TMI Blog2005 (7) TMI 280X X X X Extracts X X X X X X X X Extracts X X X X ..... 6(1)(va) of the Act. (iii) The third issue relates to disallowance of assessee's claim of deduction of the amounts paid on account of employees' contribution to PF after due dates (iv) The fourth issue relates to assessee's claim of depreciation @ 100 per cent in respect of items of plant and machinery entitled to depreciation @ 100 per cent, but made for the first time before the CIT(A). 2.1 Issues involved in ITA No. 654/Ahd/2005 for asst. yr. 2002-03 The issues involved in this appeal were admitted to be read as under: (i) Validity of proceedings under s. 154 of the Act, 1961, by the AO for amendment of assessment under s. 143(1) of the Act, after having issued notice under s. 143(2) of the Act. (ii) Permissible adjustments under s. 143(1) of the Act, and amending of record for that purpose. (iii) Levy of interest under s. 234B of the Act and 234D of the Act, 1961. 2.2. Since both the appeals are of the same assessee, we, for the sake of convenience, have decided to dispose of these appeals, by this common/consolidated order. 3. ITA No. 3955/Ahd/2003 for asst. yr. 2001-02 3.1 We have heard the parties. 4. The brief facts, as have been revealed from the record ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause the period during which agreement was to remain in force was 5 years, but in the computation of income furnished along with return, the assessee claimed whole of the expenditure of Rs. 6 crores, as revenue expenditure. 4.6 The other facts, which have been brought on record by the AO, are as under: "(i) The assessee-company is headed by Shri S.C. Mehta, who is the director of Deepak Fertilizers Petrochemicals Corporation Ltd. (DFPCL). The company is under common management and part funding of the acquisition cost was made by DFPCL by way of subscription to preference shares of the company. DFPCL is the largest private sector manufacturer and supplier of nitric acid and ammonium nitrate and is one of the major players in nitric acid (NA) and ammonium nitrate (AN) market. The business of DFPCL is same of manufacturing nitric acid (NA) and ammonium nitrate (AN), which was also the business of VBC Industries Ltd. (ii) M/s VBC Industries Ltd. belonged to group of companies under the leadership of M.V.V.S. Murthy. Originally the group was in the bottling business and subsequently got into a number of business including manufacturing and sale of nitric acid and ammonium nitrat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and further payment towards debtors and inventories on determination on the date of transfer. The definition of acquire business undertaking was defined in art. 1.1(1), p. 3 of the agreement as under: "Acquire business undertaking means of all seller's right, title and interest as on pre-closing or the closing, in respect of chemical business. The seller, as the case may be in and upon to the following: (sic) 'Dt.: 21st Dec, 2002 Income-tax Officer, Ward-4(3), Aayakar Bhawan, Race Course Circle, Baroda - 390 007 Kind attention: Shri S.K. Agal (ITO) Dear Sir, Sub: Assessment proceedings for asst. yr. 2001-02 PAN: AACCA 5046 P In connection with our ongoing assessment for captioned assessment year and as required by your notice No. BRD/ITO/Wd. 4(3)/SPL/133(6)/02-03 dt. 13th Dec,2002, we give details here below: 1. Non-compete consideration of Rs. 6 crores paid to VBC Industries Ltd. The company had paid Rs. 6 crores to VBC Industries Ltd. towards non-compete consideration. The same had been claimed as revenue expenditure in the year under consideration. In this connection, please find enclosed our detailed submission in Annex. 1.' For Smartchem Technolo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd know-how from Projects Development India Limited (PDIL) Sindri, Dhanbad, Bihar, Norsk Hydro, Norway and UHDE Germany. The technology is tailor-made and under strict secrecy clause contained in the agreements between VBC and the technology providers. VBC while transferring chemical business had obtained permissions ..... technology providers for the company to continue using the said ........ Copies of agreement of confidentiality regarding aforesaid three ..... providers as also permission letters from them are enclosed for your perusal. Thus, the key factor in the entire business is the aforesaid .... ................... backdrop of the above, the company entered into non-compete .... with VBC and its founder promoter Shri M.V.V.S. Murthy. The ... provides for restriction on VBC and Shri M.V.V.S. Murthy to engage in manufacturing, trading or dealing in any manner with nitric acid and ammonium nitrate directly or indirectly for a period of 5 years for a cash consideration of ... to be paid upfront. The detailed analysis of the agreement vis-a-vis .... circumstances reveal the following: VBC and its founder promoter Shri M.V.V.S. Murthy had acquired technical knowledge of m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... However ...... in profitability in the very first year of operations, would have upset the ... and very purpose of this acquisition for the company. Thus, necessity of ....... lies in commercial expediency with a view to protect future revenues in shorter period. It may not be out of place to mention here that in subsequent years starting in middle of 2001, the company has faced severe competition from imported ammonium nitrate in the market place, which ... not threatening the existence of the company, has nevertheless put pressure on the margins of the company. However, as stated earlier with customer relationship already in place, the company has been able to face the competition with restrained margins. This also explains the nature and type of competition thought about in the said non-compete agreement. Thus, with the said agreement in place, the company was able to establish itself in the market place within a year. However, the said agreement has not given any enduring benefit to the company, which is demonstrated by the fact that the company has faced competition (may not be from VBC, but otherwise) in the very second year of its operation. .... Thinking on the subject ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the entire amount of Rs. 6 crores of non-compete consideration has already been paid to VBC and only on accounting principles the said amount has been amortized over a period of five years in the books of the company. Here we do not wish to waste your time by referring number of case laws settling the issue that mere accounting entry does not determine allowability/non-allowability of an expenditure under income-tax. ................... confident that the above submissions will find meritorious .............. Madras Industrial Investment Corporation Ltd. vs. CIT (1997) 139 CTR (SC) 555 : (1997) 225 ITR 802 (SC), wherein the Hon'ble Judge Mrs. Sujata Manohar, after perusing series of case laws on the subject, has held that the discount on issue of debentures has to be allowed by spreading over the period of the debentures. In addition to the aforesaid two claims, we put forth another alternate claim for your consideration. As stated earlier in the note, a technical know-how has been the main fulcrum of the acquired business. One of the major factors behind VBC's capability to compete was their knowledge about the technologies as provided by Norsk Hydro Norway, UHDE Germany, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under: "2.3 In addition to the business purchase agreement, assessee-company entered into non-competition agreement dt. 22nd March, 2000, wherein assessee-company agreed to pay Rs. 6 crores to the transferor-company and its founder promoter and it was agreed that the transferor-company for 5 years shall not directly or indirectly manage, operate, joint, have an interest in, control or participate in the ownership, management, operation or control or be otherwise connected in any manner with any corporate, partnership, proprietorship, trust, estate, association or other business entities, which directly or indirectly engaged as a commercial activity anywhere in the world in the business or any business similar to the business of the assessee. The assessee-company paid Rs. 6 crores upfront separately as consideration. In the return of income, assessee-company claimed, this payment has not given any enduring benefit to the company and expenditures were incurred to avoid competition with a view to improve profitability and, therefore, it was treated as revenue expenditure. The assessee-company has also relied on the following decisions and contended that: (i) The Commr. of Taxes v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he perpetual or everlasting. Enduring benefit need not be an everlasting character, it should not at the same time be transitory and ephemeral that it can be terminated at any time at the volition of any of the parties. Payment made to rival dealer to ward off competition in business would constitute capital expenditure, if the object of making payment is to derive an advantage by eliminating the competition for some length of time. It was further observed that the same result would not follow if there is no certainty of the duration of the advantage. How long the period of contemplated advantage should be in order to constitute enduring benefit would depend upon the facts of each case. 2.6 Hon'ble Calcutta High Court, in the case of CIT vs. Hindustan Pilkington Glass Works (1981) 24 CTR (Cal) 327 : (1983) 139 ITR 581 (Cal) held such expenditure as capital expenditure. The facts of the case was that three companies including the assessee were producing the wired figured glass. They came to a conclusion that at the relevant time there was excess production capacity in the country, resulting in losses to the industry. Therefore, one of the companies was asked to stop the production ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The non-competition by VBC Industries Ltd. for five years would allow the assessee-company with the support of associate company DFPCL to settle down in the market of east-central India and monopoly would result in enduring advantage. The associate company of assessee is already a major player in the western part of the country and unfettered access in eastern and central part of the country, where VBC had strong presence would give advantage which will last beyond the period of even five years. Since VBC Ltd. was incurring losses in the chemical business and moved to the business of power generation would not be in a position to compete after the period of non-competition, i.e., 5 years. Further, similar new plant would take at least four to five years in setting up, therefore, after the period of non-competition is over, VBC Ltd. would not be in a position to establish and compete in the same line of business. Hence, advantage of non-competition would be available for 9 to 10 years and thereafter. 