TMI Blog2016 (4) TMI 1343X X X X Extracts X X X X X X X X Extracts X X X X ..... ce given by U.K. Company to the assessee constituted a separate source of income and the compensation received on termination of the licence agreement in respect of even one of the said trade marks constituted a capital receipt not liable to tax in the hands of the assessee. In our opinion, CIT(A) has correctly decided the issue in favour of the assessee after analyzing and considering the facts of the case and also the settled legal position. Therefore, we do not see any valid ground in interfering with the findings of the CIT(A) on this issue. Accordingly, we uphold the order of CIT(A) and dismiss ground No. 1 of the appeal. Recompute the deduction u/s. 80HHC after excluding Excise Duty, Octroi and Sales-tax etc from the total turnover - Held that:- We observe that the issue is squarely covered in favour of the assessee and against the Revenue by the decision of the Hon'ble Supreme Court in the case of CIT v Laxmi Machine Works [2007 (4) TMI 202 - SUPREME COURT]. We do not find any infirmity in the findings of the CIT(A) on this issue. Accordingly, we uphold the order of CIT(A) on this issue and reject ground No. 2 of the appeal. 100% depreciation on Effluent Treatment Pla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... :- Tribunal in assessee's own case for the assessment year 82-83 (supra), uphold the order of the CIT(A) in regard to valuation of closing stock and dismiss the above common grounds of appeals raised by the assessee as well the revenue. Addition on account of MODVAT element not reflected in the value of closing stock - Held that:- Assessing officer had included the modvat credit in the valuation of closing stock. The CIT(A) has recorded a finding of fact that the assessee had decided the purchases not of modvat credit and accordingly has not included the modvat credit in the valuation of closing stock and has accordingly deleted the addition for the respective assessment year. The parties before us agreed that the issue is covered in favour of the assessee by the decision of the Hon'ble Supreme Court in the case of Indo Nippon [2003 (1) TMI 8 - SUPREME COURT]. Respectfully following the said decision of the Hon'ble Supreme Court in the case of Indo Nippon, this common ground raised by the Revenue in respective assessment years is hereby dismissed. Expenditure on account of rent paid for guest house - allowable busniss expenditure - Held that:- Hon'ble Supreme Court in the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... demark user agreement was entered into between Beecham Group Plc. and the assessee company. M/s. Smithkline Beecham Plc. U.K. had sole right to manufacture, pack and sell goods in respect of these trade marks granted the right to use these trademarks to the assessee company. The U.K. Company also granted other trademarks to the assessee, which are as under:-- Trade mark 1. ENO (word) 2. FRUIT SALT 3. SIL VIKRIN (Word) 4. SIL VIKRAN (Brand) 5. MACLEAN (brand) 6. MACLEANS (Word) 7. MACLEANS Signature 8. MACLEANS (Tooth paste carton) 9. BRYLCREEM (word) 10. BRYLCREEM (label) The Assessing officer noted that on re-organization of its business, M/s. Smithkline Beechan Plc. transferred the trade mark use of 'ENO' and 'Fruit Salt' out of the above items to M/s. Smithkline Beecham Asia(P) Ltd., New Delhi. The agreement terminating the ENO and Fruit Salt trade mark licence agreement reads as under:-- I refer to the trade mark user agreement between Beecham Group Plc and Smithkline Beecham Consumer Healthcare dated 28 June 1979 as subsequently amended from time to time ( Agreement ). The rights relating to the tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany. In order to arrive at a fair market value for the goodwill and the marketing and advertising related information associated with SBCH's development effort, a valuation report from an independent and international firm of accountants has been obtained. The said independent valuation report recommends a one-time lump-sum consideration of ₹ 45 Million as a fair and reasonable compensation for the said goodwill, and for transfer of all the marketing, advertising and brand related information generated by SBCH in its development effort. Accordingly we propose to pay SBCH a one-time lump sum consideration of ₹ 45 Millions for the said goodwill and for transfer of all information associated with SBCH's development effort. We would request you to signify your consent to the above terms by signing and returning a copy of this letter to us at the earliest . Yours faithfully for and on behalf of Agreed and accepted for and on behalf of on behalf of SMITHKLINE BEECHAM ASIA PRIVATE LIMITED SMITHKLINE BEECHAM CONSUMER HEALTHCARE LIMITED Sd /- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee company to M/s. Smithkline Beecham Asia (P) Ltd., New Delhi in the course of regular business transactions of M/s. Smithkline Beecham Plc U.K. The Assessing officer concluded that the compensation received by the assessee was not for termination of the business itself but it was a payment received for termination of a contract/agreement entered into by the assessee in the regular course of business. He therefore, held that the compensation received by the assessee is s taxable Revenue receipt in the hands of the assessee. He, therefore, held that receipt of ₹ 4.5 cores is a taxable income of the assessee. 