Income Tax Appellate Tribunal - Chennai
T.T.Krishnamachari & Co., Chennai vs Assessee on 12 October, 2011
IN THE INCOME TAX APPELLATE TRIBUNAL
'B ' BENCH, CHENNAI
[BEFORE SHRI HARI OM MARATHA, JUDICIAL MEMBER
AND SHRI N.S. SAINI, ACCOUNTANT MEMBER]
I.T.A Nos.1183 to 1188/Mds/2009
(Assessment years : 1999-2000 to 2004-05 )
The ACIT vs M/s T.T. Krishnamachari & Co.
Circle XV 6, Cathedral Road
Chennai Chennai 600 086
[PAN - AAAFT0395D]
(Appellant) (Respondent)
I.T.A Nos.1039 to 1043/Mds/2009
& 448/Mds/2010
(Assessment years : 2000-01 to 2005-06 )
M/s T.T. Krishnamachari & Co. vs The ACIT
6, Cathedral Road Circle XV
Chennai 600 086 Chennai
(Appellant) (Respondent)
Department by : Shri K.E.B Rengarajan, Jr. Standing
Counsel
Assessee by : Shri R.Vijayaraghavan
Date of Hearing : 12-10-2011
Date of Pronouncement : 19-10-2011
ORDER
PER BENCH:
This is a bunch of twelve appeals - six appeals by the Revenue for assessment years 1999-2000 to 2004-05 and six by the assessee :- 2 -: ITA 1183 to 1188/09 1039 to 1043/09 & 448/10 for assessment years 2000-01 to 2005-06. In all these appeals, almost identical issues are involved, therefore, for the sake of convenience and brevity, we proceed to decide them by a common order. The leading appeal was stated to be Revenue's appeal in I.T.A.No. 1186/Mds/2009 for assessment year 2002-03, which is filed against the order of the ld. CIT(A) dated 31.3.2009. Therefore, for the sake of convenience, we narrate the facts of this appeal.
I.T.A.No. 1186/Mds/2009 - A.Y 2002-03
2. The assessee-firm derives income from its activities of clearing/forwarding and from trading. The firm filed its return of income for assessment year 2002-03 on 31.10.2002 declaring net loss of ` 7,00,54,515/-. The returned income was accepted u/s 143(1) on 19.3.2003 and a refund of ` 1,31,60,432/- was issued on 31.10.2003. The assessee is a partnership firm consisting of three partners. The total loss declared by the assessee-firm was arrived at after setting off of business loss of ` 7,15,54,959/- against an income of ` 13,06,365/- computed under the head 'Income from Property' and a further income of ` 1,93,076/- has been computed under the head 'Capital Gains'. The assessee-firm has computed net loss under the head 'business'. As per the Profit & Loss Account for the accounting period ended 31.3.2002 a net profit of ` 8,05,57,911/- has been reported. A :- 3 -: ITA 1183 to 1188/09 1039 to 1043/09 & 448/10 long term capital gains of ` 20,09,691/- on the sale of shares for the accounting period ended 31.3.2002 was computed but net gains has been shown at ` 1,93,076/- because of setting off of the losses carried forward from the assessment years 1998-99, 1999-2000 and 2001-02. Finally, assessment order was made u/s 143(3) vide order dated 31.3.2005 determining taxable income at ` 13,45,91,800/- for the assessment year 2002-03. The Assessing Officer has added certain amounts under the head 'business' and has converted the losses of ` 7,15,54,959/- into a profit of ` 13,62,51,553/-. The adjustments made to the income under the head 'business' can be summarized as under under:
(i) A sum of ` 10,00,00,000/- claimed as deduction from the profits and as representing capital receipt was added back.
This sum had been received by the firm during the accounting period ended 31.3.2002 as consideration for agreeing for the removal of the restrictive covenant in a joint venture agreement it had entered into with a foreign company, M/s. Sara Lee/D.E.N.V. It has to be noted here that this sum had been however subjected to tax as capital gains in the impugned assessment order.
(ii) A sum of ` 10,25,00,000/- claimed as 'Bad Debt' written off was disallowed and added to the business income.
(iii) An interest expenditure of ` 46,29,782/-(net) claimed as payable to ICICI Bank Ltd. was disallowed and added as not relating to the firm's business.
(iv) Expenditure incurred by the firm towards payment of commission, professional fees and interest totalling to ` 6,60,000/- was disallowed. As these payments were claimed to have been made to (Late) Shri T.T. Vasu, who was related to the partners, the Assessing Officer was of the view that this expenditure was unnecessary and it did not relate to the firm's business.
:- 4 -: ITA 1183 to 1188/09
1039 to 1043/09 & 448/10
(v) A sum of ` 16,7301- representing the difference in interest receipts from ICICI Bank Ltd. was also added.
(vi) Apart from the above, the Assessing Officer had re-
computed the Long Term Capital Gains at ` 7,82,884/-. As already mentioned, in the return filed, the firm had admitted an income by way of Long Term Capital Gains a sum of ` 20,09,691/- against which it had claimed set off of Long Term Losses carried forward from the earlier years 1998- 99, 1999-00 and 2001-02 totalling to ` 18,15,615/-. Out of these losses, the Assessing Officer had not permitted the benefit of set off of a loss of ` 5,89,808/- pertaining to the assessment year 2001-02 whereas, he had allowed the losses carried forward by the firm from the other two assessment years 1998-99 and 1999-2000 totalling to ` 12,26,807/-.
(vii) Thus, the Assessing Officer had raised a net demand of ` 6,51,54,685/- which was inclusive of an interest of ` 1,45,81,770/- charged u/s 234B and an interest of ` 11,84,436/- levied u/s 234D of the Act.
2. Aggrieved, the assessee had challenged the above additions and after considering the rival stands, the ld. CIT(A) has given a part relief to the assessee and that is why both the parties are aggrieved.
3. The first two issues in the Revenue's appeal are against the allowance of interest paid by the assessee on borrowals which were utilized for reviving the business of M/s TTK Textiles Limited and write off of advance of ` 10.25 crores made to M/s TTK Textiles Limited :- 5 -: ITA 1183 to 1188/09 1039 to 1043/09 & 448/10 allowed as a deduction. As the issues are interlinked, they are considered together.
4. For assessment year 2002-03, the assessee-firm M/s TTK & Co. had claimed a sum of ` 61,81,852/- as interest paid to ICICI Bank Ltd. As against this, a sum of `15,51,070/- as representing interest received from ICICI Bank Ltd. had been adjusted and the net interest paid was shown as ` 46,29,782/-. The Assessing Officer observed that the firm had obtained a Term Loan of ` 10 crores from ICICI Bank Ltd during the accounting period ended 31.3.99 and out of this, a sum of ` 2.50 crores was continued to be shown as liability as at 31.3.2002 also and the interest expenditure of ` 61,81,852/- claimed was on this Term Loan. Further he found that the firm had utilised these borrowed funds to make advances to and investments in the shares of the company, M/s TTK Textiles Ltd. It was explained before the Assessing Officer at the stage of assessment that the Term Loan from ICICI Bank Ltd., availed by M/s TTK & Co. was utilised by the firm for a specific purpose of advancing monies to M/s TTK Textiles Ltd, a group concern, as per a Scheme approved by the Board for Industrial and Financial Reconstruction (BIFR). It was also stated before the Assessing Officer that this company was promoted by the firm, M/s TTK & Co., as part of its business activity and was also :- 6 -: ITA 1183 to 1188/09 1039 to 1043/09 & 448/10 acting as a dealer of the products of this company. It was explained that since this company was becoming sick and M/s TTK & Co., was interested, as its promoter, in its revival it had invested in this company as per the directions of the BIFR. So much so, it was argued that the interest liability on this Term Loan from ICICI Bank Ltd must be considered as relating to the business of the firm, M/s TTK & Co. and that the loan funds cannot be said to have been diverted for non-business purposes. It was also shown before the Assessing Officer as to how the loan balances were getting reduced year after year. But rejecting all the plea made by assessee-firm the Assessing Officer disallowed the interest expenditure incurred and claimed by the firm on the balance outstanding out of the Term Loan of ` 10 crores from ICICI Bank Ltd for the main reason that the funds borrowed had not been utilised in the business of the assessee-firm itself. The Assessing Officer held that it is not as if the main business of the assessee-firm was making investments in other concerns. The main business of M/s TTK & Co, as per the partnership deed, was that of manufacturing and the firm's activities were those of manufacturers, representatives, dealers, importers, exporters and such other lines and activities as may be determined from time to time. The expenditure incurred by M/s TTK & Co towards interest on borrowed funds that were utilised for investing in a sick company had no nexus with the :- 7 -: ITA 1183 to 1188/09 1039 to 1043/09 & 448/10 business of the firm. The investment made in the sister concern though incidental to carrying on of the business of the firm on the above lines, had to be treated as capital in nature. The Assessing Officer had mainly relied on the reasons given for a similar disallowance made in the assessee's own case for the earlier assessment year 2001-02. He had noted that the Advances, Deposits and the Investments had been coming down from what it was as on 31.3.2001 at ` 11,11,84,117/- to ` 6,10,46,782/- as on 31.3.2002.
5. TTK & Co., was the promoter of all the companies. The main business of the firm was trading, marketing, warehousing as well as promotion of companies to engage in various businesses. The firm promoted and invested in these companies, permitted the companies to use the valuable name and logo of 'TTK' In the initial years the firm also acted as a distributor of the products of the company till the companies were able to carry out the marketing on their own. The partners of the firm are also Directors of the company. The firm not only invests in the shares of the promoted companies, it also provides comfort and guarantee to the lenders of such companies. The firm is receiving huge royalty from the companies for the use of the name and logo 'TTK'. Interests earned on monies advanced earlier to these companies were being assessed as business income. Therefore, there :- 8 -: ITA 1183 to 1188/09 1039 to 1043/09 & 448/10 is a close business connection between the assessee-firm and the companies promoted by them. Not only was it the business of the assessee to promote companies but also invest in the capital, permission to use the name on payment of royalty and appointment of Directors would also indicate the existence of business connection. There is continuity in the relationship and use of the name 'TTK' improves the profitability of the companies and also results in income of the assessee. The partners of the assessee-firm also participate in the management of the companies. Thus, there is business connection between the assessee and the companies promoted by them. Promotion of new companies which results in expansion of the business and income of the firm is in the course of business of the assessee. The assessee has promoted more than a dozen companies in which it has invested in equity and has earned Royalty, for the use of the name. As regards M/s TTK Textiles Ltd in particular, it was submitted that this company was promoted by M/s TTK & Co., and that the company had been selling its products under the brand name of "TANTEX HOSIERIES" The firm was receiving income by way of royalty from this company for a number of years for using the name and Logo of 'TTK'. It was stated that however, due to recession in the textile industry. The entire net worth of the company M/s TTK Textiles Ltd was eroded by the year 1997and so, its case was referred :- 9 -: ITA 1183 to 1188/09 1039 to 1043/09 & 448/10 to the BIFR It was submitted that when the matter of reconstruction of the company was dealt with by the BIFR, the assessee-firm had advanced huge funds to the extent of ` 35.51 crores to M/s TTK Textiles Ltd on various dates with the aim of reviving this company and that these amounts were utilised by this company to settle its various liabilities. It was emphasized that huge advances had to be necessarily given by M/s TTK & CO., to M/s TTK Textiles Ltd as per the Scheme laid down by the BIFR in their order dated 15.1.2001.
6. The circumstances that led the assessee-firm to advance ` 35.51 crores to the company M./s TTK Textiles Ltd., as explained in the written submission, is extracted below:
"TTK & Co are the promoters of TTK Textiles Ltd which had mainly Spinning Division and Textile Division as its activity. Amongst others promotion of business entities is a business of TTK & Co.,Partners of TTK & Co., had provided Guarantees to Institutions and Banks in connection with the loans extended by them to TTK Textiles Ltd.
Due to severe recession in the Cotton Spinning Industry, Spinning Division started making huge losses which affected the monies available for promotion of Tantex brands ay Hosiery Division. Thus this Division also started incurring losses.
