TMI Blog2007 (4) TMI 284X X X X Extracts X X X X X X X X Extracts X X X X ..... . 3. The assessee is in appeal against the order of the learned CIT(A) confirming the disallowance of Rs. 62,26,739 being expenditure incurred on guest house. At the time of hearing, the learned counsel for the assessee fairly admitted that the aforesaid amount represented expenditure incurred on rent, rates, taxes, insurance and depreciation relating to the guest house maintained by the assessee. He also conceded, in all fairness, that the issue was now concluded against the assessee by the judgment of the Hon'ble Supreme Court in Britannia Industries Ltd. vs. CIT (2005) 198 CTR (SC) 313 : (2005) 278 ITR 546 (SC). In this view of the matter, ground No. 1 taken by the assessee is dismissed. 4. Ground No. 2 taken by the assessee reads as under: 2. The learned CIT(A) erred in confirming that the cash compensatory assistance and duty drawback are to be taxed on accrual basis as against on receipt basis offered by the appellant. It is submitted that the appellant had changed the method of accounting from cash basis to accrual basis for its account purpose following the amendments in the Companies Act, and submit that for income-tax purposes the appellant continues to follow the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecision of the Tribunal in the assessee's own case for asst. yr. 1989-90 was not in conformity with the law laid down by the Hon'ble Punjab Haryana High Court in CIT vs. Punjab Bone Mills (1998) 146 CTR (P H) 63 : (1998) 232 ITR 795 (P H) affirmed by the Supreme Court in CIT vs. Punjab Bone Mills (2001) 170 CTR (SC) 558 : (2001) 251 ITR 780 (SC) as also the statutory provisions contained in s. 145(2) of the IT Act and the circular issued by the Board in this behalf. The learned Departmental Representative has also filed his written submissions in this behalf in which he has made the following submissions: (i) The order of this Tribunal in the assessee's own case for asst. yr. 1989-90 should not be followed in view of the decision of Hon'ble Punjab Haryana High Court in CIT vs. Punjab Bone Mills, which has since been affirmed by the Hon'ble Supreme Court in (2001) 170 CTR (SC) 558 : (2001) 251 ITR 780 (SC). It is pointed out that the High Court, in the aforesaid case, has dealt with a similar question and held in para 21 of its judgment that income in respect of cash incentive for export would accrue on the date of application filed by the assessee and that neither the date of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 (Guj). 7. In his rejoinder submissions, the learned counsel for the assessee referred to the decision of the Supreme Court in CIT vs. Punjab Bone Mills, relied upon by the learned Departmental Representative and submitted that, in CIT vs. Punjab Bone Mills, the Punjab Haryana High Court had to consider a case where the assessee was accounting for the incentives on a receipt basis and, therefore, had not accounted for the incentives even though they had accrued. The AO took the view that the incentives accrued when the export took place and, therefore brought to tax the amount. The Tribunal however had taken the view that the incentives accrued to the assessee on the date when the claim was made by the assessee to the competent authority. The assessee, in that case, accepted the aforesaid finding of the Tribunal and did not prefer any reference to the High Court. The Revenue in its reference had urged that the cash incentives accrued as and when the export was made and the Tribunal's conclusion was therefore erroneous. It was this contention of the Revenue that was rejected by the High Court with the observation in para 21 of the judgment that the plea put forth by the Revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accrual basis in its books of account. It is therefore clear that the assessee has followed accrual basis and following that basis recorded the export incentives in its books at the time when it lodged the claims for export incentives before the concerned authorities. 9. Sec. 145(1) provides that the income chargeable under ss. 28 and 56 of the IT Act shall, subject to the provisions of s. 145(2), be computed in accordance with cash or mercantile system of accounting regularly employed by the assessee. Sec. 145(2) empowers the Central Government to notify accounting standards to be followed by any class of assessees or in respect of any class of income. Sec. 145(3) empowers the AO to discard the books of account if he is not satisfied about their correctness or completeness or where the method of accounting provided in s. 145(1) or accounting standards as notified under s. 145(2) have not been regularly followed by the assessee. It is therefore clear that, barring the cases covered by s. 145(2) and (3), the books of account maintained by the assessee are binding on the AO and will therefore form the basis for computation of income. Same logic applies to the assessee and binds him ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tained by it is in conformity with the income-tax law and more particularly in conformity with the accounting standards notified by the Government. We therefore confirm the orders of the AO and the CIT(A) in bringing the amount of export incentives to the charge of income-tax on the basis of their accrual as recognized and recorded by the assessee in its books of account. 11. The assessee has placed strong reliance on the decision of this Tribunal in the assessee's own case for asst. yr. 1989-90. That was the case for asst. yr. 1989-90 when accounting standards had not been notified. Now, the accounting standards have been notified w.e.f. asst. yr. 1997-98 in pursuance of the provisions of s. 145(2) and hence we have proceeded to consider and adjudicate upon the issue in the light of the law in force in the assessment year under appeal. 12. In view of the foregoing, the order of the CIT(A) is confirmed. Ground No. 2 is dismissed. 13. Ground No. 3 taken by the assessee reads as under: 3. The learned CIT(A) erred in confirming that 10 per cent of the total receipt be treated as expenditure incurred for earning the technical fees in foreign currency and therefore, deduction un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e reads as under: 5. The learned CIT(A) erred in confirming that the head office expenses are required to be allocated while arriving at the profit of the industrial undertaking for the purpose of allowing deduction under s. 80-I of the IT Act. Without prejudice, it is further submitted that the expenditure is allocated on a very higher side and it should be reduced substantially. 18. Briefly stated, the facts of the case are that the assessee had claimed a combined deduction under ss. 80-I and 80-IA of the IT Act in respect of 11 newly established undertakings out of which 7 undertakings were such in respect of which the claim had been made in the past and also allowed by the AO after detailed examination. However, the AO disallowed the claim in the year under consideration on the ground that the aforesaid units were situated within the existing factory buildings. According to him, the deduction is available only to a new entity that comes up on its own and has its own independent existence. On appeal the learned CIT(A) held as under: 10.3 The submissions made by the appellant's representative have been considered. From the assessment order it is clear that the only reason ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly that expenditure, which had a direct and proximate nexus with the earning of the profit that could be taken into consideration in determining such profits. He argued that the expenditure incurred at the head office would have no such nexus. In this regard, he placed reliance on a ruling of the Authority for Advance Ruling in National Fertilizers Ltd., In re (2005) 193 CTR (AAR) 498 : (2005) 142 Taxman 5 (AAR) wherein, in para 10 of the order, the Authority has observed therefore the income and expenditure transferred by the corporate office and the marketing office to Vijaypur unit ignored the fact that for the purpose of claiming the exemption under s. 80-I, it is only income derived from the industrial undertaking that has to be reckoned in computation as such the income and expenditure which are not directly relatable to Vijaypur unit cannot but be ignored. In view of this position, the expenditure allocated by the corporate office and the marketing division ought to have been excluded from the debit side of the P L a/c for working out the profits of industrial undertaking for the purpose of computing the said deduction under s. 80-I... 20. The learned counsel further submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses would have to be allocated to each unit for determining profit derived for the purposes of s. 80-IA, unless there were compelling reasons to exclude specific items of expenses. According to him, the assessee has not given any compelling or special reasons for not apportioning the head office expenses to new units. 22. His next argument was that the IT Act always recognized allocation of head office expenses to compute the profits correctly. In this connection he referred to the provisions of s. 44C. According to him, head office expenses were always allowed for computing income of Indian branch, when head office was located out of India and one branch was in India. He referred to the decision in Grindlays Bank Ltd. vs. ITO (1979) 116 ITR 710 (Cal) which pertained to asst. yr. 1959-60 in which head office expenses were allowed by the AO and all other higher forums (dispute was on quantum/reopening). When s. 44C was introduced to regulate quantum of head office expenses, CBDT issued Circular No. 202, dt. 5th July, 1976 recognising deduction of head office expenses as under: Ceiling limit in respect of head office expenses in the case of non-residents-New s. 44C. 25.