9911796707
TMI Blog2024 (7) TMI 832X X X X Extracts X X X X X X X X Extracts X X X X ..... .CIT(A)- I/IT/343/02-03 dated 19.08.2004 (for AY 2000-01), arising out of assessment orders passed u/s. 143(3) of the Act by ACIT, Circle-1(1), Mumbai, dated 28.01.2003. 1.3. In ITA Nos.287 & 724 /MUM/2005, Order No. No.CIT(A)- I/IT/319/03-04 dated 13.09.2004 (for AY 2001-02), arising out of assessment orders passed u/s. 143(3) of the Act by ACIT, Circle-1(1), Mumbai, dated 31.12.2003. 2. In all the six appeals, common issues are raised by both assessee and Revenue in their respective appeals. However, there are certain grounds which are specific to the respective appeal. Since common issues are involved, we take up all the six appeals together to pass a consolidated order. To draw the facts, we take up appeal in ITA No.7447/Mum/2004 for Assessment Year 1999-2000 as the lead case. Our observations and findings in this appeal shall apply mutatis mutandis to the other appeals in ITA Nos.286 & 287/Mum/2005 for Assessment Year 2000-01 and 2001-02 in respect of the common issues. Similarly, for the appeals by the Revenue, we take ITA No.7532/Mum/2004 for Assessment Year 1999-2000 as the lead case. Our observations and findings in the same shall apply mutatis mutandis to ITA Nos. 337 & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant. 2.2 The Id. CIT(A) further erred in excluding the following amounts in computing the profits eligible for deduction under section 36(1) (viii): (i) Income from housing finance for residential purpose for a period of less than 5 years. (ii) Income from housing finance for non-residential purpose. (iii) Income earned on temporary deployment of funds in investments, which are statutorily required to be made in the business of housing finance. 2.3 The Id. CIT(A) erred in not appreciating that having regard to the nature of the business of the appellant, the following amounts are to be considered as an integral part of the main business of housing finance eligible for deduction under section 36(1)(viii) of the Act: (i) interest on inter-corporate deposits (ii) interest on deposits and investments (iii) interest on investment application amounts, discount on Treasury Bills and Commercial paper (iv) Profit on sale / redemption of debentures / securities (v) Incidental charges (vi) Processing administrative fees and commitment charges 2.4 The Id. CIT(A) erred in allocating expenses erroneously, arbitrarily and on incorrect assumptions, for the purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arising on account of revaluation of the said borrowings at the year-end (refer Ground Nos. 1.1 to 1.3 of the Concise Grounds of Appeal); b) Whether in arriving at the quantum of deduction available to the Appellant under section 36(1)(viii) of the Income-tax Act ('the Act') the Appellant is justified in taking into consideration: (i) income by way of interest on loans given for residential purposes for period less than 5 years; (ii) income by way of interest on loans for non-residential purposes; and (iii) income by way of interest / discount etc. from temporary deployment of funds in treasury operations (refer Ground Nos. 2.1 to 2.3 of the Concise Grounds of Appeal) c) Whether the deduction allowable for interest paid on foreign currency borrowings and provision for contingencies should also be allocated as deductible against income which is alleged to be ineligible for deduction under section 36(1)(viii) of the Act, and further, whether other common expenses should be allocated in the final ratio of eligible to the ineligible income. (refer Ground No. 2.4 of the Concise Grounds of Appeal) d) Whether the Revenue was justified in making a disallowance of interest and o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... redemption of Debentures/Govt. Securities 6,748,846 Profit on sale of Debentures/Govt. Securities 1,926,284 9 Other Income Incidental Charges 3,587,016 Gross Total Income 13,454,112,251 Overall Ratio of Housing finance (%) 76.76 Income from Housing Finance (Excluding Dividend & Capital Gains)(%) 83.30 Other Income (%) 16.70 TOTAL - (%) 100 APPORTIONMENT OF PROFIT BEFORE TAX Gross Income 13,454,112,251 Less: Other Depreciation (Allocated in the ratio 81.59 : 18.41) 63,307,993 Other Expenses (Allocated in the ratio 81.59 : 18.41) 10,946,141,232 Total Expenses 11,009,449,225 Profit Before Tax 2,444663,026 8. In the course of assessment, ld. Assessing Officer noted that assessee has considered the following income in determining profits derived from the business of providing long time finance for construction or purchase of houses for residential purposes. a) Interest on deposits Rs. 176,22,16,379/- b) Interest on debentures Rs. 77,46,55,522/- c) Interest on investment application money Rs. 12,25,179/- d) Inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preciation on leased assets solely to the income from leasing (iii) AO has allocated interest expenditure (other than foreign currency borrowings) to income from housing business and other income in the ratio of 66.25 : 33.75 (iv) AO has allocated other expenses to income from housing business and other income in the ratio of 80:20. 