TMI Blog2014 (1) TMI 588X X X X Extracts X X X X X X X X Extracts X X X X ..... a & Mahindra Ltd., the assessee has lost the ownership over the debts - the assessee has made the provisions of section 41(4) redundant - the assessee has not shown any income on account of recovery of part of such debt since the assessee has assigned the debts to Mahindra & Mahindra. It is not the business of the assessee to assign debts - the assessee, i.e. the assignor has undertaken to collect the debts on behalf of the assignee and has remitted the same periodically - The submission of the assessee that M/s. Mahindra & Mahindra Ltd. has paid tax on the debts so recovered and therefore taxing the same in the hands of the assessee amount to double taxation is without any merit – Thus, the contention of the assessee that amount of Rs.1,34,99,999/- should be allowed either as a bad debt or a business loss cannot be accepted - the assessee has adopted a colourable device to compensate Mahindra & Mahindra for the surrender of their 51% shareholding and therefore this is a capital expenditure – Decided against Assessee. Nature of Expenses – Capital OR Revenue expenditure – Expenses paid for use of trade name – Expenses treated as payment made for purchase of goodwill – Depreci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee company that the assessee has shown an amount of Rs.63,91,400 as Miscellaneous income under the head other income . While computing the deduction claimed u/s.80HHC the assessee has reduced 90% of gross interest received but has not reduced 90% of the Miscellaneous income to arrive at the adjusted profit eligible for deduction u/s.80HHC. He referred to the order for A.Y. 1998-99 in case of the assessee wherein the issue has been discussed elaborately and the claim for the assessee that the Miscellaneous income consists mainly of scrap sale and exchange gain and hence forms a part of eligible business profit was not accepted for the reasons mentioned therein. Since the issue in the instant year is identical to that of assessment year 1998-99 the Assessing Officer relying on the observation made in the A.Y. 1998-99 recomputed the deduction u/s.80HHC by reducing 90% of the Miscellaneous income of Rs.63,91,400 in addition to 90% of interest income. 4. In appeal the learned CIT(A) allowed the claim of the assessee by following the decision of the Tribunal in assessee s own case for earlier years. Aggrieved with such order of the CIT(A) the revenue is in appeal before us. 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unals have consistently held that sales-tax refund goes to reduce the cost of production. Foreign exchange gains form part of eligible turnover and income from scrap sales pertain the character of business income. Useful reference may be made to the decisions of the Bombay High Court in the case of CIT Vs. Bangalore Clothing Co. [260 ITR 371 and Alfa Laval India Ltd. DCIT [266 ITR 418]. The Mumbai Tribunal in the case of Renaissance Jewellery P. Ltd. Vs. ITO [101 ITD 380] has followed the same rule. In assessee s own case for the assessment year 2000-01, the Tribunal has held in ITA No.3588/Mum/2004, that such items are forming part of the business profits for the purpose of Sec. 80HHC. Therefore, this ground is also liable to be dismissed . 5. It is also noticed from the order of the CIT(A) that miscellaneous income consist mainly of scrap sales, sales tax refund and discount. Nowhere it is mentioned that exchange gain is also included. Be that as it may, if there is any exchange gain involved the assessee is entitled for deduction under section 80HHC on the above amount. Respectfully following the above decision the grounds of the Revenue are rejected . 9. Respectfully fol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loss on assignment has been written off in the books of account Rs. 1,34,99,999. Rs.1,35,00,000/- (ii) The Company has entered into a Name License Agreement with M M for use of trademarks for a one time fee Rs. 75,00,000/- TOTAL Rs.2,09,99,999/- 12. On being questioned by the Assessing Officer to justify the claim of the extraordinary items of expenditure amounting to Rs.1,35,00,000/- as a revenue expenditure the assessee replied as under: "1) Enclosed please find copy of the Agreement dated 18.07.2002 between our Company, Mahindra Mahindra and GKN Sinter Metals Holdings Ltd., U.K. for Share sale and Purchase. 2) The Company had debts due from various customers on account of sales made to them in the normal course of business. Needless to say, the corresponding amounts had been offered for tax from time to time. In ordinary course therefore if any portion of these debts had wholly or partially bad or irrecoverable, the shortfall would have been allowable as a deduction, as a bad debt u/s.36(1)(vii). 