2.9 Moreover, the non-competition agreement is back to back with the business purchase agreement and would give the time to settle down in the market and use the network which was a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e consideration of Rs. 29 crores. Therefore, there is no scope for separate payment to be made for any intellectual property. No specific intellectual business/commercial right was acquired by the assessee-company against the payment of Rs. 6 crores. Therefore, it cannot be part of the block of assets under s. 32 of the Act. The payment of Rs. 29 crores includes all such rights along with cost of plant and depreciation is being allowed on them. The assessee has not acquired any specific intellectual right by making payment of Rs. 6 crore, which is eligible for depreciation under s. 32 of the Act, hence no such claim is admissible." 5. The assessee went in appeal before the CIT(A) and in addition to reiterating the submissions made before the AO, relied upon the decisions by referring to specific observations in the following cases: "1. CIT vs. Lahoty Brothers Ltd. (1951) 19 ITR 425 (Cal)-In this case, an assessee as a dealer in petroleum and mobil oil and sole agent of an oil company took over the business from a joint family and by an agreement with the said family, the appellant was to pay Rs. 2,100 annually on the understanding that during the continuance of the agreement, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lted. What the appellant paid was out of business exigencies and for carrying on all the business of the appellant smoothly. Therefore, the expenditure is revenue in nature. The AO, in rejoinder, submitted that the appellant was not engaged in the manufacturing of nitric acid or ammonium nitrate. P L a/c for the asst. yr. 2000-01 shows only other income on the credit side. Some trading of chemicals on a small scale in some year does not make the appellant as engaged in chemical business. Manufacturing of these two items on a large scale by a new technology was indeed a new business. It is immaterial whether the other group concerns were engaged in chemical industries as the appellant is a separate entity. Even otherwise, the group concerns were not engaged in manufacturing of chemicals using the technology acquired from VBC. The appellant has wrongly tried to bring in the concept of unity of control over itself and DFPCL as these are two separate entities and not the same one and accordingly, the reference to the decision in the case of CIT vs. Prithvi Insurance Co. Ltd. (1967) 63 ITR 632 (SC) is irrelevant. Similarly, in the case of CIT vs. Tata Chemicals Ltd. (2002) 175 CTR (Bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ores. The appellant is a concern of the group to which another company, DFPCL belongs. Both the companies are under control of Shri S.C. Mehta, who is director in both the companies. It is worthwhile to mention that DFPCL is a major player in the western India in the field of manufacturing and selling of nitric acid and ammonium nitrate. It appears that they did not nave any hold, worth the name in the central-eastern India. VBC was a major player in the same business in central-eastern India. For certain reasons, they planned to shift to some other line of business and dispose of this chemical business. The appellant entered at that stage and the appellant, who under the name of 'Arlem Investment Finance Ltd.' did some work related to chemicals, struck a deal with VBC and purchased the chemical business from them against payment of Rs. 29 crores as mentioned above. But, in addition to this payment, they made a further payment of Rs. 6 crores to VBC upfront for non-competition on the part of the VBC. The VBC under the agreement was not supposed to enter either directly or indirectly, in the manufacturing of or trading in the chemicals in that part of the country. The issue to be de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty. Payment made to a rival trader to ward off competition in business would constitute capital expenditure, if the object of making payment is to derive an advantage by eliminating the competition for some length of time. But the same result, would not follow if there is no certainty of duration of the advantage. How long the period of contemplated advantage should be in order to constitute enduring benefit would depend upon the facts of each case. The Supreme Court in another case of Assam Bengal Cement Co. Ltd. vs. CIT (1955) 27 ITR 34 (SC), has observed that ordinarily, money paid to keep out a potential competitor in business, where the benefit is of an enduring nature, is an expenditure in the nature of capital. Similar view has been expressed by Punjab High Court in the case of Behati Lal Beni Parshad vs. CIT (1959) 35 ITR 576 (P H), Allahabad High Court in the case of Neelkamal Talkies (1973) 87 ITR 691 (All), Orissa High Court in the case of Orissa Road Transport Co. Ltd. vs. CIT (1970) 75 ITR 126 (On). However, when the benefit is not of an enduring nature but is to exhaust in year or in a short period, the expenditure is of a revenue nature. It has been so held by the Su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e other market players in this field. But in my view though there were certain other market players, but the appellant has avoided competition from at least one major market player, i.e., VBC and thus, advantage has in fact accrued to it by warding off competition from VBC. The appellant's counsel has cited several decisions in support of the case of the appellant. On consideration of these decisions, it is seen that they are not relevant to the case of the appellant, as can be seen from the following brief discussion of those decisions. In the case of CIT vs. Late G.D. Naidu By LRs (1986) 51 CTR (Mad) 256 : (1987) 165 ITR 63 (Mad), Madras High Court considered the receipt in the hands of retiring partners of a firm for not carrying out the bus business for five years and held that it is neither taxable as income or capital gains. The decision was not to the effect that the payment on the part of the firm was revenue expenditure. In fact, in this case, the Court relied on its earlier decision in the case of CIT vs. Saraswathi Publicities (1981) 132 ITR 207 (Mad) wherein, it has been held that the receipt referable to restrictive covenant was capital receipt. In the case of Empi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e payment was made to a broker for non-carrying on the business for a certain period unless and until the agreement was rescinded. Thus, it can be seen that the period of benefit was uncertain and the agreement in this regard could be terminated at any time at the volition of the parties concerned. Thus, it can be seen that these judicial pronouncements do not come to the rescue of the appellant as the facts in those cases are different from that of the appellant. The appellant has started its business in a new field by acquiring its business from VBC and has paid Rs. 6 crores upfront to the said party for non-competition. This would definitely result in advantage of enduring nature. The period of five years is a long period during which the appellant by utilizing various informations, network of VBC, from which it has purchased its business, can establish itself in eastern India and this would definitely continue for years to come and, therefore, the advantage has to be considered as enduring in nature. The period of five years is definite and the agreement for non-competition for this period cannot be terminated on the volition of the parties concerned. Taking into account, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e AO. The impugned expenditure has been earlier held as capital in nature. The concept of deferred revenue expenditure comes only when the expenditure under consideration is revenue in nature and its allowance in one year might result in distorting the figure of income of an assessee. Further, the provisions dealing with allowance of deferred revenue expenditure in the Act like s. 35D do not cover the non-compete fees. Therefore, I hold that the impugned expenditure cannot be considered as deferred revenue expenditure and accordingly, cannot be allowed proportionately in five year as contended by the appellant." 