The company could not honour its commitments of repayments to the institutions as well as creditors who have supplied materials. The company was not in a position to pay wages in time to workers.:- 10 -: ITA 1183 to 1188/09
1039 to 1043/09 & 448/10 In view of the default in payment of interest and instalments to institutions .the company was saddled with huge interest burden including compound interest and penal interest.The Company was in the process of being classified as defaulting Company and the promoters (TTK & Co) as defaulting promoters by financial institutions.
The above situation led to affecting the image of the other companies in the TTK Group amongst the Banks and institutions. The other companies in the group were finding it difficult to avail appropriate credit limits under competitive terms since the promoters (TTK & Co.,) of these company were viewed as defaulting promoters. In any case, TTK & Co., had given guarantees and comforts to lending institutions.
TTK & Co., derives its business income by way of license fees for use of its logo, commission, etc from various companies under the group TTK & Co., was also receiving license fee from TTK Textiles Ltd Any fall in the business of these companies due to the defaults of TTK Textiles Ltd or its promoters would have significantly affected the business income of TTK & Co., Thus, by way of business expedience TTK & Co., had provided monies to TTK Textiles Limited to enable them to honour their commitments to various creditors including banks and institutions and also to revamp the business. It also enabled TTK Textiles to make payments to workmen and statutory contributions like PF, ESI etc Any default in such contributions would have invited criminal proceedings against the promoters and the Directors.
Apart from the above, as per BIFR scheme the promoters were required to bring in adequate sources to fund cash losses and other exigencies of the Company.
Thus the exposure to TTK Textiles was done as part of the business and protect the overall income of TTK & Co., Out of the total amount of ` 35.51 crores advanced only ` 3 crores was advanced as share application money,. Out of the balance, ` 11.89 crores were converted into Bond/shares in June/Sept/Dec. 2001.":- 11 -: ITA 1183 to 1188/09
1039 to 1043/09 & 448/10
7. As to the reference made to BIFR of M/s TTK Textiles Ltd and the order dated 15.1.2001 passed by the Board and the obligation arising therefrom to M./s TTK & Co., the ld.AR highlighted the following aspects.
(i) As the net worth of M/s TTK Textiles Ltd was fully eroded by the losses incurred as per the Balance Sheet as at 31st December 1997 the company was registered with BIFR in the year 1998 as per provisions of section 3(1)(o) of the Sick Industrial Companies (Special Provisions) Act, 1985. In the first instance BIFR asked the company to prepare a scheme on its own under section 17(2) of the Act. Later the BIFR appointed Bank of Baroda as Operating Agency under sec 17(3) of the act. The BIFR process was a time consuming one and it was very difficult to arrive at any settlement with the creditors as well as to revive the company without the cooperation and assistance of the promoters who had to work with the operating agency. It was stated that the Operating Agency being an independent agency was accountable only to the BIFR and hence the scheme prepared by the operating agency and as approved by the BIFR was binding on the company and its promoters.
(ii) It was further submitted that if a company is referred to BIFR and continues to be registered under BIFR, it affect the image of the entire Group and the banks do not consider exposure to other companies of the group favourably. Further continuing to be registered under BIFR, reduces the operating flexibility.
(iii) It was also stated that a company comes out of BIFR only after the networth is made positive and that this is achieved by several measures which include reduction of capital, converting part of the loans as capital waiver of interest, splitting of companies etc And so the scheme as approved by :- 12 -: ITA 1183 to 1188/09 1039 to 1043/09 & 448/10 the BIFR for revival of M/s TTK Textiles Ltd involved the following activities to be carried out. a. Splitting of the company by transferring the Spinning Division to a separate company called TTK Spinning Ltd., b. Renaming TTK Textiles Ltd as TTK Tantex Ltd as the Spinning Division has been hived off into a separate company as referred to above.
c. Setting off a part of the losses against the capital of TTK Textiles Ltd.
d. Converting part of the loan extended by TTK & Co., and others to TTK Textiles Ltd as Shares/Bonds.
e. Bringing into books, the value of Tantex brand based on an external Valuation Report and setting off book losses against the surplus recognized in the books due to valuation of the brand.
f. Promoters were to bring in needful funds to meet cash losses of TTK Textiles Ltd and also to meet all unforeseen contingencies.
g. TTK & Co., provided a sum of ` 35.51 crores
from 1998 to 2003.
h. Pursuant to BIFR orders, TTK & Co., was to
be allotted shares/Bonds instruments, etc
aggregating to ` 11.89 crores thus leaving a sum of ` 23.62 crores as Unsecured Loans.
8. Thus, It may be noted from the above synopsis that out of the total of the funds advanced by the assessee-firm to the company M/s TTK Textiles Ltd, allotment of shares, bonds etc were for ` 11.89 :- 13 -: ITA 1183 to 1188/09 1039 to 1043/09 & 448/10 crores and the balance of ` 23.62 crores were to be treated as "Unsecured Loans" only. That the assessee-firm was under the obligation to make advances to or investments in the company M/s TTK Textiles Ltd during the financial year 1998-99 itself, but without adequate returns was explained by the assessee's representative as under in the written submission filed.
9. The BIFR in their order for reconstruction of the company has observed that M/s TTK Textiles was promoted by the assessee- firm. They had directed the amounts already brought by the promoters to the extent of ` 5.35 crores should be converted into optionally convertible Bonds and optionally convertible preference shares. (Clause 9.2 of the BIFR's Order). Further the BIFR has held in clause 12.2.(e) and (f) that interest on optionally convertible Bonds shall be paid only after accumulated loss was wiped off and the promoters shall not charge interest on loans given from 1.4.98. Under clause 12.2.(g) they have directed that the promoters shall bring in needful funds from their own sources to meet the cash loss in the respective years.
10. It was further explained by the ld.AR in the written submission as to how the steps taken for revival of the company M/s :- 14 -: ITA 1183 to 1188/09 1039 to 1043/09 & 448/10 TTK Textiles Ltd did not yield fruitful results and ultimately, the amounts invested by the assessee-firm that were treated as unsecured loans had to be written off by it in the accounting period ended 31.3.2002 as well as in the next accounting period. An extract from the submission made in this regard is given below:
1. After hiving off Spinning Division into a separate company, TTK Textiles Ltd focused on Hosiery business.
2. One of the proposals for TTK Tantex was to fund a Joint Venture partner.
3. The company looked for several overseas partners who were interested in coming into India for exploiting the Tantex brand and as well as outsource products for export brands.
4. The potential joint venture partners wanted 51% stake in the company However, as the Hosiery manufacturing wads reserved for small scale sector, the company had to seek approval from Foreign Investment Promotion Board (FIPB).
5. Due to policy and regulatory framework, the company was finding it difficult to obtain necessary clearances and the potential foreign collaborators lost interest.
6. The company tried for participation of Private Equity Funds in the revival of the company. In fact the company signed with one private equity partner for infusion of capital as well as strategic inputs. Due to South East Asain Capital market crisis, the equity partner backed out of its commitments.
7. The company did revive its promotion campaign but could not sustain due to severe competition from unorganized sector. The company also could not ensure a reasonable margin due to customer resistance against end product price increase.:- 15 -: ITA 1183 to 1188/09
1039 to 1043/09 & 448/10
8. As the business continued to make losses due to the above factors, the promoters could not afford to keep pumping monies. Hence TTK Tantex decided to dispose the Tantex brand.
11. After considering the various decisions and submission of the assessee, the CIT(A) held as under :
"10.5.1 - All facts regarding the revival scheme as approved by the BIFR and as brought out in the earlier paragraphs were before the assessing officer, but he had still gone ahead with due disallowance of the entire interest expenditure of rs.46,29,782/- (net) by citing the decision of four High Courts including the jurisdictional Court. He had also invoked Section 14A of the Act. But if an analysis of the utilization of the borrowed funds had been attempted as shown in paragraph Nos.6.1, 6.2 (g) and 9.2(b), 9.2(c) and 9.2(d) above, then it will be clear that the assessing officer was certainly not correct in disallowing the interest expenditure in respect of borrowed funds and further that he ought to have considered and allowed the expenditure claimed on the borrowed funds that had been invesed in the company M/s.TTK Textiles Ltd for which shares and bonds had been allotted under the scheme laid down by the BIFR in their order dated 15.01.2001 cited above. On a complete analysis of the facts as brought out in the earlier paragraphs, it is seen that there is enough merit in the stand taken by the appellant that the whole processes carried out by M/s.TTK & Co ., the appellant firm under the scheme of the BIFR was out business exigencies and that it was not as it there had been diversion of the funds of the firm for non business purposes.
10.5.2 It was also brought out in the earlier paragraph while giving an analysis of the case of K.Somasundaram & Brothers that through the madras High Court approved the department's action of disallowing interest on the borrowed funds for the reason that the assessee had added on to its interest liability unnecessarily by diverting its funds for non business purposes. It was observed by their Lordships that where the expenditure claimed was shown to be for commercial expediency, the same must be allowed u/s.36. So, both the Madras High Court as well as the Supreme Court have clarified that wherever the diversion of the funds had taken place out of commercial expediency, the interest expenditure incurred by an assessee on borrowed funds that were diverted cannot be disallowed. Therefore, in the present :- 16 -: ITA 1183 to 1188/09 1039 to 1043/09 & 448/10 appellant's case, the question of deciding the commercial expediency in the appellant firm borrowing from ICICI Bank Ltd and advancing to M/s.TTK Textiles Limited is revolving around the scheme of the BIFR. Even if it be that the appellant firm was bounded by the regulations of the BIFR to make advances to the sister concern which had become sick, still, it can be said that so long as the funds borrowed by the firm and given as advances to the sister concern were uitlised only in the business of that concern and the appellant firm did not derive any benefit even out of the allotment of shares and bonds etc.m by that company, the interest on the borrowals claimed by the appellant firm cannot be allowed as its business expenditure as the borrowed funds were not utilsied in its business. But this line of argument is not correct because of the simple fact that it is not only that the appellant firm had to come into the picture in the scheme of the BIFR for the revival of the sick company M/s.TTK Textiles Ltd as its promoter, but the very fact that one of the business activities of the appellant firm is promotion of business and companies as evidenced by the partnership deed and in that process, it had earlier promoted the sister concern M/s.TTK Textiles Ltd and when that concern had become sick and had to be rehabilitated, the responsibility of such rehabilitation or revival automatically came to the appellant firm is that which proves the commercial expediency in the appellant firm going in for the term Loan from ICICI Bank Ltd during the financial year 1998-99 when its own funds were insufficient and its profits were inadequate. The continued advancing of funds to the sister concern by the appellant firm during the subsequent accounting periods was also necessitated by the scheme of the BIFR and the fact that as a promoter of the sister concern, worth turned positive is significant. The sequence of events that had taken place supporting this finding have been elaborated in the various sub-paragraphs of paragraph No.6 of this order. Further, the salient features of the order of the BIFR were also discussed in paragraphs No. 7 to 7.7.1.
10.5.4 The nature of the activities carried on by the partnership firm have been brought out in paragraphs Nos. 4.3.1 , 4.3.1.1. and 4.3.2.1. above. It was also stated in paragraphs Nos.4.3.1.1, 4.3.2 and 4.3.2.1 as to how M/s TTK & Co was participating as a promoter and as a share holder with substantial holding of shares in different companies the TTK Group over a period of years even prior to the financial year 2001-02. These details will establish the fact that M/s TTK & Co had been investing in other concerns of the TTK Group as a promoter of those businesses which was very much part of its business activities. It was explained in paragraphs Nos.4.3.2, 4.3.2.1, 4.3.3, 4.3.3.2, 7 to 7.6 above :- 17 -: ITA 1183 to 1188/09 1039 to 1043/09 & 448/10 as to how M/s TTK & Co., was also under obligation to bring substantial funds in order to revive the business of M/s TTK Textiles Ltd/TTK Spinning Ltd/TTK Tantex Ltd., It was already established in paragraph No.10.5.4 as to how the appellant firm had to enter the proceedings before the BIFR in its capacity as a promoter of M/s TTK Textiles Ltd which is part of business activity. There was certainly commercial expediency which made M/s TTK & Co go in for borrowals in order to find resources for making advances to its sister concern, M/s TTK Textiles Ltd without which the other company would not have been able to carry out the entire programme and get the scheme for its revival approved by the BIFR. This is evident from the salient features of the order of the BIFR that were brought out in paragraphs No. 7.1 to 7.6 above. And so, the ratio of the Supreme Court's decision in the case of S.A. Builders :Ltd., is squarely applicable to the facts prevailing in the present appellant's case.