8.3. Ld. Assessing Officer accordingly altered the allocation of expenses made by the assessee to re-compute the income from housing finance business @ Rs. 111,94,30,835/-. He thus, disallowed interest under section 36(1)(viii) to the tune of Rs. 54,48,07,533/- as against the claim of the assessee. 9. In the course of hearing before us, ld. Counsel for the assessee pointed out that issue relating to quantum of deduction available to the assessee u/s. 36(1)(viii) by taking into consideration interest income on loans given for residential purposes for a period of less than five years, interest income on loans for non-residential purposes and interest /discount, etc. income from temporary deployment of funds in treasury operations (ground no.2.1 to 2.4) have already been dealt and decided by the Co-ordinate Bench of ITAT, Mumbai in assessee's own cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "17. The ld AR argued that considering the language of section 36(1)(viii) of the Act, a distinction has to be made between the concept of profits derived from providing long term finance and profits derived from the 'business of' providing long term finance. It is an undisputed position that the Assessee is carrying on the eligible business, and therefore the test is to be applied is whether the immediate source of the aforesaid three categories of receipts under consideration is the said eligible business or the said receipts could be regarded as a separate business or activity. Accordingly it was submitted that, the said three categories of receipt cannot be regarded as a separate business or activity and have their immediate source in the business of long term finance for construction and purchase of houses in India for residential purposes. In view thereof, the ld AR prayed that deduction under section 36(1)(viii) of the Act may be granted in respect of all the aforesaid three categories of receipts. In this regard reliance is placed on the decision of the Apex Court in the case of Standard Refinery & Distillery Ltd. vs. CIT (1971) 79 ITR 589 (SC). 18. The ld AR further reli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18.07.2018 in ITA No. 415 of 2004 (iv) CIT vs. Shree Balaji Alloys 287 CTR 459 (v) Continental Construction Ltd. vs. CIT 195 ITR 81 (vi) ACIT vs. Nahavasheva International Container Terminal Pvt. Ltd. in Order dated 28.09.2018 in ITA No. 2935/Mum/2012 20. The ld AR drew attention to the cases where exemption under section 10(23FB) of the Act has been extended to interest and other income arising from temporary deployment of funds by venture capital funds and venture capital companies. In these cases, pending the investment in venture capital undertakings, the venture capital fund or the venture capital company had invested the funds in interest earning securities or units of liquid mutual funds. The Revenue had denied the assessee's claim of exemption on the ground that the said investment was not in a venture capital company and was also in violation of the SEBI guidelines. Upholding the assessee's claim for exemption in respect of such receipts, the Tribunal has held that the short-term investment formed a part of the business of investing in venture capital undertakings and did not violate the SEBI guidelines. An illustrative list of these decision are given hereunder: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded Section 36(1)(viii) to limit the deduction to 40% only in respect of income derived from providing long-term finance for the activities specified in section 36(1)(viii). Now, income arising from other business activities or from sources other than business shall not be taken into account for computing deduction under section 36(1)(viii). 