TMI Blog2014 (9) TMI 1006X X X X Extracts X X X X X X X X Extracts X X X X ..... on that answer, the Assessing Officer shall decide the applicability of section 35AB of the Act. On this limited aspect, we deem it fit and proper to restore the matter back to the file of the Assessing Officer to be adjudicated afresh, of-course after allowing assessee reasonable opportunity of being heard. In this manner, on this Ground assessee partly succeeds Disallowance under Rule 6B of the I.T. Rules, 1962 - Held that:- This expenditure can only be allowed u/s.37(1) provided it is established that expenses have been incurred for the purpose of business. As name of persons to whom these gifts have been given were not available with the assessee, it was difficult to hold that such persons were business associates or having business dealings with the assessee’s company. Under these circumstances, authorities below were justified to hold that such expenditure incurred could not be treated for business purpose. Disallowance made by the appellant in respect of warranty obligations - Held that:- The precedent in the assessee’s own case fully covers the controversy and accordingly the Assessing Officer is directed to give effect to the above precedent as per directions given ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the turnover for the purpose of computing deduction u/s.80HHC Fluctuation in rate of exchange - Held that:- As only component of fluctuation which is on sales is liable to be included in total turnover and not the balance, if any. The Assessing Officer is directed to re-compute the deduction under section 80HHC of the Act accordingly. Exclusions from the “profits of the business” as per Explanation (baa) for the purposes of section 80HHC - Held that:- We deem it fit and proper to set aside the issue to the file of the Assessing Officer to be adjudicated in the light of the judgment of the Hon’ble Bombay High Court in the case of Pfizer Ltd., (2010 (6) TMI 433 - Bombay High Court) except to the extent of lease rental, which is liable to be excluded in terms of Explanation (baa) to section 80HHC of the Act. The Assessing Officer shall re-adjudicate the controversy after allowing the assessee an opportunity of being heard in the matter. Subjecting the items of income / receipts to 90% reduction on net income basis by invoking Explanation (baa) to Section 80 HHC of the Act and not on gross receipts basis - Held that:- Hon’ble Supreme Court in the case of ACG Associated Capsu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the transfer of the business undertaking does not involve itemised sale of assets and provisions of Section 50 are therefore not attracted. The said transfer of business undertaking is for a lump sum price involving monetary consideration and therefore provisions of Section 28 (iv) are also not applicable in such a case. We draw support in this regard from the decision of Hon’ble Bombay High Court in the case of Mahindra & Mahindra Limited (2003 (1) TMI 71 - BOMBAY High Court ). We find that the provisions of Section 50 B and 28 (va) being prospective in nature as held by the Hon’ble Apex Court Guffic Chem P. Ltd. reported in [2011 (3) TMI 6 - Supreme Court] are not applicable to the impugned capital receipts on transfer of business undertaking by the assessee in the previous year relevant to the A.Y. 1997-98. In the light of the attendant facts and circumstances of the case and respectfully following the decisions of the Hon’ble Apex Court and jurisdictional Bombay High Court cited above the grounds raised by the assessee are allowed. Attributable to dividend income while computing deduction u/s 80M - Held that:- Hon’ble Supreme Court in the case of Distributors (Baroda) P. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by Thermax Ltd. has been held by us to be not deductible in its hands for the impugned A.Y. 1997-98 in appeal of Thermax Ltd. (ref. 970/PN/01). In the light of the facts and circumstances of the case we do not find it necessary to interfere with the finding of the CIT(A) that the said receipt is therefore not taxable in the hands of Mrs. Aga. We order accordingly. - ITA No.970/PN/2001, ITA No.947/PN/2001 & ITA No.946/PN/2001 - - - Dated:- 3-9-2014 - SHRI SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER AND SHRI G S PANNU, ACCOUNTANT MEMBER For the Petitioner : Shri H.P. Mahajani and R.D. Onkar For the Respondent : Smt. M.S. Verma, CIT ORDER PER SHAILENDRA KUMAR YADAV, JM: The captioned two cross-appeals and one by the assessee involve common issues and were heard together and are being disposed of by way of a consolidated order for the sake of convenience and brevity. 2. We shall first take up assessee s appeal in ITA No 970/PN/01 pertaining to the assessment year 1997-98, which is directed against the order of the Commissioner of Income-tax (Appeals)-I, Pune dated 13.03.2001, which in turn, has arisen from an order under section 143(3) passed by the Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant and accepted by the Department in the past, the learned CIT (Appeals) ought not to have held that the liability in question was of a contingent nature which did not accrue at the time when the appellant made a provision for it. The learned CIT (Appeals) further erred in confirming the view taken by the Assessing Officer that the liability on account of warranty obligation accrued only when a claim is made by the customer and accepted by the appellant. 6. The learned CIT(A) erred in confirming disallowance of provision for leave encashment of ₹ 23,42,,000/- rejecting the contention of the appellant that such actuarially determined liability was a crystallized liability which was allowable in the year under appeal In any event, the distinction drawn the ld CIT(A) on the facts of the appellant s case from those of the SC decision in the case of Bharat Earth Movers Ltd (112 Taxmann pg.61) is not apt and determinative of the issue of allowability of the expenditure in question. 7. The ld. CIT(A) erred in holding that only a sum of ₹ 884.86 lacs was not to be included in the appellant s income, rejecting the appellant s contention that the entire amount of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terest others 1.59 lacs 151.63 lacs 9. The learned CIT(A) further erred in not accepting the Appellant s contention that Retention Money forming part of Sales, ought to be excluded while computing the Appellant s business income for the year under appeal inasmuch as, to that extent, income had not accrued to the Appellant. The Appellant s business income be, accordingly reduced by the amount of retention money included in Sales. 