Income Tax Appellate Tribunal - Pune
Aquapharm Chemical Co Ltd, Pune vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
Pune Bench "A" , Pune
Before Shri I.C. Sudhir, Judicial Member
and Shri. G.S. Pannu, Accountant Member
Sr.No. ITA Asst. Appellant Vs. Respondent
No./C.O.No. Year
1 372/PN/2002 1998-99 Aquapharm Chemical Jt. CIT, S.R.1, Pune
Co. Ltd.,
S-113/2, MIDC
Bhosari, Pune 26
PAN : Not available
2. 1111/PN/2005 2001-02 -do- Addl.CIT, R-8, Pune
3. 626/PN/2002 1998-99 Asstt. CIT, Cir 8, Acquapharm
Akuri, Pune Chemical Co. Ltd.
S-113/2 , MIDC,
Bhosari, Pune 26
PAN : Not available
4. 1193/PN/2007 2001-02 -do- -do-
5. 1386/PN/2005 2001-02 -do- -do-
6. C.O.1/PN/2008 2001-02 Acquapharm Asst. CIT, Cir. 8,
(Arising out of Chemical Co. Ltd. Pune
ITA No. S-113/2 , MIDC,
1193/PN/2007) Bhosari, Pune 26
PAN : Not Available
Appellant By : S/Shri Sunil Pathak & R.G. Nahar
Department by: S/Shri Hareshwar Sharma,CIT, S.K.Misra, CIT II &
S.K. Ambastha
Date of Hearing : 09/1/12
Date of Pronouncement: /2/12
ORDER
Per I.C. Sudhir, JM
ITA No. 372/PN/2002
The assessee has questioned first appellate order on the following grounds :
"(1). That the learned CIT(A) erred in law and on facts in rejecting the claim of the Appellant that the Compensation of Rs. 4,53,86,124/- received under settlement of dispute with AIK Germany was a capital receipt not liable to income tax. The learned CIT(A) erred in not appreciating that, since in substance the claim awarded by the International Council of Arbitration to the Appellant represented damages for nonfulfilment of the contractual obligations by AIK Germany due to which the Appellant could not implement the project, and since there was sterilization of the profit earning sources of the Appellant, such compensation or damages awarded for breach of 2 ITAs . Nos. 372, 626/PN/2002 etc. Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 contract fell in the category of a capital receipt not chargeable to income tax, as clearly held by a number of direct judicial pronouncements of the Hon'ble Supreme Court and various High Court.
(2) That the learned CIT(A) erred in law and on facts in confirming the disallowance of Rs. 46,040/- out of expenditure for gift and presentation articles.
(3) That the learned CIT(A) erred in law and on facts in confirming the disallowance of Rs. 6,92,595/- out of Sales Commission paid by the Appellant. The learned CIT(A) further erred in not admitting additional evidence under Rule 46-A of the I.T. Rules, although the Appellant had explained the circumstances under which the same could not be produced before the A.O..The learned CIT(A) further erred in not even appreciating the Appellant's contention and prayer that out of Rs. 6,92,595/- while Rs. 3,16,629/- represented commission actually paid, the remaining amount of Rs.3,72,966/- provided during A.Y. 1998-99, had been actually written off as not payable in the subsequent years and accordingly been offered as income and, therefore, the Assessing Officer be suitably directed to ensure that the Appellant was not doubly taxed in respect of the same. (4) That the learned CIT(A) erred in law and on facts in confirming the disallowance of Rs. 11,829/- out of Telephone Expenses. (5) That the learned CIT(A) erred in law and on facts in not entertaining the Additional Ground in respect of disallowance of Rs. 65,854/- out of Vehicle Expenses, although the same was requested to be entertained in the submissions before the learned CIT(A), in view of the fact that a specific prayer for relief in this regard had already been taken in Form No. 35 filed before him. The learned CIT(A) has not even discussed this issue at all in his Appellate order."
2. Besides, the assessee has also raised the below mentioned 2 additional grounds with request to allow the same for adjudication of the Tribunal since issue 3 ITAs . Nos. 372, 626/PN/2002 etc. Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 involved therein is legal in nature and adjudication of the same does not require consideration of any material outside the record :
Additional Grounds "6] The learned CIT(A) erred in directing in para 3 of his order, asst. of profit on sale value of Rs. 19,40,000/- of operating assets to be taxed u/s. 41(2) without appreciating that the sale value being lesser than the WDV of the block, no profit was taxable in the hands of the assessee. 7] The learned CIT(A) erred in taxing the capital gains on transfer of trademark to HACCL. The appellant submits that there being no cost of acquisition of trade mark, the capital gains on transfer thereof are not chargeable to tax."
We mark these additional grounds as Additional Ground Nos. 1 & 2. 2.1 The Ld. D.R. opposed the raising of the above stated additional grounds on the basis that it is belated.
2.2 Considering the above submissions, we find that the issue raised in the additional grounds is legal in nature and adjudication of the same does not require consideration of fresh material outside the record. We thus do not find substance in the opposition of the Ld D.R. against the allowability of the adjudication of the above stated additional grounds. We accordingly allowed the same. Ground No. 1
3. It is against the holding of Rs.4,53,86,124/- as a revenue receipt by the Ld CIT(A).
3.1 The relevant facts as per assessment order are that the assessee company was incorporated in 1974 with its primary object of manufacturing sea water 4 ITAs . Nos. 372, 626/PN/2002 etc. Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 desalting kit for the Indian Air Force and Indian Navy. In early 1980, it diversified its operation by entering into the manufacturing of non-toxic non-pollutant water treatment chemicals. The assessee has having 2 Divisions/Plants - one at Bhosari and the other at Pirangude. The assessee company entered into an agreement dated 23.12.1989 with AIK - Germany, for supply of technical knowhow for manufacture of fire retardant chemicals. The company was keen to expand its activity and thought that fire retardant chemical have a good market potential. The company decided to set up the project at Pirangude. It made out its expansion project and got it approved from SICOM and WMDC for project loan and sales-tax benefits of Government of Maharashtra. As per the agreement with AIK - Germany, the assessee company paid first installment of technical know how fees and it received certain technical information and drawings from AIK. Since the information provided by AIK was not sufficient, the assessee could not start its manufacturing activities of fire retardant chemicals. Despite repeated requests by it, AIK refused to divulge any further information and took the stand that it had supplied all the necessary information. The assessee company left with no alternative but to go into arbitration as per technical know how agreement and to claim compensation. As per the agreement between the 2 parties i.e. the assessee and AIK, the dispute between the two was to be settled in an arbitration proceedings to be held in Germany. One arbitrator each was to be appointed by both the parties and 3rd umpire was to be appointed with the mutual consent of the parties. In the arbitration, an award of Rs. 4,53,86,124/- was awarded during the previous year to the assessee as compensation for the settlement of the disputes. While processing the return u/s. 143(1)(a), prima facie, adjustment of Rs. 4,53,86,124/- was made treating the same as revenue receipt. The assessee filed a rectification application u/s. 154 but could not succeed. The aggrieved assessee preferred first appeal but, again could not succeed as the Ld CIT(A) confirmed the addition of Rs.4,53,86,724/-. In the scrutiny proceedings, the assessee was asked to explain as to why the said adjustment should not be retained in the assessment. 5 ITAs . Nos. 372, 626/PN/2002 etc.
Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 The assessee explained several reasons for treating the amount received as compensation in the award, as capital receipt. The A.O was not satisfied with those explanation and treated the amount received in award as revenue receipt. The Ld CIT(A) also upheld the same. The said first appellate order on the issue has been questioned by the assessee in ground No. 1, in its appeal before the Tribunal. 3.2 Before the Tribunal, the Ld. A.R. while reiterating the submissions made before the authorities below, argued that the previous year relevant to the A.Y. under consideration was first year of manufacturing of anti fire chemicals. He submitted that the compensation received was an award for non-fulfilling of their part of the contract by AIK. It is damage for non-performance of the contractual obligation by AIK. The Ld. A.R referred page nos. 1 to 11 of the paper book filed on behalf of the assessee on 10.2.2010. It is copy of the agreement dt. 25th October 1989 between the assessee and AIK. The Ld. A.R. submitted that as per the terms of the agreemen AEG ISOLIER-Undqunststoff GMBH, a German company was licensor and the assessee was referred as licencee. As per this agreement, the "contract work" was meant and included the items described in Annexure 1, manufactured by licensor. As per the agreement, licensor granted to licensee the non-exclusive, non-transferrable right to reproduce contract products in its own manufacturing facilities in India by using documentation, and to use and sell. As per the clause (3) of the agreement, the licensor had to furnish to licencee the documentation which was in licensor's possession on the effective date of the agreement within 3 months in the form of copies or blue prints. The Ld. A.R. submitted that the agreement was for the supply of knowhow to the assessee in the form of documentation defined in the agreement for the purpose of the assessee's reproduced contract products in India. The licensor AIK failed to provide knowhow to the assessee as agreed upon and thus the assessee was having no option but to invoke arbitration clause of the agreement for compensation of damages caused due to non-performance of contractual obligation by the licensor AIK. After considering 6 ITAs . Nos. 372, 626/PN/2002 etc. Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 the case of the parties, an award of Rs. 4,53,86,124/- was awarded to the assessee in the arbitration proceedings. The Ld. A.R. referred page nos. 12 to 39 of the paper book i.e. copy of the award dated 31st October 1996 by International Court of Arbitration. The Ld. A.R. referred page No. 17 and internal page No. 4 of the said award wherein in para No. vii, summary of factual background has been given. The Ld. A.R. also referred para No. viii of the award wherein summary of the dispute and the claims of the parties has been given. The Ld. A.R referred para No. 10.2 of the award discussing the substantive issues in dispute which were to be decided by arbitrators and the arbitrator has also mentioned the rights and obligation of the parties under the agreement and about the breach of those obligations. The Ld. A.R. also referred page No. 38 of the paper book and internal page No. 26 of the award whereby the AIK has been ordered to pay the claimant assessee a net amount of 3170000 Deutsh Marks (DM) as assessee's damages reduced by the balance DM 160000 due under the agreement. The Ld. A.R. submitted that the assessee has to start the manufacture of anti fire chemicals for the first time and it was new line for it. He pointed out that although agreement was for 7 years, but assessee was to continue manufacture and to let out the know- how to others. He referred clause No. 9.6 of the agreement made available at page No. 6 of the paper book filed on behalf of the assessee. 3.2.1. The Ld. CIT(A) while deciding the issue against the assessee, has not appreciated the injury caused to the profit making apparatus and that the know- how was foundation of the business of the assessee. Appreciating the same, huge compensation was awarded by the arbitrators. The arbitrators noted failure on the part of the German Co. The basis of award remained the lost profit due to non- supply of the know-how and not on loss of profit. The Ld. A.R submitted that newly installed machinery in absence of supply of know-how have gone completely waste. The Ld. A.R thus concluded his argument with this submission that considering the totality of the facts and circumstances of the present case on the issue, the only 7 ITAs . Nos. 372, 626/PN/2002 etc. Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 inference can be drawn is that the compensation received by way of award by the arbitrator due to non-supply of know-how by the German Co. under the agreement was capital receipt. In support, he placed reliance on the following decisions :
1) CIT Vs Bombay Burmah Trading Corporation, 161 ITR 386 (SC)
2) Senairam Doongarmall Vs CIT, 42 ITR 392 (SC)
3) CIT Vs. Barium Chemicals Ltd., 168 ITR 164 (A.P)
4) CIT Vs. Abbasbhoy A. Dehgamwalla and Others, 195 ITR 28 (Bom)
5) CIT Vs. J. Vajantizies and Others, 91 ITR 345 (Bom)
6) Spaco Carburetors (I) (P.) Ltd. Vs Additional CIT, 127 ITD 153 (Bom)
7) Ms. Payal Kapur Vs. Asst. CIT, 98 ITD 19 (Del)
8) Spaco Carburators (I) (P.) Ltd. Vs. Addl. CIT, 127 TTJ 637 (Mum.) 3.2.2. The Ld. A.R. further pointed out that 2 agreements were entered into, the one with assessee (75%) and other with Delhi party (25%) for marketing the product. He referred page No. 5, 289 to 294 of the paper book No. 2 i.e. copy of certificate and of agreement with M/s. A.R.K Industrial Product Pvt. Ltd. Delhi. He submitted that according to the said agreement M/s. A.R.K. Industrial Products Pvt. Ltd., Delhi were appointed as sole selling agent for fire product system. The assessee had made marketing arrangements with the said company of Delhi. The Ld. A.R. also referred page No. 295 of the paper book No. 2 i.e. approval from AIK Germany allowing to use brand name "Flammadur". He submitted that assessee had only one agreement with AIK Germany on the basis of which, award was given. 8 ITAs . Nos. 372, 626/PN/2002 etc.
Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 3.3. The ld. D.R., on the other hand, tried to justify the first appellate order on the issue. He submitted that there cannot be a standard test to determine the nature of receipt as capital or revenue. To determine the character of receipt what has to be seen whether the venture in which the assessee giving up his rights was the profit earning apparatus and such an action itself represent the entire profit earning structure of the assessee. If that be so, anything received, would partake the character of the capital receipt, but where, however, the venture is only for the purpose of carrying on the existing business by taking help of the another, compensation received in such a venture would be a revenue receipt. He placed reliance on the decision of the Hon'ble Delhi High Court in the case of CIT Vs. Manoranchan Picture Corportion (1977) 228 ITR 202 (Del.). He submitted that under the License, AIK was to provide "documentation" (designs, manufacturing & test information) as available and as used by licensor, to the assessee for use in "reproduction" of contracted products at its own manufacturing facilities in India. The assessee was licensed to manufacture and sell such 'contracted products', besides AIK, to its customers in India, and other specified countries. As per para 2 of the licensed agreement (page No.2) of paper book volume II), the licensee assessee was granted the 'non exclusive and 'non-transferable ' right to use the documentation and to reproduce contracted products. Thus, the parties to the agreement were not bound by any 'exclusive' clause under the agreement. The licensor, AIK was free to enter with similar agreement with any other party in India or elsewhere, and to supply such documentation for the production of such products. The licensor, AIK was also not restricted from entering into similar contracts with any competing party of AIK. The documentation for the contracted products were not transferable by the licensee, during the contracted period of 7 years, although this condition 9 ITAs . Nos. 372, 626/PN/2002 etc. Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 was also diluted by clause 6.3 of the agreement whereby the assessee was free to assign another Indian party to use the documentation and technical know-how subject to concurrence of the licensor and licensee. Thus the production of contracted products could be assigned to any other manufacturing facilities by the assessee. 3.3.1 The Ld. D.R. further pointed out that as per the clause 8.1.1, the licensee assessee was entitled and obliged to provide the containers of re-produced contract products, with the designation "licensed by AIK", as approved by licensor and in any other language. The designation could also be used by the assessee in sales promotion activity etc. to claim that the contracted products were manufactured with technical support provided by AIK, Germany.