'Long term finance' was defined by the Finance Act 1996 and the "5 year" period is fixed by legislature. The deductions claimed by the assessee do not fall within the definition of long term finance for construction or purchase of houses in India for residential purposes. (2) The word "such business" is also very important. The scope of application is very limited and narrow. It clearly means that only profits which arise from such long term housing finance will be eligible for deduction and not any other income. Even in respect of cases relied upon by the assessee on section 80IA/80IB or other sections for interpreting the phrase 'derived from business of industrial undertaking', the words used in those sections are 'any business', while here the words used are 'such business'. The case laws cited by the assessee are therefore, on different ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstruction or purchase of houses of residential purposes and, therefore, the amount given for non residential purposes cannot be part of deduction claimed under section 36(1)(viii) of the Act. (8) The assessee claims that the purpose of other investments is to park temporary surplus. However this facts is not clearly coming out if the statement of accounts where are large investments held for more than 2 years. In the garb of temporary deployment, assessee is claiming benefit for a wide variety of other income, which is not allowable (9) The assessee has claims that income from treasury operations are a stop gap arrangement for deployment of funds before utilizing them in the business of housing finance and to partly recoup the interest cost in this manner. The Revenue strongly places reliance on the decision of the Hon'ble Supreme Court in the case of Liberty India vs CIT 317 ITR 218 (SC) in which it was held that incentive profits are not eligible profits derived from eligible business under section 80IB and that they belong to category of ancillary profits of such undertakings. (10) The assessee has argued that the section uses the phrase 'business of' even the other incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be incidental. (13) The income from treasury operations in assessee's case has immediate source in deposits / debentures etc. where the funds have been deployed, and not from the housing loans for period more than 5 years. Similarly the income earned from housing loan < 5 years and non-residential loans cannot be said to be from housing loans > 5 years. Therefore as per the ratio laid down in the decisions discussed above including the decision of Meghalaya Steels, the assessee's reliance is misplaced and the income other than from housing loan of > 5 years, cannot be said to be derived from the eligible business." 24. The Id DR also relied on plethora of other decisions to reiterate the submissions made above. 25. We heard the parties and perused the material on record. The assessee through a note to the return of income had included the following incomes eligible for deduction u/s. 36(1)(viii) i. income from housing finance for residential purposes for a period of less than 5 years; ii. income from housing finance for non-residential purposes; and iii. income from temporary deployment of funds ["treasury operations"] 26. The AO and the CIT(A) has denied the benef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n section 617 of the Companies Act. 1956 (1 of 1956).] (d) "infrastructure facility" shall have the meaning assigned to it in clause 23G) of section 10; (e) "long-term finance" means any loan or advance where the terms under which moneys are loaned or advanced provide for repayment along with interest thereof during a period of not less than five years. 28. From the perusal of the above provisions it is clear that - (a) The deduction is allowable in respect of any Special Reserve that is created and maintained (b) In the case of a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes (c) Deduction is allowed for an amount not exceeding forty per cent of the profits derived from such business of providing long-term finance 29. The assessee has segregated the total income into income from Housing Finance Business, Income from Capital Gains / Dividends and Other Income. The assessee has also segregated the investments into those held under Housing Finance Business which are in the nature of short term and those held for long term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh Court in the context of deduction allowable under the said section in the case of Goodricke Group Ltd. vs CIT ([2011] 11 taxmann.com 130 (Calcutta)) held that the a purposive interpretation of the aforesaid provision should be made instead of literal construction of the same otherwise, the legislative purpose will be frustrated. The Hon'ble High Court concluded by holding that - "28.......the second point in the negative against the revenue by setting aside the part of the finding of the authorities below on the second question and hold that the assessee is entitled to the benefit of the entire profit arising out of the business of growing and manufacturing the tea and the amount of tea purchased from outside for blending should not be deducted as the said amount is insignificant in comparison to the amount of tea grown and manufactured by the assessee......." 