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DCIT, CIRCLE 13 (1) , NEW DELHI Versus M/s NITREX CHEMICALS INDIA LTD AND VICA-VERSA

2015 (11) TMI 340 - ITAT DELHI

Non-compete fee - revenue expenditure v/s capital expenditure - Held that:- The said amount was difference in the value of tangible/intangible assets of the going concern which was purchased by the assessee and the lump sum amount was paid for taking over the business, so it was in the nature of the goodwill and since the assessee was having the enduring benefit particularly when there was a covenant on the seller for not to run the similar type of business for three years. Therefore, the said a .....

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s eligible for depreciation on the goodwill? - Held that:- As the non-compete fee paid by the assessee was capital in nature and goodwill it was eligible for depreciation u/s 32 of the Act as relying on SMIF Securities Ltd. (2012 (8) TMI 713 - SUPREME COURT) wherein held that the goodwill is eligible for depreciation u/s 32

Addition on expenses incurred in connection with purchase/acquisition of business assets - purchase of division on slump sale - CIT(A) deleted the addition - Held .....

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llow the depreciation as per law on those capitalized expenditure.

Payment made to the holding company - Revenue v/s capital expenditure - Held that:- In the present case, by incurring the impugned expenses, the assessee had not acquired any tangible/intangible asset which had any lasting and enduring benefit to the assessee's business. The payments were made for using the trade mark of M/s Nitrex Mauritius and to obtain expertise in the field of commerce, finance, manufacturing etc. .....

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paid at the same rate which was paid by the seller of the business i.e. M/s ICI India Ltd., the said contention had not been rebutted. It is also noticed that M/s Asha Export is not related to the assessee and the commission was paid for the services provided by M/s Asha Export. In the present case, the AO did not bring any material on record to substantiate that the commission paid by the assessee was excessive. We, therefore, do not see any infirmity in the order of the ld. CIT(A) on this issu .....

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2,206/- . However, before the ld. CIT(A), the details of bills from April 4 to March 5 amounting to ₹ 52,12,320/- were furnished. In the present case, it appears that new evidences were furnished before the ld. CIT(A) which were not before the AO. We, therefore, to meet the ends of justice, deem it appropriate to send this issue back to the file of the AO for proper verification and adjudication after providing due and reasonable opportunity of being heard to the assessee. Accordingly, the .....

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e payable was related to the trading business of the assessee which had subsequently been transferred but since the income till 14.10.2005 had been offered by the assessee in the profit and loss account and this performance incentive payable was related to the period ending on 14.10.2005, therefore, it was to be paid by the assessee and was allowable as expenditure. In that view of the matter, we do not see any valid ground to interfere with the findings of the ld. CIT(A).- Decided in favour of .....

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are holding from management was bought back which was required to be funded by the assessee company. However, the impugned amount was non-recoverable and was a loss on account of business transfer, so it was required to be deducted from the capital gain in respect of slump sale of trading business. In our opinion the ld. CIT(A) was justified in holding that the impugned amount was allowable from the capital gain arisen to the assessee. We do not see any valid ground to interfere with the finding .....

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ssment year 2008-09 while the assessment year under consideration is 2007-08. Therefore, the AO was not justified in working out the disallowance by applying the provisions of Rule 8D. In our opinion, the ld. CIT(A) was fair and reasonable in restricting the disallowance of ₹ 37,740/- Decided in favour of assessee in part.

Disallowance on account of Foreign Exchange Fluctuation loss - CIT(A) allowed the claim - Held that:- In the present case, it is noticed that the ECB loan tak .....

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Decided in favour of assessee.

Disallowance u/s 14A - assessee suo motu disallowed a sum of ₹ 2,85,288/- in accordance with the provisions contained u/s 14A of the Act r.w Rule 8D - CIT(A) deleted addition - Held that:- AO without establishing the nexus between the expenses claimed and the tax free income was not justified in making the disallowance of ₹ 12,09,198/-as against the disallowance of ₹ 2,85,288/- suo motu made by the assessee. It is also not the case of .....

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9, ITA NO. 756/DEL/2009, ITA NO. 2331/DEL/2011, ITA NO. 5801/DEL/2012, CO NO. 314/DEL/2009, CO NO. 322/DEL/2009, CO NO. 367/DEL/2009 - Dated:- 3-8-2015 - SH. N. K. SAINI, AM AND SH. I. C. SUDHIR, JM FOR THE ASSESSEE : SH. VED JAIN, CA, MS. RANO JAIN & V. M CHORASIYA, ADVS. FOR THE REVENUE : SH. P. DAM KANUNJNA, SR. DR ORDER PER N.K. SAINI, A.M. The appeals by the department and Cross Objections by the assessee for the assessment years 2004-05, 2005-06 & 2006-07 are directed against the o .....

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nsolidated order for the sake of convenience and brevity. 3. First we will deal with the appeal of the department and Cross Objections of the assessee for the assessment year 2004-05. In ITA No.3388/Del/2009, following grounds have been raised by the department: "1. On the facts and in the circumstances of the case as well as in law, the Ld. CIT(A) erred in deleting the addition of ₹ 6,80,00,000/- being non-compete fee paid by assessee holding it to be revenue expenditure as against c .....

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No. 314/Del/2009, the assessee has raised the following grounds: "1. That the issue decided by the Ld. CIT(A) is as per law and therefore appeal of the department is not maintainable and should be dismissed. 2. That the non-compete fees is to be allowed as deferred revenue expenditure over a period of the non-compete term. 3. That if non-compete is held as Capital Expenditure, then the learned AO be directed to allow applicable depreciation thereon. 4. That if revenue expenditure is held as .....

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objection and has challenged the addition made by AO with regard to noncompete fee. 3. (i) Posting filing of the cross objections the Hon 'ble Supreme Court has delivered a judgment in the case of CIT, Kolkata v. SMIF Securities Ltd. in SLP(Civil) No. 35600 of 2009 whereby it has been held that the goodwill is a depreciable asset, and, therefore the assessee is entitled to claim depreciation on goodwill under section 32 of the Income Tax Act, 1961. (ii) That the above judgment of the Apex C .....

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ound goes to the root of the order and is crucial for determining the liability of the appellant. PRAYER It is therefore prayed that the above ground of cross objection may be admitted for adjudication. For this act of kindness the appellant shall ever be grateful. For Nitrex Chemicals India ltd. Sd/- Managing Director' 6. During the course of hearing the ld. Counsel for the assessee submitted that the additional ground goes to root of the matter and all the facts are already available on th .....

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it should not be admitted. 8. We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, it is an admitted fact that the assessee raised the additional ground relating to depreciation on goodwill after the judgment of the Hon ble Supreme Court in the case of CIT, Kolkata Vs SMIF Securities Ltd. in SLP(Civil) No. 35600 of 2009 and all the facts are already available on record and this ground goes to the root of the .....

