TMI Blog2006 (12) TMI 262X X X X Extracts X X X X X X X X Extracts X X X X ..... essee are independent of the activities of the industrial undertaking. Thus, the net marketing receipts i.e., gross receipts less expenses incurred/allocable to earning of such marketing receipts have been rightly excluded from the profits and gains of industrial undertaking by the learned CIT(A). Hence, we confirm the order of the learned CIT(A) on this issue. Hence, the appeal of the assessee on this ground fails and dismissed. Deduction u/s 80HHC - exclusion of marketing receipts from the profits of the business - HELD THAT:- In our humble opinion, in that case the Hon ble jurisdictional High Court found that the export activities and the labour charges carried by the assessee were identical, hence, the Hon ble Court extended the deduction u/s 80HHC in a very limited manner; however the Court did not overrule the earlier decisions in the case of CIT v. Kantilal Chhotalal [ 2000 (7) TMI 41 - BOMBAY HIGH COURT] , Ravi Ratna Exports (P.) Ltd.[ 2000 (7) TMI 42 - BOMBAY HIGH COURT] . Thus, in our opinion, the receipts which can be eligible for deduction u/s 80HHC must have a nexus with the export. Exclusion of marketing receipts from the profits - We find that these re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profit-earning process. In our considered view, in substance the agreement though refers to non-disclosure of information by the assessee and M/s Lyka Labs Ltd. and non-competition by M/s Lyka Labs Ltd. for specified period, payment- is for of information regarding clinical data, scientific details and valuable market information only. Further, even if some of the consideration is attributed towards non-competition, the assessee s case finds support from the decision in the case of Smartchem Technologies Ltd.[ 2005 (7) TMI 280 - ITAT AHMEDABAD-C] wherein the Tribunal followed the decision of the case of Empire Jute. Ltd.[ 1980 (5) TMI 1 - SUPREME COURT] in concluding that the expenditure to avoid competition was dictated by the business necessity and commercial expediency and the benefit derived out of it was directly related to enhancement of its profitability; hence, the said expenditure was of revenue nature. Thus, we are of the view that the decision of the learned CIT(A) is not correct in law and reverse the same and direct the Assessing Officer to allow the expenditure as revenue expenditure. Disallowance paid under the orders of the Company Law Board (CLB) - fami ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se business protection and development expenses would be allocated to section 80HH units and, therefore, we direct the Assessing Officer to recompute the deduction u/s 80HH as per law, after affording a reasonable opportunity of hearing to the assessee. In the result, appeal of the assessee stands allowed in part. - HON'BLE K.P.T. Thangal, Vice President and V.K. Gupta, A.M. For the Appellant : S.K. Tulsiyan and H.O. Tulsiyan For the Respondent : K.C.P. Patnaik ORDER K.P.T. Thangal, Vice President. 1. This appeal by the assessee is for the assessment year 1998-99. 2. The first and second ground of objection by the assessee is directed against the order of the CIT(A) in confirming the disallowance of Rs. 3,79,876/- in respect of employer s contribution and Rs. 4,05,635/- in respect of employees contribution to PF/EPF/ESIC paid by the assessee beyond the grace period allowed by the Central Government. 3. We heard the rival submissions. The Tribunal is constantly taking the view that the employees contribution if not paid within the due date extended by the grace period, the same is not allowable. As such, we remand the matter back to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India. This amount of Rs. 34,25,032/- received by way of marketing receipts allocated to the new industrial undertaking while computing the total income of the new undertaking, Assessing Officer held, is not allowable and such marketing receipts do not qualify for deduction under section 80HH. Out of the processing charges of Rs. 2,42,67,427/-, Assessing Officer held, Rs. 2,13,46,380/- only pertains to the new industrial undertaking. The amount claimed as processing charges in the return was added back. Aggrieved, assessee approached the first appellate authority. 8. This issue has been discussed by the CIT(A) vide para 9 of his order. It was contended before the CIT(A) that the assessee is entitled for deduction under section 80HH in respect of the amount of Rs. 34,92,514/-. Alternatively, it was contended that the Assessing Officer ought to have computed the profits of the new industrial undertaking without reducing expenses incurred on research development unit, which is stated to be an independent unit physically separate from the new industrial undertaking and that he should have reduced the proportionate salary of field staff and other expenses from marketing receipts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t an independent source of income. The cost incurred by the company for marketing its products includes those of the new industrial undertakings but was reduced by recovering a part of the cost through utilisation of marketing infrastructure of the assessee-company to market the products of others as well, like the one marketed viz. Fluxum injection of Alfa Wassermann SpA. Hence, according to the assessee, the marketing receipts have a direct nexus to the profits earned from the new industrial undertakings. The marketing costs of eligible pharmaceutical unit deducted for computing the profits of the new industrial undertakings were reduced to the extent recovered by way of marketing receipts. Therefore, the assessee rightly included these amounts in computing the profits derived from the new industrial undertakings for working out deduction under section 80HH. Even assuming that the view of the Department is correct, it is the case of the assessee that appropriate proportion of marketing costs allocated by the assessee to arrive at the profit derived from the new industrial undertakings should be excluded for determining the profit. 