Income Tax Appellate Tribunal - Mumbai
Blue Star Ltd. vs Deputy Commissioner Of Income Tax on 24 May, 2005
Equivalent citations: (2006)105TTJ(MUM)974
ORDER
K.P.T. Thangal, Vice President
1. These appeals are by the assessee and the Revenue, pertaining to asst. yr. 1991-92.
2. HA No. 1464/Bom/1995 : The first ground of objection by the assessee is directed against the order of the CIT(A) in confirming the addition of Rs. 1,80,40,772 as revenue receipt, being the amount received as non-compete fees from Hewlett Packard India (P) Ltd.
3. The assessee filed the return on 30th Dec, 1991, declaring income at Rs. 34,88,780. The return was processed under Section 143(1)(a), taking the income at Rs. 2,13,05,795. Assessee is in the business of manufacturing and selling of packed water coolers, commercial refrigeration equipments, air conditioners, air handling units, etc. and also trading in electronics and other appliances, having factories at different places. Assessee had a total turnover of Rs. 1,85,62,38,358, which includes commission also.
4. While framing the assessment order, AO noticed, assessee received Rs. 1,80,40,772 from Hewlett Packard India (P) Ltd. (for short 'HPI') as consideration for restrictive covenant, being the second instalment. Though it is credited in the P&L a/c, it was claimed as deduction from the computation, treating it as capital receipt. Assessee, M/s Blue Star Ltd., (for short 'BSL') entered into an agreement with Hewlett Packard Asia Ltd. (for short 'HP Asia') on 11th Oct., 1988, w.e.f. 1st Nov., 1987 onwards, wherein the assessee was appointed as "representative" of HP to sell HP products in the territory of India and Nepal, to maintain sales and suppon organization of products, market and support HP products, production and dissemination of sales literature, advertisement and editorial press release, technical and servicing personnel, provide support service to customers and to look after other functions on behalf of HPI. Assessee was to get commission for the services. However, AO noticed, much before the agreement was to expire, assessee and HPI entered into a joint venture as per agreement dt. 7th Aug., 1989 to manufacture and marketing of the products in India and for this purpose, a new company in the name of HPI was incorporated, having sharesHP and/or its affiliates 40 per cent; BSL and/or its affiliates, directors, etc. 20 per cent and public 40 per cent. It was also agreed that as long as the assessee owns at least 15 per cent of the outstanding shares of the company, they have a right to appoint directors to the board, proportionate to shareholding in the company, rounded to the nearest whole number. It was also agreed that HPI would offer to hire at least 90 per cent of the employees to BSL's HP division, who are engaged in selling, marketing and support of HP products.
5. By agreement dt. 7th Aug., 1989, entered into between the assessee and the new Indian company HPI (a joint venture of HP and the assessee), whereby the assessee agreed to avoid competition with the latter (HPI) by entering into any new business activities pertaining to manufacture or sale or promotion of sale of such products. New company agreed to pay sum of USD 2,000,000 in equivalent Indian Rupees, payable in two instalmentsone on coming in force of the agreement and the other on the first anniversary of effective date. The non-competitive covenant was to remain in force for a period of two years. It is how this amount was received by the assessee from HPI and this was credited to P&L a/c. Assessee claimed, this is a capital receipt and not taxable. In support of the above claim, assessee also filed an opinion from Shri Sanat P. Merita, advocate. It was contended/opined that the amount is not taxable for the following reasons:
It was not in substitution of income but in substitution of very source of income, in the light of the decision of the Hon'ble Supreme Court reported in Beak (Inspector of Taxes) v. Robson (1943) 11 ITR 23 (HL), CTT v. Best & Co. (P) Ltd. and 53 ITR 282 (sic). By this agreement, the assessee gave away a substantial part of its business to another company. By transferring 95 per cent of its personnel, the assessee was further disabled to carry the business even after two years, which can be treated as a permanent loss of source of income. Because of the restriction, the assessee will be completely out of market. However, the AO did not agree with the view canvassed by the assessee. He held that before allowing the claim of the assessee, it is necessary to analyse the following facts:
(i) the nature of business of the assessee; (ii) relevant provisions of Section 28 of the Act; and
(iii) whether the amount received by the assessee is compensation or not for termination of agency.
