TMI Blog2005 (5) TMI 252X X X X Extracts X X X X X X X X Extracts X X X X ..... o. 4. While framing the assessment order, AO noticed, assessee received Rs. 1,80,40,772 from Hewlett Packard India (P) Ltd. (for short 'HPI') as consideration for restrictive covenant, being the second instalment. Though it is credited in the P L a/c, it was claimed as deduction from the computation, treating it as capital receipt. Assessee, M/s Blue Star Ltd., (for short 'BSL') entered into an agreement with Hewlett Packard Asia Ltd. (for short 'HP Asia') on 11th Oct., 1988, w.e.f. 1st Nov., 1987 onwards, wherein the assessee was appointed as "representative" of HP to sell HP products in the territory of India and Nepal, to maintain sales and support organization of products, market and support HP products, production and dissemination of sales literature, advertisement and editorial press release, technical and servicing personnel, provide support service to customers and to look after other functions on behalf of HPI. Assessee was to get commission for the services. However, AO noticed, much before the agreement was to expire, assessee and HPI entered into a joint venture as per agreement dt. 7th Aug., 1989 to manufacture and marketing of the products in India and for this pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of business of the assessee; (ii) relevant provisions of s. 28 of the Act; and (iii) whether the amount received by the assessee is compensation or not for termination of agency. 6. AO noticed, assessee received total commission of Rs. 6,41,66,406 out of which Rs. 5,62,89,131 was received from various foreign manufacturers for distribution of their products in India. The receipt from HP Asia as commission was Rs. 1,67,61,608. Therefore, he held that acquiring of agency for marketing of products of various manufacturers was in fact in the regular course of business of the assessee. Assessee, in other words, was marketing HP products in India. The agreement was to expire on 31st Oct., 1990. He held, had not there been a proposal for new business of manufacture of items marketed by the assessee under the joint venture, the assessee perhaps would have carried on the agency work. Assessee had sufficient infrastructure to handle the business of products manufactured by HP, it was one of the reasons why the assessee was made a party to the joint venture. 7. AO held that prior to the amendment brought out by the Finance Act, 1955, compensation for loss of office or agency undoubted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd cannot compete with the products of joint venture for a period of two years and was not subject to the assessee continuing to be a participant in the joint venture of the company and consequently, involved non-competitive obligations which were not corollaries to the assessee being a participant in the joint venture. The consideration received was nothing but for non-competitive covenants. However, the CIT(A) did not accept the view canvassed by the assessee. He held, the distinction that the assessee tried to make out between the terms 'distributor' and 'agent' is more of an exercise in romantics, not of substance. He held, what is to be seen is the essence of a contract, as held by the Hon'ble Bombay High Court in the case of Daruvala Bros. (P) Ltd. vs. CIT (1971) 80 ITR 213 (Bom). By virtue of the first agreement dt. 11th Oct., 1988, the assessee was to provide necessary services to the other party. But by virtue of cl. 6(3), assessee could not initiate or participate in activities, which directly competed with HP products or put the company as representative into a substantial conflict of interest position with HP. This agreement was to be terminated on 31st Oct., 1990. But ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee in the case of CIT vs. Late G.D. Naidu By LRs (1986) 51 CTR (Mad) 256 : (1987) 165 ITR 63 (Mad). In view of the above, the CIT(A) confirmed the order of the AO. Assessee is in appeal before the Tribunal. 12. Contending parties reiterated their respective stands. Assessee's counsel produced an order of the Tribunal, Delhi Bench in the case of Hewlett Packard India Ltd. vs. Dy. CIT (2003) 80 TTJ (Del) 208 : (2003) 85 ITD 455 (Del), wherein the Tribunal held, compensation received so as to ensure monopoly status and to eliminate competition in its business, for two years is a receipt in the capital nature inasmuch as the assessee had obtained an enduring benefit of elimination of competition in its line of business. Assessee also relied on the decision of the Tribunal in the case of R.K. Swamy vs. Asstt. CIT (2004) 88 TTJ (Chennai) 940 : (2004) 88 ITD 185 (Chennai). At the same time, we find that exactly identical issue was agitated before the Tribunal, Mumbai Bench, in assessee's own case for the asst. yr. 1990-91. in ITA Nos. 4323 and 4176/Bom/1994 and the Tribunal confirmed the order of the CIT(A), vide para 19 of its order dt. 8th July, 2004, on the following lines: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ground that assessee had made only the provision for bad debts and the same was not actually written off. 18. The contention of the assessee is that Explanation to s. 36(1)(vii), inserted retrospectively by the Finance Act, 2001, w.e.f. asst. yr. 1989-90 was not available at the time of disposal of the appeal by the CIT(A). Thus, the limited prayer is that the issue may be remanded back to consider it on merit in the light of the retrospective amendment brought into statute book w.e.f. asst. yr. 1989-90 onwards. 