10.5.4 Though the complete facts in the case of S.A. Builders Ltd are not available in the decision reported. The views expressed by the Supreme Court are very much relevant in the present context. Extracts of the relevant portions of this decision are given below:
"In order to decide whether interest on funds borrowed by the assessee to give an interest free loan to a sister concern (e.g. a subsidiary of the assessee) should be allowed as a deduction u/s 36(1)(iii) of the Income Tax Act 1961 one has to enquire whether the loan was given by the assessee as a measure of commercial expediency. The expression commercial expediency is one of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation. But yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency. For the purpose of business includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby. To consider whether one should allow deduction u/s 36(1)(iii) of interest paid by the assessee on amounts borrowed by it for advancing to a sister concern, the authorities and the courts should examine the purpose for which the assessee advanced the money and what the sister concern did with the money. That the borrowed amount is not utilised by the assessee in its own business but had been advanced as interest free loan :- 18 -: ITA 1183 to 1188/09 1039 to 1043/09 & 448/10 to it sister concern is not relevant. What is relevant is whether the amount was advanced as a measure of commercial expediency and not from the point of view whether the amount was advanced for earning profits. We wish to make it clear that it is not our opinion that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister concern. It all depends on the facts and circumstances of the respective case. For instance if the directors of the sister concern utilize the amount advanced to it by the assessee for their personal benefit, obviously if cannot be said that such money was advanced as a measure of commercial expediency. However money can be said to be advanced to a sister concern for commercial expediency in many other circumstances (which need not be enumerated here). However where it is obvious that a holding company has a deep interest in its subsidiary and hence if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes the assessee would in our opinion ordinarily be entitled to deduction of interest on its borrowed loans."
10.5.4.1 If the above views are applied to the present appellant's case then it is clear that even if there had been no regular business transactions or no profits were expected to be earned by the appellant firm for the impugned accounting period or for the subsequent periods still it has to be held that the interest expenditure incurred by the firm on the Term Loan was for the purpose of the business of the appellant firm only because as rightly argued M/s TTK & Co had the bounded duty to protect the business interests of the concerns in the entire TTK group and it had volunteered to incur the expenditure to the benefit of the company M/s TTK Textiles Ltd in its capacity as promoter of this company. The firm might have lost ultimately and had not earned profits out of the entire deal but still it has to be held that the amounts advanced to the extent shares and bonds were issued as per the directions of the BIFR were out of commercial expediency as the firm's business itself was to promote companies and businesses.
The observations made by the Assessing Officer in the impugned assessment order were brought out in paragraphs Nos. 4.1 to 4.1.8. The Assessing Officer :- 19 -: ITA 1183 to 1188/09 1039 to 1043/09 & 448/10 had stated that it was not as if the main business of the appellant firm was making investments in other concerns. And in paragraph No.4.1.2 the main activities of the appellant firm as shown in the impugned assessment order were brought out. The Assessing Officer had taken cognizance of all other activities of the appellant firm except the activity of promoting businesses and companies. The complete details of the income earned by the appellant firm by way of commission and royalty from the years 1972 to 1996 from the Tantex division and the Spinning division were brought out in paragraph nos. 4.3.9 & 4.3.9.1. The Assessing Officer had chosen to ignore all these vital facts. He had not made a complete analysis of the scheme of the BIFR and also the manner in which the other concern M/s TTK Textiles Ltd., had utilised the advances given by the appellant firm. It was brought out in paragraphs Nos.4.3.3.7 that the firm had a heavy responsibility of saving the sick unit in order to protect the business interests of all the concerns in the TTK Group. And it had taken upon itself this task in its capacity as the promoter of the other concerns in the group. The Assessing Officer had chosen to completely sideline the commercial expediency i.e. the fact that the appellant firm had a fulfil concern business commitments in its capacity as a promoter which is part of its business activities involved in the whole process. He had further chosen to apply sec, 14A in support of the impugned disallowance. And this line of thinking of the Assessing Officer also is not correct. Once the commercial expediency is established whether or not the appellant firm benefited out of the advances or the investments made is immaterial. It may be a fact that the appellant firm had not derived any income by way of dividend or interest from the shares and the bonds to the value of Rs 11.89 crores allotted to it to by M/s TTK Textiles Ltd/TTK Spinning Ltd/TTK Tantex Ltd and the shares and bonds were ultimately sold or redeemed by the firm at a loss. But these facts or events that had happened later on will not take way the commercial expediency with which the appellant firm had acted initially at the time of advancing monies to the sick concern."
:- 20 -: ITA 1183 to 1188/09
1039 to 1043/09 & 448/10
12. The CIT(A), therefore, concluded that the interest payable on the loans borrowed for advancing to sister concern was an allowable deduction. Aggrieved the Revenue is in appeal.
13. We have considered the rival submissions. From the facts culled out by the CIT(A) in his elaborate order, following emerge -
The assessee has started various companies permitted them to use the logo of 'TTK' giving them advance and also participated in their management by having partner of the assessee as a Director in the company.
The Company also received income, apart from dividend declared by the promoter company by way of royalty for the use of the name as well as marketing their product or providing services to them.
14. Hence, the assessee is in the business of promoting company as well as providing service and earning income therefrom and apart from funding them whenever necessary. It is in this context TTK Textiles has become sick and referred to BIFR. The assessee-firm as a promoter have been implemented the scheme for reviving TTK Textiles Ltd. BIFR in their order has clearly embargo on the appellant company to charge any interest on the amounts advanced to TTK Textiles. They also directed that the assessee-firm should provide :- 21 -: ITA 1183 to 1188/09 1039 to 1043/09 & 448/10 necessary fund for the revival of TTK Textiles Limited. It is in these circumstances, the assessee had advanced money to TTK Textiles Limited and in view of stringent financial circumstance do not charges any interest right from their initial loan given for the assessment year 1999-00. Even if the assessee had charged interest M/s. TTK Textiles Ltd would not have been in a position to pay the same and the assessee would have to write of such interest charged. Further by virtue of BIFR, the assessee would have to cancel the interest, if any, charged by them in TTK Textiles Limited.
15. It is not doubted that the assessee as a promoter of various companies, have a very close business connection with the company promoted by them. The assessee also earned income by way of royalty and other service charges from M/s. TTK Textiles Limited. As extracted by CIT(A) the decision of the Apex Court in the case of M/s.S.A.Builders reported in 288 ITR 1, is in favour of the assessee. In the case of Amalgamations Ltd, reported in 226 ITR 128 SC, holding company which had promoted various subsidiaries, had guaranteed loans taken by the subsidiary. When the Subsidiary went bankrupt, guarantee given by the holding company was invoked for payment and the Apex Court allowed the payment made under the guarantee by the :- 22 -: ITA 1183 to 1188/09 1039 to 1043/09 & 448/10 Holding Company as business deduction incurred in the course of business.
16. The assessee had also relied on the decision of the W.S.Industries Limited in ITA No 1373/Mds/08 and V.Ramakrishna and Sons in ITA No 2272/Mds/08 (confirmed by the Madras High Court reported in 326 ITR 315). These cases supports the submission of the assessee for the advances made by the assessee in the course of business to safe guard their name and prestige in their market should be considered as for the purpose of business and hence, interest on such loans are allowable u/s 36(1)(iii).
17. We agree with the impugned finding of the CIT(A) on this issue and hold that the interest payable by the assessee on its borrowings are allowable as deduction. The grounds raised by the Revenue on this issue stand dismissed.
18. The next issue of Revenue appeal is writing off of bad debt of ` 10.25 crores out of the amount advanced to M/s.TTK Textiles Limited. Here, again the assessee had written off out of the total advance of ` 35.50 crores to M/s.TTK Textiles a sum of ` 10.25 crores for the assessment year 2002-03 and ` 12.86 crores for the :- 23 -: ITA 1183 to 1188/09 1039 to 1043/09 & 448/10 assessment year 2003-04. It is to be borne in mind that out of the total advance of ` 35.50 crores given by the assessee to M/s.TTK Textiles, the assessee been granted optional convertible bonds of ` 4 crores, equity shares of TTK spinning Mills ltd of ` 4 crores, difference in share in TTK Tantex of ` 1.4 crores, Optional convertible bonds of ` 2.39 crores aggregating to ` 11.89 crores. A sum of ` 50 lakhs was received from TTK Textiles Limited. Therefore, the assessee had written off the balance advance amount of ` 23.56 crores for the assessment years 2002-03 and 2003-04. Bonds and share issued for and on behalf of the TTK Textiles have been retained by the assessee and have not been written off. It is only an advance given to TTK Textiles which, in the opinion of the assessee, has become irrecoverable inasmuch as the scheme for reviving of sick company had not taken off. The CIT(A) has allowed the claim of the assessee by observing as under:
"To conclude the inferences that are to be drawn from the discussions in the above paragraphs are as follows:
(A) As far as the interest claim on the loan balance in respect of the Term Loan of ICICI Bank Ltd is concerned the following findings are given:
(i) There exists a direct nexus between the borrowed funds and the advances made by the appellant firm to M/s TTK Textiles Ltd.
(ii) The entire loan amount of ` 10 crores had been advanced during the financial year 1998-99 to the company M/s TTK Textiles Ltd., :- 24 -: ITA 1183 to 1188/09 1039 to 1043/09 & 448/10
(iii) Though there were repayments made towards the Term Loan by M./s TTK & Co and the loan balances were being reduced from year to year the fact remains that the liability continued till the financial year 2002-03 and it added on to the interest liability of the appellant firm. The advances did not remain as advances but were converted in shares and bonds in the company M/s TTK Textiles Ltd during the financial year 2001-02.
(iv) Although the above facts seem to take the case of the appellant nearer to K. Somasundaram & Bros dealt with by the jurisdictional High Court and relied upon by the Assessing Officer, the ratio of this decision cannot be said to apply to the impugned disallowance as the existence of commercial expediency in diverting the borrowed funds to the sister concern M/s TTK Textiles Ltd has been established by the appellant.
(v) M/s TTK & Co had been allotted shares and bonds by M/s TTK Textiles /TTK Spinning Ltd/TTK Tantex Ltd covering the entire loan amount that had been given as advances.
In fact the value of shares and bonds so issued was to the tune of ` 11.89 crores which far exceeded the Term Loan that had been advanced to the sister concern.
(vi) As commercial expediency had been proved in the diversion of the borrowed funds based on two factors that promoting businesses and companies is one of the business activities of the appellant firm and the advancing of the moneys to the sister concern was in the course of its business and further such advancing was necessitated out of the order of the BIFR, the ratio of the Supreme Court's decision in the case of S.A. Builders Ltd is applicable to the interest expenditure claimed on the term loan of ICICI Bank Ltd and the Assessing Officer was not correct in disallowing the interest by applying the decision of the Madras High Court in the case of K. Somasundaram & Bros..
(B) As regards the appellant's claim towards the amounts of advances given to M/s TTK Textiles Ltd, that were written off as irrecoverable, the following findings are given:
(i) The sums of ` 10.25 crores and ` 12.87 crores claimed as deduction from the profits of the accounting periods ending with 31.3.2002 and 31.3.2003 do not represent any 'bad debts written off' within the meaning of section 36(1)(vii) r.w.s 36(2) of the Act.:- 25 -: ITA 1183 to 1188/09
1039 to 1043/09 & 448/10
(ii) The advances made by the appellant firm to the company M/s TTK Textiles Ltd/TTK Tantex Ltd. were in the course of its business of promoting businesses an companies. Furhter,t he firm was compelled to make a huge advances to its sister concern in order to revive it as per the scheme of the bIFR. When M/s TTK Textiles Ltd/TTK Tantex Ltd. became incapable of repaying the debts owing to the fact that there was no business carried on by it and its assets position was also reduced to minimal level and the advances were written off by the appellant firm, as per the ratio of the Supreme Court's decision in the case of CIT vs Amalgamations P. Ltd the firm is entitled to claim the amounts so written off as irrecoverable in its accounts as business losses and the same are alloable in principle.
