TMI Blog2001 (6) TMI 175X X X X Extracts X X X X X X X X Extracts X X X X ..... vance to M/s R.R. Holding (P) Ltd. (f) Compensation paid for loss of office to directors at Rs. 1,29,26,601. Ground No. 2(a): 4. It may be seen that while completing the assessment, the AO noted that as per tax audit report an amount of Rs. 28,266 had been worked out and added under r. 6D. According to AO it was clear from Annexs. B1 and B2 that other expenses relating to local conveyance and telephone amounting to Rs. 19,467 had not been considered in the light of r. 6D(2)(b). Accordingly, the AO disallowed this amount along with Rs. 58,266. In appeal the CIT(A) confirmed the action of the AO. 5. The learned counsel for the assessee submitted that amount on local conveyance and telephone etc. are not subject of disallowance under r. 6D as held by Hon ble Bombay High Court in the case of CIT vs. Chemet (1999) 240 ITR 624 (Bom). The learned counsel also placed reliance on the order of Tribunal Special Bench Madras in the case of Sundaram Finance Ltd. vs. IAC (1984) 18 TTJ (Mad)(SB) 348 : (1984) 7 ITD 845 (Mad)(SB) for this very purpose. 6. The learned Departmental Representative placed reliance on the order of AO. 7. After considering all the facts and going through t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould have been followed by the CIT(A). The learned Departmental Representative conceded to this proposition and respectfully following the same we are directing the AO to allow 35 per cent expenses out of hotel bills for lunch, dinners, etc. and entertainment expenses and rest will be subject of disallowance under s. 37(2A) of the Act. 12. So far as amount of Rs. 46,192 claimed by the assessee on account of presentation of articles to customers is concerned, the contention of the learned counsel was that whole of the amount should have been allowed as articles of presentations were not containing the logo of the company and thus it cannot be treated as sale promotion expenses. List of the articles of presentation had been given. It was submitted that the same view be taken now. 13. Learned Departmental Representative placed reliance on the order of AO. 14. We have considered the submissions and gone through the list of articles of presentation which is appearing at page No. 106A and these items are not containing the logos of the assessee-company and will not be treated as articles promoting sales and whole of the amount was allowable and AO is directed to allow whole of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cent on telephone expenses were disallowed totalling Rs. 94,668. Before the CIT(A) it was contested by the assessee that there was no justification for disallowance of 25 per cent of the expenses of the car and telephone for personal use of managing director/directors, etc. The CIT(A) noted that AO disallowed the claim under s. 40A(5)/40(c) and not under s. 40A(2)(b) of the Act and following the earlier order he confirmed the action of the AO. 19. The learned counsel submitted that AO has not disallowed the amount under s. 40A(5)/40(c) but he has simply made disallowance without referring any particular section of the Act and it was submitted that no disallowance for personal use of the cars and telephone by managing director/directors, etc. can be effected particularly when the amount was being recovered from their salary for use of the vehicle and telephones. The learned Departmental Representative placed reliance on the order of AO. 20. We have considered the rival submissions and perused the record. It is to be noted that undisputedly amount for personal use of vehicle were being recovered from managing director/directors and chairman as noted by AO and still he further di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the past services rendered by him to the assessee-company and for his agreeing not to indulge in future for a period of twenty years in the business of ordinary bus body building in which line he was an expert so that assessee-company may be allowed to retain its monopoly in that business and to avoid jeopardy to its resources. The contention of the assessee was that had assessee-company not paid the amount, the assessee-company would not have survived as main source of its income was profits from bus body building division and by making payment, company was going to continue its monopoly among its constituents without any interruption. The assessee also placed reliance on the decision of Bombay High Court in the case of CIT vs. Champion Engineering Works Ltd. (1971) 81 ITR 273 (Bom) and the ratio of decision in the cases of V. Damodaran vs. CIT (1967) 64 ITR 26 (Ker) and CIT vs. Bowrisankara Steam Ferry Co. (1973) 87 ITR 650 (AP) and other cases. The AO noted that Ramesh Suri was managing director of the assessee-company and there were three more companies managed and controlled by Ramesh Suri as well as by his brothers G. Sagar Suri, Roshan Lal Suri and Lalit Suri. Accordi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of G. Sagar Suri, his HUF, his wife, three sons and HUFs of two sons and one Roshan Lal Suri. This family dispute not only involved the assessee-company but three other companies as well as Rajdhani Cold Storage (P) Ltd. According to AO, the object of this payment was settlement of dispute between these two groups. He noted that every payment does not spell expenditure as laid down in the case of Iron Traders (P) Ltd. vs. CIT (1994) 97 ITR 606 (Del). The AO was of the view that payment was not made by assessee-company in its character as a trader but for and on behalf of G. Sagar Suri group. The said expenditure was not incurred in the course of business of the assessee-company" but in the proceedings that arose as a result of disruption or the possible stoppage of the business and cannot be allowed as business expenditure. 