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2016 (8) TMI 559

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..... Jhaveri And G. R. Udhwani, JJ. For the Appellant : Mr KM Parikh, Advocate For the Opponent : Mr Manish J Shah, Advocate JUDGMENT ( Per : Honourable Mr. Justice KS Jhaveri ) 1. By way of this appeal, the revenue has challenged the order of the Income Tax Appellate Tribunal, Ahmedabad Bench C , Ahmedabad, (For short, the Tribunal ) in ITA No.3955/Ahd/2003 dated 28.7.2005, whereby the Tribunal has reversed the finding of the CIT (Appeals). 2. The assessee company had filed return of income on 31/10/2001 declaring total loss of ₹ 6,92,03,450/-. The same was processed under Section 143 (1) on 21.1.2002 and the case was selected for scrutiny by issuing notice under Section 143 (2) dated 23.1.2002. The same was served upon the assessee on 25.1.2002. Notice under Section 142 (1) along with detailed questionnaire was issued on 28.1.2002, which was served upon the assessee on 29.1.2002. In reply to such notice, reply was filed by the assessee. During the course of assessment proceedings, the Assessing Officer had noticed that the assessee-company, which was formerly known as Arlem Investment Finance Ltd had during the previous year relevant to Assessment .....

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..... siness Undertaking consisting of immovable properties, movable properties, liabilities, receivables, etc. as more particularly recited in the Business Purchase Agreement dated 22nd March, 2000 (The BPA), including the business of manufacture of Nitric Acid, Ammonium Nitrate as also alll that their Brands, Labels, etc. (The said Business) 2. At the request of the Assignees the Assignors have agreed to grant to the Assignees as per the BPA and that the Assignors are bound to grant to the Assignees a covenant to non-compete in the said business transferred under the BPA i.e. manufacture and/or selling and/or trading of Nitric Acid and Ammonium Nitrate directly and/or indirectly for a period of 5 (five) years. 3. The parties hereto have desired and do hereby record the terms and conditions of the non-compete agreement as follows:- NOW THIS AGREEMENT HEREBY WITNESSETH AND THE PARTIES HERETO HEREBY MUTUALLY AGREE AS FOLLOWS: 1. The recitals contained herein shall constitute an integral operative part of this Agreement. 2. This agreement and the covenants recited hereunder shall be effective and binding on both the parties for a period of five years. 3. .....

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..... r of Income Tax, Belgaum and Another reported in 332 ITR 602 (SC), wherein it is held as under:- 7. Two questions arose for determination, namely, whether the amounts received by the appellant for loss of agency was in normal course of business and therefore whether they constituted revenue receipt? The second question which arose before this Court was whether the amount received by the assessee (compensation) on the condition not to carry on a competitive business was in the nature of capital receipt? It was held that the compensation received by the assessee for loss of agency was a revenue receipt whereas compensation received for refraining from carrying on competitive business was a capital receipt. This dichotomy has not been appreciated by the High Court in its impugned judgment. The High Court has misinterpreted the judgment of this Court in Gillanders' case (supra). In the present case, the Department has not impugned the genuineness of the transaction. In the present case, we are of the view that the High Court has erred in interfering with the concurrent findings of fact recorded by the CIT(A) and the Tribunal. One more aspect needs to be highlighted. Payment re .....

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..... time, evolved various tests for distinguishing between capital and revenue expenditure but no test is paramount or conclusive. There is no all embracing formula which can provide a ready solution to the problem; no touchstone has been devised. Every case has to be decided on its own facts, keeping in mind the broad picture of the whole operation in respect of which the expenditure has been incurred. But a few tests formulated by the courts may be referred to as they might help to arrive at a correct decision of the controversy between the parties. One celebrated test is that laid down by Lord Cave L.C. in Atherton v. British Insulated and Helsby Cables Ltd. [1925] 10 TC 155, 192 (HL), where the learned Law Lord stated: ........ when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital. This test, as the parenthetical clause shows, must yield where there are special circumst .....

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..... Another test which is often applied is the one based on the distinction between fixed and circulating capital. This test was applied by Lord Haldane in the leading case of John Smith and Son v. Moore [1921] 12 TC 266, 282 (HL) where the learned law Lord drew the distinction between fixed capital and circulating capital in words which have almost acquired the status of a definition. He said: Fixed capital as what the owner turns to profit by keeping it in his own possession ; circulating capital as what he makes profit of by parting with it and letting it change masters. Now so long as the expenditure in question can be clearly referred to the acquisition of an asset which falls within one or the other of these two categories, such a test would be a critical one. But this test also sometimes breaks down because there are many forms of expenditure which do not fall easily within these two categories and not infrequently, as pointed out by Lord Radcliffe in Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd. [1965] 58 ITR 241 (PC), the line of demarcation is difficult to draw and leads to subtle distinctions between profit that is made out of asset .....

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..... the nature of relaxation of restriction on working hours imposed by the working time agreement, so that the assessee could operate its profit-earning structure for a longer number of hours. Undoubtedly, the profit-earning structure of the assessee was enabled to produce more goods, but that was not because of any addition or augmentation in the profit-making structure, but because the profit-making structure could be operated for longer working hours. The expenditure incurred for this purpose was primarily and essentially related to the operation or working of the looms which constituted the profit-earning apparatus of the assessee. It was an expenditure for operating or working the looms for longer working hours with a view to producing a larger quantity of goods and earning more income and was, therefore, in the nature of revenue expenditure. We are conscious that in law as in life, and particularly in the field of taxation law, analogies are apt to be deceptive and misleading, but in the present context, the analogy of quota right may not be inappropriate. Take a case where acquisition of raw material is regulated by quota system and in order to obtain more raw material the ass .....

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..... out as part of the process of profit earning ?-or, on the other hand, is it a capital outlay ?-is it expenditure necessary for the acquisition of property or of rights of a permanent character, the possession of which is a condition of carrying on its trade at all ? It is clear from the above discussion that the payment made by the assessee for purchase of loom hours was expenditure laid out as part of the process of profit earning. It was, to use Lord Sumner's words, an outlay of a business in order to carry it on and to earn a profit out of this expense as an expense of carrying it on . [John Smith and Son v. Moore [1921] 12 TC 266, 296 (HL)]. It was part of the cost of operating the profit-earning apparatus and was clearly in the nature of revenue expenditure. It was pointed out by Lord Radcliffe in Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd. [1965] 58 ITR 241 (PC) that in considering allocation of expenditure between the capital and income accounts, it is almost unavoidable to argue from analogy . There are always cases falling indisputably on the one or the other side of the line and it is a familiar argument in tax courts that the case under rev .....

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..... present case for purchase of loom hours so as to enable the assessee to work the profit making apparatus for a longer number of hours and produce more goods than what the assessee would otherwise be entitled to do, must be held to be of revenue character. The decision in IRC v. Carron Company [1968] 45 TC 18 (HL), also bears comparison with the present case. There certain expenditure was incurred by the assessee-company for the purpose of obtaining a supplementary charter altering its constitution, so that the management of the company could be placed on a sound commercial footing and restrictions on the borrowing powers of the assesseecompany could be removed. The old charter contained certain antiquated provisions and also restricted the borrowing powers of the assessee-company and these features severely handicapped the assessee-company in the development of its trading activities. The House of Lords held that the expenditure incurred for obtaining the revised charter eliminating these features which operated as impediments to the profitable development of the assessee-company's business was in the nature of revenue expenditure since it was incurred for facilitating the day- .....

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