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,17,73,780/- which was processed u/s 143(1) of the Income Tax Act, 1961 (hereinafter referred to as the Act) on 29.03.2005. Later on, the case was selected for scrutiny. This was the first year during which the assessee company started its business and purchased one division of Nitro Cellulose & Chemicals Trading (NCT) business from ICI India Ltd. on slump sales basis and incurred following expenditure in connection with the acquiring of assets: (a) Payment made for legal advice taken from W .....

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ngs noted that in the notes forming part of computation of income, the assessee company had mentioned that a sum of ₹ 6.80 crores was paid to ICI India Ltd. as a consideration for not to compete with the company for three years in the Nitro Cellulose & Chemicals Trading business which was transferred to the assessee company by way of slump sales, the assessee treated those expenditure as revenue in nature. The AO observed that M/s Nitrates Mauritius Ltd. entered into Business Transfer .....

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omposite slump price of ₹ 75 crore subject to adjustment for net liquid assets. At the time of agreement net liquid assets were estimated at ₹ 9,02,53,634/-. Later Net Liquid Assets were finally reworked out totaling ₹ 11.88.29.338/- and therefore final consideration of the slump sale increased from ₹ 75 crore to ₹ 77.85 crore. 2. The sale consideration was based on the valuation of business as a whole and payment of ₹ 62,25,00,000/- was made to ICI Ltd. at co .....

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cords. The assets were defined as: Ownership, freehold, leasehold, user and/or other rights in the property and assets whether tangible or intangible, owned, held and/or currently and/or immediately prior to signing date and/or completion date (as the case may be) used by ICI India relating exclusively to the business and shall include without other terms like net liquid assets, products, permits, records, stocks, technology etc. were also defined in the deal. 4. Conditions precedent to the comp .....

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y information relating to the business. It was further undertaken that for a period of three years after the completion date ICI India shall not directly or indirectly carry on or be engaged in any business competing with this business. 7. Consideration was not for different tangible assets, intangible assets etc. The transfer of business was on slump sale basis hence, nowhere in the agreement separate consideration was mentioned. 8. This was a composite agreement to transfer business as a whole .....

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tangible assets as under: Plant and machinery ₹ 28,32,84,910/- Furniture and Fixture ₹ 20,96,800/- Rolling stock ₹ 6,17,600/- ₹ 28,59,99,310/- Factory Land ₹ 1,53,46,000/- Building ₹ 7,22,52,000/- ₹ 8,75,98,000/- Total value of fixed assets: ₹ 37,35,97,310/- Trading Assets ₹ 6,30,062/- Total value of fixed assets: ₹ 37,42,27,372/- Value of intangibles(excluding goodwill) : ₹ 25,20,00,000/- Value of goodwill (residual) ₹ 3,35 .....

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sets, working capital was based on tangible assets and since no consideration was separately fixed for intangible assets, the assessee company on its own tried to assign the separate value for intangibles. The AO also pointed out that from the copy of valuation report in respect of know-how following assumptions were noted: "a. Initial Royalty payment was assumed at $1 million b. Royalty rates are assumed as 5% of sales for domestic business and 7% of sales for export business. c. Tax rate .....

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d out the goodwill of business hence, residual figure was adopted as the goodwill of the business. The AO observed that in the books of account, the assessee treated entire payment related to the transfer business as capital expenditure and all the assets were made part of the block of assets for the purpose of books and depreciation was claimed on the assets acquired as part of business transfer, but in the statement of total income prepared for the purpose of Income Tax, out of total composite .....

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iture incurred for non-compete was out of business expediency, to augment the productivity of the profit making structure, to efficient conduct of business and there was nexus with the business. The reliance was placed on the following case laws: CIT Vs G.D. Naidu & Others 165 ITR 63 (Mad.) CIT Vs Motor Industries Co. Ltd. 223 ITR 112 (Ker.) CIT Vs Bawri Shankara Steam Ferry Co. 87 ITR 650 (AP) CIT Vs Lahoty Bros. 19 CTR 425 (Cal.) CIT Vs M/s Pigeot Chapman & Co. 17 ITR 317 (Cal.) Smartc .....

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ssets, liabilities, employees, records and also for agreeing to conditions of warranty and not to compete for next three years. Therefore, the entire payment was for the purpose of acquiring the business as a going concern and no part of consideration was specifically assigned in the agreement to different types of intangibles or mutually agreed obligations which were part of the composite deal. He further observed that had the consideration for non-compete been agreed upon and received specific .....

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r the normal principles of accountancy, if any, business was acquired on going concern basis then after assigning values and working capital, the amount paid in excess of such value is treated as goodwill of the business and in this case also the assessee company had taken the residual amount as goodwill. According to the AO, the assessee on the one hand contended that the running business was acquired out of the many business of ICI Ltd. hence, valuation of goodwill was not possible, on the oth .....

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of account assessee company had capitalized the entire payment except for working capital as part of schedule of fixed assets. iii) There is no separate agreement for not competing with the assessee company and also no separate consideration was agreed upon. iv) Assessee company split the slump consideration in various payments that of fixed assets, intangibles, know-how and residual was treated as goodwill. v) When assessee company could not work out the goodwill of the division in view of the .....

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d a capital expenditure. Accordingly, the disallowance of ₹ 6,80,00,000/- was made. The reliance was placed on the following case laws: CIT Vs Hindustan Pilkington Glass Works 139 ITR 581 (Cal.) Blaze and Central Pvt. Ltd. Vs CIT 120 ITR 33 (Mad.) Chelpark Co. Ltd. Vs CIT 191 ITR 249 (Mad.) 19. Being aggrieved the assessee carried the matter to the ld. CIT(A) and submitted as under: 1. That the valuation of all tangible and intangible assets including non-compete consideration was done by .....

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he appellant, at least for 3 years. It was not in the interest of the company to allow the ICI India Ltd. to operate in the same line of business without putting the restricting clause in the business transfer agreement. 2. Restrictive clause was necessary for the business expediency and commercial requirement of the appellant company and mainly to put check on the seller company and its affiliates, so that appellant can efficiently conduct the business without any hurdle at least from the same .....

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ould be disastrous in terms of business and profitability. Therefore, assigning the value of non-compete consideration was an integral part of the terms of the agreement and necessary and essential for the smooth running of the business. The restrictive clause is only for 3 years which is necessary to establish into the business as the appellant company was new in the trade. 4. It was illogical and without application of mind to suggest that restrictive business clause has no value, meaning, com .....

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the only procedure to consider the various terms and conditions of the agreement and to allocate the value according to its nature and life expectancy. 6. If the business assets and liabilities can be easily valued as suggested by the assessing officer then there would be no need to enter into an agreement as slump sale. Slump sale means the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabil .....

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the consideration/cost paid has to be determined on the basis of report of technical person and accordingly, we have taken Valuation Report for the fixed asset from Dalal Mott MacDonald and the intangibles, from KPMG India Pvt. Ltd. Copy of the said valuation reports of fixed assets and intangibles are submitted as Annexure 2 & 3, respectively. 8. Here, we would like to submit that except for value of non-compete, all other values as per the Valuation Reports have been accepted by the learne .....