24. The AO examined the case of the assessee which was based on para 6 of the compromise application as assessee claimed that disputed amount was paid by the assessee-company to Ramesh Suri to avoid the competition in coming twenty years. For this the AO noted that Hon ble apex Court in the case of Swadeshi Cotton Mills Co. Ltd. vs. CIT (1967) 63 ITR 57 (SC) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts go to show that this was the amount paid to settle the claim made by Ramesh Suri and was not for any business activities. 25. The other observation of the learned AO is that no payment could have been made to Ramesh Suri for his past services as noted in para 6 of the compromise application as already G. Sagar Suri group had removed him from the Board of Directors and he was not allowed to operate any of the bank account of these four concerns. Next important observation of the learned AO was that assessee had failed to prove on record that Ramesh Suri had acquired special and invaluable expertise and experience in bus body building activities as assessee did not bring any material to prove that fact. He further noted that assessee-company was incurring loss in business from year to year and contribution of Mr. Ramesh Suri to bus body building division was not established. On the basis of these facts and circumstances the AO was of the view that payment under consideration was not made for the purpose of assessee s business. 26. He further examined that the amount was not wholly and exclusively incurred for the purpose of business and for that he had taken into considerat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ainst which assessee came in appeal before the CIT(A). 29. The submissions of the assessee before the CIT(A) were identical as were agitated before the AO and reliance was placed on different case laws. The CIT(A) confirmed the view taken by the AO for the reasons recorded by him. Aggrieved, the assessee is in second appeal before the Tribunal. 30. The learned counsel for the assessee assailing the findings of the learned AO submitted that AO while deciding the issue involved had mixed up the facts of the present case. The learned counsel pointed out that Ramesh Suri was managing director of the assessee-company for last several years and acquired special expertise and experience in business of bus body building. It is wrong on the part of AO to note that "Bus Body Building Division" of assessee-company was not earning profit. For this the learned counsel for the assessee pointed out to page No. 202 of the paper book in which net profit/loss of the assessee-company as well as profit in bus body building division since asst. yrs. 1982-83 to 1992-93 had been given which showed that profit in bus body building division was always substantial and except that profit, assessee-compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o made baseless allegations to show that Ramesh Suri was having grievances against all the members of the families and of the companies. The allegations of Ramesh Suri were never agreed to by the assessee-company or by G. Sagar Suri and his family members as is apparent from their written submissions, copy of which is appearing in the paper "book. The record shall show that complicated situation arose with regard to the assessee-company as transaction of this company could not proceed as Ramesh Suri effectively stopped operation of the bank account of the company. The assessee-company was going to suffer due to action of Ramesh Suri and it forced the assessee-company to part with huge amount to check Ramesh Suri from coming in competition for twenty years. It was not justified view of the AO that the amount in question was in any way related to settling of the family dispute but it was for restraining Ramesh Suri to come in competition with the assessee s business for a period of twenty years and partly for past services rendered by him. 33. The learned counsel also submitted that no such amount paid by assessee are to be treated as incidental to the assessee s business and for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is to be treated as revenue expenditure. Same was the view laid down in the case of CIT vs. Associated Cement Co. Ltd. (1988) 70 CTR (SC) 28 : (1988) : (1988) 172 ITR 257 (SC). 36. The learned counsel also submitted that, if any amount is for termination of agreement/arrangement to avoid future commercial inconvenience then it is to be treated as revenue expenditure and for that reliance was placed on the decision in the case of CIT vs. Ashok Leyland Ltd. 1973 CTR (SC) 9 : (1972) 86 ITR 549 (SC). 37. In the end the learned counsel submitted that the amount in question was for the purpose of business and that too smoothly and incidental to business. The very purpose for payment was to keep the trade going and if it is so, then reasoning in the case of Haji Aziz Abdul Shakoor Bros. vs. CIT (1961) 41 ITR 350 (SC) followed by CIT vs. Shahibag Entrepreneurs (P) Ltd. (1995) 215 ITR 810 (Guj) by Gujarat High Court shall be applicable. This is also settled proposition of law that connection between expenditure and object must be real and not remote and illusory and in this case the very purpose of payment is real one as Ramesh Suri was creating problem. 