Income Tax Appellate Tribunal - Mumbai
Blue Star Ltd. vs Joint Commissioner Of Income Tax on 7 March, 2007
Equivalent citations: (2007)108TTJ(MUM)336
ORDER
D.K. Srivastava, A.M.
1. These are cross-appeals filed by both the parties against the order passed by the CIT(A) for asst. yr. 1996-97 on 12th Feb., 2001. We find it convenient to dispose of both of them by a consolidated order.
ITA No. 3165/Mum/2001 (assessee's appeal)2. Ground No. 1 taken by the assessee reads as under:
I. Deduction under Section 80-O
1. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in upholding a deduction of Rs. 35,00,000 as indirect expenses from net receipts eligible for deduction under Section 80-O of the IT Act, 1961 against appellant's claim that no such deduction can be made to arrive at the income eligible for deduction under the provisions of the said section.
2. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in failing to appreciate that deduction under Section 80-O of the Act was required to be computed with respect of net receipts in foreign exchange and no adjustment to the same is contemplated by the provisions of Section 80-O of the Act.
3. The appellant prays that the deduction under Section 80-O of the Act be appropriately worked out in the facts and circumstances of the appellant's case.
3. Facts of the case, in brief, are that the assessee received a sum of Rs. 3,67,93,336 in foreign exchange for rendering software consultancy services abroad. The assessee claimed 50 per cent of the aforesaid foreign exchange receipts as deduction under Section 80-O of the IT Act. The AO recomputed the deduction by estimating the indirect expenses incurred at Rs. 50 lakhs for earning the foreign exchange following the decision of this Tribunal in Tata Unisys Ltd. v. Dy. CIT (1993) 47 TTJ (Bom) 8. On appeal, the learned CIT(A) confirmed the order of the AO which he found to be in conformity with the decision of this Tribunal in Tata Unisys Ltd. (supra) He, however, reduced the estimation of indirect expenses from Rs. 50 lakhs to Rs. 35 lakhs following his order for asst. yr. 1995-96. The order of the CIT(A) for asst. yr. 1995-96 was appealed against before this Tribunal as also the order of the CIT(A) for asst. yrs. 1994-95 and 1997-98 in this behalf.
4. In the order dt. 28th Dec, 2004 passed by this Tribunal in the assessee's appeal for asst. yr. 1994-95, the issue has been disposed of as under:
43. In ground No. 5, the assessee is aggrieved that the CIT(A) erred in upholding AO's action of deducting the estimated sum of Rs. 35,00,000 on account of indirect expenses from the net receipts for computing the admissible deduction under Section 80-O.
44. There is no dispute about the position that the deduction under Section 80-O is to be allowed on the net basis but the controversy before us is confined to the question whether, for the purpose of arriving at net receipt, an ad hoc deduction can be made on the estimate basis. We find guidance from decision of a co-ordinate Bench in the case of Shaw Wallace & Co. Ltd. v. Dy. CIT (2001) 71 TTJ (Cal) 478 : (2002) 80 ITD 156 (Cal). Although the said decision is in the context of the net dividend for the purpose of deduction under Section 80M, but the same principle applies in this context as well. Even when an income is to be taken on net basis, all that can be deducted from the gross figure, to arrive at the net figure, is the actual expenditure and not the notional or estimated expenditure. Accordingly, in our considered view, it was indeed not open to the AO to reduce the estimated sum of Rs. 35,00,000 on account of indirect expenses from the gross receipts. To that extent, we agree with the assessee and uphold his grievance.
45. The AO shall, accordingly, recompute the deduction after removing the deduction of the aforesaid amount of Rs. 35,00,000 on account of estimated indirect expenses.
5. In its order dt. 26th May, 2005 in the assessee's appeal for asst. yr. 1995-96, this Tribunal has disposed of the issue with the following observations:
4. The fourth ground of assessee's appeal is that the CIT(A) has erred in upholding the deduction of an estimated sum of Rs. 35,00,000 in respect of indirect expenses from the net receipts for computing deduction under Section 80-O. It is admitted that the issue is covered in favour of the assessee by the said order of Tribunal in the assessee's own case for asst. yr. 1994-95, cited supra. Respectfully following the decision of co-ordinate Bench, we allow the fourth ground of assessee's appeal.