10. In the matter of deduction under sec.80-HHC, the CIT (Appeals) erred in confirming i) reduction from profits derived from export of manufactured goods the loss suffered from export of trading goods. The learned CIT (Appeals) ought to have accepted the contention of the appellant that such loss from export of trading goods had to be ignored for the purpose of sec.80-HHC and deduction there under ought to have been allowed only with reference to the profits derived from export of manufactured goods. ii) treatment of the following items as forming part of total turnover Rs. a)Excise duty collected ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant s claim for deduction of a sum of ₹ 2 Crores paid by the appellant as a testimonial to Mrs A.R. Aga. Without prejudice to the generality of the above ground, the ld CIT(A) erred in taking a view that the said expenditure was in the nature of ex-gratia and was therefore, not allowable either u/s 37(1) or any other provision of the Act. On the facts and in the circumstances of the case and in law the ld CIT(A) ought to have held the said expenditure was incurred wholly or exclusively for the purpose of the business and was allowable as such. 12. The ld CIT(A) erred in holding that the amount of ₹ 3 crores accrued by the appellant under non-compete covenant was assessable as income of the appellant alongwith a further sum of ₹ 3 crores received towards transfer of business of the company. The ld CIT(A) ought to have accepted the contention of the appellant that both the amounts in question were in the nature of capital receipts not exigible to tax. The ld CIT(A) erred in clubbing the receipt of ₹ 3 crores under non-compete agreement with ₹ 3 crores received under Agreement for transfer of business. The ld CIT(A) also erred in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee s own case for the assessment years 1994-95 and 1995-96 and the Tribunal vide order dated 29.1.2009 in ITA No 855/PN/2000 for assessment year 1994-95 and in ITA No 252/PN/01 dated 30.6.2011 for assessment year 1995-96 has confirmed the orders of the lower authorities in this regard. Since the action of the lower authorities is in conformity with the precedent in the assessee s own case, therefore, we dismiss the Ground of appeal raised by the assessee. 4. Ground No 2 raised by the assessee reads as under: The learned CIT (Appeals) further erred in confirming rejection of the appellant s claim for deduction of proportionate premium on leasehold land amortised and charged to the Profit Loss Account of the year in question. 4.1 At the time of hearing, it was common ground between the parties that this Ground is covered against the assessee in view of the decision of the Special Bench in the case of Mukund Limited 106 ITD 231(Bom) (SB). It was also noticed that similar ground has been decided against the assessee by the Tribunal in the assessee s own case for the assessment year 1994-95 and 1995-96, vide orders dated 29.1.2009 and 30.6.2011(supra). In view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the file of the Assessing Officer with certain directions. For the sake of brevity, we extract below the relevant observations of the Tribunal: 16. We have carefully considered the rival submissions. Before adjudicating on the dispute raised by the assessee, a brief reference to the background is necessary. In the impugned assessment year, the Assessing Officer noticed that in the computation of income annexed to the return of income, the assessee had claimed a deduction of ₹ 1,84,28,945/- on account of fees paid towards process know-how. However, in the books of account such expenditure incurred on imported technical know-how (including process know-how) was treated as a deferred revenue expenditure and amortized in equated instalments over a period of six years. Accordingly, in the books of account an amount of ₹ 62,31,302/- was written off, while in the computation of income such amount was added back and the full payment made during this year on this count amounting to ₹ 1,84,28,945/- was claimed as a deduction. The Assessing Officer show-caused the assessee to explain as to how full amount of ₹ 1,84,28,945/- was allowable as deduction when there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revisited in terms of the decision of the Hon ble Supreme Court in the case of Swaraj Engines Ltd. (supra). 18. In this context, we have carefully examined the rival stands. In the case before the Hon ble Supreme court, the assessee Swaraj Engines Ltd. had entered into an agreement of transfer of technology know-how and trade mark in terms of which royalty was payable by it as a percentage of net selling price of the licensed products. The said expenditure was claimed as a revenue expenditure by the assessee. A question also arose as to whether such expenditure was liable to be considered in terms of section 35AB of the Act or not? As per the Hon ble Supreme court before deciding the applicability of section 35AB of the Act, it was to be decided whether the expenditure incurred is revenue or capital in nature and depending on the answer to that question, applicability of section 35AB of the Act was required to be addressed. In the present case, we find that the claim of the assessee before the lower authorities has all along been that the impugned expenditure is revenue in nature. In the instant assessment year as well as in the past, the claim of the Department has been that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d into earlier years, the deduction thereon shall be governed by the provisions of section 35AB, as held by the Tribunal in assessment years 1993-94 and 1994-95 (supra). In so far as the fees paid under the process know-how agreements entered during the year under consideration is concerned, in order to test the efficacy of section 35AB on such claim, it would be imperative to examine as to whether the expenditure is revenue or capital in nature and depending on that answer, the Assessing Officer shall decide the applicability of section 35AB of the Act. On this limited aspect, we deem it fit and proper to restore the matter back to the file of the Assessing Officer to be adjudicated afresh, of-course after allowing assessee reasonable opportunity of being heard. In this manner, on this Ground assessee partly succeeds. 5.4 Nothing contrary has been brought to our knowledge on behalf of the Revenue. Facts being similar, so following the same reasoning, we restore this issue to the Assessing Officer with similar direction as done by our coordinate Bench in A.Y. 1995- 96. 