TaxTMI 
TaxTMI 
2005 (7) TMI 280
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....rikakulam District, Andhra Pradesh. (ii) The second issue relates to the consideration of delayed payment of employees' contribution to PF as not deductible under s. 36(1)(va) of the Act. (iii) The third issue relates to disallowance of assessee's claim of deduction of the amounts paid on account of employees' contribution to PF after due dates (iv) The fourth issue relates to assessee's claim of depreciation @ 100 per cent in respect of items of plant and machinery entitled to depreciation @ 100 per cent, but made for the first time before the CIT(A). 2.1 Issues involved in ITA No. 654/Ahd/2005 for asst. yr. 2002-03 The issues involved in this appeal were admitted to be read as under: (i) Validity of proceedings under s. 154 of the Act, 1961, by the AO for amendment of assessment under s. 143(1) of the Act, after having issued notice under s. 143(2) of the Act. (ii) Permissible adjustments under s. 143(1) of the Act, and amending of record for that purpose. (iii) Levy of interest under s. 234B of the Act and 234D of the Act, 1961. 2.2. Since both the appeals are of the same assessee, we, for the sake of co....
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....agreement so entered into has been discussed by the Revenue authorities in their respective order and, therefore, need not to be reproduced here. 4.5 In the books of account, the assessee wrote off 1/5th of the expenditure of Rs. 6 crores because the period during which agreement was to remain in force was 5 years, but in the computation of income furnished along with return, the assessee claimed whole of the expenditure of Rs. 6 crores, as revenue expenditure. 4.6 The other facts, which have been brought on record by the AO, are as under: "(i) The assessee-company is headed by Shri S.C. Mehta, who is the director of Deepak Fertilizers & Petrochemicals Corporation Ltd. (DFPCL). The company is under common management and part funding of the acquisition cost was made by DFPCL by way of subscription to preference shares of the company. DFPCL is the largest private sector manufacturer and supplier of nitric acid and ammonium nitrate and is one of the major players in nitric acid (NA) and ammonium nitrate (AN) market. The business of DFPCL is same of manufacturing nitric acid (NA) and ammonium nitrate (AN), which was also the business of VBC Industries Ltd. (ii) ....
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....ition to effectively utilize the aforesaid plant in expansion of its business activities." In this background, the assessee-company entered into business purchase agreement dt. 22nd March, 2000 under which assessee-company acquired business undertaking by making payment of Rs. 29 crores and further payment towards debtors and inventories on determination on the date of transfer. The definition of acquire business undertaking was defined in art. 1.1(1), p. 3 of the agreement as under: "Acquire business undertaking means of all seller's right, title and interest as on pre-closing or the closing, in respect of chemical business. The seller, as the case may be in and upon to the following: (sic) 'Dt.: 21st Dec, 2002 Income-tax Officer, Ward-4(3), Aayakar Bhawan, Race Course Circle, Baroda - 390 007 Kind attention: Shri S.K. Agal (ITO) Dear Sir, Sub: Assessment proceedings for asst. yr. 2001-02 PAN: AACCA 5046 P In connection with our ongoing assessment for captioned assessment year and as required by your notice No. BRD/ITO/Wd. 4(3)/SPL/133(6)/02-03 dt. 13th Dec,2002, we giv....
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.... the major player in nitric acid and ammonium nitrate market. The acquired chemical business was established by VBC between 1990 and 1994 with commercial production commencing towards end of 1994. The plant design and production processes for manufacturing nitric acid and ammonium nitrate are based on technical information, documentation and know-how from Projects & Development India Limited (PDIL) Sindri, Dhanbad, Bihar, Norsk Hydro, Norway and UHDE Germany. The technology is tailor-made and under strict secrecy clause contained in the agreements between VBC and the technology providers. VBC while transferring chemical business had obtained permissions ..... technology providers for the company to continue using the said ........ Copies of agreement of confidentiality regarding aforesaid three ..... providers as also permission letters from them are enclosed for your perusal. Thus, the key factor in the entire business is the aforesaid .... backdrop of the above, the company entered into non-compete .... with VBC and its founder promoter Shri M.V.V.S. Murthy. The ... provides for restriction on VBC and Shri M.V.V.S. Murthy to engage in manufacturing, trading or dealing in....
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.... time company would have warded off such competition. With actual running of ..... including running of plant with aforesaid technologies and building relationship with the customer base of VBC, the company would in any case be (in a) position with the customer base of VBC, the company would in any case be (in a) position to face any kind of competition in less than a year's time. However ...... in profitability in the very first year of operations, would have upset the ... and very purpose of this acquisition for the company. Thus, necessity of ....... lies in commercial expediency with a view to protect future revenues in shorter period. It may not be out of place to mention here that in subsequent years starting in middle of 2001, the company has faced severe competition from imported ammonium nitrate in the market place, which ... not threatening the existence of the company, has nevertheless put pressure on the margins of the company. However, as stated earlier with customer relationship already in place, the company has been able to face the competition with restrained margins. This also explains the nature and type of competition thought about in the said non-compete agr....
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.... judgment are pertinent: 'The compensation paid relied on relatable to the restrictive covenant not to carry on similar business for a period of 5 years is in the nature of a separate transaction unconnected with the business or the assets of the partnership- that it could not be said that the assessee-firm has secured an enduring advantage and that therefore, the payments could only be treated as a revenue outgoing.' It may be worth noting that the entire amount of Rs. 6 crores of non-compete consideration has already been paid to VBC and only on accounting principles the said amount has been amortized over a period of five years in the books of the company. Here we do not wish to waste your time by referring number of case laws settling the issue that mere accounting entry does not determine allowability/non-allowability of an expenditure under income-tax. ... confident that the above submissions will find meritorious ... Madras Industrial Investment Corporation Ltd. vs. CIT (1997) 139 CTR (SC) 555 : (1997) 225 ITR 802 (SC), wherein the Hon'ble Judge Mrs. Sujata Manohar, after perusing series of case laws on the subject, has held that the di....
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....th simultaneous introduction of Part B to Appendix I to IT Rules, 1962 (under r. 5), being intangible assets qualifying for depreciation. Thus, even if such expenditure is considered non-revenue, the income-tax statute permits allowance of the same on deferred basis earlier under s. 35AB and now under depreciation schedule. For Smartchem Technologies Limited Sd/- Bhaskar S. Pai Manager Accounts" 4.10 The AO, however, did not agree with the submissions made by the assessee with respect to claim that the expenditure in question was revenue expenditure. The findings of the AO are found in para Nos. 2.3 to 2.9 of assessment order, which read as under: "2.3 In addition to the business purchase agreement, assessee-company entered into non-competition agreement dt. 22nd March, 2000, wherein assessee-company agreed to pay Rs. 6 crores to the transferor-company and its founder promoter and it was agreed that the transferor-company for 5 years shall not directly or indirectly manage, operate, joint, have an interest in, control or participate in the ownership, management, operation or control or be otherwise connected in any manner with any cor....
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....ses. Secondly, in case of Coal Shipments (P) Ltd., there was no certainty of duration of non-competition arrangement, as there was no written agreement, between the parties, hence Hon'ble Court held that because of uncertainty advantage derived is not of enduring nature. In case of G.D. Naidu, the facts are totally different as the payment were made by the firm to the retiring partner of an existing business. 2.5 Therefore, the decisions quoted by the assessee-company are not applicable on the facts of the case. The Hon'ble Supreme Court in the case of Coal Shipments (P) Ltd. itself has laid principle very clearly that: It is an accepted preposition that the word 'permanent and enduring' are only relative terms and not synonyms with the perpetual or everlasting. Enduring benefit need not be an everlasting character, it should not at the same time be transitory and ephemeral that it can be terminated at any time at the volition of any of the parties. Payment made to rival dealer to ward off competition in business would constitute capital expenditure, if the object of making payment is to derive an advantage by eliminating the competition for some l....