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be disturbed. (iii) CIT vs. Anniversary Investments Agencies Ltd. (1989) 78 CTR (Cal) 91 : (1989) 175 ITR 199 (Cal). (iv) Neyveli Lignite Corpn. Ltd. vs. State of Tamil Nadu (1992) 193 ITR 685 (Mad) for the proposition that, with a view to claim deduction, it was essential for the assessee to establish that the staff was employed and deployed exclusively for the agricultural activity and since it failed to establish that by producing any material or-evidence, the statutory authorities had the option either to reject the claim in toto or to do substantial justice and arrive at an estimate and they fairly adopted the latter course. (v) CIT vs. National Grindlays Bank Ltd. (1993) 109 CTR (Cal) 264 : (1993) 202 ITR 559 (Cal): The question of allocation of expenditure may arise when different activities do not constitute one and the same business and income from some of the activities is not taxable. In such a case, composite business expenditure has to be allocated to each one of the activities. (vi) Kota Co-operative Marketing Society Ltd. vs. CIT (1994) 207 ITR 608 (Raj): If a co-operative society is carrying on a business and earning income a part of which is exempted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s which are in the nature of common expenses are required to be allocated to different units or undertakings and more particularly to the undertakings claiming deduction under s. 80-IA of the IT Act in respect of the profits derived from those undertakings. 26. Sec. 14 of the IT Act classifies all income into five heads for the purpose of creating charge to income-tax and computation of total income. The term total income has been defined in s. 2(45) of the IT Act, to mean the total amount of income referred to in s.5, computed in the manner laid down in this Act. Secs. 15 to 59 of the IT Act lay down the rules for computing income for the purpose of charge ability to tax under specified heads. It is therefore clear that computation of income under a given head will require accounting of not only the receipts but also of the expenses relating thereto. In other words, the expenses relating to a given head must be considered under that head only so as to arrive at the net income under that head. Likewise the income (i) may be chargeable to tax; and (ii) may not be chargeable to tax because of exemptions and deductions available under the IT Act. In order to work out profits correct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxed. The head office expenses are, therefore, required to be allocated on pro rata basis between various undertakings, which according to the assessee are independent of each other. 28. In taking the aforesaid view, we are supported by a decision of the Hon'ble Supreme Court in Waterfall Estates Ltd. vs. CIT (1996) 132 CTR (SC) 495 : (1996) 219 ITR 563 (SC). In that case also the issue involved was whether managing agency commission, which was common to various sources of income, some of which were taxable and some non-taxable, should be allocated to the respective sources of income. In that case the Hon'ble Supreme Court upheld the order of the Tribunal and the High Court allocating common expenses namely management agency commission against the sources of income chargeable to tax as also to those not chargeable to tax. In the context of allocation of head office expenses to an industrial undertaking eligible for deduction under s. 80-IA, the Delhi Bench of this Tribunal has already held in Dy. CIT vs. Eastern Medikit Ltd. that head office expenses have to be allocated to each unit for determining the profits eligible for deduction under s. 80-IA. Similar principle emerges on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the business of any particular unit/undertaking/division will have to be adjusted against the receipts of that particular unit/undertaking/division only. Similarly, head office expenses or expenses which are common to all the units/undertakings/divisions expenses will have to be spread over and charged against the receipts of all the units/undertakings/divisions. If this course is not followed, then what would stand allowed under s. 80-IA would be inflated profits and not the net profits derived from the industrial undertaking in terms of the provisions of ss. 29 to 43. In this view of the matter and also in the absence of any better alternative, the CIT(A) is justified in holding that the assessee is entitled to deduction of the eligible amounts in respect of the profits derived from the eligible undertakings after the allocation of head office expenses in the ratio of turnover. We see no valid reason to take a view contrary to the one taken by the CIT(A) in this behalf. Ground No. 5 is dismissed. 30. Ground No. 6 taken by the assessee reads as under: 6. The learned CIT(A) erred in confirming disallowance of Rs. 95,50,940 being gratuity debited to P L a/c and outstanding a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year in which such sum is actually paid by him. It is submitted that in accordance with the rules governing the gratuity fund, the amount of Rs. 95,50,940, although it represented a liability for the year ended 31st March, 1997, was not a sum payable as on the last date of the accounting year and hence the provisions of s. 43B would have no application. In this regard, he has placed reliance on the ratio of the judgment of the Andhra Pradesh High Court in Srikakollu Subba Rao Co. vs. Union of India Ors. (1988) 71 CTR (AP) 34 : (1988) 173 ITR 708 (AP) wherein it has been held that, in order to apply the provisions of s. 43B, not only should the liability to pay the tax or duty be incurred in the accounting year but the amount should also be statutorily payable in the accounting year. According to him, the legislature has set at naught the ratio of the aforesaid decision by inserting Expln. 2 below s. 43B, which clarifies that it is only for the purposes of cl. (a) that any sum payable means the sum for which the assessee has incurred the liability in the previous year even though such sum might not have been payable within that year under the relevant law. He points out that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ajasthan High Court in CIT vs. Udaipur Distillery Co. Ltd. (2004) 187 CTR (Raj) 369 : (2004) 137 Taxman 201 (Raj) has held that first proviso to s. 43B relieved the hardship by making liberalized exception to the general provision about sums falling in cls. (a), (c), (d) and (e) of s. 43B, which have been incurred during the concerned previous year and has been paid before filing the return for relevant assessment year within time allowed under s. 139 and return is accompanied by proof of such payments but this does not apply to the provisions of s. 43B(b) requiring actual payment within the previous year itself for claiming the deduction in respect of sums referred to in cl. (b) only if they were paid as and when they become due to be paid, under relevant statute or settlement, etc. 36. Referring to the facts of the present case, he submitted that the assessee company was required to pay to the gratuity fund by the end of the financial year or soon thereafter. According to him, payment made after 8-9 months of the end of the financial year could not be said to have been made 'soon thereafter' when time frame itself is of 12 months. He contended that 'soon' would mean within a re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d during the previous year relevant to the assessment year under appeal. It is the 9ase of the assessee that the provisions of s. 43B are not attracted in its case as the impugned amount was not payable in the year under appeal. If that is so, the assessee, in our view, would not be entitled to claim deduction under s. 36(1)(v) itself in the year under appeal as the amount in question was not payable. However, if the case of the assessee is that it was payable in the year under appeal, it would, in that case also, be hit by s. 43B of the IT Act which, inter alia, provides that deduction for 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, in computing the income referred to in s. 28 of that previous year in which such sum is actually paid by him. Sec. 43B thus bars the deduction otherwise allowable unless it is actually paid by the assessee in the previous year in whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ious deductions made from the business income are not as per the provisions of s. 80HHE and it may be so held now. 42. Briefly stated, the facts of the case are that the assessee has claimed a deduction for Rs. 1,37,58,241 under s. 80HHC of the IT Act. For the reasons given in para 15 of the assessment order, the AO has restricted the deduction to Rs. 1,08,76,244. One of the reasons for reduction in the eligible amount of deduction under s. 80HHC is the action of the AO in excluding 90 per cent of the receipts by way of the interest income, rental income, commission income and sundry income while computing the business profits under sub-cl. (i) of cl. (baa) of the Explanation to s. 80HHC. On appeal, the learned CIT(A) has confirmed the action of the AO in this behalf with the following observations: 14.2 In respect of the second area, the appellant's representative has submitted that the AO was not justified in excluding 90 per cent of the receipts by way of interest income, rental income, commission income and sundry income in the computation of business profits. It was further submitted that the sundry income represents an insurance claim received and hence should not be held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceeds. Any receipt which does not form part of the sale proceeds cannot come within the ambit of the above ratio. This is also in view of the fact that proration applies to business profits in order to work out the export profits. Further, the exclusion provided under cl. (ba) to the Explanation further establish that the legislature clearly intended to exclude all receipts which have no nexus with the sale proceeds from the export activity. 