6. The ground No.4 reads as under: The learned CIT(A) further erred in confirming disallowance of a su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unal in the immediately preceding assessment year of 1995- 96 followed its own order for the assessment year 1994-95 on this issue and in principle decided the issue in favour of the assessee. After considering the submissions of both the parties, we find that the precedent in the assessee s own case fully covers the controversy and accordingly the Assessing Officer is directed to give effect to the above precedent as per directions given in assessment years 1994-95 and 1995-96. Accordingly, the assessee succeeds on this Ground as above. 8. Ground No. 6 raised by the assessee is as under: The learned CIT(A) erred in confirming disallowance of provision for leave encashment of ₹ 23,42,,000/- rejecting the contention of the appellant that such actuarially determined liability was a crystallized liability which was allowable in the year under appeal In any event, the distinction drawn the ld CIT(A) on the facts of the appellant s case from those of the SC decision in the case of Bharat Earth Movers Ltd (112 Taxmann pg.61) is not apt and determinative of the issue of allowability of the expenditure in question. 8.1 Before us, the learned counsel for the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The designs are evolved depending upon the total profile of the customer s project of which the equipment manufactured by the assessee forms a part. All the contracts entered into by the aaseessee are fixed price contracts. The difference between the order value and the estimated total cost is the budgeted contribution from that order. During the course of assessment proceedings, the Assessing Officer noted that for the year ended 31st March 1997 the Company has provided a sum of ₹ 1230.11 lacs by way of profit equalization. The Assessing Officer required the assessee to give the particulars of the method followed for recognition of revenue in respect of Long Term contract. The assessee explained in detail as follows. It was explained by the assessee that recognition of Revenue from such long-term contracts is governed by Accounting Standard 7 issued by the Institute of Chartered Accountants of India. Two methods prescribed, at the relevant time, were the percentage completion method and the completed contract method. Under the completed contract method, profit is recognized only when the contract is completed or substantially completed. Under the percentage of complet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Equipment, till such time as the contract is completed, when true profits will emerge for the first time While ordinarily sales minus cost booked would reflect profits, in the case of long term contracts, in order to ensure that there is equalization of contribution over the whole of the progress of the contract; an adjustment is made based on stage of completion. Thus, if the contract is finally expected to result in a profit of ₹ 80 but invoicing and costs booked at an interim stage of completion, say 50%, reflect profit of ₹ 35 or 45, as against ₹ 40 (50% of ₹ 80) adjustment of ₹ 5 to the profits as per the books of account is called for in terms of AS 7. Further, normally, at an early stage of a project, there is less certainty about the estimated profit from a contract which uncertainty diminishes gradually as the project nears completion. Based on past experience the company did not recognize any profit till the contract reached 33.33% completion. At the relevant time revenue was recognized in following proportion depending on the stage of completion: Project completion stage % of Revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rst grievance of the assessee relates to addition of ₹ 60,30,000 on account of provisioning made on account of revenue recognition on percentage of completion method. The year under consideration is the first year of assessee's business and for arriving at the portion of the profit of the long-term contracts, whose execution is spread over more than one accounting period, the company maintained accounts on the percentage of completion method, now formally recognised as accounting standards 7(AS-7) of the Institute of Chartered Accountants of India . The assessee contended before the Assessing Officer that the provision of ₹ 60,36,000 was liable to be allowed as the company regularly followed percentage of completion method and amount of revenue recognized is determined by reference to stage of completion at the end of the accounting period. It was further stated that for convenience of execution of job and supplies of various components required for assembly of boiler at site, a price break up is preferred and approved by the client before commencement of the supply. Material costs were booked against the job and same were also recognized at job level. It was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was issued in the year 1983, but AS-7 is merely a codification of existing accounting practices for which evidence of commentaries of various authors have already been referred to in paragraph 5 (page 32). Further,AS-7 has been made mandatory from April 1, 1991. From the chart reproduced on para. 4 (page 31), it is noted that the books of account, especially trading account has been accepted, save and except the addition of provisioning. As pointed above, the assessee is engaged in long-term contracts and the provisioning was made for the purposes of finding the profits on the basis of percentage of completion method as the provisioning is by way of distribution of profit for the contract in various previous years for which the contract was in progress. Thus, provisioning is in the nature of profit rationaliser, divider and allocator in order to determine profit each year during which contract was in progress. In the year of completion of contract, ultimately true profit emerged and such profit was not interfered with. In other words, ultimate profit in the year of completion of project also includes stage by stage as worked out by the assessee-company and in that sense, profit fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee had offered for taxation the total receipts and claimed for deduction on account of liability, which the assessee had to incur in subsequent years in order to fulfil the contractual agreement. According to the learned Departmental Representative under these particular circumstances, the Supreme Court allowed the deduction on account of liabilities to be incurred in subsequent year. However, according to the learned Departmental Representative, in the instant case the receipts have been