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....me. Same view was also undertaken by Madras High Court in the case of Chelpark Co. Ltd. vs. CIT (1991) 94 CTR (Mad) 71 : (1991) 191 ITR 249 (Mad) and Hon'ble Karnataka High Court in the case of CIT vs. Bangalore Arrack Co. (1992) 108 CTR (Kar) 57 : (1993) 201 ITR 25 (Kar). 2.8 Therefore, the principle laid down in the decision of Hon'ble Supreme Court and in the above referred decision of Hon'ble Calcutta High Court, Madras High Court and Karnataka High Court is that if competition is warded off for some length of time, it will constitute advantage of enduring nature and would constitute as capital expenditure. In the case of assessee, there was no existing business of manufacturing and selling of chemical, therefore, the payment was not made for carrying out of any existing business. The non-competition by VBC Industries Ltd. for five years would allow the assessee-company with the support of associate company DFPCL to settle down in the market of east-central India and monopoly would result in enduring advantage. The associate company of assessee is already a major player in the western part of the country and unfettered access in eastern and central part of ....
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.... observing as under: "2.10 Alternative contention Assessee-company had made an alternative claim that technical know-how has been the main fulcrum of the acquiring business. One of the major factors behind VBC's capability to compete was their knowledge. Therefore, payment should be treated as made for business/commercial right related to such know-how and which is eligible for 25 per cent depreciation. If expenditure is held as capital expenditure, depreciation @ 25 per cent should be allowed. The alternative contention of the assessee is also not acceptable for the reason that: in the business purchase agreement, assessee has clearly agreed to transfer all its tangible and intangible assets including know-how, license, permits, intellectual property rights, etc. as part of acquiring business undertaking at the consideration of Rs. 29 crores. Therefore, there is no scope for separate payment to be made for any intellectual property. No specific intellectual business/commercial right was acquired by the assessee-company against the payment of Rs. 6 crores. Therefore, it cannot be part of the block of assets under s. 32 of the Act. The payment of Rs. 2....
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.... (1965) 58 ITR 241 (PC) In this case, payment made to avoid over-production in the same field by another manufacturer was held to be on revenue account." 6. The learned CIT(A), after considering the facts of the case and observations of the AO as well as decisions relied upon by the assessee and the AO, came to the conclusion that the expenditure incurred by the assessee, under appeal, was of capital nature. The relevant part of the order of the CIT(A), wherein he distinguished the decisions relied upon by the assessee and supported the decisions relied upon by the AO and other reasons for arriving at the aforesaid finding as contained in para Nos. 3.3 to 4.3 of the appellate order, reads as under: "3.3. In this background, it was submitted that the payment of Rs. 6 crores to the VBC did not result into any advantage to the appellant in the capital field nor any advantage of enduring nature has resulted. What the appellant paid was out of business exigencies and for carrying on all the business of the appellant smoothly. Therefore, the expenditure is revenue in nature. The AO, in rejoinder, submitted that the appellant was not engaged in the manufactur....
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....the payments were made in respect of the continuing business whereas the appellant has entered into a new business and as such, the decisions would not apply. With respect to the decision of Empire Jute Co. Ltd., the issue before the Supreme Court was the purchase of loom hours to increase the production and profit thereon. It has nothing to do with non-compete consideration. The AO emphasized that the appellant has got an advantage of enduring nature by making the above payment as brought out in the assessment order and as such, the same is on capital account. 3.4 The issue has been considered carefully. It is seen that the appellant has acquired the chemical business from VBC, which includes transfer of immovable, movable properties and all clearances, permits, license, consents, NOC, etc, tangible and intangible rights and benefits entitled to seller thereunder, registration, intellectual property rights, etc. against a payment of Rs. 29 crores. The appellant is a concern of the group to which another company, DFPCL belongs. Both the companies are under control of Shri S.C. Mehta, who is director in both the companies. It is worthwhile to mention that DFPCL is a major p....
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....lt for the appellant to create an effective base in that area. For that very purpose, the appellant paid Rs. 6 crores to VBC for non-competition. It is now to be considered whether by doing so, the appellant acquired any advantage of enduring nature so as to bring the payment under the capital expenditure. In this regard, many decisions have been cited by the appellant and also by the AO. I find that no thumb rule has been prescribed by any decision and the decisions have been taken by the various Courts based on the facts of the case. This is summarized by the Supreme Court in the case of Coal Shipments Ltd., wherein, the apex Court has laid down certain principle. It has observed that 'permanent and enduring' are only related terms and not synonymous with the perpetual and everlasting. Enduring benefit need not be an everlasting character. It should not at the same time, be transitory and ephemeral that it can be terminated at any time at the volition of any of the party. Payment made to a rival trader to ward off competition in business would constitute capital expenditure, if the object of making payment is to derive an advantage by eliminating the competition for some ....
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....gton Glass Works considered the payment made by the assessee to a competitor for stopping production for five years so that excess production could be avoided in the field of manufacturing of wired figured glass. The Court held that the period of five years was a critical period in the glass manufacturing and in this period, the assessee could eliminate the competitor and could generate goodwill for its product and this can be considered as advantage of enduring nature as this would last not only beyond one year, not even for five years, but even for longer periods. The Madras High Court in the case of Blaze & Central (P) Ltd. has held that the payment made to a competitor for taking over all the business carried by them for nine years to ward off competition, resulted in advantage of enduring nature and hence, the payment was capital in nature. The appellant has tried to argue that in these cases, there was one competitor, but in its case, VBC was not the only competitor but there were other market players in this field. But in my view though there were certain other market players, but the appellant has avoided competition from at least one major market player, i.e., VBC and thus....
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....as for very short, i.e., for one year. In the case of Sree Annapoorna Gowrishankar Hotels (P) Ltd. vs. Asstt. CIT (1991) 37 ITD 541 (Mad), what the Tribunal, Madras Bench, considered was the reasonableness of payment under s. 40A(2) and the issue was not relating to capital or revenue nature of the payment. In the case of Pathare Dhru & Co. vs. Asstt. CIT (1995) 54 ITD 746 (Bom), the issue involved was payment made to a person for stopping profession for two years. The period thus is very short, only for two years. Similarly, in the case of Modipon Ltd. vs. IAC (1995) 52 TTJ (Del) 477, the period of benefit was only for three years. In the case of IRC vs. Canon Company (1968) 45 Tax Cases 18 (HL), the issue involved was expenditure for obtaining the new character, defending the action and payment made to two dissenting shareholders in respect of their shares and expenses in the action. The payments were not for non-competition from another party. In the case of CIT vs. Piggot Chapman & Co. (1949) 17 ITR 317 (Cal), the payment was made to a broker for non-carrying on the business for a certain period unless and until the agreement was rescinded. T....
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....t year in question the said amount of discount had to be spread out proportionately over a number of years for which the bonds are issued. The Bombay High Court in the case of Taparia Tools Ltd. vs. Jt. CIT (2003) 180 CTR (Bom) 256 : (2003) 260 ITR 102 (Bom) has considered the one-time payment of interest and debentures in advance and has held that this has to be spread over entire period of the debenture. 4.2 The AO, on the other hand, submitted that the IT Act contains provision for allowing revenue expenses, certain specified capital expenditure like depreciation, deduction under s. 35D, etc., but the impugned expenditure is not revenue in nature and there is no other provision under the Act in which the same can be allowed as deferred revenue expenditure. He also added that the decision of the Supreme Court cited by the appellant relates to revenue expenditure to be allowed in a period spread over several years, but in the case of the appellant, the impugned expenditure is not revenue in nature. 4.3 On consideration of the facts of the case, I fully agree with the stand of the AO. The impugned expenditure has been earlier held as capital in nature. The concept....
