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TMI Blog2013 (1) TMI 393X X X X Extracts X X X X X X X X Extracts X X X X ..... of the order dated 16th September 2002, passed by the Commissioner (Appeals). Following grounds have been raised by the Revenue:- "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in - 1. deleting the addition of Rs.2 Crores made on account of L.T.C.G. which represents amount received for desisting from utilisation of business know-how; 2. deleting the addition of Rs. 2 Crores even while holding that utilisation of business know- how constitutes an asset within the meaning of Section 2(14) of the IT. Act and its relinquishment shall invite charge of capital gain in accordance with Section 45 of the I.T. Act: 3. deleting the addition of Rs.6 Crores for computing book profit under Section 115JA as these amounts were not credited to P & L A/c. and directly brought to reserve account in the balance-sheet: 4. deleting the addition of Rs.6 Crores made for computing book profit under Section 115JA relying on the decision of Appollo Tyres 255 ITR 273 where the facts of the case were different: 5. relying on the decision of Supreme Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxable capital receipt. While the assessee holds this view firmly, it has out of abundant caution deposited a sum of Rs.3,00,00,000/- in DSP Menu Lynch Bond Fund (Growth) qualifying for exemption under section 54EA. The assessee reserves the right to withdraw this investment and convert it into cash once the non-taxability is confirmed by the Assessing Officer. The details of investment made alongwith necessary proof is sent herewith." 5. During the course of assessment proceedings, the Assessing Officer required the assessee to explain as to why the sum of Rs. 1.00 crore received on account of goodwill and the sum of Rs. 5.00 crores received on account of restraint covenants should not be taxed. The Assessing Officer further observed that both these amounts were credited by the company directly to the capital reserves account in the balance sheet and were not considered for Minimum Alternate Tax (for short "MAT") liability. Insofar as the sum of Rs. 1.50 crores received on account of sale of sales generating assets are concerned, the Assessing Officer found that the assessee has credited the same to the block of assets which has been offered as income under section 50 of the Inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ill Lynch Bond Fund (Growth) being one of the specified securities under section 54EA. The proof of investment has been verified. The investment has been made within prescribed time of six months from the date of transfer. The claim for exemption is therefore accepted. Being nil cost asset, the value of gross consideration equates the net sale consideration as also capital gains. Since part of the amount is invested, exemption is equivalent to investment of Rs. 3.00 crores is allowed and the balance sum of Rs. 2.00 crores is brought to tax a long term capital gain." 7. Further, with regard to the computation of book profit under section 115JA, the Assessing Officer observed that the same should have been shown in the Profit & Loss account as a book profit for MAT liability instead of directly crediting it to the capital reserves account. In response to the show cause notice, the assessee, in sum and substance, submitted that - (i) Profit and Loss account is supposed to contain normal operational results of the working of the company. One time realization of the assets and capital receipts need not be routed through Profit and Loss account; (ii) Capital gain which is exempt under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he held that the Revenue has not accepted the said decision and an appeal has been preferred before the Jurisdictional High Court; and lastly, the methodology adopted by the assessee for not routing these receipts through Profit & Loss account but directly crediting to the capital reserve account is nothing but a device to mitigate the tax liability and, therefore, the judgment of Hon'ble Supreme Court in McDowell and Co. Ltd. v/s CTO, [1985] 154 ITR 148 (SC), gets clearly applicable. In support of his conclusion, he relied upon various decisions rendered by the Tribunal as given in Pages-12 and 13 of the assessment order. 