6. AO noticed, assessee received total commission of Rs. 6,41,66,406 out of which Rs. 5,62,89,131 was received from various foreign manufacturers for distribution of their products in India. The receipt from HP Asia as commission was Rs. 1,67,61,608. Therefore, he held that acquiring of agency for marketing of products of various manufacturers was in fact in the regular course of business of the assessee. Assessee, in other words, was marketing HP products in India. The agreement was to expire on 31st Oct., 1990. He held, had not there been a proposal for new business of manufacture of items marketed by the assessee under the joint venture, the assessee perhaps would have carried on the agency work. Assessee had sufficient infrastructure to handle the business of products manufactured by HP, it was one of the reasons why the assessee was made a party to the joint venture.
7. AO held that prior to the amendment brought out by the Finance Act, 1955, compensation for loss of office or agency undoubtedly was regarded as a capital receipt not chargeable to tax. But after the change in law, "any compensation" or "other payment" due or received by any person in respect of termination of/or variation in terms relating to management of affairs or any agency in India for any part of the business activities has to be regarded as a revenue receipt and to be charged to tax. Hence, he held, assessee's contention is not acceptable.
8. Assessee was functioning as a "representative" of HP Asia. The contention otherwise is incorrect. Whatever be the reason given or called for by the assessee, in fact the assessee was holding the agency for HP in India and the same was terminated after setting up of joint venture and after the agreement, dt. 7th Aug., 1989. Hence, he held, this is compensation for the loss of source and chargeable to tax. He further noted that the plea of the assessee that the agency has not been terminated, but had a permanent loss of source of income for the assessee is rather a strange contention. He held, the virtual effect of the whole arrangement is that the assessee has enlarged the scope of their activity by entering into a joint venture with HP for manufacture and sale of such products in India. He further noted that the major part of the period during which restrictive covenant was to remain in force, was covered by remaining period of operation of the old agreement, i.e. two years. He held, the smoke screen of negative covenant is with the tax effect in mind and to see that the Revenue does not get its due. In short, he held, the income claimed by the assessee as capital receipt, in fact was a revenue receipt and taxable being substitution for the loss of agency commission. Aggrieved by the above order, assessee approached the first appellate authority.
9. Before the CIT(A), it was contended, the agreement entered into between the assessee and HPI, in fact related to compensation to the assessee in not competing with the joint venture and not for parting with the trade secrets. It was contended that each of the agreement, such as mutual promises relevant to the agreement for formation of joint venture, financial participation and control and benefit obtained by the assessee as a promoter was relevant to the agreement relating to support services to be promoted by the assessee. The concerned agreement provided that the assessee would not and cannot compete with the products of joint venture for a period of two years and was not subject to the assessee continuing to be a participant in the joint venture of the company and consequently, involved non-competitive obligations which were not corollaries to the assessee being a participant in the joint venture. The consideration received was nothing but for non-competitive covenants. However, the CIT(A) did not accept the view canvassed by the assessee. He held, the distinction that the assessee tried to make out between the terms 'distributor' and 'agent' is more of an exercise in romantics, not of substance. He held, what is to be seen is the essence of a contract, as held by the Hon'ble Bombay High Court in the case of Damvala Bios. (P) Ltd. v. CIT . By virtue of the first agreement dt. 11th Oct., 1988, the assessee was to provide necessary services to the other party. But by virtue of Clause 6(3), assessee could not initiate or participate in activities, which directly competed with HP products or put the company as representative into a substantial conflict of interest position with HP. This agreement was to be terminated on 31st Oct., 1990. But before this, the assessee entered into an agreement dt. 7th Aug., 1989 with HP, pursuant to which HPI was formed for manufacture and sale of HP products in India, with 20 per cent equity participation of BSL. In effect, the assessee was functioning as an agent of HPI by virtue of agreement dt. 11th Oct., 1988. In fact, he held, as noted by the AO, by virtue of the second agreement, the scope and relation with HP only got enlarged by assessee having a say in the manufacturing and sale of products of HP in India.
10. Relying upon the decision of the Hon'ble Supreme Court in the case of CIT v. Bombay Buxmah Trading Corporation Ltd. (1986) 58 CTR (SC) 144 : (1986) 161 ITR 383 (SC), CIT(A) held, the compensation received represents profits in a new form, therefore, it amounts to current income, not of capital receipt. He further held, by getting support from the decision of the Hon'ble Supreme Court in the case of CIT v. Prabhu Dayal and the decision of the Hon'ble Andhra Pradesh High Court in the case of CIT v. Balaji Chitia Mandir , that neither the trading structure of the assessee is impaired nor such cancellation resulted in a loss. The assessee's business only got converted into a joint venture in the name of a new company, where the assessee also continued to get the same profit without any loss risk. Following the decision of the Hon'ble Supreme Court in the case of CIT v. Rai Bahadur Jairam Valji , he held that in general, payments made in settlement of rights under a trading contract or trading receipt are assessable to revenue. He held, whether the receipt is capital or revenue will depend upon whether it is compensation for injury inflicted on a capital asset or on stock-in-trade. In the instant case, the assessee has not been prevented from carrying its business by an external authority in exercise of paramount power. The assessee willingly joined the joint venture and the conditions imposed on the assessee were without any force.