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....o be made for intellectual property and by making this payment, the appellant has not obtained any commercial right. While coming to this conclusion, the AO has wrongly referred to the definition of acquired business undertaking discussed at cl. 1.1 of the art. 1 at p. 3 of the agreement with VBC, which is as under: (i) The acquired business undertaking immovable properties, (ii) The acquired business undertaking movable properties. (iii) All clearances, permits, licenses, consents, NOC, etc., tangible and intangible rights and benefits entitled to the seller there under, registration, intellectual property rights, etc. It was submitted that the AO has not appreciated the facts in correct perspective. My attention was drawn to the art. 2, cl. 2.2. on p. 5 of the agreement wherein, it is mentioned that 'in consideration of the seller transferring to the buyer, the acquired business undertaking which shall include the acquired business undertaking movable properties and acquired business undertaking immovable properties, the buyer shall pay to the seller a sum of Rs. 29 crores .......'. It was argued that the payment of Rs. 29 crores thus n....
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....t in the case of Henriksen vs. Grafton Hotel Ltd. (1942) 24 Tax Cases 453, an observation has been made that the payments for monopoly for acquiring a license for period of 3 years must be regarded as attaining the dignity of a capital asset. Similar decision has been given by Madras High Court in the case of Chelpark Co. Ltd. vs. CIT (1991) 94 CTR (Mad) 71 : (1991) 191 ITR 249 (Mad). These decisions of the Courts indicate that the payment for non-compete consideration are in the nature of capital asset i.e., the appellant has got the business on commercial rights for which it had payments for non-compete. In view of above, it was submitted that the appellant be allowed depreciation on such acquisition of business/commercial rights under s. 32 in respect of non-compete fees of Rs. 6 crores. 5.2 The AO, on the other hand, in his written submission observed that s. 32(1)(ii) specifies certain intangible assets like know-how, patents, copyrights, trademarks, licenses, franchise and also mentions any other business or commercial right of similar nature. The appellant has never claimed that the payment of non-compete fees was to acquire an asset. All the assets pertaining to ch....
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....comes in possession of a person even if it is intangible like know-how, patents, copyrights, etc. which appear in the said section. The payment to ward off competition does not bring in any asset much less in the nature of and similar to specified intangible assets mentioned in s. 32(1)(ii) of the Act. The asset means property in general-all that one owns. The word "asset" has been defined in the 20th Century Dictionary as follows: Property in general; all that one owns considered as applicable to the payment of each debts ............... As a singular : any portion of one's property or effect so considered. The definition as given above, has been noted by the Supreme Court in the case of D.G. Gouse & Co. vs. State of Kerala AIR 1980 SC 271. That is to say, an asset is something which is owned and in this definition, all the assets, tangible or intangible, as specified in s. 32 fit in. Know-how, patents, copyrights, trademarks, license, franchises, etc. which are mentioned in the said section are capable of being owned whereas, the appellant is owning nothing against the payment of Rs. 6 crores to VBC for non-competition. Of course, in s. 32, business of commercial rights are a....
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....till the sale of chemical business. As can be observed from the above, the sale of business by VBC was not occasioned due to severe competition or due to its inability to compete due to dependence on imported ammonia but mainly due to change in business focus of the promoters. (iv) That the acquired chemical business was established by VBC between 1990 and 1994 with commercial production commencing towards end of 1994. The plant design and production processes for manufacturing nitric acid and ammonium nitrate are based on technical information, documentation and know-how from Projects and Development India Limited (PDIL), Sindri, Dhanbad, Bihar, Norsk Hydro, Norway, and UHDE, Germany. The technology is tailor-made and under strict, secrecy clause contained in the agreements between VBC and the technology providers. VBC while transferring the chemical business had obtained permissions from these technology providers for the appellant to continue using the said technologies. (v) That the appellant was formerly known as "Arlem Investment & Finance Limited". The acquisition by the appellant of the business of the VBC was spearheaded by Shri S.C. Mehta, director of th....
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....urpose of and/or relating to the rendering, selling, supplying, marketing or distributing of products or services constituting part of the business including rendering any assistance for the purpose of improving, modifying, upgrading or making any betterment to any existing process, know-how, software methodology or technology whatsoever for the purpose of and/or relating to the manufacturing, selling, supplying, marketing or distributing of the same whether or not the same is patented or proprietary or otherwise. (iv) The covenant shall be interpreted in the widest possible commercial sense and shall be observed, in letter and in spirit. The parties hereto have entered into this non-compete agreement as stated in the business purchase agreement. The assignees have agreed for a consideration of Rs. 6 crores towards the non-compete covenants and acquit, release and discharge the assignors forever." (vii) To summarise the above, the learned counsel for the assessee, submitted that the agreement provides for restriction on VBC and Shri M.V.V.S. Murthy to engage in manufacturing, trading or dealing in any manner with nitric acid and ammonium nitrate directly ....
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....with the return of income, which reads: "While acquiring the chemical business from VBC Industries Ltd. (VBC), the company has paid a consideration of Rs. 600 lacs to VBC and its promoters agreeing not to compete against the company in the same or similar business either directly or indirectly for a period of five years of the said purchase of the business. The said consideration of Rs. 600 lacs is being amortized over a period of five years under consideration. Accordingly, during the previous year the company has written off Rs. 1.20 crores, out of total non-compete fee of Rs. 6 crores paid. It is however submitted that the entire non-compete fee of Rs. 6 crores is a revenue expenditure and, therefore, fully allowable as a deduction during the previous year. Accordingly, in the tax computation the said consideration is claimed in full as business expense. Without prejudice to the above, it is submitted that the sum of Rs. 1.20 crores written off during the previous year is allowable as a deduction. The company in this connection relies on the decision of the Supreme Court in the case of Madras Industrial Investment Corporation Ltd. vs. CIT (1997) 139 CTR (SC) 55....
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....isition cost had come from DFPCL to the extent of Rs. 18 crores by way of preference shares. (b) the assessee-company enjoyed the support of DFPCL, being one of the major players of nitric acid and ammonium nitrate market. (xi-a) The learned counsel for the assessee further submitted that it was DFPCL which carried out the due diligence (paid fees for the same) of the VBC for its acquisition and negotiated with VBC for the acquisition of its chemical business and only as business structuring housed the said chemical business with the appellant. (xii) The learned counsel for the assessee, further submitted that the appellant was able to procure critical raw materials, i.e., ammonia immediately after the acquisition from Nagarjuna Fertilisers and thereafter through Coromandel Fertilisers Limited only because of DFPCL contacts. Further, the appellant could immediately get the bank facilities from State Bank of India and UTI Bank only on the basis of the personal guarantees of the chairman of DFPCL. The business of the appellant has been guided by experienced employees of DFPCL in technical, marketing and financial aspects. In view of the above fact ....
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.... (2002) 256 ITR 395 (Bom) wherein the Court has held that the decisive test to decide whether the company is carrying on the same business or separate business, is the unity of control which is indicated by interlacing, interdependence and interconnection between the business and dovetailing of one into the another. In view of the above, it was submitted that the observations made by the learned AO that it was not doing any business prior to the acquisition of VBC and the non-compete payment was associated with acquiring of new business are not correct. (xiv) The learned counsel for the assessee, further submitted that without prejudice to the above, it is submitted that when the payment is made in respect of non-compete fees, whether the assessee was in the business prior to such payments or not would not alter the nature of transaction. The payments made for non-compete should still be treated as being in the nature of revenue expenditure. (xv) According to learned counsel for the assessee, the learned AO/CIT(A) have further relied on certain judgments in disallowing the claim of the appellant. It is submitted that the said judgments do not apply to the....
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....available in the market. It is further stated that by making the above payments the appellant has not obtained monopoly in the market as in addition to DFPCL and VBC/appellant, there are other manufacturers of ammonium nitrate like RCF, GNVFC, SAIL, NFL, etc. It is, therefore, submitted that there are other entities also in the same industry who are carrying on competing business. Thus, the benefit that the appellant obtained is a limited one and does not give any enduring advantage which could result in a view being taken that the expenditure incurred is capital in nature. (iii)(a) With respect to the decision in the case of Chelpark Company Ltd. vs. CIT (1991) 94 CTR (Mad) 71 : (1991) 191 ITR 249 (Mad), (he) submitted that m this case the assessee was engaged in the business of manufacture of ink. Over the years the assessee had established a good reputation and market for writing inks by the manufacture and sale of ink under the brand name of 'Quink'. The managing director of the assessee who was heading the company for substantial period of time left the company and decided to start his own venture. The assessee believed that if the managing director started th....
