TaxTMI 
TaxTMI 
2016 (4) TMI 1343
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.... was entered into between Beecham Group Plc. and the assessee company. M/s. Smithkline Beecham Plc. U.K. had sole right to manufacture, pack and sell goods in respect of these trade marks granted the right to use these trademarks to the assessee company. The U.K. Company also granted other trademarks to the assessee, which are as under:-- Trade mark 1. ENO (word) 2. FRUIT SALT 3. SIL VIKRIN (Word) 4. SIL VIKRAN (Brand) 5. MACLEAN (brand) 6. MACLEANS (Word) 7. MACLEANS Signature 8. MACLEANS (Tooth paste carton) 9. BRYLCREEM (word) 10. BRYLCREEM (label)" The Assessing officer noted that on re-organization of its business, M/s. Smithkline Beechan Plc. transferred the trade mark use of 'ENO' and 'Fruit Salt' out of the above items to M/s. Smithkline Beecham Asia(P) Ltd., New Delhi. The agreement terminating the ENO and Fruit Salt trade mark licence agreement reads as under:-- "I refer to the trade mark user agreement between Beecham Group Plc and Smithkline Beecham Consumer Healthcare dated 28 June 1979 as subsequently amended from time to time ("Agreement"). T....
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....on report from an independent and international firm of accountants has been obtained. The said independent valuation report recommends a one-time lump-sum consideration of Rs. 45 Million as a fair and reasonable compensation for the said goodwill, and for transfer of all the marketing, advertising and brand related information generated by SBCH in its development effort. Accordingly we propose to pay SBCH a one-time lump sum consideration of Rs. 45 Millions for the said goodwill and for transfer of all information associated with SBCH's development effort. We would request you to signify your consent to the above terms by signing and returning a copy of this letter to us at the earliest". Yours faithfully for and on behalf of Agreed and accepted for and on behalf of on behalf of SMITHKLINE BEECHAM ASIA PRIVATE LIMITED SMITHKLINE BEECHAM CONSUMER HEALTHCARE LIMITED Sd/- NANDAN DASGUPTA ALTERNATE DIRECTOR Sd/- S.J. SCARFF MANAGING DIRECTOR" The Assessing officer observed that in the return of income, the assessee had treated Rs. 4.5 crores as non taxable capital receipt in its hands. In that background, the Assessing officer required the as....
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....ssessee in the regular course of business. He therefore, held that the compensation received by the assessee is s taxable Revenue receipt in the hands of the assessee. He, therefore, held that receipt of Rs. 4.5 cores is a taxable income of the assessee. 4. On appeal, the CIT(A) deleted the addition for the reasons stated in para 3 of the impugned order, which reads as under:-- "3. The submissions made by the appellant have been given careful consideration and I have also gone through the various decisions cited by the Assessing Officer as well as learned counsel for the assessee. I have also perused the agreements entered into by the appellant. The Assessing Officer has held that the solatium of Rs. 4.5 crore was received by the appellant for termination of contract and was during the regular course of business, therefore, it represents a revenue receipt, whereas the appellant's contention is that by virtue of transfer and assignment of the trademark of 'ENO" and 'FRUIT SALT', the appellant had lost the valuable business of manufacturing and marketing the said products, and therefore, it was a loss of the source itself, hence the compensation received r....
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.... receipt not chargeable to income tax. The council also held that the expression 'receipt arising from business' must mean receipts arising from the carrying on of business, In the case of CIT V. The Mills Store Co., 9 ITR 642. it was held that a restrictive covenant, whereby a person undertakes, for certain consideration to abstain from doing a particular act or from following a particular course or conduct, is something quite outside an ordinary contract of employment and the receipt is not taxable being a capital receipt. Further the Hon'ble Supreme Court in the case of CIT v. Best & Co. Ltd., Supra held that the compensation agreed to be paid was not only in lieu of the loss of the agency but also for the respondent accepting a restrictive covenant for a specified period and the restrictive covenant was an independent obligation which came into operation only when the agency was terminated and that part of me compensation which was attributable to the restrictive covenant was a capital receipt and hence not taxable. Further in the case of Gilliinders Arbuthnot and Co. Ltd. v. CIT, 1964 : 53 ITR 283 it was held that the compensation paid for agreeing to refrain from ....