11. The CIT(A) held, the decisions relied by the assessee in the case of CIT v. Ajit Kumar Bose , is distinguishable on facts. In that case, compensation was paid on termination of services and it was ex gratia. He also distinguished the case relied by the assessee in the case of CIT v. Late G.D. Naidu By LRs . In view of the above, the CIT(A) confirmed the order of the AO. Assessee is in appeal before the Tribunal.
12. Contending parties reiterated their respective stands. Assessee's counsel produced an order of the Tribunal, Delhi Bench in the case of Hewlett Packard India Ltd. v. Dy. CIT (2003) 80 TTJ (Del) 208 : (2003) 85 ITD 455 (Del), wherein the Tribunal held, compensation received so as to ensure monopoly status and to eliminate competition in its business for two years is a receipt in the capital nature inasmuch as the assessee had obtained an enduring benefit of elimination of competition in its line of business. Assessee also relied on the decision of the Tribunal in the case of R.K. Swamy v. Asstt. CIT (2004) 88 TTJ (Chennai) 940 : (2004) 88 ITD 185 (Chennai). At the same time, we find that exactly identical issue was agitated before the Tribunal, Mumbai Bench, in assessee's own case for the asst. yr. 1990-91, in ITA Nos. 4323 and 4176/Bom/1994 and the Tribunal confirmed the order of the CIT(A), vide para 19 of its order dt. 8th July, 2004, on the following lines:
19. We have perused the agreement. The assessee did receive commission for the services rendered to HPA. The mere fact that the assessee was restrained from entering into a competitive business with HPI cannot be construed as permanent loss of business or the very source from which to earn income. The Revenue authorities took into consideration the true nature of the receipt. The assessee itself was partner in the joint venture. As such, it is difficult to believe that the amount in question was paid for non-competitive covenant. It transpires from the factual details that the amount in question was received by the assessee in connection with the termination of the agency or the modification of the terms and conditions relating thereto. We have perused the various reasonings adduced in the impugned order. In our opinion, the Revenue authorities took a correct view in the matter and the amount in question is exigible to tax under Section 28(ii)(c) and/or Section 28(ii)(b) of the Act. As such, we uphold the impugned order on this count.
13. It is also seen that the decision now relied by the assessee in the case reported in (2002) 80 TTJ (Del) 208 : (2003) 85 ITD 455 (Del)(supra), was also considered by the Tribunal before coming to the conclusion quoted hereinabove. We have no reason to take a contrary view in assessee's own case for the subsequent year, since the view taken by the CIT(A) has been approved by the Tribunal for the asst. yr. 1990-91. Hence, the appeal by the assessee on this ground fails and is dismissed.
14. The second ground of objection by the assessee is without prejudice to the above contention that on the facts and circumstances of the case, the CIT(A) erred in rejecting assessee's contention that compensation received for restrictive covenant is also a compensation for loss of sales right and being a capital receipt that cannot be regarded as a normal part of business income and taxed as revenue receipt.
15. This issue, we have already dealt with hereinabove while dealing ground No. 1. As such, this alternative plea of the assessee is also rejected.
16. Ground No. 3 by the assessee is directed against the order of the CIT(A) in confirming the addition of Rs. 12,68,148 being the provision for bad and doubtful debts under Section 36(1)(vii).
17. The impugned amount claimed by the assessee was disallowed by the AO and confirmed by the CIT(A) on the ground that assessee had made only the provision for bad debts and the same was not actually written off.
18. The contention of the assessee is that Explanation to Section 36(1)(vii), inserted retrospectively by the Finance Act, 2001, w.e.f. asst. yr. 1989-90 was not available at the time of disposal of the appeal by the CIT(A). Thus, the limited prayer is that the issue may be remanded back to consider it on merit in the light of the retrospective amendment brought into statute book w.e.f. asst. yr. 1989-90 onwards.
