TMI Blog2007 (3) TMI 308X X X X Extracts X X X X X X X X Extracts X X X X ..... ts of the case are that the assessee is a private limited company. It was engaged in the business of manufacture/sale of and deals in electrical goods. Its premises were temporarily sealed by the office of the District Collector, Tees Hazari, Delhi, vide order dt. 26th Aug., 1996. The manufacturing activity has been suspended since then from the said premises. During the year under consideration the assessee has received royalty under the "manufacturing and selling license agreements" with various parties. The AO held the royalty income as "income from other sources" as against assessee's claim that it is business income and disallowed various expenditures claimed thereagainst. 3. In its order, the AO observed that s. 28 of the Act states that income shall be chargeable to income-tax under the head profits and gains of business or profession which was carried out by the assessee at any time during the previous year. The assessee has stopped its manufacturing activity which was its core business activity way back in the year 1996 and there was no intention to restart the business. As on date the assessee has not started any of its manufacturing activity even after a gap of 8 years ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... first question to be decided is whether there was a closure or permanent discontinuance of the business carried on by the appellant in earlier years so as to deny allowance of expenditure pertaining to the said business. The second question is whether the royalty income earned by the appellant during the year by exploitation of its commercial asset, viz., brand name/trademark/goodwill is business income or income from other sources. The appellant company was incorporated in 1962 and was engaged in the manufacturing and selling of all sorts of electrical consumer goods under the trademark/brand name Laxman Sylvania/Laxman. According to the appellant they were not only manufacturing the products on their own but also getting the goods manufactured by other concerns for the purpose of selling under their brand name. But of late in 1996 (in April 1996), its business premises have been sealed by the office of District Collector, Delhi, Tees Hazari and its manufacturing activities were temporarily suspended since then due to labour dispute. The learned counsel contended that the appellant has no intention to close down its business and the stoppage of manufacturing activity from its pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... continuing and then reviving its manufacturing activity once the circumstances become conducive for the same. It may be noted that the company has been engaged in the business of manufacturing/dealing in various kinds of electrical goods for the past 30 years or so. It had installed plant and machinery and set up factory, etc., and had earned goodwill/brand name in the market. Suddenly in 1996, certain labour dispute arose due to which the appellant was compelled to suspend its manufacturing activity temporarily. Since it could not manufacture its own products from the factory premises but in order to earn some profit to meet the various establishment and other expenses during the suspension of manufacturing activity, it leased out its brand name/trademark earned during the past several years of its business to various parties under strict quality control and supervision by the appellant. It is very clear from these facts narrated above, that in this case there was only a temporary suspension of manufacturing activity. There was no discontinuance of the existing business by the appellant. In order to tide over the crises, the appellant exploited its goodwill/brand name through gra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he year in question, assessee had earned income from royalty. This royalty is being earned under the "manufacturing and selling license agreements" with various parties viz., Kiran Lighting (P) Ltd., Laxman Marketing (P) Ltd., Orion Electrotech (P) Ltd. In terms of the said agreements, the assessee company has granted its trade names to be used by these licensees for the purpose of manufacturing and selling the products and the licensees pay royalty to it as envisaged in the agreements. The trademarks, viz., 'Laxman Sylvania' and 'Laxman' are the commercial assets of the company, which are being exploited by the assessee in one of the core activities i.e. marketing of lighting products. For this purpose, the assessee company was to continuously monitor market situation, ensure quality and specification of the products manufactured by the licensees and get involved in introduction of new products. The "manufacturing and selling license agreements" are an integral part of the core activities envisaged in the memorandum of association of the company. The temporary suspension of manufacturing and selling activity was due to circumstances beyond the control of the assessee. The business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntention. It was held that the intention was not to go out of the business altogether as there was no act indicating that the assessee never intended to carryon the business. This judgment of the Supreme Court dated 15th Dec., 1987 is subsequent to the case relied upon by the AO in the case of CIT vs. Jacobs (1987) 59 CTR (Ker) 300 : (1986) 160 ITR 570 (Ker). The facts of assessee's case are even better than those in the case of Vikram Cotton Mills Ltd. It had not sold or let out the factory and the machinery. It had all the intention of resuming the manufacturing and marketing operations, and it was only because of the exigencies of the situation, the assessee company turned to an indirect way of operation in the market through the licenses. All the activities during the year are indicative of intention that it was in the business and had no plan to abandon the core of the business. In Laxmi Narayan Board Mills (P) Ltd. vs. CIT (1994) 205 ITR 88 (Cal), the assessee found certain difficulties and the factory was leased to another concern. The lease was given for a period of nine years and six months. On expiry of the lease, the lessee did not vacate it and the assessee filed a civi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome. However, as per the details of expenses placed on record, keeping in view, the nature of the expenditure, we found that expenses were laid down for the purpose of the business. The litigation expenses are allowable as business expenditure in view of the decisions of Hon'ble Supreme Court in the cases of Shri Meenakshi Mills Ltd. vs. CIT (1967) 63 ITR 207 (SC) and Birla Cotton Spinning Wvg. Mills Ltd. (1971) 82 ITR 166 (SC). Retrenchment compensation is also allowable expenditure. The AO has disallowed the retrenchment compensation payable to the workers in pursuance to the settlement agreement signed by the management with the workers before the Delhi High Court. Such expenditures are intimately connected with the running of business. In Sassoon J. David Co. (P) Ltd. vs. CIT (1979) 10 CTR (SC) 383 : (1979) 118 ITR 261 (SC), the Hon'ble Supreme Court examined the question whether terminal benefits on termination of employment can be allowed as business expenditure. The Court held,- "It is too late in the day now, whatever may have been the position about two decades ago, to treat the expenditure incurred by a management in paying reasonable sums by way of gratuity, bonu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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