6.1. The assessee's alternative ground of allowing depreciation, if the expenditure is found to be of capital nature was also rejected and the relevant discussion/findings as contained in para Nos. 5 to 5.3 of the order of the CIT(A) are in the following terms: "5. The appellant has taken another alternative plea that if the impugned payment of non-compete fee is considered capital in nature then depreciation @ 25 per cent should be allowed under s. 32 of the Act since the payment of non-compete fees could at worst be said to have resulted in acquisition of business/com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 29 crores thus not included the payments for intangible assets and also does not include all the items mentioned at sub-cl. (iii) of cl. 1.1 of art. 1 of the business purchase agreement. The appellant's counsel also referred to the valuation report dt. 31st March, 2002 of M/s Anmol Sekhri Associates, a leading figure in this line, in which item-wise break-up of assets included as part of the consideration of Rs. 29 crores has been given and the valuation of Rs. 29 crores is with regard to only the plant and machineries, furnitures and fixtures, vehicles, land and building, etc., and this shows that the amount of Rs. 29 crores is paid only towards acquisition of tangible movable and immovable assets. It is not towards acquisition of intangible assets. The payment of Rs. 6 crores was, therefore, made for acquisition of business and commercial rights in the form of non-competition from VBC. This commercial right is in the nature of the intangible assets mentioned in s. 32 of the Act. Sec. 32 provides for depreciation in the respect of know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature, being intangible ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness of VBC Industries were acquired as per business purchase agreement dt. 23rd March, 2000 and -as per the definition given in para 1.1. of this agreement, it can be seen that the acquired business undertaking means all of seller right, title and interest in respect of chemical business including all movable and immovable property, licenses, NOCs, etc., tangible and intangible rights and benefits. Thus, all the assets of the chemical business whether tangible or intangible, were part of acquisition of business purchase agreement, for which consideration of Rs. 29 crores has been paid. The payment of Rs. 6 crores for non-compete fees was only to avoid competition from seller for a period of five years and this was not linked with any of the intangible assets like know-how, patents, -etc. Without prejudice, it was submitted that if at all any intangible assets can be said to have been acquired by non-competition, the same is not a right such as know-how, patents, copyrights, trademarks, license, franchise or any other right of similar nature. The appellant might have acquired some commercial right but the same are not similar to the nature of the know-how, patents, etc. Therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ights have to be similar in nature with know-how, patents, etc. whatever has been gained by the appellant against the said payment cannot be considered as similar to know-how, patents, etc. That is to say, the appellant has not acquired any asset against the said payment. Further, any asset, tangible or intangible can be subjected to transfer. But non-compete agreement with a particular person can be subjected to transfer. Thus the non-compete agreement cannot be considered as an asset. The decisions cited by the appellant's counsel in this regard, as discussed above are based on the facts of those cases and the issues involved therein. The Courts in those cases considered the issue which involve the nature of payment, whether revenue or capital and not whether against the payments made in those cases, any capital asset has been acquired. In view of aforesaid, I hold that the non-compete fees of Rs. 6 crores paid by the appellant to VBC did not bring in any asset as mentioned in s. 32(1)(ii) so as to qualify for depreciation. Accordingly, this claim of the appellant cannot be granted. In the result, the stand of the AO is confirmed." 7. It was, in view of above facts and circumst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilisers Petrochemicals Corporation Limited (DFPCL) (currently managing director of DFPCL) during the relevant assessment year. DFPCL is the largest private sector manufacturer and supplier of nitric acid and ammonium nitrate. Thus, the company enjoys the support of DFPCL, being one of the major player in nitric acid and ammonium nitrate market. In earlier years, the appellant was engaged in the business of trading of chemicals including ammonium nitrate. (vi) In the backdrop of the above, the company entered into a non-compete agreement with VBC and its founder promoter, Shri M.V.V.S. Murthy. Part of the non-compete agreement which is relevant in the present context reads as under: "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. Covenant The assignors' and individual hereby agree with the assignees that: (i) the assignors' and individual shall not directly or indirectly own, manage, operate, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ances reveal the following: (a) VBC and its founder promoter Shri M.V.V.S. Murthy had acquired technical knowledge of manufacturing nitric acid and ammonium nitrate as also they knew the market, prices, costing, international trends and customers. (b) The continued existence of 8 years old VBC in original name with key management personnel, business contacts and money received from sale of businesses could pose a serious threat to the appellant's profitability from the chemical business, if VBC or Mr. Murthy decided to compete in the said business. (viii) The learned counsel for the assessee, further submitted that as mentioned earlier, VBC possessed necessary technical knowledge for manufacturing and supply of ammonium nitrate. Considering the above, it was a business necessity for the appellant to stop VBC and its founder promoter to again enter the business of nitric acid and ammonium nitrate directly or indirectly. In the absence of such an agreement, VBC directly or indirectly could give competition to the appellant by: (i) either manufacturing itself or providing knowledge and management skills to an associate to manufacture nitric acid and ammonium nitrate. (ii) im ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e appellant had explained the same vide letters dt. 21st Dec, 2002 and 9th Jan., 2003. However, the learned AO did not agree with the submissions and the judicial pronouncements relied upon by the appellant and disallowed the non-compete compensation paid as being in the nature of capital expenditure. The learned AO has held that the ratio of the decisions on which the appellant has placed reliance is not applicable to the facts of the case. While coming to the above conclusion, the learned AO has held that in most of the cases relied by the appellant, the assessees were carrying out particular business and during the course of carrying out of business, payments were made to ward off the competition; whereas in the case of appellant, it was not doing any business prior to the acquisition and the non-competition was associated with acquiring of new business. He has, therefore, held that the appellant cannot be treated at par with assessees in the decisions relied upon by the appellant and CIT(A) has just confirmed the same. (xi) It was submitted that the observations made by the learned AO/CIT(A), that the appellant was not doing any chemical business prior to the acquisition an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... VBC. Once, it is held that the appellant was in the chemical business prior to its acquisition of VBC, the ratio of the decisions as quoted by the appellant, wherein it has been held that such payments are in the nature of revenue expenditure, would be clearly applicable to the facts of the case. (xiii) The learned counsel for the assessee further submitted that the learned AO has not correctly appreciated the concept of business already in existence. The mere fact that the business acquired a chemical business does not imply that it was not part and parcel of the existing business. Mr. S.C. Mehta holds approximately 99 per cent of the equity share capital of the appellant. He along with the members of his family and associate concerns holds approximately 32 per cent of the equity share capital of DFPCL. Further, as stated earlier, Mr. Mehta is on the board of both the appellant and DFPCL. Further as stated above, Mr. Mehta was also the director of the appellant. The above facts would clearly indicate that both the companies operate under the common management and have unity of control. The concept of common management, unity of control, etc. referred above would, therefore, clea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ard to the observations made by the Supreme Court as regards the general principle which one may follow in determining the character of the payment, i.e., whether it is capital or revenue. It has been clearly indicated in the said judgment that the facts and circumstances of each case have to be viewed in order to determine the character of the payment. That in the above case, the payments made by Coal Shipments (P) Ltd. towards the restrictive covenant were held to be on revenue account and deductible. The Hon'ble Supreme Court has allowed the said expenditure on the ground that the expenditure incurred to keep a competition out of assessee's field of business should be treated as revenue expenditure as it was to improve the profitability of assessee's business. (ii)(a) With respect to the decision in the case of CIT vs. Hindustan Pilkington Glass Works (1981) 24 CTR (Cal) 327 : (1983) 139 ITR 581 (Cal), he submitted that in the above case the appellant entered into a tripartite agreement with two other concerns which produced the same type of commodity as produced by the appellant. The object of the agreement was the elimination of competition in order to prevent possible ann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had left the shores of India. This clearly established that the benefit that the assessee obtained was of permanent or enduring quality in the sense that competition was totally eliminated and protection had been acquired by the assessee