4. On appeal, the CIT(A) deleted the addition for the reasons stated in para 3 of the impugned order, which reads as under:-- 3. The submissions made by the appellant have been given careful consideration and I have also gone through the various decisions cited by the Assessing Officer as well as learned counsel for the assessee. I have also perused the agreements entered into by the appellant. The Assessing Officer has held that the solatium of ₹ 4.5 crore was received by the appellant for termination of contract and was during the regular course of busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in reaching the decision. In one of the decisions of the Privy Council, in the case of CIT v. Shaw Wallace Co. reported in 1932 : AIR 1932 PC 138, it was observed that wherein the company was paid a certain sum by way of compensation, a sort of solatium, for termination of its agency with two other companies, the receipt has to be regarded as a capital receipt not chargeable to income tax. The council also held that the expression 'receipt arising from business' must mean receipts arising from the carrying on of business, In the case of CIT V. The Mills Store Co., 9 ITR 642. it was held that a restrictive covenant, whereby a person undertakes, for certain consideration to abstain from doing a particular act or from following a particular course or conduct, is something quite outside an ordinary contract of employment and the receipt is not taxable being a capital receipt. Further the Hon'ble Supreme Court in the case of CIT v. Best Co. Ltd., Supra held that the compensation agreed to be paid was not only in lieu of the loss of the agency but also for the respondent accepting a restrictive covenant for a specified period and the restrictive covenant was an independ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng apparatus, therefore, it amounts to loss of an enduring nature. Therefore, hi view of the tests laid down by the various decisions cited above, there can not doubt that the compensation received is in the nature of a capita! receipt. In. view of the foregoing discussion, it is held that the appellant had lost the source itself and the income earning apparatus and had abrogated the right to carry on a like business for all limes, therefore, the loss was of an enduring nature. The compensation received, therefore, is in the nature of a capital receipt. 5. We have heard Shri S.K. Mittal, Ld. DR and Shri Rohit Jain, Ld. Counsel for the assessee. The Ld. Counsel for the assessee pointed out that the agreement with U.K. Company entered into on 28.6.1979 whereby the assessee was granted licence to use, inter alia, the trade marks 'ENO' and 'Fruit Salt'. Shri Rohit Jain, Ld. Counsel for the assessee vehemently argued that the assessee formed the foundation of carrying on of another line of business viz. producing and marketing 'ENO' and 'Fruit Salt'. According to Ld. Counsel for the assessee, termination of agreement dated 28.6.1979 in part by U.K. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an earning apparatus which tantamount to loss of an enduring asset. At this stage, we may refer to a decision of the Hon'ble Supreme Court in the case of Kettlewell Bullen and Co. Ltd. v CIT (1964) 1964 : 53 ITR 261 (SC), wherein their lordship of Supreme Court on the facts of the said case observed that the arrangement with Mugneeram Bangur was not in the nature of trading transaction but was one in which appellant-assessee parted with an asset of an enduring value. The Hon'ble Supreme court held that what the assessee was paid was to compensate it for loss of a capital asset and was not, therefore, in the nature of the Revenue receipt. The Hon'ble Supreme Court at page 262 (head Note) held as under:-- Held, on the facts, that the arrangement with Mugneeram Bangur and Co. was not in the nature of a trading transaction, but was one in which the appellant parted with an asset of an enduring value. What the assessee was paid was to compensate it for loss of a capital asset and was not, therefore, in the nature of a revenue receipt. It mattered little that the appellant did continue to conduct the remaining managing agencies after the determination of its agency with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the state of Hyderabad, and thereafter also extended to other states. Subsequently, agency of other states cancelled and the assessee was paid compensation for loss of agency. The Hon'ble Supreme Court held that the amount received by the assessee is capital receipt. The Hon'ble Supreme Court categorically held that it was immaterial that only one of the agency was cancelled. Similarly, in the case of CIT v. Bombay Burmah Trading Corporation (1986) 161 ITR 386 (SC), the assessee held about 15 forest leases. The forest leases were terminated by the Union of Burma and