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9, wherein question was answered as under:- "15. Question No. (2): "If the above mentioned receipt is held taxable in India, then whether the applicant is justified in contending the tax should be computed based on the consideration as per the independent valuation adopted by the applicant?. 15.1 It is the case of the applicant that it has obtained an independent valuation report relating to trademarks and Foster's Brand IP as on 30th April, 2006. The values are set out in the penu .....

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ory statement that "Had the consideration of non-compete been agreed upon and received specifically other than as slump sale for transfer of business same would have become a revenue receipt in the hands of transferor u/s 28(va)." It is not the law of the land that if the one party has considered the transaction as revenue receipt then only second party would claim the expense in the books of account as revenue expenditure. Whereas, in the hands of the transferor the computation of cap .....

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s CIT 120 ITR 33 (Mad) Chelpark Co. Ltd. Vs CIT 191 ITR 249 (Mad.) JCIT Vs Synergy Credit Corpn. Ltd. (2006) 9 SOT 75 (Mum) CIT Vs Lahoty Brothers Ltd. (1951) 19 ITR 425 (Cal.) DCIT Vs Motor Industries Co. Ltd. 223 ITR 112 (Kar) 21. It was submitted that the assessee had not acquired enduring benefit by putting restrictive clause in the business transfer agreement. It was further submitted that the AO had ignored those decision where the expenditure as non- compete fee was considered as revenue .....

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22. It was contended that the assessee had purchased the business of Nitrocellulose and Chemical Trading business without the brand/trade name of ICI India Ltd. and the ownership was also transferred. The assessee further contended that to keep and maintain the reputation intact with customers, employees and associates was a question of subjective nature and could not be valued. It was stated that the assessee had not been able to bar any competition in the market other than restraining the tra .....

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applied his mind before suggesting that anything over and above the cost of asset was goodwill, therefore, the valuation of goodwill on the basis of residual value after ascertaining realistic figures to each and every item was correct on the part of the independent valuers as well as on the assessee company. It was further submitted that the action of the AO was totally unjustified and not in accordance to the law. It was contended that the accounting entry in the books of account was irrelevan .....

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not necessary that any amount which was being considered as revenue expenditure under Income Tax Act cannot be shown as Capital Expenditure under Companies Act or vice versa, therefore, the action of the AO was totally unjustified and not in accordance with law. The reliance was placed on the following case laws: Guruji Entertainment Network Ltd. 108 TTJ(Del)180 Kedarnath Jute Mfg. Co. Ltd. Vs CIT 82 ITR 363 (SC) Tuticorin Alkali Chemicals & Fertilizers Ltd. Vs CIT 227 ITR 172 (SC) DCIT Vs M .....

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le and intangible assets done through the professional valuers in this field, namely M/s Dalal Mott McDonald (P.) Ltd. and M/s K.P.M.G. (I) (P.) Ltd. and based on the valuation reports, values were assigned to the Plant & Machinery, other miscellaneous assets and tangible and intangible assets. The ld. CIT(A) pointed out that as per the valuation report of the valuer dated 05.04.2004, the value of non-compete covenant was computed at ₹ 6,80,00,000/- and in the Business Transfer Agreeme .....

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ess in India for a period of three years from the date of completion of agreement, which was done to protect the business interest of the assessee company and had this been not part of the agreement, then competition with ICI who was market leader in the Nitrocellulose business. The ld. CIT(A) pointed out that there was no separate consideration assigned in the agreement but the restrictive covenant under clause 14 was the part of the agreement which clearly showed that the consideration was pai .....

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o value of the goodwill was worked out, the ld. CIT(A) pointed out that the same valuers had determined the value of goodwill as residual at ₹ 3,50,00,000/- and as no other method of valuation of goodwill was applicable to the assessee's case, the said value had been capitalized in the books of account by the assessee company. However, in the case of non-compete fee, the same was separately identified and payment was inbuilt in the lump sum consideration which was later on valued separ .....

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e same business for three years and the assessee had warded off a potential competition from the transferor in the same agreement. According to the ld. CIT(A) the mere non-assignment of the amount in the Business Transfer Agreement on account of non-compete fee could not change its nature from revenue to capital. The ld. CIT(A) also pointed out that the assessee had distinguished the cases relied by the AO by stating that the payment was made to a strong competitor in all those cases and the des .....

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mount, therefore, the non-compete fee has been treated as revenue expenditure. He further observed that the restrictive covenants were only negative agreements, which did not bring into existence of any assets for the assessee and the expenditure could not be treated as capital expenditure as it did not bring any asset of enduring advantage, the payment was only to restrain the ICI Ltd. for entering into same business for three years. The ld. CIT(A) was of the view that for treating any expendit .....

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ompete fee was not an expenditure covered by sections 30 to 36, it was also not a personal expenditure as the Directors of the assessee company had not been benefited for this payment, it was also not a capital expenditure as no asset of enduring nature had been acquired by paying the non-compete fee and the payment of non-compete fees was made in the previous year relevant to the assessment year under consideration, it was laid out wholly and exclusively for the purpose, i.e. to protect the bus .....

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ra) 26. The ld. CIT(A) also held that the ground raised by the assessee for allowing the depreciation on the payment of non-compete fee became infructuous as the payment of non-compete fee was held as revenue expenditure. As regards to the alternative claim of the assessee that the payment may be treated as deferred revenue expenditure. The ld. CIT(A) observed that this ground has become infructuous because the entire expenditure of non-compete fees was held to be allowable as revenue expenditur .....

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bmissions the ld. Counsel for the assessee reiterated the submission made before the authorities below and further submitted that no new asset came into existence, therefore, the expenses were revenue in nature and the ld. CIT(A) rightly directed the AO to allow the same as revenue expenditure. Alternatively, it was submitted that if the non-compete expenses are to be treated to be capital in nature and for goodwill then the benefit of depreciation was to be allowed to the assessee. The reliance .....

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ing (NCT) business which was transferred to the assessee company by way of slump sales. The assessee treated the same as capital expenditure in the books of account and claimed the depreciation. However, for the purpose of computing total income under the Income Tax Act, the assessee treated ₹ 6.80 crores as non-compete fee on the basis of the value of the intangibles determined by the valuers. The said value of non-compete fee was assigned by the assessee. The AO treated the said amount a .....

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t of ₹ 6.80 crores was directed to be considered as revenue in nature by observing that by this restrictive covenant, the assessee had warded off a potential competition from the transferor. In the present case, it is noticed that there was no separate consideration assigned for non-compete fee in the agreement but there was a restrictive covenant under clause 14 of the agreement. The said restrictive covenant was to protect the business interest of the assessee and to capture the market. .....

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going concern which was purchased by the assessee and the lump sum amount was paid for taking over the business, so it was in the nature of the goodwill and since the assessee was having the enduring benefit particularly when there was a covenant on the seller for not to run the similar type of business for three years. Therefore, the said amount cannot be considered as revenue in nature as has been held by the ld. CIT(A). Since the amount under consideration was in excess of the value of tangi .....