14.6 In view of the above, as far as this area relating to computation of deduction under s. 80HHC is concerned, the action of the AO to hold the receipts as falling under cl. (baa) of the Explanation is as per law and hence is sustained. 43. Aggrieved by the aforesaid order, the assessee is now in appeal before this Tribunal. 44. In support of the aforesaid ground, the learned counsel for the assessee submitted that the assessee had claimed a deduction under s. 80HHC of Rs. 1,37,58,241, which has however been restricted by the AO to the extent of Rs. 1,08,76,244 and therefore the issue that arises in the present ground is whether the AO is justified in determining the profits of the business by excluding therefrom 90 per cent of the inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apparent from p. 125 of the assessee's compilation and hence 90 per cent of the same should be excluded from the profits of the business under Expln. (baa) to s. 80HHC to which the learned counsel replied by contending that it would only be the net amount of commission that would be excluded following the principle laid down in Lalson's case. As regards the issue whether the AO is justified in reducing the profits of the business by a sum of Rs. 1,02,28,161 being the sundry income, the learned counsel took us through the details at p. 125 of his compilation and submitted that the amount was received from the insurance company towards indemnification of the loss suffered by the assessee and hence could not be regarded as a receipt of a nature similar to interest, rent, commission or brokerage as is contemplated in cl. (baa) of the Explanation. In this regard, he placed reliance on the decision of the Ahmedabad Bench of this Tribunal in Gujarat Alkalies Chemicals Ltd. vs. Dy. CIT (2002) 77 TTJ (Ahd) 245 : (2002) 82 ITD 135 (Ahd) at 157 as well as the decision of the Chennai Bench of this Tribunal in Kadri Mills (CBE) Ltd. vs. Jt. CIT (2002) 76 TTJ (Chennai) 38. The learned counsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers of law should be preferred over the view taken by the Tribunal in a given case. His alternative submission was that even otherwise the decision in Lalsons case was on net interest as it was based upon a judgment of the Supreme Court regarding netting of interest to partners under s. 40 and hence it cannot be extended to rent, commission, etc., especially when two High Courts are against the decision in Lalsons. 46. We have heard the parties and considered their submissions including the authorities referred to by them in their submissions. According to Expln. (baa) to s. 80HHC, Profits of the business means the profits of the business as computed under the head Profits and gains of business or profession as reduced, inter alia, by 90 per cent of any sum referred to in cls. (iiia), (iiib) and (iiid) of s. 28 or any receipt by way of brokerage, commission, interest, rent, charges or any other receipt of similar nature included in such profits. Bare perusal of the aforesaid Explanation shows that the profits of the business would mean only those items, which are subject-matter of computation under s. 28 of the IT Act under the head Profits and gains of business or profession. An ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... element of turnover and non-operational business income, which does not have an element of turnover. Learned CIT(A) has recorded a categorical finding that the items, like interest, rent, commission are not included in the turnover. He therefore treated them as non-operational income falling under sub-cl. (1) of cl. (baa) of Explanation to s. 80HHC. In our opinion, learned CIT(A) is right in his observation that the profits of the business is required to be reduced by 90 per cent of the interest, rent, and sundry income as all these items of income have been held by the learned CIT(A) to be in the nature of non-operational income. The decision taken by the learned CIT(A) is broadly in conformity with the decision of the Hon'ble jurisdictional High Court in Bangalore Clothing Co. 47. It is, however, contended by the assessee that it is 90 per cent of the net amount of interest income, rental income, commission income and sundry income, which can be considered for reduction from the profits of the business. The learned counsel for the assessee has relied upon the decision of a Special Bench of this Tribunal in Lalsons Enterprises in which a view has been taken that it is only the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ission income and miscellaneous/sundry income of similar nature. As already mentioned above, deduction of expenses @ 10 per cent has already been statutorily provided for netting non-operational income. Statutory fixation of 10 per cent for expenses can neither be increased nor decreased by us. Netting of non-operational income is permissible @ 10 per cent alone. No further netting can therefore be allowed. 49. It has been pointed out by the learned counsel for the assessee that the actual amount of receipt on account of commission is only Rs. 39,09,286 and hence it is 90 per cent of this amount which should be considered for exclusion from the profits of the business. The learned counsel for the assessee however submitted that it is 90 per cent of net commission alone, which, in terms of the decision of the Special Bench of this Tribunal in Lalsons Enterprises, should be considered for exclusion from the profits of the business. We have already rejected the aforesaid submission of the assessee and held that netting of commission is permissible @ 10 per cent for expenses as statutorily provided. The AO is however directed to verify the figures and correctly determine the actual r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpugned sale is a slump sale and hence the profits and gains arising on transfer are not taxable. Briefly stated, the facts of the case are that the assessee was, inter alia, engaged in the business of manufacture, sale and distribution of machinery components for fabricating locomotives, signaling systems and electrification for the railways, compendiously referred to in the agreement as the transportation business. At a meeting of the board of directors of the assessee company held in December, 1995, it was resolved that the transportation business would be sold as a going concern to a company called ABB Diamler Benz Transportation (India) Ltd. (hereinafter referred to as the purchaser). It was also resolved that the assessee would enter into an agreement with the purchaser whereby it would furnish a covenant that it would not compete with the purchaser of the company in its business activities. A formal agreement dt. 28th June, 1995 (agreement in short) was executed between the assessee and the purchaser company where under it was agreed that the assessee would transfer the transportation business w.e.f. 1st Jan., 1996 for a total consideration of Rs. 53.10 crores. Clause 3 of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as such in respect of which the cost of acquisition and the cost of improvement were not capable of being ascertained. The assessee had arrived at the aforesaid sale price of Rs. 54,17,28,000 after including therein the interest and excluding the profit. The AO took the view that a capital gain of Rs. 46,30,45,000 arose on account of the transfer and accordingly brought the same to the charge of income-tax as long-term capital gain. According to him, the full value of the consideration accruing or arising as a result of the transfer was a sum of Rs. 53,10,00,000 from which he reduced the (i) net value of the fixed assets of Rs. 68,02,000; and (ii) current assets of Rs. 6,11,53,000. He thus determined the capital gain at Rs. 46,30,45,000. In addition thereto he assessed the interest of Rs. 5,32,55,000 that the appellant had received as income chargeable under the head Income from other sources. He also rejected the assessee's claim for depreciation on the assets, which constituted a part of the transportation business. 56. The assessee carried all the three issues, namely, taxability of Rs. 53.10 crores; taxability of interest; and, taxability of Rs. 33.21 crores, being the amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Land Department) (1965) 57 ITR 299 (SC) at 304 and 305; (ii) CIT vs. Narkeshari Prakasan Ltd. (1992) 196 ITR 438 (Bom); (iii) CIT vs. F.X. Periera Sons (Travancore) (P) Ltd. (1991) 94 CTR (Ker) 176 : (1990) 184 ITR 461 at 465 (Ker); (iv) CIT vs. Kar Valves Ltd (1992) 197 ITR 95 at 104 (Ker); (v) CIT vs. Hindustan Co-operative Insurance Society (1992) 107 CTR (Cal) 323 : (1994) 72 Taxman 259 at 263 (Cal); (vi) Syndicate Bank Ltd. vs. Addl. CIT (1985) 45 CTR (Kar) 68 : (1985) 155 ITR 681 at 687 (Kar); (vii) West Coast Electric Supply Corporation Ltd. vs. CIT 1977 CTR (Mad) 64 : (1977) 107 ITR 483 (Mad); (viii) Premier Automobiles Ltd. vs. ITO (2003) 182 CTR (Bom) 202: (2003) 264 ITR 193 (Bom); (ix) Coromandel Fertilizers Ltd. vs. Dy. CIT (2004) 84 TTJ (Hyd) 370 : (2004) 90 ITD 344 (Hyd); (x) Industrial Machinery Associates vs. CIT (2003) 78 TTJ (Ahd) 434; (xi) M.R. Muchhala vs. ITO (1996) 56 TTJ (Mumbai) 504; (xii) Dy. CIT vs. Mahalasa Gases Chemical (P) Ltd. (2004) 84 TTJ (Bang) 992; (xiii) Technomics vs. Asstt. CIT (2006) 103 TTJ (Pune) 998 : (2006) 100 ITD 324 (Pune); (xiv) Sankeya Chemicals (P) Ltd. vs. Asstt. CIT (2006) 8 SOT 50 (Mumbai); (xv) W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the transaction/transfer was contrary to the documents/agreement on record, the burden was on it to establish that the parties had agreed upon itemized sale of assets with different values being ascribed by them or at least by the transferor to each asset transferred and such values were ascertained when the transfer took place. He submitted that the Revenue has brought no material on record to discharge that burden. According to him, what was crucial was that the ascertainment of itemized values must have been made on the date when the consideration was arrived at: CIT vs. Artex Manufacturing