9. Accordingly, he added the receipt of Rs. 6.00 crores to the book profit while computing the income under section 115JA. 10. The assessee, being aggrieved by the stand so taken by the Assessing Officer, preferred first appeal, wherein before the learned Commissioner (Appeals), a detail submission with regard to the non-taxability of Rs. 5.00 crores received towards restraint covenant was made and reliance was placed upon various case laws in support of the same. The learned Commissioner (Appeals), after taking into consideration various judgments as relied up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e devoid of merit. In fact I find merit in the submission of the appellant that the extinguishment of every type of right does not give rise to capital gain. Though here, there is no extinguishment as shall be discussed later. In this connection, I find that the provisions of law as contained in section 28(va) brought on statute book with effect from 1.4.2003 by Finance Act, 2002 lend credence to this line of argument by the appellant. In my considered view, the law legislated by Parliament by Finance, 2002 clearly brings into its purview the receipts on account of restrictive covenants but this law is effective from 1.4.2003 and therefore has no application to the A.Y. 1999-2000 wherein the appellant received Rs.5 cores as a consideration for restrictive covenants to carry out its business and not to disclose and use know-how etc. for a period of ten years. 5.8 As regards A.O's reliance on order of the learned CIT(A) XLII in the case of Pane Soft Drinks P Ltd. for A.Y. 1998-99 in appeal No.CIT(A) XLIIIIT 213/JC SR 6/98-99, it may be mentioned that there the payment received is on account of 'right of first refusal' and here in case of the appellant the consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs and therefore was in nature of capital receipt not liable to tax. Accordingly the addition of s.2 crore made by the A.O. treating this amount as long term capital gain is deleted." 11. The Revenue, being aggrieved by the order so passed by the learned Commissioner (Appeals), is in further appeal before the Tribunal. 12. Before us, the learned Departmental Representative submitted that the amount of Rs. 5.00 crores received by the assessee on account of restraint covenant is nothing but extinguishment of right which amounts to transfer within the meaning of sub-section 47(ii) pf section 2 and, therefore, the amount received is on account of transfer of capital assets liable to be taxed as capital account and the Assessing Officer was fully justified in taxing the same. The learned Departmental Representative, during the course of hearing, in response to a query raised by the Bench as to whether the provisions of section 55(2)(a) would be applicable in this case, submitted that provisions of section 55 will come into force only when it is held to be capital receipt and cost of acquisition is to be determined and not otherwise. He thus, strongly relying upon the findings and conc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 55(2)(a) of the Act. We do not find any merit in such a conclusion drawn by the Assessing Officer for the reason that section 55(2)(a) is for the purpose of determining the cost of acquisition in relation to a capital asset which also includes right to manufacture produce or process any article or thing or right to carry on any business. In the present case, the assessee has not received any right to carry such kind of activities. In fact, the amount has been given for not to carry out any such business activities or manufacturing. Regarding other aspect that the assessee has itself treated part of its receipt as capital gain by making the investment in specified securities for the purpose of exemption under section 54EA, will also not help the case of the Revenue as one has to see the nature of receipts and not the conduct of the assessee. As rightly pointed out by the learned Senior Counsel that if at all this sum can be treated to be as taxable income, the same can be taxed under the provisions of section 28(va) which has been brought in the statute w.e.f. 1st April 2003. The Hon'ble Supreme Court in Guffic Chem Pvt. Ltd. (supra) has held that prior to this period, such a paym ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t find any merit in the grounds raised by the Revenue and, consequently, the findings given by the learned Commissioner (Appeals) are upheld that the sum of Rs. 5.00 crores is treated as a capital receipt and is not chargeable to tax in the year under appeal. Thus, grounds no.1 and 2, are dismissed. 16. With regard to the inclusion of Rs. 5.00 crores and Rs. 1.00 crores under the computation of MAT liability under section 115JA, the learned Departmental Representative has heavily relied upon the detail reasoning given by the Assessing Officer and submitted that even though section 115JA provides that Profit & Loss account has to be maintained in accordance with the provisions of Parts-II and III of Schedule-VI of Companies Act, 1956, the Assessing Officer always has the right to examine as to whether the assessee's Profit & Loss account has been made in accordance with the said provision or not. In case, the Profit & Loss account has not been drawn in accordance with the provisions of Companies Act, 1956, he has the right to tinker with the assessee's Profit & Loss account while computing the income