2) The company assigned these debts to Mahindra Mahindra in terms of an agreement dated 27th September ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9%. By virtue of the agreement dated 28.03.2002, the purchaser acquired the share holding of the Seller for a consideration of Rs.65 Crores. A supplementary agreement dated 18.07.2002 was made to the original agreement dated 28.03.2002, between the same 3 parties mentioned (supra). By virtue of the supplementary agreement dated 18-07-2002, the assessee company assigned Book Debts of Rs.1,35,00,000/- for a consideration of Rs.1 to the Seller. 15. After analyzing the various clauses and schedule attached to the principal agreement the AO confronted the assessee with the following facts: 4(e) In this regard, vide this office letter dated 10-02-2006, the assessee was informed as under: 1. In this regard the undersigned obtained a copy of the share sale and purchase agreement dated 20-03-2002, between Mahindra Mahindra Ltd. (Seller) and G.K.N. Sinter Metals Holdings Ltd. (Buyer). 2. As per Clause 2 of the said agreement, certain conditions precedent to the closing of the share sale and purchase transaction was laid down. Your attention is drawn more specifically to clause 2.1.9 of the same agreement, which stated that "the company shall have completed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 99,999 holding the same to be capital expenditure in nature for the following reasons: 4(g) The assessee's various submissions have been considered in depth, however, the same is not accepted for the following reasons: (i) The assessee s contention that the amount of Book Debts assigned to Mahindra Mahindra would be allowable as a deduction as a Bad Debts u/s.36(1)(vii) is belied by the fact that the assessee is recovering these debts on behalf of Mahindra Mahindra and remitting the amount collected to Mahindra Mahindra. Hence, it is not clear how these debts can be considered to be bad in the hands of the assessee company. (ii) From the copies of accounts filed by the assessee in respect of few parties in respect of debts assigned, such as: 1. Hindustan Motors Ltd. 2. Rico Auto Industries Ltd. 3. Lohia Machines Ltd. Munjal Show Ltd. 4. Hero Honda Motors Ltd. 5. Escorts Ltd. It is seen that the assessee has regular transactions throughout the year and is also receiving payments from these parties regularly and periodically. Hence, the assessee's claim that certain amounts due from these parties are not recovera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on various decisions. It was submitted that if the bad debt is not allowable as bad debt then the loss suffered on account of assigning such debt has to be allowed as business loss u/s.37. It was submitted that Mahindra Mahindra Ltd. have confirmed that they have subsequently recovered debts amounting to Rs.79.5 lakhs only which proves that the debt assigned to Mahindra Mahindra Ltd. was in no way good debt. It was also confirmed by Mahindra Mahindra Ltd. that the bad debt so recovered has been offered to tax. The observations of the AO that the assignment of book debts is nothing but a colourable device was challenged. It was submitted that for the purpose of share sale one of the commercial terms of the transactions was that any debt which were doubtful for recovery and outstanding for more than 180 days is to be written off by the assessee company. A due diligence report was obtained from Ernst Young Company on behalf of the purchaser before the share sale. Therefore, the loss claimed by the assessee is allowable as revenue loss. 19. However, the learned CIT(A) also was not convinced with the arguments advanced by the assessee and upheld the action of the AO by holdi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 37(1) of the I.T. Act. The A.O. has proved that these debts are not bad in the sense that Mahindra Mahindra to whom these debts were assigned has recovered the debts to the extent of Rs. 79.51 Lacs. Hence the loss claimed by the appellant cannot be allowed. In the result, this ground of appeal is dismissed. 8. The authorized representative filed additional ground of appeal during the course of appellate proceedings. In the additional grosund of appeal the appellant has claimed that the A.O. has disallowed the bad debt which is not justified. 9. I find that the assessee has claimed expenditure/loss in the first ground of appeal. However, during the appellate proceedings all submissions were made claiming the loss as bad debt. As such the additional ground of appeal was filed claiming the loss as bad debt. Since the claim of bad debt is being disallowed for reasons stated above this additional ground of appeal is not required to be adjudicated separately. 19.1 Aggrieved with such order of the CIT(A) the assessee is in appeal before us. 20. The Ld. Counsel for the assessee reiterated the same arguments as made before the AO and the CIT(A). He submitted that the Ld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hen the debt is written off. However, in the instant case the ownership has been transferred by assignment. 