11. It is also the case of the assessee that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss as chemists, druggists, chemical dealers, importers, exporters, wholesale or retail dealers and to undertake sales and distribution agencies for the products of other concerns, firms, persons, companies, whether such products are manufactured in the company or otherwise and whether such products are of the description herein above specified or other products of whatever nature and kind and to buy, sell, refine, manipulate, import, export or deal in the products or goods herein specified, either as principals or as agents; 13. The learned Departmental Representative submitted, supporting the orders of the Revenue authorities, that there is no finding as to whether this is related to assessee s business. The issue is whether income is derived from new industrial undertakings. In support of the above proposition, learned Departmental Representative relied upon the decision of the Hon ble Supreme Court in the case of ITO v. Induflex Products (P.) Ltd. [2006] 280 ITR 1 and also the decision of the Hon ble Madhya Pradesh High Court in the case of D.P. Agrawal v. CIT [2005] 272 ITR 118 . Learned Departmental Representative, relying upon both the decisions, submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the eligible undertakings for the purpose of deduction under section 80HH of the Act. 16. Learned counsel for the assessee submitted, he is under instruction not to press this ground. Hence, this ground is dismissed as not pressed. 17. The next ground, i.e., ground No. 7 is regarding the allocation of expenses of independent research and development unit while computing the profits of new industrial undertaking for working out deduction under section 80HHC of the Act. 18. We find that this issue was raised by the assessee before the learned CIT(A) vide ground No. 9. The learned CIT(A) has dealt the issue under section 80HHC learned CIT(A) in para 15 are reproduced as under: Therefore, to sum up ground Nos. 5 to 10 are allowed in part to the extent mentioned above and this deduction may be recomputed in accordance with the directions contained in the preceding paras of these grounds of appeal. However, from the perusal of paras 9 to 14 of the appellate order, we find that this issue has not been dealt by the learned CIT(A) although he has referred to the issue in para 10 of the appellate order. Accordingly, we remand back this issue to learned CIT(A) for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the assessment and this technical objection of the Assessing Officer was thus negatived. CIT(A) further took note of assessee s alternative contention that the Assessing Officer should have reduced proportionate salary of field staff and other expenses from marketing receipts before reducing the same from profits. CIT(A), following his decision in assessee s own case for the assessment year 1996-97, held that the marketing receipts are not profits of industrial undertaking and hence the Assessing Officer was justified in reducing 90 per cent of such receipts from the profits while computing deduction under section 80HHC. However, he agreed with the assessee s submission that for earning marketing receipts, certain expenses are to be incurred and therefore only 90 per cent of the net marketing receipts, which should be reduced from the business profits. Accordingly he directed the Assessing Officer to examine as to what is the proportionate salary of field staff and other expenses, which are to be reduced from the marketing receipts, and to consider only net marketing receipts for computation of deduction under section 80HHC. Aggrieved by the above order, assessee is in appea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0HHC, we find that these receipts have been earned by the assessee in respect of products of foreign principal marketed by the assessee in India, therefore, these have got no connection with the export activities of the assessee, especially when no material has been brought on record to show that the assessee s exported products and these products are the same and assessee got these marketing rights only because of export of its own products. As the learned CIT(A) has directed to exclude only 90 per cent of net marketing receipts i.e., gross receipts as reduced by direct expenditure incurred by the assessee to earn the same as per clause ( baa ) of Explanation to section 80HHC, the same is liable to be upheld. We order accordingly. We further hold that such gross marketing receipts would also not form part of total turnover. Thus, the appeal of the assessee on this ground fails and dismissed. 27. The next ground (Ground Nos. 9 to 14) of objection by the assessee is directed against the order of the CIT(A), confirming the disallowance of Rs. 6 crores being payment to M/s Lyka Labs Ltd. under agreement dated 20 th Jan., 1998. 28. It is the case of the assessee that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ists and institutions shortlised by M/s. Lyka Labs Ltd. with respect to formulations, visual aid designs, copies of promotional material used, so as to establish itself in the market. Copy of agreement between the assessee and M/s Lyka Labs Ltd. dated 20th Jan., 1998 was submitted before the Assessing Officer. It was further contended that the payment is for a short-term advantage in marketing of Nitroglycerine formulations in the initial stages, as such expenditure being revenue in nature is allowed under section 37 of the Act. It was also contended that the expenditure does not fall within the ambit of section 35AB as the said section is applicable only in the case of technical know-how pertaining to manufacturing/processing. 