for its business for rest of the period of the business activities. Considering the above facts, it was held that the amounts paid were in the nature of capital expenditure, (b) The learned counsel for the assessee submitted that in the instant case, the facts are entirely different. The payment has not resulted in the competition being eliminated totally as was the position in the case of Chelpark Co. Ltd. The competition for the appellant continued to exist and, therefore, the payment did not result in any benefit of enduring nature as contemplated. At best the payment made by the company supplemented the profit-making apparatus of the appellant and such the payment ought to be regarded as being made on revenue account. (iv)(a) With respect to the decision in the case of Blaze Central (P) Ltd. vs. CIT (1979) 120 ITR 33 (Mad), it was submitted that in the above case also payments were made by the assessee to acquire the business for a per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding running of plant with the available technology and building relationship with the customer base of VBC, the appellant would have been in a position to face any competition in less than a year's time. However, any dent in profitability in its first year of operations, would have upset the payback and the very purpose of acquisition of VBC. With the aforesaid background in mind, the appellant had entered into a non-compete agreement with VBC. (xvii) It was further submitted that the appellant saw an opportunity in the eastern part of the country, as the supply of ammonium nitrate in such market from existing manufacturer catering to major mining areas of east-central India was not adequate as compared to the demand for the same. This was mainly because of dwindling production from manufacturers like FCI, Sindhri, SAIL, Rourkela. A statement showing the manufacturing capacity per metric ton in each part of the country is enclosed at p. 220 of the compilation. As can be observed from the above statement the total manufacturing capacity per metric ton of the major player in the eastern part of the country, viz., SAIL and FCI was reducing. Accordingly, the appellant-company saw an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as stated by the learned AO. In view of the above facts, it was submitted that the ratio of the decisions relied upon by the learned AO/CIT(A) are not applicable to the facts of the case of the appellant. (xx) The learned counsel for the assessee further submitted that as can be observed from the submissions made hereinbefore, the appellant did not get any benefit of an enduring nature by entering into the aforesaid agreement but has only tried to ward off the dent to its profitability during the first year of its operations. Accordingly, it is submitted that by entering into the aforesaid agreement the appellant has not got any advantage of enduring nature. The learned AO erred in making an observation that VBC decided to sell its business to the appellant as it was incurring losses due to the fact that they were dependent on the imported ammonia and the CIT(A) followed the same mistakably. (xxi) To counter this, it was submitted that VBC in fact was competing in the market till the sale of chemical business. Sale of business by VBC was not occasioned due to severe competition but mainly due to change in business focus of the promoters. Again the inability to compete was not d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Rs. 2,100 paid by the assessees to the joint family was an allowable deduction." It was, on above facts that the Court has held that: "As the sum of Rs. 2,100 was paid for the purpose of the business and with a view to keep the competitor out of the area in which the assessee was carrying on its business, it was an allowable deduction under s. 10(2)(xv)." (ii) The learned counsel for the assessee, therefore, submitted that from the above, it can be observed that facts of the appellant's case are similar to the above decision and, therefore, the amount paid to keep the competitor out of the area in which the appellant was to carry on its business activities, ought to be held as being deductible. (b) CIT vs. Late G.D. Naidu Ors. (1986) 51 CTR (Mad) 256 : (1987) 165 ITR 63 (Mad) (i) Facts of this case were as under: "In the aforesaid case, the deceased and his son along with others were partners in five different firms carrying on business in transport services. During the relevant assessment year, all old partners were retired and firms were constituted with new groups of partners. The deceased and his son were paid varying amounts by the various firms. The Tribunal c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he learned counsel for the assessee submitted that from the above, it can be observed that the apex Court has observed that what is material is the nature of the advantage in a commercial sense and where the advantage is in the capital field then the expenditure is disallowable. The appellant submits that by way of payment of non-compete fees of Rs. 6 crores to VBC, the appellant has not received any advantage in the capital field. Further, no new capital asset belonging to the appellant came into existence by way of the aforesaid payment. Hence, in view of the above, the appellant submits that the payment ought to be held to be on revenue account arid hence deductible. (d) In addition to above, the learned counsel for the assessee relied upon the following decisions also: (i) In the case of Pathare Dhru Co. vs. Asstt. CIT (1995) 54 ITD 746 (Bom), wherein the Hon'ble Tribunal allowed as a deduction the payment made to retiring partner of the firm as a consideration of the restrictions placed on the retiring partner from undertaking any professional work which will affect the assessee's professional practice for a period of two years. (ii) In the case of Sree Annapoorna Gowr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be spread over a number of years even if the assessee has written it off in his books, over a period of years. However, the facts may justify as assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. Issuing debentures is an instance where, although the assessee has incurred the liability to pay the discount in the year of issue of debentures, the payment is to secure a benefit over a number of years. There is a continuing benefit to the business of the company over the entire period. The liability should, therefore, be spread over the period of the debentures." 9.1. The learned counsel for the assessee further submitted that the Supreme Court has approved the decision of the Madhya Pradesh High Court, Indore Bench in the case of M.P. Financial Corporation vs. CIT (1986) 51 CTR (MP) 249 : (1987) 165 ITR 765 (MP), wherein in the context of issue of bonds at a discount, the High Court held that though the entire amount of discount was not an allowable expenditure in the assessment year in que ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ithin the meaning of block of assets. The rate of depreciation in respect of these intangible assets has since been prescribed at 25 per cent vide Notification S.O. No. 781 (E), dt. 4th Sept., 1998. These amendments will take effect from 1st April, 1999, and will, accordingly, apply in relation to the asst. yr. 1999-2000 and subsequent years." (ii) Reverting to the assessment order, the learned counsel submitted that the learned AO has held that the payment of Rs. 29 crores for acquisition of business of VBC includes payments for tangible and intangible assets including know-how, licence, permits, intellectual property rights, etc. Therefore, there is no further scope for separate payment to be made for intellectual property. He has further held that by making payment of Rs. 6 crores no business/commercial right has been obtained by the appellant and, therefore, has not allowed depreciation under s. 32 of the Act to the appellant; and while coming to the above conclusion, the learned AO has gone by the definition of "acquired business undertaking" which has been discussed at cl. 1.1 of art. 1 at p. 3 of the business purchase agreement. "Acquired business undertaking means all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sets Amount (Rs.) ----------------------------------------- ANP plant 2,70,58,000 WNA plant 1,20,51,600 MFA plant 5,76,45,000 Others 5,56,00,000 Instruments 45,00,000 Furnitures and fixtures 1,75,000 Vehicles 3,00,000 Total 26,57,94,000 Rounded off to (A) 26,58,00,000 Land 27,00,000 Building 2,15,00,000 Total (B) 2,42,00,000 Total (A) + (B) 29,00,00,000 ----------------------------------------- From the above details, the learned counsel for the assessee submitted that the amount of Rs. 29 crores paid is only towards acquisition of tangible and movable assets. It is not towards acquisition of intangible assets. (vi) In view of above, it was further submitted that the payment of Rs. 6 crores is for acquisition of business/commercial rights and the payment of Rs. 29 crores was for the acquisition of the business as the whole which is separate from acquisition of the business/commercial rights. The payment of Rs. 29 crores w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, applying the principle of ejusdem generis, such rights should be in the nature of know-how, patents, copyrights, trademarks, licences, etc. The expression "similar" is a significant expression. It does not mean identical but it means corresponding to or resembling to in many respects, somewhat like, or having a general likeness. The expression, if interpreted restrictively, will include only business or commercial rights if they are corresponding to or resembling to any one of the preceding assets in many respects. However, the use of word 'or' instead of 'and' enlarges the ambit and commercial rights like rights to trade for a specific period or in a specified area, etc. will