33. The Hon'ble High Court expressed a similar view in the case Singlo (India) Tea Ltd. vs CIT [2016] 68 taxmann.com 187 (Calcutta) where it is held that - "14. Hence the expression "profits of such business" in clause (b) as aforesaid relates to the expression "business of growing and manufacturing tea" as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claiming deduction under section 36(1)(viii) which was denied by the assessing officer for the reason that the interest is earned from loans that are given for non-residential purposes. The contention of the Id AR is that the housing projects which are constructed by corporate or developer may have an element of non-residential amenities and these cannot be isolated from housing projects. Therefore the Id AR argued that the interest income earned should be considered as part of the profits derived from the business of long term finance for construction or purchase of residential housing. 36. The main purpose of allowing deduction under section 36(1)(viii) is to encourage financial corporations/approved public companies to lend for construction or purchase of residential houses. The income derived from the business of providing long-term finance for construction or purchase of houses in India for residential purposes is eligible for deduction under section 36(1)(viii). In the given case the claim of the assessee is towards interest on loans given for non- residential purposes. Therefore the same cannot be said to be from the business activity of long-term finance for construction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubject matter of discussion in various decision of the Apex Court. Highlights of some of the principles laid down by these judicial pronouncements are - (i) Receipts which are incidental to the actual conduct of the business of industrial undertaking yet the same may not fall within the expression of 'derived from Cambay Electrical Supply Co. Ltd. 113 ITR 84 (ii) The nexus between the income and the industrial undertaking was should be direct and not incidental, otherwise it would not fall within the expression 'profits derived from industrial undertaking' Sterling Foods 237 ITR 53 (SC) & Pandian Chemicals Ltd. 262 ITR 278(SC) (iii) When Section 80-IA/80-IB refers to profits derived from eligible business, it is not the ownership of that business which attracts the incentives but what attracts the incentives under Section 80-IA/80-IB is the generation of profits (operational profits). Liberty India Ltd. Vs CIT [2009] 183 Taxman 349 (SC) (iv) The words "derived from" are narrower in connotation as compared to the words "attributable to". - Liberty India Ltd. Vs CIT [2009] 183 Taxman 349 (SC) (v) By using the expression "derived from", Parliament intended to cov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mport entitlements did not relate to manufacture or sale of the products of the undertaking, but related only to an event which was post-manufacture namely, export. On an application of the aforesaid test to the facts of the present case, it can be said that as all the four subsidies in the present case are revenue receipts which are reimbursed to the assessee for elements of cost relating to manufacture or sale of their products, there can certainly be said to be a direct nexus between profits and gains of the industrial undertaking or business, and reimbursement of such subsidies. However, Shri Radhakrishnan stressed the fact that the immediate source of the subsidies was the fact that the Government gave them and that, therefore, the immediate source not being from the business of the assessee, the element of directness is missing. We are afraid we cannot agree. What is to be seen for the applicability of Sections 80-IB and 80-IC is whether the profits and gains are derived from the business. So long as profits and gains emanate directly from the business itself, the fact that the immediate source of the subsidies is the Government would make no difference, as it cannot be dispu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business itself. 21. The Calcutta High Court in Merinoply & Chemicals Ltd. v. CIT [1994] 209 ITR 508, held that transport subsidies were inseparably connected with the business carried on by the assessee. In that case, the Division Bench held:- "We do not find any perversity in the Tribunal's finding that the scheme of transport subsidies is inseparably connected with the business carried on by the assessee. It is a fact that the assessee was a manufacturer of plywood, it is also a fact that the assessee has its unit in a backward area and is entitled to the benefit of the scheme. Further is the fact that transport expenditure is an incidental expenditure of the assessee's business and it is that expenditure which the subsidy recoups and that the purpose of the recoupment is to make up possible profit deficit for operating in a backward area. Therefore, it is beyond all manner of doubt that the subsidies were inseparably connected with the profitable conduct of the business and in arriving at such a decision on the facts the Tribunal committed no error." 