30. However, the Assessing Officer did not agree with the contentions of the assessee. He held, purpose of this know-how obtaining ranges from clinical data, reports on clinicical trials, side effect and contra-indications of the drug to information to educate doctors, physicians, etc. which shows that it is technical know-how as such covered under section 35AB. Accordingly, Assessing Officer allowed deduction of 1/6th of the total amount for the ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of various cardiac products and desires to expand its market share/activities in the field of Nitroglycerine based formulations. While deciding the issue, CIT(A) has taken note of the following three important clauses : (3) The obligations undertaken by Lyka hereunder shall not be assigned by Lyka to any third party without the prior written consent of USV. (4) Lyka undertakes not to disclose the data, details and the scientific and marketing know-how referred to herein to any third party for a period of at least three years from the date thereof. (8) For a period of 5 years from the date of this agreement Lyka shall not compete with USV directly or indirectly or through its affiliates in the promoting, distribution and selling activities of formulations made from the bulk drug Nitroglycerine i.e. formulations whose major ingredient is the bulk drug Nitroglycerine. 34. Considering that M/s Lyka Labs Ltd. was prevented from disclosing the know-how to any third party for a minimum of three years and further it undertook not to compete with the assessee company in this field for five years, which is in the nature of non-compete agreement and further taking note ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oid business competition at p. 1622 of Vol. II of 1991 Edition of Chaturvedi Pithisaria s Income-tax Law : Payment made to ward off competition in business to a rival 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 tie same could 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 on the circumstances and the facts of each individual case [ CIT v. v. Coal Shipments (P) Ltd. 1972 CTR (SC) 151 : (1971) 82 ITR 902, 910 (SC), Devidas Vithaldas Co. v. CIT 1972 CTR (SC) 28 : (1972) 94 ITR 277, 285 (SC)]. Ordinarily, money paid to keep out a potential competitor in business, where the benefit is of an enduring nature, is on expenditure in the nature of capital. [ Behari Lal Beni Parshad v. CIT (1959) 35 ITR 576 (Punj.); Assam Bengal Cement Co. Ltd. v. CIT (1955) 27 ITR 34 (SC); Orissa Road Transport Co. v. CIT (1970) 75 ITR 126 (Ori.)]. Where, however, the benefit is not o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imed deduction of only Rs. 50 lakhs in the P L a/c while the Assessing Officer added Rs. 6 crores, need to be rectified. Aggrieved by the above order, assessee is in appeal before the Tribunal. 37. Learned counsel for the assessee brought our attention to paper book pp. 5 to 10, agreement dt. 20th Jan., 1998, entered into between M/s Lyka Labs Ltd. and the assessee, particularly cl. 5, which reads as under : 5. Lyka shall not disclose to any third party any information pertaining to business of USV which comes in its possession in the course of discharging its obligations hereunder unless the same is in public domain. Schedule referred to above Scientific and marketing know-how ( a ) Clinical data, scientific details and reports on clinical trials carried out by Lyka in respect of the formulations based on the bulk drug Nitroglycerine. ( b ) Source of manufacture of formulations from the bulk drug Nitroglycerine. ( c ) Break up of statewise list of wholesalers, stockists and dealers of the formulations. ( d ) Break up of statewise sales of formulations for last 5 years. ( e ) Break up of statewise list of specialists, doctors, cardiologists and insti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, which would remain effective for a period of five years, learned counsel submitted, is incorrect. He submitted, the decisions relied upon by the CIT(A) to come to the above conclusion cannot be applied strictly. Learned counsel submitted, particularly bringing our attention to the decision of the Hon ble Supreme Court in the case of K.T.M.T.M. Abdul Kayoom v. CTT (1962) 44 ITR 689 what is attributable to capital and what to revenue cannot be decided either exhaustively or universally. Each case depends on its own facts. Even a single significant detail may alter the entire aspect and the conclusion arrived at cannot be made applicable in a given case. He particularly stressed the finding of the Hon ble Supreme Court: to decide, therefore, on which side of the line a case falls, its broad resemblance to another case is not at all decisive. What is decisive is the nature of the business, the nature of the expenditure, the nature of the right acquired, and their relation inter se, and this is the only key to resolve the issue in the light of the general principles, which are followed in such cases. 