6. In its order dt. 14th Sept., 2006 in the assessee's appeal for asst. yr. 1997-98, this Tribunal has disposed of the issue as under:
2. There are only two grounds taken by the assessee i.e. against in directing to deduct an estimated sum of Rs. 35 lakhs in respect of indirect expenses from the net receipts for computing deduction under Section 80-O of the IT Act and disallowance of an amount of Rs. 3,61,076 in respect of payment made to Blue Star Club disallowed under Section 40A(9) of the Act.
2.1 Both the issues were involved in earlier year's appeal i.e. asst. yrs. 1994-95 and 1995-96 decided in ITA No. 1534/Mum/1999, dt. 28th Dec, 2004 and in ITA No. 2260/Mum/1999 for asst. yr. 1995-96 vide order dt. 8th April, 2005.
2.2 The first issue was decided by the Tribunal in favour of the assessee whereas the second issue was restored to the file of the AO to decide the same afresh in the light of the decision in the case of CIT v. Bharat Petroleum Corporation Ltd. (2001) 169 CTR (Bom) 119 : (2001) 252 ITR 43 (Bom). In view of the decision taken by the Tribunal for earlier year, we direct the AO to recompute the income of the assessee accordingly.
7. The short question is whether deduction under Section 80-O of the IT Act should be allowed on net receipts or on gross receipts of foreign exchange. In support of the case of the assessee, the learned senior counsel has placed reliance upon the orders of this Tribunal in the assessee's own case, which have already been referred to above as also on the decisions of this Tribunal in Wipro GE Medical Systems v. Dy. CIT (2003) 81 TTJ (Bang) 455 and Anr. decision of this Tribunal in' Jacobs H&G (P) Ltd. ITA Nos. 160-162/Mum/2000. The learned Departmental Representative has, on the other hand, placed reliance on the decisions of the Hon'ble jurisdictional High Court in CIT v. Asian Cables Corporation Ltd. , CIT v. Chemical & Metallurgical Design Co. Ltd. , Water & Power Consultancy Services (India) Ltd. v. Jt. CIT (2004) 91 TTJ (Del) 29 for the proposition that net receipts alone can be considered for deduction under Section 80-O and not the gross receipts. He has submitted that the binding decision of the Hon'ble jurisdictional High Court has not been considered by this Tribunal while deciding the issue in favour of the assessee in the assessee's appeals for other years and hence the decisions taken by the Tribunal in the assessee's own case should not be followed being contrary to the judgment of the Hon'ble jurisdictional High Court.
8. We have heard the parties and considered their submissions including the authorities referred to by them. If the disallowance made by the AO and confirmed by the learned CIT(A) is deleted, the assessee, in that case, would get deduction under Section 80-O on gross receipts which is against the law laid down by the Hon'ble jurisdictional High Court in Asian Cables (supra). In CIT v. Chemical & Metallurgical Design Co. Ltd. (supra), the Hon'ble Delhi High Court has also taken the view that deduction under Section 80-O is admissible on net receipts and not on gross receipts. Similar view has been taken by this Tribunal also in (2004) 91 TTJ (Del) 29 (supra). All these decisions were perhaps not brought to the notice of the Bench deciding the appeals of the assessee for other years. Be what it may, we cannot ignore the binding decision of the Hon'ble jurisdictional High Court in Asian Cables (supra) and therefore cannot agree with the assessee that deduction under Section 80-0 should be made available to it on gross receipts.
9. The assessee has rendered software consultancy services abroad. It is inconceivable that services of such specialized nature can be had and provided to foreign enterprises without incurring any expenditure. Therefore, the only issue that survives for consideration is as to how the expenses incurred by the assessee in earning those receipts should be computed. If the assessee had treated the aforesaid activity as a profit center and maintained the books of account recording the receipts and expenses relating to the activities undertaken under Section 80-O, it would have been easy to allocate expenses incurred for earning the foreign exchange under Section 80-O. If the assessee has not maintained the books of account for the aforesaid activity, the question that arises is whether the Departmental authorities should work out the expenses relating to the activities under Section 80-O on a reasonable basis. In our view, the Departmental authorities are under legal mandate as also under the mandate of the Hon'ble Bombay High Court to allow deduction only in respect of net receipts and not on gross receipts. Therefore they have ample jurisdiction to work out the expenses incurred for earning the receipts under Section 80-O on pro rala basis or on a reasonable basis after giving reasonable opportunity of hearing to the parties. In this view of the matter, we restore the matter to the file of the CIT(A) with the direction to allocate reasonable amount of expenditure in this behalf and consider the same for netting the receipts under Section 80-O. He will give a reasonable opportunity of hearing to both the parties. Ground No. 1 is treated as allowed for statistical purposes.