(iv) The Assessing Officer was certainly not correct in his observation that the appellant firm had written off the amounts of advances as irrecoverable in the year in which it had been allotted shares, bonds and other securities by the company M/s TTK Textiles Ltd/TTK Tantex Ltd. and rejecting its claim in respect of the advances written off in its accounts during the accounting periods ended 31.3.2002 and 31.3.2003. He ought to have considered the totality of the facts before him.
(v) As the appellant firm had advanced monies to M/s TTK Textiles Ltd/TTK Tantex Ltd. as its promoter and when that company could not be revived, irrespective of the fact that the firm had written off the advances in its accounts in the year of giving the advances itself, it is entitled to claim the amounts so written off as business losses. As held by the ITAT, Chennai Bench in the case of V.D.Swamy & Co. Ltd./M/s South India Corporation, the nexus between the loss suffered by the appellant firm and the business carried on by it having been established, the balance of advances that became irrecoverable must be allowed as business losses."
19. Aggrieved, the Revenue is in appeal. The facts leading to the write off of loan have been elaborately brought out by the CIT(A) in her order. The assessee, as a promoter of various companies viz., :- 26 -: ITA 1183 to 1188/09 1039 to 1043/09 & 448/10 TTK Textiles Limited, was obligatory to fund and revive the TTK Textiles Limited and directed to do so by the BIFR. The assessee in all had provided a staggering sum of ` 35.35 crores and out of the same, the assessee was allowed bonds and equity shares to the extent of ` 11.89 crores and had got back the amount of ` 50 lakhs. Therefore, the balance advance amounting to ` 23.11 crores remains outstanding and the assessee was of the bonafide belief that no amount can be recovered out of this advance. The Company , already a sick company and referred to BIFR, could not be revived. It had no assets or means to repay this amount. In fact, the assessee as a promoter had to pump in monies to meet that company's liabilities to outsiders. It is in these circumstances, the assessee decided that the advances to M/s TTK Textiles Ltd have become irrecoverable as that company had no assets or means to repay the same. Hence, the assessee had written off the amount in its books of accounts. As held by the Supreme Court in the case of TRF Limited v CIT (323 ITR
397), when a debt is written off as irrecoverable in the accounts of the assessee then the same should be allowed as a deduction. Again the Apex Court in the case Amalgamations Ltd (226 ITR 188) has held that, when the assessee is in the business of promoting various companies and in the course of the same could not recover any amount paid for and on behalf of the promoted company, the same :- 27 -: ITA 1183 to 1188/09 1039 to 1043/09 & 448/10 should be allowed as bad debt or business loss. The assessee also relied on other decisions of the ITAT in the cases of W.S.Industries Limited in ITA No 1373/Mds/08 and V.Ramakrishna and Sons in ITA No 2272/Mds/08 (confirmed by the Hon'ble Madras High Court reported in 326 ITR 315), Chemplast Sanmar Ltd in ITA No 911, 952/M/1993 (which was affirmed by the High Court in TCA No 844, 845/04) wherein the tribunal has allowed the deduction of advances to associate concern written off as irrecoverable.
20. Respectfully following the ratio of the above decisions, we find that CIT(A) has rightly allowed the claim of the assessee for write off of ` 10.25 crores, being part of advance which are become irrecoverable from TTK Textiles Ltd. Hence, we dismiss the grounds raised by the Revenue in this respect.
21. The next issue of this appeal is against allowance of 50% of the technical fees and commission paid by the assessee to late Shri TT Vasu. The CIT(A) has found that it cannot be disputed that the contribution of Late Sri. T.T. Vasu, whether as a partner or after his retirement to the growth of the business of the assessee. Late Shri T.T.Vasu has taken great effort to enhance the business of the appellant firm and on account of his various business contacts and the :- 28 -: ITA 1183 to 1188/09 1039 to 1043/09 & 448/10 assessee has benefited substantially therefrom. In the circumstances we agree with the order of the CIT(A) regarding allowance of commission and 50% of the technical services paid to Late Shri T.T Vasu. The grounds raised by the Revenue stand dismissed.
22. In the result, the appeal of the Revenue, for assessment year 2002-03, stands dismissed.
I.T.A.No. 1041/Mds/09 AY : 2002-03
23. In this cross appeal filed by the assessee, for assessment year 2002-03, the first issue is against the treatment of ` 10 crores received by the assessee towards non-compete fee from M/s.Sara Lee. The assessee treated the same as capital receipt and held it as not subject to tax. The Assessing Officer held the entire amount of ` 10 crores as long term capital gains and charged accordingly. On appeal, the CIT(A), has held the same to be revenue receipt and thus enhanced the assessment by assessing the said sum of ` 10 crores as business income.
:- 29 -: ITA 1183 to 1188/09
1039 to 1043/09 & 448/10
24. The assessee-firm had credited in the profit and loss account for the accounting period ended 31.3.2002 a sum of ` 10 crores with the following narration:
Capital Receipts - consideration received for Removal of Restrictive Covenant and Discharge and Non compete Agreement.
25. The net profit shown of ` 8,05,57,911/- was after taking into consideration this receipt. However, the assessee had claimed this sum as exempt from taxation in the income Computation Statement accompanying the return filed for the assessment year 2002-03. After excluding the sum of ` 10 crores from the profits the firm had shown only a net loss of ` 7,15,54,959/- under the head 'Business'. This sum of ` 10 Crores was stated to have been received by the assessee-firm from a foreign company M/s. Sara Lee a member of the Joint Venture in which the assessee-firm had participated. One of the main activities of the assessee-firm, M/s TTK & Co, has been to promote companies and businesses and in that process it had been entering into joint venture agreements with different companies and making investments in those companies. M/s Kiwi TTK Ltd was one such joint venture in which the assessee-firm along with M/s TTK Pharma Ltd was participating and this joint venture company was engaged in the manufactured and marketing of products like leather care products, :- 30 -: ITA 1183 to 1188/09 1039 to 1043/09 & 448/10 domestic hygiene products shoe polish etc., Kiwi is the shortened form of SARA LEE -KIWI HOLDINGS INC. This concern wanted to expand its capacities and go in for production of certain new products. The joint venture agreement for expansion of the business of M/s Kiwi TTK Ltd was entered into between Sara Lee Corporation, TTK & Co Group consisting of T.T. Krishnamachari & Co., and M/s TTK Pharma Ltd and Kiwi TTK Ltd on 17.9.1993. The products to be manufactured under the expansion programme and by the joint venture company M/s Kiwi TTK Ltd were toilet and drain cleaner liquid toilet cleaner, leather goods finishing preparations, house hold cleaner, laundry care products house hold insecticides and automobile care products. The necessary approval for the expansion was obtained from the Government of India, vide Order No. FC II 282 (92) 358(92) dated 14.8.1992 issued by the Ministry of Industry, Department of Industrial Development Secretariat for Industrial Approvals. As per this agreement Kiwi was to hold 51% of the shares in the joint venture capital and the TTK group concerns were to hold 49%. As per this agreement Kiwi was to provide the necessary formulae, know how or other expertise required for manufacturing and marketing of the products dealt in by "Kiwi TTK. Further the management and control of the joint venture company was to be in accordance with the articles of association and the shareholders' agreement. :- 31 -: ITA 1183 to 1188/09
1039 to 1043/09 & 448/10
26. The shareholders' agreement was entered into by these companies on 17./9.1993 as per which Kiwi was to offer to the joint venture company additional brands other than KIWI and RIDSECT to be manufactured and or distributed in India for which purpose the parties shall enter into a license agreement with Kiwi. Further as per this agreement till such time the new products attain 20% gross profit as defined by Kiwi Controller Manual the joint venture company was to pay Kiwi a royalty equal to 5% of the sales to the company's distributor of the new brands. Also as per this agreement if either Kiwi or any concern in TTK & Co Group wanted to introduce any new product of the categories mentioned above in the Indian market then such party shall notify the joint venture Kiwi TTK and the other party. And the joint venture company Kiwi TTK Ltd shall be granted the option to manufacture these new products in addition to the range of products it had been already dealing in. But there was a time limit given to Kiwi TTK Ltd to exercise option in the sense that if within 3 months it had not exercised the option then the party which initially wanted to manufacture the new product shall be entitled to manufacture the same by itself or it could manufacture the product through a third party in India. This was a restrictive covenant in the joint venture agreement. But later on in the year 2001, the parties to :- 32 -: ITA 1183 to 1188/09 1039 to 1043/09 & 448/10 the joint venture agreement entered into another agreement whereby the restrictive covenant was removed.. This agreement was dated 30.9.2001. As per this agreement M/s TTK & Co the assessee-firm was paid a sum of ` 10- crores by M/s Sara Lee for agreeing to get out of the restrictive covenant in the joint venture agreement.
27. M/s TTK & Co had received the sum of ` 10 crores on 5.10.2001 According to the assessee-firm this receipt was for relinquishment/ restriction of the commercial right arising from the shareholding agreement with M/s. Sara Lee and therefore, it was a capital receipt. It had also claimed that this sum was a mere payment for breach of the terms of the Shareholders' Agreement and therefore it would constitute capital receipts in its hands. It was further argued that that there was no cost of acquisition incurred by the firm to acquire this right of first refusal through the Joint Venture agreement and therefore no capital gains tax was also leviable on this sum. It was pointed out that this type of receipt does not fall into the terms specified in sec. 55(1)(b) of the IT Act Reliance was placed on the following decisions:
(i) Oberoi Hotels Pvt Ltd. vs CIT (1999) 236 ITR 903(SC)
(ii) Godrej & Co. vs CIT (1959) 37 ITR 381(SC)
(iii) Kettlewell Bullen Co. vs CIT (1946) 53 ITR 261(SC) :- 33 -: ITA 1183 to 1188/09 1039 to 1043/09 & 448/10
28. After taking into consideration the contents of the shareholders' agreement the Joint Venture Agreement and the Sales Agreement entered into between M/s Sara Lee and the TTK Group of concerns of which the assessee-firm is one and after going into the other details furnished the Assessing Officer held that the entire receipt of ` 10 crores would constitute income by way of long term capital gains in the hands of the assessee-firm for the assessment year 2002-03 as there had been extinguishment of the right of not carrying on the business which was conferred originally upon M/s TTK & Co by the "Sales and purchase" agreement dated 17.9.93 and other subsequent agreements. Thus, according to the Assessing Officer, by virtue of the agreement dated 30.9.2001 entered into by M/s TTK & Co., with M/s Sara Lee Corporation, the right to carry on business in the various products as per the agreements entered into by the assessee-firm with the other concerns in the joint venture earlier got extinguished and so there was a transfer within the meaning of section 2(47) of the Act and therefore, the consideration received by the assessee-firm was exigible to capital gains tax. The Assessing Officer had gone into the definition of the term capital asset as given in sec 2(14) of the Act to include the right to carry on any business and also the right of not carrying on any business. The Assessing Officer had further held that the cost of acquisition of the right to carry on :- 34 -: ITA 1183 to 1188/09 1039 to 1043/09 & 448/10 business so acquired must be treated as NIL and also there was no cost of improvement to this right. Though the Assessing Officer had held in paragraph No.4.1.16 of the impugned order that the sum of Rs 10 crores was assessable as long term capital gains in the computation part of the impugned order in page No.18, he had included the same under the head Business.
29. Before the CIT(A), while objecting to the levy of capital gains tax on the sum of ` 10 crores received by the assessee from M/s Sara Lee Corporation during the accounting period ended 31.3.2002 the appellant has submitted that the amount received by the firm M/s TTK & Co., was for giving up certain rights of the firm arising from a contract and as there was no cost of acquisition for such rights the sum of ` 10 crores was not to be subjected to the levy of capital gains tax. Reliance was placed on the decision of the Hon'ble Supreme Court rendered in the case of CIT , Bangalore v B.C. Srinivasa Setty, reported in 128 ITR 294, wherein it was held that if there were no cost of acquisition capital gains tax cannot be levied. Without prejudice to the above arguments, it was contended that the Assessing Officer erred in not levying tax on ` 10 crores at the rates applicable to income by way of capital gains.
