs, the Ld. D.R. submitted that the licensee assessee was also granted right to use AIK's brand name "Flammadur" under the contract agreement. Thus assessee not only was granted the right for documentation and designs to produce and the license to manufacture the contracted products but also to use the re....
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..... Bishambher Nath Swaroop Narain Vs CIT (1979) 119 ITR 681(All.) 9. Matherson Bosanquet Co. Ltd. Vs. CIT (1988) 171 ITR 359 (Madras) 10. Blue Star Ltd Vs. CIT (1994) 217 ITR 514 (Bom) 11. CIT Vs Manoranjan Pictures Corpn. (1997) 228 ITR 202(Delhi) 12. CIT Vs Highway Construction Co. (P) Ltd. (1997) 223 ITR 32 (Gau) 13. Chemplast Engineers P Ltd Vs CIT (1998) 234 ITR 23 (Madras) 14. Parry & Co. Ltd. Vs CIT (2004) 269 ITR 177 (Madras) 15. Elegant Chemicals Enterp. P Ltd Vs ACIT -2004-TIOL-131-ITAT-Hyd 16. IBM India Ltd Vs CIT (2007) 105 ITD 1 (Bangalore) 17. Ansal Properties & Industries Ltd (2008) 19 SOT 391 (Delhi) 18. JCIT Vs Khana Vs Annadhanam, 2008-TIOL-377-ITAT-Delhi 19. Ansal Properties & Industries Ltd. (2010)-TIOL-810-HC-Delhi 20. CIT Vs. H.S. Ramachandra Rao (2011) 330 ITR 322 (Karn) 21. B.Rachurama Prabhu Estate (2011), 239 CTR (Kar) 274- 22. Guffic Chem (P) Ltd. Vs CIT (2011) 332 ITR 602 (SC) 23. London and Thames Havel Oil Whatvers Ltd. (1968) 70 ITR 460 (CA)- 24. ION Exchange (I) Ltd. Vs. ITO, 52 DTR 411(Mum) 25. S. Ku....
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....a), relied upon by the Ld. D.R., the assessee was already into manufacturing and distribution of the products which were to be distributed by virtue of joint venture. This joint venture was terminated . It did not affect the assessee as he rebranded back to which old set up of manufacturing of the distribution of the same products. It is on this fact, the Tribunal held the same to be revenue receipt. In the case of Ansal Properties and Industries Ltd. (Supra) relied upon by the Ld. D.R., the restrictive covenant was not intended to divest the assessee of its income earning apparatus, whereas in the case of present assessee it would deprive of source of income or that there was sterilization of source of income. He submitted further that in the case of S. Kumar's Tyre Manufacturing Company (Supra) relied upon by the Ld. D.R., the amount received by the assessee consequent upon termination of the agreement was not against any price for relinquishment of any right in the capital asset or parting with any asset of injuring nature. The Hon'ble High Court came to the conclusion that the same paid was in ordinary course of business to adjust the relationship between the assessee and other....
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....y the authorities below to the claim of the assessee and the opposition of the ld. D.R. On the basis of these submissions of the party, we would deal with each of the above mentioned objections on the basis of which, the receipt of compensation has been treated as revenue in nature. OBJECTION A 3.5.2. The objection of the authorities below is that the compensation is not for suffering injury to the profits making apparatus. They have observed that the apparatus of the assessee was existing set up. The assessee is a pioneer in manufacture of dispersants and produces a wide range of formulations based on these chemicals. It was having established manufacturing division, factory, research & development department and administrative establishments when it entered into an agreement for the know-how. It was further observed by them that the proposed making of fire retardants chemical was merely an extension of existing business. The submission of the Ld. A.R. in this regard remained that the agreements with AIK, Germany was entered into by the assessee company with a view to set up at Pirangut a fullfledged Indian manufacturing facilities of fire protection chemicals. It was a new ....