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....the competition in that business. As discussed earlier in the given case, the appellant has made the payment for non-compete only for a period of five years and moreover the appellant has not eliminated the competition by making payment to VBC. Accordingly, the ratio of the said judgments is not applicable to the facts of the case. However, the learned AO/CIT(A) have not appreciated the fact that the ratio of the judgments as relied by them are not applicable to the facts of the case of the appellant. Accordingly, by relying on these judgments, the learned AO/CIT(A) have come to a conclusion that the payment of non-compete fees to VBC for a period of 5 years, would allow the appellant to settle down in the market of east-central India and the resultant monopoly would result in an enduring advantage. The benefit of the above will even last for a period of more than five years. Hence, by making the above payment it has got an advantage of non-competition, which will be available for the period of 9 to 10 years and even thereafter. (xvi) The learned counsel for the assessee submitted that the appellant has not got any advantage of enduring nature by entering into a non-compet....
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....NSP of the appellant did increase in the financial year 2000-01 as compared to NSP of VBC in the financial year 1999-2000, pursuant to acquisition. However, the NSP of the appellant has started declining in the years 2001-02 and 2002-03 as compared to the NSP in the earlier years. It can be further observed that the total turnover of ammonium nitrate increased @ 69.83 per cent from asst. yr. 1999-2000 (Rs. 18.73 crores in case of VBC) to asst. yr. 2000-01 (Rs. 31.81 crores in case of the appellant) pursuant to the acquisition. However, the total turnover of ammonium nitrate of the appellant increased only @ 3.61 per cent in the asst. yr. 2001-02 (Rs. 32.96 crores) as compared to asst. yr. 2000-01 and @ 0.42 per cent in asst. yr. 2002-03 (Rs. 33.10 crores) as compared to asst. yr. 2001-02. It was, therefore, submitted that though the restriction imposed as per the terms of the non-compete agreement on VBC was for five years, the benefit accrued to the appellant was only for one year as there was enough competition in the market of ammonium nitrate. (xix) In view of the above, it was submitted that the observation made by the learned AO/CIT(A) that due to acquisitio....
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....enditure did not bring into existence any asset or advantage of enduring nature for the appellant. It is submitted that the appellant has paid separate consideration for the acquisition of the chemical business. On this basis, it is submitted that the expenditure was incurred for the purposes of carrying on the business of the appellant and is thus deductible in computing the total income of the appellant. (xxiii) It was further submitted that since the aforesaid expenditure is incurred wholly and exclusively for the purpose of the business and is not in the nature of capital or personal expenditure, it is fully allowable as a deduction under s. 37(1) of the Act. In this connection, the appellant relied on the decisions and observations/findings as reproduced hereunder: (a) CIT vs. Lahoty Brothers Ltd. (1951) 19 ITR 425 (Cal) (i) Facts in the case were as under: "The assessee, a private limited company, carried on business as dealers in petroleum and mobil oil. It was also the sole agent of an oil company for the distribution of kerosene oil in a particular area. Prior to the taking up of this business by the assessee, it was run by joint family.....
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....he partnership. The Tribunal was right in its view that the total compensation paid by the firms to the old partners was for (a) the share in the assets, (b) the share of the goodwill, and (c) for the restrictive covenant and that the part of the amount referable to the acquisition of the share in the assets and the share of the goodwill would be on capital account as it was in the nature of an initial outgoing and the payment towards the restrictive covenant was on revenue account and it would not amount to an acquisition of an advantage of an enduring nature." (ii) The learned counsel for the assessee, therefore, submitted that it may be observed from the above that the Madras High Court in the above case held that the payment made towards restrictive covenant was on revenue account and it did not amount to an acquisition of an advantage of an enduring nature. Considering the above decision, it is submitted that it may be held that the payment made by the appellant is deductible. (c) Empire Jute Co. Ltd vs. CIT (1974) 97 ITR 581 (Cal) In the aforesaid case, the apex Court observed that: "Expenditure even if incurred for obtaining an advantage of endurin....
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.... production, the expenditure would be on revenue account. (iv) in the case of CIT vs. Coal Shipments Ltd 1972 CTR (SC) 151 : (1971) 82 ITR 903 (SC), wherein the Hon'ble Supreme Court has held that expenditure inclined to keep a competition out of assessee's field of business should be treated as revenue expenditure as it was to improve the profitability of assessee's business. (v) In the case of IRC vs. Carron Company (1968) 45 Tax Cases 18 (HL), wherein it was held that if advantage consist merely in facilitating the assessee's trading operation or enabling management and conduct of assessee's business to be carried out more efficiently and profitably by leaving the fixed capital untouched, the payment would be on revenue account. (xxiv) Apart from the above judgments, the appellant placed reliance on the following judgments: (a) Modipon Ltd. vs. IAC (1996) 52 TTJ (Del) 477 (b) CIT vs. Piggot Chapman & Co. (1949) 17 ITR 317 (Cal) (xxv). In view of the above submissions, it was submitted that it may be held that the expenditure incurred is on revenue account and accordingly, the learned ITO may be directed to....
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....ve submissions, he relied on the decision of the Bombay High Court in the case of Taparia Tools Ltd. vs. Jt. CIT (2003) 180 CTR (Bom) 256 : (2003) 260 ITR 102 (Bom). In view of the facts of the case and the decision of the Hon'ble Supreme Court and the Bombay and Madhya Pradesh High Courts, it was submitted that the 1/5th of the non-compete fees as debited to the accounts should be allowed as a deduction. 9.2 In support of above, reliance was placed with respect to alternative ground of allowing expenditure in five yearly instalments by considering the same as deferred expenditure, reliance was placed on the decisions in following cases: (1) Madras Industrial Investment Corporation Ltd. vs. CIT (2) M.P. Financial Corporation vs. CIT (3) Taparia Tools Ltd. vs. Jt. CIT 10. The learned counsel for the assessee raised another alternative plea saying that without prejudice to the above it is submitted that the appellant had obtained a commercial or business right pursuant to the above payment, that (intangible assets) being in the nature of technical know-how, qualifies for 25 per cent depreciation as applicable to intangible assets. (i) ....
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....tc., tangible and intangible rights and benefits entitled to the seller thereunder, registrations, intellectual property rights, etc." (iii) Further submitted that the learned AO has erred in not appreciating the facts of the case in its correct perspective. He erred in making an observation that the appellant by making the payment of Rs. 6 crores has not derived any intellectual business or commercial right and, therefore, it cannot be part of the block of assets under s. 32 of the Act. The learned AO erred in not accepting the above contention of the appellant on the ground that the payment of Rs. 29 crores includes payments for intangible assets on the basis of the definition of the "acquired business undertaking" as provided in the business purchase agreement and, therefore, there is no further scope for separate payment to be made for an intellectual property. Our attention, in this connection, was invited to art. H, cl. 2.2 on p. 5 of the business purchase agreement, the relevant part of which is reproduced below: "In consideration of the seller transferring to the buyer, the acquired business undertaking which shall include the acquired business un....
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.... order wherein the learned AO has made an observation that the technical know-how which was used by VBC Ltd. was acquired from PDIL Sindhri, Norsk, Norway and UHDE, Germany. The technology was under strict secrecy clause and with the permission of technology provider, VBC Ltd. has also transferred this to the assessee-company as part of business purchase agreement. (viii) The learned counsel for the assessee submitted that separate agreements were entered into between the appellant-company and VBC for transfer of the technical know-how. The said agreements were not part of the business purchase agreement as has been observed by the learned AO. Accordingly, the consideration paid of Rs. 29 crores was not for the transfer of technology but was only for the transfer of business as discussed earlier. A copy of the said agreements is enclosed. In view of the above, it was submitted that the payment of Rs. 6 crores made for acquisition of business/commercial rights which were part of the non-compete agreement entered into between the appellant and VBC. (ix) The learned counsel for the assessee further submitted that s. 32 of the Act so amended inter alia, provi....