:- 35 -: ITA 1183 to 1188/09
1039 to 1043/09 & 448/10
30. During the course of hearing before the CIT(A), the assessee's representative furnished details and copies of the various agreements entered into by the TTK group of companies with Sara Lee and also the agreement under which the assessee-firm had received the sum of ` 10 crores. The circumstances under which M/s TTK & Co., was entitled to the sum of ` 10 crores are briefly narrated as under:
"M/s Kiwi TTK Ltd which was formerly known as "New Way Chemicals and Polishes (P) Ltd" was a joint venture between Kiwi an affiliate of Sara Lee Corporation and M/s T.T.Krishnamachari & Co., the appellant firm. There was an agreement entered into on 17th September 1993 between TTK & Co., Group concerns the firm M/s TTK & Co., and M/s TTK Pharma Ltd and the joint venture company M/s Kiwi TTK Ltd for the sale of the products of Kiwi TTK. This joint venture agreement was also governed by a shareholders' agreement. Kiwi was holding 25% of the share capital of Kiwi TTK and the remaining 75% was held by M/s TTK & Co., Group. By virtue of Kiwi amalgamating with M/s Sara Lee, the shares in M/s Kiwi TTK Ltd., were held by M/s Sara Lee Kiwi Holding Inc. and M/s TTK & Co., And so, actually, Sara Lee was holding 25% of the shareholding of Kiwi TTK and the remaining 75% was owned by the TTK Group the firm M/s TTK & Co., and the company, M/s TTK Pharma Ltd, And later on, Kiwi's shareholding was increased to 51% and the holding of M/s TTK & Co Group was only 49%. M/s Kiwi TTK Ltd was also manufacturing Kiwi shoe polishes. And by virtue of the joint venture agreements entered into in the year 1993, the partners of the joint venture were to go in for the manufacture and marketing of new products. It has to be noted here that before the year 1992, the products manufactured by the joint venture company, "New Way Chemicals and Polishes (P) Ltd were mainly Kiwi shoe polish and Dranex. Whereas as per the agreements entered into in the year 1993, the joint venture company :- 36 -: ITA 1183 to 1188/09 1039 to 1043/09 & 448/10 had expanded its business by including in its agenda manufacture and sale of personal care products viz., hair care and cosmetics under the brand "Brylcream" and the like. The turnover of the joint venture company increased from Rs 3 crores in the year 1992 to over Rs 30 crores in 2000-01. But suddenly the foreign company Sara Lee decided to tap the Indian market through certain other joint venture concern in which the firm TTK & Co was not a partner for manufacture and sale of some new products in the insecticide category which were, of course, coming under household products. And with that motive, Sara Lee wanted to remove the restrictive covenant whereby the members of the TTK Group were hitherto exercising the first right of refusal and the foreign company was prepared to pay a compensation of Rs 10 crores to the appellant firm. Further, Sara Lee wanted to acquire the entire stake of the TTK group in the joint venture "Sara Lee TTK" so that the joint venture would become 100% subsidiary of the foreign company. That is how an agreement was entered into between the parties on 30.9.2001 as per which TTK & Co., agreed for the removal of the restrictive covenant in the joint venture agreement dated 17th September 1993 for a consideration of ` 10 crores. And ultimately TTK & Co., Group had disposed of the shares in the joint venture."
Thus it may be gathered from the above narration that the participants in the joint venture wanted to expand their business by manufacturing certain new products in addition to the range of products that were being manufactured by them already and Kiwi was to supply the requisite knowhow. It is not only that the foreign shareholding was increased to 51% by the agreement dated 17.9.93 but there were certain other conditions imposed by the management of the joint venture company in respect of sales, trademark, warranties, etc., As per Article 10 of this agreement which is a restrictive covenant if either Kiwi or TTK intended to introduce any new product in the Indian market and such product belonged to the category products for shoe and leather care or household and personal care products. Such party shall notify the joint venture "Kiwi TTK" and the other party and "Kiwi TTK" shall be granted the option to add the manufacturing of these new products to the :- 37 -: ITA 1183 to 1188/09 1039 to 1043/09 & 448/10 present range of products. It was further stipulated in this Article that should such option not be exercised by Kiwi TTK within three months after the date of such notice from either party then such party shall be entitled to manufacture such product by itself or to appoint a third party for the manufacture of such product in India. And also, both Kiwi and TTK reserved the right to exclude from the procedure set forth in this Article products that either of them may acquire from third parties. As per Article 10.2, except as permitted under Article 10.1, neither TTK nor Kiwi shall either directly or indirectly utilise its goodwill, know how or other resources in a way detrimental to Kiwi TTK, its organisation or business in India.
As per Article 10 of the joint venture agreement dated 17th September, 1993 TTK Group always enjoyed the first right of refusal for manufacture/dealing with any products in the household and personal care segment and the said product shall have to be first offered to the Indian entity in which TTK Group had stakes. In other words, Sara Lee would not be able to bring into India any products in the household and personal care segments without first offering the same to TTK group. The product could be exploited by any constituent of TTK Group including the JV in which TTK. Group was holding significant stake. Before 1992, the products were mainly Kiwi Shoe Polish and Dranex. Post 1993, the product portfolio expanded to cover personal care products consisting of hair care and cosmetics under the brand Brycream. While SKTTK would arrange for manufacture of products, the distribution of the same would be done by TTK Group through its constituent TTKHC. The business was progressing well and turnover which was around Rs 3 crores in 1992 exceeded Rs 30 crores in 2000-01.
31. It was the argument of the ld.AR that on a combined reading of the various agreements, the receipt of ` 10 crores would :- 38 -: ITA 1183 to 1188/09 1039 to 1043/09 & 448/10 take the character of a capital receipt only. The following points were highlighted:
(i) If Sara Lee TTK introduces a new product or a new brand the same shall be offered to the joint venture for exploitation in which TTK Group is a major partner.
(ii)The products manufactured by the joint venture shall be offered for distribution through TTK Group.
(iii) If there was a dilution of right to do business in the joint venture, the same would result in dilution of business interests of TTK Group which was holding 49% in the joint venture initially.
(iv) In the year 2001, a major change took place because the foreign company was desirous of introducing new products not through the joint venture and not through the members of the TTK Group but on its own or through third parties. And in that process, the TTK Group agreed to waive the right of first refusal for payment of Rs 10 crores as consideration.
32. Thus, it was his contention that the right to do business in a new product is a major right and as the TTK Group had to give up this right for capital consideration the sum of ` 10 crores did not fall into any category of income liable to be taxed under the Income Tax Act.
33. After considering the various arguments by the assessee as well as case laws cited by them, the CIT(A) held that receipt was revenue receipt observing as under:-
:- 39 -: ITA 1183 to 1188/09
1039 to 1043/09 & 448/10 "It was noted in paragraphs Nos. 8,9 & 13.4.2. above that one of the main activities of M/s TTK & Co was to promote companies and businesses. And so the joint venture agreement it had entered into with Sara Lee Corporation was in the course of its business activity, that is, promotion of businesses and companies. And the appellant firm had also made substantial investments in the shares of the joint venture company Kiwi TTK Ltd., All these activities were governed by the Joint Venture Agreement dated 17.9.1993 the Amended Agreement dated 12.10.1993 Shareholders' Agreement dated 17.9.1993 and the Sales and Purchase agreement dated 17.9.1993. So it is clear that all these activities undertaken by the appellant firm with Sara Lee Corporation were in the normal course of its business. It was also pointed out in paragraphs nos. 13.1 and 13.3.2 above that by entering into all these agreements the parties to the joint venture were going in for expansion of the products or the manufacturing of new products. It is only by virtue of the agreement dated 30.9.2001 that the restrictive covenant present in the earlier agreement dated 17.9.1993 as amended by agreement dated 12.10.1993 was deleted and the appellant firm was entitled for a compensation of ` 10 crores. So, on going through the various clauses of the agreement dated 30.9.2001 it is clear that there is nothing found in this agreement to indicate that the removal of the restrictive covenant affected the profit making stricture of the appellant firm or it involved a loss of an enduring trading asset. By losing the right of first refusal in respect of introduction, manufacture and distribution of any new product introduced by the joint venture company or Sara Lee Corporation, the appellant firm M/s TTK & Co., was not deprived of any of its trading avenues or its profit making structure was not affected in any manner,. In fact, the appellant firm was just as free as it was before to devote its energies to the whole of its business even after canceling the restrictive covenant in the joint venture agreements dated 17th September 1993.
So, if we apply the principles set forth in the various decisions of the Supreme Court an analysis of which was made as brought out in the earlier paragraphs, it will be clear that the sum of ` 10 crores received by the firm M/s TTK & Co from Sara Lee Corporation would constitute revenue receipt only. And none of the appellant's contentions are acceptable. It follows that the Assessing Officer's view that the deal arising out of the agreement dated 30.9.2001 would be hit by the mischief of sec 2(47) of the Act is also not correct. The Assessing Officer had taken the agreement dated 30.9.2001 in isolation and had given such a finding. It is necessary to take cognizance of the fact that the appellant firm had been :- 40 -: ITA 1183 to 1188/09 1039 to 1043/09 & 448/10 entering into various types of joint venture agreements as part of its business activities which is to promote businesses and companies, etc., And, by this agreement dated 30.9.2001 it had not lost any capital asset which would deny the firm its profit earning apparatus. In fact it was brought out in paragraphs Nos. 13.3.5, 13.3.9 &13.3.9.1 above that even after the removal of the restrictive covenant the TTK Group concerns were dealing in products like Brylcream. In view of what is stated above, it is clear that the sum of ` 10 crores has to be taxed as revenue receipt under the head, "Business" and in such an event, the assessment will get enhanced.
When the above views were put forth before the appellant's representatives they did not come up with substantial arguments or objections as to how and why the assessment should not be enhanced. The ratio of the Supreme Court's decision in the case of CIT v Gangadhar Baijnath (86 ITR 19) has to be necessarily applied in the present context. It has to be mentioned here that this decision has found application in various other decisions rendered by Courts later on. So, in the light of this decision, the appellant's arguments that the sum of Rs 10 crores was to be treated as capital receipt are not acceptable. This sum becomes taxable in the hands of the appellant firm as a revenue receipt."
34. Aggrieved, the assessee is in appeal before us. It is an undisputed fact that it had entered into shareholders' agreement with M/s.Sara Lee. As per the shareholders' agreement, various joint venture partnership M/s.Sara Lee had to make offer for introducing any new product in India, to be managed by the JV. M/s.Sara Lee apparently wanted to have its own subsidiary as well other out let to market this product in India. Consequently M/s. Sara Lee had agreed to purchase the shares held by the assessee in JV and had also prelude to the same required the appellant to give up its right under :- 41 -: ITA 1183 to 1188/09 1039 to 1043/09 & 448/10 the shareholders' agreement for the first refusal of introducing of the new product by M/s. Sara Lee through JV. This right was available to the assessee as major shareholder in the JV under the shareholders' agreement. Therefore the assessee had given up its right under the shareholders' agreement for a consideration of ` 10 crores. We are of the opinion that consideration received in connection with negative or restrictive covenant is covered by the decision of the Apex Court in the case of Guffic Chem P Ltd vs CIT, 332 ITR 602. In that case, the assessee had agreed that it shall not carry on business directly, business hitherto carried on by it on the terms and conditions appearing in the agreement for which consideration of ` 50 lakhs as non competition fee was paid. The Apex court has held that payment received under negative covenant was always capital receipt till the assessment year 2003-04. It is only by the Finance Act 2002 with effect from 01.40.2003 that the said capital receipt was made taxable u/s 28(va). Finance Act, 2002 itself indicates that in the earlier assessment years compensation received by the assessee under non competition agreement was capital receipt not subject to tax. In the instant case also, the assessee had restricted itself or given up its commercial rights as shareholder to insist JV partner, by the virtue of the shareholders' agreement, to introduce all their products through JV. Therefore, respectively applying the ratio of the Apex Court in the :- 42 -: ITA 1183 to 1188/09 1039 to 1043/09 & 448/10 case of Guffic Chem Pvt Ltd(supra) we allow the claim of the assessee and hold that ` 10 crores received by the assessee for agreeing to give up the restrictive covenant is a capital receipt. The fact that the assessee is in the business of promoting companies would not in any way alter the character of the receipt for accepting a negative covenant as a capital receipt. As there is no cost of acquisition for the same it is not taxable as capital gains. It cannot also be taxed as revenue receipt u/s 28(va) as the section is not applicable to the year under appeal.