received by the assessee during the assessment year and that these receipts have been earned by assessee by performing the object as envisaged in the contract. This distinction given by the learned Departmental Representative has no relevance because the assessee's reliance is for limited purpose that a deduction is allowable not only on the basis of incurrence of a liability under section 37 and that section 28 is the real repository of all the deductions unless negated by the Legislature. Further, while estimating the profit from the contract as a whole, and that contract value was juxtaposed against the estimated cost for execution of the whole contract with a view to finding out gross ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ex court nowhere falls foul of the accounting principles which have found acceptance in several cases. Here, in this case, the business was not started, yet the company earned income by way of interest from the available surplus fund. Accounting practice is such that when the project is in construction stage, interest should be set off against the capital cost of the project. However, the Institute's guidelines of pre-construction accounting clearly states that even that income earned during the construction period is to be set off against the project cost yet in the profit and loss account tax provision is required to be made. Further, there is a specific provision which charges such income under section 56. Obviously, therefore, here accounting principles fractures specific provision of section 56 and, therefore, the court ruled that such interest income is liable to be taxed in this context. Here, it is noteworthy that the Supreme Court refers to the observations of their Lordships in B.S.C. Footwear Ltd. v. Ridgway (Inspector of Taxes) [1970] 77 ITR 857 (CA) as follows (page 181) : In the case of B.S.C. Footwear Ltd. v. Ridgway (Inspector of Taxes) [1970] 77 IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red for taxation the total receipts and claimed deductions on account of liability, which that assessee had incurred in subsequent years in order to fulfil the contractual agreement. However, in the instant case, the receipts had been received by the assessee during the assessment year and that these receipts have been earned by the assessee by performing the job as envisaged in the contract. For earning the receipts, whatever expenses have to be incurred as for the contract, have already been incurred as per the terms of payment; payments are to be made only after production of the certificate that the relevant work has been done. Further, the judgment of the Supreme Court in the case of CIT v. British Paints India Ltd. [1991] 188 ITR 44 was applicable because the method adopted by the assessee is one which does not give correct position of accounts and the correct profits cannot be deduced there from. The learned Counsel further submitted that the issue, whether profits as arrived at in accordance with the mandate of AS 7 would constitute the base for computing taxable income is squarely covered in favour of the assessee by the aforesaid order of the co-ordinate Bench. Acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year. In short, according to AS-7, no revenue is to be recognized when the percentage completion of contract is less than 25%. This was followed, hence assessee was not recognizing the income on such project where percentage completion was less than 25%. Further, the accepted position is that the contracts entered into by the assessee were fixed price contract. The entire cost used to be carried forward as the contract got progressed and once the threshold was crossed at the time the entire revenue was recognized by offering the profit for the purpose of tax. Several calculations and year-wise charts are part of the compilation. Since this is the background of the addition, hence according to us the issue seems to be more or less covered by the decision of Third Member in assessee s own case reported in 79 ITD 63 (T.M.). 255 ITR 20(AT) only for the proposition that AS-7 is an accepted guidelines so a tax payer is right in consistently following the same. An another fact has also been placed on record that in the past i.e. in A.Y. 1995-96, the Revenue Department has not allowed for such a change in the method of accounting. Hence the A.O. went wrong in changing the consistently foll ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 57 ITR 512, 526)(SC) (iii) Badridas Daga 34 ITR 10,15 (SC); (iv) Calcutta Co. Ltd. 37 ITR 1(SC); (v) H.M. Kashiparekh Co 39 ITR 706 (Bom); (vi) Indo Nippon Co. (I) Ltd. 261 ITR 275 (SC); (vii) Aruna Mills Ltd 31 ITR 153 (Bom); (viii) Challapali Sugars Ltd 98 ITR 167 (SC); (ix) Madras Industrial Investment Corpn Ltd 225 ITR 802 (SC); (x) Bokaro Steel Ltd 236 ITR 311 (SC) (xi) U P Industrial Dev. Corpn. 225 ITR 703; (xii) United Commercial Bank 240 ITR 355 (SC); (xiii) Otis Elevator Co (I) Ltd 99 ITD (Mum); (xiv) M N Dastur Co Ltd 61 ITD 167 (Cal); (xv) Metal Box Co of India Ltd 73 ITR 53 (SC); (xvi) Advance Consttruction C. L Ltd 275 ITR 30 (Guj); (xvii) Bilahari Invetments (P) Ltd 299 ITR 1 (SC); (xviii) Hyndai Heavy Industries Ltd; (xix) Triveni Engg Industries Ltd (Del); (xx) Jacobs Engg India P Ltd; and, (xxi) Dredging International N.V. 9.4 Having considered the rival submissions and material on record, we find that a similar issue came before coordinate Bench in the case of Thermax Babcock Wilcox Ltd. Vs. DCIT in ITA Nos.157, 158/PN/95 vide order dated 11.05.2001 for A.Ys. 1990- 91 and 1991-92, wherein the Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10.1 Before us, the learned Counsel for the assessee did not press the issues relating to other income; interest on investments; and interest others and therefore, these issues are dismissed as not pressed. 10.2 Fluctuation in rate of exchange. In so far as the issue relating to Premium on forward Contracts is concerned, the same is decided against the assessee by following the findings in the order of the Tribunal for the assessment year 1996-97, vide para 99 in ITA No 482/PN/01 (supra). Thus, the assessee fails on this issue. 10.3 In so far as the issue relating to Service Charges is concerned, the same is decided in favour of the assessee by following the findings in the order of the Tribunal for the assessment year 1995-96, vide para 45 in ITA No 252/PN/01 (supra). Thus, the assessee succeeds on this issue. 