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.... a revenue receipt liable to tax. In that case before the Bombay High Court. Under an agreement of lease executed in 1942, the assessee agreed to become tenant of certain premises for using the premises as a hotel. The lease was to commence from the date the building was completely constructed and ready for possession and to continue for a period of 5 years. By a requisition order dated 25th April 1942, the Government of India requisitioned and directed of delivery of possession on priority to the government. The requisition was to continue during the period of the war and 6 months thereafter. In 1945, the assessee put in a claim for damages for not having been able to start the hotel business. His claim was finally settled and in 1947, he received a sum of Rs. 82,460/- from the government. On the question whether the same was assessable to income tax, it was held by the Hon'ble High Court that the hotel business which the assessee intended to start could never be started because of the requisitioned order passed by the government, hence the compensation of Rs. 82,460/- was not related or concerned with any business or trading activity of the assessee. It was held that it was a sol....
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....uced. Undisputedly, the project could not be started due to nonsupply of the know-how by the AIK as per the agreement to the assessee. In our understanding the meaning of the phrase "in normal course of business carried on by the assessee" would come into effect only after starting of the business, if the assessee enters into an agreement with the supplier or with any person for an act beneficial to the business, the said action will fall under the category of "in normal course of business carried on by the assessee." The agreement in the present case with AIK was entered into by the assessee for supplies of the know-how to enable the assessee for manufacturing of fire protection chemicals in new undertaking set up at Pirangut. Undisputedly in absence of supply of the said know-how, the assessee could not operate the project and the fire protection chemicals could not be manufactured to start the business of the assessee. Thus, in our view, the said agreement cannot be held as entered into in the normal course of the business, since the very business was yet to be carried on by the assessee with the assistance of the said know-how. We thus do not find substance in the finding of th....
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....was not according to the agreed specifications. The assessee took up the matter with the English company and discussions followed. Meanwhile, in March, 1966, the English company abruptly left the erection site. Subsequently, there were protracted negotiations as a result of which a settlement was reached on February 22, 1967, whereby the English company agreed to pay certain sums aggregating to Rs. 56,87,402 if the assessee waived its claims against the English company. The assessee contended that this sum was a capital receipt. It also claimed deduction of the following amounts - 1. Rs. 50,000 paid to A for conducting investigation into deficiencies of the various production units , and 2 Rs. 42,212 paid to C for advising the assessee regarding rectification of the defects. On appeal, the Appellate Assistant Commissioner held that only Rs. 47,20,939 should be treated as revenue receipt and the balance was capital receipt. The Tribunal held that the amount of Rs. 47,20,939 constituted a capital receipt, that it could not be assessed as capital gains and that the payments to A and C constituted capital expenditure. On a reference : Held, (i) that neither on the findings of ....
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....tinction or sterilization fully, as a profit earning source. Thus, the receipt in compensation for extinction or sterilization of a profit earning source, in view of the decision of the Hon'ble Andhra Pradesh High Court in the case of CIT Vs. Barium Chemicals Ltd. (Supra) is a capital receipt. We thus respectfully following the decision of the Hon'ble Andhra Pradesh High Court in the case of Barium Chemicals Ltd. hold that receipt of compensation in question not being in the ordinary course of assessee's business, but awarded to compensate extinction or sterilization of a profit earning source is a capital receipt. Since the facts of the case of Barium Chemicals Ltd. (supra) as discussed above are almost similar to the facts of the present case, rather, the case of the present assessee is at better footing in a sense that in the present case production could not even start in absence of the agreed supply of know-how by the AIK. We thus do not agree with the contention of the Ld. D.R. that decision in the case of CIT Vs. Barium Chemicals Ltd. (Supra) relied upon by the Ld A.R. is having distinguishable facts and thus is not helpful to the assessee. The decisions relied upon by the L....