Co. (1997) 141 CTR (SC) 290 : (1997) 227 ITR 260 at 276 (SC), CIT vs. Electric Control Gear Mfg. Co. (1997) 141 CTR (SC) 302 : (1997) 227 ITR 278 at 281 (SC), CIT vs. Narkeshari Prakashan Ltd. and CIT vs. Premier Automobiles Ltd. 61. He submitted that the fact that the act of the purchaser in allocating, in its accounts, the consideration paid by it for the individual assets acquired was irrelevant because in accordance with the accounting standards the purchaser was bound to allocate the consideration paid by him for the acquisition of the business over the assets acquired and such s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nted out that even assuming that a view was taken that as various items that constituted the business were assets in respect of which depreciation had been allowed and, therefore, formed a part of the block of assets, the full value of the consideration accruing in respect of the transfer of each such asset was not ascertainable and, in fact, was not ascertained by either of the Departmental authorities and, hence, the question of application of s. 50 would not arise in the present case. Submissions made by the learned CIT -Departmental Representative 64. In reply, the learned Departmental Representative submitted that the Judge-made law has always been that when a unit as a whole and as a going concern is sold lock, stock and barrel it is a slump sale. In this connection, he referred to paras 20.1 to 20.7 of the order of the learned CIT(A) in which a finding has been recorded that the unit transferred was not a separate unit at all in that the Baroda factory was engaged in the manufacturing of many products simultaneously and no particular building or land or unit or undertaking in the said factory was specifically engaged in transportation business. The entire production unit at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ttention to the following observations made in that case: According to the impugned findings, since the entire land was not transferred there was no slump sale. This finding is erroneous. The Kalyan factory at all material times prior to 11th March, 1993 was located on an area admeasuring 7.23 lakh sq. meters. In fact, that area was bounded by a wall. In fact, that area always stood segregated from the open land. In fact, the open land and the built-up area were separated by a road. In the circumstances, the area admeasuring 7.23 lakh sq. meters was the fixed asset of the Kalyan business. That, the entire area of 18.10 lakh sq. meters was never the asset of the Kalyan business. Hence, the impugned finding is erroneous. According to the next impugned finding, in this case, machines were not physically transferred from PAL to PPL. That, only name plates of PAL are put on the machines and, therefore, there was no transfer under the slump sale of plant and machinery. According to the next impugned finding, no separate accounts were maintained by PAL for the Kalyan business. This finding is also erroneous. Before us, general ledgers for accounting year 1994-95 have been produced. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /c of one or the other assessment year in the past and thus there was no question of allowing any further deduction in respect of their acquisition and improvement for computing the profits on their sale. He submitted that it was a fairly well settled proposition of law that deduction cannot be claimed twice as income cannot be taxed twice. In support of his submissions, the learned Departmental Representative relied upon the decisions in Escorts Ltd. VS. Union of India (1992) 108 CTR (SC) 275 : (1993) 199 ITR 43, 59-61 (SC), CED vs. Estate of Late K.S. Rangan, by Smt. Radha Ammal (1981) 11 TTJ (Mad) 534, WTO vs. T.S. Sundaram (1981) 11 TTJ (Mad) 102, JCT Ltd. vs. Dy. CIT (2005) 194 CTR (Cal) 509 : (2005) 276 ITR 115 (Cal), Berger Paints India Ltd vs. CIT (2004) 187 CTR (SC) 193 : (2004) 266 ITR 99 (SC), Continental Construction Ltd. VS. Union of India (2004) 186 CTR (SC) 88 : (2003) 264 ITR 470 (SC), Tube Investments of India Ltd. vs. CIT (2002) 178 CTR (Mad) 495 : (2003) 260 ITR 94 (Mad). He concluded his submission by pointing out that it was a fundamental principle of taxation that no legislature would intend a double deduction in regard to the same outgoing; and, if it is so i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns by holding that all the assets sold were capable of being appropriately valued for the purpose of computation. 69. Learned Departmental Representative has also referred to the following observations made by this Tribunal in Kampli Co-operative Sugar Factory Ltd. vs. Jt. CIT (2001) 70 TTJ (Bang) 874 : (2002) 83 ITD 460 (Bang): 5. The reliefs claimed by the assessee are based on the contention that the aforesaid sale of the assets of the assessee factory was slump sale of business as a whole giving rise to long-term capital gains alone. The AO had bifurcated the sale consideration in two parts viz., in respect of consideration attributable to land was determined by him by applying the prevailing market rate and thus he had computed long-term capital gains by adopting fair market value of the land as on 1st April, 1981 as deemed cost in terms of s. 55(2)(b) and giving the benefit of indexation; on the balance consideration, he had computed the short-term capital gains by deducting the written down value of depreciable assets, the AO had accordingly rejected the claim of the assessee in the revised return filed on 18th Feb., 1999 that the transaction, being a slump sale of busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nless the assets are revalued upward. The legislature has now removed this difficulty by inserting w.e.f. 1st April, 2000, s. 50B of the Act providing for the levy of capital gains in case of slump sale and also s. 2(42C) defining slump sale. According to the s. 2(42C), slump sale means the transfer of one or more undertakings for a lump sum consideration without values being assigned to the individual assets and liabilities. And what s. 50B makes chargeable to capital gains, is the difference between slump price and the net worth of the undertaking without giving the benefit of indexation and the net worth for this purpose is defined as the sum total of paid up capital and free reserves by importing the definition of s. 3(1)(aa) of the Sick Industrial Companies (Special Provisions) Act, 1985. We are thus of clear view that the transaction in the present case of the assessee, is entirely different from the transaction of slump sale i.e., the sale of a running business as a whole and prior to insertion of s. 50B of the Act w.e.f. 1st April, 2000, no Court had given verdict that in case of such slump sale of running business, long-term capital gains will have to be computed with refe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nto consideration while estimating the profits arising on transfer: 1. Transaction was between two very closely connected parties who have decided upon the restructuring at global level. 2. Assessee was not forthcoming with details regarding value adopted by the purchaser company, which was a very closely connected company. 3. Transaction was not at arm's length. 4. Only details of accounts of purchaser company as on 31st Dec., 1996 were furnished. 5. It was unbelievable that assessee was not aware of the value placed by the purchaser company. 6. So-called valuation report of KPMG is based upon past and projected profits as furnished by the assessee. When no separate accounts were available, assessee was at liberty to furnish profit details as it suited him to claim that a slump price was obtained. 71. As regards the computation of capital gains, he submitted that some clue could be taken from the provisions of s. 50B, which were introduced w.e.f. 2000-2001. He contended that s. 50B codified the Judge-made law and that the manner of computation prescribed therein, being computational and machinery provisions, could be followed even for working out the capital gains. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Delhi Bench of this Tribunal in Steriplate, relied upon by the learned Departmental Representative, he submitted that the aforesaid order was contrary to the judgment of the Bombay High Court in the case of Premier Automobiles Ltd. and hence need not be followed. According to him, that order has proceeded on the basis that it is open to apply s. 50 by estimating the value of the assets transferred. He submitted that the aforesaid principle laid down by the Delhi Bench would be contrary to the principle laid down by the Supreme Court in CIT vs. Artex Manufacturing Co. Ltd. and CIT vs. Electric Control Gears. He reiterated that the ratio of the aforesaid two decisions was that if the parties had agreed upon a lump sum consideration for the transfer of the business and lump sum consideration was arrived at having regard to the individual values of the assets, then, the provisions of s. 41(2) of the Act would be applicable. On the other hand, if the consideration arrived at is not based on the individual values of the assets, then, the said provisions would have no application. In the present case, as noted earlier, the consideration was arrived at based on the valuation report of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... running a sugar mill, which had gone into liquidation. The liquidator sold the assets of the assessee's factory and none of the liabilities of the business were transferred. It was on this factual premise that the Tribunal came to the conclusion that it was not a case of a slump sale unlike the present case where a going business has been transferred along with all assets and liabilities. 