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....nefit was to continue for the whole period of the lease. It was an enduring benefit for the benefit of the whole of the business of the company. It was not a lump sum payment but was spread over the whole period of the lease and it would be urged that it was a recurring payment. The feet however that it was a recurring payment was immaterial, because one had to look to the nature of the payment which in its turn was determined by the nature of the asset which the company had acquired. The asset which the company had acquired in consideration of the recurring payment was in the nature of a capital asset, the right to carry on its business unfettered by any competition from outsiders within the area. It was a protection acquired by the company for its business as a whole ....." (b) Reliance was further placed: (i) on the ratio of the decision in the case of-Henriksen vs. Grafton Hotel ltd. (1942) 24 Tax Cases 453, wherein an observation has been made that the payments for monopoly for acquiring a license for a period of three years must be regarded as attaining the dignity of a capital asset. (ii) on the decision of the Chelpark Company Ltd. wherein it has ....
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....(va) and 43B of the Act, respectively, in respect of delay in payment of employer's and employee's contribution towards employees provident fund on or before the due date. The grounds read as under: Grounds B and C "B. Deduction under s. 36(1)(va) of the IT Act 4. The learned CIT(A) erred in confirming the disallowance of Rs. 1,50,766 under s. 36(1)(va) of the IT Act for delayed payment of employees' contribution to provident fund. He erred in not appreciating that since the payment was made within the grace period permitted and/or during the relevant previous year, the same was fully allowable as a deduction. C. Deduction under s. 43B of the IT Act 5. The learned AO erred in making a disallowance of Rs. 1,66,657 under s. 43B of the IT Act for delayed payments of employer's contribution to provident fund. He erred in not appreciating that since the payment was made within the grace period permitted and/or during the relevant previous year, the same was fully allowable as deduction." 12.1 We have heard the parties. 12.2 The brief facts relating the issue involved in these two grounds, as have been revealed from the r....
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....; Month Amount (Rs.) Due Date Date of payment April, 2000 72,572 20-5-2000 24-6-2000 May, 2000 72,812 20-6-2000 24-6-2000 Total 1,45,384 Pune Plant July, 2000 2,647 20-8-2000 9-3-2001 August, 2000 2,647 20-9-2000 9-3-2001 September, 2000 2,647 20-10-2000 9-3-2001 October, 2000 600 20-11-2000 7-12-2000 November, 2000 4,244 20-12-2000 9-3-2001 December, 2000 4,244 20-1-2001 9-3-2001 January, 2001 4,244 20-2-2001 9-3-2001 Total 21,273 (iii) It was submitted that the learned AO while disallowing the claim of the appellant has failed to appreciate the fact that the delay in the aforesaid payments made by the appellant in respect of employees' contribution and employers' contribution of provident fund were due to reasons which were unavoidable. The learned AO/CIT(A) while disallowing the claim of the appellant also failed to appreciate the following notes forming part of Annex. 4 and Annex. 6 of the tax audit report. The CIT(A) has followed suit. According to lear....
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....l years. For the purpose of their income-tax assessments, they claim the liability as deduction on the ground that they maintain accounts on mercantile or accrual basis. On the other hand, they dispute the liability and do not discharge the same For some reason or the other, undisputed liabilities also are not paid. To curb this practice, the Finance Act has inserted a new s. 43B to provide that deduction for any sum payable by the assessee by way of tax or duty under any law for the time being in force or any sum payable by the assessee as an employer by way of contribution to any provident fund for the welfare of employees shall irrespective of the previous year in which the liability to pay such sum was incurred, be allowed only in computing the income of that previous year in which such sum is actually paid." (vi) From the above, it was submitted that the intention for insertion of s. 43B was to curb the practice of employers not depositing provident fund dues for long period of times, sometimes of several years and claiming such liability with the IT Department authorities. (vii) According to him, it was never the intention of the appellant to hold t....
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....nts which are due at the end of the year in respect of which the due date falls in the subsequent year. The same is not applicable to payments which have been made during the previous year beyond the due date prescribed. (x) It was further submitted that without prejudice to the above, s. 43B(b) of the Act provides that the payments as specified therein should be made within the specified due dates, as provided in the respective laws. The Employees Provident Fund Act provides that the payment should be made within 15 days of the month next following the month for which the salary has been paid. Further, a grace period of 5 days has been extended for the payment of the said sum. Hence, if the payments have been made within the extended period as specified in the respective laws, then the assessee should not be denied the benefit of deduction under s. 43B of the Act. Reliance, in this connection, was also placed on following decisions and observations therein: (a) Decision of Gauhati High Court in the case of CIT vs. Assam Tribune (2002) 253 ITR 93 (Gau), wherein the High Court has held as under: "Where the contribution towards provident fund, etc.....
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....f the month'. In the instant case, the salary and wages had been paid on the 7th day from the end of the month to which it related. So there arose certain amount of ambiguity with regard to the period of 15 days from the close of each month. So, the benefit of ambiguity should be given to the assessee. Viewed in that context, most of the payments having been made within 9 to 22 days from the date of payment of salary and wages should be deemed to have been made within due date and, therefore, no disallowance could be made on that account. Even assuming that the due date for the payment of the contributions fell within a period of 15 days from the end of the month for which salaries were payable since all the payments had been made in the year itself though with a marginal delay of a few days on certain occasions, no part of the contributions received by the assessee from its employees towards PF and ESI could be disallowed so as to consider the same as the assessee's income under s. 2(24)(x) r/w s. 36(1)(va). Therefore, none of the payments in question were hit by the provisions of s. 43B or s. 2(24)(x) r/w s. 36(1)(va), as the case might be, and the additions made by invok....
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....Madras Radiators & Pressings Ltd. vs. Dy. CIT (1996) 56 TTJ (Mad) 662, wherein the Madras Tribunal has held as under: "If the due date is taken to refer to the period of 15 days from the end of the month for which salary is payable to the employees, there was no doubt that in the instant case, there was a delay of only 4 days for two months in respect of PF contribution and a delay of 5 days in respect of ESI contributions. Sec. 36(1)(va) yields to s. 43B as the latter section starts with a non obstante clause. According to s. 43B, the deduction is to be regulated only on the basis of actual payment in the previous year in which it is so paid. ........ According to second proviso to s. 43B unless the payment in respect of contributions to PF, etc. have been actually made during the previous year on or before the due date as prescribed under the relevant Acts or the Rules, no deduction should be allowed in respect of the same. Thus, the first proviso in a sense is an enabling provision and the second proviso appears to be a disabling provision. The expression 'during the previous year' was committed from second proviso to s. 43B w.e.f. 1st April, 1989 and w....
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....-02, the same were deductible in asst. yr. 2001-02 itself. (xii) The learned counsel for the assessee concluded his submissions on this point by submitting that as can be observed from the details all the payments have been made within the grace period allowed and/or during the relevant previous year. Therefore, the amount of Rs. 1,50,766 and Rs. 1,66,657 being employees' and employer's contribution to provident fund should, therefore, not be disallowed, under ss. 36(1)(va) and 43B of the Act, respectively. (xiii) The learned counsel for the assessee has submitted that the aforesaid disallowance was not justified and were liable to be deleted in view of following decisions in the following cases: (1) Commr. of Taxes vs. Nchanga Consolidated Copper Mines Ltd. (2) Hon'ble Supreme Court in the case of CIT vs. Coal Shipments (P) Ltd. (3) In the case of IRC vs. Canon Company (4) Hon'ble Madras High Court in the case of CIT vs. Late G.D. Naidu By LRs (5) Hon'ble Calcutta High Court in the case of CIT vs. Hindustan Pilkington Glass Works (6) Blaze & Central (P) Ltd. vs. CIT (7) Hon'ble....