the assessee was paid compensation for the same. The Hon'ble Supreme Court held that the forest leases affected the very structure of the operations and, therefore, constituted capital assets and payment made for cancellation or sterilization of the right would be capital receipt. It is also relevant to mention here that the Hon'ble Supreme Court in the case of Oberoi Hotel (P) Limited (1999) 236 ITR 903 (SC) held that the amount received by the assessee for giving up right to purchase hotel and/or to operate the hotel resulting in loss of source of income is capital receipt. In view of the above, we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax Act, 1961, is to disallow a part of the concession thereunder when the entire deduction claimed cannot be regarded as relating to exports. Therefore, while interpreting the words total turnover in the formula in section 80HHC one has to give a schematic interpretation. The various amendments made therein show that receipts by way of brokerage, commission, interest, rent, etc., do not form part of business profits as they have no nexus with the activity of export. The amendments made from time to time indicate that they became necessary in order to make the formula workable. If so, excise duty and sales tax also cannot form part of the total turnover under section 80HHC(3) : otherwise the formula becomes unworkable. 12. Respectfully following the judgement of the Hon'ble Supreme Court in the case of CIT v Lakshmi Machine Works (supra), we do not find any infirmity in the findings of the CIT(A) on this issue. Accordingly, we uphold the order of CIT(A) on this issue and reject ground No. 2 of the appeal. 13. Ground No. 3 of the appeal reads as under:-- 3. On the facts and circumstances of the case the Ld. CIT(A) has erred in directing the Assessing officer to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; 53 lakhs. As per the minutes of meeting with M/s. Envirad Project (P) Limited held on 19.3.1997, it is clear that Effluent Treatment Plant had been put on continuous operation on 15.3.1997. The minutes of the meeting read as under- 1) An assured during the previous minutes Mr. Venkat of M/s. Envirad reached the site on 15.3.97 and after a review put the ETP on continue operations at 11AM, 15.3.97 2) The plan is being operated continuously since 11 AM, 15.3.97 barring a couple hours I between owing to inevitable circumstances. 3) Instead of grab samples, composite samples (2 Nos. ) are being collected for evaluation since 17.3.97. 4) The result of composite samples (2Nos) have shown COD levels to be 245 and 243 mg/lt at final out lets respectively. The BOD results are awaited as the same take longer time. 5) The EIP Plant shall be under continuous operation and manned by the staff of M/s. Envirad, Once the desired output results are achieved the plant shall be further operated under steady state condition for a duration of 2-3 weeks. 6) During this period M/s. SBCH Ltd. shall designate plant personnel in all the three shifts to check and also train. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... obligation of order and full satisfaction of the client i.e. appellant. It is only when the plant was put into operation, certain defects were noticed and as per agreement with M/s. Envirad Project (P) Limited final payment was to be made after all the defects were removed and plant was put into perfect shape. Therefore, there is no doubt the appellant was owner of the plant and that it was commissioned before 15.3.1997. Some of the payments may have been made subsequent to the financial year under consideration but that cannot have the effect of negating the appellant's claim for depreciation. In the facts and circumstance of the case, it is held that the Effluent Treatment Plant had been commissioned and put to use during the year under reference, and the appellant is entitled to depreciation thereon. The Assessing Officer is accordingly directed to allow depreciation on Effluent Treatment Plant as per rules. Thus this ground of appeal is, therefore, allowed. 16. We have considered the rival submissions. It is apparent from the record that the assessee had produced the minutes of meeting held with Envirad on 19.3.1997, which revealed that the ETP was being operated conti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ates to deduction u/s. 80-I of the Act amounting to ₹ 7,08,59,578/-. The Assessing officer denied the claim of the assessee. On appeal, the CIT(A) allowed the claim of the assessee for the reasons stated in para 6.3 of the order. 