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....als unit proposed to be set up, at Pirangude (Maharashtra), was the effective source from which the assessee could have earned profit, in future, had the agreement been fully honored by AIK. Since the assessee was deprived of the "profit earning source" it was awarded the compensation under the arbitration clause of the agreement. The decision of Hon'ble Bombay High Court in the case of CIT Vs. Boyantizies & Others (Supra), discussed in Objection No. 'A' hereinabove, support the case of the assessee wherein it has been held by the Hon'ble High Court that when the assessee was prevented from the commencement of business, the damages or compensation received, even if they are worked out on the basis of loss of profit, which the assessee would have earned, had he carried on business, was only a capital receipt and not a revenue receipt liable to tax. Respectfully following this decision of Hon'ble Bombay High Court in the case of Boyantizies & Others, we do not find substance in the objection no. 'C' raised by the authorities below. The decision of Hon'ble Delhi High Court in the case of CIT Vs. Manoranjan Corporation (Supra) relied upon by. Ld. D.R. is not helpful to the revenue, as ....
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....business and did not amount to be received for loss of an enduring asset. We have already discussed the issue in detail hereinabove that this material fact that due to non-supply of now how by AIK, the assessee could not start manufacturing of fire protection chemicals at Pirangut plant has remained undisputed, hence we do not find substance in the objection of the authorities below that the receipt of compensation for loss suffered by the assessee was incidental to the business. Objection 'F' 3.5.10. The further objection of the authorities below remained that the assessee had mainly acquired the right to use the technology and expenditure incurred has also been claimed as revenue expenditure, therefore, any receipt in lieu of such expenditure cannot be termed as capital receipt. The explanation of the assessee remained that in its Profit and Loss Account for the accounting period 1997-98, relevant to the A.Y. 1998-99, corresponding Rs. Equivalent of Dutch DM 1,60,000 which was earlier appeared as "balance payable to AIK Germany" was duly written back and credited under the head "other income" as reflected under Schedule 12 of the Profit & Loss Account. Besides, we are also ....
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....ion received, even if they are worked out on the basis of loss of profit which the assessee have earned, had he carried on business was only a capital receipt and not a revenue receipt liable to tax. The decisions relied upon by the authorities below in the cases of Raghuwansi Mills Ltd. Vs. CIT and Travancore Rubber and Tea Co. Ltd. (Supra) are having distinguishable facts and issue, hence are not helpful to the revenue. In both these cases, the assessees were already in the business, whereas in the present case before us, the assessee could not start its business of manufacturing fire protection chemicals due to non-supply of know-how by the AIK, Germany. We thus do not find substance in the Objection No. G. We also find strength from the decision of Hon'ble Supreme Court in the case of Senairam Doongarwell Vs. CIT, 42 ITR 392(SC). In that case the compensation was paid to the assessee for requisition of his factory by the military and the yardstick for determining the amount of compensation was the loss of future profits. In para nos. 6 and 7 of the decision, the facts are clearly stated. In that context the Hon'ble Supreme Court held in para nos. 15 and 17 and thereafter tha....
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....mpensation on the basis that in absence of supply of knowhow, the assessee was prevented from the commencement of the business, was capital receipt and not a revenue receipt liable to tax. We thus while setting aside orders of the authorities below in this regard direct the A.O to treat the receipt of award in question as capital receipt for the purpose of the assessment. The ground No. 1 is accordingly allowed in favour of the assessee. Ground No. 2 4. The A.O disallowed Rs. 46,040/- out of expenditure for gift and presentation articles. 4.1. The relevant facts are that A.O noted from the details of office and general expenses that the assessee has incurred Rs. 4,60,307/- on gift and presentations worth above and below Rs. 1000/-. In reply, the assessee stated that details of gifts, articles are available and have been filed but the distribution record of the same are not maintained. Since the assessee could not explain as to whether all the gifts distributed are relevant for the purpose of business, the A.O keeping in mind the assessment order for A.Y. 1995-96 on the issue held 10% of Rs. 4,60,307/- as not incurred wholly and exclusively for the purpose of business which....