3.3.2. The Ld D.R. drew our attention to the contents of para no.7.8 at page 5, and para no. 10.2.9.5 at page 17 of the ICA award, a copy whereof has been made available in the paper book volume 1 dated 17.11.2005 filed by the assessee. With the assistance of these paragraphs, the Ld. D.R. submitted that the licensee assessee was also granted right to use AIK's brand name "Flammadur" under the contract agreement. Thus assessee not only was granted the right for documentation and designs to produce and the license to manufacture the contracted products but also to use the registered trade mark of "Flammadur" owned by AIK Germany. The assessee also had an agreement with AIK for marketing/application of Joint Venture with 75% interest and the lost profit from this venture has been claimed to be D.M. 5.625 million. The Ld. D.R. submitted that the claim of the assessee before the ICA, as listed in para 8.2.4 on page 8 and para No. 10.3.2 on page No. 19 of the ICA Award was relating primarily to loss of business 10 ITAs . Nos. 372, 626/PN/2002 etc. Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 opportunities include loss of profits from assessee's participation in the marketing joint venture.
3.3.3. The Ld D.R. submitted further that the financial as rendered by ICA also shows that it has been computed with reference to lost profit for 7 years (para No. 10.3.2.5 on page No. 21 of the ICA Award) computed at D.M 4.189 million for the manufacturing, and D.M 3,129 million from the joint venture. He submitted that para 10.3.2.7 on page 22 refers to award of D.M. 3.33 million for loss in profits, caused by AIK. 3.3.4. The D.R. submitted that it is clear from the claims made by the assessee before the ICA of the decision of ICA"s compensation was made with regard to lost profit and not for the distortion or damage to any capital, commercial asset of the assessee. The agreement was not merely for the technical know-how but also for the trade mark of AIK and the marketing joint venture. In fact, the assessee was required to pay the balance of D.M 1,60,000 to AIK as cost incurred for the lost future profits. He submitted that the compensation being for the potentially lost profit resulting from breach of agreements in the normal course of business and not causing any damage to the profit making structure of the assessee, is a review receipt, and there is nothing to indicate that the turnover or the profits of the assessee went down following the breach of contract by the AIK. The Ld D.R. placed reliance on the following decisions :
1. CIT Vs Rai Bahadur Jairam Valji ( 1959) 35 ITR 48(SC)
2. Gillanders Arbuthnot & Co. Ltd (1964) 53 ITR 23 (SC)
3. Kettlewell Bullen & Co. Ltd. (1964) 53 ITR 261 (SC)
4. CIT Vs. Best & Co. (1966) 60 ITR 11 (SC)-11 ITAs . Nos. 372, 626/PN/2002 etc.
Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73
5. CIT Vs Karamchand Thapar & Bros. (P) Ltd. (1971) 80 ITR 197(SC) Also (1968) 67 ITR 705 (Cal.)
6. CIT Vs Mannaji Ramji & Co. (1972) 86 ITR 29 (SC)
7. CIT Vs. Siewart & Dholakia (P) Ltd (1974) 95 ITR 573 (Cal)
8. Bishambher Nath Swaroop Narain Vs CIT (1979) 119 ITR 681(All.)
9. Matherson Bosanquet Co. Ltd. Vs. CIT (1988) 171 ITR 359 (Madras)
10. Blue Star Ltd Vs. CIT (1994) 217 ITR 514 (Bom)
11. CIT Vs Manoranjan Pictures Corpn. (1997) 228 ITR 202(Delhi)
12. CIT Vs Highway Construction Co. (P) Ltd. (1997) 223 ITR 32 (Gau)
13. Chemplast Engineers P Ltd Vs CIT (1998) 234 ITR 23 (Madras)
14. Parry & Co. Ltd. Vs CIT (2004) 269 ITR 177 (Madras)
15. Elegant Chemicals Enterp. P Ltd Vs ACIT -2004-TIOL-131- ITAT-Hyd
16. IBM India Ltd Vs CIT (2007) 105 ITD 1 (Bangalore)
17. Ansal Properties & Industries Ltd (2008) 19 SOT 391 (Delhi)
18. JCIT Vs Khana Vs Annadhanam, 2008-TIOL-377-ITAT-Delhi
19. Ansal Properties & Industries Ltd. (2010)-TIOL-810-HC-Delhi
20. CIT Vs. H.S. Ramachandra Rao (2011) 330 ITR 322 (Karn)
21. B.Rachurama Prabhu Estate (2011), 239 CTR (Kar) 274-
22. Guffic Chem (P) Ltd. Vs CIT (2011) 332 ITR 602 (SC)
23. London and Thames Havel Oil Whatvers Ltd. (1968) 70 ITR 460 (CA)-
24. ION Exchange (I) Ltd. Vs. ITO, 52 DTR 411(Mum)
25. S. Kumar Tyres Manufacturing Co. Vs. CIT, 227 CTR (MP)
181. 12 ITAs . Nos. 372, 626/PN/2002 etc. Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 3.3.5. On the basis of above decisions, the Ld. D.R. pointed out that following broad principles are emerging there-from :
"(i) It is immaterial as to whether the payment in the hands of assessee is voluntary or other-wise, i.e. through court or arbitration.
(i) Cessation / termination of any and every source of income would not make the receipt of such cessation as capital receipt.
(ii) The real test would be whether such venture/agreement resulted in any profit-making apparatus or whether it was a normal business venture, the termination of which would not adversely affect the existing business structure or the profit making apparatus.
(iii) Where the compensation is computed with regard to the probable loss of potential income, the receipt is revenue in nature."
3.3.6. The Ld. D.R. submitted that the decisions relied upon by the Ld. A.R. in the cases of CIT Vs. Barium Chemicals Ltd. (Supra), Spac Carburators P. Ltd. Vs. ACIT (Supra), Bombay Burma Trading Corporation Ltd. (Supra), Abbas Bhoy A. Dehgamwalla (Supra) and Sinairam Dungurmal (Supra) are having distinguishable facts, hence these are not helpful to the assessee. He submitted that in the case of CIT Vs. Barium Chemicals Ltd. (Supra), foreign company had given contract to structure, erect and commission plant and machinery of the assessee. The plant was performing only 30% of the capacity. The compensation was awarded which held to be capital receipt. Likewise in the case of Space Carburators P. Ltd., the assessee was manufacturing carburators for Hero Hondo Mobikes under exclusive license from 'K', Japan. 'K' obliged to provide advance designs and dyes for advanced version. Hero Honda was to comply with Y to K initiation norms. 'K' Japan refused to 13 ITAs . Nos. 372, 626/PN/2002 etc. Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 provide Y to K technology to assessee and entered into agreement with another Indian company resulting in stoppage of business of assessee completely. The compensation granted held to be capital in nature. 3.4. In rejoinder, the Ld. A.R. submitted that nature of receipt either capital or revenue depends on the facts of the case, hence there cannot be a standard test. He submitted that the decisions relied upon by the Ld. D.R. having different facts are not applicable in the present case. He submitted that in the case of Ion Exchange (I) Ltd. Vs. ITO (Supra), relied upon by the Ld. D.R., the assessee was already into manufacturing and distribution of the products which were to be distributed by virtue of joint venture. This joint venture was terminated . It did not affect the assessee as he rebranded back to which old set up of manufacturing of the distribution of the same products. It is on this fact, the Tribunal held the same to be revenue receipt. In the case of Ansal Properties and Industries Ltd. (Supra) relied upon by the Ld. D.R., the restrictive covenant was not intended to divest the assessee of its income earning apparatus, whereas in the case of present assessee it would deprive of source of income or that there was sterilization of source of income. He submitted further that in the case of S. Kumar's Tyre Manufacturing Company (Supra) relied upon by the Ld. D.R., the amount received by the assessee consequent upon termination of the agreement was not against any price for relinquishment of any right in the capital asset or parting with any asset of injuring nature. The Hon'ble High Court came to the conclusion that the same paid was in ordinary course of business to adjust the relationship between the assessee and other party to the agreement. There is also finding that it did not create any right in favour of the assessee. On these facts, it was treated as revenue receipt. In the case of present assessee, the assessee was 14 ITAs . Nos. 372, 626/PN/2002 etc. Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 deprived of the source of the income by virtue of breach of contract or in fulfillment of the contract. The assessee thereby was prevented from commencing the business of fire retardant chemicals. That is why this is a capital receipt.
Findings 3.5 There is no dispute that there cannot be a standard test to determine the nature of receipt as to where it is capital or revenue in nature. The nature of receipt depends on facts of each case. The authorities below have treated the amount received in compensation as revenue in nature mainly on the basis of following grounds / objections :
A) The compensation is not for suffering injury to the profit making apparatus. The apparatus of the assessee was the existing set up and the proposed making of fire retardant chemical was merely an expansion of the existing business. B) The compensation received was in normal course of business carried on by the appellant.
C) The injury if any was not inflicted of any capital asset of the applicant. The agreement was to use the know-how as a licensee for a limited period of 5 years (sick 7 years). D) The failure to supply full details of know-how did not affect the basis intention of the business of the assessee/appellant. E) The compensation for the loss suffered by assessee was incidental to the business and it did not amount to be received for loss of an enduring asset.
F) The assessee had mainly acquired the right to us the technology and the expenditure incurred has also been claimed as a 15 ITAs . Nos. 372, 626/PN/2002 etc. Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 revenue expenditure, therefore, any receipt in view of such expenditure cannot be termed as capital receipt. G) The arbitration award there categorically states that the amount of compensation received by the assessee is in lieu of profits and not because the assessee's profits earning apparatus was affected, hence the expenses on arbitration has been claimed as revenue expenditure' and H) The loss of extinction of source of income which the assessee contends never came into effect. The arbitration award is only in lieu of profits.
3.5.1 Before us, the Ld. A.R. has tried to meet out the objections raised by the authorities below to the claim of the assessee and the opposition of the ld. D.R. On the basis of these submissions of the party, we would deal with each of the above mentioned objections on the basis of which, the receipt of compensation has been treated as revenue in nature.
OBJECTION A 3.5.2. The objection of the authorities below is that the compensation is not for suffering injury to the profits making apparatus. They have observed that the apparatus of the assessee was existing set up. The assessee is a pioneer in manufacture of dispersants and produces a wide range of formulations based on these chemicals. It was having established manufacturing division, factory, research & development department and administrative establishments when it entered into an agreement for the know-how. It was further observed by them that the proposed making of fire retardants chemical was merely an extension of existing business. The submission of the Ld. A.R. in this regard remained that the agreements with AIK, Germany was entered 16 ITAs . Nos. 372, 626/PN/2002 etc. Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 into by the assessee company with a view to set up at Pirangut a full- fledged Indian manufacturing facilities of fire protection chemicals. It was a new line of business altogether, since, the assessee company was earlier engaged in the manufacturing of basic chemicals and facility chemicals. A new project of fire protection chemicals required a new infrastructure in itself. It was submitted that since the assessee could not commence its new line of business due to non-performance of the agreement on the part of AIK, the question of receiving the compensation in the normal course of business does not arise at all. 3.5.3. There is no dispute that the assessee company decided to set up the project for manufacturing of fire retardant chemical, a new line of business for the assessessee at Pirangut where sufficient land was available and got the project approved from SICOM and WMDC for project loan and sales tax benefits of Government of Maharastra. Thus, in our view, there is no reason to doubt the independent existence of the project. Now, to verify as to whether the project was in operation or not, we will have to see the relevant facts relating to this project only. It has also not been disputed that in absence of know-how which as per the agreement was to be supplied by AIK, the assessee could not start the project to produce the fire protection chemicals. It has also not been rebutted by the Department that production of fire protection chemicals aimed at the project was a new line of business altogether as the assessee company was earlier engaged in the manufacturing of basic chemicals and facility chemicals. Under these circumstances, fire protection chemical unit proposed to be set up at Pirangut, in our view was the profit earning source from which the assessee could have earned profit in future, had the agreement been fully honoured by AIK. Clearly therefore, since assessee was deprived of the "profit earning source", it 17 ITAs . Nos. 372, 626/PN/2002 etc. Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 was awarded compensation by the arbitrator appointed as per the arbitration clause of the agreement. In this regard, we find support from the decision of Hon'ble Bombay High Court in the case of CIT Vs. Voyantizies & Others (Supra) relied upon by the Ld. A.R. In that case, the Hon'ble Bombay High Court was pleased to hold that when assessee was prevented from the commencement of business, the damages for compensation received even if they are worked out on the basis of loss of profit which the assessee would have earned, had he carried on business was only a capital receipt and not a revenue receipt liable to tax. In that case before the Bombay High Court. Under an agreement of lease executed in 1942, the assessee agreed to become tenant of certain premises for using the premises as a hotel. The lease was to commence from the date the building was completely constructed and ready for possession and to continue for a period of 5 years. By a requisition order dated 25th April 1942, the Government of India requisitioned and directed of delivery of possession on priority to the government. The requisition was to continue during the period of the war and 6 months thereafter. In 1945, the assessee put in a claim for damages for not having been able to start the hotel business. His claim was finally settled and in 1947, he received a sum of Rs. 82,460/- from the government. On the question whether the same was assessable to income tax, it was held by the Hon'ble High Court that the hotel business which the assessee intended to start could never be started because of the requisitioned order passed by the government, hence the compensation of Rs. 82,460/- was not related or concerned with any business or trading activity of the assessee. It was held that it was a solitium not carrying of business and hence not revenue receipt assessable to tax. This decision of Hon'ble Bombay High Court fully covers the case of the present assessee as in case of the assessee also, , the assessee could not 18 ITAs . Nos. 372, 626/PN/2002 etc. Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 start its business due to non-supply of know-how by AIK as per the agreement between assessee and the AIK. The matter went in the arbitration as per the clause of the agreement and the arbitrators awarded the compensation as a solitium for not carrying on busiess. We thus do not find substance in the objection.