76. The next decision referred to by the learned Departmental Representative, namely, the decision of the Mumbai Bench of this Tribunal in Mahindra Sintered Products Ltd. vs. Dy. CIT is again distinguishable. In this case valuers were appointed by the transferor before the transfer took place who had valued the building as well as the plant and machinery. It was on the basis of the valuation reports that the parties had agreed upon the price. Further, no liabilities were taken over. In any event, the decision in that case, according to the learned counsel, is contrary to the judgment of the jurisdictional High Court in Premier Automobiles Ltd. inasmuch as the Tribunal has held that the value placed for stamp duty purposes could be adopted for the purposes of application of s. 50. The other deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the statement of law applied to the legal problems raised by the facts as found, upon which the decision is based. The other two elements are not precedents. It is equally well settled that decisions are rendered in the context of a given set of facts. In Padmasundara Rao (Decd) vs. State of Tamil Nadu Ors. (2002) 176 CTR (SC) 104 : (2002) 255 ITR 147 (SC), the Hon'ble Supreme Court has held thus: Courts should not place reliance on decisions without discussing as to how the factual situation fits in with the fact situation of the decision on which reliance is placed. There is always peril in treating the words of a speech or judgment as though they are words in a legislative enactment, and it is to be remembered that judicial utterances are made in the setting of the facts of a particular case, said Lord Morrin in Herrington vs. British Railways Board (1972) 2 WLR 537 (HL). Circumstantial flexibility, one additional or different fact may make a world of difference between conclusions in two cases. In Union of India vs. Major Bahadur Singh (2006) 1 SCC 368, 374, the Hon'ble Supreme Court has quoted, with approval, the following observations of Lord Denning: Each case depends on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not a slump sale while the assessee is equally keen to establish that a given transaction is a slump sale as this helps him to get certain tax advantages, as explained above. 81. The concept of slump sale is not new for the purposes of income-tax law regardless of the fact that a special provision for computation of capital gains from slump sale has now been enacted under s. 50B effective from asst. yr. 2000-01. The concept of slump sale as incorporated in s. 50B of the IT Act follows the English decision in Doughty vs. Taxes Commr. (1927) AC 327 (PC) and several Indian decisions in which it has been held that in the case of a slump sale, tax incidence cannot be fixed with reference to individual items covered by such sale as for example, stock-in-trade comprised in such business The aforesaid principle was noticed and cited, with approval, by the Hon'ble Supreme Court in CIT vs. West Coast Chemicals Industries Ltd. (1962) 46 ITR 135 (SC). This was a case relating to the asst. yr. 1945-46 when capital gains were not chargeable to tax. Capital gains were subjected to the charge of income-tax for the first time in India by the Income-tax and Excess Profits Tax Act (Amendment) A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns has to be computed by treating the business as a whole as a single asset distinguishing it from a severeable or item-wise sales. Such a view was followed in a number of cases ruling out any withdrawal of depreciation under s. 41(2) with the result that entire surplus was treated as long-term capital gains. Stock-in-trade forming part of slump sales of a going concern was not separately considered for computation as business profits, it was in fact, construed as part of capital gains arising on slump sales. This principle was applied in sales-tax cases also so that no sales-tax liability could arise on sale of stock as a result of slump sale of the business as a whole and as a going concern. 84. In CIT vs. Artex Manufacturing Co., the assessee was a firm carrying on the business of manufacturing of art silk cloth. A private limited company was formed with a view to takeover the business of the assessee as a running concern for which an agreement was entered into whereby the assessee agreed to sell to the company the business hitherto carried on by the assessee as a whole and as a going concern for a sum of Rs. 11,50,400 which was paid and satisfied through allotment of shares. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assets transferred by the firm to the said company, was chargeable to tax under s. 41(2) of the IT Act, 1961 as applicable in that assessment year. He also brought capital gains of Rs. 8 lakhs to tax, being the consideration received by the assessee. Hon'ble Supreme Court held that there was nothing to indicate the price attributable to assets like the machinery, plant or building out of the total amount of consideration and that merely because some depreciation has been allowed to the assessee firm, it could not be said that it was the excess amount between the price and written down value. Provisions of s. 41(2) were held to be not applicable on the facts of that case. The decision in Electric Control Gear Mfg. Co. has thus proceeded on the basis that information was not available on record to show that the items were severable or the values to the individual items were assigned and hence doctrine of severalty of sales, as applied in Artex, was not applied in this case to reject the plea of sale being slump sale. 86. It is quite evident on perusal of the aforesaid and several other judgments on the concept of slump sale that the underlying philosophy has all along been tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a group philosophy and a management to promote its interest through various entities worldwide. Group management was well aware of all the facts, details and position of accounts pertaining to all the companies of the group. It is quite obvious that the agreement could be drafted in a manner that promoted the interest of the group as a whole. It was therefore quite appropriate for the AO and the learned first appellate authority to go behind the veil of apparent legality expressed through the recitals in the agreement and get to the truth or substance of the impugned transaction and to deal with it in accordance with law. It is only normal that dealings involving transfer of funds and avoidance of tax through such oblique transfers to the close relatives or group companies need to be probed into with care and caution. Mere recitals in the agreements involving such transfers may not by themselves be sufficient unless they are corroborated by surrounding circumstances. In short, the recitals made in the agreement between two connected entities are required to be read and interpreted keeping the aforesaid facts in view. 89. Recitals made in the agreement show that the assets and oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, without their precise identification, as constituting transportation business in the agreement. The books of account maintained by the assessee did not recognize transportation business as a going concern or as an independent undertaking. Thirdly, the learned CIT(A) has observed in para 20.2 of his order that the impugned transfer comprises of movable properties like plant and machinery, furniture and fixtures, office equipments, stocks, book debts, other current assets and liabilities without there being any transfer of immovable property. The assessee has indeed spelt out the reasons for not transferring out the immovable properties. But those reasons have to be seen in the light of another important finding recorded by the learned CIT(A) that it was Baroda factory of the assessee which could be termed as a going concern or a unit and not the individual activities carried out or machines installed at the said Baroda factory. His finding that the impugned transfer seeks to transfer only some of the machines and other items of Baroda factory and not Baroda factory itself and therefore the impugned transfer was not a transfer of a going concern as a whole and consequently not a s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt of their close connection. On the facts of the case, corporate veil is required to be lifted. It cannot be said that the group management controlling both the companies was unaware of the aforesaid allocation of the value. The mere fact that another company of the group has allocated the value to each item instead of the assessee itself would not make any substantial difference in view of their close relationship. On the facts found by both the Departmental authorities, we cannot say that there is no material on the basis of which severalty in impugned transaction with allocation of value to each item cannot be inferred as was done by the Hon'ble Supreme Court in Artex. 92. The facts brought on record and those discussed above are clear enough to indicate that the impugned transaction does not seek to transfer any unit or undertaking or business as a whole and as a going concern at its realizable value. In the absence of any precise recognition of transportation business as a separate unit or concern or business in the books of the assessee, it is neither possible to identify as to what assets and liabilities belonged to the transportation business nor consequently hold that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her submits that s. 50 envisages, inter alia, the computation of short-term gain arising on transfer of depreciable assets with reference to sale consideration and written down value of the depreciable assets with some other adjustments but in no case with reference to the cost of other assets including non-depreciable assets, as directed by the learned CIT(A). 