be covered by this expression 'similar nature'. (xi) In view of the above, it was submitted that the appellant by making the payment for non-compete has acquired the technical know-how. It was further submitted that payments for non-compete results in the acquisition of a capital asset being a right to carry on the business unfettered by any competition from the said competitors, i.e., it gives a business or commercial right to the assessee and, therefore, should be part of the block of assets for the pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re of a capital expenditure and not revenue expenditure." (c) Referring to above decisions, (he) submitted that the Courts have held that payments for non-compete consideration are in the nature of a capital asset, i.e., the assessee has got a business or commercial rights for which it has made payments, for non-compete. The assessees by entering into such an agreement has acquired the right from the seller to not to produce or deal or do any business in respect of a particular product or business, etc., for a particular period of time as mentioned in such agreements. Accordingly, such payments are in the nature of acquisition of the business or commercial rights from the buyer, which are in the nature of capital assets, as held by the Courts within the meaning of s. 32 of the Act. (xii) Concluding his submissions on this point, it was again submitted that the appellant be allowed depreciation on such acquisition of business/commercial rights under s. 32 of the Act in respect of non-compete fees of Rs. 6 crores paid to VBC. 11. In addition to above, the learned counsel for the assessee in support of the submissions relating to ground No. 'A', further relied upon the decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i) of this order). 12.4 The assessee went in appeal before the CIT(A), but failed. 13.(i) It was in view of above facts that the learned counsel for the assessee submitted that the learned CIT(A) and AO disallowed the payments made by the appellant-company in respect of employees' provident fund to the provident fund authorities without appreciating the facts of the case in its correct perspective. (ii) According to him, the following were the details of payments made by the employer in respect of employees' contribution and employer's contribution to provident fund, which has been disallowed by the learned AO: Details of disallowance under s. 36(1)(va) of the Act-Employer's contribution. Srikakulam Office ---------------------------------------------------- Month Amount Due Date Date of (Rs.) payment ---------------------------------------------------- April, 2000 64,002 20-5-2000 24-6-2000 May, 2000 64,204 20-6-2000 24-6-2000 Total 1,28,206 ---------------------------------------------------- Pune Plant July, 2000 2,400 20-8-2000 9-3-2001 August, 2000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onal Provident Fund Commr., Pune, and a code number was allotted on 19th Jan., 2001. The intimation of the same was received by the appellant on 5th March, 2001. The appellant has thereafter paid the provident fund dues, on 9th March, 2001. (c) The due date for payment includes 5 days of grace period allowed under the provisions of the Employees' Provident and Miscellaneous Provisions Act, 1952. Reference : Para 27.4 of the Fourth Edition of the Guidance Note on Tax Audit under s. 44AB of the IT Act, 1961, issued by ICAI. (iv) The learned AO as well as CIT(A) has failed to appreciate the fact that delay in payment of provident fund dues by the appellant-company were due to unavoidable reasons. As can be observed from the aforesaid notes, the delay in respect of the payments in respect of the earlier contributions were due to the fact that the appellant-company had not received the registration certificate from the respective provident fund authorities. After receiving approval from the provident fund authorities both in the case of Pune and Srikakulam Plant, the appellant-company had deposited the dues at the earliest to the provident fund authorities. It was never the intentio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view needs to be taken as the delay of payments made by the appellant in respect of employer's as well as employees' contribution to the provident fund were due to unavoidable reasons. Accordingly, it is submitted that the disallowances of the amount paid in respect of provident fund of Rs. 1,50,766 and Rs. 1,66,657 under ss. 36(1)(va) and 43B of the Act, respectively, needs to be deleted. (viii) Without prejudice to the above it was submitted that the learned AO has erred in not appreciating the fact that the said payments were made during the relevant previous year. (ix) Referring to s. 43B, it was submitted that s. 43B of the Act provides that notwithstanding anything to the contrary contained in any other provisions of the Act, a deduction otherwise allowable under this Act in respect of any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of the employees, shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. Further, the Finance Act, 1987, inserted two provisos before the Explanation to s. 43B w.e.f. 1st April, 1988 to the effect that the second proviso dealt with liabilities falling under cl. (b) of s. 43B to the effect that no deduction will be allowed in the assessment of the employers unless such contribution is paid to the fund on or before the 'due date', due date means the date by which an employer is required to credit the contribution to the employees' account in the relevant fund under the provisions of any law or terms of contract of service or otherwise. As the assessee had deposited the amounts within the period relevant to the asst. yr. 1992-93, so, if the assessee's claim was not allowed in this year then it will not get any benefit in any of the subsequent years. If a strict interpretation of ss. 43B and 2(24)(x) r/w s. 36(1)(va) is taken then it would certainly lead to injustice and absurd result which was never the intention of the legislature. Therefore, on the basis of equitable construction, if the construction results in equity and justice, rather than injustice and absurdity then such construction should be preferred to the strict literal construction. Thus, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is he not liable to pay any damage in accordance with the EPF Scheme and the relevant Act, but by virtue of CPFC's circular dt 29th April, 1967, he will also not be treated to be in default. Hence, from the practical point of view, the 5 days' period of grace after the 15th of the succeeding month was to be considered merely as an extension of the earlier period of 15 days and all the consequences of making payment within the said 15 days should be considered to follow if the payment be made within the grace period following the said period of 15 days. The Explanation to cl. (va) of s. 36(1), again, defines due date rather in a vague way to mean the date by which the assessee is required to make the payment in accordance with the relevant Act, rule, order or notification or even any standing order, award, contract of services or otherwise. It is clear therefrom that the concept of due date here is to be taken in a rather very flexible sense. Inasmuch as the assessee is very much under impunity if he paid the amount under consideration within the 20th of the following month, the purpose of cl. (va) of s. 36(1) would be substantially complied with if the payment be made within suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the end of the month for which salaries were payable since, in the instant case, all the payments had been made in the year itself though with a marginal delay of a few days on certain occasions, no part of the contributions received by the assessee from its employees towards PF and ESI could be disallowed. Reading ss. 30 and 32 of the EPF Scheme together, it would be clear that it is the liability of the employer to pay his own contribution and also the contribution of the member of the PF Scheme employed by him and the employer is also given the right to recover the amount of member's contribution from the wages bill. Therefore, the provisions of s. 43B which has an overriding effect over other sections must prevail over s. 36(1)(va). Hence, the assessee's appeal was allowed." (xi) It was further submitted that the Hon'ble Tribunal Delhi Bench "C" in the case of Addl. CIT vs. Vestas RRB India Ltd. (2005) 93 TTJ (Del) 144 : (2005) 92 ITD 1 (Del) has held that since introduction of second proviso to s. 43B of the Act, had been held to be retrospective in nature, its omission by the Finance Act, 2003, is also retrospective and will be deemed to be with effect from the date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otality of the facts and circumstances of the case, what we are able to gather is that the AO has rejected the assessee's claim that the expenditure of Rs. 6 crores incurred in consequence upon "non-compete agreement" was revenue expenditure mainly because of the following reasons: (i) As is gathered from para No. 2.4 of assessment order, the AO distinguished all the decisions except as discussed in ensuing paragraph relied upon by the assessee on the basis of which the assessee had pleaded that the expenditure in question had resulted in enhancement of assessee's profitability/sales by observing that in those cases, the assessees were carrying on similar business earlier to incurring of the expenditure, whereas the assessee was not carrying on the business of dealing in these two chemicals prior to incurring of the expenditure. (ii) The decision of Hon'ble Supreme Court in the case of Coal Shipments (P) Ltd. was distinguished by observing that in that case there was no certainty of duration of non-compete agreement because there was no written agreement and because of uncertainty, advantage derived