10. Ground No. 2 reads as under:
II. Disallowance under Section 40A(9)
1. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in not adjudicating on the disallowance under Section 40A(9) of the Act pertaining to deducibility of Rs. 2,66,242 in respect of payment made to Blue Star Club.
2. On the facts and in the circumstances of the case and in law, the learned CIT(A) has legally erred and failed to appreciate that the deductibility of expenses in respect of payment to Blue Star Club is not covered within the ambit of provisions of Section 40A(9) of the Act as held by the learned AO.
3. The appellant, therefore, prays that the aforesaid disallowance of Rs. 2,66,242 be deleted.
11. At the time of hearing, the learned Counsel for the assessee invited our attention to the order of this Tribunal for asst. yrs. 1994-95, 1995-96 and 1997-98 and submitted that the issue has since been restored by this Tribunal to the file of the AO for deciding the matter in the light of the decision in CIT v. Bharat Petroleum Corporation Ltd. (2001) 169 CTR (Bom) 119 : (2001) 252 ITR 43 (Bom).
12. The learned Departmental Representative however relied upon the decision of Hon'ble Andhra Pradesh High Court in Raasi Cement Ltd. v. CIT (2005) 198 CTR (AP) 179 : (2005) 275 ITR 579 (AP) in support of the case of the Department. He submitted that if the matter is restored to the file of the AO, a direction should be given to the AO to consider the aforesaid decision of the Hon'ble Andhra Pradesh High Court also.
13. We have considered the submissions made including the authorities referred to by the parties. Following the order of this Tribunal for earlier years in the assessee's own case, we restore the matter to the file of the AO with the direction to decide the matter afresh in accordance with law including the decisions in CIT v. Bharat Petroleum (supra) and Raasi Cement Ltd. v. CIT (supra). In the event of a conflict between the aforesaid decisions, the decision of Hon'ble Bombay High Court shall be followed. Ground No. 2 is treated as allowed for statistical purpose.
14. Ground Nos. 3 and 4 taken by the assessee and ground No. 6 taken by the Department are interlinked. They are therefore being decided here for the sake of convenience. Ground Nos. 3 and 4 taken by the assessee read as under:
III. Compensation received on termination of joint venture agreement
1. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in holding that out of compensation received on termination of its joint venture agreement (JVA) with Hewlett Packard (USA) (HP) amounting to Rs. 15 crores, a sum of Rs. 10.39 crores is taxable as long-term capital gains, thereby rejecting the appellant's claim that the entire amount received by the appellant is a capital receipt not at all eligible to tax.
2. On the facts and in the circumstances of the case and in law, the learned CIT(A) has failed to appreciate the facts and ought to have held that the amount received by appellant for giving up rights under the JVA being a zero cost capital asset and is therefore a capital receipt, which is not exigible to capital gains tax as held by the Hon'ble Supreme Court in the case of CIT v. B.C. Srinivasa Shetty .
IV. Compensation received on termination of joint venture agreement
1. Without prejudice to ground HI as stated above and on the facts and in the circumstances of the case, the learned CIT(A) has erred in denying the benefit of indexation of cost available under the provisions of Section 48 of the Act in respect of cost attributable to the rights acquired under the JVA with Hewlett Packard, USA, even though the part of compensation received was determined as liable to be taxed as long-term capital gains.
2. Without prejudice to ground HI above, the learned CIT(A) has erred in hypothetically bifurcating the compensation received into parts i.e. interest on the share application money, liable to be taxed as 'income from other sources, refund of share application money and balance amount as compensation attributable to gain on termination of JVA, liable to be taxed as long-term capital gains without attributing any cost thereto.