19. We accept the above contention. We direct the AO to decide the issue on merit, in accordance with law, as applicable retrospectively, giving assessee an opportunity. Hence, this ground by the assessee is allowed for statistical purposes. 20. The next ground (ground No. 4) of objection by the assessee is directed against the order of the CIT(A) in confirming the addition of Rs. 1,68,925 to the closing stock, in respect of value of optional warranty paid to Kelvinator of India. 21. Assessee's counsel submitted, he is under instruction not to press this ground. Hence, this ground is rejected as not pressed. 22. The next ground (ground No. 5) of objection by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dition of Rs. 2,50,000 being the provision for premium on redemption of debentures. 31. Assessee's counsel submitted, this point is covered in assessee's favour by the decision of the Tribunal in assessee's own case, on identical facts, for the asst. yr. 1990-91, vide paras 20 and 21 of its order dt. 8th July, 2004, which in turn considered the decision of the Hon'ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. vs. CIT (1997) 139 CTR (SC) 555 : (1997) 225 ITR 802 (SC). 32. In the light of the above facts, we allow the claim of the assessee on this ground for the year under consideration. 33. Ground Nos. 9 and 10 by the assessee are directed against the order of the CIT(A) in confirming the addition of Rs. 1,00,000 being professional charges paid to M/s Rathi Associates, treating it as capital expenditure and also confirming the addition of Rs. 14,72,088 being the repairs carried out at various places, treating the same as capital expenditure. 34. While framing the assessment order, AO noticed that the assessee had paid Rs. 1,00,000 to M/s Rathi Associates, as consultancy fee towards renovation of Madras office. Assessee was required to exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gainst the order of the CIT(A) in confirming the addition of Rs. 3,56,000 being commission paid and holding the same as non-genuine. 39. This issue has been dealt with by the AO at pp. 27 to 29 of his order. AO noticed that the assessee had paid an amount of Rs. 3,56,000 to Himalaya Electrical Industries (India) (P) Ltd. (for short 'HEI'). It was stated that Government of India floated. a global tender for installation of CT scanner at DDU Hospital through DGS D and the assessee-company succeeded in winning the contract for installation. CT scanner was procured from Hitachi Medical Corporation, Japan, for about Rs. 1.95 crores., Regarding the payment to HEI, 8hri Sharma was unable to recollect anything except stating that he does not know any person in HEI and also not aware of their addresses. The letter was signed at the instance of Shri D.D. Bhatia. Shri Sharma was asked to explain who Shri Bhatia was and in reply he stated that Shri Bhatia was no more in BSL (assessee). On 8th Jan., 1993 Shri Sharma appeared before the AO and filed letters exchanged between HEI and assessee. From these letters AO noticed that on behalf of Shri D.D. Bhatia a letter was addressed to HEI stating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany, i.e. HEI, indicates that the payment has not been made to above company and he further records that investigation. makes clear that it was paid not for rendering any service. Hence, the CIT(A) confirmed the addition. Being aggrieved, assessee is in appeal before the Tribunal. 41. However, assessee's counsel brought our attention to certain correspondence between the parties. At p. 62 of the paper book is a debit note dt. 14th Dec., 1990. At p. 63 is the intimation from HEI of receipt of the amount. Inviting our attention to p. 68 of the paper book, which is part of the assessment order in the case of HEI for the asst. yr. 1991-92, assessee's counsel submitted that this payment was made for the services rendered. At p. 55 of the paper book is a letter from HEI dt. 11th June, 1990, offering their services in obtaining rates from various parties who can do the site job and who can help in installing the CT scanner. At p. 56 of the paper book is the reply of the assessee to HEI. At p. 57 is again letter from the assessee to HEI in regard to payment of approximately 2 per cent of total value of the order towards rendering of professional services. In the light of the facts, ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital expenditure because the payment was received against the loss of services of five employees. AO treated this as casual receipt. AO did not accept the above explanation in the light of the decision of the Hon'ble Allahabad High Court in the case of CIT vs. Gulabchand (1992) 101 CTR (All) 226 : (1991) 192 ITR 495 (All). Aggrieved by the above order, the assessee approached the first appellate authority. 