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..... The Ld. D.R., on the other hand, placed reliance on the orders of the authorities below. He pointed out that the assessee could not produce any documentary evidence as to what business was served for the commission paid. 5.3. Considering the above submission, we find that the assessee upon whom onus was lying to establish its claim could not improve its case before the Tribunal. The documents which were not allowed to be admitted as additional evidence by the ld. CIT(A) were merely Credit Notes raised by the assessee and not confirmation from the parties. The Ld. CIT(A) was thus justified in rejecting the request of the assessee for admitting those evidence. In result, we are of the view that the assessee failed to discharge its onus to establish the genuineness of the claim. The authorities below were thus justified in disallowing Rs. 6,92,595/- out of the claimed sales commission of Rs. 74,81,032/- in absence of the evidence in support to the extent of the said amount of Rs. 6,92,595/-. The disallowance is thus upheld. The ground No. 3 is accordingly rejected. Ground No.4 6. This ground is against the disallowance of Rs. 1,829/- out of telephone expenses. 6.1. Havin....
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....sessee. 7) The learned CIT(A) erred in taxing the capital gains on transfer of trademark to HACCL. The appellant submits that there being no cost of acquisition of trade mark, the capital gains on transfer thereof are not chargeable to tax." 8.1. For proper identification we have marked these additional grounds as Additional ground nos. 1 and 2. 8.2. On perusal of appeal preferred by the Revenue, we find that the revenue vide ground No. 1 of the appeal questioned the first appellate order on the ground that the ld CIT(A) has erred in directing to compute the consideration received on transfer of trade names, trade mark, marketing data base etc., under the head "income from capital gain". Since the issue raised in Ground No. 1 of the appeal preferred by the revenue is connected to the issue raised in additional ground No.1, we for the sake of brevity preferred to adjudicate both these issues vide a consolidated order. 8.3. The relevant facts are that vide agreement for assignment of business dated 30th January 1998, the assessee company ACL assigned its business of Speciality Chemical Divisions for a consideration of Rs. 10 Crores to Houseman Ltd., U.K. 8.3.1. T....
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.... i.e. Aquapharm." 8.3.5. The assessee claimed that they have sold the entire business of Speciality Chemicals on a lumpsum price as per the agreement for "assignment of business". The assessee submitted further that they have sold the manufacturing data, manufacturing rights, marketing data base, everything connected with this activity of HACL, who are the owners of this activity after they have purchased their business. If at all, the assessee is manufacturing these chemicals, only for them, and under their orders. The assessee does not manufacture and market the same products for any other party. The assessee has seized the business of this nature. 8.3.6. The A.O did not agree with the claim of the assessee. Basically, the A.O has denied the claim of the assessee with observation that technical know-how, technical specification, trademarks, trade names, if at all there is transaction for them, it is only for the use of these technical knowhow, technical specification, trademarks, trade names, the reason being the assessee is still manufacturing the products in relation to which the same trade mark, trade names, technical knowhow and technical specifications are stated to ha....
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.... ground Nos. 1 & 2. 8.5. Considering the above submissions, we find that the A.O has denied the claim of the assessee that the receipt of Rs. 10 Crore as a consideration was against the selling of entire business of Speciality Chemicals as a slum sale on the following grounds : "a) There is no slump sale or sale of business as a going concern. b) The consideration has not been received for the slump sale as there is no slump sale as a going concern. Hene it is not a capital receipt. c) The technical know-how, technical specifications, trademarks, trade names, if at all there is transaction for them, it is only for the USE of these technical know-how, technical specifications, trademarks, trade names, the reason being the assessee is still manufacturing products in relation to which the same trademarks, trade names, technical know-how and technical specifications have been stated to have been transferred. d) The consideration has been received in the normal course of business transaction for regular supply of the formulations and commercialization of Speciality Chemicals." 8.5.1. Before the ld. CIT(A), the assessee tried to clarify that they....