15. Ground No. 6 taken by the Department in its appeals reads as under:
On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in treating the non-compete fees as long-term capital gains without appreciating that there was no capital asset on transfer of which gains could have accrued, as has been rightly held by the AO in his assessment order.
16. Briefly stated, the facts of the case are that the assessee was a distributor of Hewlett Packard, USA, (HP) for about 20 years till 1989 or so. In 1989, the distribution agreement, which the assessee had with HP, was terminated consequent upon which the assessee entered into a joint venture agreement with HP on 7th Aug., 1989 and a new company known as Hewlett Packard India (P) Ltd. (HPIL) was formed. The joint venture agreement provided, inter aha, that the assessee company would be entitled to contribute 20 per cent of the paid-up share capital of HPIL. The agreement also stipulated that the assessee would not compete with HPIL by entering into business activities pertaining to, including but not limited to, manufacture, sale or sales promotion, representation or servicing of products directly competitive with the products of HP or of HPIL in the test and measurement (T & M) product range as of the transfer date for a period of two years commencing with the transfer date. Resultantly, the assessee paid Rs. 1,69,20,000 on 9th Nov., 1989 and Rs. 1,04,00,000 on 16th Aug., 1990 towards share application money for allotment of shares of HPIL. With the liberalization of the policy in and around 1991, foreign companies were allowed to have 100 per cent subsidiaries in India. HPIL therefore did not allot 20 per cent shares to the assessee in respect of which the assessee had paid share application money on 9th Nov., 1989 and 16th Aug., 1990 to HPIL. After negotiations, the parties decided to terminate the joint venture agreement under a MOU dt. 21st July, 1995. In terms of the said MOU, the assessee agreed to allow HP to have 100 per cent shareholding in HPIL in consideration of Rs. 15 crores to be paid by HP to the assessee. It was stated in the MOU that a sum of Rs. 2,73,20,000 being the share application money paid by the assessee would be refunded to the assessee without any interest on or before 30th Oct., 1995. It was further provided that HP would pay to the assessee a sum of Rs. 12,26,80,000 in consideration of the assessee agreeing with HP not to compete with HPIL in the business of electronic components, medical monitoring products, computer peripherals and personal computers for a period of three years from the date of MOU. It was further provided that, upon HPIL refunding to the assessee, the said sum of Rs. 2,73,20,000 and upon HP paying to the assessee the said sum of Rs. 12,26,80,000, the joint venture agreement dt. 7th Aug., 1989 entered into between the assessee and HP would stand terminated and the assessee would consequently waive all his rights against HP and/or HPIL under the said agreement.
17. The assessee claimed before the AO that the aforesaid sum of Rs. 15 crores was a capital receipt with zero cost of acquisition and hence was not exigible to capital gains tax in terms of the decision of the Hon'ble Supreme Court in CIT v. B.C. Srinivas Shetty . The AO however brought the impugned sum to tax as revenue receipt primarily for the reason that the agreements giving rise to the impugned receipts were entered into in the ordinary course of business. On appeal before the CIT(A), the assessee reiterated its submissions made before the AO. In the alternative, the assessee submitted before the CIT(A) that it should be allowed the benefit of indexed cost of acquisition for computing the long-term capital gains. In this connection, the assessee submitted a detailed calculation of capital gains before the CIT(A), which reads as under:
The appellant however submitted without prejudice the following working of capital gains Calculation of capital asset Amount in Rs.
Sale consideration 15,00,00,000
Less : Cost of acquisition
Date of payment Received Amount
9-11-1989 30-10-1995 1,69,20,000
16-8-1990 30-10-1995 1,04,00,000 2,73,20,000
Cost inflation index of year of payment financial 172
year 1989-90
Cost inflation index of year of payment financial 182
year 1990-91
Cost inflation index of year of payment financial 281
year 1995-96
Indexed cost of acquisition
16920000*271/172 2,76,42,558
10400000*281/182 1,60,57,143
4,36,99,701
Long-term capital gain
10,63,00,290
Tax on LTCG @ 30% plus surcharge of 15% 3,66,73,603
18. On careful consideration of the submissions made by the assessee, the learned CIT(A) has disposed of the matter with the following observation:
I have given considerable thought to this issue. According to the appellant, it paid HPIL as under:
9-11-1989 Rs. 1,69,29,999 repaid on 30-10-1995 16-8-1990 Rs. 1,04,00,000 repaid on 30-10-1995
The above figures show that the share application money was retained by HPIL from 1989 to 1995 without allotting any shares or rights. During the period the appellant had also transferred their commission business to HPIL. The compensation paid can therefore be (a) a compensation that has an interest potential; (b) transfer of commission to HP.