48. CIT(A) held, there was no capital loss to the assessee by transfer of the employees. The employees working with the assessee were transferred to another company and, therefore, this cannot be treated as capital receipt as there was no capital loss. Hence, he confirmed the addition made by the AO. 49. Contending parties reiterated their respective stands. Considering the rival submissions, we are of the view that the assessee lost the services of employees permanently, which is to be treated as capital in nature. The appeal by the assessee on this ground (is) also allowed. 50. The next ground (ground No. 14) of objection by the assessee is directed against the order of the CIT(A) in confirming the addition of Rs. 40,70,175 being capital receipt on account of compensation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on this ground is allowed. 55. Next ground (ground No. 15) of objection by the assessee is directed against the order of the CIT(A) in confirming the disallowance of loss on forfeiture of licence deposit of Rs. 78,00,000 treating the same as capital loss. 56. This issue has been dealt with by the AO at p. 32 of his order. The addition is made by the AO vide para 21 of his order, on the following lines: "During the year under consideration, the assessee-company has claimed a loss of Rs. 78 lakhs being loss on forfeiture of licence deposit. The assessee-company has decided to amortise the deposit of Rs. 78 lakhs in respect of premises over a period of 5 years commencing from 1990-91 and accordingly, an amount of Rs. 62.40 lakhs is carried forward under the head 'Miscellaneous expenditure'. Accordingly, the assessee-company has treated the said loss as revenue loss and has made a claim of the same against the profit of this year. This view of the assessee-company is not acceptable at all, because the said loss was not in the regular course of the business of it. It was on account of loss of forfeiture of licence deposit made. with a third party and, therefore, the same is treat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d reconstruction of the work, assessee has not obtained any enduring benefit because after some time, the assessee had to part with the building it reconstructed. 61. In the case reported in (1988) 70 CTR (SC) 28 : (1988) 172 ITR 257 (SC) cited supra, the assessee, who agreed to provide water pipelines and electricity facilities to municipality, was exempted from payment of municipal taxes for 15 years, which the Hon'ble Supreme Court held, because the advantage secured by the assessee is in the field of revenue. 62. Coming to the licence deposit, as rightly noted by the Revenue authorities, licence is a capital asset in nature. The loss on account of forfeiture of licence is also to be treated as such. The Revenue authorities were right in disallowing the claim of the assessee and not treating it as revenue loss. Hence, this ground by the assessee fails and is dismissed. 63. The next ground (ground No. 16) of objection by the assessee is directed against the order of the CIT(A) in confirming the addition of Rs. 27,112 in respect of commission paid to Silverline Electronics (P) Ltd. as payment out of undisclosed income. 64. This issue is dealt with by the AO at pp. 32 and 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... brought on record to show that the same facts stood at the point of time in the instant case of the assessee as well. Coming to interest under s. 234C also, we find no merit in the contention of the assessee. Hence, this ground fails and is dismissed. 72. ITA No. 1176/Bom/1995: The first ground of objection by the Revenue is directed against the order of the CIT(A) in deleting the disallowance of Rs. 3,02,444 on account of non-repatriable foreign asset being only the provision made for bad debts in the account. 73. On going through the order of the CIT(A), it is clearly mentioned that the amount was written off by the assessee in its books of account. The CIT(A) allowed the claim of the assessee, following the decision of the Hon'ble jurisdictional High Court in the case of CIT/EPT vs. Jwala Prasad Tiwari (1953) 24 ITR 537 (Bom) and the decision of the Hon'ble Gujarat High Court in the case of Vithaldas H. Dhangibhai Bardanwala vs. CIT (1981) 21 CTR (Guj) 190 : (1981) 130 ITR 95 (Guj). Since the amount is actually written off and not a provision, the claim of the assessee was rightly allowed by the CIT(A).Hence, the appeal by the Revenue on this ground fails and is dismissed. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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