under section 115JA. In support of his contention, he has placed heavy reliance in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isdiction to go beyond the net profit shown in the Profit & Loss Account except to the extent provided in the Explanation. He submitted that this principle has been reiterated in several decisions. Regarding the judgment of Jurisdictional High Court in Vee Kay Lal (supra), he submitted that the same has been considered by the Jurisdictional High Court in a later judgment of CIT v/s Akshay Textile Trading, [2008] 304 ITR 401 (Bom.). He further relied upon various other judgment rendered by the Hon'ble Supreme Court and the Jurisdictional High Court. He, thus, concluded that the findings given by the Commissioner (Appeals) are wholly in accordance with the provisions of law and the ratio laid down by the Hon'ble Supreme Court. 18. In the rejoinder, the learned Departmental Representative submitted that none of the decisions relied upon by the Sr. Counsel has been distinguished the case of Vee Kay Lal (supra) or has given any observation that it is no more a good law. The Assessing Officer has not tinkered with the accounts but he has only applied correct accounting principle in accordance with the provisions of Companies Act, 1956. 19. We have carefully considered the rival content ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accordance with the provisions of Parts II and III of Sch. VI to the Companies Act" was made for the limited purpose of empowering the assessing authority to rely upon the authentic statement of accounts of the company. While so looking into the accounts of the company, an AO under the IT Act has to accept the authenticity of the accounts with reference to the provisions of the Companies Act which obligates the company to maintain its account in a manner provided by the Companies Act and the same to be scrutinised and certified by statutory auditors and will have to be approved by the company in its general meeting and thereafter to be filed before the Registrar of Companies who has a statutory obligation also to examine and satisfy that the accounts of the company are maintained in accordance with the requirements of the Companies Act. In spite of all these procedures contemplated under the provisions of the Companies Act, we find it difficult to accept the argument of the Revenue that it is still open to the AO to re-scrutinise this account and satisfy himself that these accounts have been maintained in accordance with the provisions of Companies Act. In our opinion, reliance pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om.) and held that in view of the judgment of Hon'ble Supreme Court in Apollo Tyres Ltd. (supra), the Assessing Officer cannot re-work the net profit prepared by the company in accordance with Companies Act. Once this issue has been settled by the Hon'ble Supreme Court, we do not find necessary to deal with the other decisions relied upon by the parties as the law is very clear on this issue specifically the scope of the Assessing Officer that tinkering of assessee's Profit & Loss Account except for those provided in Explanation thereto. 21. In the present case, the Assessing Officer has heavily relied upon clause (b) of Explanation to section 115JA which provides that the amount carried to any reserve whatever name called should be increased in the book profit. He has also referred to various dictionary meaning for the word "Profit & Loss Account". The Explanation is very clear that the book profit means the net profit as shown in the Profit & Loss Account which has been prepared in accordance with Parts-II and III of Schedule-VI to the Companies Act, 1956, and such net profit has to be increased and reduced in view of the provisions given in the Explanation. Thus, the Explanatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le to tax without appreciation of the facts of the case. 2. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in directing the Assessing Officer to exclude the receipt of Rs. 14 crores in computing the book profit under section 115JA of the Act without appreciating the fact that the assessee has failed to prepare the Profit & Loss account in terms of Parts-I and II of Schedule VI of the Companies Act giving all the necessary details." 27. Ground no.1, is similar to grounds no.1 and 2, raised by the Revenue in ITA no.6571/Mum./2010, and in view of the findings given therein, ground no.1, is dismissed. 28. Ground no.2, is similar to grounds no.3, 4 and 5, as raised in Revenue's appeal in ITA no.6571/Mum./2010, and in view of the findings given therein, this ground is treated as dismissed. 