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....acquisition is to be taken at NIL as per section 55 amended w.e.f. 1.4.98 5) The sale consideration for different assets can be taken as per valuation report filed in the case of Houseman Aquapharm Chemicals Ltd, where the Directors are common" 8.5.3. The Ld. CIT(A) has discussed the issue in detail. He has called upon the comments of the A.O on the submissions of the assessee and considering the same he has come to the following findings : "36. The submissions of both the sides have been considered. On the facts and circumstances of the case, I am not inclined to agree with the Assessing Officer that the receipt of Rs. 10 crore received by the appellant on Assignment of its Speciality chemical division to M/s. Houseman Aquapharm Chemicals ltd was a revenue receipt. There is nothing to show that whatever was transferred by the appellant such as sale of trademarks, trade names, technical specifications, marketing database was part of trading or business receipt of the appellant. The appellant was not in the business of sale of technical specifications, know-how or marketing data base. The appellant was engaged in the business of producing basic chemical....
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.... On the facts of the case I am inclined to hold that the receipt of Rs. 10 Crores on sale of speciality chemical division was not a trading/revenue receipt by the appellant. The AO has herself mentioned in the Assessment Order that in the alternative and without prejudice to her holding that it was a revenue receipt, the could be taxed as a Capital Gain based on the valuation Report filed in the case of M/s. HACCL, where the directors were common. The case of the appellant is also covered by the decision of the Hon'ble Supreme Court in the case of Artex Manufacturing Company Vs. CIT 277 ITR 260(SC). On the facts of the case I am inclined to hold that the receipt of Assignment of Business of Speciality chemical Division was a capital receipt liable for tax. The appellant has also finally conceded that the sum of Rs. 10 Crores was liable to capital gain tax. As per the valuation report of the chartered accountant, filed in the case of HACCL, the value of Rs. 970 Lacs (Rs.1000 Lacs-30 :Lacs for Stamp duty) has been bifurcated as under : Rs. Lakh Value of Technical Know-how 421.95 Value of Goodwill 305.65 Value of Trade Marks 223.10 Value of Operat....
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....ability to pay tax on Long Term Capital Gain on Rs. 727.50 Lakhs. The addition of Rs. 10 Crores as business income is deleted however Rs. 729.36(net) shall be liable for Long Term Capital Gain Tax. On the sale value of operating asset of Rs. 19,40,000/- the appellant is however liable for tax u/s. 41(2) of the IT Act as business income. The appellant had submitted that the total cost of the operating asset was Rs. 50,37,040/- comprising of vehicle Rs. 10,23,449/-, tools and equipments Rs. 34,90,397/- and computers Rs. 5,23,194/- and depreciation claimed on these assets Rs. 32,7y6,246/-. The WDV was shown at Rs. 17,60,794/-. The income u/s 41(2) as per this calculation comes to Rs. 1,79,206/- [19,40,000 - 17,60,795]. The Assessing Officer is directed to compute the income u/s 41(2) after verifying the actual cost of the operating assets and depreciation claimed and the WDV." 8.5.4 We find that the first appellate order on the issue is comprehensive and reasoned one. Since the assessee was still manufacturing the products in relation to which the same trade mark, trade names, technical knowhow and technical specifications claimed to have been transferred, we are of the vi....
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....ecision in the case of B.C. Srinivasa Shetty, 128 ITR 294 (SC) and also for the reason that the trademarks had been covered u/s. 55(2)(a) only w.e.f. A.Y. 2002-03. The Ld. CIT(A) has accepted the same with this observation that the assessees shall not be liable for capital gains on trademark for the A.Y. under consideration since there was no cost of acquisition. Under these circumstances, we find that the first appellate order on the issue is reasoned one and does not need interference. The same is upheld. Ground No. 1 of the appeal preferred by the revenue questioning the action of Ld. CIT(A) in directing to compute the consideration received on transfer of trademark, trade names, marketing data base etc., under the head "income from capital gain", thus does not hold water. The ground is accordingly rejected. 8.5.6. The additional ground 2 raised in the appeal preferred by the assessee is also rejected whereby the assessee has questioned action of the ld. CIT(A) in taxing the capital gains on transfer of trademark to HACL. 8.5.7. In additional ground No. 1, the assessee has questioned the action of the ld. CIT(A) in directing the A.O to assess the profit on sale value of Rs....