OBJECTION B 3.5.4 In objection No. B, the authorities below have denied the claimed capital nature of the receipt of compensation on the basis that the compensation was received in normal course of the business carried on by the assessee. They observed that assessee has been engaged in marketing of various chemicals and formulations since 1980 and in ordinary course of business it has to enter into agreement to have the license for use of know-how. They held that compensation of breach of contract would be natural consequence which would be known to the parties entering into agreement. The contention of the ld. A.R. remained that the agreement that the assessee was to set up a new industrial undertaking and on account of breach and non-performance on the part of the AIK, the same never came into being and therefore, the observation of the authorities below that the contract was entered in the ordinary course of business is altogether unjustified and irrelevant on the facts of the present case. In support, reliance was placed on the decision of Hon'ble Andhra Pradesh High Court in the case of CIT Vs. Barium Chemicals Ltd. (Supra). The contention of the ld. D.R. remained that this decision of Hon'ble Andhra Pradesh High Court in the case of Barium Chemicals Ltd. is having distinguishable facts, hence it is not helpful to the assessee. The Ld. D.R. also placed reliance on several decisions including the decision of Hon'ble Delhi High Court in the case of Ansal 19 ITAs . Nos. 372, 626/PN/2002 etc. Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 Prooerties and Industries Ltd. (Supra) & Guffic Chemicals (P) Ltd. Vs. CIT (Supra) etc. 3.5.5. We have already discussed the facts of the case hereinabove, and have held that in Objection No. 'A' that the project was separate and distinguished from other business of the assessee. It was entirely an independent set up, wherein fire protection chemicals was to be produced. Undisputedly, the project could not be started due to non- supply of the know-how by the AIK as per the agreement to the assessee. In our understanding the meaning of the phrase "in normal course of business carried on by the assessee" would come into effect only after starting of the business, if the assessee enters into an agreement with the supplier or with any person for an act beneficial to the business, the said action will fall under the category of "in normal course of business carried on by the assessee." The agreement in the present case with AIK was entered into by the assessee for supplies of the know-how to enable the assessee for manufacturing of fire protection chemicals in new undertaking set up at Pirangut. Undisputedly in absence of supply of the said know-how, the assessee could not operate the project and the fire protection chemicals could not be manufactured to start the business of the assessee. Thus, in our view, the said agreement cannot be held as entered into in the normal course of the business, since the very business was yet to be carried on by the assessee with the assistance of the said know-how. We thus do not find substance in the finding of the authorities below that a compensation received in lieu of the non-supply of the said know-how was received in normal course of the business carried out by the assessee. In this regard, we find support from the decision of the Hon'ble A.P. High Court in the case of CIT Vs. Barium Chemicals Ltd. (Supra). The Hon'ble 20 ITAs . Nos. 372, 626/PN/2002 etc. Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 Andhra Pradhesh High Court in that case was pleased to hold that in order to decide whether or not a payment is revenue in nature, its true nature and substance must be looked into; if the payment is received in the ordinary course of the business of the assessee for loss of stock in trade, it is a revenue receipt; if, on the other hand, the payment is towards compensation received for extinction or sterilization partly or fully of a profit earning source, such receipt not being in the ordinary course of assessee's business, is a capital receipt. For a ready reference, we reproduce hereunder, the relevant portion of the head-note of the decision containing facts and finding of the Hon' ble High Court as under
:
"The assessee entered into agreement with an English company in October, 1961, according to which the English company was required to erect a barium chemical plant for the assessee for producing certain barium salts. The consideration fixed for the erection of the plant was 1,84,500. The work was to be commenced within four months and completed within 9 to 12 months from the issue of the letter of credit. The English company had agreed to ensure a certain quality of barium salts and also guaranteed certain quantity of production per annum. As difference arose between the assessee and the English company, a supplementary agreement was concluded on August 3, 1963, under which the English company agreed to take up complete responsibility for the plant and machinery supplied and they were prepared to give necessary guarantee. The erection of the plant continued till the middle of 1964. During the trial runs, it was noticed that the plant and machinery was completely defective and did not conform to the agreed specifications and designs. After the defects were pointed out by the assessee-company and investigated into by the English company, the plant commenced production on May 4, 1965. Then it was noticed that the production capacity was only 30% of the installed capacity. It was also found that the quality of the barium salts produced was not 21 ITAs . Nos. 372, 626/PN/2002 etc. Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 according to the agreed specifications. The assessee took up the matter with the English company and discussions followed. Meanwhile, in March, 1966, the English company abruptly left the erection site. Subsequently, there were protracted negotiations as a result of which a settlement was reached on February 22, 1967, whereby the English company agreed to pay certain sums aggregating to Rs. 56,87,402 if the assessee waived its claims against the English company. The assessee contended that this sum was a capital receipt. It also claimed deduction of the following amounts - 1. Rs. 50,000 paid to A for conducting investigation into deficiencies of the various production units , and 2 Rs. 42,212 paid to C for advising the assessee regarding rectification of the defects. On appeal, the Appellate Assistant Commissioner held that only Rs. 47,20,939 should be treated as revenue receipt and the balance was capital receipt. The Tribunal held that the amount of Rs. 47,20,939 constituted a capital receipt, that it could not be assessed as capital gains and that the payments to A and C constituted capital expenditure. On a reference :
Held, (i) that neither on the findings of the Tribunal, nor on an examination of the terms of the settlement dated February 22, 1967, could it be said that the amount in question represented loss of profits. The business the assessee carried on was in barium chemicals. The settlement dated February 22, 1967, concluded between the assessee and the English company could not be treated as one in the ordinary course of the business carried on by the assessee. Installation of machinery and parts was not the business of the assessee. It was the business of the English company. There had been a sterilization of capital assets of the assessee in that the English company failed to erect the machinery and plant according to the original stipulations. It had abandoned the work in the middle. The optimum capacity of the machinery installed was not even 30 per cent, of the installed capacity. The amount paid was towards damages in order to compensate the assessee for not fulfilling the terms of the contract. Hence, the sum of Rs. 47,20,939 received by the assessee during 22 ITAs . Nos. 372, 626/PN/2002 etc. Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 the assessment year 1968-69 constituted in its entirety a capital receipt and was not assessable.
(ii) that none of the ingredients mentioned in section 2(47) of the Income-tax Act, 1961, was present in the transaction in question. There was neither sale nor exchange nor relinquishment of any rights in respect of the amount of Rs. 47,20,939 received by the assessee from the English company as damages for their failure to fulfil their obligations under the agreements concluded with the assessee. The amount could not, therefore, be brought to tax as capital gains under section 45; and
(iii)that when the damages received by the assessee were held to be capital receipts, if necessarily followed that the amounts of Rs. 50,000 and Rs. 42,212 paid for the purpose of investigation into the defects and for advice to rectify the defects were also capital expenditure. The amounts were not deductible."
3.5.6. There is no dispute that in the present case before us, there was no loss of stock in trade or any other loss after starting the business for which the assessee has been compensated, but the compensation has been granted to the assessee on failure of AIK in performing their part of the agreement to supply the know-how to the assessee to operate the project for the intented manufacturing at Pirangut plant, which was resulted into extinction or sterilization fully, as a profit earning source. Thus, the receipt in compensation for extinction or sterilization of a profit earning source, in view of the decision of the Hon'ble Andhra Pradesh High Court in the case of CIT Vs. Barium Chemicals Ltd. (Supra) is a capital receipt. We thus respectfully following the decision of the Hon'ble Andhra Pradesh High Court in the case of Barium Chemicals Ltd. hold that receipt of compensation in question not being in the ordinary course of assessee's business, but awarded to compensate extinction or 23 ITAs . Nos. 372, 626/PN/2002 etc. Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 sterilization of a profit earning source is a capital receipt. Since the facts of the case of Barium Chemicals Ltd. (supra) as discussed above are almost similar to the facts of the present case, rather, the case of the present assessee is at better footing in a sense that in the present case production could not even start in absence of the agreed supply of know-how by the AIK. We thus do not agree with the contention of the Ld. D.R. that decision in the case of CIT Vs. Barium Chemicals Ltd. (Supra) relied upon by the Ld A.R. is having distinguishable facts and thus is not helpful to the assessee. The decisions relied upon by the Ld. D.R. in the cases of Ansal Properties & Industries Ltd. (Supra) and in the case of Guffic Chem (P) Ltd. (Supra) etc., are of no help to the revenue as they are having different facts. In the case of Ansal Properties and Industries Ltd., admittedly the company carried on its business as before within the existing framework of the business, thus it was held that it was necessary instance of business with existing agencies were terminated and fresh agencies were taken. The compensation in that case was granted for loss of future profits which was held as a revenue receipt. It is an established proposition of law that to determine the nature of receipt as to whether it is capital or revenue, consideration of facts of that case is of more importance and de-horse the consideration of facts, the test cannot be applied. That is the reason that a definite standard of test could not be framed but importance has been given to the facts of each case to determine the nature of receipt applying possible test coupled with the facts. Likewise in the case of Guffic Chem (P.) Ltd. Vs. CIT (Supra) relied upon by the Ld. D.R., before the Hon'ble Supreme Court, the assessee was already carrying on the business of manufacturing, selling, distribution of pharmaceuticals and medical preparations, and required Rs. 50 lakhs from Ranbaxy as non- competition fee. The agreement was for 20 years. The Tribunal held that 24 ITAs . Nos. 372, 626/PN/2002 etc. Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 the amount was a capital receipt but the Hon'ble High Court reversed the decisions. The Hon'ble Supreme Court on appeal was pleased to reverse the decision of Hon'ble High Court with this finding that the payment was in the nature of capital receipt. The decision is thus on the capital nature of receipt of non-competition fee, hence not helpful to the revenue. We thus do not find substance in the objection.
Objection 'C' 3.5.7. In Objection No. 'C', the authorities below have held that the injury, if any, was not inflicted on any capital asset of the assessee. The agreement was to use the know-how as a licensee for a limited period of 7 years, they observed that the assessee was not going to acquire the know-how as a owner and it was for a use for a limited period and therefore, it was not an acquisition of any asset or advantage of enduring nature. We do not find substance in such objection raised by the authorities below especially when the fire protection chemicals unit proposed to be set up, at Pirangude (Maharashtra), was the effective source from which the assessee could have earned profit, in future, had the agreement been fully honored by AIK. Since the assessee was deprived of the "profit earning source" it was awarded the compensation under the arbitration clause of the agreement. The decision of Hon'ble Bombay High Court in the case of CIT Vs. Boyantizies & Others (Supra), discussed in Objection No. 'A' hereinabove, support the case of the assessee wherein it has been held by the Hon'ble High Court that when the assessee was prevented from the commencement of business, the damages or compensation received, even if they are worked out on the basis of loss of profit, which the assessee would have earned, had he carried on business, was only a capital receipt and not a revenue receipt liable to tax. Respectfully following this decision of Hon'ble Bombay High 25 ITAs . Nos. 372, 626/PN/2002 etc. Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 Court in the case of Boyantizies & Others, we do not find substance in the objection no. 'C' raised by the authorities below. The decision of Hon'ble Delhi High Court in the case of CIT Vs. Manoranjan Corporation (Supra) relied upon by. Ld. D.R. is not helpful to the revenue, as in that case the fact was that the venture was only for the purpose of carrying on the existing business by taking help of the another. Under that fact, the Hon'ble Delhi High Court was pleased to hold that compensation received in such a venture would be a revenue receipt. Rather, the decision of Hon'ble Delhi High Court is helpful to the assessee as the ratio laid down therein is that to determine the character of receipt, what is to be seen is whether the venture in which the assessee giving up its right was itself the profit earning apparatus and such an action would disrespect the entire profit earning structure of the assessee. It was held that if that be so, anything received would partake the character of capital receipt. In the present case before us, the machinery along with knowhow was the venture for manufacturing the fire protection chemicals. In absence of non supply of know-how/documentation, the machinery could not be operated to start the manufacturing and the assessee was forced to give up its right in the venture, which itself was the profit earning apparatus. Such action disrupted the entire profit earning structure of the assessee.
Objection No. 'D' 3.5.8. The authorities below has observed that the failure to supply the full details of the know-how did not effect the basic foundation of the business of the assessee and it continued to conduct its business as efficiently as it was during earlier period. We do not find any material on record to support this objection of the authorities below that even in 26 ITAs . Nos. 372, 626/PN/2002 etc. Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 absence of supply of know-how by AIK, the assessee continued to conduct its business as efficiently as it was during earlier period. Undisputedly, the assessee could not start manufacturing of fire protection chemicals at Pirangut which was a new set up and new line of business altogether since the assessee company was earlier engaged in the manufacturing of basic chemicals and facility chemicals. The new project of fire protection chemicals required an independent infrastructure, hence it was a separate profit earning apparatus in itself. We thus do not find substance in the objection.
Objection 'E' 3.5.9. The authorities below have also refused to accept the claim of the assessee that receipt of award was capital in nature on the basis that the compensation awarded for the loss suffered by the assessee was incidental to the business and did not amount to be received for loss of an enduring asset. We have already discussed the issue in detail hereinabove that this material fact that due to non-supply of nowhow by AIK, the assessee could not start manufacturing of fire protection chemicals at Pirangut plant has remained undisputed, hence we do not find substance in the objection of the authorities below that the receipt of compensation for loss suffered by the assessee was incidental to the business.