22. However, in CIT v. Andaman Timber Industries Ltd., [2000] 242 ITR 204/109 Taxman 135 (Cal.), the same High Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in [1997] 228 ITR at page 257 expressed the following views:- "...........Similarly, subsidy on power was confined to 'power consumed for production'. In other words, if power is consumed for any other purpose like setting up the plant and machinery, the incentives will not be given. Refund of sales tax will also be in respect of taxes levied after commencement of production and up to a period of five years from the date of commencement of production. It is difficult to hold these subsidies as anything but operation subsidies. These subsidies were given to encourage setting up of industries in the State of Andhra Pradesh by making the business of production and sale of goods in the State more profitable.' 23. We are of the view that the judgment in Merinoply & Chemicals Ltd's case (supra) and the recent judgment of the Calcutta High Court have correctly appreciated the legal position. 24. We do not find it necessary to refer in detail to any of the other judgments that have been placed before us. The judgment in Jai Bhagwan Oil and Flour Mills' case (supra) is helpful on the nature of a transport subsidy scheme, which is described as under: "The object ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 28.***** 29. For the reasons given by us, we are of the view that the Gauhati, Calcutta and Delhi High Courts have correctly construed Sections 80-IB and 80-IC. The Himachal Pradesh High Court, having wrongly interpreted the judgments in Sterling Foods (supra) and Liberty India's cases (supra) to arrive at the opposite conclusion, is held to be wrongly decided for the reasons given by us hereinabove. 30. All the aforesaid appeals are, therefore, dismissed with no order as to costs." 39. From the plain reading of the above judicial pronouncement of Hon'ble Supreme Court, it can be said that so long as profits and gains emanate directly from the business itself and that there should be a direct nexus between such profits and gains and the industrial undertaking or business then the assessee would be eligible to get a deduction u/s. 80IA. 40. Now coming to the merits in assessee's case, on perusal of the records we notice that the assessee has segregated the income from investments between the business of housing finance and other income and the basis for the segregation was explained during the course of hearing. The Id AR submitted that on the income from short ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee is to be considered as "derived from" the business of providing long-term finance for construction or purchase of houses in India for residential purposes and accordingly will be eligible for deduction u/s. 36(1)(viii). The nomenclature of income is not so relevant as the nature of income since the same income which is a business income for somebody can be an income from other sources for someone else. A typical example would be the leasing of property which can either be a business income or income from property depending on whether the leasing is the doing of the business or the exploitation of the property by its owner. In the given case, the deployment of funds in short term investment is part and parcel of housing finance business of the assessee since the idle funds are available in the regular course of business of housing finance and as part of the business activity the assessee keeps these funds in short term investments which earn income. 41. The Id DR submitted that the decision of the Hon'ble Delhi High Court is directly on the issue under consideration where it is held that - 13. Question No.5 is directed against the finding of the Tribunal that int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .2 (Ground Nos. 2.1 to 2.3) is partly allowed. 9.4. With respect to the allocation of provisions for contingencies and interest on foreign currency borrowings, we direct the ld. Assessing Officer to apportion part of the cost towards the income which has been held to be not eligible for claiming deduction u/s. 36(1)(viii), since interest income from housing finance for non-residential purpose has been held to be not eligible for deduction u/s. 36(1)(viii). Also, in respect of other expenses we set aside the allocation done by the ld. Assessing Office on ad-hoc basis in the ratio of 80:20 towards income from housing finance and income other than from housing finance and adopt the recomputed ratio in terms of our directon. Considering our observations and findings, certain income has been recharacterized as income from eligible business and those from ineligible business activities. Accordingly, ld. Assessing Officer is directed to reallocate such cost in the ratio as finally determined consequent to the findings given herein on re-characterisation of income into eligible and ineligible business. Ground No.2.4 is partly allowed. 