19. After hearing Ld. Representatives of both the parties we find that the issue is squarely covered in favour of the assessee and against the Revenue by the decision of the Tribunal dated 31.1.2005 passed in assessee's case in ITA Nos. 301/Chandi/2001, 17, 274 1243/Chandi/98 233/Chandi/99 and 302/Chd/2001 relating to assessment years 1991-92, 92-93, 93-94, 94-95 95-96 and 1996-97. A similar view has also been taken by the Tribunal in Revenue's appeal in ITA No. 345/Chandi/2001 in assessee's own case relating to assessment year 1996-97 vide its order dated 28.2.2005. The Tribunal following its earlier orders passed in assessee's case held as under:-- The second ground of appeal of the Revenue is as under:-- 2. On the facts and in the circumstances of the case, the Ld. CIT(A) allowing the claim of deduction u/s. 80-I of the Income-Tax Act, 1961 after verification of facts in view of ITAT's order passed in assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion of the excise duty in the valuation of closing stock. However, from assessment year 83-84, the assessee excluded the excise duty paid in respect of goods lying in the closing stock from the valuation of such stock on direct cost basis. The AO as well as the CIT(A) did not accept the contention of the assessee for the assessment years 83-84 85-86. The Tribunal also confirmed the view of the revenue that the excise duty paid has necessarily to be included in the valuation of closing stock on direct cost basis. In assessment year 85-86, the assessee had raised an alternate submission that if excise duty paid had to be included as part of the valuation of closing stock, the same had to be excluded after the insertion of section 43B w.e.f. 1.4.84, in order to give full effect to the said provisions. The Tribunal in assessment year 85-86, while deciding the issue, in principle, against the assessee directed the AO to decide the issue afresh in accordance with the decision of the Special Bench of the Tribunal constituted in the case of Indian Communication Network Ltd. Subsequently, the Special Bench of the Tribunal in the case of ITO v. Food Specialties Ltd. 206 ITR (AT) 119, held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Tribunal relying upon the decision of the Bombay High Court in the case of Indo Nippon Chemicals Ltd. (supra), directed the AO to exclude excise duly m valuation of closing stock 18. Since the assessment years involved before us are prior to 1.4.99 and section 145A not being applicable, we do not find any infirmity in the order of the CIT(A) in directing to exclude the excise duty component from the valuation of closing stock We, therefore, find no justification to interfere with the order of the CIT(A). The grounds of appeals raised by the revenue in the respective assessment years are accordingly dismissed. 23. The above decision is squarely applicable to the facts of the present case and therefore, we do not see any merit in this ground of appeal. Accordingly, the same is dismissed. 24. Ground No. 6 of the appeal, reads as under:-- 6. On the facts and in the circumstances of the case the Ld. CIT(A) has erred in allowing relief of ₹ 83,97,899/- by directing the Assessing officer to value the closing stock on the direct cost method as adopted by the assessee subject to inclusion of certain expenses. 25. After hearing Ld. Representatives of both the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was saleable or marketable, have necessarily to be treated as expenses incurred after the products are manufactured and, therefore, could not be made part of the value of the stocks, especially when they are to be valid at cost or market prices, whichever is lower. The - product- that is manufactured by the assessee is extracted out of milk and milk is the main raw material followed by Malt extract, wheat flour, coca powder etc. The fresh milk is collected at various milk collection centres located in the State of Punjab. Thereafter it is processed and made into a product called horlicks and other products which are packed in drums and dispatched to various packing stations that are located in different regions. At these packing stations, which have their own machines required for packing, filling the product in various bottles, placing of cocks, fixing of lids and labels. The components of direct cost according to the assessee, are prime cost comprising of raw-materials, packing materials, direct labour of factory workers concerned with the production and the packing stations, direct expenses -of (he factory and of the packing stations. The direct overhead comprising of workers, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res, capital items, coal etc. from stores to production site, from production site to despatch bay or stores, unloading them within the factory and shifting of various other record are treated as indirect overheads. The assessee had stated that the above is proper direct cost, valuation of the products, the selling overheads, distribution overheads, market overheads, administration and that relating to exports have been totally excluded from the above valuation because they have no contribution, whatsoever, towards the bringing the product to its p-physical condition and location. 