was not of 'enduring nature'. (iii) Similarly, the decision of Hon'ble Madras ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eriod of five years but it could be brought to an end earlier only if there was mutual consent in writing by all the parties. On the question whether the sum paid by the assessee under the agreement was allowable as business expenditure. (ii) It was in view of above facts, that the Hon'ble High Court after having observed as under (to be reproduced hereinafter) held, that in the instant case, the expenditure was incurred with the declared intention of preventing what the parties to the agreement described as annihilation from business. The expenditure would, in all probability, secure a goodwill for the assessee in its field by sterilizing the operation of a competition 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. The relevant observations of the Hon'ble High Court were as under: "In considering whether an expenditure was revenue expenditure or not, the Court has to consider the nature and ordinary course of business and the objects for which the expenditure was incurred. The question whether a particular expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss which generated income. Consequently, the payment was capital in nature and was not allowable as a revenue expenditure." (iii) In addition to above, the learned AO has relied on similar findings of Hon'ble Madras High Court in the case of Chelpark Co. Ltd. and of Hon'ble Karnataka High Court in the case of CIT vs. Bangalore Arrack Co. 16. From the order of the learned CIT(A), we are able to gather that he distinguished the decisions relied upon by the assessee almost on the same reasoning as given by the AO and/or given by him-with respect to decisions which were not referred to before the AO as per his observations contained in para No. 3.4 at page Nos. 11, 12, 13, 14, 15 and 16 of the appellate order, which reads as under: "3.4 The issue has been considered carefully. It is seen that the appellant has acquired the chemical business from VBC, which includes transfer of immovable, movable properties and all clearances, permits, license, consents, NOC, etc., tangible and intangible rights and benefits entitled to seller thereunder, registration, intellectual property rights, etc. against a payment of Rs. 29 crores. The appellant is a concern of the group to which another c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in that part of the country and in this situation, if the VBC also started similar type of business directly or indirectly, it would have been difficult for the appellant to create an effective base in that area. For that very purpose, the appellant paid Rs. 6 crores to VBC for non-competition. It is now to be considered whether by doing so, the appellant acquired any advantage of enduring nature so as to bring the payment under the capital expenditure. In this regard, many decisions have been cited by the appellant and also by the AO. I find that no thumb rule has been prescribed by any decision and the decisions have been taken by the various Courts based on the facts of the case. This is summarized by the Supreme Court in the case of Coal Shipment Ltd., wherein, the apex Court has laid down certain principle. It has observed that "permanent and enduring" are only related terms and not synonymous with the perpetual and everlasting. Enduring benefit need not be an everlasting character. It should not at the same time, be transitory and ephemeral that it can be terminated at any time at the volition of any of the parties. Payment made to a rival trader to ward off competition in b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efit. Coming to the period of benefit accrued because of non-competition, it is seen that the Calcutta High Court in the case of Hindustan Pilkington Glass Works considered the payment made by the assessee to a competitor for stopping production for five years so that excess production could be avoided in the field of manufacturing of wired figured glass. The Court held that the period of five years was a critical period in the glass manufacturing and in this period, the assessee could eliminate the competitor and could generate goodwill for its product and this can be considered as advantage of enduring nature as this would last not only beyond one year, not even for five years, but even for longer period. The Madras High Court in the case of Blaze Central (P) Ltd. has held that the payment made to a competitor for taking over all the business carried by them for nine years to ward off competition, resulted in advantage of enduring nature and hence, the payment was capital in nature. The appellant has tried to argue that in these cases, there was one competitor, but in its case, VBC was not the only competitor but there were other market players in this field. But in my view, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... production of copper for one year because of fall in price of copper. It can be seen that the period involved was for very short, i.e., for one year. In the case of Sree Annapooma Gowrishankar Hotels (P) Ltd. vs. Asstt. CIT (1991) 37 ITD 451 (Mad), what the Tribunal, Madras Bench, considered was the reasonableness of payment under s. 40A(2) and the issue was not relating to capital or revenue nature of the payment. In the case of Pathare Dhru Co. vs. Asstt. CIT (1995) 54 ITD 746 (Bom), the issue involved was payment made to a person for stopping profession for two years. The period thus is very short, only for two years. Similarly in the case of Modipon Ltd. vs. IAC (1995) 52 TTJ (Del) 477, the period of benefit was only for three years. In the case of IRC vs. Carron Company (1968) 45 Tax Cases 18 (HL), the issue involved was expenditure for obtaining the new character, defending the action and payment made to two dissenting shareholders in respect of their shares and expenses in the action. The payments were not for non-competition from another party. In the case of CIT vs. Piggot Chapman Co. (1949) 17 ITR 317 (Cal), the payment was made to a broker for non-carrying on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is very para, the learned CIT(A) had accepted that another group concern DFPCL, was manufacturing and selling the two chemicals in the western India, but in the central eastern part of India, they did not have any hold worth the name. 18. After having considered the totality of the facts and circumstances of the case, we, first of all, are of the opinion that, we should decide the question as to whether for appreciating the fact that the non-compete agreement was to enhance the assessee's profitability, was it necessary for the assessee carrying on of the same business and that too on large scale and also the question as to whether the assessee, prior to entering into non-compete agreement was carrying on the business of dealing in same chemicals or not. 19. So far as the first question is concerned, we are of the opinion that carrying on of the same business prior to entering into a non-compete agreement is not necessary to appreciate as to whether the non-compete agreement is to enhance the assessee's profitability or not, because the stage when increase in profitability is to be seen has to be subsequent to entering into such an agreement and not before that. In our opinion, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not in the business of chemicals and also the submission that the fact that the appellant was not in the same business, prior to the acquisition of VBC is not decisive or relevant factor in determining whether the payment of non-compete fee is allowable as revenue expenditure, refers to the remand report procured from the AO and in the said remand report, the AO has stated to have again submitted that the appellant was not engaged in the manufacturing of nitric acid or ammonium nitrate. Here, it is important to mention that in the assessment order, the AO had taken a plea that the assessee was not carrying on the business of same chemicals, whereas in the remand report he takes a stand that the assessee was not in the manufacturing of nitric acid or ammonium nitrate. In the same breadth, the AO has stated to have been admitted that "some trade of chemicals on a small scale in some year does not make the appellant as engaged in chemical business". (c) The CIT(A) on appreciation of facts, in para 3.4 admits that the assessee-company as well as DFPCL were under the control of the director, Shri C.S. Mehta and that the assessee was doing some trade business in the chemicals earlie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion, which was formed with the objects of, inter alia, protecting the trade of its members, imposing restrictive conditions on the conduct of the trade and adjusting the production of the mills of its members. A working time agreement was entered into between the members restricting the number of working hours per week for which the mills were entitled to work their looms. Clause 4 of the working time agreement provided that no signatory shall work for more than 45 hours per week. Clause 6(b) provided that the signatories shall be entitled to transfer, in part or wholly, their allotment of hours of work per week to any one or more, of the other signatories. Under this clause the appellant purchased "loom hours" from four other mills for the aggregate sum of Rs. 2,03,255 during the previous year relevant to the asst. yr. 1960-61 and claimed to deduct that amounts as revenue expenditure. The Tribunal held that the expenditure incurred by the appellant was revenue in nature and hence deductible in computing the appellant's profits. On a reference, feeling that the decision of the Supreme Court in CIT vs. Maheshwari Devi Jute Mills Ltd. (1965) 57 ITR 36 (SC) concluded the matter, the H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he