35. The next issue of this appeal relates to disallowance of 50% of the technical fees of ` 3 lakhs and the interest of ` 60,000/- paid to late Shri T.T.Vasu. As against the fee paid to Shri T.T.Vasu and the interest payment to him, the CTI(A) has held as under:-
"The above sums were disallowed for the only reason that these payments had been made to (Late) Shri T.T.Vasu who was just a relative to the partners. As regards the claim towards interest expenditure of ` 60,000/- it was specifically noted by the assessing officer that no prudent buisnessman would incur expenditure by way of interest when already huge balance were due from this person.
In this connection, it has to be stated that identical amounts of expenditure were claimed as payable by the appellant firm to (Late) Shri T.T.Vasu for the earlier assessment year 2001-02 which the assessing officer had disallowed in the assessment order dated 26.03.2004 passed u/s.143(3) for the assesment year 2001-02. On an appeal filed by the appellant, the :- 43 -: ITA 1183 to 1188/09 1039 to 1043/09 & 448/10 following findings were given in the appellate order in ITA No 14/04-05 of even date.
(i) The commission expenditure of ` 3 lakhs claimed by the appellant firm was to be fully allowed .
(ii) As regards the professional fee of ` 3 lakhs, the disallowance was to be restricted to 50%.
(iii) As far as the interest of ` 60,000/- was concerned, the disallowance was confirmed in toto As there are no charges in the facts and circumstances for the current year under appeal, the same views as above hold good for this assessment year also.
Accordingly, out of the expenditure of ` 6 lakhs representing payment to (Late) Shri T.T.Vasu, it is held that ` 4.5 lakhs is allowable and the balance of ` 1.5 lakhs is to be disallowed. And further, the disallowance of the interest expenditure of ` 60,000/- is confirmed.
36. We have heard both the parties. No arguments or fresh evidence were adduced by either party to persuade us to take a view from that of the CIT(A). We, therefore, uphold the order of the CIT(A) on this issue and dismiss the appeal of the assessee.
37. In the result the appeal filed by the assessee for assessment year 2002-03 stands partly allowed.
I.T.A.No. 1042/Mds/2009 - A.Y 2003-04 :- 44 -: ITA 1183 to 1188/09 1039 to 1043/09 & 448/10
38. This appeal filed by the assessee, for assessment year 2003- 04, is directed against the order of the ld. CIT(A)-XII, Chennai, dated 31.3.2009.
39. The first issue of this appeal relates to adoption of ` 4,23,30,000/- as sale consideration of property in Bangalore invoking the provisions of Section 50C. The assessee-firm had shown income by way of long term capital gains of ` 3,21,14,748/- that had arisen on sale of a land situated at No 2/1, Infantry Road, Bangalore, for a total consideration of ` 3,49,59,600/- during the accounting period ended 31.3.2003. The working for this sum is as under:
Sale consideration received ` 3,49,59,600/-
Less: Indexed cost of acquisition (Rs.8,46,455 x 447/133) ` 28,44,852/-
------------------------
Long Term Capital Gains ` 3,21,14,748/-
------------------------
40. The Assessing Officer had recomputed the income by way of long term capital gains at `3,94,85,148/- by adopting the sale consideration at ` 4,23,30,000/- in the above working. The Assessing Officer had enhanced the sale consideration by applying section 50C of the Act. The facts apropos this issue are that initially the assessee-
firm, M/s T.T. Krishnamachari & Co., entered into an agreement on :- 45 -: ITA 1183 to 1188/09 1039 to 1043/09 & 448/10 19.2.2001 with a company M/s Dynasty Developers Pvt. Ltd ('DDPL') for the sale of land at No.2/1 Infantry Road , Bangalore for a consideration of ` 3,49,59,600/-. On the basis of this agreement, a "No Objection Certificate" was also obtained from the Appropriate Authority, Bangalore. It was stated that M/s DDPL had also paid the sale consideration of ` 3,49,59,600/- to the assessee-firm. Later on, the purchaser company wanted to sell the land to another company M/s Topaz Investments P. Ltd ('TIPL') just before registration of the sale deed that was already executed in their name. And so, M/s DDPL requested the assessee-firm to transfer the land directly in the name of M/s TIPL and again another "No Objection Certificate" dated 17.5.2001 was obtained from the Appropriate Authority. Accordingly, the assessee-firm had registered the property in the name of M/s TIPL. The value of the land that was adopted for the purposes of Stamp Duty at the time of registration of the sale was ` 4,23,30,000/-. It is the contention of the assessee-firm that as it was bound by the agreement entered into between itself and M/s DDPL only and further it had received ` 3,49,59,600/- alone as sale consideration for the transfer of the land and it had not received any further amount in respect of this deal, either from M/s DDPL or from M/s TIPL, the Assessing Officer was not correct in adopting a higher figure of sale :- 46 -: ITA 1183 to 1188/09 1039 to 1043/09 & 448/10 consideration in the impugned order by invoking section 50C of the Act.
41. The Assessing Officer had held that the assessee had initially entered into an agreement to sell with M/s. DDPL for a consideration of ` 3,49,59,600/-. The assessee entered into second agreement to sell the same property with the TIPL with M/s DDPL as a confirming party for a sale consideration of ` 4,23,30,000/-. As the assessee-firm had not produced a copy of the agreement for sale with M/s. TIPL dated 11.4.2002, he could not verify whether any sum became payable to M/s DDPL out of the total sale consideration of ` 4,23,30,000/-. But by referring to clause XII of the deed dated 30.5.2002 registered document No. BNG (U) SNGR -805/-02-03 BK -I, the Assessing Officer himself had noted that out of the total sale consideration of ` 4,23,30,000/-, only ` 3,49,59,600/- was received by the assessee-firm and the balance of ` 73,70,400/- was received by M/s Dynasty Developers P. Ltd in their capacity as a confirming party. Though the Assessing Officer had taken cognizance of the fact that the assessee received only the sum of ` 3,49,59,600/- on the sale of the said land and had not received anything extra in the deal, still, he adopted ` 4,23,30,000/- as the sale consideration by referring to clause IX of the agreement dated 19.9.2001 entered into between the :- 47 -: ITA 1183 to 1188/09 1039 to 1043/09 & 448/10 firm and M/s DDPL, a specific finding was given by the Assessing Officer in paragraph No.8.4.11 of the impugned order that as per the terms of clause IV of the agreement dated 19.9. 2001 the transfer of the land should have been completed within 30 days, i.e. by 13.1.2002 or a few days later depending on the date of receipt of the order of the Appropriate Authority, Bangalore, and as the sale deed was not executed by this time and further the sale deed was executed only on 30.5.2002 and it was registered on 31.5.2002, clause IX of the agreement dated 19.9.2001 became operative. The Assessing Officer had adopted the value taken by the Stamping Authorities as the sale consideration received by the assessee and computed capital gains accordingly. The assessee has objected to the enhancement of the sale consideration for the land sold from ` 3,49,59,600/- to ` 4,23,30,000/-.
42. The Assessing Officer ought to have appreciated that under the agreements of sale entered into by the assessee-firm as also according to the final sale deed executed, the firm had received only ` 3,49,59,600/- as sale consideration for the subject land. It was argued that the Assessing Officer ought to have appreciated that the sale consideration of ` 3,49,59,600/- having been approved by the Appropriate Authority must alone be considered as market price for :- 48 -: ITA 1183 to 1188/09 1039 to 1043/09 & 448/10 the said property. It was contended that out of the total sale consideration of ` 4,23,30,000/- paid by the ultimate purchaser finder fee/commission of ` 73,70,400/- was payable to M/s DDPL and the same ought to have been allowed as deduction in computing the income from capital gains.
43. The assessee submitted that although Clause IX of the agreement for sale deed dated 19.9.2001 with M/s DDPL dealt with consequence of breach, assessee did not enforce the same in view of the stakes involved and also in lieu of the liability assessee would have to bear in case the agreement was terminated. Hence, the assessee did not exercise any option to terminate the agreement as per clause IX. It was orally agreed between the Parties that further time should be given for payment of the agreed sale consideration and this M/s DDPL, had complied with. No monetary benefit was received by the assessee for entering into a fresh agreement of sale with M/s TIPL as the assessee had to comply with the Agreement entered into with M/s DDPL. It was argued that even if as per the sale deed that was ultimately executed the sale consideration was to be considered as ` 423,30,000/- in respect of the sale of the subject land the capital gains assessable in the hands of the assessee-firm would not be affected in any manner as the amount of ` 73,70,400/- that was :- 49 -: ITA 1183 to 1188/09 1039 to 1043/09 & 448/10 actually appropriated by M/s DDPL must be allowed as a deduction. Thus, it was the contention of the ld.AR that in either of the above two situations the question of applicability of section 50C of the Act will not arise.
44. The CIT(A) has dismissed the claim of the assessee by observing as under:
"4.5 The arguments put forth by the appellant's representative were carefully considered. Even at the appeal stage the appellant's representatives have not filed a copy of the sale agreement dated 30.4.2002 entered into between the appellant firm and M/s Topaz Investments P. Ltd It was only a copy of the sale deed dated 30.5.2002 which was registered on 31.5.2002 that was made available. In the absence of the sale agreement dated 30.4.2002 entered into between the appellant firm and M/s Topaz Investments P. Ltd it is not possible to comment anything about the correctness of the amount of extra sale consideration if any, which the appellant firm was actually entitled to, in the entire deal.
4.5.1 So, if we go by the sale agreement dated 19.9.2001 and the sale deed dated 30.5.2002 it is clear that the appellant firm was entitled for a sale consideration of ` 3,49,59,600/- only. It is a fact that the appellant firm originally entered into a sale agreement with M/s Dynasty Developers P. Ltd to sell the subject land for a consideration of ` 3,49,59,600/- and it is also a fact that M/s Dynasty Developers P. Ltd was to be paid a sum of ` 73,70,400/- by the ultimate purchaser M/s Topaz Investments P. Ltd as a "Confirming party" as per the sale deed dated 30.5.2002 . So there is nothing in these documents to indicate that .the appellant firm had any right to receive a further sum of ` 73,70,400/- over and above the sale consideration it was entitled to as per the sale agreement dated 19.9.2001 . It is only the company M/s Dynasty Developers P. Ltd that had the right to receive the sum of ` 73,70,400/- in its capacity as "Confirming party" Clearly the sum of ` 73,70,400/- became payable to M/s Dynasty Developers P. Ltd for foregoing its right over the property and allowing the property to be registered in favour of the ultimate purchaser. These facts will make it clear that the sum of ` 73,70,400/- is not in the nature of expenditure allowable either under clause (i) or clause (ii) of section 48. And so the :- 50 -: ITA 1183 to 1188/09 1039 to 1043/09 & 448/10 appellant's argument that the sum of ` 73,70,400/- must be allowed as deduction as finding fee/commission, even if the sale consideration were to be adopted as ` 423,30,000/- is not acceptable. The totality of the facts available on record do not justify the appellant's views.
Further as the appellant firm had registered the subject land ultimately in favour of M/s Topaz Investments P. Ltd and the value determined for the purposes of Stamp Duty was ` 4,23,30,000/- the Assessing Officer had rightly invoked section 50C. It is not the case of the appellant that there were any appeal proceedings pending against the value determined by the Stamp Valuation authority at the time of registration of the subject land. Therefore, sec 50C being mandatory has to be applied to the appellant's case and the Assessing Officer was right in adopting the sale consideration as ` 4,23,30,000/- in the place of ` 3,49,59,600/-."