39. Relying upon the Special Bench decision of the Tribunal in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... curring expenditure in the nature of operational expenses. If the expenditure is for the initial outlay or for acquiring or bringing into existence an asset or advantage of an enduring benefit to the business that is being carried on, or for extension of the business that is going on, or for a substantial replacement of an existing business asset, it would be capital expenditure. If, on the other hand, the expenditure, although for the purpose of acquiring an asset or advantage, is for running of the business or for working out that asset with a view to produce profit, it would be revenue expenditure. If the outgoing is so related to the carrying on or the conduct of the business that it may be regarded as an integral part of the profit-earning process or operation, and not for the acquisition of an asset of a permanent character, the possession of which is a condition precedent for the running of the business, then it would be expenditure of revenue nature. If it is intrinsically a capital asset, it is immaterial whether the price for it is paid once and for all, or periodically, or whether it is paid out of capital, or income, or linked up with net sales, the outgoing, in such a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s business. Agreement with M/s Lyka Labs Ltd. was not for venturing into any new line of business. It was only for developing the market intrinsically linked with running of existing business. It is true, assessee entered into agreement with M/s Lyka Labs Ltd. with the sole intention of getting scientific and commercial know-how with a view to increase the profit. Hence, learned counsel submitted, in view of the Special Bench decision of the Tribunal in the case of Peerless Securities Ltd. v. Jt. CIT ( supra ), the expenditure partakes the character of revenue expenditure and thus it is to be allowed. 41. Learned counsel assailed the view taken by the learned CIT(A) that the assessee acquired the know-how from M/s Lyka Labs Ltd. and it is an enduring benefit. He submitted, assessee has not obtained any benefit or advantage except the advantage of enabling to conduct assessee s business more profitably by adopting techniques of manufacturing and marketing formulations of existing basic product, while keeping the fixed capital unaltered and intact. Assessee s expenditure was not at all in the capital field. 42. Coming to the decision of the jurisdictional High Court i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e know-how documentation. Therefore, it can hardly be said that the assessee obtained an advantage of, an enduring nature. It is required to be noted that the assessee was not a new unit engaged in manufacturing various types, of motors and weighing machines and this advantage or benefit even if acquired to facilitate to run the existing business, it should be treated as revenue expenditure. 43. Again learned counsel brought our attention to the decision of the Hon ble Calcutta High Court in the case of CIT v. Avery India Ltd. [1994] 207 ITR 813 which is in tune with the decision of the Hon ble Supreme Court in the case of Empire Jute Co. Ltd. ( supra ), wherein their Lordships observed : a benefit that might endure long in the assessee s business may nonetheless be in the revenue field, if the benefit is in respect of asset which is part of the circulating capital . Learned counsel submitted, in the instant case of the assessee, the know-how obtained by the assessee from M/s Lyka Labs Ltd. does not form part of its fixed capital. Possession of the know-how is intrinsically linked with running of the existing business of the assessee. Assessee merely wanted to take advan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... main so even after ten years, learned counsel submitted, assessee has not derived any enduring benefit from the know-how obtained by this agreement. 45. Learned counsel again relied upon the decision of the Hon ble Delhi High Court in the case of CIT v. Goodyear India Ltd. (2000) 243 ITR 239 1 . In this case the Hon ble High Court held that the consideration was paid for betterment of the product and to enlarge the range of its existing products and the expenditure was an outlay of business in order to carry it on to earn better profit; as such this is to be treated as revenue expenditure. Learned counsel submitted, in the instant case the assessee acquired the right to use technical knowledge and information to manufacture market the product already in the existing line of business. Agreement with M/s Lyka Labs Ltd. was for enlarging the range of existing products by marketing formulations based on bulk drug Nitroglycerine. Assessee basically obtained scientific and marketing information. This has not been disputed at any stage. Hence, learned counsel submitted, this is revenue expenditure. For the same proposition he relied upon the decision of the Hon ble Madras High C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alent then to Rs. 2,39,625/-), agreed to supply to the appellant the subcultures of Meiji s most suitable penicillin producing strains in a pilot plant, the technical information, know-how and written description of Meiji s process for fermentation of penicillin along with a flowsheet of the process in the pilot plant, and the design and specifications of the main equipment in such pilot plant, and to arrange for the training of the appellant s representatives in Meiji s plant in Japan at the appellant s expense and advise the appellant in large scale manufacture of penicillin for a period of two years. The appellant was to keep the technical know-how confidential and secret and was net to seek any patent for the process. For the assessment year 1964-65, the appellant claimed deduction of the sum of Rs. 2,39,625/- as a revenue expenditure. Both the Department and the Tribunal rejected the claim holding that the expenditure was capital in nature . in support of assessee s claim and submitted that in the instant case of the assessee the facts are identical. Learned counsel further brought our attention to the observation of the Hon ble Supreme Court in the case of Alembic Chemi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... detail, that if a person starting absolutely a new business, comprehends