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erilizing the operation of a competitor for five years, and the benefit would last beyond the period of five years. The profit making apparatus of the assessee was thereby vastly improved. The expenditure in question was, therefore, of a capital nature. " 31. Similarly, the Hon'ble Madras High Court in the case of Chelpark Co. Ltd. (supra) has held as under: "That though, under the agreement, the benefit of the restrictive covenant was for a period of five years, from the terms of .....

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ssee was in the nature of a capital expenditure and not revenue expenditure. " 32. We, therefore, by considering the totality of the facts as discussed hereinabove set aside the findings of the ld. CIT(A) on this issue and upheld the view taken by the AO that the non-compete fee of ₹ 6.80 crores was nothing but goodwill of the business and a capital expenditure. Now question arises as to whether the assessee is eligible for depreciation on the goodwill. In this regard, it is relevant .....

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s paid towards the reputation which the Amalgamating Company was enjoying in order to retain its existing clientele. The Assessing Officer held that goodwill was not an asset falling under Explanation 3 to Section 32(1) of the Income Tax Act, 1961 ('Act', for short). We quote here in below Explanation 3 to Section 32(1) of the Act: "Explanation 3: For the purposes of this sub-section, the expressions 'assets' and 'block of assets' shall mean; (a) Tangible assets, bei .....

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ature' in clause (b) of Explanation 3 indicates that goodwill would fall under the expression 'any other business or commercial right of a similar nature'. The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b). In the circumstances, we are of the view that 'Goodwill' is an asset under Explanation 3(b) to Section 32(1) of the Act." 33. In view of the above, we hold that the non-compete fee amount .....

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ated to this issue in brief are that the assessee had taken over business on slump sale basis and incurred following expenses for acquiring of assets: Payment made for legal advice taken from Wadia Ghandy & Co. in connection with purchase of NCT business Rs.16,01,585 Payment made to Mott MacDonald for valuation of fixed assets ₹ 1,62,000 Payment made to KPMG India Pvt. Ltd. for professional advice taken for the purchase of division ₹ 5,66,810 Dua Associates-professional services .....

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. The AO however, did not accept the contention of the assessee by observing that the expenses were incurred to bring the assets into existence, resulting in the benefit of enduring nature. He, therefore, treated those expenses as capital in nature, however, he did not allow the depreciation by stating that the expenditure was not incurred for specific asset and was relating to purchase of division on slump sale basis. 38. Being aggrieved the assessee carried the matter to the ld. CIT(A) and sub .....

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as also not been accepted as expenditure was not incurred for specific asset and related to purchase of division on slump sale basis. The Assessing Officer has made contradictory statement while passing the order. In first instance he issued show cause as to why the expenditure in connection with the acquisition of assets or business be not treated as capital expenditure. When appellant stated that no enduring benefit has arisen and alternatively claimed for depreciation if capitalized, then he .....

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other purposes." 39. The reliance was placed on the following case laws: CIT Vs Hindustan Zinc. Ltd. (2009) 221 CTR 631(Raj) Empire Jute Co. Ltd. Vs CIT (1980) 124 ITR 1(SC) CIT VS Madras Auto Service (P) Ltd. (1998) 233 ITR 468 (SC) CIT VS Tamil Nadu Industrial Development Corporation Ltd. (2008) 215 CTR 90 (Mad) 40. The ld. CIT(A) after considering the submissions of the assessee observed that the assessee incurred legal and advisory expenses with relation to acquiring the NCT business fr .....

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horities below and strongly supported the impugned order passed by the ld. CIT(A). 42. We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, it is an admitted fact that the impugned expenditure was incurred in connection with the acquiring of assets and since the expenses incurred were related to bring the assets into existence those were capital in nature and not the revenue in nature. We, therefore, reverse .....

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On the facts and in the circumstances of the case as well as in law, the Ld. CIT(A) erred in deleting the addition of ₹ 1,20,00,000/- being payment made to the holding company treating the same as a revenue expenditure instead of capital as treated by AO. 2. On the facts and circumstances of the case as well as in law, the Ld. CIT(A) has erred in deleting the addition of ₹ 1,36,78,560/- being disallowance of excessive commission by admitting fresh evidences without calling for a rep .....

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t; 44. The assessee in its Cross Objection has raised additional ground in the same fashion as was raised for the assessment year 2005-06. 45. In the departmental appeal, the first issue relates to the deletion of addition of ₹ 1,20,00,000/- being payment made to the holding company treating the same as revenue expendture instead of capital as treated by the AO. 46. Facts related to this issue in brief are that the AO, during the course of assessment proceedings noticed that the assessee h .....

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d Licensing Agreement and Techno Commercial Agreement, which were executed on 14.03.2005 for a period of three years effective from 01.04.2004 on annual payment of ₹ 40 lakhs and ₹ 80 lakhs respectively. The AO was of the view that the services to be provided were in the nature of brand building, therefore, the same appears to be capital in nature and M/s Nitrex Mauritius Ltd. was under obligation to provide services, which were necessary for betterment in the field of manufacture, f .....

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revenue expenditure. In this regard we also most respectfully submit that the said expenditure is annual payment for the use of Brand Name and it is not towards the purchase of the Brand Name and it is annual outgoings as royalty and this regard clause 2, of the said agreement is relevant, which reads as under: "Subject to the approval of the regulatory authorities in India, if any required, during the currency of this agreement, Nitrex Mauritius shall grant a licence to Nitrex India for u .....

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the agreement under consideration. Accordingly, it is evident that we have not purchased the said data and we have taken right to use the data and for which said payment has been made. In this regard we rely on the following judgments: a. CIT Vs Eicher Motors Limited (2008) 293 ITR 464 (MP) b. DCIT Vs DCM Benetton India Ltd. (2008) 9 DTR 587 (Del) c. Derbertsons Ltd. Vs DCIT (2004) 87 TTJ 840 (Mum) d. CIT Vs Arvind Mills Ltd. 248 ITR 187 (Guj) e. CIT Vs Arvind Mills Ltd. 254 ITR 529 (Guj) f. CIT .....

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llant on the issue and case laws relied upon. It is seen that during the year under consideration, the appellant company has entered into an agreement with M/s Nitrex Mauritius Ltd. through itself and its affiliates for obtaining information and expertise available with it or to render any financial assistance requested for time to time for conducting and expanding of the business of the M/s Nitrex Chemicals India Ltd. In consideration of all the services to be rendered by M/s Nitrex Mauritius L .....

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onsent of both the parties. Similarly, the appellant company entered into another agreement with M/s Nitrex Mauritius Ltd. under the head 'Brand Licensing Agreement'. This agreement was made on 14th March, 2005 and was effective from 1st April, 2004. Under this agreements, the Nitrex Mauritius, agreed to allow to the appellant company i.e. M/s Nitrex Chemicals India Ltd. to build an international image to its products under the Nitrex' brand. The Nitrex Mauritius, also agreed to prov .....