The treatment of Rs. 15 crores received will be considered as under:
Calculation of interest and capital gains Amount in Rs.
Amount advanced towards share capital in 2,73,20,000 financial years 1989-90 and 1990-91 Interest on above @ 12% p.a. Amount Period in months Interest 1,69,20,000 9-11-1989 to 30-10-1995 1,21,82,400 1,04,00,000 16-8-1990 to 30-10-1995 65,52,000 2,73,20,000 1,87,34,400 Compensation received 15,00,00,000 Less : Refund of share application 2,73,20,000 money Less : Interest 1,87,34,400 4,60,54,400 Balance--LTCG 10,39,45,600
The question of charging commercial interest was contemplated. However, considering the course of events and the protracted negotiations, I am of the opinion that charging of 12 per cent would be reasonable.
The AO is directed to charge interest @ 12 per cent on Rs. 2,73,20,000 from the date of payment till receipt of such amount by the appellant as shown above. The balance will be taxed as long-term capital gains. The AO is directed to verify the date of payment of share application money and date of its receipts and long-term capital gains be calculated accordingly.
19. In support of the aforesaid ground of appeal, the learned Counsel for the assessee has reiterated the submissions made by the assessee before the Departmental authorities. According to him, Rs. 2,73,20,000 represent refund of share application money, which on the face of it, is not taxable. As regards the remaining sum he claims it is not taxable as there is no cost of acquisition. In this connection, he has placed reliance on the decision of this Tribunal in Payal Kapur v. Asstt. CIT (2006) 104 TTJ (Del) 690 : (2006) 98 ITD 19 (Del), for the proposition that compensation received for breach of joint venture agreement was capital receipt not liable to tax. In the alternative, he submits that the benefit of indexed cost of acquisition should be allowed for computing the long-term capital gain.
20. In reply, the learned Departmental Representative supported the order of the CIT(A). He submitted that the compensation in the case before us was received for waiving and relinquishing the right to subscribe to the share capital of the joint venture, namely, HPIL. He submitted that the impugned JVA and MOU were entered into in the ordinary course of business of the assessee and hence the settlement amount received by the assessee upon termination of JVA represented profits, which the assessee would have made if the contract had been performed. Relying upon the decision in CIT v. Gangadhar Baijnath , the learned Departmental Representative submitted that the issue was fully covered in favour of the Department by the aforesaid decision of the Hon'ble Supreme Court. He also referred to the decision of the Hon'ble jurisdictional High Court in Gammon India (P) Ltd. v. CIT for the proposition that if the payment is received in the ordinary course of business of the assessee for loss of stock-in-trade, it is a revenue receipt and that, in order to decide, whether or not a payment is a revenue receipt, its true nature and substance must be looked into. Referring to the decision of this Tribunal in PayaJ Kapur v. Asstt. CIT (supra), relied upon by the learned senior counsel for the assessee, he submitted that the said decision was not applicable on the facts of the case before us, as the shares had already been allotted in Payal Kapur's case (supra). He further submitted that the compensation was received, in Payal Kapm case (supra) for breach of JVA whereas, in the case before us, the assessee has been compensated for loss of right to shares on the basis of a joint agreement entered into by the assessee in the ordinary course of its business.