that another known person may compete with him in future, and to ward off such competition enters into a non-compete agreement with him, then the agreement is certainly for increasing the profitability of his existing business. It is so because, Tribunal held, the agreement ensures that the first person will be able to carry on business without competition from the second and thereby enhance the profitability. To come to the above conclusion Tribunal relied upon the decision of the Hon ble Supreme Court in the case of Empire Jute Ltd. ( supra ), wherein one jute mill purchased the loom hours from others claimed deduction of that amount paid as revenue expenditure. Reversing the decision of the Hon ble High Court, Hon ble Supreme Court held that the amount paid by the assessee for purchase of loom hours was in the nature of revenue expenditure. The Hon ble Supreme Court held that by purchase of loom hours from the other mills, assessee has not obtained any, new asset. There was no addition or expansion of profit-making apparatus. Acquisition of additional loom hours did not add to the fixed capital of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed up his arguments as under : ( a ) Where the know-how is obtained for manufacturing a new product in the existing line of business of the assessee or for the purpose of development and/or better exploitation of the market, the expenditure incurred for obtaining the said know-how is revenue expenditure. ( b ) Where the know-how is utilised for improving the profitability of an existing business and not for starting a new business, the expenditure for obtaining the same would be revenue expenditure. ( c ) A benefit that might endure long in the assessee s business may nonetheless be in the revenue field, if the benefit is in respect of an asset which is part of circulating capital. ( d ) Expenditure to acquire knowledge cannot be disallowed merely because knowledge dies hard. Where the expenditure, although enduring in character, has its impact on the running of the business, there can be no doubt that it is revenue expenditure. ( e ) The period for which the know-how, etc. could be used is of little consequence in determining whether the expenditure incurred should be considered as revenue or capital expenditure. Even if the know-how could be used for an indefinite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ( d ) The compensation received for transfer of know-how did not affect or alter the capital structure of M/s Lyka Labs Ltd. M/s Lyka Labs Ltd. did not dispose of any capital asset by entering into the agreement with USV. ( e ) M/s Lyka Labs Ltd. earned consideration for granting the know-how not by parting with any capital asset but merely by applying the technical data generated by it differently in its trade. In view of the above, learned counsel submitted, the orders of the Revenue authorities are liable to be reversed. 51. Replying to the above, learned Departmental Representative supported the orders of the Revenue authorities and submitted, first of all the assessee capitalised receipt. Secondly, the learned Departmental Representative submitted, whatever data received by the assessee is permanent and this gives the assessee an enduring benefit. Learned Departmental Representative further submitted, there is a non-compete clause and the payment is made for this. He relied upon the decision of the Hon ble Delhi High Court in the case of Triveni Engg. Works Ltd. v. CIT [1998] 232 ITR 639 and submitted, in this case the assessee paid Rs. 5,000/- to a company for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellant s established business and not to a new product indicated that what was stipulated was an improvement in the operations of the existing business and its efficiency and profitability not removed from the area of the day-to-day business of the appellant s established enterprise. The financial outlay under the agreement was for the better conduct and improvement of the existing business and was revenue in nature and was allowable as a deduction in computing the business profits of the appellant. 54. We also find that the view canvassed by the learned counsel gets support from the decision of the Hon ble Supreme Court in the case of Empire Jute Co. Ltd. ( supra ) wherein the Hon ble-Supreme Court held, purchase of loom hours plying an aggregate sum does not go to the capital expenditure but it only facilitates the looms to work its full capacity and therefore the expenditure incurred for purchase of loom hours by a mill could only be treated as revenue expenditure. 55. It is an undisputed fact that the assesses is engaged in the manufacturing and marketing of various pharmaceutical products and also have the knowledge of manufacturing products made from the bulk dr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a benefit of enduring nature; hence it was of a capital nature and disallowed the same accordingly. 56. Learned counsel has vehemently argued that the impugned payment is of revenue nature because it has resulted in increasing the market share, higher revenues and carrying of manufacturing/marketing operations more efficiently. It has also been contended that the assessee by obtaining this information has curtailed the period which could have been consumed in generating these informations by the assessee, on its own, therefore, the revenue expenditure which would have been incurred by the assessee if the same informations were generated on its own has been incurred in this form and also the assessee has been able to generate revenue without wasting time, hence, the expenditure so incurred is nothing more than the recurring of revenue expenditure in one go and is allowable as such. Both these contentions of the assessee have sufficient force in view of the judicial decisions relied on by the assessee, particularly in the light of the decision of the Hon ble Supreme Court in the case of Empire Jute Co. Ltd. ( supra ), which is clearly applicable. 