45. Now, the assessee is aggrieved.
46. We have considered the rival submissions and have perused the entire material available on record. As can be seen from the above, that the assessee had entered into an agreement to sell with M/s.DDPL for a sale consideration of ` 3,49,59,600/-. Even though M/s DDPL did not pay the full value of the sale consideration within the stipulated time, the assessee had tacitly extended the time of payment and has in fact received the full consideration from M/s.DDPL . Thus M/s DDPL had the right of specific performance for insisting that the assessee to sell the property to them. Further, as per the agreement, the assessee is to sell the property to M/s/DDPL or their nominee at the request of DDPL. Having received the full value of consideration as per agreement with M/s. DDPL, the assessee sold :- 51 -: ITA 1183 to 1188/09 1039 to 1043/09 & 448/10 the property to M/s.TIPL nominated by M/s. DDPL. The deed of conveyance has clearly specified that the sale consideration is to be split up whereby a sum of ` 3,49,69,600/- has to be paid to the Appellant and ` 73,70,400/- was to be paid to DDPL as the confirming party. Thus, the assessee has the right to receive only a sum of ` 3,49,69,600/- on the sale of the property. The payment is in the nature of improving the title of the assessee in the property and hence, the amount should be allowed as a deduction under section 48. The Hon'ble Madras High Court in the case of CIT v A.Venkatraman (137 ITR 846) has held that the amount paid to the existing tenant to vacate the premises should be allowed as a deduction u/s 48 in computing the capital gains. Applying the same ratio, the amount paid to the agreement holder for giving up its rights for specific performance should also be considered as expenditure incurred in connection with transfer for the purpose of improving the title of the assessee and hence, should be allowed as a deduction in computing the capital gains. In the circumstances, the claim of the assessee that capital gains in its hands on the sale of Bangalore property should be considered by taking into account the net sale consideration of ` 3,49,69,600/- instead of `4,23,30,000/- is upheld. It is hereby clarified that in this transaction the adoption of the sale consideration as per section 50C is upheld. But in computing the capital gains the amount :- 52 -: ITA 1183 to 1188/09 1039 to 1043/09 & 448/10 of ` 73,70,400/- has been allowed as a deduction u/s 48 as expenditure for improvement of title of the assessee in the transferred property and is not in any way against the applicability of provisions of Section 50C. The grounds raised by the assessee are, therefore, allowed.
47. The next issue of this appeal relates to disallowance of 50% of the technical fees of ` 3 lakhs and the interest of ` 60,000/- paid to late Shri T.T.Vasu. For the reasons stated on this issue for the assessment year 2002-03 in I.T.A.No. 1041/Mds/2009, we uphold the order of the CIT(A) on this issue. The grounds raised by the assessee stand dismissed.
48. The next issue of this appeal relates to levy of interest under Section 234D amounting to ` 55,552/- . The Special Bench of the Tribunal in the case of Ekta Promoters as well as the Hon'ble Delhi High Court in the case of Director of Income-tax Vs Jacabs Civil Incorporated, 330 ITR 578, has held that levy of interest under Section 234D with effect from 01.06.2003 will be applicable only for the assessment year 2004-05 onwards. By respectfully following the above decisions, we hold that levy of interest 234D is not correct for the assessment year under appeal.
:- 53 -: ITA 1183 to 1188/09
1039 to 1043/09 & 448/10
49. In the result, the appeal of the assessee for assessment year 2003-04 stands partly allowed.
I.T.A.No. 1187/Mds/2009 - A.Y 2003-04
50. In this cross appeal filed by the Revenue, for assessment year 2003-04, the first issue raised vide Ground Nos.2 and 2.1 is against the allowance of 50% of technical fee paid to Late Shri T.T.K.Vasu. In view of decision on the same issue in I.T.A.No. 1186/Mds/2009 for assessment year 2002-03, we dismiss the grounds raised by the Revenue.
51. The next issue is regarding the allowance of ` 20,29,291/- interest paid by the as on the loan obtained for granting advance to its sister concern TTK Textiles Limited as well as write off of ` 12,86,70,007/- being the advance, considered as irrecoverable from M/s.TTK Textiles Ltd. We find that similar issue came up for consideration for the assessment year 2002-03. With similar reasoning, we uphold the order of CIT(A) allowing the deduction of interest payable of ` 20,29,291/- and advance written off of ` 12,86,70,007 in connection with revival of the sister concern of M/s.TTK Textiles Limited.
:- 54 -: ITA 1183 to 1188/09
1039 to 1043/09 & 448/10
52. In the result, the appeal filed by the Revenue for assessment year 2003-04 stands dismissed.
I.T.A.No. 1043/Mds/2009 - A.Y 2004-05
53. This appeal of the assessee, for assessment year 2004-05, is directed against the order of the ld. CIT(A)-XII, Chennai, dated 31.3.2009.
54. The first issue of this appeal relates to disallowance of advertisement expenditure of `3,33,334/-. The Company had completed 75% years of business successfully. They are promoters and key shareholders of various TTK group. They render various services like warehousing, dealer relations, invoicing, clearing and forwarding, selling etc. Therefore, the assessee has developed vast contacts and business links in the Industry. To celebrate the completion of 75 years in business, the assessee has given various gifts to clients and associates. They had given paintings worth of ` 10 lakhs as memento to various peoples connected with the business. The Assessing Officer had disallowed the entire expenditure for the simple reason that receipt of the Mementos were not produced before him. The assessee contended that by the very nature of expenditure, :- 55 -: ITA 1183 to 1188/09 1039 to 1043/09 & 448/10 the same had been incurred in the course of business and it will be difficult to bringing all the receipts before the Assessing Officer at this point of time. While agreeing with the contention of the assessee, the CIT(A) has held that such expenses were incurred for the purposes of business, she disallowed ` 3,33,334/- out of the total expenses of ` 10 lakhs for the deficiencies pointed by the Assessing Officer. Now the assessee is aggrieved.
55. We have considered the rival submissions and have perused the entire material available on record. It was contended by the ld.AR that having held that the expenses were for the purposes of business, ad hoc disallowance is not called for. At the time of hearing, the ld DR submitted that some of the paintings were purchased from the directors/close relatives. While this fact alone cannot be the reasons for disallowance of expenses incurred by the assessee, but in view of the close connection between the assessee and the persons from whom gifts were purchased, we are inclined to agree with the disallowance of ` 3,33,334/- made by the CIT(A) out of ` 10 lakhs. The grounds raised by the assessee on this issue are dismissed.
56. The next issue of this appeal relates to disallowance of 50% of the professional/technical fee and disallowance of interest of ` :- 56 -: ITA 1183 to 1188/09 1039 to 1043/09 & 448/10 60000/- paid to Late Shri T.T.Vassu. For the reasons stated in the assessee's appeal in I.T.A.No. 1041/Mds/09, for the assessment year 2002-03, we uphold the order of the CIT(A) on this issue and dismiss the appeal of the assessee.
57. In the result, the appeal filed by the assessee for assessment year 2004-05 stands dismissed.
I.T.A.No. 1188/Mds/2009 - A.Y 2004-05
58. In this cross appeal filed by the Revenue, the first issue is against the allowance of bad debts of ` 33,39,065/- being the amount paid by the assessee for standing as guarantor to the Term loan and credit facilities enjoyed by another company by name M/s.Sasmi Organics Pvt. Ltd. as business loss. Before the ld. CIT(A), the assessee's representative submitted as under:
"Sasmi organic Chemicals Pvt Ltd, was manufacturing and supplying Niacinamide chemicals and we were doing business on consignment basis. Commission earned on consignment sales was taken as income during those years. They were enjoying term loans and other credit facilities against the undertaking given by T.T.Krishnamachari & Co. The business did not progress as per the expectation and the bank decided to enforce the bank guarantee given by T.T.Krishnamachari & Co as per the undertaking agreement. Bank of Baroda proceeded through the Debt Recovery Tribunal :- 57 -: ITA 1183 to 1188/09 1039 to 1043/09 & 448/10 and decree was passed against T.T.Krishnamachari & Co. The firm negotiated with the bank of Baroda and arrived at a settlement whereby an amount of ` 33,39,065/- was paid in full settlement as per bank of Baroda letter (enclosed herewith). As Sasmi organic Pvt Ltd became defunct and there was no possibility of recovering any amount from them. Therefore, the firm decided to write off the said amount as a prudent measure. The expenses having incurred in connection with the business of the company, the same may be allowed as bad debts or business loss".
4.3 He also filed the following evidence a. copy of the certificate letter in BOB/RTM/ADV/34/225 dated 13.06.2003 issued by the Senior Branch Manager, Rutlam Branch, Rutlam.
b. Copy of the letter of undertaking dated 02.01.1980 issued by the representatives of the company M/s.Sasmi organic Pvt Ltd, Bank of Baroda and M/s.
T.T.Krishnamachari & Co wherein TTK & Co had agreed to repay the amounts advanced by Bank of Baroda to M/s.Sasmi Organic Pvt Ltd in case there was any failure on the part of the company to repay the advances.
59. The CIT(A) has allowed the claim of the assessee by holding as under:-
"4.6.2 The Appellant firm had trade relations with M/s.Sasmi Orgnic Limited and the firm was earning commission out of the consignment sales of the products of "Niachinamide"
Chemicals manufactured by the company. And in that process, M/s.TTK & Co had given letter of undertaking to Bank :- 58 -: ITA 1183 to 1188/09 1039 to 1043/09 & 448/10 of Baroda not only guaranteeing the liabilities owed by that company to the Bank but had also undertaken not to withdraw its funds advanced to M/s.Sasmi Organics Chemicals Pvt Ltd. And the appellant firm had gone to the extent of foregoing its 5% commission from M/s.Sasmic Organics P Ltd as long as the installments or interest to the Bank were in arrears. Having entered into such a deal and having found that the company M/s.Sasmi Organic Pvt Ltd had become defunct and that there was no possibility of recovering amount from the company, the appellant firm had written off the sum of ` 33,39,065/- which it had paid to Bank of Baroda on behalf of that company. And this is in order.
4.7 It was already held in the appellate order in ITA No 41/05-06 of even date for the assessment year 2002-03 in the appellant's case that the balances of advances granted by the appellant firm to sister concern which became irrecoverable that were written off in its accounts during the financial year 2001-02 and 2002-03 were allowable as business losses, because, those advances had been given to the sister concern by the appellant firm under the scheme of revival of the sister concern that had become sick whose case was taken to the BIFR, And further, it was held that the appellant firm had got a vital role to play in the whole scheme, because, it was the promoter of the sister concern and promoting businesses and companies is one of its busienss objectives and in that process it had to incur these losses. The same principle applies to the sum of ` 33,39,065/- written off by the firm in its accounts for the assessment year 2004-05 also. It is in the course of the firm's business that it had to guarantee the loans and credit facilities sanctioned to the company M/s.Sasmi Organic P Ltd by Bank of Baroda and once that company failed, the appellant firm was under obligations to make good the debts to the Bank.
4.7.1 Thus, it is held that the sum of ` 33,39,065/- is allowable as a business loss in the hands of the appellant firm."
60. Now the Revenue is aggrieved.
61. We have considered the rival submissions and have perused the entire material available on record. It is an undisputed fact that the assessee-firm had trading relationship with M/s Sasmi Organics :- 59 -: ITA 1183 to 1188/09 1039 to 1043/09 & 448/10 Pvt. Ltd. and therefore, earning commission income out of the consignment sale of the product of that company. In order to facilitate M/s Sasmi Organics Pvt. Ltd. obtained credit for manufacture of the product the assessee had given letter of undertaking to the Bank of Baroda not only guarantying the liability owed by that company to the bank but also agreed not to withdraw the amounts advanced to M/s Sasmi Organics Pvt. Ltd. In these circumstances, giving guarantee on behalf of the concern to enable that concern to obtain credit essential for manufacturing and selling to the assessee is essentially connected with the business of the assessee. Therefore, furnishing of guarantee by the assessee to M/s. Sasmi Organics Ltd. is in the course of trading business of the assessee. In view of the above, the amount had to pay on account of guarantee given by it to M/s.Sasmi Organics Pvt. Ltd is allowable as business loss and as such we uphold the order of the CIT(A) allowing the claim of ` 33,39,065/- paid to the bank on account of Sasmi Organic Pvt. Ltd. as business loss. Consequently, the grounds raised by the Revenue are dismissed.