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....vernment of Maharashtra Industrial Energy and Labour Department. It was submitted that the said scheme is implemented through the operating agency known as "WMDC". The assessee explained that the preamble of the said scheme makes it clear that the object of putting such incentive scheme into the practice is to achieve dispersal of industries outside the Bombay, Thane, Pune belt and to attract them to the underdeveloped and developed areas of the said governments. This subsidy has been granted by the State Government with specific view to encourage the industries to go to backward areas and set up the industrial units thereon. It was further stated that even though such incentive is computed on the basis of investment of capital in plant & machinery etc., for setting up industry, it is a capital subsidy and therefore, a capital receipt. Reliance was placed on the decisions in the cases of PJ Chemical 210 ITR 830 (SC), Elyas Plastics Pvt. Ltd. 188 ITR 11 (Bom.) and Merinoply and Chemicals Ltd., 209 ITR 508 (Cal.). The A.O. did not agree with the submission of the assessee and following the decisions including decision of Hon'ble Supreme Court in the case of Sahani Steel and Press Wor....
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....d in these appeals are different, hence these matters require adjudication by the Tribunal. ITA No. 1111/PN/2005 11. The assessee has raised following grounds : "1. On facts and circumstances prevailing in the case and as per provisions of law, it be held that, disallowance out of repairs to Plant and Machinery of Rs. 20,904/- is resulting out of misapprehension of the fact on the part of Authorities below and the same is not in accordance with the provisions of the Act. The additions so retained on account of disallowance out of repairs to Plant and machinery and others be deleted. 2. On facts and circumstances prevailing in the case and as per provisions of law, it be held that, disallowance of Rs. 15,000/- retained out of Staff Welfare Expenses is without giving just and proper reasons and the same is based on guess work. The disallowance being not in accordance with the provisions of the Act be deleted and it be held that entire expenditure is incurred wholly and exclusively for the purpose of business. Alternatively, the disallowance may be reduced considerably, on the facts and circumstances prevailing in the case and as per provisions of the Act. ....
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....of eligible claim u/s. 80HHC. 9. It further be held that deduction of 90% be restricted within the meaning explanation (baa)(i) to the sec. 80HHC only to the net interest income & not the gross interest income. Just & proper relief be granted to the appellant in this office." Ground No. 1 12. The Ld. A.R. submitted that the assessee does not wish to press this ground. The ground is accordingly rejected as withdrawn. Ground No. 2 13. The assessee claimed expenses of Rs. 9,04,662/- consisting of Rs. 2464/- towards cake and biscuits, Rs. 5,13,204/- towards room expenses and Rs. 1,61,432/- towards staff welfare expenses. The A.O. disallowed Rs. 50,000/- out of the claimed amount on the basis that bills were not verifiable, hence personal element in the expenses could not be ruled out. The assessee objected the same on the basis that the disallowance is based on estimation without any evidence and supporting justifying reasons. It was submitted that the assessee company has got about 180 staff and workers to whom the assessee provides regular tea during the office hours from its canteen, hence there was no question of personal expenses. It was also pleaded that turn....
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....e advantage derived from some system, therefore, cannot be called as an expenditure giving enduring benefit. 18. Considering the above submission, the ld CIT(A) observed that the software relates to the areas of operation viz-a-viz accounts, purchases, sales and production operation of the company. He held that as far as the software relating to the account, purchases, sales is concerned, the same can be said to be of the revenue nature because it is not part of the profit earning apparatus, but it is a part of profit earning process. He accordingly relying upon the decisions cited by the assessee, held that expenditure in relation to the software which relates to the areas of operation in accounts and purchases and sales can be said to be of revenue nature. So far as the software related to production operation of the company is concerned, he held that the same cannot be said to be of revenue nature because such software is not part of the profit earning process but it is a part of the profit earning apparatus itself. He thus following the decision of Hon'ble Rajasthan High Court in the case of CIT Vs. Arawalli Construction Company Pvt. Ltd.,259 ITR 30 (Rajasthan) held that any....