96. We have heard both the parties. There are three distinct categories of assets which have been transferred under the agreement and to which values have been assigned by the purchaser, namely, (i) value assigned to the inventory sold; (ii) value assigned to the depreciable assets sold; and (iii) value assigned to the other assets sold. We shall now deal with each of them. (i) Taxability of profits/gains arising on transfer of inventories 97. The purchaser has allocated Rs. 3.09 lakhs towards the purchase of inventories. It has been held in Doughty vs. Commissioner of Taxes (1927) AC 327 that even in the case of realization sale, i.e., sale of an entire business, if there were one item which could separately be traced as representing the stock sold, the profit obtained by that sale, though made in conjunction with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terms of s. 50. For this purpose, the total consideration will have to be split into three parts, namely (i) sale consideration allocable to the inventories; (ii) sale consideration allocable to depreciable assets; and (iii) remaining amount of sale consideration not allocable to inventories and non-depreciable assets. The AO is directed to compute the capital gains arising on transfer of depreciable assets in terms of s. 50 and not in terms of the directions given by the learned CIT(A) in para 22(ii) of his appellate order. (iii) Taxability of profits or gains arising on transfer of other assets 99. In view of our aforesaid direction modifying the order of the learned CIT(A) regarding the computation of capital gains under s. 50 in respect of depreciable assets only, a consequential issue arises as to what treatment should be given to the remaining amount of sale consideration, i.e., sale consideration not allocable to inventories and non-depreciable component of the assets transferred. It can be considered for taxation either as capital gains or as business profits depending upon whether it is in capital field or revenue filed. If it is not in any of the aforesaid fields, it c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w-how in its accounts in which case the profit or gain arising on their transfer would be chargeable to tax as capital gains under s. 45 after allowing deduction for the costs of their acquisition/improvement/development. The assessee cannot argue, after claiming deduction towards the expenses/costs of their acquisition/improvement/development as revenue expenditure, that the gains arising therefrom would not be exigible to capital gains tax as their costs of acquisition/improvement/development are not available for deduction under s. 48 of the IT Act. If the assessee has treated the costs/expenses relating to acquisition/improvement/development of intangible/non-depreciable assets in the revenue field, the gains arising as a result of sale thereof will have to be necessarily treated in revenue field either under s. 28 or s. 56 and not as capital gains. The provisions of s. 56 r/w s. 10(3) are quite apposite. Entire sale consideration not allocable to inventories and non-depreciable assets can also be considered for taxation as a receipt of casual and non-recurring nature under s. 56 of the IT Act if the assessee is not in a position to establish that the income accruing to it on a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision of the Hon'ble jurisdictional High Court in Premier Automobiles. Therefore, the limited question now is as to what should be the mode of computation for working out the profits/gains from the slump sale. There are two provisions which are relevant in this behalf; (i) the provisions of s. 50B, which are specific to the computation of capital in case of slump sales, and (ii) the general provisions of s. 45, which would be applicable in the absence of special procedure prescribed in s. 50B. (i) Taxability under s. 50B 102. The learned Departmental Representative submits that even if the transaction is held to be a slump sale, the taxability of the profits and gains arising on such sale has to be brought to tax under s. 50B of the IT Act. According to him s. 50B, being procedural and computational provisions, has retroactive operation and therefore would govern all the pending proceedings. Learned counsel for the assessee, on the other hand, contends that s. 50B does not have retrospective operation and hence the taxability of profits/gains from a slump sale cannot be considered under s. 50B. They have made detailed submissions in this behalf, which have already been menti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ump sale, the Hon'ble High Court has held at p. 235 of the said report as under: In this appeal, we were only required to consider whether the transaction was a slump sale and having come to the conclusion that there was a sale of business as a whole, we have to remand the matter back to the AO to compute the quantum of capital gains. For that purpose, the AO will have to decide the cost of the undertaking for the purposes of the computing capital gains that may arise on transfer. That, the AO will also be required to decide its value under s. 55 of the IT Act. Further, the AO will be required to decide on what basis indexation should be allowed in computing the capital gains and the quantum thereof. Lastly, the AO will be required, to decide the quantum of depreciation on the block of assets. It may be mentioned that these parameters, which we have mentioned are not exhaustive. They are some of the parameters under the Act. 104. Coming as it does from our own jurisdictional High Court, we are bound to follow the aforesaid dictum. In the aforesaid case also, the assessment year involved was 1995-96 when s. 50B was not in existence. Still the Bombay High Court did not accept the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... machinery provisions and hence would have retroactive operation and apply to all pending matters. In Premier Automobiles also, the Hon'ble High Court has left the issue of working out the cost of acquisition to the AO with the observations, which are indeed quite significant, that the parameters set out in that judgment are not exhaustive and that there are some other parameters in this behalf under the IT Act. It is thus clear that the Hon'ble jurisdictional High Court in the aforesaid case has not excluded the applicability of the parameters prescribed in s. 0B(2) and (3) for computing the cost of acquisition/improvements in cases of slump sale. Thus the decision that we have taken that the provisions of sub-ss. (2) and (3) of s. 50B are retroactive and apply to all pending matters is in conformity not only with the law declared by the Hon'ble Supreme Court in CWT vs. Shrawan Kumar but also with the decision of the Hon'ble Bombay High Court in Premier Automobiles. 106. Sub-ss. (2) and (3) of s. 50B, which have been held above to be retroactive and applicable to all pending proceedings require the computation of cost of acquisition and improvement to be done in the manner presc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be pressed into service for canvassing the view that s. 50B(2) and (3) does not have retroactive operation. We are obliged to follow the law laid down by the Hon'ble Supreme Court in CWT vs. Shrawan Kumar and of the Hon'ble jurisdictional High Court in Premier Automobiles which we have respectfully followed instead of following the decisions holding otherwise. (ii) Taxability under s. 45 108. Referring to the decisions B. Raghurama Prabhu Estate vs. Jt. CIT and Premier Automobiles Ltd. vs. ITO, the learned CIT-Departmental Representative submits that the profits and gains from slump sale would still be chargeable under s. 45 if a view is taken that s. 50B has no retroactive operation. Learned counsel for the assessee has however submitted that they are not taxable as it is not possible to determine their cost of acquisition. They have made detailed submissions in this behalf which have already been elaborated earlier in this order. 109. We have heard the parties and considered their submissions. In both the aforesaid decisions, it has been held that profits/gains arising from slump sale are taxable. In Premier Automobiles Ltd., the Hon'ble jurisdictional High Court has re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eriod ending 31st March, 1996 as also the period ending 31st March, 1997. The AO has taxed the interest income on revenue account on accrual basis. On appeal, the learned CIT(A) has confirmed the order of the AO in this behalf with the following observations: 21.15 In regard to the taxability of the interest receipt there cannot be two opinions that interest accrues on daily basis and hence required to be charged to tax as income. As held in the case of Tiruchirapalli Co-operative Marketing Society Ltd. vs. CIT (2000) 163 CTR (Mad) 194 : (2001) 247 ITR 830 (Mad), the amount is liable to be taxed as on revenue account. The appellant company had resolved to transfer the business in a resolution that had taken place in December, 1995 much before the date of execution of the sale agreement. Hence in anticipation of income on account of sale has been all along there since then. Therefore, though the sale has taken place on 1st Aug., 1996, once it has been made effective from 1st Jan., 1996 and interest has been paid for the period starting from that date, on account of the delay in payment of sale consideration. Interest on both the payments of sale consideration and non-compete fee i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . We therefore confirm his order in this behalf. Ground No. 10 is dismissed. Ground No. 11 : Taxability of non-compete fee 112. Simultaneously with the execution of the agreement a non-competition agreement (NCA in short) was also executed between the assessee and ABB Bahnbeteiligungen Gmbh, a German company, which was the sole shareholder in the purchaser company. Pursuant to the NCA, it was agreed that as long as the assessee held directly or indirectly 25 per cent of the capital and voting stock of the purchaser company and for a period of 5 years thereafter neither the assessee nor any of its affiliates would engage in anyway directly or indirectly in any industrial activity which competes in India with the transportation business acquired by the purchaser. In consideration thereof the assessee was to be paid a sum of Rs. 30 crores along with interest from 1st Jan., 1996 upto 31st July, 1996 at the rate of 18 