purpose of removing a restriction on the number of working hours for which it could operate its looms with a view to increasing its profits was revenue in nature and allowable as a deduction under s. 10(2)(xv). By the purchase of loom hours no new asset was created and there was no addition to or expansion of the profit-making apparatus of the appellant. The acquisition of additional loom hours did not add to the fixed capital of the appellant; the permanent structure of which the income was the product or fruit remained the same; it was not enlarged nor did the appellant acquire a source of profit or income when it purchased the loom hours. The expenditure incurred for the purpose of operating the looms for longer working hours was primarily and essentially related to the operation or working of the looms which constituted the profit-making apparatus of the appellant and was expenditure laid out as part of the process of profit-earning. It was 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; it was part of the cost of operating the profit-earning apparatus and was clearly in the nature of revenue expenditu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ugh, there are no set principles or tests or rules which can be said to be universally applicable to decide as to whether a particular expenditure is capital expenditure or revenue expenditure because whatever principles have been laid down by various Courts can be applied only with reference to facts of a particular case, but still, we are of the opinion that some of the tests which play a dominant role and should be kept in mind while deciding as to whether the expenditure in question is capital expenditure or revenue expenditure, are as under: (i) That the question must be viewed in the larger context of business necessity or business expediency. This principle had been applied by the Hon'ble High Court of Andhra Pradesh (Full Bench) in the case of Praga Tools Ltd. which we will discuss later on. (ii) That if a payment is found to have been made for augmenting the productivity of the profit-making structure, that payment would be revenue expenditure and not capital expenditure, as have been held by the Hon'ble High Court of Gujarat in the case of Sarabhai M. Chemicals (P) Ltd. (iii) That if the benefit procured in consequence upon incurring of an expenditure consists merel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , entered into a licence agreement with J. S. Ltd., a foreign company of U.K., for the manufacture of certain tools and cutter grinding machines for which J. S. Ltd. was to supply the accessories, design, technical know-how with latest modifications and assistance. J. S. Ltd. also agreed to assist the assessee in the manufacture of main castings of the machine and sell to the assessee all the fixtures, jigs, tools, gauges, raw materials and special parts at their commercial retail value. In consideration of grant of manufacturing rights and for providing assistance under the agreement, the assessee agreed to pay initially £ 1,000. The agreement was for a period of ten years and renewable thereafter for five years by mutual consent. During the subsistence of the agreement, the assessee had to pay royalty at 5 per cent on the Indian selling price on the production of the machine, subject to Indian taxes. The termination of the agreement was not to affect the rights of the assessee to use, for the purpose of their business, all the information, techniques, technical know-how, patents, copyrights and drawings transferred by J.S. to the assessee or which might have come into the po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e deductible. It is the totality or cumulative effect of all the material facts evidenced by the documents and the surrounding circumstances that are to be taken into consideration to arrive a decision as to what is the nature of the expenditure. Viewed in the larger context of business, each factor or circumstance by itself may not be decisive." 26. Without prejudice to our aforesaid findings, if we, for the sake of discussion, consider that the benefits derived by the assessee in the present case were of 'enduring nature', then also the assessee is to succeed because of the decision of Hon'ble Supreme Court in the case of Empire Jute Co. Ltd., and our findings arrived at after following the same to the effect that the effect of the agreement in question being directly related to the sale and production capacity and of two chemicals, which in turn had effect of carrying on assessee's business efficiently and profitably in central and eastern parts, of India, the test of enduring nature fails and the expenditure has to be held as revenue expenditure. 27. In view of aforesaid totality of the facts and circumstances of the case, we, after respectfully following the various deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... businessman and not from the Revenue's attitude and it is so because had the assessee any mala fide intention to reduce its tax burden, it could have easily included this payment of Rs. 6 crores in purchase price of the manufacturing plant itself, and could have purchased the plant for Rs. 35 crores instead of Rs. 29 crores. In that case, the assessee would have got depreciation on whole of the amount, i.e., including payment of Rs. 6 crores, and in that situation, nobody was going to question the assessee's bona fide and, therefore, to term the expenditure as of capital nature, only because the assessee has claimed the payments separately, in our opinion, was not justified. 29. So far as decisions, relied upon by the AO and CIT(A) are concerned, we are of the opinion that all those decisions are either distinguishable on facts or had been decided without considering the decision of Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. Therefore, they are not applicable to the facts of the case. 30. The only decision which could have been applicable, had it considered the decision of Hon'ble Supreme Court in the case of Empire Jute Co. Ltd., is the decision of High Court o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is assumed that the assessee was not carrying on the business in these two chemicals at all, even then, the purchase of manufacturing unit was itself relevant and sufficient to support the assessee's claim that subsequent agreement was only to enhance the assessee's sales of these two chemicals in central and eastern parts of India which in turn was bound to enhance the profitability. (v) So far as Revenue's view that VBC was not able to compete after sale of manufacturing unit because it would have taken about five or more years to install such a plant and by that time, the assessee might have established itself well in the market, we are unable to subscribe to this theory, firstly, because the authorities have not pointed out as to how the installation of such a plant was to take five or more years and, secondly, the authorities have not considered the fact that agreement was with two parties, namely, VBC as well as its founder, Shri M.V.V.S. Murthy, in his individual capacity and was for both manufacturing and trading activities. Since, not only these two chemicals, but all such type of chemicals are normally sold without any brand because manufacturing of these chemicals doe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-occurring after the expiry of period, then the benefit derived cannot be said to be of 'enduring nature'. 35. So far as the present case is concerned, M/s VBC and founder, Shri M.V.V.S. Murthy, both being well in a position financially, as well as otherwise, to compete the assessee even after a period of five years, the threat which was perceived at the time of agreement still subsists and liable to reoccur at the expiry of period of five years in the present case, could not be said to be 'enduring nature' and, therefore, Revenue's plea that expenditure in question was of 'capital nature' because benefits derived were of 'enduring nature' fails. 36. In view of above facts and circumstances of the case, we, after following the decision of Hon'ble Supreme Court in the case of Empire Jute Co. Ltd., are of the opinion that benefit to be derived by the assessee in consequence upon incurring the expenditure of Rs. 6 crores by entering into a non-competition agreement with VBC and Mr. M.V.V.S. Murthy was directly related to the enhancement of the assessee's profitability in the business of manufacturing and trading of these two chemicals under reference and, therefore, the same is h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... established (in the market) for the past several years, we find no merit in the contention raised by the learned Departmental Representative. As such, we proceed on the premise, being borne out of record, that the Revenue has not assailed the agreement as to its purport and import, and rather, inferred it to bestow the benefit of non-competition to the assessee even beyond the stipulated five years, over which it (assessee) claims, in the alternative, the deduction (of the revenue expenditure) to be evenly spread. Further, in view of the foregoing, it is also, therefore, not the case of the Department that the consideration of Rs. 6 crores, though purportedly for abstaining (by the vendor-company) from engaging in the trade, is, in reality, a part of the acquisition deal (admittedly, a transaction on capital account) and whereby all the assets and liabilities stand acquired by the assessee; and only camouflaged as a non-compete fee to avail any tax benefits, saving(s) on stamp duty, etc. (iii) Examining the expenditure for its nature, i.e., revenue or capital, we are of the opinion that once the vendor has sold its entire bundle of rights, whether relating to the manufacturing un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an extended benefit, would not be appropriate. Again, the analogy of the advertisement expenditure may prove useful; the high level of uncertainty associated with any advertisement campaign, howsoever intensive, and thus high-cost, precludes ascribing (for most part) any capital (in terms of increase in market share) or deferred revenue (in terms of maintaining the existing market share over an extended period of time) value to it. We, therefore, are of the view, that, under the given facts and circumstances of the case, the nature of the non-compete fee of Rs. 6 crores incurred by the assessee is revenue. 