62. The next issue of this appeal is regarding allowance of 2/3rd of advertisement expenditure incurred by the assessee on completion of 75 years of business. The assessee had completed 75 years of business and decided to commemorate the occasion by :- 60 -: ITA 1183 to 1188/09 1039 to 1043/09 & 448/10 distributing memento of some value to the persons and close associates with the business. In this case, the assessee chose to purchases Tanjore paintings for giving to the associates. Therefore this expenditure has to be held as incurred for the purpose of business. We have decided similar issue in assessee's appeal in I.T.A.No.1043/Mds/2009 and in view of our finding therein, we confirm the order of the ld. CIT(A) on this issue and dismiss the grounds raised by the Revenue
63. The next ground of appeal is against the allowance of 50% of the technical fees and commission paid to Late Shri T.T.Vasu. For the reasons stated in the Revenue's appeal in I.T.A.No. 1186/Mds/2009 for the assessment year 2002-03, we dismiss the grounds raised by the Revenue.
64. In the result, the appeal of the Revenue, for assessment year 2004-05, stands dismissed.
I.T.A.No. 1040/Mds/2009 - A.Y 2001-02
65. In this appeal of the assessee, for assessment year 2001-02, which is directed against the order of the ld. CIT(A)-XII, Chennai, dated 31.3.2009, the only issue involved is regarding disallowance of :- 61 -: ITA 1183 to 1188/09 1039 to 1043/09 & 448/10 50% of the professional fees and disallowance of interest of ` 60000/- paid to Late Shri T.T.Vasu.
66. We have decided similar issue in assessee's appeal in I.T.A.No. 1041/Mds/2009, for assessment year 2002-03. With similar reasoning, we uphold the order of the CIT(A) and dismiss the assessee's appeal.
67. In the result, the appeal filed by the assessee for assessment year 2001-02 stands dismissed.
I.T.A.No. 1185/Mds/2009 - A.Y 2001-02
68. In this cross appeal by the Revenue, the first issue raised vide Ground Nos.2 and 2.1, is against allowing the claim of ` 3 lakhs as commission and ` 1.5 lakhs as technical fees paid to Late Shri T.T.Vasu. We have decided similar issue in assessee's appeal as well as in Revenue's appeal in the former part of this order. With the similar reasoning, we uphold the order of the CIT(A) on this issue and dismiss the grounds raised by the Revenue on this issue.
69. The next issue raised vide Ground Nos.3 and 3.1 is against the allowance of ` 89,04,253/- being interest payable on term :- 62 -: ITA 1183 to 1188/09 1039 to 1043/09 & 448/10 loan obtained for the purpose of grounds of advance given to its associate concern M/s.TTK Textiles Ltd.
70. We find that this issue has come up for consideration for assessment year 2002-03. For the reasons stated in the Revenue's appeal in I.T.A.No. 1186/Mds/09 for the assessment year 2002-03, we uphold that the amount borrowed from the bank should be considered to have been used for the purpose of business of the assessee and hence the entire payment of interest of ` 89,04,253/- is allowable under Section 36(1)(iii).
71. In the result the appeal filed by the Revenue for assessment year 2001-02 stands dismissed.
I.T.A.No. 1039/Mds/2009 - A.Y 2000-01
72. The only issue involved in this appeal of the assessee is against the treatment of non compete fee of ` 1,90,74,000/- received from New Bridge Hongkong Ltd as revenue receipt. The facts apropos this issue are that TTK Biomed Limited, which was a group Company of TTK and which engaged in the business of manufacturing and marketing of Rubber Contraceptives had entered into a Non- compete agreement with London International Group Plc (LIG). TTK Biomed merged with TTK Pharma Ltd., another TTK Group Company. :- 63 -: ITA 1183 to 1188/09
1039 to 1043/09 & 448/10 TTK, the assessee firm, as a promoter, having controlling stakes in various TTK Group Companies, undertook to exercise all its powers and rights as a major shareholder, such that Pharma or its successor or assignees and any of the TTK Companies shall, all times, honour the non-compete agreement entered into the New Bridge Hong Kong Ltd., a member of the London International Group, Plc. Since the payment was received for the Restrictive covenant, not to compete with the business of New Bridge Hong Kong Ltd., the same is capital in nature. It is only with effect from the assessment year 2003-2004, the consideration received for non-compete agreement has been brought to tax. The Assessing Officer after considering the recitals of the non-compete agreement dated 16.2.2000, came to the conclusion that as the right to carry on business in any manner would constitute a capital asset and in the assessee's case, such right was partly extinguished by virtue of the non-compete agreement, there was a transfer of the right within the meaning of Sec.2(47) of the Act and so, the consideration received of ` 1,90,74,000/- was to be subjected to capital gains tax. Further, in his order, the Assessing Officer had observed that the cost of acquisition of this right as also the cost of improvement was 'Nil' as the assessee-firm had not incurred any cost in acquiring this right. Hence, the entire compensation was assessed as capital gains.
:- 64 -: ITA 1183 to 1188/09
1039 to 1043/09 & 448/10
73. On appeal before the CIT(A), the assessee reiterating its stand that the amount is a capital receipt not subject to tax, also submitted that LIG had paid 4,99,000 pounds as non-compete fee (` 344.92 Lakhs) to TTK Biomed Limited but since TTK Biomed Limited has got merged with TTK Healthcare Limited this receipt was reflected in the accounts of TTK Healthcare Limited which it had claimed as exempt from taxation. It was argued that this sum was not taxable, because, the whole structure of the assessee company's profit making apparatus had been given up by the Company. On this basis, the ITAT allowed the non-compete consideration as capital receipt in the hands of TTK Healthcare Limited. The ld. CIT(A) has observed that the situation in the present assessee's case is not the same as that of TTK Healthcare Limited. In respect of the same transaction which TTK Healthcare Limited had entered into with LIG that Company had received ` 344.92 Lakhs as compensation which the ITAT had held as not liable to tax, because, the non-compete fee received, resulted in loss of particular source of income, the Company had to stop manufacturing of contraceptives as a consequence of the non-compete agreement. Whereas in the case of assessee-firm, it was not involved in any activity of manufacturing and selling of contraceptives before the non-compete agreement which it had to give up after the :- 65 -: ITA 1183 to 1188/09 1039 to 1043/09 & 448/10 agreement, but, its role was that of a promoter only. The ld. CIT(A) further observed that the firm, M/s. TTK & Co. had not directly involved itself in the business of manufacturing and selling rubber contraceptives, and it had not lost any right to do business that was existing before. Its interest in the agreement was only in its capacity as a promoter of M/s. TTK Pharma Ltd. In fact, M/s. TTK & Co. was made a party to this non-compete agreement for the only reason that as a promoter of the Companies in the entire TTK Group, it would restrict the other members of the Group from competing with LIG either in its individual capacity or in joint venture with any other Company. So, it is clear that there was no capital asset over which the assessee-firm had lost its interest or right for which it had received the impugned sum. Whatever stakes it had was in the Company M/s. TTK Pharma Ltd. only. And it is only M/s. TTK Pharma Ltd. that had lost the right to do business in rubber contraceptives. The agreement dated 16.2.2000 under which the assessee-firm became entitled to the impugned amount, it is evident that the profit earning apparatus of the assessee-firm was not impaired in any manner because of this agreement. There had been no loss of any source of income to the assessee-firm. There could have been a loss of a source of income because of the non-compete agreement to the Company, M/s. TTK Pharma Ltd., but, not to M/s. TTK & Co. The :- 66 -: ITA 1183 to 1188/09 1039 to 1043/09 & 448/10 assessee-firm was not carrying on the manufacturing of condoms which it had to stop because of the non-compete agreement. Its role in the non-compete agreement was to restrain the members of the TTK Group as a promoter of those concerns from entering into competitions with the LIG Group of Companies in the business of manufacture of condoms which it had performed in the normal course of its business which is to promote businesses and Companies without there being any loss or damage created to its business structure as such. The ld. CIT(A) has held that the sum of ` 1,90,74,000/- received is taxable as revenue receipt. The assessee is now aggrieved.
74. We have considered the rival submissions and have perused the entire material available on record. The issue regarding treatment of non compete is now well settled in view of the decision of the Supreme Court in the case of Guffichem Vs CIT reported in 332 ITR 602. The Apex Court in that case has held that payment for restrictive covenant has to be held as capital receipt and the amendment made to Section 28(v)(a) is prospective and applicable only for the assessment year 2003-04 onwards. Further, we found that non compete fee on same transaction with M/s.TTK Healthcare Limited (formerly known as 'TTK Pharma Ltd') of ` 34492820/- has been held by the ITAT as capital receipt not subject to tax. The :- 67 -: ITA 1183 to 1188/09 1039 to 1043/09 & 448/10 assessee being a promoter and having a name of repute in the field of manufacturing condoms could have started companies in competition with the business transferred. It is to avoid this competition. New Bridge Hong Kong Ltd. had entered into a non compete agreement with the assessee. Applying the ratio of the decision of the Apex Court as well as the decision of the ITAT in respect of non compete fee received by TTK Healthcare Limited from the same transaction, we hold that the amount of ` 1,90,74,000/- received by the assessee as capital receipt not subject to tax.
75. In the result, the appeal of the assessee for assessment year 2000-01 stands allowed.
I.T.A.No. 1184/Mds/2009 - A.Y 2000-01
76. The only issue involved in this cross appeal filed by the Revenue, for assessment year 2000-01, is against allowance of ` 1,47,62,787/- being interest payable on term loan obtained for the purpose of advance given to its associate concern M/s.TTK Textiles Ltd.
77. We have decided identical issue in ITA No 1186/-09 for assessment year 2002-03. In view of our finding therein, we uphold the order of the CIT(A) allowing the interest payable on the loan taken in connection with advance to its sister concern M/s.TTK Textiles Ltd. :- 68 -: ITA 1183 to 1188/09
1039 to 1043/09 & 448/10
78. In the result, the appeal filed by the Revenue for assessment year 2000-01 stands dismissed.
I.T.A.No. 1183/Mds/2009 - A.Y 1999-2000
79. This appeal of the Revenue, for assessment year 1999-2000, is directed against the order of the ld. CIT(A)-XII, Chennai, dated 31.3.2009.
80. The only issue involved in this appeal relates to allowance of ` 71,29,987/- being interest payable on term loan obtained for the purpose of advance given to its associate concern M/s.TTK Textiles Ltd.
81. We have decided similar issue in I.T.A.No. 1186/Mds/2009 for assessment year 2002-03 and in view of our finding therein, we uphold the order of the CIT(A) allowing the interest payable on the loan taken in connection with advance to its sister concern M/s.TTK Textiles Ltd.
82. In the result, the appeal filed by the Revenue, for assessment year 1999-2000, stands dismissed.
:- 69 -: ITA 1183 to 1188/09
1039 to 1043/09 & 448/10 I.T.A.No. 448/Mds/2010 - A.Y 2005-06
83. This appeal of the assessee, for assessment year 2005-06, is directed against the order of the ld. CIT(A)-XII, Chennai, dated 26.2.2010.
84. The first issue in the assessee appeal relates to disallowance of 50% of the professional fees and disallowance of interest of ` 60000/- paid to Late Shri T.T.Vasu. For the reasons stated in the assessee's appeal for assessment year 2002-03 on this issue, we uphold the order of the CIT(A) and dismiss the grounds raised by the assessee.
85. The next issue relates to setting off of brought forward depreciation/business loss. Brought forward loss and unabsorbed depreciation as claimed by the assessee are not set off in view of the scrutiny of assessment for the earlier years when the income was substantially increased and hence there was no loss depreciation to be carried forward for this year. However, on the basis of the Tribunal order for these years, the Assessing Officer will rework the loss or depreciation to be carried for earlier years and to set off the amount so carried against the income of the year in accordance with law. :- 70 -: ITA 1183 to 1188/09
1039 to 1043/09 & 448/10
86. In the result, the appeal of the assessee for 2005-06 stands partly allowed for statistical purposes.
87. To summarize the result -
Revenue's appeals -
I.T.A.Nos.1183 to 1188/Mds/2009 - Dismissed.
Assessee's appeals
I.T.A.No.1039/Mds/2009 - Allowed
I.T.A.Nos.1041 & 1042/Mds/2009 - Partly allowed
I.T.A.Nos.1040 & 1043/Mds/2009 - Dismissed
I.T.A.No. 448/Mds/2010 - Partly allowed for
statistical purposes.
Order pronounced in the open court on 19.10.2011.
Sd/- Sd/-
(N.S. SAINI) ( HARI OM MARATHA )
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 19th October, 2011
RD
Copy to: Appellant/Respondent/CIT(A)/CIT/DR