per cent per annum. The assessee claimed before the AO that the amount of Rs. 33,21,00,000 (inclusive of the interest component) was not exigible to tax being a receipt on capital account having regard to the ratio of several decisions of the Supreme Court and High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re can be no question of any non-competition as it is unlikely that the assessee would compete with a company in which the group of which it is a part has a 50 per cent interest, the learned counsel for the assessee submitted that the compensation was paid by the purchaser on purely commercial considerations and that if the Revenue alleges that what is apparent is not real the burden is on it to establish the company. CIT vs. Daulat Ram Rawat Mull 1972 CTR (SC) 411 : (1973) 87 ITR 349 (SC). He further submitted that, apart from making the allegation, the Department has brought no evidence on record to prove that what is apparent from the NCA is not real. According to him, furnishing of a restrictive covenant by a co-venturer is not unknown in commercial circles. He submitted that while the assessee has been engaged in the business in India for last several decades, Diamler, the other co-venturer, had no presence in India and it was therefore apprehensive that the assessee could continue to compete with it more so if the joint venture agreement fell through and accordingly found it in its commercial interest to agree to pay an amount for obtaining a restrictive covenant. He pointed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e price/consideration as a receipt for furnishing a non-compete would have no legs to stand on. 115. Per contra, the learned CIT-Departmental Representative rebutted the submissions made by the learned counsel for the assessee. He submitted that, during 1994-95, a joint venture company ABB Diamler-Benz Transportation AG [Adranz] was established by ABB and Diamler in Germany after which a subsidiary of ADRANZ was incorporated in India to take over transportation business from the assessee as part of global restructuring of the operations of ABB and therefore it was unbelievable that both the companies controlled by the same groups would compete with each other. According to him, there was only one single buyer of the railway goods produced by the assessee in India, i.e., Chittaranjan Loco Works. Entire transportation business was dependent upon this single customer and no free market existed. He invited our attention to five factual aspects of the case, namely, (i) entire arrangement was part of global restructuring; (ii) there was complete monopoly of production and of buyer; (iii) business was transferred voluntarily without any tender or negotiations; (iv) same groups are contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the facts of each individual case. He reiterated that even if the assessee had desired to compete with the purchaser, it would not have been possible for it to do so in view of the aforesaid factors. Still if the assessee had desired to set up a competitive facility, the duration of the period of non-competition was such that it was meaningless and this being the position the claim of the assessee would be squarely hit by the aforesaid judgment. In this connection, he made elaborate references to the observations made in Chelpark Company Ltd. vs. CIT (1991) 94 CTR (Mad) 71 : (1991) 191 ITR 249 (Mad) and several other decisions in which the principles laid down in Coal Shipments have been reiterated and followed. 117. Taking further his submission that the element of competition was nonexistent in the present case, he submitted that the restrictive covenant was, in view of the aforesaid facts, sham and a colour able device to defeat the levy of tax and hence should be ignored. In this connection, he referred to several authorities, namely, CIT vs. Keshavji Morarji Anr. (1967) 66 ITR 142 (SC), Om Dutt vs. CIT (2005) 194 CTR (P H) 239 : (2005) 277 ITR 63 (P H), CIT vs. Kanchanlal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion in view of the fact that it occurs in a legislative head conferring legislative power. Since the definition of income in s. 2(24) is an inclusive one, its ambit, in our opinion, should be the same as that of the word income occurring in Entry 82 of List I of the Seventh Schedule to the Constitution (corresponding to Entry 54 of List I of the Seventh Schedule. to the Government of India Act). 119. Referring to the decision in Emil Webber, he submitted that the income of every kind has to be brought to the charge of income-tax either under the specific heads of income or under the residuary head of income, i.e., income from other sources, unless specifically exempted. He also referred to the decision in Mrs. Rooma Bose vs. ITO (1974) 95 ITR 299 (Cal) for the proposition that if an income cannot be charged to income-tax under any of the heads mentioned in cls. (a) to (e) of s. 14 of the IT Act, the same shall be chargeable to income-tax under the head Income from other sources mentioned in cl. (f) of the said s. 14 under the express provisions of s. 56(1). 120. He submitted that the impugned amount received by the assessee in the garb of non-compete fee is in the nature of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Tribunal to determine correct head under which the impugned receipt is taxable as the order of the CIT(A) regarding taxability of the impugned receipt under a particular head of income i.e. capital gain is under challenge. His next argument in this behalf was that the respondent can defend the order of the AO even in the absence of cross-appeal in view of the decisions in CIT vs. P.V. Corporation (2004) 187 CTR (Guj) 212 : (2004) 266 ITR 548 (Guj), CIT vs. Common Wealth Trust (India) Ltd. (1996) 132 CTR (Ker) 456 : (1996) 221 ITR 474 (Ker) and CIT vs. Smt. S. Vijayalaxmi (2000) 162 CTR (Mad) 569 : (2000) 242 ITR 46 (Mad). On being asked as to whether such a consideration by the Tribunal would lead to enhancement of income and if so, whether the Tribunal has the power to enhance the income already determined by the CIT(A), the learned Departmental Representative invited our attention to the decision in CIT vs. T. Namberumal Chetty Sons (1933) 1 ITR 32 (Mad)(FB) and submitted that enhancement of the assessment would mean an enhancement of the assessment as a whole and not enhancement of a particular item of income in the assessment which does not result in the enhancement o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of those cases, the expenditure was disallowed. The principle laid down in the said decisions, according to the learned counsel, is that it would be open to the Court to lift the veil and look at the substance of the transaction. While not disputing the aforesaid proposition, he contended that there was no basis in the allegation of the Revenue that the consideration received by the assessee was for something other than furnishing of the restrictive covenant. He concluded by submitting that both the consideration for the restrictive covenant as well as for the sale of the transport undertaking should be held as not chargeable to tax. 124. We have considered the rival submissions including the authorities referred to by them. There is no doubt that the authorities which have been referred to lay down the proposition that if the amount of compensation has been received from a rival dealer in lieu of non-competition in business, the amount so received cannot be taxed as income. However, the same result would not follow if the materials on record reveal that the amount was not received from a rival dealer in lieu of non-competition in business. In order to appreciate the issue, we ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents (P) Ltd. cited at Bar, which lays down following three requisites for successfully claiming that the amount paid to a rival dealer to ward off competition is capital expenditure: (i) It must be demonstrated that the payment has been made to ward off competition in business; (ii) The payment must be demonstrated to have been made to a rival dealer; and (iii) The object of making the payment is to derive an enduring advantage with certainty by eliminating the competition over some length of time. 127. Before we turn to the facts of the case, it may be mentioned that Courts have time and again declined to be bound by labels and have always tried to look through it and solve the question of substance. We also propose to follow the aforesaid dictum. Upon critical evaluation of the facts presented before us, we are inclined to hold that the assessee does not satisfy any of the aforesaid requisites. It is the case of the assessee that it has received the impugned sum in consideration of its agreeing to a restrictive covenant for undertaking not to compete in the similar business as that of the joint venture for a period of five years after it ceases to be a shareholder in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ividual operations in various countries into a new joint venture company formed for this purpose. This clause itself rules out the possibility of any competition between the assessee and other companies of the group. Perusal of para 3.12 of the said report shows that there were internal projections indicating downward trend in the revenues in this segment of activity due to technology obsolescence. This again shows the desire of the assessee to close down this activity and also the absence of any desire on its part to enter into competition in long run with the other group companies. The valuation firm, namely, KPMG have indicated in para 4.2 of their report that they have not been able to review the joint venture agreement between ABB and Diamler and therefore are unable to comment on all the factors that are enunciated in the various legal decisions of the US Courts. However, they have allocated 1/3rd of the total consideration to the non-compete component without reaching to the conclusion that there was any element of real