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...., it certainly necessary for the effective management and conduct of the business. Keeping in view the dynamics and uncertainty involved in obtaining enduring benefits from software, we are of the view that the expenditure of software does not partake the nature of capital expenditure. Under these circumstances, we are of the view that even on proper analysis of functioning, one would come to the conclusion that even if for arguments sake, it brings benefits of enduring nature, the same is in revenue field and not in capital field since it improves and helps the administration and day to day working of an organization. We thus do not agree with the approach of the Ld CIT(A) on the issue and respectfully following the decision of Hon'ble Bombay High Court in the case of CIT Vs. Raychem RPG Ltd., (Supra) hold that the claimed expenditure of Rs. 7,30,000/- is of revenue nature. We thus direct the A.O to allow the claimed revenue expenditure. The ground No. 3 is accordingly allowed. Ground No. 4 21. In the Profit & Loss Account, the assessee had debited the following expenses : i) Office & General Expenses Rs. 243595 ii) Administrative Expenses Rs. 8048 ....
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....1000/- from Rs. 25000/- made by the A.O. The first appellate order on the issue is thus upheld. The ground No. 5 is accordingly rejected. Ground No. 6 28. The Ld. A.R. fairly withdrew this amount with this submission that the issue raised is covered against the assessee by the decision of Hon'ble jurisdictional Bombay High Court in the case of Sudarshan Chemicals Ltd., 245 ITR 769 (Bom.). The ground is accordingly rejected. Ground Nos. 7 & 8 29. The grievance of the assessee in these grounds is that interest on Fixed Deposit amounting to Rs. 15,10,562/-, interest on delayed receipt of Rs. 7,22,139/-, sales tax refund of Rs. 6,22,456/- and other interest of Rs. 9,209/- be assessed as business income instead of the same being assessed under the head "income from other sources" and same be treated as forming part of the business income eligible for the purpose of computation of claim u/s. 80 HHC. 30. Before the Tribunal, the Ld. A.R. submitted that even though vide para No. 8.4 of the first appellate order, the Ld CIT(A) has discussed this issue, but he has not given any finding thereon. He submitted that even for the sake of argument, it is admitted that the interest o....
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....the A.O must ascertain the nature of receipt in each case independently. Interest income may or may not be out of the business activity. In the present case before us, we find that the A.O has examined the issue of interest on delayed receipt from the customers and sales tax refund, interest received on Fixed Deposit and others etc., and has come to the conclusion that these are income from other sources admissible for deduction u/s. 80 HHC of the Act. We are also of the view that the ld CIT(A0 has rightly upheld this action of the A.O because the above mentioned receipt can not be said to be part of business income for consideration of deduction u/s. 80HHC of the Act in absence of their direct nexus with the eligible business of the assessee. The first appellate order in this regard is thus upheld. Ground Nos. 7 & 8 are accordingly rejected. Ground No. 9 33. In support of this ground, the ld. A.R. contended that deduction of 90% be restricted within the meaning of Explanation of (baa)(i) to Section 80 HHC only to the net interest income and not to the gross interest income. 34. It is an established position of law that netting of interest for the purpose of deduction can ....