16. In our view, in the above classification, exclusion of managerial staff of the factory i.e. various managers, executive and other staff and also exclusion of works, maintenance, watch and ward staff that are kept in readiness is not proper, because they directly 'are related to the production as such, as they are involved in the planning, procurement, actual production, manner of production and the like. They also are concerned with the quality of the milk as such for which veterinary executives are also made part. Therefore, the entire direct labour should be included of not only of the work ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d with the direction of the Tribunal for the assessment year 82-83 (supra) We respectfully following the aforesaid decision of the Tribunal in assessee's own case for the assessment year 82-83 (supra), uphold the order of the CIT(A) in regard to valuation of closing stock and dismiss the above common grounds of appeals raised by the assessee as well the revenue. 26. The facts of the present year are similar to that of earlier years. Respectfully following the order of the Tribunal passed in assessee's case for earlier years, we do not see any infirmity in the findings of the CIT(A) on this issue. Accordingly, we uphold the order of CIT(A) and dismiss ground No. 6 of the appeal. 27. Ground No. 7 of the appeal, reads as under:-- 7. On the facts and in the circumstance of the case the Ld. CIT(A) has erred in deleing the addition of ₹ 54,74,522/- on account of MODVAT element not reflected in the value of closing stock. 28. This issue is also covered in favour of the assessee and against the Revenue by the decision of the Tribunal passed in assessee's case for earlier years referred to above. While deciding a similar issue, the Tribunal held as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l payment of the liability. The nature of the Account-Current already examined brings home the point that the advance payment of excise duties are actual payments of duties. Therefore, when the payments are understood as actual payments, those payments even if mentioned as advance payments need to be allowed as deduction under section 43B. The above position is emerging out of the language of the statute itself. Section 43B provides for the deduction of sums payable mentioned in clauses (a) to (f), only if actually paid; but shall be allowed irrespective of the previous year in which the liability to pay such sum was incurred by the assessee. The intention of the Legislature is apparent in the above language used in section 43B, that the deduction in respect of tax or duty, which was actually paid by the assessee has to be allowed as deduction without looking into the year of incurring liability. Further the expression irrespective of the previous year dispenses with the concept of previous year, in the matter of the sums covered by section 43B. The expression irrespective means lacking relation, regardless of what is mentioned. Here the subject-mentioned is previous ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e return, will be deductible. It could be seen that the circular deals with the extended period of time by which certain belated payments could be claimed by the assessee as deduction. The circular nowhere deals with the patent question of advance payment of duties and taxes and deduction thereof. Generally the advance payments of excise duty are not provisional or refundable. They are actually payments of Central Excise duty. We have examined the legislative intent and purpose of section 43B. The assessees in the past were not paying taxes, duties and other dues to the Government in time. At the same time, they were booking those items as expenses in their accounts on accrual basis on the ground that they are following mercantile system of accounting. By doing so, they were claiming deduction and reducing the taxable income. Concurrently in many cases, the assessees were challenging the very liability itself before the Courts and Tribunals, finally resulting the payments belated, deferred, and sometimes never made. In order to stop such exploitation practised by the assessees, section 43B has been brought in the statute declaring that well you claim the deduction, but only o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction the expenses towards rents, repairs and also maintenance of premises/accommodation used for the purpose of a guest house of the nature indicated in sub-section (4) of section 37. The Hon'ble Supreme Court further held that if the Legislature had intended that deduction would be allowable in respect of all types of buildings/accommodation used for the purpose of the business or profession, then the Legislature would not have felt the need to amend the provisions of section 37 so as to make a definite distinction with regard to buildings used as guest houses as defined in section 37(5) and the provisions of sections 31 and 32 would have been sufficient for that purpose. In view of the judgement of the Hon'ble Supreme Court, we decide this issue against the assessee and in favour of the Revenue. Resultantly, this ground of appeal is allowed. 36. Ground No. 10 of the appeal, reads as under:-- 10. On the facts and in law, the Ld. CIT(A) has erred in directing the Assessing officer to delete the interest charges u/s. 234B of the Act. 37. At the time of hearing of the appeal, Shri Rohit Jain, Ld. Counsel for the assessee was fair enough to concede that this ..... X X X X Extracts X X X X X X X X Extracts X X X X
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