non-competition in the NCA. Two of the tests, inter alia, as referred to in the said report, i.e., that (i) the purchaser must demonstrate that the vendor po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p which was common both to the assessee company and the purchaser company and hence the assessee could not possibly have its own goodwill independent of the goodwill of the ABB Group for transfer to the purchaser company. In any case, the goodwill of the ABB Group was equally available to the purchaser company. Since the learned CIT(A) has failed to consider the relevant aspects of the case and pass a well reasoned order in this behalf, it is considered appropriate to set aside his order In normal course, we would have restored the matter to his file. However, we are not doing so because we have restored other issues to the file of the AO. We therefore restore the matter to the file of the AO for a fresh decision in accordance with law keeping in view the observations made by us earlier in this order Ground No. 11 thus stands restored to the file of the AO. Summing up 131. To sum up, our decision, in view of the foregoing, on the issues raised in ground Nos. 9 to 11 is as under: (i) We confirm the finding of fact recorded concurrently by both the AO and the learned first appellate authority that the impugned transaction/sale is not a slump sale. (ii) The AO is directed to ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in accordance with the judgment of the Gujarat High Court in Lakhanpal National Ltd. vs. ITO (1986) 54 CTR (Guj) 241 : (1986) 162 ITR 240 (Guj) and the decision of a Special Bench of this Tribunal in Indian Communication Network (P) Ltd. vs. IAC (1994) 48 TTJ (Del)(SB) 604 : (1994) 206 ITR 96 (Del)(SB)(AT), in the computation of income. Consistent with its stand, the assessee used to reduce its opening stock of the succeeding year by the amount that was claimed as deduction in the earlier year. As the said adjustment had a negative impact in the assessment year under appeal, the AO did not make any addition to the assessee's income. However, the CIT(A) rejected the assessee's contention on merits. The assessee is now in appeal before the Tribunal. 135. In support of the ground of appeal, the learned counsel for the assessee submitted that the issue is now concluded, by the decision of the Hon'ble Supreme Court in Berger Paints vs. CIT, in which the Hon'ble Supreme Court has approved, inter alia, the judgments and decisions relied upon by the assessee. 136. We have heard both the parties and considered their submissions. As rightly submitted by the learned counsel for the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and in law, the learned CIT(A) has erred in directing the AO to exclude excise duty and sales-tax from the total turnover while computing the deduction under s. 80HHC. (iv) On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in directing the AO to exclude excise duty and sales-tax from the total turnover while computing the deduction under s. 80HHE. 143. We have heard the parties. The issue is covered in favour of the assessee by the decision of the Hon'ble jurisdictional High Court in CIT vs. Sudarshan Chemical Industries Ltd. (2000) 163 CTR (Bom) 596 : (2000) 245 ITR 769 (Bom) in which it has been held that excise duty and sales-tax would neither form part of the total turnover nor of the profits for computation of deduction under s. 80HHC. The AO is directed to act accordingly. Ground Nos. 3 and 4 are dismissed. 144. Ground No. 5 reads as under: (v) On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in deleting the disallowance of Rs. 3,90,370 being expenditure incurred towards donation to school and on gift items without appreciating the fact that these expenses have not established this dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1983) 32 CTR (Bom) 306 : (1984) 145 ITR 793 (Bom) and CIT vs. General Insurance Corpn. Of India (2002) 254 ITR 203 (Bom). The issue is now covered in favour of the assessee by the decision of the Hon'ble Supreme Court in CIT vs. General Insurance Corpn. (2006) 205 CTR (SC) 280 : (2006) 286 ITR 232 (SC). Ground No. 6 is therefore dismissed. 149. Appeal filed by the Department is dismissed. ITA No. 2554/Mum/2003 for asst. yr. 1996-97: Assessee's appeal 150. Ground No. 1 taken by the assessee reads as under: 1. The learned CIT(A) erred in confirming that the cash compensatory assistance and duty drawback are to be taxed on accrual basis as against on receipt basis offered by the appellant. It is submitted that the appellant had changed the method of accounting from cash basis to accrual basis for its account purpose following the amendments in the Companies Act, and submitted that for income-tax purposes the appellant continues to follow the receipt basis and the CIT(A) ought to have accepted the same. 151. We have heard the parties. We have already adjudicated upon identical issue being ground No. 2 in the assessee's appeal for asst. yr. 1997-98 earlier in this order. Fol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... required to be allocated while arriving at the profit of the industrial undertaking for the purpose of allowing deduction under s. 80-I of the IT Act. Without prejudice, it is further submitted that the expenditure is allocated on a very higher side and same should be reduced substantially. 5. The learned CIT(A) erred in confirming that the head office expenses is required to be allocated while arriving at the profit of the industrial undertaking for the purpose of allowing deduction under s. 80-IA of the IT Act. Without prejudice, it is further submitted that the expenditure allocated is on a very higher side and same should be reduced substantially. 157. We have heard the parties. We have already considered and adjudicated upon this issue while disposing off ground No. 5 in the assessee's appeal for asst. yr. 1997-98. Following the aforesaid order, ground Nos. 4 and 5 are dismissed. 158. Ground No. 6 reads as under: 6. The learned CIT(A) erred in confirming disallowance of deduction claimed under s. 80-IA for new industrial undertaking established for the manufacture of combined cycle power plant and pollution and environmental control plant. In the facts and circumsta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s allowed for statistical purposes. 164. Ground No. 10 reads as under: 10. The learned CIT(A) erred in holding that while arriving at business income for the purpose of deduction under s. 80HHC various deductions made by AO are as per the provisions of s. 80HHC. It is submitted that various deductions made from the business income are not as per the provisions of s. 80HHC and it may be so held now. 165. We have heard both the parties. Learned CIT(A) has dealt with the issue in para 20 at p. 11 of his order as under: 20. In this regard, the appellant has contested the action of the AO to allow deduction under the section of a lower amount of Rs. 1,74,76,301 as against the claim of Rs. 2,05,45,945 made by the appellant in the return. The grievance is threefold: (i)............................ (ii)........................... (iii) determination of the profits derived from the business excluding 90 per cent of interest income, rental income, sundry receipts etc. under cl. (baa) of Explanation below s. 80HHC (4B) of the Act. It has been submitted that all these receipts are not such as covered under the clause and ought to have been taken as part of the business profits. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtaking. The issue of taxability of the said receipt, which the appellant had claimed as exempt from tax and the year of its accrual as income have been examined in detail in my appellate order bearing No. CIT(A) VIII/IT-542/2000-01 dt. 27th Jan., 2003 for the asst. yr. 1997-98. Also examined therein was the issue of taxability of interest amount which the appellant company was to receive for the period commencing from 1st Jan., 1996. As held in the said order, the interest amount is required to be taken as of revenue nature having accrued on day-to-day basis on the amount receivable by the appellant company. In view of the said decision, interest attributable for the period upto 31st March, 1996 is liable to be taxed in the year under consideration. Consequently, the action of the AO to tax the interest income accrued on both the receipts in the year is correct and hence liable to be upheld. Hence, the addition of Rs. 3,73,95,000 to the income of the appellant for the year is confirmed. 170. We have heard the parties. In the assessee's appeal for asst. yr. 1997-98, we have already considered and confirmed the order of the CIT(A) holding that the interest was taxable on revenue a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cal issue has already been considered and decided by us against the Department in the Department's appeal for asst. yr. 1997-98. Ground No. 3 is therefore dismissed. 178. Ground No. 4 reads as under: (iv) On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in directing the AO to exclude excise duty and sales-tax from the total turnover while computing the deduction under s. 80HHC. 179. We have heard the parties. Identical issue has already been considered and decided by us against the Department in the Department's appeal for asst. yr. 1997-98. Ground No. 4 is therefore dismissed. 180. Appeal filed by the Department is dismissed. ITA No. 6235/Mum/2003: Asst. yr. 1997-98: Assessee's appeal 181. The assessee has taken the following grounds of appeal: 1. The learned CIT(A) erred in holding that a sum of Rs. 42,05,18,000 is assessable as short-term capital gains. 2. The learned CIT(A) ought to have held that even assuming the contention of the appellant that it had transferred the transportation undertaking as a going concern was to be rejected that the sale proceeds received would have to be allocated over the various assets trans ..... X X X X Extracts X X X X X X X X Extracts X X X X
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