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s, research results, safety security, health and environment policy and in the areas of expertise which was to be provided by the Nitrex Mauritius described in the Annexure to the Agreement. Such expertise was necessary for smooth running of business of the appellant company and to take advantage of the expertise available with the said company. It is also seen that this payment is on yearly basis and no asset has been acquired by making this payment. The appellant company was new in this busine .....

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n a position to establish itself in the international market and would not have achieved the results, which it was able to achieve with such assistance. Therefore, it appears that the payment made to the Nitrex Mauritius Ltd. for using 'techno commercial information' and license to use brand name 'Nitrex' and 'logo' was in furtherance of the business interest of the appellant company. These payments were to be made on quarterly basis and no asset or enduring benefit has b .....

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annot be termed as 'capital expenditure'. The AO has treated the said payments as capital in nature. The word 'capital' connotes permanency and capital expenditure is, therefore, closely akin to the concept of securing something tangible or intangible property, or corporeal/incorporeal right, so that they could be of a lasting or enduring benefit to the enterprise in issue. The capital expenditure must therefore generally mean an acquisition of an asset and the asset must be inte .....

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by the appellant were only in furtherance of appellant business and none of the payment or part thereof was incurred for acquiring any capital asset or tangible/intangible asset which has any lasting or enduring benefit to the appellant's business. These payments were made for only one year in consideration of using the trade mark of M/s Nitrex Mauritius and to obtain expertise in the field of commercial, marketing, logistics, research results, safety security, health and environment policy .....

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the ld. CIT(A) and reiterated the submissions made before him. 51. After considering the submissions of both the parties and perusing the material on record, it is noticed that the AO did not doubt the genuineness of the expenses. He only doubted the nature of expenses which were claimed by the assessee as revenue in nature but the AO was of the view that it was capital in nature. In the present case, by incurring the impugned expenses, the assessee had not acquired any tangible/intangible asset .....

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, we do not see any infirmity in the order of the ld. CIT(A) on this issue. 52. Next issue Ground No. 2 relates to the deletion of addition of ₹ 1,36,78,560/- made by the AO on account of excessive commission, another grievance of the department is that the ld. CIT(A) had violated the provisions of Rule 46A of IT Rules, 1962. 53. Facts related to this issue in brief are that the AO during the course of assessment proceedings noticed that the assessee had claimed selling commission of ͅ .....

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reement for domestic sales commission (among others) have been enclosed as Annexure 2." 54. The AO after considering the submissions of the assessee observed that for export sales, the rate of commission was 10% FOB value of the products and for domestic sales commission was paid @ ₹ 1.50 per kg plus prompt payment discount of Re. 1 per kg. The AO further observed that in the absence of comparative figures of commission paid on export sales, there was no alternative except to estimate .....

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n slump sale basis. It was further submitted as under: 'The company has entered into export agency agreement (Agreement) with Asha Exports ("Asha Exports"), a copy of the agreement is submitted herewith (Annexure 1). As per the agreement, Asha Exports sells company's goods directly and through sub agents, appointed by Asha Exports, for commission. The commission as per percentage agreed upon in the Agreement, is paid directly by the company to Asha Exports and the sub agents ap .....

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nesses) and that the business was purchased from ICI India Ltd. on slump sale basis and the Agreement was part of the business transfer agreement. In the case of the Transferor Company viz. ICI India Ltd., the commission payment to the said party on the same rate of commission has been claimed and allowed while computing the total income. That the applicable TDS on the commission paid to Asha Export has been deducted and paid to the Central Commission. Copy of the TDS return is submitted herewit .....

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llow the same while computing the total income.' 56. The ld. CIT(A) after considering the submissions of the assessee deleted the impugned addition by observing as under: "I have considered the factual position of the case and copies of various agreement and letters submitted by the appellant in this regard and also the commission payments have been claimed as paid to M/s Asha Exports and other international parties, in F.Y. 2003-04 which ranges from 9.40% to 10.50%, and the same have b .....

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facts establish that the commission was paid by the appellant company, in furtherance to the agreement entered by it with M/s Asha Exports and sub agents of Asha Exports, for its business expediency. On the basis of the facts and documents filed by the appellant, it is established that the commission on export has been paid by the appellant for its business purpose. The AO was not justified in disallowing 50% of the commission paid on the ground that the same was excessive. It has been held in p .....

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penses claimed by the appellant on export sales were genuine expenses, expended and laid out wholly and exclusively for the purpose of the business. Further, such expenses have been claimed and allowed in earlier years in terms of the agreement. During the year under consideration, the AO has not brought on record and new information or facts, which may lead to disallowance of part of the commission expenses. Hence, there is no justification, in disallowing part of the expense on the basis of ex .....

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elates to the additional evidences, however it has not been pointed out what were the additional evidences particularly when the AO himself admitted that the commission was paid by the assessee, he only considered this commission as excessive but without bringing any material on record to substantiate the same. Therefore, the ld. CIT(A) rightly deleted the addition made by the AO. 59. We have considered the submissions of both the parties and carefully gone through the material available on the .....

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n was paid for the services provided by M/s Asha Export. In the present case, the AO did not bring any material on record to substantiate that the commission paid by the assessee was excessive. We, therefore, do not see any infirmity in the order of the ld. CIT(A) on this issue. It is also noticed that nothing is brought on record to substantiate that any new evidence was furnished by the assessee before the ld. CIT(A) in violation of Rule 46A of the IT Rules, 1962. 60. The last issue vide Groun .....

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ot furnished, the AO made the addition for those expenses i.e. ₹ 42,27,858/-. When the matter was taken to the ld. CIT(A), the addition to the extent of ₹ 20,79,886/- was confirmed by observing as under: "I have considered the observations of the AO and the submission made by the appellant as well as the supporting documents filed before me. It is seen that the appellant has claimed Water Charges expenses of ₹ 72,92,206/-. Out of this the AO disallowed a sum of ₹ 42, .....

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320 The appellant has further submitted that remaining amount of ₹ 20,79,886/- relates to the provision of the expenses and the same has been paid/reversed in the next Assessment year and offered as income. Since the appellant could prove only payment of ₹ 51,12,320/- to Gujarat Irrigation Department towards Water Charges the same are held to be allowable. The remaining provision of ₹ 20,79,886/- was an unascertained liability and the same is not allowable, in computing the inc .....

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T(A), the details of bills from April 4 to March 5 amounting to ₹ 52,12,320/- were furnished. In the present case, it appears that new evidences were furnished before the ld. CIT(A) which were not before the AO. We, therefore, to meet the ends of justice, deem it appropriate to send this issue back to the file of the AO for proper verification and adjudication after providing due and reasonable opportunity of being heard to the assessee. Accordingly, the appeal of the department is partly .....

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and CO No. 367/Del/2009 for the A.Y. 2006-07 65. First issue in this appeal of the department relates to the direction of the ld. CIT(A) to allow the expenses of ₹ 8,43,000/-, ₹ 3,57,206 and ₹ 6,00,000/- against business income. 66. Facts related to this issue in brief are that the AO during the course of assessment proceedings noticed that the assessee had claimed to have incurred expenses of ₹ 40,90,048/- in connection to the transfer which included following expenses: .....