10. On the fourth issue relating to disallowance of e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... financed from internal accruals and not out of borrowed funds. The assessee further submitted that the loan funds borrowed by the assessee are institutional loans taken for specific purpose of business of housing finance and cannot be utilized for the purpose of any other investments and, therefore, the assessee submitted that the interest paid by the assessee on the institutional loans cannot be adjusted against the dividend income and that the assessee has not incurred any other expenditure wholly and exclusively for the purpose of earning the dividend income. The Assessing Officer did not accept the submissions of the assessee. The Assessing Officer placed reliance on circular No.780 dated 04/10/2009 which clarifies that exemption under section 10(33) is to be allowed on net basis and not on gross basis. Therefore, the Assessing Officer was of the view that expenses incurred for earning the exempt income is to be reduced from the gross dividend income before arriving at the deduction under section 10(33) of the Act. The Assessing Officer accordingly arrived at the interest and other expenses to be adjusted against the dividend income for the purpose of exemption u/s. 10(33) at R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome from shares. The Id AR also submitted that in the allocation of expenses made by the AO for the purposes of section 36(1)(viii) of the Act, no part of interest expenditure has been allocated to income from capital gains/dividend. The Id AR further submitted that the Hon'ble Jurisdictional High Court in CIT vs. Reliance Utilities and Power Ltd. (2009) 313 ITR 340 (Bombay) (refer pages 68 to 72 of the case law compilation) and CIT vs. HDFC Bank Ltd. 366 ITR 505 (refer pages 64 to 67 of the case law compilation), have held that if investments have been made out of mixed funds and sufficient interest free funds are available with the assessee, then, the presumption should be that such investments have been made out of interest free funds and not borrowed funds. This view has also been approved by the Hon'ble Apex Court in the case of South Indian Bank vs. CIT (2021) 438 ITR 1 (SC). 48. The Ld.DR, on the other hand, relied on the order of the lower authorities. 49. We heard the parties and perused the materials available on record. We notice that the Assessing Officer while arriving at the proportionate interest to be adjusted against the dividend income has considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the provisions of section 14A accordingly. In this regard the ld AR submitted that though the tax free bonds would result in interest which would be exempted from tax, the capital gains would be chargeable to tax. It is further submitted that since, such investment would also result in taxable income, no disallowance should be made under section 14A of the Act. The ld AR in this regard placed reliance on judgment of the Hon`ble Apex Court in CIT vs. Indian Bank Ltd. (1965) 56 ITR 77 (SC) (refer pages 90 to 93 of the case law compilation), wherein, it has been held that no part of the expenditure could be disallowed when the investment in securities yielded taxable as well as exempt income. The alternate contention of ld AR is that the investment in tax free bonds stood at Rs. 179.51 crores as against shareholders' funds at Rs. 1777.23 crores and therefore no disallowance of interest expenditure should be made under section 14A of the Act. Reliance in this regard is placed on Tribunal's order in the cases of Prakash K. Shah Shares & Securities Pvt. Ltd. vs. ACIT (refer page Nos. 73 to 78 of the case law compilation) by order dated 30.09.2016 in ITA No.944/Mum/2015 and Silvassa Est ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made. 12.2. Ld. Counsel for the assessee took us through the relevant terms and conditions of the non-compete agreement to demonstrate that this agreement restrained the assessee from carrying on the business activity rather than requiring it for performance of any positive activity or rendering any service. In respect of the agreement, it was stated that GE Capital Services India (GECSI) is