20.2 So far as the loss on account of assignment of the debt is concerned he submitted that in such a case the assignor assigns the debts to the assignee for the collection of the same. The assignee acting as the agent of the assignor recovers the debts from the debtors and remit to the assignor or principal. The assignor pays the assignee some commission as per agreement towards the services. Therefore, in case of assignment of debt the assignee acts as collector of debt and after collecting the money hand it over to the assignor. Relating to the facts of the case he submitted that here the assessee has collected the debt and has sent the amount collected to Mahindra Mahindra Ltd. He submitted that the assessee, i.e. GKN Sinter Metal Ltd. has transferred the debt of Rs.1.35 Cr. for Rs.1/- to Mahindra Mahindra Ltd. under share sale and purchase agreement dated 28-03-2002. Under this agreement the 51% share holding of Mahindra Mahindra Ltd. has been purchased by the assessee company. The Ld. Departmental Representative drew the attention of the Bench to Clause 2.1.9 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowable as bad debt or business loss as claimed by the assessee or the same is not allowable u/s.36(i)(vii) r.w.s. 36(2) or u/s.37(1) as held by the AO and upheld by the CIT(A). From the various details furnished by the assessee we find the assessee has assigned the debts to Mahindra Mahindra Ltd. for Rs.1/-. The copy of the assignment of debt filed in Paper Book at Pages 63 64 is undated. We find the first sentence of the agreement reads as under: This deed of assignment is made at Mumbai on this ________day of September 2002 . 20.5 The first proposition made by the Ld. Counsel for the assessee is that the same should be allowed as bad debt in view of the decision of Hon ble Supreme Court in the case of TRF Ltd. However, we find no force in the above submission of the Ld. Counsel for the assessee since the assessee has not written off the amount as bad debt but has claimed loss on assignment due to transfer of the debtors by a deed of assignment for a consideration of Rs.1/-. In our opinion, for claiming the bad debt as allowable under the provisions of the Income Tax Act the same must be written off in conformity with the provisions of the Income Tax Act. By transferrin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raised by the assessee. 21. Grounds of appeal 3, 4 and 5 by the assessee read as under: 3. The Ld. CIT(Appeals) erred in holding that the amount of Rs.75,00,000/- paid for use of Trade Name for a period of two years constitutes capital expenditure. 4. Without prejudice to Ground No.3 above, the Ld. CIT(Appeals) further erred in enhancing the assessment, by treating the entire amount of Rs.75,00,000/- paid for use of the Trade Name for two years as payment for purchase of goodwill. 5. Without prejudice to Ground Nos.3 and 4 above, the Ld. CIT(Appeals) further erred in not allowing depreciation on the said amount of Rs.75,00,000/ . 21.1 Facts of the case, in brief, are that the extraordinary items of Rs.2,09,99,999/- debited to the profit and loss account includes an amount of Rs.75,00,000/-. On being asked by the AO to justify the same it was submitted that the same has been paid to Mahindra Mahindra, by virtue of a Name Licence Agreement dated 18-07-2002. It was submitted that as per clause 6 of the agreement, M/s. GKN Sinter Metals Ltd. was allowed to use the Trade Mark "Mahindra" for two years. The AO asked the assessee to justify the payment of Rs.75,00, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diture in Income tax. Hence the A.O. is not justified in allowing only 50% of the expenditure in this year. The following case laws were relied upon: i. Empire Jute Co.Ltd. vs. C.I.T. 124 ITR pg. 1 ii. Alembic Chemicals Works Ltd. vs. CIT 177 ITR pg. 377 21.4 However, the CIT (A) also was not convinced with the explanation given by the assessee. He issued notice for enhancement u/s. 251(1) to show cause as to why the entire expenditure of Rs. 75 Lacs should not be disallowed as the assessee has acquired good will of Mahindra which is a capital expenditure and not allowable as revenue expenditure. No depreciation is also allowable in respect of goodwill. 