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. The AO did not accept the claim of the assessee by observing that the same was not allowable as bad debts u/s 48 of the Act. He added ₹ 8,43,500/-under the head short term capital gain of the assessee. As regards, to the insurance claim not recovered, the assessee submitted that it suffered some losses on account of deluge in Mumbai against which the insurance claim was lodged. The AO also did not allow this claim by stating that it had no relation to the transfer of business and accordi .....

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0,000/- was added to the short term capital gain. 67. Being aggrieved the assessee carried the matter to the ld. CIT(A) who allowed the claim of the assessee by observing that the expenditure of ₹ 18,00,500/- was claimed against the short term capital gain pertaining to writing off of debt of ₹ 8,43,500/-outstanding in the name of R.R Enterprises, short receipt of insurance claimed of ₹ 3,57,206/- and the payment of incentive bonus of ₹ 6,00,000/- to the employees who had .....

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he extent of ₹ 3,57,206/- and since it was a business loss relating to the trading business, the same was allowable expenditure u/s 37(1) of the Act. As regards to the annual performance incentive payable to the employees of the trading unit who had been subsequently transferred, the ld. CIT(A) pointed out that it was related till 14.10.2005, which had been offered in the profit and loss account. Therefore, incentive till that date had to be paid by the assessee. The ld. CIT(A) held that a .....

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ported the impugned order. 69. After considering the submissions of both the parties, we do not see any infirmity in the order of the ld. CIT(A), particularly when the assessee had written off bad debts in its books of account and insurance claim relating to the business was less recovered to the extent of ₹ 3,57,206/- which was allowable as a business loss u/s 37(1) of the Act. Similarly, the annual performance incentive payable was related to the trading business of the assessee which ha .....

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e of ₹ 1,39,76,352/-. The facts related to this issue in brief are that the AO during the course of assessment proceedings noticed that the assessee claimed cost of purchase of shares to the extent of ₹ 1,39,76,352/-, as expenses incurred in connection with transfer. The AO treated those expenses as not related to slump sale and were not allowable. He added the same to the short term capital gain of the assessee for the following reasons: "4.1 The buy back shares of the manageme .....

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he nature of slump sale the seller cannot withdraw any asset (both movable and immovable) or liability from the business sold or the purchaser cannot reject any asset or liability comprised in the business. 4.3 The ETA dated 14.10.2005 does not in any manner whatsoever casts any obligation on the assessee company to buy back the shares held by the outgoing employees or fund the Trust for this purpose. In fact the ETA as per clause 4.4 lays that EAC and/or Newco shall employ the employees from th .....

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the business transfer and cannot be allowed u/s 48 of the Act for computation of Short Term Capital Gain." 71. Being aggrieved the assessee carried the matter to the ld. CIT(A) and submitted as under: "That the assessee company was formed by Nitrex Mauritius Ltd. after "acquiring Nitrocellulose and Trading business from ICI Ltd. vide ETA dated 3rd December 2003. It was agreed that for the smooth running of the business of the company, it would be prudent that the employees of the .....

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share capital of assessee company with an undertaking to make the shares available to the management team as per the ESOP scheme. 1. Subsequently, the assessee company decided to sell the trading business originally acquired from ICI to EAC vide BTA dated 14.10.2005. As per the employee transfer agreement (ETA) of the even date, it was a condition precedent to the completion of transactions contemplated in BTA that the management staff shall have confirmed to accept the employment in the new co .....

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other than retirement, the employees had to exercise the option vested on them within three months of date of resignation. The employees also had to divest with their other shareholdings in the company on account of such transfer. 3. That in order to effect the business transfer transactions, it became necessary for the appellant company to ensure that the management staff accepts to part with their employment with the assessee company and accept the employment of the new company, as the same wa .....

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their management holding was bought back by the Trust at following rate. Name Shareholding Management Holding Rate of Buy Back by Trust Paid to them on transfer Mr. Sanjay Gupta 120000 85.00 Rs.10,200,000 Mr. Manish Bahuguna 40000 60.46 Rs.2,418,400 Mr. Murali Duvvuri 32000 30.46 Rs.1,934,720 Mr. Satish Kumar 32000 60.46 Rs.1,934,720 Total 224000 Rs.1,64,87,840 4. That in pursuance to said Business Transfer Agreement and Employee Transfer Agreement, ESOP Scheme, consent of the management employe .....

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employees was necessitated by the transfer of trading business to EAC and the such transfer would not have been possible had such buy back not have been made, the amount paid in respect thereof, is an expense incurred wholly and exclusively in connection with transfer as contemplated under section 48 of the Act and therefore the said amount is required be allowed to be deducted while computation of capital gain in respect of slump sale of trading business." 72. The ld. CIT(A) after conside .....

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ployees Transfer Agreement (ETA) and the Employees Stock Option Plan, 2004 (ESOP, 2004). It is seen that the appellant company entered into an agreement to sell the Trading Division of the company which was engaged in the business of whole sales trading in chemicals and whole sale trading business with M/s EAC, Industrial Ingredients Pte. Ltd. on 14.10.2005 for a consideration of ₹ 22,15,00,000/- subject to the adjustment regarding net liquid assets and movable assets which are given in Sc .....

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Condition precedent-It shall be a condition precedent to completion of the transaction contemplated by the BTA that the management staff shall have confirmed that subject to the completion they will accept to be employee by Newco instead of Nitrex India Ltd. 4.4 EAC and/or Newco shall employ the employees from the completion date on terms and conditions of service which are no less favourable than those which the employees enjoyed immediately prior to the completion date with Nitrex India withou .....

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are no less favourable than those which the employees were enjoying immediately prior to completion date of business transfer without any interruption or break up of service. However, in the agreement it is clearly mentioned that in the new company they will not be given any employee stock or share holding options. It is seen that the management employee of the Nitrex were having ESOP which was allowed to them by the appellant company in 2004 as per ESOP 2004 Scheme. As per this, 5.5% of the sh .....

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was in the custody of Trust. As per the ESOP-2004 in the vest of separation of employees for reason other than retirement, the employee had to exercise the option vested on them within three months of the date of resignation. On the joining of the new company, the employee would have lost the benefit of ESOP which would have effected them financially. However, as per the terms and conditions of BTA, the management team has to agree to join the new company which was a pre-condition for business t .....

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e determined by applying a price earnings multiple of five to the company's profit after tax for the Financial year 2004-05. However, the management team requested the appellant company to calculate the price of share by suing the profit after tax of the company for F.Y 2005-06 adjusted for EAC warranty claim. As a result of acceptance letter from the management team, the appellant company was able to transfer its trading business to M/s EAC without any hindrance. For buy backing, the manage .....

