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TMI Blog2015 (4) TMI 918X X X X Extracts X X X X X X X X Extracts X X X X ..... payment made by Appellant to Colour Chem Ltd. on account of Short Notice Pay for termination of Toll Manufacturing Agreement, in view of the facts of the case, are revenue in nature and shall be allowed as deductible revenue expenditure u/s 37 of the I.T. Act. In the alternative and without prejudice to above, the Appellant submits that the payment made to Colour Chem Ltd. on account of short notice pay for termination of Toll Manufacturing Agreement be treated as Capital Expenditure as held by the DCIT in Draft assessment order and depreciation on the same shall be allowed. 3. The DCIT erred in initiating penalty proceedings u/s 271(1)(c) of the I.T. Act." 2. Appeal of the assessee is disposed of by this Tribunal vide order dated 01/06/2012. The assessee challenged the order of the Tribunal before the Hon'ble High Court in appeal. The Hon'ble High Court set aside the order dated 01/06/2012 of this Tribunal and remanded the matter to the Tribunal for fresh adjudication on merits vide order dated 24/01/2013 as under :- "2. The Counsel for appellant-assessee at the very outset points out that the Tribunal in the impugned order dated 01.06.2012 has proceeded on inconsisten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ufacturing Agreement (TMA) on 29/08/1997 whereby CCL agreed to undertake the production of textile dyestuff for and on behalf of the assessee company at CCL's plant. As per the terms and conditions of the agreement this arrangement was for an initial period of 5 years w.e.f. 01/09/1992 but cannot be terminated before a minimum period of two years. The TMA was terminated vide agreement dated 29/04/2006. During the year under consideration the assessee debited an amount of Rs. 2.20 crores towards short-notice payment on account of termination of TMA. The AO asked the assessee to explain the nature of expenses and also support its claim as revenue expenses. The assessee explained vide letter dated 30/11/2009 and claimed that the payment under agreement is allowable revenue expenditure. The AO did not accept the contention of the assessee and disallowed Rs. 2.20 crores paid by the assessee on account of termination of TMA by treating the same as capital expenditure. Accordingly the AO passed an assessment order dated 30/11/2009. The assessee filed its objection before the DRP. The DRP held that this expenditure is neither allowable as revenue expenditure nor allowable to the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee. The ld. AR reiterated that this amount of Rs. 2.20 crores is allowable expenditure as incurred for the purpose of business of the assessee. He has relied upon the following judgments:- 1. CIT vs. Nainital Bank Ltd. (62 ITR 638)(SC); 2. CIT vs. Sales Magnesite (Pvt.) Ltd. (214 ITR 1)(Bom.) 3. S.A. Builders vs. CIT (288 ITR 1)(SC) 3.3 It was contended that this was a prudent business decision of the assessee which cannot be questioned on the ground of particular requirement or justification by the revenue authorities. The expenditure was incurred exclusively for the business of the assessee and for commercial expediency. 4. On the other hand the ld. DR has submitted that vide an agreement dated 31.3.98 the CCL transferred all business carried on by CCL of manufacturing, producing and dealing of textile-dyes together with beneficial interest and goodwill as a going concern with all licence, permits, quota rights to the assessee. Pursuant to the transfer of the business, CCL undertook not to carry-on or commence the business of manufacturing, producing of textile dyes except for with the assessee for a period of 5 years. The CCL also undertook for a secrecy of 5 yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d enter into a Toll Manufacturing Agreement (TMA) so that CCL would utilize manpower and manufacturing facility for production of the product for and on behalf of the assessee. Clause A of BTA further reiterates the exclusion of fixed assets from transfer under BTA which reads as under :- "A. The Assignor agrees to sell, transfer and assign to the Assignee and the Assignee shall purchase and acquire from the Assignor the right and the business of the Assignor of manufacturing, producing and dealing in "textile dyes" (which shall mean and amongst others include Pigment Emulsions, Reactive dyes and Dispense Dyes) together with the right to use and avail of all licences, permits, quota rights, trade-marks, tradenames held by the Assignor but shall exclude all the fixed assets of the Assignor connected with the business of textile dyes in India at or for the lumpsum consideration of Indian Rs. 295,047 mios. The said consideration shall comprise of :- (i) Indian Rs. 136.431 mios for the assignment of the right to manufacture, produce and dealing in textile dyes; (ii) Indian Rs. 76.923 mios as goodwill for the assigned business; and (iii) Indian Rs. 81.693 mios. for the Assignor unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcial expediency. The CCL undertook manufacturing only on behalf of the assessee and agreed to the ownership of the product with that of the assessee as per clause 6.4 as under :- "6.4 The Processor recognizes unconditionally:- - that the Processor will undertake the Production on behalf of the Principal so that the Principal retains title to the Materials supplied by it and acquires title to Semi-manufactured Products and Finished Products; - that the Processor will not acquire any right or title with regard to the documents received from the Principal and that the Processor will have no legal claim to the information; - that the Processor will use these documents only for the purpose of this Agreement; and - that after termination of this Agreement or on renunciation of the further Production of an Agreement Product, the Processor will return to the Principal without delay all documents received;" 5.5 Clause-13 of the TMA contains the duration, termination and compensation to be paid by the assessee to CCL. The relevant clauses of TMA are 13.1, 13.2 and 13.6 which are reproduced as under :- "13.1 This Agreement takes effect on 1.9.1997 with the intention to continue until ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or requirement of payment of compensation. The genuineness of the agreement between the parties as well as payment of compensation is not doubted. Therefore, the justification and requirement of payment of compensation becomes irrelevant. Only in case of genuineness of transaction of payment of compensation, the question of justification of such payment can be raised as relevant, but, when there is no question of genuineness of the payment of compensation the assessing authority cannot sit in the arms chair of a businessman and assume the role to decide how much is reasonable expenditure. The Hon'ble Supreme Court in the case of S.A. Builders (supra), has observed in para - 35 as under :- "35.We agree with the view taken by the Delhi High Court in CIT v. Dalmia Cement (B.) Ltd. [2002] 254 ITR 377 that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 37 of the Act which is a residuary section extending the allowance of deduction to items of business expenditure not covered by any of the preceding sections (sections 30 to 36) and section 80VV. The only conditions are that : (i) it is not an expenditure, (a) in the nature of capital expenditure, or (b) personal expenses of the assessee, and (ii) it is laid out or expended wholly and exclusively for the purposes of the business or profession. Various tests have been evolved by the courts from time to time to decide whether an expenditure is incurred for the purposes of business. One of the tests often applied is whether it is incurred by the assessee in his character as a trader. To hold it to be an expenditure allowable as a deduction under section 37, it is not essential that it should be necessary, legally or otherwise, to incur the same or that it should directly and immediately benefit the business of the assessee. Even expenditure incurred voluntarily on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business would be deductible under this section. The question whether it was necessary for commercial expediency or not is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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