10.4 It was a common point between the parties that the issue relating to fluctuation in exchange rate had been subjectmatter of consideration by the Tribunal in assessment year 1995- 96 (supra) and the Tribunal has restored the matters to the file of the Assessing Officer to follow the directions given therein. Following the same, we hold so and rest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts ₹ 42,74,160 ₹ 2,22,08,707 viii) In any event the ld CIT(A) ought to have directed that the Profits of the business should be increased by 10% of all income assessed under the head other sources inasmuch as to that extent, expenditure must be deemed to have been incurred for earning such income, resulting in a pro tanto reduction in expenditure attributable to Profit Gains of business . ix) That ₹ 1,54,01,000/- and ₹ 9,85,390 were not eligible for inclusion in profits of business for the purposes of section 80-HHC. 12.1 We have considered the rival submissions carefully. So far as Ground No. 10 (i) is concerned, the issue is liable to be decided against the assessee in view of decision of the Hon ble Supreme Court in the case of IPCA Laboratories Ltd. (2004) 266 ITR 521 (SC). We hold so. 12.2 The issues relating to exclusion of Excise Duty and Sales tax collected from total turnover contained in Ground No. 10(ii) (a) (b) respectively are concerned, they are decided in favour of the assessee in view of the decision of the Hon ble Supreme Court in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the order cancellation is compensation received from customer for cancellation of an order and cannot represent value of goods sold or services rendered. We find merit in the plea set-up by the assessee, and accordingly assessee succeeds. 54. As for the issue at sub-ground (x) of fluctuation in rate of exchange of ₹ 8,41,888/-, it was submitted by the learned Counsel for the assessee that Exchange fluctuation in so far as exports are concerned is already included in value of export turnover since in terms of section 80HHC the same is to be taken at FOB value of exports. In our view, only component of fluctuation which is on sales is liable to be included in total turnover and not the balance, if any. The Assessing Officer is directed to recompute the deduction under section 80HHC of the Act accordingly. 55. In so far as the issues involved in Ground No. 14(c) are concerned, the same relate to exclusions from the profits of the business as per Explanation (baa) for the purposes of section 80HHC of the Act. The plea set-up by the assessee is that the aforesaid items of income are not excludible in terms of Explanation (baa), inasmuch as the same are not ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xclusions from the profits of the business as per Explanation (baa) for the purposes of section 80HHC of the Act. The plea set-up by the assessee is that the aforesaid items of income are not excludible in terms of Explanation (baa), inasmuch as the same are not independent incomes, but are otherwise inextricably related to the main business of the assessee. Quite fairly the learned Counsel pointed out that at best income by way of lease rental ₹ 1,15,51,947/-, may constitute independent incomes excludible in terms of Explanation (baa) of section 80HHC of the Act. Apart therefrom, it has also been pointed out that the issue may be decided in the light of the recent judgment of the Hon ble jurisdictional High Court in the case of CIT v. Pfizer Ltd. 233 CTR 521 (Bom). 12.5.1 On the other hand, the learned Departmental Representative has defended the orders of the authorities below. 12.5.2 Having considered the rival submissions, we deem it fit and proper to set aside the issue to the file of the Assessing Officer to be adjudicated in the light of the judgment of the Hon ble Bombay High Court in the case of Pfizer Ltd., (supra) except to the extent of lease rental, whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supreme Court in the case of ACG Associated Capsules P. Ltd. (2012) 343 1TR 89 (SC), wherein, the Hon ble Supreme Court has upheld the contention that such receipts should be considered on net income basis and not on gross receipts basis for the purpose of invoking Explanation (baa) to Section 80 HHC of the Act. We direct the Assessing Officer to decide the issue in the light of the same. 13. Ground No. 11 reads as follows: 11. The ld CIT(A) further erred in confirming rejection of the appellant s claim for deduction of a sum of ₹ 2 Crores paid by the appellant as a testimonial to Mrs A.R. Aga. Without prejudice to the generality of the above ground, the ld CIT(A) erred in taking a view that the said expenditure was in the nature of ex-gratia and was therefore, not allowable either u/s 37(1) or any other provision of the Act. On the facts and in the circumstances of the case and in law the ld CIT(A) ought to have held the said expenditure was incurred wholly or exclusively for the purpose of the business and was allowable as such. 13.1 The facts, in brief, in relation to this Ground are that Mr. R. D. Aga was the Managing Director of the company when he died in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Economics Tripos in Cambridge. He underwent a programme for management development of Harvard University. He was Chairman of the National Committee on Energy of CII and led the CII Energy Mission to the USA. The learned Counsel pointed out that Mr. Aga took over as the Managing Director of the erstwhile Thermax in 1974 and of the present assessee in 1981, i.e. right from the time of its incorporation. He was an iconic figure and the driving force behind Thermax. He further explained the contributions made by Mr Aga to Thermax that it was because of him that Thermax achieved such fame as an engineering major. He pioneered new products covering a wide spectrum of water treatment equipment, pollution control equipment, energy saving devices, co-generation systems etc. During Mr Aga s tenure (1981 to 1995-96) the turnover of Thermax increased manifold reflecting Mr. Aga s contribution to the growth of Thermax. During this period its product range also increased manifold from mere boilers to water treatment, pollution control, chemicals, waste management etc. He was also instrumental in bringing about a lot of foreign partners for Thermax to tie-up leading to diversification of its pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n law. The payment was made to Mr. Aga / Mrs. Aga not in their capacity as shareholder/s. The payment was made to her as the wife of an employee-Director of the company who died while on duty. Explaining further, he submitted that the expenditure incurred on grounds of commercial expediency may not be incurred with a view to making profits; that every expenditure need not be matched by corresponding income; that what is important is