Objection 'F' 3.5.10. The further objection of the authorities below remained that the assessee had mainly acquired the right to use the technology and expenditure incurred has also been claimed as revenue expenditure, therefore, any receipt in lieu of such expenditure cannot be termed as 27 ITAs . Nos. 372, 626/PN/2002 etc. Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 capital receipt. The explanation of the assessee remained that in its Profit and Loss Account for the accounting period 1997-98, relevant to the A.Y. 1998-99, corresponding Rs. Equivalent of Dutch DM 1,60,000 which was earlier appeared as "balance payable to AIK Germany" was duly written back and credited under the head "other income" as reflected under Schedule 12 of the Profit & Loss Account. Besides, we are also of the view that whatever claim assessessee makes i.e. either revenue or capital receipt, the duty of the A.O is to allow just and proper claim after examining the very nature of the claim as per the law. Under these circumstances, we are of the view that the nature of receipt of compensation whether capital or revenue in nature is to be decided keeping in mind totality of the facts and circumstances under which the said compensation was awarded. The loss was compensated by the award by the arbitrator keeping in mind that the assessee could not start the manufacturing and earn profit there-from due to non-supply of the know-how by the AIK to the assessee. We thus find no substance in the plea of the authorities below that the expenditure incurred to acquire the right to use the technology by the assessee was claimed as revenue expenditure, therefore, any receipt in lieu of such expenditure cannot be termed as capital receipt.
Objection 'G' 3.5.11. The authorities below have pointed out that the arbitration award very categorically states that the amount of compensation received by the assessee is in lieu of profits and not because the assessee's profit earning apparatus was affected. They further pointed out that no claim was allowed for loss of goodwill, loss of business opportunity or any capital asset. In support, the authorities below have placed reliance on the decision in the cases of Raghuwansi Mills Ltd. Vs. 28 ITAs . Nos. 372, 626/PN/2002 etc. Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 CIT, 22 ITR 484 (SC) and Travancore Rubber & Tea Co. Ltd. Vs. CIT, 243 ITR 158 (SC). Under the background of the present case, we do not find substance in such type of objection raised by the authorities below, especially in view of this undisputed fact that the loss suffered by the assessee in the present case was in fact attributed to the extinction of the profit earning apparatus viz., the fire protection chemicals unit proposed to be set up at Pirangude. It was the effective source from which the assessee could have earned profit, in future, had the agreement been fully honored by AIK. Since the assessee was deprived of the "profit earning source", it was awarded compensation under arbitrator's agreement. The Hon'ble Bombay High Court in the case of CIT Vs. Voyentizies & Others (Supra) relied upon by the Ld. A.R. has been pleased to hold that when the assessee was prevented from the commencement of the business, the damages or compensation received, even if they are worked out on the basis of loss of profit which the assessee have earned, had he carried on business was only a capital receipt and not a revenue receipt liable to tax. The decisions relied upon by the authorities below in the cases of Raghuwansi Mills Ltd. Vs. CIT and Travancore Rubber and Tea Co. Ltd. (Supra) are having distinguishable facts and issue, hence are not helpful to the revenue. In both these cases, the assessees were already in the business, whereas in the present case before us, the assessee could not start its business of manufacturing fire protection chemicals due to non-supply of know-how by the AIK, Germany. We thus do not find substance in the Objection No. G. We also find strength from the decision of Hon'ble Supreme Court in the case of Senairam Doongarwell Vs. CIT, 42 ITR 392(SC). In that case the compensation was paid to the assessee for requisition of his factory by the military and the yardstick for determining the amount of 29 ITAs . Nos. 372, 626/PN/2002 etc. Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 compensation was the loss of future profits. In para nos. 6 and 7 of the decision, the facts are clearly stated. In that context the Hon'ble Supreme Court held in para nos. 15 and 17 and thereafter that just because the compensation is determined with reference to the lost profits, it is not amounting to a revenue receipt. The basic condition is whether the proposed business is sterilized or could not take off. In this case before us, because of the breach of the agreement by AIK, the business could not take place and therefore, it is a Capital receipt. Objection 'H' 3.5.12 The authority below have pointed out that expenses on arbitration has been claimed as revenue expenditure. We have already discussed in objection No. "F" hereinabove that the type of claim of the assessee cannot be a decisive factor for the A.O to verify the nature of the receipt as he is supposed to examine the issue independently on the basis of the facts of the case before him and the requirement of the law. The assessee had to incur the arbitration expenditure in order to protect or save its business interest of getting compensation and therefore it can not be held that such expenditure is not a revenue expenditure. The receipt by way of compensation awarded by the arbitrators is not dependent on this expenditure. Therefore, the question of holding the compensation as a capital receipt just because the arbitration expenditure is claimed as revenue expenditure does not arise at all. Applying same logic as discussed in objection No. 'F', we do not find substance in Objection No. "H".
Objection No.'I' 3.5.13. The authorities below pointed out that the loss were extinction of source of income which the assessee contends never came 30 ITAs . Nos. 372, 626/PN/2002 etc. Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 into existence and the arbitration award is only in lieu of profits. We have already discussed this aspect of the matter hereinabove in Objection No. "G". We have also cited the decision of Hon'ble jurisdictional High Court in the case of CIT Vs. Voyentizies & Others (Supra) holding that working out the damages even on the basis of loss of profit which the assessee would have earned had he carried on business, was only capital receipt and not a revenue receipt liable to tax, when the assessee was prevented from the commencement of business. In view of this binding decision of Hon'ble jurisdictional High Court, we do not find substance in Objection No. 'I' raised by the authorities below in denying the claimed treatment of the receipt of award as capital nature. 3.5.14. Under the above circumstances, we hold that the award received by way of compensation on the basis that in absence of supply of knowhow, the assessee was prevented from the commencement of the business, was capital receipt and not a revenue receipt liable to tax. We thus while setting aside orders of the authorities below in this regard direct the A.O to treat the receipt of award in question as capital receipt for the purpose of the assessment. The ground No. 1 is accordingly allowed in favour of the assessee.
Ground No. 2
4. The A.O disallowed Rs. 46,040/- out of expenditure for gift and presentation articles.
4.1. The relevant facts are that A.O noted from the details of office and general expenses that the assessee has incurred Rs. 4,60,307/- on gift and presentations worth above and below Rs. 1000/-. In reply, the 31 ITAs . Nos. 372, 626/PN/2002 etc. Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 assessee stated that details of gifts, articles are available and have been filed but the distribution record of the same are not maintained. Since the assessee could not explain as to whether all the gifts distributed are relevant for the purpose of business, the A.O keeping in mind the assessment order for A.Y. 1995-96 on the issue held 10% of Rs. 4,60,307/- as not incurred wholly and exclusively for the purpose of business which has resulted into disallowance of Rs. 46,030/- on this account. The Ld CIT(A) has upheld the same.
4.2. Since the assessee could not improve its case before the Tribunal, we are not inclined to interfere with the orders of the authorities below in this regard. The same is upheld. The ground No. 2 is accordingly rejected.
Ground No. 3
5. The A.O has disallowed a sum of Rs. 6,92,595/- out of the commission on the ground that the assessee has neither produced the details of commission paid nor any documentary evidence as to what business purpose was served for the commission paid. The A.O noted that the assessee has not furnished the confirmations from these persons. The Ld CIT(A) has also upheld the same with this observation that even if at the appellate stage, the assessee has failed to furnish any contract confirmations from the persons to whom the commission of Rs. 6,92,595/- was shown to have been paid.
5.1. The contention of the Ld. A.R. remained that that the assessee was required to furnish details regarding sales commission amounting to Rs. 74,81,032/-, out of which, it was able to comply in respect of commission 32 ITAs . Nos. 372, 626/PN/2002 etc. Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 paid to the extent of Rs. 66,88,436/-. For the balance amount of Rs. 6,92,595/-, the Ld. A.R. submitted that it pertained to 9 parties only from whom confirmations could not be produced since they could not be contacted as they had closed their business or were unavailable. The ld. A.R. submitted that before the Ld CIT(A), the assessee has furnished the details with supporting evidence regarding this amount with request to the ld CIT(A) for admission of additional evidence under Rule 46A of the I.T. Rules as the assessee was prevented for sufficient cause from producing the evidence before the A.O. The Ld. A.R. submitted that the amount of Rs.3,19,629/- out of the amount disallowed represents the commission actually paid by the assessee duly supported by credit note attached in the assessee's paper book, agency agreement and journal of the voucher and cheque payment details. The remaining amount of Rs. 3,72,966 provided during the year but written off in subsequent years and has been offered as income. The same may therefore either be allowed during the year under consideration or in case the same is not allowed, then the same should not be taxed as income again in the subsequent years being A.Ys. 2000-01 and 2001-02. 5.2. The Ld. D.R., on the other hand, placed reliance on the orders of the authorities below. He pointed out that the assessee could not produce any documentary evidence as to what business was served for the commission paid.
5.3. Considering the above submission, we find that the assessee upon whom onus was lying to establish its claim could not improve its case before the Tribunal. The documents which were not allowed to be admitted as additional evidence by the ld CIT(A) were merely Credit Notes raised by the assessee and not confirmation from the 33 ITAs . Nos. 372, 626/PN/2002 etc. Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 parties. The Ld CIT(A) was thus justified in rejecting the request of the assessee for admitting those evidence. In result, we are of the view that the assessee failed to discharge its onus to establish the genuineness of the claim. The authorities below were thus justified in disallowing Rs.6,92,595/- out of the claimed sales commission of Rs. 74,81,032/- in absence of the evidence in support to the extent of the said amount of Rs.6,92,595/-. The disallowance is thus upheld. The ground No. 3 is accordingly rejected.
Ground No.4
6. This ground is against the disallowance of Rs. 1,829/- out of telephone expenses.
6.1. Having gone through the orders of the authorities below, we find that out of Rs. 26,26,409/- under the head postage, telephone, telex a sum of Rs. 59,144/- was spent on account of residential telephones of directors. Since it was not possible for the A.O to verify that all the telephone calls have been made only for the business purposes, the A.O following the action of the first appellate authority for the A.Y. 1997-98 restricted the disallowance to the extent of 20% of the expenses incurred on telephones installed at the residence of the directors. It has resulted into disallowance of Rs. 11,829/-. The same has been upheld by the ld CIT(A). Since the assessee could not improve its case before the Tribunal on the issue, we do not find reason to interfere with the first appellate order in this regard. The same is upheld. The ground is accordingly rejected.
34 ITAs . Nos. 372, 626/PN/2002 etc.
Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 Ground No.5
7. The contention of the Ld. A.R. is that before the Ld CIT(A) an additional ground regarding disallowance of Rs. 65,854/- out of vehicle expenses was raised but the Ld CIT(A) has not entertained this additional ground.
7.1. Having gone through Form No. 35, we find that in ground Nos. 1 to 9, the assessee has not raised such ground but in prayer clause of the grounds marked as para No. 10, the assessee has prayed that the disallowance of Rs. 65,854/- out of vehicle expenses be directed to be deleted.
7.2. Before us, the ld. A.R. has not specifically pointed out when this prayer was raised as an additional ground before the Ld CIT(A) to agree with his contention that the Ld CIT(A) has failed to entertain this additional ground. Under these circumstances, we are not inclined to entertain the above contention of the Ld. A.R. and accordingly, ground No. 5 is rejected.
Additional ground Nos.1 & 2
8. Besides the general grounds 1 to 5, the assessee has raised two additional grounds reproduced hereunder with request to allow the adjudication of the same on the basis that legal issue is involved therein and adjudication of the same does not require consideration of fresh material outside the record.
"6) The learned CIT(A) erred in directing in para 3 of his order, asst. of profit on sale value of Rs. 19,40,000/- of operating assets to be taxed u/s. 41(2) without appreciating that the sale value being lesser than the WDV of the block, no profit was taxable in the hands of the assessee.35 ITAs . Nos. 372, 626/PN/2002 etc.
Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73
7) The learned CIT(A) erred in taxing the capital gains on transfer of trademark to HACCL. The appellant submits that there being no cost of acquisition of trade mark, the capital gains on transfer thereof are not chargeable to tax."
8.1. For proper identification we have marked these additional grounds as Additional ground nos. 1 and 2.
8.2. On perusal of appeal preferred by the Revenue, we find that the revenue vide ground No. 1 of the appeal questioned the first appellate order on the ground that the ld CIT(A) has erred in directing to compute the consideration received on transfer of trade names, trade mark, marketing data base etc., under the head "income from capital gain". Since the issue raised in Ground No. 1 of the appeal preferred by the revenue is connected to the issue raised in additional ground No.1, we for the sake of brevity preferred to adjudicate both these issues vide a consolidated order.
8.3. The relevant facts are that vide agreement for assignment of business dated 30th January 1998, the assessee company ACL assigned its business of Speciality Chemical Divisions for a consideration of Rs. 10 Crores to Houseman Ltd., U.K. 8.3.1. The question before the A.O was as to whether this amount of Rs. 10 Crores received for assigning the business of Speciality Chemical Division as a going concern can be eligible for tax. 8.3.2. The assessee claimed that consideration was received in a slump transaction for the sale of business as a going concern, hence, no part of this amount is taxable either as revenue receipt or even as capital 36 ITAs . Nos. 372, 626/PN/2002 etc. Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 gains. It was claimed that consideration of Rs. 10 Crores received from Houseman Ltd., U.K. was for the assignment of the entire business of Speciality Chemicals Division as a going concern along with all the assets, existing contract, trade names, trademarks, marketing data base and related know-how, technical knowhow and technical specification. Hence, no portion of the slump price is attributable to any individual asset and thus no part of the slump price is taxable.