57. Having stated so, we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d marketing know-how obtained by the assessee company, it becomes amply clear that the emphasis of the assessee company is on getting the information/data created by M/s Lyka Labs Ltd. in a readymade manner so as to reduce the gestation period and to enter into the activities at a rapid pace and it is because of this reason only and having regard to the nature of information, no judicial remedy has been provided for future obligations to be observed by both the parties. In view of such a situation, in our considered view, in substance the agreement though refers to non-disclosure of information by the assessee and M/s Lyka Labs Ltd. and non-competition by M/s Lyka Labs Ltd. for specified period, payment- is for of information regarding clinical data, scientific details and valuable market information only. Further, even if some of the consideration is attributed towards non-competition, the assessee s case finds support from the decision of the Ahmedabad Bench of the Tribunal in the case of Smartchem Technologies Ltd. ( supra ) wherein the. Tribunal followed the decision of the Hon ble Supreme Court in the case of Empire Jute. Ltd. ( supra ) in concluding that the expenditure t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /- under the head Miscellaneous expenses . It was submitted that the assessee company and its promoters had several disputes. There were various proceedings on different issues. Had the litigation allowed to continue, it would damage assessee s reputation and hence assessee made the payment. It was submitted, in fact assessee s business stagnated between the accounting year ended on 31st March, 1997 and 31st March, 1998 with paltry increase of Rs. 7 crores in the turnover. There were many enquiries from excise authorities, sales-tax authorities and regional director under the Companies Act. All this effected assessee s business and to avoid unnecessary litigation and to ensure a stable and peaceful existence, assessee made the impugned, payment of Rs. 12.5 crores. The payment was made under the order dated 10th March, 1998 of the CLB. CLB found that the pendency of litigation adversely affected the reputation, triggered false signals in the pharmaceutical industry and seriously affected the business growth of the assessee and therefore CLB held that we are satisfied that the money paid by USV and to be paid by USV is for the legitimate and genuine business reasons of USV. Shri A.V ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest of the majority shareholders. Apparently, such expenses-could be paid out of the accounts of the assessee company, not only because it was closely held but also because the majority shareholding of Mrs. Leena Gandhi Tewari and her husband was supremely dominant having 46,391 shares whereas other shareholders having 1,641 shares. He held, IT Act is a self-contained code and taxability of receipts or allowance of an expenditure are to be determined only within the scheme of the Act itself. The provisions of a statute which is not cognate or pari materia to the IT Act, cannot be taken into aid to judge the taxability or otherwise of a receipt or allowance or otherwise of an expenditure. 65. After discussing the issue in detail and placing reliance on the decisions of the Hon ble Supreme Court in the case of CIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140 and Bombay Steam Navigation Co. (P) Ltd. v. CIT [1965] 56 ITR 52 (SC); and also the decision of the jurisdictional High Court in the case of Adarsha Dugdhalaya v. CIT [1971] 80 ITR 49 (Bom.), Assessing Officer decided the issue against the assessee. Particularly taking note of the decision in the case of A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the fact that such expenditure was laid out wholly and exclusively for the purpose of carrying on the business of the assessee. (3) What must be considered is the purpose for and the object of expenses at the time when it was incurred. (4) The company may well become a pawn in the hands of different persons at different times having very little say in the course of conduct of litigation or of its business and incurring expenditure in the circumstances created by others, the company may well act outside its character. 67. On the basis of the chart given at para 14( a ), Assessing Officer held that the dispute never affected the assessee adversely. Assessee disclosed fast moving upward curve of turnover. It did not affect assessee s reserve and surplus. On the other hand, it multiplied many times. He rejected assessee s contention that the domestic disputes debilitated business of the assessee and its smooth running. He held, this is against the evidence on record. Thus he rejected assessee s claim vide para 15 of his order, observing as under : 15. To sum up, for the purpose of section 37(1) of the IT Act, the cumulative effect of the evidence as discussed above whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mily members in the Gandhi Group of companies. The Impugned expenditure consequently sprang from the terms of settlement as the consideration for clinching the arrangement. The consideration so paid had nothing to do with the ongoing business activities of the assessee company or for that matter other family companies. The expenditure of Rs. 12,06,53,113/- debited in the books of the assessee company had therefore, the character of personal expenditure. Aggrieved by the above order, assessee approached the first appellate authority. 