21.5 It was reiterated that the company has paid a sum of Rs.75 Lacs to Mahindra Mahindra for use of its name. The trade mark is one of the most valuable industrial properties of Mahindra Mahindra. By paying a sum of Rs. 75 Lacs the assessee has become entitled to use the Trade name Mahindra for a limited period of two years. As no new asset has come into existence the expenditure cannot be treated as capital expenditure. No enduring benefit has also come into the possession of the company. It was submitted that u/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ground that the same is for acquiring of goodwill for 2 years and on which no depreciation can be allowed. It is the submission of the Ld. Counsel for the assessee that the entire amount should be allowed as Revenue expenditure. Alternatively it is the argument of the Ld. Counsel for the assessee that depreciation should be allowed in case it is held to be acquisition of goodwill in view of decision of Hon ble Supreme Court in the case of SMIFS Securities Ltd. reported in 348 ITR 302 (SC). We find the alternate contention of the assessee that depreciation should be allowed is acceptable in view of decision of Hon ble Supreme Court in the case of CIT Vs. SMIFS Securities Ltd. reported in 348 ITR 302 wherein it has been held that goodwill under Explanation 3(b) of section 31(2) of the Act is eligible for depreciation. In view of the decision of Hon ble Supreme Court cited supra we set-aside the order of CIT(A) and direct the AO to allow depreciation on the goodwill as per law. Accordingly, Ground of appeal Nos. 3 and 4 by the assessee are dismissed and Ground of appeal No.5 is allowed. 22. Grounds of appeal No.6 by the assessee reads as under: 6. The Assessing Officer erre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to return the money already raised. Moreover, this expenditure is not contractual but purely voluntary in the sense that there is no such provision in the terms of issue of the debenture payment of this pre-closure charges. This payment is purely a discretionary decision by the assessee company, who is under no legal compulsion to make this payment. 22.3 Before CIT(A) the assessee reiterated the same arguments as made before the Assessing Officer. However, the CIT(A) was also not convinced with the arguments advanced by the assessee and upheld the action of the Assessing Officer by holding as under: I have duly considered the submission of the Authorised Representative and I find that the Assessing Officer is justified in disallowing the prepayment charges of Rs.43,34,000/-, incurred by the assessee on cancellation of debentures. I find that there is no condition for payment of pre-closure charges. The debentures were issued by assessee company to Mahindra Mahindra on private placement basis and Mahindra Mahindra in turn sold these debentures to Deutsche Bank. Therefore the debentures held by Deutsche Bank at the time of pre-closure were not contractual obligation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure in question was a revenue expenditure . 22.6 Referring to the decision of Chennai Bench of the Tribunal in the case of Overseas Sanmar Finance Ltd. Vs. JCIT reported in 86 ITD 602 he submitted that deduction claimed for foreclosure premium paid on loan taken in earlier year which was repaid prematurely in full in previous year was held to be revenue expenditure. Relying on various other decisions he submitted that since the assesses incurred the expenditure of prepayment charges to relieve it from future financial burden, therefore, the same should be allowed as a revenue expenditure. 22.7 The Ld. Departmental Representative on the other hand heavily relied on the orders of the AO and the CIT(A) 22.8 We have considered the rival arguments made by both the sides, perused the orders of the AO and CIT(A) and the Paper Book filed on behalf of the assessee. We have also considered the various decisions cited before us. There is no dispute to the genuineness of the expenditure of Rs.43,34,000/- towards debenture prepayment charges. The only dispute is regarding the allowability of the same. It is the case of the revenue that there is no condition for payment of pre-clos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ether the item of expenditure concerned in that case was a revenue expenditure. Briefly stated the facts of that case were: Under its articles of association the management of a company of insurance brokers registered in England was vested in its board of directors in London, with powers of delegation. One of the directors was appointed resident director in France. He conducted the French business of the company from an office in Paris under a power of attorney from the company. The company claimed as a deduction from its profits for income tax purposes a sum of pound 19,200 payable (by instalments) to a retiring director in the following circumstances: 'The original directors were appointed for life so long as they held a qualifying number of shares, subject to dismissal forthwith for neglect or misconduct towards the company. A director so dismissed was only entitled to receive his salary then due and could be required to sell his shares to the other directors at par. He would also have to surrender for cancellation certain notes issued by the company entitling him to participate in surplus profits. Circumstances arose in 1920 and 1921 in which the company might possibly have bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreements were cancelled in 1922, the agent company agreeing to go