TMI Blog2017 (4) TMI 969X X X X Extracts X X X X X X X X Extracts X X X X ..... id - Claim u/s 36(1)(iii) rejected on the ground that there was no borrowal by the assessee per se - alternate claim under section 37 was also rejected on the ground that the expenditure was capital in nature - Held that:- The arrangement with SFL for financing the acquisition and leasing of the equipment is only for the business purposes of the assessee. The provision of compensation charges is in the nature of the interest liability payable to the manufacturer or supplier of the equipment by SFL that the assessee makes good. The sum and substance of the arrangement is that the assessee engages the services of SFL for rendering financial assistance for acquisition of equipment for its business. SFL, while advancing the funds, negotiates the purchases of the equipment and the assessee undertakes to pay charges at the rate of 21% to compensate SFL for the advances made by it to the manufacturers and suppliers of equipment. We are thus of the view that the assessee assumes the role of the borrower in this situation. The compensation charges paid are in the nature of interest, liable to be allowed in terms of section 36(1)(iii) of the Act. With respect to the alternate plea under s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e broken bottles need not be reduced from the written down value for the purpose of calculation of short term capital gains arising from sale of bottles? b) Whether in the facts and circumstances of the case, the Tribunal was right in holding that lease compensation charges should be treated as a revenue expenditure? c) Whether in the facts and circumstances of the case, the Tribunal was right in holding that the amount of ₹ 3 crores received as sale consideration in respect of goodwill should not be assessed to long term capital gains? 2. The Assessee/Respondent is engaged in the manufacture of Soft drinks under a franchise from Coco Cola. It had two bottling plants, Unit I at Poonamallee High Road, Arumbakkam and Unit II at Pulianthope, Trivellore District, Nemam. The assessee, in the previous year relevant to the present assessment year, entered into an arrangement for transfer of its entire soft drinks and beverage undertaking as a going concern to Hindustan Coco Cola Bottling South West Pvt. Ltd (in short HCC ). 3. The first issue raised in the appeal relates to the reduction of the value of breakages of bottles and crates from the written down value ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Company for the year ending 31.03.1999 that corroborated this position and reflected the closing stock as Nil. Thus the Assessing Officer brought to tax the amount of ₹ 3 crores in the present assessment year being of the view that the transfer of goodwill business had been effected in the present year itself. 5. In appeal before the Commissioner of Income Tax (Appeals) all issues were held against the Assessee. The order was assailed in appeal before the Income Tax Appellate Tribunal, which held the issues in favour of the assessee. The aforesaid order of the Tribunal dated 12.06.2006 is challenged in appeal before us. 6. We have heard the submissions of Mr.T.Ravikumar, learned counsel appearing for the Income Tax Department and Mr.V.S.Jayakumar, and Mr. Sandeep Bagmar, learned counsels appearing for the Assessee/Respondent. 7. Adverting to the issue of computation of short term capital gain, the assessee has been consistently providing for breakage of bottles and crates, 33% in the present year as against 15% in the past, adding the same back for the claim of depreciation. The assessee also did did not claim the loss from breakage since it was capital in nature. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n value of the block of assets at the beginning of the previous year, as increased by the actual cost of any asset falling within that block acquired during the previous year. In the present case, the WDV as on 1.4.1998 is ₹ 12,02,56,812/- after reducing the depreciation allowable. In such an event, and in the light of the fact that the breakages have not been claimed in the computation of income, there is no justification for any further reduction from WDV. The case law relied upon by the assessing officer have been rightly distinguished by the Tribunal as they turn on entirely different facts. Substantial Question No.1 is answered against the Revenue and in favour of the Assessee. 9. Adverting to Substantial No. 2, the Assessee had set up a new plant in Nemam to commence production from March 1997. In this regard, an Agreement to enter into Lease dated 23.2.1995 was entered into between the assessee and M/s.Sundaram Finance Limited ( SFL ) for financing of the plant and machinery, at the behest of the assessee and subsequent lease thereof by SFL to the assessee. The agreement provided for various terms and conditions for the intended lease including the payment of compen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d leasing of the equipment is only for the business purposes of the assessee. The provision of compensation charges is in the nature of the interest liability payable to the manufacturer or supplier of the equipment by SFL that the assessee makes good. The sum and substance of the arrangement is that the assessee engages the services of SFL for rendering financial assistance for acquisition of equipment for its business. SFL, while advancing the funds, negotiates the purchases of the equipment and the assessee undertakes to pay charges at the rate of 21% to compensate SFL for the advances made by it to the manufacturers and suppliers of equipment. We are thus of the view that the assessee assumes the role of the borrower in this situation. The compensation charges paid are in the nature of interest, liable to be allowed in terms of section 36(1)(iii) of the Act. 13. With respect to the alternate plea under section 37 of the Act, the equipment has been acquired for the expansion of the business of the assessee. The second unit at Nemam is also engaged in the bottling of beverages under the existing franchaisee with Coco Cola. Thus, while a new asset is acquired, it is for the pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e finding of the Tribunal to the effect that the consideration on account of goodwill was not received is contrary to Clause No.2 extracted above wherein the vendors specifically confirm the receipt thereof. The execution of a Bank Guarantee as well as the Letter dated 28.03.2002 by HCC where the payment of ₹ 3 crores is shown as an advance has to be seen in the context of the agreements between the parties and the suspension of the business of the assessee as on 28.02.1999. 16. We are thus of the view that the Tribunal erred in deleting the addition on account of goodwill when the same has, as a fact, been transferred as on 28.2.1999 and full consideration received then and there. The amount representing goodwill is thus liable to be taxed in the present year. The conclusion of the Tribunal stands reversed and that of the Assessing Officer in this regard restored. Consequently, the amount shall stand reduced from the taxable income in respect of assessment year 2002-03. 17. Substantial Question Nos.1 and 2 are answered in favour of the Assessee and against the Revenue and Substantial Question No.3 stands answered against the Assessee and in favour of the Revenue. The D ..... X X X X Extracts X X X X X X X X Extracts X X X X
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