that the purpose or rationale must be a business purpose and it must be germane to the business and must not be de hors the business. The learned Counsel submitted that it should reflect a genuine transaction and must not have been entered into for collateral purposes or for indirect or improper motive or for some consideration not aligned with the business needs of the assessee. He concluded by submitting that the mere fact that the recipient of the money contends that the receipt is of capital nature in her hands would not be determinative of the character of the expenditure in the hands of the company. In support of his varied submission, the learned Counsel placed reliance on various decisions of judicial forums. The learned Departmental Represent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mounts were not in the nature of capital receipts. In the alternative the ld. CIT(A) erred in holding that even if in the nature of capital receipt, the provisions of section 50 were applicable thereto. The ld. CIT(A) ought to have atleast accepted the alternate contention of the appellant that the amounts were assessable at the rate applicable to long term capital gains. The ld.CIT(A) ought to have accepted the various facets of the grounds taken before him and the arguments advanced before him and held that the amounts were not in any circumstances taxable as income of the appellant. The relevant facts, as explained by the learned Counsel for the assessee, are that the Company was inter-alia in the business of designing, engineering, procurement, distribution, marketing, and sale of water treatment conditioning and purification products especially related to industrial applications. During the course of this water treatment business of twenty years the Company had acquired considerable know-how, technologies, and trademarks. It had also acquired a strong market presence and had established related infrastructure which could cater to the potential growth of the bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransferred. No depreciable assets have been transferred. Even goodwill, intellectual property right and know-how right claimed to have been transferred by the Appellant have not been transferred fully because according to the AO, the assessee will continue to be in the business of Water Treatment Projects Business Division and according to him technical know-how, goodwill and intellectual property right acquired by the assessee would be required for the purpose of executing projects of its continuing Division. Whatever has been received by the Appellant can be called a benefit derived during the course of business and, therefore, taxable under section 28(iv) of the Act. 14.3 As regards the non-compete agreement, the Assessing Officer held that receipt of ₹ 3 crores towards sale of the undertaking are not on account of foregoing any income-earning source; that the appellant only agreed not to compete with TCWTL in areas of Water Treatment Product Division; but it continues to operate its Project Division. This non-competition agreement is valid only for 25 years. The assessee has artificially created a difference between Water Treatment Product Division and Water Treatment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of business activities and not wholly unconnected with such transfer. Applying the decision of the Hon ble Supreme Court in the case of Artex Manufacturing Co (227 ITR 262) he held that the said sum was taxable having been received during the continuance of the business. He further held that even if receipts are capital in nature provisions of section 50 of the Act would apply. Accordingly, the CIT(A) confirmed the order of the AO that the said sums were taxable either as business income or as short term capital gains u/s 50 of the Act. 14.5 Before us, the learned Counsel for the assessee assailed the order of the CIT(A) and filed written submissions which are extracted below for the sake of brevity: SUBMISSIONS: GENERAL a. Thermax and Culligan had initially entered into a Shareholders Agreement on 17th December, 1996 with the intention of forming a joint venture for manufacturing products, systems and services for water treatment for commercial, household, industrial and other markets and also for manufacture etc. of purified and bottled drinking water. TCWTL was to be a 50:50 Joint Venture.This Agreement was followed by the Business Transfer Agreement (BTA) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... activity taken as a whole but does not include individual assets or liabilities or any combination thereof not constituting a business activity. Thus, even under the postamendment statute in order to qualify as a slump sale, even a part of an undertaking, unit or a division of an undertaking or a business activity can constitute the subject matter of slump sale 1. ON SOME SPECIFIC VIEWS TAKEN BY THE AO a. In view of the definition of an undertaking in Explanation to s 2(19AA) part of undertaking etc - the contention of the AO that only Product Division has been transferred by culling it out from the Project Division is contrary to the subsequent legislation. The activity of manufacturing Water Treatment Products was all along a distinct business activity of the Water Treatment Division. So was the case with the Project activity. As a matter of fact, in FY 1993-94 the Water Treatment business was segregated into two subdivisions namely Projects and Products. Project Division focused on large turn-key projects involving site erection and installation. The value of Project Division jobs was also comparatively large. Product division focused essentially on standard prod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, the other contention of the AO that liabilities of the Product Division have not been transferred is also not borne out by legislative intent. In any event, if liabilities had been also transferred the consideration would have been adjusted pro tanto. j. The AO s charge that all the employees of the Water Treatment have not been transferred has no significance in that the law does not require that there should be a transfer of all or any employees. This is essentially a commercial decision which is best left to the parties. Even the provisions relating to de-merger which stipulate transfer of all assets and all liabilities in the event of demerger do not lay down transfer of employees. In any event the list of 66 persons selected for transfer has been annexed to the BTA. k. The other contention of the AO is that even after transfer of the Business and attendant transfer of intangibles like know how, intellectual