29. In the result, Revenue's appeal is dismissed. We now take up assessee's Cross Objection no.164/Mum./2004, arising out of Revenue's appeal in ITA no.3757/Mum./2003, vide which, following grounds have been raised:- "On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in not dealing w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nbsp; 2. In the facts and circumstances of the case and in law, the learned CIT(A) erred in holding that compensation of Rs.23,17,936 paid to workmen was inadmissible as the expenditure was incurred upon closure of business. The appellant submits that there was no closure of business - even otherwise expenditure merited deduction. 3. In the facts and circumstances of the case and in law, the learned CIT(A) erred in rejecting the ground no, 7 challenging levy of interest under section 234B by holding it to be infructuous. Your appellant craves leave to add to amend, alter, delete and/or modify the above grounds of appeal on or before the final date of hearing of this appeal petition." 32. This appeal was represented by Mr. Rajan Vora, learned Counsel for the assessee. In ground no.1, the assessee has challenged disallowance of set-off of unabsorbed depreciation of Rs. 4.65 crores, pertaining to assessment years 1991-92 to 1996-97, against income chargeable under the head short term capital gains under section 50 of the Act. 33. Before the Assessing Officer, the assessee claimed that unabsorbed depreciation pertaining to assessment year 1996- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall be deemed as depreciation u/s 32(1), that is depreciation for the current year in the following year(s) to be set off against income under any head, like current depreciation. B. In the second period (i.e. A.Y. 1997-98 to 2001-02) i. Brought forward unadjusted depreciation allowance for and upto A.Y. 1996-97 (hereinafter called the 'First unadjusted depreciation allowance'), which could not be set off upto A.Y. 1996-97, shall be carried forward for set off against income under any head for a maximum period of eight A.Ys. starting from A.Y. 1997-98. ii. Current depreciation for the year u/s 32(1) (for each year separately starting from A.Y. 1997-98 upto 2001-02) can be set off firstly against business income and then against income under any other head. iii. Amount of current depreciation for A.Ys. 1997-98 to 2001-02 which cannot be so set off as per ii. above, hereinafter called the 'Second unabsorbed depreciation allowance' shall be carried forward for a maximum period of eight assessment years from the A.Y. immediately succeeding the A.Y. for which it was first computed, to be set off only agai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd that it is capital in nature after observing and holding as under:- "41. In the circumstances, it is to be seen whether the payment made to the employees leaving their services which in turn had arisen in the peculiar circumstances of the industrial undertaking of the appellant company having got closed in view of the said part of the business having been transferred can be held to be of revenue nature. There is no dispute that the employees to whom the payments were made were part of the work force of the unit that was transferred. Another part of the work force refuse to leave their job while the balance were taken by the new management as part of the business. Hence as far as the appellant is concerned, the payment was made on the closure of the industrial undertaking where these persons were employed. In the decision in the case of Coimbatore Premier Corp. P. Ltd. v/s CIT, 244 ITR 445 (Mad.) it has been held that compensation paid on the closure of the manufacturing unit to its workmen is not allowable as revenue expenditure. 42. In view of the facts in the instant case the payment was made as full and final settlement of dues conseque ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce about the change of the period over which the amount was written off. (iii) That the said expenses were incurred by the assessee to save expense. This was not refereable to any income-yielding asset. It must be allowed in its entirety in the year in which it was incurred and it could not be spread over a number of years even though the assessee had written it off in its books over a period of years. Further, the assessee had incurred the said expenses not to the tune of Rs. 10,02,23,735 but only Rs. 6,79,06,431. The remaining expenses were on account of gratuity, bonus, leave travel allowance, etc., which could not be spread over by the Assessing Officer over a period of sixty months. Therefore, the expenses relating to voluntary retirement scheme were a revenue expenditure and were an allowable deduction. Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC) followed. Taparia Tools Ltd. v. Joint CIT [2003] 260 ITR 102 (Bom) explained and distinguished." 44. Respectfully following the aforesaid ratio laid down by the Jurisdictional High Court, we hold that the retirement compensation paid to the wrokmen is revenue expenditure and is to be allowed in this year. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue is similar to grounds no.1 and 2 raised by the Revenue in ITA no.6571/Mum./2002, and in view of our decision given therein, we dismiss these grounds also. 49. Grounds no.5, 6 and 7, relate to implication of MAT on account of receipt of goodwill and non-compete receipts. 50. The issue arising out of grounds no.5, 6 and 7, is similar to the issue raised in ground no.3 4 and 5 in Revenue's appeal in ITA no.6571/Mum./2002, and in view of our decision given therein, these grounds are dismissed as such. 51. In the result, Revenue's appeal is dismissed. We now take up assessee's cross objection no.293/Mum./2003, arising out of Revenue's appeal in ITA no.6923/Mum./2002, wherein following grounds have been raised:- "1. In the facts and circumstances of the case and in law, the learned C.LT(A) erred in not dealing with following ground raised at Sr. No. 10.4 in our Grounds of Appeal before C.I.T(A) :- "Without prejudice to the above grounds of appeal, the Deputy Commissioner of Income-tax ought to have accepted contention of the appellant that at least to the extent the receipts were exempted under section 54EA, the receipts did not constitute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epreciation of Rs. 1,73,47,966, against the income of Rs. 10,44,29,082, under the head "short term capital gain" under section 50 of the Act. 56. Learned Counsel for the assessee submitted before us that unabsorbed depreciation pertains to assessment year 1997-98 and is allowed to be set-off in this assessment year against short term capital gain. He submitted that even though the Special Bench decision on this issue is against the assessee, however, the same has been now covered in favour of the assessee by the judgment of Hon'ble Gujarat High Court in General Motors Pvt. Ltd. v/s DCIT, passed in Special Civil Application no.1773/2012, vide judgment dated 23rd August 2012. 57. Learned Departmental Representative fairly agreed that this issue is covered in favour of the assessee by the aforesaid judgment of Gujarat High Court. 58. After carefully going through the order passed by the learned Commissioner (Appeals) and the judgment of Gujarat High Court, we find that the High Court held that provisions of section 32(2) as amended by Finance Act, 2001, permits the unabsorbed depreciation allowance available in assessment year 1997-98, 1999-2000, 2000-01 and 2001-02 to be carried f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that assessee's claim for set-off of unabsorbed depreciation is allowable against short term capital gain. Consequently, ground no.3, is hereby allowed. 60. Insofar as ground no.5 is concerned, the learned Counsel for the assessee submitted that this ground becomes purely academic if grounds no.1 to 4, raised by the Revenue in its appeal in ITA no.6923/Mum./2002, are allowed in favour of the assessee. 61. Since we have already dismissed the grounds no.1 to 4, raised by the Revenue in its appeal in ITA no.6923/Mum./2002, ground no.5, raised in this appeal has been rendered academic and hence, dismissed as infructuous. 62. Ground no.6, relates to charging of interest under section 234B and 234C of the Act. 63. Both the parties agree before us that this ground is consequential in nature. Accordingly, the Assessing Officer is directed to give consequential effect in accordance with law while computing the income of the assessee. 64. In the result, assessee's appeal is partly allowed for statistical purposes. We now take up Revenue's appeal in ITA no.6570/Mum./2002, vide which, following grounds have been raised:- "On the facts and in the circumstances of the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re dismissed as infructuous. 69. In the result, Revenue's appeal is dismissed. We now take up assessee's cross objection no.291/Mum./2002, vide which, following grounds have been raised:- Being aggrieved by the order of the Hon'able CIT.(A), the following memorandum of cross objection is filed which it is prayed may please be considered. 1. In the facts and circumstances of the case and in law, the learned C.I.T(A) erred in not dealing with following grounds raised at Sr. No. 7 in our Grounds of Appeal before C.I.T(A) - "Without prejudice, the learned A.O. ought to have accepted contention of the appellant that at least to the extent the receipts were exempted under section 54EA, the receipts did not constitute part of "book profits". In the facts and circumstances of the case and in law, the learned A.O. erred in not granting set off of business losslunabsorbed depreciation of Rs. 55,55,475/- in terms of clause (iii) of Section 115JA(2)." 2. In the facts and circumstances of the case and in law, the learned C.I.T(A) erred in not accepting contention of the appellant that interest ..... X X X X Extracts X X X X X X X X Extracts X X X X
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