68. It was contended before the CIT(A), in addition to the facts brought on record before the Assessing Officer, that the assessee company s business was adversely affected and that the payments were made to keep the interest of the assessee company or otherwise assessee would have been adversely affected. It was further submitted that the holding company, viz., APCO has large number of shareholders who are not in any way connected with the promoter family. Out of total shares of 48,032 in APCO, 46,391 shares were held by Leena and her husband Prashant, noticed the CIT(A). Both these companies are closely held and practically no other shareho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assets to three family members and the assessee is unfairly trying to claim this expenditure as business expenditure. He agreed with the Assessing Officer s finding that there is no relationship between the disputes and the business of the assessee. The payments were made for settlement of the family disputes between the two groups. Hence, he confirmed the order of the Assessing Officer. Aggrieved by the above order, assessee is in appeal before the Tribunal. 69. The brief facts, narrated in para 7 of the written submission, are as under : Assessee is a 98 per cent subsidiary of American Products Company Ltd. (for short APCO ). Assessee as well APCO; and also other two companies, viz. M/s Vital Pharmacal (P) Ltd. (for short VP ) and M/s Vital Organics (P) Ltd. (for short VO ) belonged to erstwhile Gandhi family Group. The family of Shri A.V. Gandhi, his family trust and HUF owned almost entire shares, of these companies. Management and control of these companies was with Shri A.V. Gandhi. He died on 15th January, 1986, leaving his widow Dr. Pramila Gandhi and three daughters, viz. Leena Gandhi Tewari, Sheela Gandhi Rao and Sunita Gandhi. Mrs. Leena Gandhi Tewari a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lders. There was no business exigency for this payment. It is not wholly and exclusively expended for the purpose of business of the company. ( f ) During the intervening period of Shri A.V. Gandhi s death and the final settlement, while the disputes were going on, it never adversely affected. ( g ) The payment was by family members to family members with objectives to which the assessee and its business were total strangers. The coffers of the assessee were used for clinching absolute control. 70. This finding of the Assessing Officer was approved by the CIT(A) almost for the same reason. To come to the above conclusion, CIT(A) also relied upon the following decisions : ( i ) Premier Construction Co. Ltd. s case ( supra ) ( ii ) Shiwalik Talkies Ltd. s case ( supra ); ( iii ) Adarsha Dugdhalaya Ltd. s case ( supra ); ( iv ) Madurai District Central Co-operative Bank Ltd. ( supra ); ( v ) Malayalam Plantations Ltd. s case ( supra ); ( vi ) Bombay Steam Navigation Company (P) Ltd. ( supra ). 71. It is the submission of the learned counsel for the assessee that the Revenue authorities failed to appreciate the facts. Firstly, the Departmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ely affected by these litigations. That is why the CLB made the above quoted observation in its order dated 3rd April, 1998. No doubt the observation is contextual in nature and content, but there is no manner of saying that this is out of context. The business of the assessee company was affected adversely by plethora of unwarranted litigations and baseless allegations against its management. Had the assessee not incurred the impugned expenditure to extricate itself from stifling conundrum, its potential growth would have been lost and the development would have been jeopardised. Thus, the payment was made for the very survival of the assessee company. The assessee, like any other prudent businessman, could have scarcely afforded such a possibility. There is no doubt that the impugned amount was laid out and expended wholly and exclusively for the purpose of business. Assessee also relied upon the decision of the Hon ble Supreme Court in the case of Malayalam Plantations Ltd. ( supra ). 73. Learned counsel further submitted, in order to appreciate the facts leading to the dispute, the background of the management is also necessary to be submitted briefly. He submitted, afte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hing of skin care products based on Lanolin . The foreign party withdrew after they came to know of the litigations and the difficulties. In 1997 the assessee negotiated with Alfa Wassermann for marketing their skin care products of well known international brand Pikenze . Negotiations suspended in midway as they suddenly hesitated to enter into an agreement, with the disputes going on in the company. Hence, learned counsel submitted, in these circumstances, putting an end to the deteriorating circumstances of the company was a must and that is what the assessee achieved by this payment and the payment was incurred out of commercial expediency is borne out by following subsequent events : ( a ) After the assessee freed itself form the shackles of litigations, the profit before tax for the period ended 31 st March, 2000 jumped to Rs. 34.46 crores from Rs. 15.67 crores in the preceding year. ( b ) Assessee established a subsidiary in the year ended 31st March, 2000 for marketing paediatric range of pharmaceutical specialities. ( c ) Assessee s international business including exports through orders with developed nations increased about 50 per cent during the year ended ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 30 December, 1997 31 December, 1998 31 December, 1999 23 April, 2000 19 Thus the facts narrated above speak for itself eloquently and credibly. Hence, learned counsel submitted, the orders of the Revenue authorities are liable to be reversed. 