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....ning apparatus and had abrogated the right to carry on a like business for all limes, therefore, the loss was of an enduring nature. The compensation received, therefore, is in the nature of a capital receipt." 5. We have heard Shri S.K. Mittal, Ld. DR and Shri Rohit Jain, Ld. Counsel for the assessee. The Ld. Counsel for the assessee pointed out that the agreement with U.K. Company entered into on 28.6.1979 whereby the assessee was granted licence to use, inter alia, the trade marks 'ENO' and 'Fruit Salt'. Shri Rohit Jain, Ld. Counsel for the assessee vehemently argued that the assessee formed the foundation of carrying on of another line of business viz. producing and marketing 'ENO' and 'Fruit Salt'. According to Ld. Counsel for the assessee, termination of agreement dated 28.6.1979 in part by U.K. Company resulted in cessation of that line of business and the above sum of Rs. 4.5 crores received by the assessee under the arrangement of the aforesaid company was towards compensation of such loss of business/source of income. Shri Jain further submitted that it has been held by the Courts that compensation received on termination of an income pr....
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.... in the nature of trading transaction but was one in which appellant-assessee parted with an asset of an enduring value. The Hon'ble Supreme court held that what the assessee was paid was to compensate it for loss of a capital asset and was not, therefore, in the nature of the Revenue receipt. The Hon'ble Supreme Court at page 262 (head Note) held as under:-- "Held, on the facts, that the arrangement with Mugneeram Bangur and Co. was not in the nature of a trading transaction, but was one in which the appellant parted with an asset of an enduring value. What the assessee was paid was to compensate it for loss of a capital asset and was not, therefore, in the nature of a revenue receipt. It mattered little that the appellant did continue to conduct the remaining managing agencies after the determination of its agency with the Fort William Jute Co. It cannot be said as general rule that what is determinative of the nature of a receipt on the cancellation of a contract of agency or office is extinction or compulsory cessation of the agency or office. Where payment is made to compensate a person for cancellation of a contract which does not affect the trading ....
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....that only one of the agency was cancelled. Similarly, in the case of CIT v. Bombay Burmah Trading Corporation (1986) 161 ITR 386 (SC), the assessee held about 15 forest leases. The forest leases were terminated by the Union of Burma and the assessee was paid compensation for the same. The Hon'ble Supreme Court held that the forest leases affected the very structure of the operations and, therefore, constituted capital assets and payment made for cancellation or sterilization of the right would be capital receipt. It is also relevant to mention here that the Hon'ble Supreme Court in the case of Oberoi Hotel (P) Limited (1999) 236 ITR 903 (SC) held that the amount received by the assessee for giving up right to purchase hotel and/or to operate the hotel resulting in loss of source of income is capital receipt. In view of the above, we fully agree with the findings of the CIT(A) that the compensation received by the assessee amounting to Rs. 4.5 crores is capital receipt not exigible to tax. 8. Before parting, we may also observe there that in this case the right to produce, market and sell the products under each trade mark/brand name licence given by U.K. Company to the a....
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...., commission, interest, rent, etc., do not form part of business profits as they have no nexus with the activity of export. The amendments made from time to time indicate that they became necessary in order to make the formula workable. If so, excise duty and sales tax also cannot form part of the "total turnover" under section 80HHC(3) : otherwise the formula becomes unworkable." 12. Respectfully following the judgement of the Hon'ble Supreme Court in the case of CIT v Lakshmi Machine Works (supra), we do not find any infirmity in the findings of the CIT(A) on this issue. Accordingly, we uphold the order of CIT(A) on this issue and reject ground No. 2 of the appeal. 13. Ground No. 3 of the appeal reads as under:-- "3. On the facts and circumstances of the case the Ld. CIT(A) has erred in directing the Assessing officer to allow 100% depreciation on Effluent Treatment Plant." 14. The facts relating to this issue are that the assessee had claimed 100% depreciation on Effluent Treatment Plant (ETP), installed at Rajmundry on 15.3.1997. The Assessing officer disallowed the claim of the assessee stating that the ETP was not installed and commissioned before 31.3.1....
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....eview put the ETP on continue operations at 11AM, 15.3.97 2) The plan is being operated continuously since 11 AM, 15.3.97 barring a couple hours I between owing to inevitable circumstances. 3) Instead of grab samples, composite samples (2 Nos. ) are being collected for evaluation since 17.3.97. 4) The result of composite samples (2Nos) have shown COD levels to be 245 and 243 mg/lt at final out lets respectively. The BOD results are awaited as the same take longer time. 5) The EIP Plant shall be under continuous operation and manned by the staff of M/s. Envirad, Once the desired output results are achieved the plant shall be further operated under steady state condition for a duration of 2-3 weeks. 6) During this period M/s. SBCH Ltd. shall designate plant personnel in all the three shifts to check and also train. themselves for ETP operation. 7) After steady state performance the ETP shall be taken over by M/s. SBCH Ltd. 8) In case M/s. SBCH Ltd., desire that entire plant be re-commissioned (to gain confidence level for restart the plant) the entire EXP/UASB shall be slushed and recharged. This re-commissioning shall be....