property rights and proprietary information the Appellant continues to be used in the water treatment project business and hence there is no effective transfer of these intangibles. l. This is pure conjecture. What have been transferred are intangibles ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the NCA the Appellant agreed to was give up, part with and desist from carrying on the Water treatment Product business anywhere in India. During the validity of the NCA the Appellant was prohibited from directly or indirectly owning, managing, operating, engaging in Product Business transferred under the BTA and in any way competing with TCWTL. It was also prohibited from providing information, know-how or assistance to any party in respect of Product Business. b. The validity of the NCA was twenty-five years beginning 29.03.1997. The long duration of the embargo is itself suggestive of the character of the receipt as a capital receipt. c. Since the right to carry on business is a valuable right it constitutes property of any kind within the meaning of section 2(14) of the Act and is thus a capital asset. Once again, since this capital asset did not have a cost of acquisition the ratio of the decision of the Supreme Court in B.C.Srinivasa Setty (128 ITR 294) squarely applies and the receipt is a capital receipt not exigible to tax. d. The amendment to section 55(2) covering right to carry on any business has been introduced only with effect from AY 2003-04 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under two distinct agreements should be clubbed together and dealt with together. b. It is not the case of either the AO or of the CIT(A) that the two agreements are sham or bogus. c. There is also no allegation that the consideration is excessive or unreasonable d. There is an acceptance by both the lower authorities that a business was transferred; the dispute is about tax treatment of the consideration received for transfer of the business and separate consideration for entering into a Non Compete agreement. e. According to the learned CIT(A) one without the other is meaningless. It is respectfully submitted that one can enter into a non compete covenant only after giving up the business or other right against which the transferor agrees not to compete. As a matter of fact, non compete without giving up any valuable asset or right is meaningless. f. S 55(2) brings to charge transfer of right to carry on business which can happen only when the transferor gives up the business which he has agreed not to compete. Similarly s 28(va) would apply when the right to carry on any activity in relation to any business is given up. g. The argument of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... up, with some portion being attributed to restrictive covenant. The Court held that the compensation was a combined one but had to be bifurcated and a portion thereof had to be assigned to the restrictive covenant which the court held was in the nature of a capital receipt. The observations were therefore made to support splitting up of a consolidated compensation which observations the CIT (A) has torn out of context. k. In the present case also the non compete covenant is an independent obligation undertaken by the Appellant consideration for which was also independently agreed upon between the parties. The lower authorities went about arbitrarily combining the two considerations and arriving at conclusions contrary to the intentions of the parties. l. The other reason adduced by the CIT (A) was that the assessee carried on multiple activities of an assessee and if one of them is transferred for a non compete covenant it cannot be said that such an agreement takes away the source of income of the assessee. For like reason he held that the trading structure of the Appellant cannot be said to have been affected. He further observed that there was nothing on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of individual agencies, a normal incident, not affecting or impairing the trading structure of the appellant . p. It will be appreciated that an agency at will and therefore without a fixed tenure cannot be equated with an industrial undertaking or business of manufacturing which inherently has permanency. One does not start and sell undertakings and manufacturing businesses in the same way as one enters into agencies at will. The very fact that the agency was at will shows that the appellant had kept for itself an exit option from the said agency and had not reckoned that as affecting his trading structure. The Court has, as a matter of fact observed the circumstance that the agency was determinable at the will of the principal company which maintained a large staff at their expense justifies the inference that upon cancellation of the agency appellants business organization was not substantially impaired ; This was because the managed company had its own business infrastructure independent of the managing agency In the absence of any evidence from the appellant the Court was swayed by these general considerations and trade practices. q. In the present ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r loss of agency Capital 6 Gillanders Arbuthnot and Co. Ltd (53 ITR 283)(SC) Compensation for loss of agency revenue 7 Best and Co. (P) Ltd (60 ITR 11)(SC) Compensation for Restrictive covenant forming part of composite consideration capital 8 Saraswathi Publicities (132 ITR 207) Restrictive covenant capital 9 Automobile Products of India Ltd (140 ITR 159)(BOM) Consideration for impairment of profit making apparatus 10 Oberoi Hotel P Ltd (236 ITR 903)(SC) Compensation for Loss of source of income Capital receipt 11 Chari and Chari Ltd (57 ITR 400)(SC) Compensation for loss of managing agency Capital receipt 12 Gomti Credits P Ltd (100 TTJ 1132)(DEL) Non Compete Capital a part of consideration for transfer of shares 13 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reported in (2008) 307 ITR 75 (SC) has held that Business undertaking can consist of not only tangible items but also intangible items and in a case of sale of business undertaking on a going concern basis where the slump price was not capable of being attributed to item-wise earmarking of assets and when there was no cost of acquisition of the undertaking sold as a going concern, it was not possible to compute capital gains and the receipt on sale of undertaking was not chargeable to tax. Hon ble Supreme Court has observed that the charging section and the computation provisions together constitute an integrated Code and when in a case the computation provisions fail, such case would not fall within the