TMI Blog2014 (1) TMI 975X X X X Extracts X X X X X X X X Extracts X X X X ..... petition over some length of time - The same result would not follow if there is no uncertainty of the duration of the advantage and the same can be put on an end any time - Although an enduring benefit need not be everlasting character it should not be so transitory and ephemeral that it can be terminated at any time at the volition of any of the parties - In the assessee's case, the three products of the company has advantage for seven years and the 4th product has advantage for fourteen years. The agreement has been entered in order to have the advantage of enduring nature as the life of these products itself in the competition age would be over before the period of seven years and fourteen years is over - Ld. CIT(A) was justified in upholding that this payment is required to be considered as capital in nature - Decided against assessee. Bad debts - Held that:- Following TRF Limited Vs. CIT [2010 (2) TMI 211 - SUPREME COURT] - After 01.04.1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable - If the bad debt has been written off as irrecoverable in the accounts of the assessee it is enough for claiming deduction u/s.36(1)(v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act was taken on 23.09.1999 mentioning the eligibility of 328 employees for the scheme. As part of the scheme of Voluntary Separation, the assessee retired 71 employees of the Valsad plant who opted for the scheme and the total outgo on this account was Rs.3,61,34,164/- including payment on account of ex gratia of Rs.34,08,539/-. In view of the past accounting policy as well as the treatment in the assessment proceedings the assessee debited the entire expense of Rs.3.61 crores to the P/L account as revenue expenditure for the year. 2.1.1 According to the AO, the facts of the case in the year under consideration are however on a very different footing. The VRS announced during the F.Y. 1999-2000 was not really a part of the rationalization of manpower costs. The plant at Valsad was in fact on the selling bloc and the procedure for sale started on 1st Jan, 2000. The negotiations of sale were not by way of a tender and were in fact a closed transaction, which was negotiated on one to one basis by the assessee with the purchaser M/s. Agrimore Industries Ltd. (a subsidiary of M/s. Atul Ltd.) The date of promulgation of the VRS is so close to the date of eventual sale of the plant t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T(A), as the impugned expenditure had been incurred to make the Valsad plant more marketable, it would be in the fitness of thing if the said VRS payment is bifurcated in the ratio of 1.6 6.8 and necessary re-computation of capital gain and adjustment of the WDV is made after reducing the resultant sum from the consideration receipt. In the result, the Ld.CIT(A) directed the AO to reduce the consideration receipt on account of sale of plant in the said ratio and re-compute the capital again and the WDV for allowing the depreciation in the current year in respect of plant and machinery. Aggrieved by the impugned decision, the assessee and the revenue have raised these grounds in their respective appeals before us. 2.3 Having heard both the sides and perused the material on record, the first issue to be decided on the respective grounds raised by the assessee and Revenue is whether the expenditure by way of payments made under the VRS for retirement of employees is revenue expenditure or a capital expenditure. It is pertinent to mention that before the introduction of section 35DDA, the legal dictum is very clear that the assessee can claim the expenditure incurred on account pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to these products for seven/fourteen years. In consideration thereto the assessee company agreed to pay a lump sum fee of Rs.36.75 crores payable in accordance with the agreed schedule of payment. For its book purpose, the assessee company had shown the said fee of Rs.36.75 crores as deferred revenue expenditure to be amortised over a period of five years. Accordingly, the assessee company debited Rs.1,83,75,000/- to the profit and loss account of the previous year. 3.1.1 During the assessment proceeding, the assessee company, relying on the decision of Supreme Court in the case of CIT vs. Empire Jute Co. Limited (124 ITR 1) and the decision of the Madras High Court in the case of CIT vs. Late G.B. Naidu ors (165 ITR 63) had claimed the entire payment as a business expenditure deductible under section 37(1) of the Act during the current year. This issue has been discussed in paras 11 to 19 spread over from pages 6 to 10 the assessment order. The AO held that the payment of non-compete fee was a colourable device deployed by the assessee company since according to him this payment was not at all warranted on account of commercial expediency, etc and thereby disallowed the impug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he supply agreement has been entered on 3rd January, 2000 wherein it is stipulated that Cyanamid Agro would purchase its actual requirements of thimet, malathion and abate. The company would give forecasting in respect of every quarter of the desired quantity manufactured and all the material produced subject to there being passing the quality control test would be purchased by Cyanamid Agro Ltd. It is also mentioned in the agreement that Cyanamid Agro Ltd is not required to purchase any fix minimum quantity of any product. Accordingly, it may be noted that Agromore Ltd has to produce the basic chemicals and concentrate in the Valsad plant on the basis of forecast made which would be wholly purchased by Cyanamid Agro Ltd. For above purchase, Cyanamid Agro Ltd would give sufficient advance to the Agrimore Ltd in order to build up sufficient inventory of the product to enable the Agrimore Ltd to make the supply. The above advance has to be adjusted against the invoice to be raised. The price of the product is to be fixed over Calendar year based on base manufacturing cost plus 7% as margin. The above agreement is to be valid for five years only and the same could be extended for a fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 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 uncertainty of the duration of the advantage and the same can be put on an end any time. Although an enduring benefit need not be everlasting character it should not be so transitory and ephemeral that it can be terminated at any time at the volition of any of the parties. In the present case, the three products of the company has advantage for seven years and the 4th product has advantage for fourteen years. The agreement has been entered in order to have the advantage of enduring nature as after these periods, the Cyanamid Agro Ltd. itself may stop using this crop protection chemicals and come out with the new product and there would be no purpose in continuing with the non competitive agreement of these four products. As the life of these products itself in the competition age would be over before the period of seven years and fourteen years is over, we concur with the decision of the Ld.CIT(A) that this payment is required to be considered as capital in nature. Since the Ld.CIT(A) has refrained from making any comment in respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le High Court held that once the assessee has written off debt as bad, requirement of section 36(1)(vii) is satisfied and the claim for deduction of bad debt is allowable. From the above discussed two judgments, it becomes manifest that the deduction on account bad debt is to be allowed in the year in which the amount is written off in its books of account provided the conditions of section 36(2) are fulfilled. In the present case, it has not been accused by the authorities below that the assessee did not satisfy the conditions of section 36(2). Thus, in principle it is held that once the amount of debt is written off in the books of account, the condition of section 36(1)(vii) is fulfilled and the deduction has to follow, of course subject to the satisfaction of the conditions of sec. 36(2). There is no requirement to distinctly prove that the debt has, in fact, become irrecoverable as a pre-requisite condition for allowing of deduction. Accordingly, we delete the addition made/sustained by the authorities below on this count. Resultantly, Ground no. 3 of the assessee's appeal is allowed and ground no. 5 of the revenue's appeal is dismissed. 5. Ground no. 3 of the revenue's appe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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