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....efects were removed and plant was put into perfect shape. Therefore, there is no doubt the appellant was owner of the plant and that it was commissioned before 15.3.1997. Some of the payments may have been made subsequent to the financial year under consideration but that cannot have the effect of negating the appellant's claim for depreciation. In the facts and circumstance of the case, it is held that the Effluent Treatment Plant had been commissioned and put to use during the year under reference, and the appellant is entitled to depreciation thereon. The Assessing Officer is accordingly directed to allow depreciation on Effluent Treatment Plant as per rules. Thus this ground of appeal is, therefore, allowed." 16. We have considered the rival submissions. It is apparent from the record that the assessee had produced the minutes of meeting held with Envirad on 19.3.1997, which revealed that the ETP was being operated continuously since 15.3.1997. The said minutes were given by one Mr. Venkat of Envirad. The minutes of meeting are available at page 136 of the assessee's paper book. The assessee had also produced the copies of fax massages dated 24.3.1997 and 28.3.1997 s....
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....g Ld. Representatives of both the parties we find that the issue is squarely covered in favour of the assessee and against the Revenue by the decision of the Tribunal dated 31.1.2005 passed in assessee's case in ITA Nos. 301/Chandi/2001, 17, 274 & 1243/Chandi/98 & 233/Chandi/99 and 302/Chd/2001 relating to assessment years 1991-92, 92-93, 93-94, 94-95 & 95-96 and 1996-97. A similar view has also been taken by the Tribunal in Revenue's appeal in ITA No. 345/Chandi/2001 in assessee's own case relating to assessment year 1996-97 vide its order dated 28.2.2005. The Tribunal following its earlier orders passed in assessee's case held as under:-- "The second ground of appeal of the Revenue is as under:-- "2. On the facts and in the circumstances of the case, the Ld. CIT(A) allowing the claim of deduction u/s. 80-I of the Income-Tax Act, 1961 after verification of facts in view of ITAT's order passed in assessee's case for earlier years." The relevant facts relating to this issue are that the assessee had claimed deduction under section 80-I of Rs. 6,32,90,368/- which was disallowed by the Assessing Officer on the basis of assessment order for ....
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....O as well as the CIT(A) did not accept the contention of the assessee for the assessment years 83-84 & 85-86. The Tribunal also confirmed the view of the revenue that the excise duty paid has necessarily to be included in the valuation of closing stock on direct cost basis. In assessment year 85-86, the assessee had raised an alternate submission that if excise duty paid had to be included as part of the valuation of closing stock, the same had to be excluded after the insertion of section 43B w.e.f. 1.4.84, in order to give full effect to the said provisions. The Tribunal in assessment year 85-86, while deciding the issue, in principle, against the assessee directed the AO to decide the issue afresh in accordance with the decision of the Special Bench of the Tribunal constituted in the case of Indian Communication Network Ltd. Subsequently, the Special Bench of the Tribunal in the case of ITO v. Food Specialties Ltd. 206 ITR (AT) 119, held that excise duty paid is not a part of direct cost while valuing the closing stock In the case of Indian Communications Network P. Ltd. v. I A C 206 ITR (AT) 96, the Special Bench held that it was necessary to remove the amount of excise duty fr....
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....ars involved before us are prior to 1.4.99 and section 145A not being applicable, we do not find any infirmity in the order of the CIT(A) in directing to exclude the excise duty component from the valuation of closing stock We, therefore, find no justification to interfere with the order of the CIT(A). The grounds of appeals raised by the revenue in the respective assessment years are accordingly dismissed." 23. The above decision is squarely applicable to the facts of the present case and therefore, we do not see any merit in this ground of appeal. Accordingly, the same is dismissed. 24. Ground No. 6 of the appeal, reads as under:-- "6. On the facts and in the circumstances of the case the Ld. CIT(A) has erred in allowing relief of Rs. 83,97,899/- by directing the Assessing officer to value the closing stock on the direct cost method as adopted by the assessee subject to inclusion of certain expenses." 25. After hearing Ld. Representatives of both the parties, we find that the issue is squarely covered in favour of the assessee and against the Revenue by the decision of the Tribunal for assessment years 1991-92 to 1995 & 1996-97 referred to above. While deciding ....