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....ble Supreme Court in the case of Empire Jute Co. Ltd. and the decision followed by the Hon'ble Supreme Court, while deciding this case have not been discussed. (v) The AO, on the contrary, relied upon the following observations of decision of Hon'ble Supreme Court in the case of Coal Shipments (P) Ltd.: "It is an accepted preposition that the words 'permanent and enduring1 are only relative terms and not synonyms with the perpetual or everlasting. Enduring benefit need not be an everlasting character, it should not at the same time be transitory and ephemeral that it can be terminated at any time at the volition of any of the parties. Payment made to rival dealer to ward off competition in business would constitute capital expenditure, if the object of making payment is to derive an advantage by eliminating the competition for some length of time. It was further observed that the same result would not follow if there is no certainty of the duration of the advantage. How long the period of contemplated advantage should be in order to constitute enduring benefit would depend upon the facts of each case." 15.1 The AO having held that the decisions reli....
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....or expediency. If the outgoing or the expenditure was so related to the carrying on or conduct of the business that it might be regarded as an integral part of the profit-earning process and not for the acquisition of an asset or a right of a permanent character, the possession of which was a condition to the carrying on of the business, the expenditure might be regarded as a revenue expenditure. Payment made to ward off competition in a business would constitute capital expenditure if the object of making that payment was to derive an advantage by eliminating the competition over some length of time. The same result should not follow if there was no certainty of duration of the advantage and the same could be put an end to at any time. How long the period of contemplated advantage should be, in order to constitute an enduring benefit, would depend on the facts and circumstances of each individual case." 15.2 The AO further relied upon the decision in the case of Blaze & Central (P) Ltd. vs. CIT. (i) The brief facts in this case were that the assessee, which was carrying on business of arranging exhibition of advertisement and film shorts in licensed public cinema theat....
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....irector in both the companies. It is worthwhile to mention that DFPCL is a major player in the western India in the field of manufacturing and selling of nitric acid and ammonium nitrate. It appears that they did not have any hold, worth the name in the central eastern India. VBC was a major player in the same business in central eastern India. For certain reasons, they planned to shift to some other line of business and dispose of this chemical business. The appellant entered at that stage and the appellant, who under the name of "Arlem Investment Finance Ltd." did some work related to chemicals, struck a deal with VBC and purchased the chemical business from them against payment of Rs. 29 crores as mentioned above. But, in addition to this payment, they made a further payment of Rs. 6 crores to VBC upfront for non-competition on the part of the VBC. The VBC under the agreement was not supposed to enter either directly or indirectly, in the manufacturing of or trading in the chemicals in that part of the country. The issue to be decided is whether the payment of Rs. 6 crores constituted capital expenditure or revenue expenditure. On appreciation of the facts of the case, ....
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....is to derive an advantage by eliminating the competition for some length of time. But the same result, would not follow if there is no certainty of duration of the advantage. How long the period of contemplated advantage should be in order to constitute enduring benefit would depend upon the facts of each case. The Supreme Court in another case of Assam Bengal Cement Co. Ltd. vs. CIT (1955) 27 ITR 34 (SC), has observed that ordinarily, money paid to keep out a potential competitor in business, where the benefit is of an enduring nature, is an expenditure in the nature of capital. Similar view has been expressed by Punjab High Court in the case of Behari Lal Beni Parshad vs. CIT (1959) 35 ITR 576 (P&H), Allahabad High Court in the case of Neelkamal Talkies vs. CIT (1973) 87 ITR 691 (All), Orissa High Court in the case of Orissa Road Transport Co. Ltd. vs. CIT (1970) 75 ITR 126 (Ori). However, when the benefit is not of an enduring nature but is to exhaust in year or in a short period, the expenditure is of a revenue nature. It has been so held by the Supreme Court in the case of M.A. Jabbar vs. CIT (1968) 68 ITR 493 (SC) and some other High Courts. So the crucial point is whether wh....
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....oided competition from at least one major market player, i.e., VBC and thus, advantage has infact accrued to it by warding off competition from VBC. The appellant's counsel has cited several decisions in support of the case of the appellant. On consideration of these decisions, it is seen that they are not relevant to the case of the appellant, as can be seen from the following brief discussion of those decisions. In the case of CIT vs. Late G.D. Naidu By LRs (1986) 51 CTR (Mad) 256 : (1987) 165 ITR 63 (Mad), Madras High Court considered the receipt in the hands of retiring partners of a firm for not carrying out the bus business for five years and held that it is neither taxable as income or capital gains. The decision was not to the effect that the payment on the part of the firm was revenue expenditure. In fact, in this case, the Court relied on its earlier decision in the case of CIT vs. Saraswathi Publicities (1981) 132 ITR 207 (Mad), wherein it has been held that the receipt referable to restrictive covenant was capital receipt. In the case of Empire Jute Co. India Ltd. vs. CIT (1980) 17 CTR (SC) 113 : (1980) 124 ITR 1 (SC), the Supreme Court considered ....
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....ng on the business for a certain period unless and until the agreement was rescinded. Thus, it can be seen that the period of benefit was uncertain and the agreement in this regard could be terminated at any time at the volition of the parties concerned. Thus, it can be seen that these judicial pronouncements do not come to the rescue of the appellant as the facts in those cases are different from that of the appellant. The appellant has started its business in a new field by acquiring its business from VBC and has paid Rs. 6 crores upfront to the said party for non-competition. This would definitely result in advantage of enduring nature. The period of five years is a long period during which the appellant by utilizing various informations, network of VBC, from which it has purchased its business, can establish itself in eastern India and this would definitely continue for years to come and, therefore, the advantage has to be considered as enduring in nature. The period of five years is definite and the agreement for non-competition for this period cannot be terminated on the volition of the parties concerned. Taking into account, the aforesaid discussion, I have....
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....an agreement and not before that. In our opinion, what is relevant, for appreciating that such an agreement has been entered for keeping in view that assessee's profitability will increase, is the carrying on of business with respect to which the agreement has been arrived at in future. Increase in profitability may not happen from the very first day. It is to happen only after the agreement in question has been acted upon and, therefore, even if a person, while starting absolutely a new business, comprehends that another known person may compete him in future and, therefore, to avoid such a competition in the assessee's line of business to be carried on, he enters into a non-competition agreement with such person, then the agreement, in our opinion, is certainly for increasing the assessee's profitability-it is so because the assessee will be able to carry on the business definitely without any competition and may be with enhanced profitability which he otherwise may have not done during the persistence of competition. We are, therefore, of the opinion that the Revenue authorities were not justified in holding that the decisions relied upon by the assessee were not app....
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....of the director, Shri C.S. Mehta and that the assessee was doing some trade business in the chemicals earlier, but according to him, it was not much. 20.1 In view of above facts and circumstances of the case, one fact, which has been duly accepted by both the authorities is that the assessee was doing at least trade business in the chemicals under reference. Here, we would like to raise a question that had the assessee been carrying on the trading business of that very chemicals on large scale, then where was the necessity for him to incur any expenditure for non-competition. Such an expenditure has to be incurred only when assessee's business is not so much and he wants to enhance the same. 20.2 In the totality of the facts and circumstances of the case, relating to this issue, we are of the opinion that in view of factum that the assessee was, prior to entering into this agreement, carrying on the trading business in the same chemicals, the findings of Revenue authorities that he was not carrying on such business get dismantled and, consequently, the very basis for rejecting the assessee's claim that the non-competition agreement was for the purpose of enhancement o....