77. Learned counsel further submitted, the opinion of the CLB is not a mere opinion. It is not merely a forum of arbitration between the disputing parties. The truth is far from the above notion of the Revenue authorities. CLB is a creature of section 10E of the Companies Act, 1956. Sub-section (4C) of section 10E vests in the CLB the same powers as are vested in a Court under the Code of Civil Procedure, 1908. Sub-section (4D) provides that every proceeding before the CLB shall be deemed to be a judicial proceeding within the meaning of section 193 and 228 of the Indian Penal Code and for the purpose of section 196 of CPC. The decision of the CLB is appealable before the respective High Court. Learned counsel further objected the finding of the Revenue t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ily. The matter ultimately reached before the CLB. They ordered certain payments to one group, this is nothing but a payment made to keep the interest of the majority shareholders or for controlling power of the company. This has nothing to do with the business of the assessee. Even during the litigation was going on, the turnover of the assessee increased, which shows that there was no adverse affect as a result of dispute between the two groups. This is actually nothing but family settlement and not a claim allowable. In support of the above view, learned Departmental Representative relied upon the decision of the Hon ble Kerala High Court in the case of S. Veeriah Reddiar v. CTT [1960] 38 ITR 152 . In this case the Hon ble High Court held, in considering the question whether the amounts were laid out or expended wholly for the purpose of business it will be open to the Revenue authorities to consider whether the employees are related to the assessee and whether the payments to them were made entirely on account of business considerations or on account of some extraneous consideration. In the instant case, learned Departmental Representative submitted, the payments were made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company would not have revived well. It is not correct to say that reaching such a conclusion is out of context. 81. Now we come to the decisions relied upon by the contending parties. The relied upon by the learned CIT(A), on which reliance has also been placed by learned Departmental Representative, i.e. Madurai District Central Co-operative Bank Ltd. ( supra ) and Shailendra Kumar s case ( supra ), does not further Revenue s case. In the case of Madurai District Central Co-operative Bank Ltd. ( supra ), Hon ble Supreme Court held, IT Act is a permanent enactment and in the case of Shailendra Kumar ( supra ), Hon ble Allahabad High Court held that IT Act is a self-contained code and the taxability or otherwise of receipts to be determined with reference to the provisions of the Act. It does not mean that a finding of fact by an authority, though it is not binding as such, cannot be considered and taken note of while coming to a conclusion on facts. In the case of Shailendra Kumar ( supra ), at p. 508, the Hon ble Allahabad High Court observed as under : The question for consideration is whether to examine the scheme of Act of 1961, aid can be taken from the F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness and is incidental to it. In fact, this decision supports the case of the assessee. Discussing the issue, their Lordships held : the expenditure incurred by the assessee in his capacity as agent of another is not a deductible item. In other words, the decision went against the assessee because it was a payment made as an agent. Assessee paid the estate duty on behalf of another person, which is not wholly and exclusively for the purpose of business, Hon ble Supreme Court held. 83. Corning to the decision relied upon by the Revenue authorities in the case of Adarsha Dugdhalaya ( supra ), this was a case wherein as directed by the award, payments were made by the assessee towards arbitrators fees, solicitors fees and costs on both sides in two suits and this amount was claimed as deduction in the assessment. Hon ble Bombay High Court held, this was not an expenditure connected with carrying on of business of the assessee but to determine the mutual rights and obligations of the partners on the terms and conditions on which they had agreed to enter into partnership from time to time. Hence, their Lordships held, this is not expenditure in the nature of revenue but capi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss or to the betterment of the business, even then, it cannot be held, it is an expenditure wholly and exclusively for the purpose of business. In the instant case of the [assessee we have seen that had the settlement not been taken, the business self would have jeopardized. 85. Assessing Officer has given a chart of turnover, profit, etc. vide pp. 29 and 30 of his order, para 14( a ), to show that assessee s business turnover and profit because of this litigation has never come down. In other words, it has not adversely affected. On the other hand, learned counsel for the assessee has contended that mere increase in the turnover and profit alone is not criteria to decide whether the business adversely affected or not. We have mentioned in para 70 of this order, the ranking given and also the parties who entered into negotiations with the assessee and because of the litigations/dispute between the waring groups of the family, withdrawn from the negotiations. This clearly shows that the business of the assessee or the growth potential of the assessee had definitely been affected. In short, we are of the opinion that the view canvassed by the learned counsel is to be accepted. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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