8.3.3. The assessee submitted further that reference made to Houseman Ltd, U.K. in the letter dated 22nd January 2001 of the assessee should be read as "Desai Mangwani Chemicals Ltd.". It was submitted that the agreement for the assignment of the business dated 30th January 1998 between the assessee i.e. M/s. Acquapharm Chemicals Ltd. (ACL) and Houseman Acquapharm Chemicals Pvt. Ltd. (HACPL) was furnished. It was pointed out that HACPL is a new name of Desai Mangwani Chemicals Pvt. Ltd. (DMCPL). The name of DMCPL was changed to HACPL.
8.3.4. The details of assets transferred to HACPL are as under :
"Computers :WDV Rs. 3,68,113.22
Vehicles :WDV Rs. 6,49,952.27
Tools & Equipments :WDV Rs. 7,42,729.94
Trademarks & Trade names : Self generated hence cost Unascertainable.
Technical Know-how : -do-
Goodwill : -do
No liabilities transferred to the assignee."
The valuation report filed in case of HACL giving the break up, the
consideration of Rs. 10 Crores paid towards the various assets of the Speciality Chemical Division presented by the assessee are as under : 37 ITAs . Nos. 372, 626/PN/2002 etc.
Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc.
Page of 73
"Sr. No. Assets For Transferor (Rs.Lacs)
1 Operating Assets like 19.40
Computers, Typewriter, Motorcars,
Test kits etc.
2. Trademarks of Aquapharm 223.10
3. Technical Knowhow 421.95
4. Goodwill 305.55
970.00
Net of stamp duty of Rs. 30 Lacs borne by the Trasferor, i.e. Aquapharm."
8.3.5. The assessee claimed that they have sold the entire business of Speciality Chemicals on a lumpsum price as per the agreement for "assignment of business". The assessee submitted further that they have sold the manufacturing data, manufacturing rights, marketing data base, everything connected with this activity of HACL, who are the owners of this activity after they have purchased their business. If at all, the assessee is manufacturing these chemicals, only for them, and under their orders. The assessee does not manufacture and market the same products for any other party. The assessee has seized the business of this nature.
8.3.6. The A.O did not agree with the claim of the assessee.
Basically, the A.O has denied the claim of the assessee with observation that technical know-how, technical specification, trade marks, trade names, if at all there is transaction for them, it is only for the use of these technical knowhow, technical specification, trade marks, trade names, the reason being the assessee is still manufacturing the products in relation to which the same trade mark, trade names, technical know- 38 ITAs . Nos. 372, 626/PN/2002 etc.
Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 how and technical specifications are stated to have been transferred. The A.O observed further that consideration has been received in the normal course of business transactions for regular supply of the formulations and commercialization of Speciality chemicals. The A.O treated the receipt of consideration of Rs. 10 Crores by the assessee as a revenue receipt.
8.3.7. Before the ld CIT(A) while reiterating submissions made before the A.O, the assessee made an alternative plea that even if for the sake of arguments it is accepted that consideration of Rs. 10 Crores is received from the transfer of Speciality Chemical Division, i.e. for the transfer of trade names, trademark, marketing data base, technical specifications etc., even then it is taxable under capital gains. 8.3.8. The ld CIT(A) called for the comments of the A.O on the submissions of the assessee on the issue and after discussing the issue in details, he held the receipt of Rs. 10 Crores as not business income. He has deleted the addition of Rs. 10 Crores as business income with this finding that Rs. 7 to 9.36(Net) Crore shall be liable for long term capital gain tax (Ground No. 1 of the appeal of Revenue). He held further that on the sale value of operating assets of Rs. 19,40,000/-, the assessee is however liable for tax u/s. 41(2) of the I.T. Act for business income (Additional Ground No. 1 of the appeal of the assessee). The assessee claimed that the value of trademark was not liable to capital gain tax. The ld CIT(A) held that the assessee shall not be liable for capital gain on trademarks for this A.Y. since there was no cost of acquisition. He observed that the value of the operating asset has been deducted from the block of assets and the block has not resulted into negative, so there is no question of short term capital gain. He rounded off the 39 ITAs . Nos. 372, 626/PN/2002 etc. Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 value of trademark determined at Rs. 228.14 lakhs to Rs. 230 lakhs with this direction that while computing the capital gains, the assessee's calculations shall be increased by Rs. 1.86 lakhs (Additional ground No.2 of the assessee's appeal).
8.4. In support of ground No. 1 of the appeal of the revenue, the ld. D.R. has basically placed reliance on the assessment order, which we have already discussed hereinabove. The Ld. A.R. on the other hand tried to justify the relief given by the ld CIT(A) and reiterated the submissions made before the Ld CIT(A) on the issue raised in additional ground Nos. 1 & 2.
8.5. Considering the above submissions, we find that the A.O has denied the claim of the assessee that the receipt of Rs. 10 Crore as a consideration was against the selling of entire business of Speciality Chemicals as a slum sale on the following grounds :
"a) There is no slump sale or sale of business as a going concern.
b) The consideration has not been received for the slump sale as there is no slump sale as a going concern. Hene it is not a capital receipt.
c) The technical know-how, technical specifications, trademarks, trade names, if at all there is transaction for them, it is only for the USE of these technical know-how, technical specifications, trademarks, trade names, the reason being the assessee is still manufacturing products in relation to which the same trademarks, trade names, technical know-how and technical specifications have been stated to have been transferred.40 ITAs . Nos. 372, 626/PN/2002 etc.
Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73
d) The consideration has been received in the normal course of business transaction for regular supply of the formulations and commercialization of Speciality Chemicals." 8.5.1. Before the ld CIT(A), the assessee tried to clarify that they have sold the manufacturing data, manufacturing rights, marketing data base, everything connected to this activity to HACL, who are the owners of this activity after they have purchased the business of the assessee. It was submitted that if at all the assessee is manufacturing this chemical, it is only for HACL and under their orders. The assessee does not manufacture and market the same product for any other party and it had ceased the business of this nature. The Ld CIT(A) invited comments of the A.O on the above submission of the assessee. The A.O. denied such explanation of the assessee with this observation that the stand taken by the assessee that it is now working on job work basis for HACL was not mentioned anywhere in the documents and agreements filed by the assessee, nor the assessee mentioned the same earlier during the course of assessment proceedings. The A.O reported further that the assessee was still manufacturing the Speciality Chemicals either on job work basis as stated by it or otherwise. Thus, the assessee has not parted with or assigned the speciality chemicals division, technical knowhow, services of the key personnel, marketing data base, trade names etc., relating to manufacturing, commercialization and formulation of the speciality chemicals. He observed that agreement for assignment of business is just a colourable device to avoid the tax. 8.5.2. Before the ld CIT(A), the assessee also raised alternative plea based on the following submissions that even if for the sake of arguments, it is accepted that consideration of Rs. 10 crore has been 41 ITAs . Nos. 372, 626/PN/2002 etc. Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 received from the transfer of speciality chemical division i.e. for transfer of trade names, trademark, marketing data base, technical specification etc., even then it is taxable under capital gains :
"1) Technical Know-how etc., are rights of the assessee relating to the manufacture of Speciality Chemicals.
2) This right alongwith the other assets have been transferred as stated.
3) Sales of these rights, trademarks, trade names, goodwill, are taxable under the head capital gains.
4) The cost of acquisition for the depreciable assets being claimed is available as per the books which has also been given by the assessee even in its letter dated 2nd Feb, 2001 and also as per depreciation chart attached to the return. For the intangible assets the cost of acquisition is to be taken at NIL as per section 55 amended w.e.f. 1.4.98
5) The sale consideration for different assets can be taken as per valuation report filed in the case of Houseman Aquapharm Chemicals Ltd, where the Directors are common"
8.5.3. The Ld CIT(A) has discussed the issue in detail. He has called upon the comments of the A.O on the submissions of the assessee and considering the same he has come to the following findings :
"36. The submissions of both the sides have been considered. On the facts and circumstances of the case, I am not inclined to agree with the Assessing Officer that the receipt of Rs. 10 crore received by the appellant on Assignment of its Speciality chemical division to M/s. Houseman Aquapharm Chemicals ltd was a revenue receipt. There is nothing to show that whatever was transferred by the appellant such as sale of trade marks, trade names, technical specifications, marketing database was part of trading or business receipt of the appellant. The appellant was not in the business of sale of technical specifications, know-how or marketing data base. 42 ITAs . Nos. 372, 626/PN/2002 etc.
Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 The appellant was engaged in the business of producing basic chemicals and speciality chemicals and it was selling the chemicals and formulations. The appellant was not engaged in the business of selling the data base, and know-how of the formulations. Therefore, in my opinion to hold the receipt of Rs. 10 crore on sale of speciality chemical division as business income is far-fetched. It can be held as transfer of assets and not sale of trading items or stock in trade. The perusal of the agreements clearly shows that it is a sale of business and the consideration has been received by the appellant for the sale of such assets. Therefore I am also not inclined to hold that the receipt by the appellant was royalty for the use of services.
The appellant has amply clarified that in the Assignment of Business the stock of such chemicals and formulations whose know- how was sold were not part of the Assignment of Business. It is for this reason that part of the stock of the formulations and chemicals pertaining to the chemicals whose know-how and technical specifications were sold remained as a part of the closing stock at the end of the year which were subsequently sold as a trading item.
It has also been clarified by the appellant that after the assignment of business of the speciality chemical division, they were subsequently doing job work for M/s. HACCL. It was for this reason that the appellant had not transferred the plant and machinery and the technical personnels relating to the scpeciality chemical to M/s. HACCL. This is clear from the Agreement for the supply of chemicals dated 30th January, 1998 which have separate rates for job work and separate rates for sale of chemicals. 43 ITAs . Nos. 372, 626/PN/2002 etc.
Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 The Assessing officer has also raised the issue of use of trade marks and trade names by the appellant even after the assignment of business. The appellant has sold the trade marks and trade names to M/s. HACCL in respect of the chemicals and formulations for which the know-how, technical specifications and data base have been sold. The details of the trade mark and trade names sold are mentioned in the Annex.F of the Assignment of Business agreement. Those which are sold are not being used by the appellant. The user of of corporate name or mark "AQUAPHARM"
OR "Aquapharm" logo is not covered by the Agreement for the Assignment of Business. This aspect is
separately covered by the shareholders' agreement dated 30th Jan. 1998.
On the facts of the case I am inclined to hold that the receipt of Rs. 10 Crores on sale of speciality chemical division was not a trading/revenue receipt by the appellant. The AO has herself mentioned in the Assessment Order that in the alternative and without prejudice to her holding that it was a revenue receipt, the could be taxed as a Capital Gain based on the valuation Report filed in the case of M/s. HACCL, where the directors were common. The case of the appellant is also covered by the decision of the Hon'ble Supreme Court in the case of Artex Manufacturing Company Vs. CIT 277 ITR 260(SC). On the facts of the case I am inclined to hold that the receipt of Assignment of Business of Speciaity chemical Division was a capital receipt liable for tax. The appellant has also finally conceded that the sum of Rs. 10 Crores was liable to capital gain tax. As per the valuation report of the chartered accountant, 44 ITAs . Nos. 372, 626/PN/2002 etc. Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 filed in the case of HACCL, the value of Rs. 970 Lacs (Rs. 1000 Lacs-30 :Lacs for Stamp duty) has been bifurcated as under :
Rs. Lakh Value of Technical Know-how 421.95 Value of Goodwill 305.65 Value of Trade Marks 223.10 Value of Operating assets 19.40
-------------------
970.00
Cost of Stamp duty 30.00
-------------------
1000.00
The appellant gave the computation of Long Term Capital Gain which was forwarded to the Assessing Officer for her comments on the correctness of the computation of Long Term Capital Gain given by the appellant. The assessing Officer vide report dated 31st January, 2002 submitted as under :
Without prejudice to the stand taken by the assessing officer in the assessment order that amount of Rs.10 crores received by the assessee is required to be treated as business income, it is submitted that the computation of capital gain as made by the assessee on the basis of valuation report is correct. The value of the operating asset sold by the assessee to Houseman Aquapharm Co.(P) Ltd. has been verified and the same has been reduced by the assessee from the opening w.d.v. of the block of assets.
The appellant has distributed the cost of stamp duty between trade marks, operating assets, technical know-how and goodwill on pro-rate basis. As per the agreement it was the appellant's liability to bear the stamp duty etc in respect of the transfer of the Speciality Chemical Division. The appellant has claimed that the value of trade marks was not liable to capital gains tax in view of the decision in the case of B.C. Srinivasa Shetty 128 ITR 294(SC) and also for the reason that trade marks had been covered under 55(2)(a) only w.e.f. A Y 2002-03. I find merit in the contention of the appellant on this point and therefore, I hold that appellant shall not be liable for capital gain on trade marks for the Assessment Year sine there is no cost of acquisition. The value of the operating 45 ITAs . Nos. 372, 626/PN/2002 etc. Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 assets has been deducted from the block of assets and the block has not resulted into negative so there is no question of short term capital gain. The value of the Trade Mark has been determined at Rs.228.14 Lacs. However it has been rounded at 230 Lacs. Therefore, while computing the capital gains the appellant's calculation shall be increased by Rs. 1.86 Lacs.
It is held that appellant shall be liable for long term capital gains on Rs. 729.36 Lacs (Rs. 727.50 Lacs + Rs. 1.86 Lacs) comprising of Rs. 421.95 Lakh on sale of technical know-how and Rs. 305.55 Lakh on Goodwill and the difference (excess) in value of Trade marks The appellant has also admitted its liability to pay tax on Long Term Capital Gain on Rs. 727.50 Lakhs. The addition of Rs. 10 Crores as business income is deleted however Rs. 729.36(net) shall be liable for Long Term Capital Gain Tax.