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.... a reference, feeling that the decision of the Supreme Court in CIT vs. Maheshwari Devi Jute Mills Ltd. (1965) 57 ITR 36 (SC) concluded the matter, the High Court held that the amount paid by the appellant for purchase of loom hours was in the nature of capital expenditure and was, therefore, not deductible under s 10(2)(xv) of the Indian IT Act, 1922. 22.2 The Hon'ble High Court has considered various judgments-of Indian Courts as well as English Courts and after explaining the decision of Hon'ble Supreme Court in the case of CIT vs. Maheshwari Devi Jute Mills Ltd., wherein similar type of expenditure was held to be capital expenditure and after following the decision in the case of Hailstorm's Proprietary Ltd. vs. Federal Commr. of Taxation 72 CLR 634 and Bombay Steam Navigation Co. (1953) (P) Ltd vs. CIT (1965) 56 ITR 52 (SC) and reserved the decision of Calcutta High Court in the case of CIT vs. Empire Jute Co. Ltd. (1974) 97 ITR 581 (Cal), held as reproduced in para No. 21.4. 22.3 The decisions discussed by the Hon'ble Supreme Court were as under: (i) Maheshwari Devi Jute Mills (ii) Recourse Belting Contract Board vs. Wild (1938) 22 Tax ....
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....It was an outlay of a business in order to carry it on and to earn a profit out of this expense as an expense of carrying it on; it was part of the cost of operating the profit-earning apparatus and was clearly in the nature of revenue expenditure. By the Court: (i) It is not a universally true proposition that what may be capital receipt in the hands of the payee must necessarily be capital expenditure: in relation to the payer. The fact that a certain payment constitutes income or capital receipt in the hands of the recipient is not material m determining whether the payment is revenue or capital disbursement qua the payer. (ii) there may be cases where expenditure, even if incurred for obtaining an advantage 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 consists merely in facilitating the assessee's tradin....
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.... the profit-making structure, that payment would be revenue expenditure and not capital expenditure, as have been held by the Hon'ble High Court of Gujarat in the case of Sarabhai M. Chemicals (P) Ltd. (iii) That if the benefit procured in consequence upon incurring of an expenditure consists merely in facilitating or enabling the management and conduct of assessee's business to be carried on more efficiently or more profitably, the expenditure would be on revenue account, even though the benefit may endure for an indefinite future [Decision of Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. vs. CIT]. (iv) It is the totality or the cumulative effect of all the facts and circumstances that would be the prime guiding factor to decide the aim and object of the expenditure, be it capital or revenue. (v) Where the expenditure has a direct nexus, connection or relation to the carrying on or conducting the business of the assessee, it must be regarded as integral part of the profit-making process and in such a case, it must be held to be a revenue expenditure. (vi) The period for which a right or benefit is available is not relevan....
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....nt on the Indian selling price on the production of the machine, subject to Indian taxes. The termination of the agreement was not to affect the rights of the assessee to use, for the purpose of their business, all the information, techniques, technical know-how, patents, copyrights and drawings transferred by J.S. to the assessee or which might have come into the possession of the assessee during the subsistence of the agreement. But the assessee had no right thereafter to use the trade-mark of the collaborator. Similarly, the assessee entered into another agreement with another foreign company, K.T. of U.K., for the manufacture of "drill chucks". The assessee claimed that the royalty payment made to J.S, and K.T. on the production of goods during the asst. yrs. 1965-66 and 1966-67 constituted revenue expenditure and was deductible in computing its profits. The ITO rejected the plea. On appeal, the AAC held that the payments related to production and hence they must be treated as an integral part of the profit-earning process and were deductible. On further appeal by the Revenue, the Tribunal held that the two types of machinery manufactured by the assessee under the agreements we....
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....to the sale and production capacity and of two chemicals, which in turn had effect of carrying on assessee's business efficiently and profitably in central and eastern parts, of India, the test of enduring nature fails and the expenditure has to be held as revenue expenditure. 27. In view of aforesaid totality of the facts and circumstances of the case, we, after respectfully following the various decisions including the decision of Hon'ble Supreme Court in the case of Empire Jute Co. Ltd., are of the opinion that the expenditure incurred by the assessee by entering into a non-compete agreement with "VBC" and its founder, Shri M.V.V.S. Murthy, was of revenue nature and, hence, an allowable deduction. 28. Before parting with the matter, we would like to deal with the AO's another observation made for holding the expenditure in question to be capital expenditure, that there was no fear of competition from "VBC" or that VBC would not have been able to compete within a period of 5 years and that assessee was to continue to get the benefit, even after 5 years, which were of 'enduring nature'. (i) First of all, we are of the opinion that the AO/CIT(A) h....
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.... and CIT(A) are concerned, we are of the opinion that all those decisions are either distinguishable on facts or had been decided without considering the decision of Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. Therefore, they are not applicable to the facts of the case. 30. The only decision which could have been applicable, had it considered the decision of Hon'ble Supreme Court in the case of Empire Jute Co. Ltd., is the decision of High Court of Calcutta in the case of Hindustan Pilkington Glass Works, relied upon by the CIT(A) as well as the AO. But since, admittedly, the decision of the Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. where the Hon'ble Court has followed the similar decision in the case of Nchanga Consolidated Copper Mines Ltd. was neither referred to nor had been considered, we are of the opinion that the law laid down by the Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. which prevails as the law of the land, not only prevails but is binding on all Tribunals and High Courts in India and, therefore, with respect to Hon'ble High Court of Calcutta, we prefer to follow the binding decision of Hon'b....
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.... we are unable to subscribe to this theory, firstly, because the authorities have not pointed out as to how the installation of such a plant was to take five or more years and, secondly, the authorities have not considered the fact that agreement was with two parties, namely, VBC as well as its founder, Shri M.V.V.S. Murthy, in his individual capacity and was for both manufacturing and trading activities. Since, not only these two chemicals, but all such type of chemicals are normally sold without any brand because manufacturing of these chemicals does not require any secret formula or secret know-how and even if, sold under a brand, then also, it is not of such importance because in case of goods whose quality is dependent on secret formula or secret skill or secret know-how, it is the 'brand' which matters. For example, nitric acid is always sold as nitric acid-it has neither secret formula nor secret know-how. Similarly, ammonium nitrate is always sold as ammonium nitrate-again does not require any secret formula or 'secret know-how, and, since there were other manufacturers (manufacturing on large scale) of these two chemicals in the field, namely, Steel Authority o....
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....e in question was of 'capital nature' because benefits derived were of 'enduring nature' fails. 36. In view of above facts and circumstances of the case, we, after following the decision of Hon'ble Supreme Court in the case of Empire Jute Co. Ltd., are of the opinion that benefit to be derived by the assessee in consequence upon incurring the expenditure of Rs. 6 crores by entering into a non-competition agreement with VBC and Mr. M.V.V.S. Murthy was directly related to the enhancement of the assessee's profitability in the business of manufacturing and trading of these two chemicals under reference and, therefore, the same is held to be of revenue nature and is allowed as business expenditure. 37. Alternatively, this issue can be seen from another angle, as discussed hereunder: (i) It is not the case of the Revenue that the vendor, bereft of all its resources by virtue of the sale (for a consideration of Rs. 29 crores), including its total intangible property (of whatever genre) and human resources, is, in effect, not in a position to provide, in reality, any significant or effective competition to the vendee. This assumes significance as the....
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....nditure) to be evenly spread. Further, in view of the foregoing, it is also, therefore, not the case of the Department that the consideration of Rs. 6 crores, though purportedly for abstaining (by the vendor-company) from engaging in the trade, is, in reality, a part of the acquisition deal (admittedly, a transaction on capital account) and whereby all the assets and liabilities stand acquired by the assessee; and only camouflaged as a non-compete fee to avail any tax benefits, saving(s) on stamp duty, etc. (iii) Examining the expenditure for its nature, i.e., revenue or capital, we are of the opinion that once the vendor has sold its entire bundle of rights, whether relating to the manufacturing unit, or the marketing of product(s) being dealt in, it has, effectively, transferred-for a stated consideration of Rs. 29 crores, its entire market share (of the product/product group), as existing, to the assessee-vendee. Further, it would be appreciated that the profits of any organization arise on account of the market share (which includes both quantitative and financial dimensions) its product(s) enjoys; its product cost being governed by the product quality on one hand, and....