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been incurred wholly and exclusively in connection with the transfer of the capital assets as contemplated in section 48 of the IT Act. Hence, the same has to be allowed as deduction while computing the capital gain in respect of the slump sale of trading business.' 73. While deleting the impugned addition the ld. CIT(A) also observed as under: "On going through the various clauses of Nitrex Chemicals Employees Stock Option Trust and Nitrex Chemicals Employees Stock Option Plan-2004, l .....

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res which have been kept in the Trust will be for the benefit and welfare of the employees and management team. Therefore, the amount paid by the appellant company was wholly and exclusively to facilitate the trading business transfer agreement with M/s EAC. If the appellant company has not executed the transfer agreement for the transfer of management team, the transaction of sale of trading business would not have materialized. The transfer of the said employees was a key to the transfer of tr .....

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f trading business to M/s EAC, Thailand. Hence, the same is allowable from the capital gains arisen to the appellant." 74. The reliance was placed on the following case laws: CIT Vs Bradford Trading Company Pvt. Ltd. (2003) 261 ITR 222 (Mad.) Gopee Nath Paul & Sons & Anr. Vs DCIT (2005) 278 ITR 240 (Cal.) 75. Now the department is in appeal. The ld. DR strongly supported the order of the AO and reiterated the observations made in the assessment order. 76. In his rival submissions th .....

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e assessee company. Therefore, 5.5% of the shares were subscribed and the assessee also entered into ESOP scheme under which further shares to be allotted to the employees. The ICI Ltd. also agreed to subscribe 10% of the equity share capital of the assessee with an undertaking to make the shares available to the management team as per the ESOP scheme. In order to give effect to the business transfer transaction, it became necessary for the assessee to ensure that the management staff accepts to .....

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r opinion the ld. CIT(A) was justified in holding that the impugned amount was allowable from the capital gain arisen to the assessee. We do not see any valid ground to interfere with the findings of the ld. CIT(A) on this issue. 78. Vide Ground No. 3 the grievance of the department relates to the deletion of addition of ₹ 10,00,000/- made by the AO on account of Techno Commercial Licensing Fees. 79. The facts related to this issue are identical to the facts involved in the assessment year .....

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essment year i.e. 2005-06 in the former part of this order and since the facts for this year are similar to the preceding year, therefore, our findings given in the former part of this order for an identical issue shall apply with the same force for this year also. Accordingly, this ground of the departmental appeal is also dismissed as was done in the preceding year. 82. In the Cross Objection No. 367/Del/2009 for the assessment year 2006-07, the assessee has raised the additional ground in the .....

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₹ 10,00,000/- which was considered to be capital in nature by the AO, since this issue has been decided in the departmental appeal, so this ground of the assessee's Cross Objection becomes infructuous as the expenses were directed to be allowed while deciding the departmental appeal. Accordingly, the departmental appeal is dismissed and the Cross Objection of the assessee is partly allowed for the assessment year 2006-07. ITA No. 756/Del/2009 for the assessment year 2007-08. 84. First .....

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from the assessee company and issued these shares to the employees eligible to exercise stock option. The AO observed that the trust had purchased 421,727 shares belonging to the employees of the Trading Business. Out of the above shares 224,000 pertained to the original allotment of shares to these employees and the balance 197,727 shares pertained to share allotted in exercise of options vested on them. The AO asked the assessee to explain the ESOP and to justify as to how the expenses claime .....

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he completion of transactions contemplated in BTA that the management staff shall have confirmed to accept the employment in the new company. Further, it was agreed that on such acceptance, the new company shall employ the employees on terms and conditions of service which are no less favorable than those which the employees enjoyed immediately prior to completion data of business transfer without any interruption or break of service (but excluding employee stock share holding options). Further, .....

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of F. Y 2005-06 and would become payable in the month of December, 2006. As a part of this contractual obligation to the management staff holding the ESOPs, the following payments were made in December, 2006:- Name ESOP Rs. Mr. Sanjay Gupta 180000 57,92,092 Mr. Murali Duvvuri 5997 27,710 Mr. Satish Kumar 6193 35,168 Total 58,55,345 In pursuance to the terms of scheme, the payment of aforesaid buy back was made and therefore, such an amount of ₹ 58,55,345/- is the liability of the company. .....

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d the claim as was done in the immediately preceding year i.e. assessment year 2006-07. 88. Now the department is in appeal. 89. We have considered the submissions of both the parties and carefully gone through the material available on the record. It is noticed that the facts for the year under consideration relating to this issue are identical to the facts involved in the earlier year in ground no. 2 of the departmental appeal, which we have already adjudicated in the former part of this order .....

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the preceding assessment years which we have already adjudicated in the former part of this order. Therefore, our findings given in the former part of this order relating the issue of selling commission shall be applicable with the same force for this year also. In that view of the matter, we do not see any merit in this ground of the departmental appeal. 92. The last issue vide Ground No. 3 relates to the relief allowed to the assessee out of the disallowance made by the AO out of the dividend .....

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ld. CIT(A) and submitted that the assessee had interest free fund of ₹ 60.59 crores being share capital of ₹ 10 crores, reserves & surplus of ₹ 26.24 crores and depreciation of ₹ 24.07 crores, against the investment of ₹ 1 crore, therefore, there cannot be any disallowance u/s 14A of the Act. The assessee also submitted that the calculations for making the disallowance under Rule 8D, by the AO were wrong. 95. The ld. CIT(A) after considering the submissions of .....

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CIT(A) also observed that besides expenditure on management which takes crucial decision on where and when to invest was also to be attributed to the receipt of dividend income. The ld. CIT(A) upheld the disallowance u/s 14A of the Act to the extent of 10% of the dividend income received by the assessee. He also pointed out that provisions of Rule 8D as applied by the AO were not applicable to the assessment years prior to assessment year 2008-09 as per the judgment of the Hon'ble Bombay Hig .....

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AO and the ld. CIT(A) was not justified in restricting the disallowance to ₹ 37,740/- only as against ₹ 3,97,880/- made by the AO. 97. In his rival submissions the ld. Counsel for the assessee submitted that the AO was not justified in applying Rule 8D while making the disallowance u/s 14A of the Act because the said rule is applicable w.e.f assessment year 2008-09 and not for the assessment year under consideration. The ld. Counsel for the assessee strongly supported the order of t .....

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sessment year under consideration is 2007-08. Therefore, the AO was not justified in working out the disallowance by applying the provisions of Rule 8D. In our opinion, the ld. CIT(A) was fair and reasonable in restricting the disallowance of ₹ 37,740/- . We do not see any merit in this ground of the departmental appeal. ITA No. 2331/Del/2011 for the assessment year 2008-09 99. The only issue involved in the appeal relates to the deletion of disallowance of ₹ 55,04,390/- made by the .....

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8377; 42,37,552/- made by the AO on account of sale commission. The similar issue was involved in assessment years 2006-07 to 2008-09, which we have already adjudicated in the former part of this order and have upheld the findings of the ld. CIT(A) in deleting the disallowance made by the AO. We, therefore, do not see any merit in this ground of the departmental appeal. 101. The next issue vide Ground Nos. 2 & 3 relates to the deletion of disallowance of ₹ 2,77,72,900/- made by the AO .....