On the sale value of operating asset of Rs. 19,40,000/- the appellant is however liable for tax u/s. 41(2) of the IT Act as business income. The appellant had submitted that the total cost of the operating asset was Rs. 50,37,040/- comprising of vehicle Rs. 10,23,449/-, tools and equipments Rs. 34,90,397/- and computers Rs.5,23,194/- and depreciation claimed on these assets Rs.32,7y6,246/-. The WDV was shown at Rs. 17,60,794/-. The income u/s 41(2) as per this calculation comes to Rs.1,79,206/- [19,40,000 - 17,60,795]. The Assessing Officer is directed to compute the income u/s 41(2) after verifying the actual cost of the operating assets and depreciation claimed and the WDV." 8.5.4 We find that the first appellate order on the issue is comprehensive and reasoned one. Since the assessee was still manufacturing the products in relation to which the same trade mark, trade names, technical knowhow and technical specifications claimed to have been transferred, we are of the view that the authorities below have rightly held that receipt of Rs. 10 Crores in consideration against selling of speciality chemical division is not a slump sale. The issue for consideration before the authorities below was, therefore, the true nature 46 ITAs . Nos. 372, 626/PN/2002 etc. Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 of receipt of Rs. 10 Crores as to whether the same can be treated as business receipt or to be taxed as income under the head "capital gain". The A.O held that entire amount of Rs. 10 Crores received by the assessee is on account of activity of commercialization and formulation of speciality chemical and are to be treated as normal business activity of the assessee and hence receipts are required to be treated as revenue receipt. The ld CIT(A), however, after discussing the issue did not agree with the A.O with this observation that there is nothing to say that whatever was transferred by the assessee such as sale of trademark, trade names, technical specifications, and marketing data base was part of trading or business receipt. He observed that the assessee was not in the business of sale of technical specification, know-how or marketing data base, but it was engaged in the business of producing basic chemicals and speciality chemicals and was selling the chemicals and formulations. These are undisputed facts. We thus fully concur with the view of Ld CIT(A) that receipt of Rs. 10 Crores on sale of 'speciality chemical division' cannot be treated as business income. It can be held as transfer of assets and not sale of trading items or stock in trade. The observation of the ld CIT(A) that those trademark and trade names sold by the assessee were not being used by the assessee and the use of corporate name or mark "AQUAOHARM" or "Aquapharm" Logo was not covered by the agreement for assigning of business. The A.O herself mentioned in the assessment order that in the alternative and without prejudice to her holding that it was a revenue receipt, the sum could be taxed as a capital gain based on the valuation report filed in the case of HACL, where the directors were common. Under these circumstances, we do not find infirmity in the finding of the Ld CIT(A) that the receipt of assignment of business of 'speciality chemical division' was a capital receipt liable for tax.
47 ITAs . Nos. 372, 626/PN/2002 etc.
Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 8.5.5. Before the ld CIT(A), the assessee had also claimed that the value on trademark was not liable to capital gain tax in view of the decision in the case of B.C. Srinivasa Shetty, 128 ITR 294 (SC) and also for the reason that the trademarks had been covered u/s. 55(2)(a) only w.e.f. A.Y. 2002-03. The Ld CIT(A) has accepted the same with this observation that the assessees shall not be liable for capital gains on trademark for the A.Y. under consideration since there was no cost of acquisition. Under these circumstances, we find that the first appellate order on the issue is reasoned one and does not need interference. The same is upheld. Ground No. 1 of the appeal preferred by the revenue questioning the action of Ld CIT(A) in directing to compute the consideration received on transfer of trademark, trade names, marketing data base etc., under the head "income from capital gain", thus does not hold water. The ground is accordingly rejected.
8.5.6. The additional ground 2 raised in the appeal preferred by the assessee is also rejected whereby the assessee has questioned action of the ld CIT(A) in taxing the capital gains on transfer of trademark to HACL. 8.5.7. In additional ground No. 1, the assessee has questioned the action of the ld CIT(A) in directing the A.O to assess the profit on sale value of Rs. 19,40,000 of operating assets as taxable u/s. 41(2). The contention of Ld. A.R. remained that the direction of Ld CIT(A) is without appreciating that the sale value being lesser than the WDV of the block, no profit was taxable in the hands of the assessee. We find that before the ld CIT(A) it was claimed that the income u/s.41(2) as per taking WDU at Rs. 17,60,794/- against the value of operating asset at Rs. 19,40,000/- was shown at Rs.1,79,206/- The Ld CIT(A) has accordingly 48 ITAs . Nos. 372, 626/PN/2002 etc. Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 directed the A.O to compute income u/s. 41(2) after verifying the actual cost of operating asset and depreciation claim and the W.D.V.. Now before the Tribunal, the assessee claims that the sale value of operating asset was lesser than the WDV of the block, hence no profit was taxable in the hands of the assessee, which prima facie, appears to be justified. We thus direct the A.O to verify this claim of the assessee as well while deciding the issue in compliance of the direction of the Ld CIT(A) in this regard. The direction of the ld. CIT(A) to the A.O. on the issue is thus stands modified to this extent. The additional ground No.1, is accordingly, allowed for statistical purposes.
8.5.8. ITA No. 372/PN/2002 preferred by the assessee is thus partly allowed.
ITA No. 626/PN/2002
9. In this appeal, the revenue has raised following 2 grounds :
"1. The CIT(A) erred in directing to compute the consideration received on transfer of trade names, trade mark, marketing data base etc., under the head " income from capital gain".
2. CIT(A) erred in holding that the capital subsidy received from WMDC of Rs.7,06,606/- is capital receipt"
Ground No. 1
9.1. We have already decided this ground hereinabove while adjudicating connected additional grounds raised in the appeal (ITA No. 372/PN/2002) preferred by the assessee against the first appellate order for the same A.Y. Following the decision taken therein, this ground is rejected.49 ITAs . Nos. 372, 626/PN/2002 etc.
Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 Ground No. 2 9.2. The relevant facts are that during the year, the assessee had received Rs. 7,06,606/- towards capital subsidy from WMDC. Before the A.O, the assessee was asked to explain as to why this receipt should not be treated as revenue receipt and accordingly be added to the income returned. The explanation of the assessee remained that the assessee company is covered by package incentive scheme 1988 announced by the Government of Maharashtra Industrial Energy and Labour Department. It was submitted that the said scheme is implemented through the operating agency known as "WMDC". The assessee explained that the preamble of the said scheme makes it clear that the object of putting such incentive scheme into the practice is to achieve dispersal of industries outside the Bombay, Thane, Pune belt and to attract them to the underdeveloped and developed areas of the said governments. This subsidy has been granted by the State Government with specific view to encourage the industries to go to backward areas and set up the industrial units thereon. It was further stated that even though such incentive is computed on the basis of investment of capital in plant & machinery etc., for setting up industry, it is a capital subsidy and therefore, a capital receipt. Reliance was placed on the decisions in the cases of PJ Chemical 210 ITR 830 (SC), Elyas Plastics Pvt. Ltd. 188 ITR 11 (Bom.) and Merinoply and Chemicals Ltd., 209 ITR 508 (Cal.). The A.O. did not agree with the submission of the assessee and following the decisions including decision of Hon'ble Supreme Court in the case of Sahani Steel and Press Works Ltd. Vs. CIT, 228 ITR 253 (SC) held that the payments in the nature of subsidy were made only after industries have been set up, hence such subsidy could only be treated as assistance given for the purpose of carrying on the business of assessee, 50 ITAs . Nos. 372, 626/PN/2002 etc. Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 hence it is of revenue character. The A.O accordingly treated the receipt as revenue income of the assessee.
9.2.1.. The Ld CIT(A) has, however, accepted the subsidy as capital receipt following order of its predecessor in the appeal of the assessee on an identical issue for the A.Y. 1997-98.
9.2.2. In support of the ground, Ld. D.R. has basically placed reliance on the assessment order and the decision, followed by him on the issue. The Ld. A.R. on the other hand tried to justify the first appellate order. He submitted that the facts of every case are important to consider the issue under that background. He reiterated his submissions made before the authorities below that the object of the scheme is important to consider as to whether the subsidy granted under that scheme is capital or revenue in nature. He submitted that the subsidy in question was granted to set up industries in backward areas as it appears from nomenclature "capital subsidy" of the scheme and thus, it is capital in nature.
9.3. Having gone through the orders of the authorities below, we find that the ld. CIT(A) has decided the issue by simply following the first appellate order in this regard by his predecessor for the earlier Assessment Year. He has not discussed the reasons based upon which his predecessor has decided the issue in favour of the assessee, to which he concurred with. Under these circumstances, we set aside the matter to the file of the ld. CIT(A) to decide the issue afresh after hearing the parties and by an speaking order. The ground is thus allowed for statistical purposes.51 ITAs . Nos. 372, 626/PN/2002 etc.
Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 9.4. In result, ITA No. 626/PN/2002 preferred by the revenue is partly allowed.
ITA Nos. 1386/PN/2005 & 1111/PN/2005
10. These are cross appeals against the first appellate order for the A.Y. 2001-02 wherein the assessment was framed u/s. 143(3) of the Act. There are another set of matters i.e. ITA No. 1193/PN/2007 (preferred by the Revenue) and C.O. No. 1/PN/2008 (Preferred by the assessee) for the same A.Y. 2001-02 against the first appellate order arising out of the assessment framed u/s. 147 read with 143(3) of the Act. Issues raised in these appeals are different, hence these matters require adjudication by the Tribunal.
ITA No. 1111/PN/2005
11. The assessee has raised following grounds :
"1. On facts and circumstances prevailing in the case and as per provisions of law, it be held that, disallowance out of repairs to Plant and Machinery of Rs. 20,904/- is resulting out of misapprehension of the fact on the part of Authorities below and the same is not in accordance with the provisions of the Act. The additions so retained on account of disallowance out of repairs to Plant and machinery and others be deleted.
2. On facts and circumstances prevailing in the case and as per provisions of law, it be held that, disallowance of Rs. 15,000/- retained out of Staff Welfare Expenses is without giving just and proper reasons and the same is based on guess work. The disallowance being not in accordance with the provisions of the 52 ITAs . Nos. 372, 626/PN/2002 etc. Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 Act be deleted and it be held that entire expenditure is incurred wholly and exclusively for the purpose of business. Alternatively, the disallowance may be reduced considerably, on the facts and circumstances prevailing in the case and as per provisions of the Act.
3. On facts and circumstances prevailing in the case and as per provisions of law, it be held that, that entire expenditure of Rs.7,30,000/- incurred on grant of license to use the Software be held as revenue expenditure. The finding of the Authorities below to the effect that such Software entails the benefit of enduring nature is improper and not in accordance with the facts prevailing in the case. The entire expenditure of Rs. 7,30,000/- be allowed as revenue expenses, being incurred for the purpose of business.
4. On facts and circumstances prevailing in the case and as per provisions of law, it be held that, disallowance of Rs. 20,000/- retained out of Office and General expenses, administrative expenses are based on guess work as well as misapprehension on the part of the Authorities below. The disallowance so made be deleted.
5. On facts and circumstances prevailing in the case and as per provisions of law, it be held that, disallowance of Rs. 1,000/- u/s. 14A retained out of managerial, administrative and other overheads is based on guess work and without having any supporting evidence in this behalf. It further be held that disallowance so made is without properly appreciating the facts prevailing in the case and the same is not in accordance with the provisions of the Act. The disallowance u/s. 14A so made be deleted.
6. On facts and circumstances prevailing in the case and as per provisions of law, it be held that deduction u/s. 80HHC should have been computed before deduction of unabsorbed depreciation pertaining to the earlier years amounting to Rs. 30,17,455/-. Just & proper relief be granted to the appellant in this score.53 ITAs . Nos. 372, 626/PN/2002 etc.
Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73
7. On facts and circumstances prevailing in the case and as per provisions of law, interest on delayed receipt Rs. 7,22,139/-, Sales Tax refund Rs. 6,22,456/- & other interest of Rs. 9,209/- be assessed as business income instead of the same being assessed under the head "income from other Sources" & same be treated as forming part of the business income eligible for the purpose of computation of claim u/s. 80HHC.
8. Assuming without admitting that the interest on fixed deposit amounting to Rs.15,10,562/- is to be treated as "Income from other source" then, it should have been netted off before it was considered for the purpose of exclusion of the same from the computation of eligible claim u/s. 80HHC.
9. It further be held that deduction of 90% be restricted within the meaning explanation (baa)(i) to the sec. 80HHC only to the net interest income & not the gross interest income. Just & proper relief be granted to the appellant in this office."Ground No. 1
12. The Ld. A.R. submitted that the assessee does not wish to press this ground. The ground is accordingly rejected as withdrawn. Ground No. 2
13. The assessee claimed expenses of Rs.9,04,662/- consisting of Rs.2464/- towards cake and biscuits, Rs. 5,13,204/- towards room expenses and Rs. 1,61,432/- towards staff welfare expenses. The A.O. disallowed Rs. 50,000/- out of the claimed amount on the basis that bills were not verifiable, hence personal element in the expenses could not be ruled out. The assessee objected the same on the basis that the disallowance is based on estimation without any evidence and supporting justifying reasons. It was submitted that the assessee 54 ITAs . Nos. 372, 626/PN/2002 etc. Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 company has got about 180 staff and workers to whom the assessee provides regular tea during the office hours from its canteen, hence there was no question of personal expenses. It was also pleaded that turnover of the assessee is about Rs. 20 Crores and the claimed expenditure on staff and welfare is just .3% which is very reasonable. Considering totality of the facts on the issue, the Ld CIT(A) has restricted the disallowance to Rs. 15,000/-.
14. Similar arguments have been advanced by the Ld. A.R. in support of the ground. He placed reliance on the decision of Hon'ble Gujarat High Court in the case of Sayaji Iron & Steel Company Ltd. 254 ITR 749 (Guj.). The ld. D.R., on the other hand, tried to justify the first appellate order on the issue.