into voluntary liquidation and the company agreeing to pay to the agents pound 300,000 in cash. This sum was in fact paid and the company contended before the Special Commissioners that it was an admissible deduction in computing the company's profits for purposes of income tax and corporation profits tax. The Special Commissioners rejected this contention and the company appealed. Rowlatt J., sitting in the King's Bench Division, allowed the appeal and held that the payment to the agents was an admissible deduction for the purpose of income tax and corporation profits tax. His decision was affirmed by the Court of Appeal. In the course of his judgment Rowlatt J. observed: "Now I want to see how the Commissioners have dealt with it, and what they say is that this was expenditure of a capital nature to secure an enduring benefit for the company's trade by getting rid of an onerous contract In my judgment that is a finding which is perfectly inconclusive. It does not deal with the question. The question is not merely getting rid of an onerous contract, but an onerous contract for what ? If it is an onerous cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve business expenditure in the relevant accounting year as well as for a few more years. It was not made for acquiring any enduring benefit or income yielding asset. We agree with the High Court that the Tribunal was right in its conclusion that the expenditure in question was a revenue expenditure. 22.10 We find the Hon ble Delhi High Court in the case of CIT Vs. Gujarat Guardian Ltd. reported in 222 CTR 516 has held as under: 14. Briefly, the assessee in its profit and loss account has debited a sum of Rs 8 crores as pre-payment premium which is classified as an extraordinary item. The Assessing Officer sought justification from the assessee for claiming the entire amount as deduction in the previous year relevant to the assessment year under consideration in view of the judgment of the Supreme Court in the case of Madras Industrial Investment Corporation Ltd vs CIT; (1997) 225 ITR 802. The Assessee responded to the query of the Assessing Officer by submitting that it had made a proposal to IDBI for restructuring its debt with respect to rupee term loan aggregating to Rs 170.76 crores. The IDBI vide letter dated 19.03.1995 agreed to the proposal and inter alia reduced th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f loans obtained from public institutions, it follows that, the interest will have to be allowed as a deduction only in the year of payment, notwithstanding the fact that, the liability to pay such sum was incurred in an earlier year based on the method of accounting regularly employed by the assessee. In these circumstances, in our opinion the Assessing Officer failed to appreciate the ratio of the judgment of the Supreme Court in Madras Industrial Corporation (supra), which is, really an application of the principle of accountancy of matching income with expenditure, where the Act makes no specific provision for claim of deduction. The said principle enunciated by the Supreme Court was not contemplated to apply to situations where the Act makes a distinct and specific provision. See Observations made by the Supreme Court in Tuticorin Alkali Chemicals v. CIT; (1997) 227 ITR 172 at pages 183-184. In the result, no fault can be found with the approach of the Tribunal in respect of this issue. 22.11 We find the Chennai Bench of the Tribunal in the case of Overseas Sanmar Finance Ltd. Vs. JCIT reported in 86 ITD 601 has held as under: The rival contentions on this issue toget ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red and hence, the entire cost of construction is allowable as revenue expenditure in the year itself. We are therefore of the opinion that the claim for deduction for the entire amount of foreclosure premium in the assessment year is justified and we accordingly uphold the claim. This issue is decided in favour of the assessee and against the revenue. 22.12 So far as the decision relied on by the CIT(A) in the case of Associated Hotels India Ltd. Vs. CIT reported in 23 ITR 134 we find the same was decided by the Hon ble Punjab High Court (Circuit Bench at Delhi). The facts in that case were distinguishable and not applicable to the facts of the present case. In that case debentures were redeemed before maturity by paying bonus and fresh debentures were issued before maturity. However, in the instant case, it is not the case of the revenue that the assessee has issued fresh debentures after prepayment of the debentures. Therefore, the above decision is not applicable to the facts of the present case. Considering the totality of the facts of the case and in view of the decisions cited (Supra) we are of the considered opinion that the amount of Rs.43,34,000/- incurred by the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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