21. We have heard the parties. In Gammon India (P) Ltd. v. CIT (supra), the Bombay High Court has held that if the payment is received in the ordinary course of the business of the assessee for loss of stock-in-trade, it is revenue receipt, and if, on the other hand, the payment is received towards compensation for extinction or sterilization, partly or fully, of a profit-earning source, such receipt, not being in the ordinary course of assessees business is a capital receipt. In the case before us, the assessee had entered into a joint venture agreement with HP by which the assessee was given the right to subscribe to the extent of 20 per cent of the paid-up capital of the joint venture, namely, HPIL. The joint venture agreement also contained a non-compete clause, which prohibited the assessee from carrying on a business in competition with the joint venture. The assessee paid a sum of Rs. 2,73,20,000 as share application money to HPIL. The MOU, on the other hand, provided for payment of Rs. 15 crores to the assessee which included refund of share application money as also for a non-compete clause incorporated in the agreement which prohibited the assessee from carrying on a business in competition with HP or HPIL. In broad terms, the sum of Rs. 2,73,20,000 paid by the assessee to HPIL was substituted by a sum of Rs. 15 crores to be paid to the assessee under the MOU containing similar non-compete clauses. The sum and substance of the agreement, i.e., MOU is that a sum of Rs. 15 crores has been paid over to the assessee as compensation upon termination of the joint venture agreement and consequently upon extinction of assessee's rights to subscribe the share capital of the joint venture, namely, HPIL. Since it is compensation for extinction of source of income, which the assessee would have enjoyed through HPIL if it had not been terminated under the MOU entered into between the parties, the compensation so received is a capital receipt liable to tax as capital gains provided the requisites of Section 45 are satisfied.
22. Section 45 provides that any profits or gains arising from the transfer of a; capital asset effected in the previous year shall be chargeable to income-tax under the head "Capital gains" and shall be deemed to be the income of the previous year in which the transfer took place. It is not the case of the assessee that the requisites of Section 45 for taxing the impugned sum as capital gains are not fulfilled. The right to subscribe to the share capital is a valuable right and so is the right to be involved in the affairs of joint venture under the joint venture agreement. Such right is a capital asset within the meaning of Section 2(14) of the IT Act, which defines capital asset as meaning property of any kind held by an assessee, whether or not connected with his business or profession. Therefore the subject-matter of impugned transfer falls well within the ambit of "capital asset" as defined in Section 2(14) of the IT Act. Loss or extinction of right to subscribe to the share capital and to be involved in the affairs of joint venture fall within the meaning of "transfer" as defined in Section 2(45) of the IT Act. The impugned capital asset has been transferred during the previous year relevant to the assessment year under appeal through the MOU. Thus, the profits or gains arising from the transfer of impugned capital asset effected in the previous year relevant to the assessment year under appeal are chargeable to tax under the head "Capital gains" under Section 45.
23. Section 48 provides for the mode of computation of capital gains. It provides that the income chargeable under the head "Capital gains" shall be computed, by deducting from the full value of the consideration received or accruing as a result of transfer of the capital asset the expenditure incurred wholly and exclusively in connection with such transfer and the cost of acquisition of the asset and the cost of any improvement thereto. In the case before us, the cost of acquisition is the amount paid as share application money and the sale consideration is the amount which has been received on termination or extinction of assessee's right to subscribe to the share capital. The prayer of the assessee that it should be allowed the benefit of indexed cost of acquisition therefore merits consideration. In this view of the matter, we direct the AO to tax the impugned amount as long-term capital gains after giving the benefit of indexed cost of acquisition as per law.
24. In view of the aforesaid, the order of the CIT(A) bifurcating the compensation received in two parts, i.e., (i) interest on share application money liable to be taxed as income from other sources; and (ii) refund of share application money and balance amount as compensation on termination of joint venture agreement to be taxed as long-term capital gains without attributing any cost thereto is vacated.
25. Ground No. 3 taken by the assessee is dismissed while ground No. 4 is allowed subject to the observations made above. Ground No. 6 taken by the Department is consequently dismissed.
26. Ground Nos. 5 and 6 read as under:
V. Taxability of amount received torn Narain Bhojwani
1. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in upholding the AO's action of treating the sum of Rs. 2,87,50,000 as capital gains being amount received by the appellant on its agreeing to transfer the DRC in the favour of Mr. Bhojwani.
2. The appellant prays that the accrued sum of Rs. 2,87,50,000 cannot be taxed in the light of the decision of Hon'ble Supreme Court in the case of CIT v. Shoorji Vallabhdas & Co. .