15. Considering the above submission, we find that keeping in mind the arguments advanced by the assessee to justify the claimed expenses, the Ld CIT(A) has already given sufficient relief even in absence of rebuttal to the observation of the A.O that these were not verifiable. Since the assessee has not been able to improve its case before the Tribunal, we do not find reason to interfere with the finding of Ld CIT(A) on the issue. The same is upheld. Ground No. 2 is accordingly rejected. Ground No. 3
16. The assessee claimed Rs. 7,30,000/- incurred on grant of licence to use the software as revenue expenditure. The A.O was of the view that licece to use the software in question was in the nature of durable benefits to the assessee, hence he treated the same as capital expenditure. At the same time, he observed that software being 55 ITAs . Nos. 372, 626/PN/2002 etc. Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 inseparable part of overall working of the computer depreciation, he allowed depreciation on those software at the rate of 60%.
17. Before the ld CIT(A), it was argued on behalf of the assessee that looking to the size of the company operation and the requirements of the competitive world, it was essential on the part of the assessee to integrate the various functions of the business and to have effective control over the organization, the assessee felt that existing software was not adequate and replace it to get the appropriate output from a new computer software system. It was submitted that the software obtained was related to all the areas of operations viz., accounts, purchase, sale and production operation of the company to streamline the same. Due to ever changing technology, the assessee requires to change the software in short span of time. For this reasons, by and large, any software becomes outdated very soon due to technological obsoleteness. It was contended that the advantage derived from some system, therefore, cannot be called as an expenditure giving enduring benefit.
18. Considering the above submission, the ld CIT(A) observed that the software relates to the areas of operation viz-a-viz accounts, purchases, sales and production operation of the company. He held that as far as the software relating to the account, purchases, sales is concerned, the same can be said to be of the revenue nature because it is not part of the profit earning apparatus, but it is a part of profit earning process. He accordingly relying upon the decisions cited by the assessee, held that expenditure in relation to the software which relates to the areas of operation in accounts and purchases and sales can be said to be of revenue nature. So far as the software related to production operation of 56 ITAs . Nos. 372, 626/PN/2002 etc. Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 the company is concerned, he held that the same cannot be said to be of revenue nature because such software is not part of the profit earning process but it is a part of the profit earning apparatus itself. He thus following the decision of Hon'ble Rajasthan High Court in the case of CIT Vs. Arawalli Construction Company Pvt. Ltd.,259 ITR 30 (Rajasthan) held that anything which is part of the profit earning apparatus itself has to be capital expenditure. Since the bifurcation was not available on record, the Ld CIT(A) directed the A.O to examine the issues and treat the expenditure as of capital nature related to the production operation of the company and the expenditure which is unrelated to the production activity but related to the accounts and management as revenue expenditure. He directed further that if it is not possible for the assessee to furnish the details and information, in that case, the entire expenditure has to be treated as capital expenditure.
19. Before the Tribunal, the ld. A.R. while reiterating the submissions made before the authorities below placed reliance on the decision of the Special Bench of the Tribunal in the case of Amway India, 111 ITD 112 (Special Bench) and on the recent decision of Hon'ble Bombay High Court in the case of CIT Vs. Raychem RPG Ltd., ITA No. 1476 of 2009,dated 4th July 2011. The ld. D.R., on the other hand, tried to justify the first appellate order.
20. Having gone through the decisions relied upon by the Ld. A.R, we find that the Hon'ble jurisdictional Bombay High Court in the case of CIT Vs. Raychem RPG Ltd. (Supra) has approved the decision of the Tribunal based on the decision of Special Bench of the Tribunal in the case of Amway India (Supra). The Tribunal in the case of Raychem RPG Ltd. held that when functional test suggested by Special Bench of the 57 ITAs . Nos. 372, 626/PN/2002 etc. Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 Tribunal is applied, they find that the ground that software does not form part of the profit making apparatus of the assessee and hence the same is to be disallowed as revenue expenditure. The Tribunal observed that the business of the assessee company was that of manufacturing telecommunication and power cable accessories and trading in oil re- tracing system & other products and impugned software is an Enterprises Resources Planning (ERP) package and hence its facilitates the assessee's trading operations or enabling the management to conduct the assessee's business more efficiently or more profitably but it is not in the nature of profit making apparatus. In our view, there is no doubt that software generally brings business advantages which consists of facilitating the assessee's business operations. Thus, even though , the software does not directly contribute to the profit earning process of an enterprise, it certainly necessary for the effective management and conduct of the business. Keeping in view the dynamics and uncertainty involved in obtaining enduring benefits from software, we are of the view that the expenditure of software does not partake the nature of capital expenditure. Under these circumstances, we are of the view that even on proper analysis of functioning, one would come to the conclusion that even if for arguments sake, it brings benefits of enduring nature, the same is in revenue field and not in capital field since it improves and helps the administration and day to day working of an organization. We thus do not agree with the approach of the Ld CIT(A) on the issue and respectfully following the decision of Hon'ble Bombay High Court in the case of CIT Vs. Raychem RPG Ltd., (Supra) hold that the claimed expenditure of Rs. 7,30,000/- is of revenue nature. We thus direct the A.O to allow the claimed revenue expenditure. The ground No. 3 is accordingly allowed.
58 ITAs . Nos. 372, 626/PN/2002 etc.
Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 Ground No. 4
21. In the Profit & Loss Account, the assessee had debited the following expenses :
i) Office & General Expenses Rs. 243595
ii) Administrative Expenses Rs. 8048
iii) Pooja Expenses Rs. 12083
iv) Club payment Rs. 103760
v) Entertainment (Restaurant) Rs. 24480
expenses
vi) Gifts/presents Rs. 43481
The A.O. disallowed a sum of Rs. 80,000/- out of the above expenditure on the basis that personal and non-business element in many of the expenses are involved.
22. Before the Ld. CIT(A), the assessee submitted that the disallowance has been made on presumption and that the personal and non-business expenditure are included in the expenditure referred above. It was contended that the A.O has not pointed out the details of such non- business expenses, if any. The assessee also filed ledger accounts of all the expenses with this submission that these expenses have been incurred in ordinary course of business and are thus allowable. Considering the totality of the circumstances, the Ld CIT(A) has restricted the addition to Rs. 20,000/-.
23. Similar arguments have been adopted by the Ld. A.R. in support of the ground before the Tribunal. The ld. D.R., on the other hand, tried to justify the first appellate order.
59 ITAs . Nos. 372, 626/PN/2002 etc.
Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73
24. Considering the submissions, we find that the Ld. CIT(A) keeping in mind the cases of the parties on the issue has already given sufficient relief. The same is upheld. The ground No. 4 is accordingly rejected. Ground No. 5
25. The A.O disallowed a sum of Rs. 25,000/- u/s. 14A with this observation that the assessee had incurred the managerial and administrative and other overhead costs to earn the income of the dividend of Rs. 19,52,949/-. It is pertinent to mention over here that the exempted dividend was Rs. 18,85,224/- which was claimed as exempt u/s. 10(33) of the Act.
26. Before the Ld CIT(A), the assessee furnished details of entire dealings in shares and mutual funds along with the dividend claimed as exempt. It was submitted that the most of the dividend has been earned from one time investment in mutual funds and there was no cost incurred either administrative or otherwise as is presumed without any evidence by the A.O. Considering this submission, the Ld CIT(A) has restricted the addition to Rs. 1000/-.
27. Similar arguments have been advanced by the Ld. A.R. before the Tribunal. We are of the view that the Ld CIT(A) has duly considered both the submissions and agreeing with it, he has already given sufficient relief by restricting the disallowance to Rs. 1000/- from Rs. 25000/- made by the A.O. The first appellate order on the issue is thus upheld. The ground No. 5 is accordingly rejected.
Ground No. 6 60 ITAs . Nos. 372, 626/PN/2002 etc.
Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73
28. The Ld. A.R. fairly withdrew this amount with this submission that the issue raised is covered against the assessee by the decision of Hon'ble jurisdictional Bombay High Court in the case of Sudarshan Chemicals Ltd., 245 ITR 769 (Bom.). The ground is accordingly rejected. Ground Nos. 7 & 8
29. The grievance of the assessee in these grounds is that interest on Fixed Deposit amounting to Rs. 15,10,562/-, interest on delayed receipt of Rs. 7,22,139/-, sales tax refund of Rs. 6,22,456/- and other interest of Rs. 9,209/- be assessed as business income instead of the same being assessed under the head "income from other sources" and same be treated as forming part of the business income eligible for the purpose of computation of claim u/s. 80 HHC.
30. Before the Tribunal, the Ld. A.R. submitted that even though vide para No. 8.4 of the first appellate order, the Ld CIT(A) has discussed this issue, but he has not given any finding thereon. He submitted that even for the sake of argument, it is admitted that the interest on Fixed Deposits amounting to Rs. 15,10,562/- is to be treated as "income from other sources", then it should have been netted off before it was considered for the purpose of executions of the same from the computation of eligible claim u/s. 80 HHC of the Act. He submitted further that so far as the income from customers on delayed payments of Rs. 722139/- and the Sales Tax refund of Rs. 6,22,450/- re concerned, the same were required to be treated as business income for the computation of claim u/s. 80HHC of the Act. In support, he placed reliance on the decision of Hon'ble Bombay High Court in the case of 61 ITAs . Nos. 372, 626/PN/2002 etc. Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 Alpha Laval Ltd., 266 ITR 418 (Bom.). The Ld. A.R. argued further that the Ld CIT(A) has given clear finding on the issue discussed by him in para Nos. 26 & 27 of the first appellate order.
31. The Ld. D.R., on the other hand, tried to justify the first appellate order on the issue raised in the grounds.
32. Having gone through the orders of the authorities below, we find that the Ld CIT(A) has dealt with the issues raised in the grounds at page Nos. 20 to 27 of the first appellate order. So far as reliance on the decision of Hon'ble Bombay High Court in the case of Alpha Laval Ltd. Vs. CIT (Supra) relied upon by the Ld. A.R. is concerned, the Ld CIT(A) has tried to distinguish this decision on the issue pertaining to the interest from customers, sales tax set off and other refund, claims etc., being not treated as part of the business profit, the Hon'ble Bombay High Court has decided the issues in favour of the assessee mainly on the basis that the A.O has not assessed the interest income from the customers and sales tax set off under the head "income from other sources". Having gone through this decision of Hon'ble Bombay High Court, we also concur with the above observation of the ld CIT(A) that in that case before the Hon'ble High Court, the interest income from customers, and sales tax set off have been computed and assessed by the A.O under the head "profits and gains of business or profession" as part of the operational income and not under the head "income from other course". Under these circumstances, the issues have been decided by the Hon'ble Bombay High Court in favour of the assessee. The Hon'ble High Court has given reference of earlier decision of Bombay High Court in the case of Bangalore Clothing Co., 260 ITR 371(Bom.) holding that the A.O must ascertain the nature of receipt in each case independently. 62 ITAs . Nos. 372, 626/PN/2002 etc.
Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 Interest income may or may not be out of the business activity. In the present case before us, we find that the A.O has examined the issue of interest on delayed receipt from the customers and sales tax refund, interest received on Fixed Deposit and others etc., and has come to the conclusion that these are income from other sources admissible for deduction u/s. 80 HHC of the Act. We are also of the view that the ld CIT(A0 has rightly upheld this action of the A.O because the above mentioned receipt can not be said to be part of business income for consideration of deduction u/s. 80HHC of the Act in absence of their direct nexus with the eligible business of the assessee. The first appellate order in this regard is thus upheld. Ground Nos. 7 & 8 are accordingly rejected.
Ground No. 9
33. In support of this ground, the ld. A.R. contended that deduction of 90% be restricted within the meaning of Explanation of (baa)(i) to Section 80 HHC only to the net interest income and not to the gross interest income.
34. It is an established position of law that netting of interest for the purpose of deduction can be allowed only when the assessee is able to establish nexus between the income earned and expenditure incurred for earning that income of interest. No such nexus has been established by the assessee to justify the claim or grievance raised in ground No. 9. We thus do not find substance in ground No. 9. The same is rejected.
34. In result, appeal is partly allowed.
63 ITAs . Nos. 372, 626/PN/2002 etc.
Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 ITA No. 1386/PN/2007
35. The revenue has questioned first appellate order on the following grounds :
"1.1 On the facts and in the circumstances of the case, the Ld. CIT(A) erred in directing to exclude sales tax and excise duty from the total turnover for the purpose of calculating deduction U/s. 80HHC.
1.2 The Ld. CIT(A) failed to appreciate the fact that the Hon'ble Supreme Court in the case of Chowringhee Sales Bureau Pvt. Ltd., 87 ITR 542 and the Hon. Bombay High Court in the case of Hindustan Petroleum Corporation Ltd. (143 ITR 318) held that the amount of excise duty and/or sales tax collected by the assessee form part of the sale price and hence gets naturally included in the turnover.
1.3 The Ld. CIT(A) has erred in directing the removal of rent of Rs. 12,19,500/-, Miscellaneous receipt of Rs. 42,550/- and Exchange Fluctuation receipt of Rs. 13,12,994/- from the total turnover of business; as the corresponding income has been treated as business income by the assessee itself, therefore those also form part of the turnover for the purposes of computation of deduction U/s. 80 HHC of the I.T. Act."
36. Grievance of the Revenue in the above grounds is that the ld CIT(A) has erred in directing to exclude sales tax, excise duty , rent and miscellaneous receipt, exchange fluctuation receipt from the total turnover of business for the computation of deduction u/s. 80 HHC of the Act.
37. At the outset of hearing, the ld. A.R. pointed out that the issue raised in ground Nos. 1.1 and 1.2 regarding the exclusion of sales tax and excise duty from the total turnover for computation of deduction u/s. 64 ITAs . Nos. 372, 626/PN/2002 etc.
Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 80HHC is concerned, the same is fully covered by the decision of Hon'ble Supreme Court in the case of CIT Vs. Laxmi Machine Works, 290 ITR 667. Having gone through the decision of Hon'ble Supreme Court in the case of CIT Vs. Laxmi Machine Works (Supra), we find that the Hon'ble Supreme Court on the issue has been pleased to hold that Excise Duty and Sales Tax cannot form part of turnover as they do not emanate from such turnover. In view of this settled position of law by the Hon'ble Supreme Court, we do not find infirmity in the first appellate order on the issue whereby the ld CIT(A) has directed the A.O to exclude sales tax and excise duty from the total turnover for the purpose of computing deduction u/s. 80 HHC of the Act. The same is upheld. Ground Nos. 1.1 & 1.2 are thus rejected.