38. In the result, group 'A' is allowed. 39. Grounds 'B' and 'C' After careful consideration of the rival submissions, facts and circumstances of the case and decision relied upon by the assessee, we are of the opinion that the issues involved in these two grounds are covered in assessee's favour and against the Revenue by the decision of Tribunal 'Delhi Bench' in the case of Addl CIT vs. Vestas RRB India Ltd., wherein the Hon'ble Tribunal has held that the omission of second proviso to s. 43B of the Act, is retrospective; i.e.. from the date the proviso was inserted and co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3, would produce inequitable and illogical result. For instance, in case of assessees where there has been delay in labour welfare payments by a few days after the due date, the same attracts total disallowance. However, in the case of an assessee who did not make payment and persisted with the default and deposited said amounts after 1st April, 2004, he shall be eligible to the benefit of deduction after the date of amendment. That would give a premium on a persistent default vis-a-vis the small default. According to the rules of interpretation, equitable construction should be preferred to the literal construction. In view of the above and following the rule of equitable construction, the assessee would be eligible to deduction for all such payments made before the due date of filing of return." 40.3 In the present case, admittedly, the payments were made within the financial year itself and, therefore, respectfully following the decision of Delhi Bench, the disallowance covered by these two grounds are deleted. 41. Ground D The ground reads as under: "6(i) The learned CIT(A) erred in holding that the date of passing of the assessment order is the date of assessment and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R 383 (SC) (xi) CIT vs. Prabhu Steel Industries (P) Ltd. (1988) 171 ITR 530 (Bom) (xii) Union Coal Co. Ltd vs. CIT (1968) 70 ITR 45 (Cal) (xiii) Baby Samuel vs. Asstt. CIT (2003) 184 CTR (Bom) 140 : (2003) 262 ITR 385 (Bom) 45. The CIT(A), however, rejected the assessee's request and refused to entertain the assessee's claim on the ground that the ground was additional one and requires verification of facts. In support of his conclusion, the CIT(A) relied upon the following decisions: (i) Addl. CIT vs. Gurjargravures (P) Ltd 1978 CTR (SC) 1 : (1978) 111 ITR 1 (SC) (ii) Jute Corporation of India Ltd. 45.1 The relevant part of his order as contained in para No. 8.2 reads as under: "8.2 The issue has been considered carefully. I find that the appellant, in this case, had filed its return of income in which it claimed depreciation @ 25 per cent on its plant and machinery. On 12th March, 2003, the appellant filed a letter dt. 28th Feb., 2003 before the AO claiming that it is entitled to depreciation @ 100 per cent in respect of certain items of plant and machinery valued at Rs 1,81,67,725. However, it is seen that the assessment order in this case was passed much before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce was adduced in support thereof. This decision was distinguished by the Supreme Court in the case of Jute Corporation of India Ltd. vs. CIT, wherein it has been observed that the power of the first appellate authority is coterminous with that of the AO and it that is so, there appears to be no reason as to why, the appellate authority cannot modify the assessment order on an additional ground even if not raised before the AO. However, the decision in the case of Addl. CIT vs. Gurjargravures (P) Ltd. was not overruled by the Supreme Court in this case as the apex Court considered that decision is founded on the special facts of that case wherein, there was no material on record to sustain the claim of exemption which was made for the first time before the first appellate authority. The apex Court further added that the observations in the case of Gurjargravures (as mentioned above within quotes) do not rule out a case for raising an additional ground before the first appellate authority if the ground so raised could not have been raised at a particular stage when the return was filed, when the assessment order was made or that the ground became available on account of change of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t certain items qualify for depreciation @ 100 per cent and in such circumstances, the AO could not have advised the appellant to claim a depreciation @ 100 per cent on some items. It was the duty of the appellant to make a claim in this regard by producing supporting evidence, which have not been done and there is no reason for not taking this ground earlier before incorporating this claim in the ground before the CIT(A). Therefore, it is held that this new ground cannot be entertained at this stage. Accordingly, I do not go into the merits of this claim." 46. It was in view of above facts, the learned counsel for the assessee, submitted that the CIT(A) was not justified in holding that the issue under reference stood settled by the decision of Hon'ble Supreme Court in the case of Gurjargravures (P) Ltd. According to the learned counsel for the assessee, this decision was of two Members Bench, whereas another decision in the case of CIT vs. Kanpur Coal Syndicate was of three Members Bench and the Hon'ble Supreme Court in the case of Jute Corporation of India Ltd vs. CIT had doubted and distinguished this decision and relied on the decisions listed in para-No. 44 of this order. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hority is vested with all the plenary powers which the subordinate authority may have in the matter. There is no good reason to justify curtailment of the power of the AAC in entertaining an additional ground raised by the assessee in seeking modification of the order of assessment passed by the ITO. (iii) The observations in the case of Addl. CIT vs. Gurjargravures (P) Ltd. 1978 CTR (SC) 1 : (1978) 111 ITR 1 (SC) do not rule out a case for raising an additional ground before the AAC, if the ground so raised could not have been raised at the stage when the return was filed or when the assessment order was made or if the ground became available on account of change of circumstances or law. There may be several factors justifying the raising of such a new plea in an appeal, and each case has to be considered on its own facts. If the AAC is satisfied, he would be acting within his jurisdiction in considering the question so raised in all its aspects. He must be satisfied that the ground raised was bona fide and that the same could not have been raised earlier for good reasons. While permitting the assessee to raise an additional ground, the AAC should exercise his discretion in ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere not available on record. (iii) The Revenue having allowed depreciation @ 25 per cent on such additions, the observation of the CIT(A) that assessee's claim required further investigation on facts, was not justified rather was arbitrary and misplaced. 51. Coming to another observations of CIT(A), that the assessee had not given any good and sufficient reason for not raising the claim earlier, we are of the opinion that the law does not specify any such requirements. On the contrary, we are of the opinion that it is incumbent upon the Revenue authorities to tax correct and proper income and levy only lawful and due tax liability and it includes their duty to allow any lawful deduction and also to withdraw or disallow any unlawful claim of deduction. So, when the AO considered the issue relating to depreciation, it was incumbent upon him to find out as to what sate of depreciation the additions in various assets were entitled. Simply saying that the assessee having claimed depreciation @ 25 per cent, the details with respect to assets entitled to depreciation @ 100 per cent were not available is nothing but an arbitrary finding which cannot be sustained in law. 52. In view o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e order dt. 14th Aug., 2003, passed by the CIT(A) for asst. yr. 2001-02. (b) He erred in not appreciating that since the AO was rectifying the intimation passed under s. 143(1) of the Act, only the documents available at the time of passing the said intimation could be treated as 'record' for the purposes of s. 154 of the Act. 3. Adjustment not permissible under s. 143(1) (a) The learned CIT(A) further erred in holding that the adjustment made by the AO in the order passed under s. 154 of the Act was mistake apparent from the record. (b) He erred in not appreciating the fact that the adjustments made by the AO in the order under s. 154 of the Act were not permitted under s. 143(1) of the Act as amended by the Finance Act, 1999, w.e.f. 1st June, 1999. (c) He, therefore, erred in not appreciating that since the said adjustments were not permissible under s. 143(1) of the Act, the said adjustments could also not be made in the order passed under s. 154 of the Act. 4. Note mistake apparent from the record. (a) The learned CIT(A) erred in not appreciating the fact that the adjustments made by the AO in the order passed under s. 154 of the Act was not mistake which are appa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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