ambit of Section 45. Hon ble Supreme Court has inter alia distinguished its decision in the case of Artex Manufacturing Co. reported in 227 ITR 262 by observing that itemized sale was involved in that case and therefore it was held that surplus on sale of assets was chargeable to tax under provisions of Section 41 (2). It is only by prospective amendment to section 50B with effect from 01.04.2000, that cost of acquisition has come to be notionally fixed in case of slump sale and co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... course of assessment proceedings, the Assessing Officer noticed that the assessee had claimed deduction under section 80M on gross dividend of ₹ 3,66,10,003/-. The Assessing Officer rejected the assessee s contention that as per section 80M deduction is available on gross dividend received if the same and therefore expenses are not to be considered while computing dividend income. As per the Assessing Officer, the expenses have to considered and for this, he derived support from the judgment of the Hon ble Supreme Court in the case of Distributors (Baroda) P. Ltd. 155 ITR 120. Since the assessee failed to furnish detail of expenses incurred, the A.O estimated the same on ad hoc basis at the rate of 5% of gross dividend received. He accordingly treated the sum of ₹ 18,30,500/- as expenses allocable to dividend earned and further held that deduction u/s 80M will be accordingly reduced. As a consequence, the business income of the assessee will be increased correspondingly. In appeal, the CIT(A) restricted the expenses attributable for earning the dividend to 2.5% instead of 5% estimated by the AO. Still aggrieved, assessee is in appeal before us. 15.1 Before us, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were to be excluded while calculating indirect costs of trading goods u/s 80HHC(3), directed relief to the assessee for the year under consideration. Before us, it was submitted that pursuant to the directions of the CIT(A), the AO has already accepted the reworking of indirect expenses as in the earlier years and has recomputed the deduction u/s 80HHC. It is also found that on similar issue for the assessment year 1995-96, the Tribunal had held that no interference was called for with such directions of the CIT(A). For the sake of brevity, the relevant observations of the Tribunal are extracted below: 71. Before parting, we may refer to an Additional Ground raised by the Revenue vide application dated 25.4.2001, which reads as under: Whether while computing indirect costs attributable to export of trading goods all indirect costs that are not relevant/attributable to trading activity should be ignored. 72. At the time of hearing, the learned Counsel for the respondent-assessee submitted that assessee has no objection to the admission of the said Additional Ground. In this view of the matter and, also noticing that the said Ground raised by the Revenue arises fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e following decisions in support of the proposition advanced by the Commissioner of Income-tax (Appeals): (i) Snowcem India Ltd. 12 SOT 333 (Mum); (ii) Khimji Vishram Sons 1 SOT 618 (Mum); (iii) MMTC Ltd. 112 TTJ 15 (Del); and, (iv) Glaxo Smithkline Asia 6 SOT 113 (Del). 76. We have considered the rival submissions and find that in principle the direction of the Commissioner of Income-tax (Appeals) does not require any interference. We also have taken note of the statement made by the learned Counsel for the assessee at Bar that while giving effect to the direction of the Commissioner of Income-tax (Appeals) for the year under consideration, the Assessing Officer had accepted the computation of indirect costs attributable to trading exports excluding costs that had no nexus with such trading exports. In our view, it would be in the fitness of things that the Assessing Officer reviews the working already accepted by him so as to be in conformity with the aforesaid decisions and also directions of the Tribunal contained in its order for the assessment year 1994-95 (supra). As a result thereof, on this Ground, the Revenue succeeds for statistical purpos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 63% shareholding in Thermax; they were also Directors of Thermax. 7. The AO also relied on the decisions in the case of Lala Lakshmipat Singhania (104 ITR 466)(All); J.Dalmia (138 ITR 653)(Del); Narhari Dalmia (80 ITR 454)(Del) for the proposition that the receipt in question was chargeable to tax under s 2(24)(iv) of the Act. 21.2 In appeal, the CIT(A) decided the issue in favour of the assessee. According to him, in the case of Thermax the payment has been held to be gratuitous and hence not in the nature of expenditure and therefore did not qualify for allowance u/s 28 to 43B of the Act; that the CBDT Circular No. 573 applies since there existed a contract of between Thermax and Mr Aga; Mr Aga has been disclosing income from salary from Thermax which has also been brought to tax under that head of income. Against the said decision of the CIT(A), Revenue is in appeal before us. 21.3 The learned departmental Representative assailed the decision of the CIT(A) and submitted that the Assessing Officer was justified in charging to tax the amount of ₹ 2 crores received by the assessee from M/s Thermax Ltd. 21.4 The learned Counsel for the respondent-assessee, on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 261 ITR 501 (Bom); iii) Padamshi Meghji 48 ITD 127 (Bom); iv) Alchemic P Ltd 130 ITR 168 (Guj); v) Kanan Devan Hills Produce Co Ltd 119 ITR 431; vi) G Venkataraman 111 ITR 444 (Mad); vii) Ravinder Singh v CIT 205 ITR 353 (Del); and, viii) V Kasturi Sons Ltd 237 ITR 24 (SC). Finally, the learned Counsel argued that the view that payments by way of a testimonial or tribue are not taxable in the hands of the recipient is supported by the following decisions: i) Dilip Kumar Roy 94 ITR 1 (Bom); ii) Mahesh Anantrai Pattani 41 ITR 481 (SC); iii) Padamraje Kadambande 195 ITR 877 (SC); iv) H H Maharani Shri Vijaykuverba Saheb of Morvi Anr. 49 ITR 594 (Bom); v) P H Divecha 48 ITR 222 (SC); vi) Rajalakshmi Venkatakrishnan 215 ITR 596 (Mad); vii) Reed V Seymour 11 T.C 625 (HL); viii) R Parthepan 72 ITD 289 (Mad); ix) Beynon V Thorpe 14 TC 1 (KBD); x) G R Vishwanath 29 ITD 142 (Bgl) xi) M Balamurlikrishna 171 ITR 447 (Mad); xii) Dr B M Sundaravadanam 148 ITR 333 (Mad); xiii) K K Roy 84 ITR 701 (SC); xiv) Mrs lakshmi M Aiyar (ITA No 5892/Mum/02; and xv) Mrs Jaya Bhaskaran 168 ITR 256 (PAT) The learned Counsel summed up his argu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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