38. Next contention of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which originally there were two partners. Before assessee-company joined partners on31st July, 1976created goodwill of the firm to the extent of Rs. 2,10,000 and two partners created their capital amount for Rs. 1,05,000 each. Later on, the said firm was dissolved on31st Dec., 1976. It was mentioned in the dissolution deed that original partners shall be paid Rs. 10 per ton each on the soap manufactured by the continuing partners provided minimum payment to each of the retiring partners shall not be less than Rs. 1,000 p.m. This payment was made in lieu of their undertaking not to carry on a similar business for a period of fifteen years under a similar trade and name. The amount of royalty payable to two partners was claimed as deduction which was rejected by the AO and by the Tribunal. Their Lordships concluded that expenditure was incurred to ward off the competition and it was a capital expenditure. Another decision of same pattern was referred by the learned Departmental Representative in the case of CIT vs. G.D. Naidu Ors. and further relied on the case law of ChelparkCo.Ltd. vs. CIT relied upon by the learned AO. The contention of the learned Departmental Representative i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee-company in the Bharat Hotel was sold on13th Nov., 1987, and Ramesh Suri paid a sum of Rs. 1 crore towards the said amount by a post-dated cheque which was dishonoured. Again a fresh cheque was issued and the same again stands dishonoured resulting into calling of extraordinary general meeting of the assessee-company by G. Sagar Suri and others for removal of Ramesh Suri as director/managing director of assessee-company along with Lalit Suri. Meeting was held on 3rd March, 1988, and after taking note of dishonoured cheque of Rs. 1 crore issued by Ramesh Suri and on refusal of Ramesh Suri and Lalit Suri for renewal of the document for continuance of their personal guarantee given to the creditors of assessee-company and for non-payment of Rs. 30 lakhs by Ramesh Suri to assessee-company, the Board of Directors removed Ramesh Suri and restrained him from operating the bank accounts of different companies of the Suri group. Necessary information was sent to bankers. Ramesh Suri approached the Hon ble High Court where a plaint was filed seeking declaration to the effect that all the resolutions passed by Board of Directors after4th Dec., 1987, were null and void. Another relief was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e AO that there was no scope for recognising the past services of Ramesh Suri and to allocate any amount out of the impugned amount given to Ramesh Suri. 44. The other alleged relevant consideration for giving the amount in question is that Ramesh Suri being involved in the bus body building division of assessee-company for so many years acquired special and invaluable expertise and experience and he could have been tough competitor in this nature of business for the assessee-company and the amount was given to Ramesh Suri so that he may be restrained from carrying on such business in future for twenty years and assessee-company may run its business smoothly free from any hindrance. In this connection the AO rightly observed that assessee-company had not brought anything on record to show that Ramesh Suri acquired special expertise or experience in the bus body building activities. It is also relevant that it is not the case of the assessee-company that Ramesh Suri had got any special training inIndiaor abroad in the bus body building operation or he himself has made any research or was personally involved in such activities. If these were the facts, then this is also again not a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee and H.V. Low Co. was not for fixed term but could be terminated at any time at the violation of any of the parties. No doubt Their Lordships have treated the amount as revenue expenditure but observation appearing at p. 910 of the report is relevant and is reproduced below: "Although we agree that payment made to ward off competition in business to a rival dealer would constitute capital expenditure if the object of making that payment is to derive an advantage by eliminating the competition over some length of time, the same result would not follow if there is no certainty of the duration of the advantage and the same can be put to an end at any time. How long the period of contemplated advantage should be in order to constitute enduring benefit would depend upon the circumstances and the facts of each individual case." 47. This ratio of apex Court lays down a law that payment made to ward off competition in business to a rival dealer would constitute capital expenditure. This was subsequently followed by different High Courts and Their Lordships of Madras High Court in the case of Chelpark Co. Ltd. vs. CIT have decided the same issue in favour of Revenue where managing d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tlement of the family dispute in between the two groups of Suri brothers and their family members. It has come on record that these four brothers were running the business of assessee-company and three other companies. Ramesh Suri was removed from the effective management and control of all the four companies including assessee-company. Ramesh Suri filed a suit and got ad interim injunction in his favour and then matter was amicably settled. The fact noted in the compromise application are relevant. No doubt Ramesh Suri and his group transferred the shares in favour of G. Sagar Suri but as pointed out by AO, Ramesh Suri group lost more and G. Sagar Suri group obtained more in the said settlement. A perusal of table 1, appearing at p. 47 of the assessment order shall show that main relief of Ramesh Suri was equalisation of shares in the business of family including the four companies referred in the plaint. He claimed 25 per cent of shares but out of compromise he not only lost that claim but he as well as his family members transferred their shareholding to rival group in all other companies. Ramesh Suri and his group members discharged their liabilities of sum of Rs. 30 lakhs to t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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