38. In ground 1.3, the revenue has questioned first appellate order in directing the A.O for removal of rent of Rs. 12,19,500/- and , miscellaneous receipt of Rs. 42,550/- and exchange fluctuation receipt of Rs. 13,12,904/- from the total turnover of the business for the purpose of computation of deduction u/s. 80 HHC of the Act.
39. The ld. A.R. pointed out that the issue raised in the ground are also fully covered by the decision of Hon'ble Kerala High Court in the case of CIT Vs. K. Rajendranath Nair & Other, 265 ITR 35 (Ker.) and by the decision of Hon'ble Madras High Court in the case of CIT Vs. Madras Motors Ltd. 257 ITR 60 (Mad).
40. Having gone through the above cited decisions, we find that the Hon'ble Kerala High Court in the case of CIT Vs. K. Rajendranath Nair & Other (Supra) has been pleased to hold that income earned by processing goods belonging to third persons can not be held part of turnover for 65 ITAs . Nos. 372, 626/PN/2002 etc. Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 purposes of computation of deduction u/s. 80HHC of the Act. The Hon'ble High Court has observed that the word "turnover" is not defined in the Act. Going by the definition in the Sales Tax Act of the word "turnover", it is clear that the consideration received must be for the sale of goods and it must be available with the assessee for being turn over, or in other words, it must come to the assessees till as money belonged to him. It has got relation to the capital employed in the business, turnover has also got relationship with profits of the business. In order that an amount can be included in the total turnover, it must either be the purchase price or sales price or something incidental to the transfer of goods deal with by the assessee. In other words, the turnover must relate to the purchase and sale of the goods made by the assessee, held the Hon'ble High Court.
40.1. In the case of CIT Vs. Laxmi Machine Works (Supra), the Hon'ble Supreme Court has been pleased to hold that rent does yield profits but it does not partake of the character of turnover and therefore, they are not includible in total turnover. The Ld CIT(A) is thus justified in present case to direct the A.O to exclude rent of Rs. 12,19,500/- from the total turnover of business for the purpose of computation of deduction u/s. 80HHC of the Act. Similar are the nature of the miscellaneous receipt and exchange fluctuation receipts. The ld CIT(A) was thus justified in directing the A.O to exclude these receipts from the total turnover of the business for the purpose of computation of deduction u/s. 80 HHC of the Act. The same is upheld. The ground No. 1.3 is accordingly rejected.
41. In result ITA No. 1386/PN/2005 preferred by the Revenue is dismissed.
66 ITAs . Nos. 372, 626/PN/2002 etc.
Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 C.O. No. 1/PN/2008 & ITA No.1193/PN/2007
44. The assessee has objected the first appellate order whereby the ld CIT(A) has upheld the validity of re-opening of the assessment proceedings u/s. 147 by issuing notice u/s. 48 by the A.O.
45. The contention of the ld. A.R. is that the A.O had no jurisdiction to re-open the assessment proceedings u/s. 147 by issuing the notice u/s. 148, thus such notice as well as assessment framed in consequence of such notice is unwarranted and illegal. He submitted that all the necessary information regarding recovered labour charges and duty draw back were furnished before the A.O during the course of regular assessment proceedings and after considering the same, the assessment was framed u/s. 143(3) of the Act. Thus, A.O had initiated re-opening proceedings merely on the basis of change of opinion which is not permissible under the provisions of Sec. 147 of the Act. He submitted further that while the ld CIT(A) has upheld the validity of re-opening, but on merits, he himself has held that the issue raised in the reasons for re- opening is fully covered by the decision of Hon'ble Bombay High Court in the case of Bangalore Clothing Co., 260 ITR 371 (Bom.). On the issue of validity of re-opening, the Ld. A.R. has place reliance on the following decisions :
1. Kelvinator India, 320 ITR 561 (SC)
2. Legato Systems (I) Pvt. Ltd. Vs. DCIT, 231 CTR 526 (Del.)
46. The ld. D.R. on the other hand tried to justify the action of the first appellate authority on the issue. He placed reliance on the following decisions :
67 ITAs . Nos. 372, 626/PN/2002 etc.
Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73
1. Honda Siel Power Products Ltd. Vs. DCIT, 52 DTR (2011) 353 (Delhi)
2. Dalmia Pvt. Ltd. Vs. CIT, 2011-TIOL-628-HC-Del- I.T.
47. Considering the above submissions, we find from the orders of the authorities below that the regular assessment framed u/s. 143(3) for the A.Y. 2000-01 was reopened after recording the following "reasons to believe" for escapement of assessable income :
"On verification of record, it is seen that the deduction u/s 80 HHC has been allowed of Rs.56,16,404/- But it is seen that the 'a' has recovered labour charges of Rs.1,23,57,201/- and this amount has been included in the total turnover. His income being the nature of services rendered/job work done, & therefore it is to be considered as Income from Other Sources & not income derived from Manufacturing business. Therefore, his income is required to be excluded from the total turnover & 90% of it is to be reduced from the total profit while calculating deduction u/s 80 HHC."
"It is also revealed that 'a' has reduced Rs.71,600/- duty draw back (export incentive) from the total turnover & also claimed 90% of it from profit for the purpose of deduction u/s. 80HHC. But in view of the Board Circular No. F.No. 153/93/2004/TPL dt. 08/09/04, the computation of deduction proved u/s. 80HHC (3) of the IT Act, 1961 does not cover profit on sale of DEPB credit. Therefore, the export incentive (DEPB) is not to be considered for calculation of deduction u/s. 80HHC.
This resulted in under assessment of income by Rs.49,48,759/- & short levy of tax by Rs. 27,74,379/- for AY: 01-02 I, therefore have reasons to believe that income chargeable to tax has been escaped assessment within the meaning of sec. 147 of the IT Act, 1961.68 ITAs . Nos. 372, 626/PN/2002 etc.
Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 Issue notice u/s 148 of the Act, 1961 accordingly."
48. We are of the view that at the stage of initiation of re-opening of the assessment, the requirement on the part of the A.O is to have a reasonable belief which a prudent person could have under similar circumstances of the case that chargeable income has escaped assessment. It is thus a prima facie belief of an A.O to initiate the re- opening proceedings by recording such reasons to belief to issue notice u/s. 148 of the Act affording an opportunity to the assessee to show cause as to why re-opening proceedings should not be initiated against him on the basis of those reasons. After considering the cause show by the assessee, the AO, if he is not satisfied with the cause show by the assessee will proceed for re-assessment and frame the re-assessment on those issues which is a submitting matter of reasons to belief and any other income which he feels during the re-assessment proceedings, has escaped assessment. It is an established position of law that sufficiency of reason to believe can not be question in a Court of Law because it is only a prima facie belief of the A.O to initiate re-opening proceedings which is always subject to final conclusion, after hearing the assessee during the course of the assessment proceedings framed u/s. 147 r.w.s. 143(3) of the Act. In the present case, the reasons shown by the A.O for the escaped assessment are firstly the deduction u/s. 80HHC allowed by inclusion of recovered labour charges of Rs.1,23,57,201/- in the total turnover. The A.O was of the view that this income being in the nature of services rendered/job work done, therefore, to be considered as income from other sources and not income derived from manufacturing business. The A.O thus formed a reason to belief that this income is required to be exclude from the total turnover and 90% of it is to be reduced from the total profit while calculating deduction u/s. 80HHC. The second reason 69 ITAs . Nos. 372, 626/PN/2002 etc. Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 recorded by the A.O to initiate re-opening proceedings remained that the assessee had reduced Rs.71,600/- duty draw back from the total turnover and has claimed 90% of it from profit for the purpose of deduction u/s. 80HHC. The A.O was having reason to belief that the computation of deduction provided u/s. 80HHC (3) of the Act does not cover the profit on sale of DEPB Credit, therefore, the export incentive (DEPB) is not to be considered for calculation of deduction u/s. 80HHC. On perusal of this reason under the facts and circumstances of the present case, we are of the view that any prudent person in the place of A.O would have formed the above reasons to believe that assessable income on the above matters has escaped assessment to justify initiation of re-opening proceedings by him. We thus do not find infirmity in the action of the AO for initiation of reopening proceedings in the present case. The issuance of notice u/s. 148 to initiate the re-opening proceedings, and the re-assessment made in furtherance thereto u/s.147 r.w.s. 143(3) are valid. We thus do not find reason to interfere with the first appellate order on the issue raised in the objection of Cross Objection preferred by the assessee. The first appellate order in this regard is thus upheld. The Objection is accordingly rejected.
49. Consequently, Cross Objection is dismissed. ITA No. 1193/PN/2007
50. The revenue has questioned first appellate order on the following grounds :
"1. On the facts and circumstances of the case, and in law, the CIT(A) erred in holding that labour charges are part of the business without considering the issues raised by the AO in the assessment 70 ITAs . Nos. 372, 626/PN/2002 etc. Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 order in holding that the labour charges are squarely covered in 'charges or any other receipts of similar nature' as mentioned in Explanation (baa) of sec. 80HHC(4C) and therefore 90% of the amount was to be reduced for determining the deduction under sec. 80HHC.
2. In allowing the above relief the CIT(A) has erred (a) in not considering the remand report sent in the matter and (b) in holding that the A.O has not sent the remand report when the same was duly sent through letter dated 18/5/07 of the A.O. and forwarding letter dated 22/5/07 of the Range Head."
51. Subsequent to escalation assessment u/s. 143(3) for the A.Y. 2000-01, the succeeding A.O issued notice u/s. 148 for re-opening the regular assessment and framed the assessment u/s. 147 r.w.s. 143(3) of the Act. The aggrieved assessee went in first appeal and got relief on the issue of labour charges whether to treat as part of the business. Relief given by the ld CIT(A) in this regard has been questioned by the revenue whereas in its cross objection, the assessee has questioned the validity of re-opening upheld by the Ld CIT(A).
52. The issue raised in the above grounds is as to whether Ld CIT(A0 was justified in holding that labour charges are part of the business and are covered in "charges or any other receipts of similar nature" as mentioned in Explanation (baa) of Sec. 80HHC ?
53. The relevant facts are that during the year, the assessee company received labour/processing charges from Aquazur India Pvt. Ltd. for manufacturing of water treatment chemicals. In the re-assessment u/s. 147 r.w.s. 143(3) of the Act, the A.O held that the labour receipts are out of the incidental business activity and it is not case that the assessee has produced similar manufactured products one for his exports and one for 71 ITAs . Nos. 372, 626/PN/2002 etc. Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 the clients from whom he receives labour charges. With this objection, the A.O denied the claimed deduction u/s. 80-HHC of the Act on the labour charges. He held that the labour charges of Rs.12,35,720/- are squarely covered in "charges or any other receipts of similar nature" as mentioned in Explanation (Baa) of Section 80HHC (4c) of the Act, therefore, he considered 90% of the said amount reducing from the profits eligible for deduction u/s. 80HHC of the Act.
54. Before the Ld CIT(A), the assessee contended that it was submitted before the A.O that the issue of processing charges is directly covered by the decision of Hon' ble Bombay High Court in the case of CIT Vs. Bangalore Clothing Co. (Supra). But, without examining as to whether such labour charges/processing charges are forming part of the operational income, the A.O has taken the adverse view.
55. The ld. D.R. tried to justify the assessment order whereas the first appellate order on the issue has been relied upon by the Ld. A.R. Considering the above submissions, we find that the issue is fully covered by the decision of Hon'ble Bombay High Court in the case of CIT Vs. Bangalore Clothing Co., as the fate of the issue depends upon the nature of receipt of labour charges . In that case before the Hon'ble High Court, labour charges were found to be part of operational income, and thus the Hon'ble Court was pleased to hold that the same is not to be excluded under Explanation (baa) to Section 80HHC of the Act. Here in the present case also, the ld CIT(A) has noted that assessee had received labour charges from Aquazur India Pvt. Ltd. for manufacturing of water treatment chemicals and further that the assessee was also engaged in the activity of manufacturing of water treatment chemicals. The assessee had manufactured water treatment chemicals for its client M/s Aquazur 72 ITAs . Nos. 372, 626/PN/2002 etc. Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc. Page of 73 India Pvt. Ltd. on labour charges basis through the year and not on stary occasion. Under these circumstances, and in view of the decision of the Hon'ble Bombay High Court in the case of Bangalore Clothing Co. (Supra), we are of the view that ld CIT(A) has rightly held that A.O was not justified in rejecting assessee's claim that its case is squarely covered by the decision of Hon'ble Bombay High Court in the case of Bangalore Clothing Co. and accordingly, the Ld CIT(A) has rightly allowed the claimed deduction to the assessee. The same is upheld. The issue is thus decided in favour of the assessee. Related grounds are rejected. Consequently, appeal is dismissed.
56. To sum up result of these appeals, ITA Nos. 372/PN/2002 & 1111/PN/2005 are partly allowed; mITA No. 626/PN/2002, ITA No. 1386/PN/2005, ITA No. 1193/PN/2007 & C.O. No. 01/PN/2008 are dismissed.
The order is pronounced in the open Court on 29th February, 2012.
Sd/- Sd/-
(G.S. PANNU) (I.C. SUDHIR )
ACCOUNTANT MEMBER JUDICIAL MEMBER
Pune, dated the 29th February, 2012
US
Copy of the order is forwarded to :
1. The Appellant
2. The Respondent
3. The CIT -III, Punek
4. The CIT(A)-concerned
73 ITAs . Nos. 372, 626/PN/2002 etc.
Aquapharm Chemical Co Ltd.
A.Ys. 98-99, 2001-02 etc.
Page of 73
5. The D.R. "A" Bench, Pune
6. Guard File
By order
Senior Private Secretary
Income Tax Appellate Tribunal
Pune