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....are to be valid at cost or market prices, whichever is lower. The - product- that is manufactured by the assessee is extracted out of milk and milk is the main raw material followed by Malt extract, wheat flour, coca powder etc. The fresh milk is collected at various milk collection centres located in the State of Punjab. Thereafter it is processed and made into a product called horlicks and other products which are packed in drums and dispatched to various packing stations that are located in different regions. At these packing stations, which have their own machines required for packing, filling the product in various bottles, placing of cocks, fixing of lids and labels. The components of direct cost according to the assessee, are prime cost comprising of raw-materials, packing materials, direct labour of factory workers concerned with the production and the packing stations, direct expenses -of (he factory and of the packing stations. The direct overhead comprising of workers, electricity, coal, oil and lubricants, other oils and water are taken into closing stock on the basis of tonnage of stock on hand, divided by the total tonnage produced in the year, applying that ratio to ....
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....eads. The assessee had stated that the above is proper direct cost, valuation of the products, the selling overheads, distribution overheads, market overheads, administration and that relating to exports have been totally excluded from the above valuation because they have no contribution, whatsoever, towards the bringing the product to its p-physical condition and location. 16. In our view, in the above classification, exclusion of managerial staff of the factory i.e. various managers, executive and other staff and also exclusion of works, maintenance, watch and ward staff that are kept in readiness is not proper, because they directly 'are related to the production as such, as they are involved in the planning, procurement, actual production, manner of production and the like. They also are concerned with the quality of the milk as such for which veterinary executives are also made part. Therefore, the entire direct labour should be included of not only of the workers operating the machines but also the managers of factory, personnel and administration who control law and order as far as the staff goes, production managers concerned with the quality produced, milk pr....
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.... for the assessment year 82-83 (supra), uphold the order of the CIT(A) in regard to valuation of closing stock and dismiss the above common grounds of appeals raised by the assessee as well the revenue." 26. The facts of the present year are similar to that of earlier years. Respectfully following the order of the Tribunal passed in assessee's case for earlier years, we do not see any infirmity in the findings of the CIT(A) on this issue. Accordingly, we uphold the order of CIT(A) and dismiss ground No. 6 of the appeal. 27. Ground No. 7 of the appeal, reads as under:-- "7. On the facts and in the circumstance of the case the Ld. CIT(A) has erred in deleing the addition of Rs. 54,74,522/- on account of MODVAT element not reflected in the value of closing stock." 28. This issue is also covered in favour of the assessee and against the Revenue by the decision of the Tribunal passed in assessee's case for earlier years referred to above. While deciding a similar issue, the Tribunal held as under:-- "25. The relevant facts relating to this issue are that the Assessing officer had included the modvat credit in the valuation of closing stock. The CIT(A) ....
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....ual payments of duties. Therefore, when the payments are understood as actual payments, those payments even if mentioned as advance payments need to be allowed as deduction under section 43B. The above position is emerging out of the language of the statute itself. Section 43B provides for the deduction of sums payable mentioned in clauses (a) to (f), only if actually paid; but shall be allowed irrespective of the previous year in which the liability to pay such sum was incurred by the assessee. The intention of the Legislature is apparent in the above language used in section 43B, that the deduction in respect of tax or duty, which was actually paid by the assessee has to be allowed as deduction without looking into the year of incurring liability. Further the expression "irrespective of the previous year" dispenses with the concept of previous year, in the matter of the sums covered by section 43B. The expression "irrespective" means lacking relation, regardless of what is mentioned. Here the subject-mentioned is "previous year". It means the deduction has to be allowed regardless of the previous year. Any reference to the time of incurring or accruing of the li....
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....nts could be claimed by the assessee as deduction. The circular nowhere deals with the patent question of advance payment of duties and taxes and deduction thereof. Generally the advance payments of excise duty are not provisional or refundable. They are actually payments of Central Excise duty. We have examined the legislative intent and purpose of section 43B. The assessees in the past were not paying taxes, duties and other dues to the Government in time. At the same time, they were booking those items as expenses in their accounts on accrual basis on the ground that they are following mercantile system of accounting. By doing so, they were claiming deduction and reducing the taxable income. Concurrently in many cases, the assessees were challenging the very liability itself before the Courts and Tribunals, finally resulting the payments belated, deferred, and sometimes never made. In order to stop such exploitation practised by the assessees, section 43B has been brought in the statute declaring that "well you claim the deduction, but only on actual payment." The law has made it clear that such payments are to be allowed as deductions in the year of payment. Section 43....