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77; 7,28,74,037/-as foreign exchange fluctuation loss. He asked the assessee to file details of the aforesaid sums alongwith the justification, vouchers etc. The assessee gave the break-up of Foreign Exchange loss as under: Particulars Net Loss/(Gain) Remark Export Sales (9364096) Export debtors Commission 1853626 Commission on export sale booked on actual realization instead of sale value in 2008-09 rectified. Forward Contract (734748) Short accounting of forward contract gain in previous year, .....

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x loss of ₹ 7,28,74,037/-, a sum of ₹ 3,26,74,000/- pertained to ECB Loan of US dollar 31,00,000. The AO asked the assessee to show cause as to how the forex loss on ECB loans, availed for capital expenditure was allowable as revenue expenditure. In response the assessee submitted as under: "The purpose of taking the foreign loans is to get the benefit of interest cost as compared to loan taken from India as the interest on this loans are much lesser. Mainly, the difference betw .....

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the submissions of the assessee observed that as per the exchange regulations in India, ECB is strictly prohibited for the purpose of utilization for working capital, general corporate purpose or repayment of existing loans, for on-lending or investment in capital market or acquiring a company or part thereof in India and investment in real estate. The AO also observed that there was no evidence on record to prove that the assessee had obtained any specific approval from the RBI for utilizing th .....

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. 3,26,74,000 - ₹ 49,01,100). The reliance was placed on the following case laws: CIT Vs Woodward Governor India (P) Ltd. and Honda Siel Power Products Ltd. 312 ITR 254 (SC) Sutlej Cotton Mills Ltd. Vs CIT reported in 116 ITR 1 (SC) 105. Being aggrieved the assessee carried the matter to the ld. CIT(A) and submitted as under: (a) The Ld. Assessing Officer has erred in law and facts by disallowing a sum of ₹ 2,77,72,900/- on account of foreign exchange loss on ECB Loan of USD 31,00,00 .....

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n or loss in respect of foreign exchange fluctuation of loan the same treatment is given in the earlier year as in the current year and in subsequent years i.e. it has been transferred to the profit and loss account and same was allowed in the earlier years by the Ld. AO. In the earlier year there was foreign exchange gain which was shown in the profit and loss account and thus was offered for taxation. Therefore, following the principle of consistency the loss should be allowed this year. Suppo .....

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Revised) - Accounting for effects of Changes in Foreign Exchange Rates, it has been clearly stated that exchange differences arising on repayment of liabilities incurred for purchase of fixed assets shall be expensed through profit and loss account. Copy of the same is submitted here with as Annexure 3. (e) Section 43A of the Act, saying to give effect to the cost of fixed asset on payment basis, is also not applicable to us, as Section 43A of the Act is applicable in the case of imported Fixed .....

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tion in liability arises. (f) Since Section 43A is not applicable and there is no provision in the Income Tax Act relating to the Foreign exchange loss incurred on a foreign currency loan taken to purchase an indigenous asset; hence Accounting Standards may be followed. Therefore following AS 11, foreign exchange fluctuation has to be debited/credited to Profit and Loss Account. 106. The reliance was placed on the following case laws: Prakash Leasing Ltd. Vs DCIT, ITA Nos. 301, 302 & 491 of .....

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considering the submissions of the assessee observed that the assessee had been disclosing in its return of income, the gain resulting from the fluctuation from the foreign exchange in the earlier as well as subsequent years and if the AO had accepted the foreign exchange fluctuation gains, the loss resulting on that score during the year under consideration has also to be accepted. The ld. CIT(A) also observed that the provisions of section 43A of the Act are not applicable to the assessee' .....

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d. Counsel for the assessee reiterated the submissions made before the authorities below and strongly supported the impugned order. 110. We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, it is noticed that the ECB loan taken by the assessee was old one and in preceding and subsequent year, there was gain on account of increase in exchange rates which had been accepted by the AO but the loss on account of t .....

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ccount. 112. Similarly, the Hon'ble Supreme Court in the case of Woodward Governor India (P.) Ltd. (supra) held as under: Loss suffered by the assessee on account of fluctuation in the rate of foreign exchange as on the date of the balance-sheet is an item of expenditure under section 37(1) of the Income-tax Act, 1961. 113. As regards to the nature of the loss occurred due to foreign exchange fluctuation, the Hon'ble Jurisdictional High Court in the case of Goyal M. G. Gases Ltd. (supra) .....

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have to be treated as revenue loss and not capital loss. 114. We, therefore, considering the totality of the facts and the ratio laid down by the Hon'ble Courts in the various judicial pronouncement as discussed hereinabove, are of the view that the ld. CIT(A) was fully justified in directing the AO to delete the impugned addition. We do not see any infirmity in the order of the ld. CIT(A) on this issue. 115. The last issue agitated by the department vide Ground No. 4 relates to the deletion .....

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00 117. The AO also observed that the assessee earned the dividend on mutual fund amounting to ₹ 1,06,498/-. The AO was of the view that as per sub-section (2) of section 14A of the Act, expenses connected with the exempt income (received or receivable) have to be necessarily disallowed regardless of whether they were direct or indirect, fixed or variable and managerial or financial. The AO worked out the disallowance of ₹ 12,09,198/- by observing as under: (i) the amount of expendit .....

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ay of interest other than the amount of interest included in clause (i) incurred during the previous year: = A × B/C B- The average of value of investment, income from which does not or shall nor form part of the total income as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year; = 9,23,910 C- The average of total assets as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year. (iii) an amo .....

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luation of assets but including the decrease on account of revaluation of assets Disallowance under Rule 8D = Aggregate of (i) + (ii) + (iii) = 2,85,288 + 9,23,910 + 2,85,288 = ₹ 14,94,486/- The assessee has suo motu disallowed ₹ 2,85,288/-in the computation of income and therefore, the balance amount of ₹ 12,09,198/- (Rs. 14,94,486 -Rs. 2,85,288) is added back to the income of the assessee for the year under consideration. (Disallowance under Rule 8D : ₹ 12,09,198/-) 118 .....

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's calculation of section 14A was incorrect. " 119. The reliance was placed on the following case laws: Maxopp Investment Ltd. (2012) 247 CTR 162 (Del) DCIT Vs Jindal Photo Ltd., ITA No. 4539/Del/2010 (ITAT Delhi) 120. It was further submitted that there was no finding for non-satisfaction for the amount disallowed by the assessee, therefore the disallowance made by the AO may be deleted. 121. The ld. CIT(A) after considering the submissions of the assessee deleted the addition by obser .....

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n this account. This ground of appeal is also allowed." 122. Now the department is in appeal. The ld. DR strongly supported the order of the AO and reiterated the observation made in the assessment order. 123. In his rival submission the ld. Counsel for the assessee submitted that the assessee gave the working for disallowance u/s 14A of the Act r.w. Rule 8D of the I.T Rules, 1962 to the AO who had not given any findings for non-satisfaction for the amount disallowed by the assessee. Theref .....

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