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....f the view, that, under the given facts and circumstances of the case, the nature of the non-compete fee of Rs. 6 crores incurred by the assessee is revenue. 38. In the result, group 'A' is allowed. 39. Grounds 'B' and 'C' After careful consideration of the rival submissions, facts and circumstances of the case and decision relied upon by the assessee, we are of the opinion that the issues involved in these two grounds are covered in assessee's favour and against the Revenue by the decision of Tribunal 'Delhi Bench' in the case of Addl CIT vs. Vestas RRB India Ltd., wherein the Hon'ble Tribunal has held that the omission of second proviso to s. 43B of the Act, is retrospective; i.e.. from the date the proviso was inserted and consequently, has held that deduction of these kinds of payments is allowable if paid on or before the due date for furnishing of return under s. 139(1) of the Act. 40.1 Facts in this case were as under: "For the months of April, 1996, December, 1996 and March, 1997, the employees' contribution and employer's contribution towards provident fund were deposited on 24th May, 1996, 21st Jan., 199....
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....ble to the benefit of deduction after the date of amendment. That would give a premium on a persistent default vis-a-vis the small default. According to the rules of interpretation, equitable construction should be preferred to the literal construction. In view of the above and following the rule of equitable construction, the assessee would be eligible to deduction for all such payments made before the due date of filing of return." 40.3 In the present case, admittedly, the payments were made within the financial year itself and, therefore, respectfully following the decision of Delhi Bench, the disallowance covered by these two grounds are deleted. 41. Ground D The ground reads as under: "6(i) The learned CIT(A) erred in holding that the date of passing of the assessment order is the date of assessment and that no claim was made either in the return of income or before assessment for depreciation @ 100 per cent in respect of certain items of plant and machinery. Accordingly ho erred in not considering the ground of appeal related to non-allowance by the AO of additional depreciation on certain items of plant and machinery. (ii) The learned CIT(....
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....e CIT(A), however, rejected the assessee's request and refused to entertain the assessee's claim on the ground that the ground was additional one and requires verification of facts. In support of his conclusion, the CIT(A) relied upon the following decisions: (i) Addl. CIT vs. Gurjargravures (P) Ltd 1978 CTR (SC) 1 : (1978) 111 ITR 1 (SC) (ii) Jute Corporation of India Ltd. 45.1 The relevant part of his order as contained in para No. 8.2 reads as under: "8.2 The issue has been considered carefully. I find that the appellant, in this case, had filed its return of income in which it claimed depreciation @ 25 per cent on its plant and machinery. On 12th March, 2003, the appellant filed a letter dt. 28th Feb., 2003 before the AO claiming that it is entitled to depreciation @ 100 per cent in respect of certain items of plant and machinery valued at Rs 1,81,67,725. However, it is seen that the assessment order in this case was passed much before that, i.e., on 3rd March, 2003. The appellant's counsel has stated that the order was received on 14th March, 2003 and, therefore, it cannot be said that the claim was not made before the AO before the co....
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....e first appellate authority is coterminous with that of the AO and it that is so, there appears to be no reason as to why, the appellate authority cannot modify the assessment order on an additional ground even if not raised before the AO. However, the decision in the case of Addl. CIT vs. Gurjargravures (P) Ltd. was not overruled by the Supreme Court in this case as the apex Court considered that decision is founded on the special facts of that case wherein, there was no material on record to sustain the claim of exemption which was made for the first time before the first appellate authority. The apex Court further added that the observations in the case of Gurjargravures (as mentioned above within quotes) do not rule out a case for raising an additional ground before the first appellate authority if the ground so raised could not have been raised at a particular stage when the return was filed, when the assessment order was made or that the ground became available on account of change of circumstances or law. There may be several factors justifying the raising of such a new plea in appeal and each case has to be considered on its own facts. While admitting the new ground, the ap....
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....ms. It was the duty of the appellant to make a claim in this regard by producing supporting evidence, which have not been done and there is no reason for not taking this ground earlier before incorporating this claim in the ground before the CIT(A). Therefore, it is held that this new ground cannot be entertained at this stage. Accordingly, I do not go into the merits of this claim." 46. It was in view of above facts, the learned counsel for the assessee, submitted that the CIT(A) was not justified in holding that the issue under reference stood settled by the decision of Hon'ble Supreme Court in the case of Gurjargravures (P) Ltd. According to the learned counsel for the assessee, this decision was of two Members Bench, whereas another decision in the case of CIT vs. Kanpur Coal Syndicate was of three Members Bench and the Hon'ble Supreme Court in the case of Jute Corporation of India Ltd vs. CIT had doubted and distinguished this decision and relied on the decisions listed in para-No. 44 of this order. 46.1 Coming to the finding of the CIT(A) that details of machinery which were entitled to depreciation @ 100 per cent were not on record, the learned counsel for the ....
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....son to justify curtailment of the power of the AAC in entertaining an additional ground raised by the assessee in seeking modification of the order of assessment passed by the ITO. (iii) The observations in the case of Addl. CIT vs. Gurjargravures (P) Ltd. 1978 CTR (SC) 1 : (1978) 111 ITR 1 (SC) do not rule out a case for raising an additional ground before the AAC, if the ground so raised could not have been raised at the stage when the return was filed or when the assessment order was made or if the ground became available on account of change of circumstances or law. There may be several factors justifying the raising of such a new plea in an appeal, and each case has to be considered on its own facts. If the AAC is satisfied, he would be acting within his jurisdiction in considering the question so raised in all its aspects. He must be satisfied that the ground raised was bona fide and that the same could not have been raised earlier for good reasons. While permitting the assessee to raise an additional ground, the AAC should exercise his discretion in accordance with and reason." 48.2 In the case of National Thermal Power Co. Ltd. vs. CIT, the Hon'ble Supreme C....
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....epreciation @ 25 per cent on such additions, the observation of the CIT(A) that assessee's claim required further investigation on facts, was not justified rather was arbitrary and misplaced. 51. Coming to another observations of CIT(A), that the assessee had not given any good and sufficient reason for not raising the claim earlier, we are of the opinion that the law does not specify any such requirements. On the contrary, we are of the opinion that it is incumbent upon the Revenue authorities to tax correct and proper income and levy only lawful and due tax liability and it includes their duty to allow any lawful deduction and also to withdraw or disallow any unlawful claim of deduction. So, when the AO considered the issue relating to depreciation, it was incumbent upon him to find out as to what sate of depreciation the additions in various assets were entitled. Simply saying that the assessee having claimed depreciation @ 25 per cent, the details with respect to assets entitled to depreciation @ 100 per cent were not available is nothing but an arbitrary finding which cannot be sustained in law. 52. In view of above facts and circumstances of the case, we are of the ....
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....dt. 3rd March, 2003, passed for asst. yr. 2002-03. (ii) The order dt. 14th Aug., 2003, passed by the CIT(A) for asst. yr. 2001-02. (b) He erred in not appreciating that since the AO was rectifying the intimation passed under s. 143(1) of the Act, only the documents available at the time of passing the said intimation could be treated as 'record' for the purposes of s. 154 of the Act. 3. Adjustment not permissible under s. 143(1) (a) The learned CIT(A) further erred in holding that the adjustment made by the AO in the order passed under s. 154 of the Act was mistake apparent from the record. (b) He erred in not appreciating the fact that the adjustments made by the AO in the order under s. 154 of the Act were not permitted under s. 143(1) of the Act as amended by the Finance Act, 1999, w.e.f. 1st June, 1999. (c) He, therefore, erred in not appreciating that since the said adjustments were not permissible under s. 143(1) of the Act, the said adjustments could also not be made in the order passed under s. 154 of the Act. 4. Note mistake apparent from the record. (a) The learned CIT(A) erred in not apprecia....