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....orm part of turnover as they do not emanate from such turnover. In view of this settled position of law by the Hon'ble Supreme Court, we do not find infirmity in the first appellate order on the issue whereby the ld CIT(A) has directed the A.O to exclude sales tax and excise duty from the total turnover for the purpose of computing deduction u/s. 80 HHC of the Act. The same is upheld. Ground Nos. 1.1 & 1.2 are thus rejected. 38. In ground 1.3, the revenue has questioned first appellate order in directing the A.O for removal of rent of Rs. 12,19,500/- and, miscellaneous receipt of Rs. 42,550/- and exchange fluctuation receipt of Rs. 13,12,904/- from the total turnover of the business for the purpose of computation of deduction u/s. 80 HHC of the Act. 39. The ld. A.R. pointed out that the issue raised in the ground are also fully covered by the decision of Hon'ble Kerala High Court in the case of CIT Vs. K. Rajendranath Nair & Other, 265 ITR 35 (Ker.) and by the decision of Hon'ble Madras High Court in the case of CIT Vs. Madras Motors Ltd. 257 ITR 60 (Mad). 40. Having gone through the above cited decisions, we find that the Hon'ble Kerala High Court in the case of CIT Vs. K....
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....d and illegal. He submitted that all the necessary information regarding recovered labour charges and duty draw back were furnished before the A.O during the course of regular assessment proceedings and after considering the same, the assessment was framed u/s. 143(3) of the Act. Thus, A.O had initiated re-opening proceedings merely on the basis of change of opinion which is not permissible under the provisions of Sec. 147 of the Act. He submitted further that while the ld CIT(A) has upheld the validity of re-opening, but on merits, he himself has held that the issue raised in the reasons for reopening is fully covered by the decision of Hon'ble Bombay High Court in the case of Bangalore Clothing Co., 260 ITR 371 (Bom.). On the issue of validity of re-opening, the Ld. A.R. has place reliance on the following decisions : 1. Kelvinator India, 320 ITR 561 (SC) 2. Legato Systems (I) Pvt. Ltd. Vs. DCIT, 231 CTR 526 (Del.) 46. The ld. D.R. on the other hand tried to justify the action of the first appellate authority on the issue. He placed reliance on the following decisions : 1. Honda Siel Power Products Ltd. Vs. DCIT, 52 DTR (2011) 353 (Delhi) 2.....
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....fied with the cause show by the assessee will proceed for re-assessment and frame the re-assessment on those issues which is a submitting matter of reasons to belief and any other income which he feels during the re-assessment proceedings, has escaped assessment. It is an established position of law that sufficiency of reason to believe can not be question in a Court of Law because it is only a prima facie belief of the A.O to initiate re-opening proceedings which is always subject to final conclusion, after hearing the assessee during the course of the assessment proceedings framed u/s. 147 r.w.s. 143(3) of the Act. In the present case, the reasons shown by the A.O for the escaped assessment are firstly the deduction u/s. 80HHC allowed by inclusion of recovered labour charges of Rs. 1,23,57,201/- in the total turnover. The A.O was of the view that this income being in the nature of services rendered/job work done, therefore, to be considered as income from other sources and not income derived from manufacturing business. The A.O thus formed a reason to belief that this income is required to be exclude from the total turnover and 90% of it is to be reduced from the total profit whi....
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....eding A.O issued notice u/s. 148 for re-opening the regular assessment and framed the assessment u/s. 147 r.w.s. 143(3) of the Act. The aggrieved assessee went in first appeal and got relief on the issue of labour charges whether to treat as part of the business. Relief given by the ld CIT(A) in this regard has been questioned by the revenue whereas in its cross objection, the assessee has questioned the validity of re-opening upheld by the Ld CIT(A). 52. The issue raised in the above grounds is as to whether Ld CIT(A0 was justified in holding that labour charges are part of the business and are covered in "charges or any other receipts of similar nature" as mentioned in Explanation (baa) of Sec. 80HHC ? 53. The relevant facts are that during the year, the assessee company received labour/processing charges from Aquazur India Pvt. Ltd. for manufacturing of water treatment chemicals. In the re-assessment u/s. 147 r.w.s. 143(3) of the Act, the A.O held that the labour receipts are out of the incidental business activity and it is not case that the assessee has produced similar manufactured products one for his exports and one for the clients from whom he receives labour charges....