VI. Assignment of Leasehold Land
1. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in upholding the AO's action of treating the sum of Rs. 1,50,297 received on transfer of its right in leasehold land to Mr. Samir Bhojwani as casual income under Section 10(3) of the Act.
2. He failed to appreciate and ought to have held that the said receipt shall not be chargeable to tax, as it would then constitute a capital receipt.
27. We have heard the parties. The issue has been elaborately discussed at pp. 8-11 of the order of the CIT(A) and at pp. 29-32 of the assessment order. Relying upon the assessee's letter dt. 31st Jan., 1996 submitted before the AO during the course of assessment proceedings for asst. yr. 1993-94, the learned CIT(A) has held that the capital gains as offered by the assessee in its return of income for the year under appeal has rightly been taxed under the head "Capital gains". At the time of hearing, the learned Counsel for the assessee did not press ground No. 5. He submitted that the issue raised in ground No. 6 should also be decided, in view of his not pressing ground No. 5, treating the transaction as giving rise to long-term capital gain. We order accordingly. Ground No. 5 is therefore dismissed while the issue raised in ground No. 6 is restored to the file of the AO for treating and taxing it as long-term capital gain.
28. Appeal filed by the assessee is partly allowed.
ITA No. 3301/Mum/2001: (Department's appeal)29. Ground No. 1 reads as under:
On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in allowing treatment of expenses incurred on issue of bonus shares as revenue expenditure ignoring the decision of the Supreme Court in the case of Brooke Bond India Ltd. v. CIT .
30. The issue is covered against the Department by the decision of the Hon'ble Supreme Court in CIT v. General Insurance Corporation . Ground No. 1 is therefore dismissed.
31. Ground No. 2 reads as under:
On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in allowing the exclusion of Modvat credit from the valuation of the closing stock.
32. We have heard the parties. The issue is covered against the Department by the decision of the Hon'ble Supreme Court in CIT v. Indo Nippon Chemicals Co. Ltd. and also by the orders of this Tribunal in the assessee's own case for asst. yrs. 1994-95, 1995-96 and 1997-98. Ground No. 2 is therefore dismissed.
33. Ground No. 3 reads as under:
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. 1,46,114 out of the disallowance made under Section 37(4) of the IT Act on the ground that such expenditure was incurred on maintenance of 'holiday home' for employees whereas the assessee had produced no evidence whatsoever that the guest house at Alibaug was really maintained as 'holiday home' as contemplated in the said Section 37(4) of the IT Act.
34. We have heard the parties. At the time of hearing, the learned Counsel for the assessee submitted that the issue has been remanded back by this Tribunal to the file of the AO in its orders for asst. yrs. 1994-95, 1995-96 and 1997-98. The learned Departmental Representative invited our attention to the decision of the Hon'ble Supreme Court in Britannia Industries Ltd. v. CIT in support of, his appeal. Since the issue has already been restored to the file of the AO by this Tribunal in other years, we consider it appropriate to remand back the matter to the file of the AO for a fresh decision in the light of the directions given by this Tribunal in its order for other years. The AO shall also keep in view the decision of the Supreme Court (supra).
35. Ground No. 4 reads as under:
On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in directing the AO to allow relief under Section 80-1 without first reducing the eligible profits by the relief admissible under Section 80HH which is in the contravention of the provision of Sub-section (9) of Section 80HH of the IT Act.
36. At the time of hearing, the learned Counsel for the assessee submitted that the issue was covered in favour of the assessee by the decision of this Tribunal in the assessee's own case for asst. yrs. 1994-95, 1995-96 and 1997-98 as also by the decision in CIT v. Nima Specific Family Trust (2001) 165 CTR (Bom) 518 : (2001) 248 ITR 29 (Bom). In this view of the matter, ground No. 4 is dismissed.
37. Ground No. 5 reads as under:
On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in law, in holding that the interest income amounting to Rs. 1,36,01,899 should be treated as 'income from business' and not as 'income from other sources' as held by the AO.
38. Para 13 of the assessment order deals with the issue as under:
In the computation of total income, the assessee has not reduced dividend amounting to Rs. 54,54,248 and interest amounting to Rs. 3,91,13,884 (intercorporate interest received on ICDs as per details submitted vide their letter dt. 4th Sept., 1998) for computing the business income. Both dividend and interest are taxed as income from other sources.