an affiliate of GECC who had entered into a joint venture agreement with the assessee, dated 23.12.1993 for setting up and establishing a joint venture company as Country-wide Consumer Financial Services Ltd. (CCFSL) to provide consumer finance services in India. In this joint venture company, GECSL holds 55% of the paid-up capital of CCFSL and balance was held by the assessee. Thereafter, assessee and GECSI arrived at an understanding whereby assessee would sell 20% of the shares in the equity share capital held by it in CCFSL to GECSI. After this transfer, the joint venture agreement dated 23.12.1993 was terminated and a share-holders agreement was executed governing their inter-se relationship. Following the said transfer of shares by the assessee, it had agreed with GECC not to undertake c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r setting up of CCFSL was to be terminated. Assessee had to surrender its rights in CCFSL. The non-compete agreement restricted certain rights of the assessee for a period of three years only which are in regard to "only restricted business". 13. On a specific query by the Bench in respect of whether this agreement tentamounts to agreement in restraint of trade, ld. Counsel submitted that Section 27 of the Indian Contract Act, 1872 provides for an exception to deal with cases of transfer of business which does not amounts to agreement in restraint of trade. 13.1. Ld. Counsel also referred to the amendment brought in by the Finance Act, 2002 by insertion of a new sub clause (xii) in section 2(24) of the Act. He also referred to amendment to section 28 by insertion of clause (va) which are prospective and not relevant to the years under consideration. According to him, for the Assessment Year 1999-2000, there was no provision under the Act to tax the aforesaid non-compete fees as revenue receipt. 13.2. For his contentions, he placed reliance on the decision of Hon'ble Supreme Court in the case of Guffic Chem (P) Ltd. vs. CIT [2011] 332 ITR 602 (SC) which dealt with similar issue r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 and restore the order of the Tribunal. Consequently, the civil appeal filed by the assessee is allowed with no order as to the costs." 13.3. Ld. Counsel, further placed reliance on the decision of Hon'ble Supreme Court in the case of Shivraj Gupta vs. CIT [2020] 425 ITR 420 (SC) wherein also similar issue was dealt with relating to Assessment Year 1995-96. Hon'ble Court followed its earlier decision in the case of Guffic Chem (supra) to hold that prior to 01.04.2003, amount received by the assessee as non-compete fee on executing deed of negative covenant was not taxable, it was exempt as capital receipt. 14. Per contra, ld. CIT, DR strongly submitted that the receipt in the hands of the assessee is against temporary cessation of business which is in the normal course of business undertaken by the assessee. For the three years for which restriction is executed, there is no corresponding intangible created in the books of GECC. According to the ld. CIT, DR the non-compete fee received by the assessee is for the loss of income and not for the loss of source of income. 14.1. To buttress her contentions, reliance was placed on decision of Hon'ble Supreme Court in the case of Gilla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come it had earned. 15.2. He referred to yet another decision of the Hon'ble Supreme Court in the case of CIT vs. Best and Co. (P) (Ltd.) [1966] 60 ITR 11 (SC) to submit that the non-compete fee received by the assessee under a negative covenant is a capital receipt. In this decision also, Hon'ble Court had dealt with its earlier decision in Gillanders Arbuthnot & Co. Ltd. (supra). The specific observations and findings by the Hon'ble Court are as under: "This court in Gillanders Arbuthnot and Co. Lat's case (Supra) accepted the said principle and held that the compensation paid for agreeing to refrain from currying on competitive business in the commodities in respect of the agency terminated or for loss of goodwill was prima facie of the nature of a capital receipt In the present case, the covenant was an independent obligation undertaken by the assessee not to compete with the new agents in the same field for a specified period. It came into operation only after the agency was terminated. It was wholly unconnected with the assessee's agency termination. We, therefore, hold that that part of the compensation attributable to the restrictive covenant was a capital rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... result, appeal of the assessee in ITA No.7447/Mum/2004 for Assessment Year 1999-2000 is partly allowed. 