39. On appeal, the learned CIT(A) has disposed of the issue with the following observations:
10.1. I have considered the issue. I find that the Hon'ble Bombay High Court's decision in the case of CIT v. Paramount (P) Ltd. (1991) 190 ITR 259 (Bom) deals with a situation where the entire interest sprang from the business activity of the assessee and did not arise out of any independent activity. The Hon'ble Supreme Court's decision in the case of Govinda Choudhary & Sons basically underlines the fact that interest partakes the same character as payment on which (interest is) awarded. The details of interest earned are as under:
Interest on inter corporate deposits Rs. 2,55,11,985 Discounting charges received Rs. 1,36,01,899 Total Rs. 3,91,13,884 Interest debited to P&L a/c Rs. 3,96,66,000
10.2 The decisions cited by the appellant merely clarifies the issue that the interest should have been due to the business activity and not incidental to it. The interest derived out of inter-corporate deposits does not emanate from the appellant's business. The AO has rightly considered the interest on intercorporate deposits as income from other sources. With regard to discounting, the appellant drew my attention to the object clause No. 26 of the appellant company which permits it to carry on bill discounting activity. The relevant object clause reads as under:
To draw, make, accept, endorse, discount, execute, issue, negotiate, assign and otherwise deal in cheques, drafts, promissory notes, bills of exchange, Hundies, debenture bonds, bills of lading, railway receipts, warrants and all other negotiable or transferable instruments.
10.3 I have considered the facts before me. I agree with the appellant that discounting activity is part of their business activity as seen from the relevant object clause. The income derived out of discounting is hence to be treated as business income.
40. We have heard the parties. In our view, the learned CIT(A) has correctly held that discounting activity undertaken by the assessee was a business activity as it was duly covered by the objects clause of memorandum of association of the assessee. Learned Departmental Representative could not place any material before us to show as to how the finding of fact recorded and conclusion reached by the learned CIT(A) were erroneous. In this view of the matter, the order passed by the learned CIT(A) is confirmed. Ground No. 5 is dismissed.
41. Ground No. 6 reads as under:
On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in treating the non-compete fees as long-term capital gains without appreciating that there was no capital asset on transfer of which gains could have accrued, as has rightly been held by the AO in his assessment order.
42. The issue raised by the Department has already been dealt with while deciding ground Nos. 3 and 4 in the appeal filed by the assessee. Following the same, ground No. 6 is dismissed.
43. Ground Nos. 7 and 8 read as under:
7. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in restricting the disallowance made by the AO on account of expenditure in hotels to 50 per cent of Rs. 50,45,625 on the ground that the same represented expenditure incurred for entertaining the employees in hotels without appreciating that the disallowance of Rs. 50,45,625 made by the AO was in accordance with Explanation to Section 37(2A) and was in the nature of entertainment expenditure.
8. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in allowing 50 per cent of Rs. 16,01,020 being the expenditure incurred and in clubs on food, beverages etc. without appreciating that the AO had correctly worked out the disallowance in accordance with explanation to Section 37(2A)of the IT Act.
44. We have heard the parties. At the time of hearing, the learned Counsel for the assessee submitted that this Tribunal has already held in the assessee's own case for asst. yrs. 1994-95, 1995-96 and 1997-98 that 25 per cent of the aforesaid expenses would not be treated as entertainment. We therefore direct the AO to modify his order in the light of the decision of this Tribunal for the aforesaid years in the assessee's own case. Ground Nos. 7 and 8 are treated as allowed in terms of the aforesaid directions.
45. Ground No. 9 reads as under:
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. 18,56,565 being club membership fees ignoring the facts that the expenditure incurred by the assessee on such fees is not business expenditure.
46. We have heard the parties. At the time of hearing, the learned Counsel for the assessee submitted that the issue was covered in favour of the assessee by the orders of this Tribunal in the assessee's own case for asst. yrs. 1994-95, 1995-96 and 1997-98. Following the same, ground No. 9 taken by the Department is dismissed.
47. Appeal filed by the Department is partly allowed.