18. In ITA No.286/Mum/2005 for Assessment Year 2000-01 and in ITA No.287/Mum/2005 for Assessment Year 2001-02, the common grounds are disposed off as noted here under: i) Ground no.2 relating to deduction u/s. 36(1)(viii), the fact pattern and the applicable law are similar to what we have already dealt with in ITA No.7447/Mum/2004 for Assessment Year 1999- 2000. ii) Also ground no.3 & 4, in these two appeals, are similar to the one dealt with in the aforesaid appeal for Assessment Year 1999-2000. 18.1. Accordingly, there being no material change in the fact pattern and applicable law on the issues dealt with in the aforesaid grounds, our observations and findings arrived at on these issues in ITA No.7447/Mum/2004, applies mutatis mutandis to these two appeals also. We direct accordingly. 19. Further to the above, we now deal with ground no.5 taken by the assessee which is specific to Assessment Years 2000-01 in ITA No.286/Mum/2005 and to Assessment Year and 2001-02 in ITA No. 287/Mum/2005 in respect of disallowance made towards discount amount of Rs. 1,82,94,011/- and Rs, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffer price amounts to discount and the same has to be treated as remuneration to the employees for their continuity of service? (iii) Whether on the facts and in the circumstance of the case and in law the tribunal committed an error in not in not examining the scheme of ESOP from which it is clear that the employees will not get any right in the shares till completion of the period prescribed and the expenditure claimed is contingent and recorded perverse finding?" 21.1. Ld. Counsel referred to para 11 of the said decision wherein it is observed by the Hon'ble Court that deduction of discount of ESOPs over the vesting period is in accordance with the accounting in books of accounts, which has been prepared in accordance with SEBI (Employees Stock Option Scheme and Employees Stock Purchase Scheme), Guidelines, 1999. Ld. Counsel also referred to the decision of Hon'ble Special Bench of ITAT in the case of Biocon Ltd. vs. DCIT [2013] 35 taxmann.com 335 (Bang) (SB) whereby this issue has been elaborately dealt with and held as allowable expenditure in the hands of the assessee. It is this order of the Hon'ble Special Bench of ITAT which has been affirmed by the Hon' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpt u/s 10(33) of the I.T.Act." 25.2. Ground no.3 above is common in all the three appeals of the Revenue except for variation in the quantum of disallowance. Ground no.1 & 2 are specific to Assessment Year 1999-2000. 26. At the outset, it is submitted before us that ground no.1 towards disallowance of entertainment expenses and ground no.2 in respect of guest house expenses have already been dealt by the Co-ordinate Bench of ITAT in assessee's own case in ITA No.477/Mum/2004 for Assessment Year 1998-99, order dated 16.05.2006, whereby the expenditure so claimed has been allowed. The relevant extracts on the above two issues are extracted from the said order for ease of reference which squarely covers the case of the assessee for the years before us. "2 Brief facts relating to Ground No 1 are that the Assessing Officer disallowed the guest house expenses incurred by the assessee u/s. 37(1) of the Act relying upon the decision of the Bombay High Court in the case of Ocean Carriers Pvt. Ltd. reported in 211 ITR 357 and Raja Bahadur Motilal Poona Mills Ltd., 212 ITR 175, wherein it was held that the guest house expenses is disallowable u/s. 37(4) and as sub-section 4 of section 37 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the expenses in detail and has not given any specific reason for such disallowance except saying that they were ostentations in nature. As held by us in ground No. 1 above, no addition can be made without a specific finding that the expenses were not wholly and exclusively for the purpose of business. In this view of the matter, the order of the learned CIT(A) is confirmed. 6. Thus, revenue appeal is dismissed." 27. There being no material change in fact pattern and applicable law on the two issues before us, we, by following the decision of the Co-ordinate Bench of ITAT in assessee's own case for Assessment Year 1998-99, dismiss the grounds taken by the Revenue in this respect. 28. Ground no.3 is common for all the three appeals of the Revenue and has already been dealt with by us while adjudicating upon ground no.3 & 4 of the appeals by the assessee, specifically in ITA No.7447/Mum/2004 for Assessment Year 1999-2000. Accordingly, our observations and findings given while adjudicating ground no.3 and 4 in the appeal of the assessee, squarely applies to this ground common to all the three appeals of the Revenue. We direct accordingly. 29. In the result, the three appeals by th ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