19. We accept the above contention. We direct the AO to decide the issue on merit, in accordance with law, as applicable retrospectively, giving assessee an opportunity. Hence, this ground by the assessee is allowed for statistical purposes.
20. The next ground (ground No. 4) of objection by the assessee is directed against the order of the CIT(A) in confirming the addition of Rs. 1,68,925 to the closing stock, in respect of value of optional warranty paid to Kelvinator of India.
21. Assessee's counsel submitted, he is under instruction not to press this ground. Hence, this ground is rejected as not pressed.
22. The next ground (ground No. 5) of objection by the assessee is directed against the order of the CIT(A) in confirming the restriction of deduction under Section 80HH at Rs. 4,19,631 against Rs. 5,36,400, on the ground that profitability of Bharuch unit was not 10 per cent as contended by the assessee.
23. It is the submission of the assessee that deduction as claimed by the assessee was allowed by the AO while giving effect to CIT(A)'s order for asst. yrs. 1988-89, 1990-91 and 1993-94 and in the assessment orders for asst. yrs. 1994-95 and 1995-96. It is submitted, there is no distinguishing fact for the year under consideration.
24. In view of the above, we direct the AO to consider the issue in the light of the orders of the Revenue authorities relied by the assessee. Hence, this ground is remanded back to the file of AO to consider it in the light of the decisions for the asst. yrs. 1988-89, 1990-91 and 1993-94 to 1995-96. The appeal by the assessee on this ground is allowed for statistical purposes.
25. The next ground (ground No. 6) of objection by the assessee is directed against the order of the CIT(A) in confirming the addition of Rs. 1,15,083 on account of assessee's holiday home at Alibag and part of the expenses of guest-house in respect of rent, taxes, repairs and maintenance.
26. Similar issue was agitated by the assessee before the Tribunal in assessee's own case for the asst. yr. 1994-95 and the Tribunal set aside the matter for fresh consideration of the issue as entire fact was not fully divulged from the order of the CIT(A). It is seen that same is the case for the year under consideration as well.
27. In view of the above, in the light of the decision of the Tribunal in assessee's own case for the asst. yr. 1994-95, in ITA Nos. 1534 and 1421/Mum/1999, dt. 28th Dec, 2004, we remand the matter back to the file of AO for adjudication on this point. Hence, this ground is allowed for statistical purposes.
28. The next ground (ground No. 7) of objection by the assessee is directed against the order of the CIT(A) in confirming the restriction of deduction under Section 80HHC at Rs. 30,734 instead of Rs. 47,776 claimed by the assessee.
29. Assessee's counsel submitted, he is under instruction not to press this ground. Hence, this ground is dismissed as not pressed.
30. The next ground (ground No. 8) of objection by the assessee is directed against the order of the CIT(A) in confirming the addition of Rs. 2,50,000 being the provision for premium on redemption of debentures.
31. Assessee's counsel submitted, this point is covered in assessee's favour by the decision of the Tribunal in assessee's own case, on identical facts, for the asst. yr. 1990-91, vide paras 20 and 21 of its order dt. 8th July, 2004, which in turn considered the decision of the Hon'ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. v. CIT .
32. In the light of the above facts, we allow the claim of the assessee on this ground for the year under consideration.
33. Ground Nos. 9 and 10 by the assessee are directed against the order of the GIT(A) in confirming the addition of Rs. 1,00,000 being professional charges paid to M/s Rathi & Associates, treating it as capital expenditure and also confirming the addition of Rs. 14,72,088 being the repairs carried out at various places, treating the same as capital expenditure.
34. While framing the assessment order, AO noticed that the assessee had paid Rs. 1,00,000 to M/s Rathi & Associates, as consultancy fee towards renovation of Madras office. Assessee was required to explain as to why the said amount should not be treated as capital expenditure. In reply, assessee submitted, it was paid to M/s Rathi & Associates for taking their advise as to how to renovate the office. This reply was unsatisfactory; hence AO disallowed the claim, treating it as capital expenditure. The CIT(A) concurred with the view taken by the AO for the reason that renovation of office is capital in nature and enduring benefit and the payment made also therefore partakes the same character. Being aggrieved, assessee is in appeal before the Tribunal.
35. Relying upon the decision of the Hon'ble Madras High Court in the case of CIT v. Ooty Dasapiakash (1999) 157 CTR (Mad) 291 : (1999) 237 ITR 902 (Mad), assessee's counsel submitted that the expenditure incurred in replacing the existing components of old building, furniture and fitting, in other words, for creating a conducive and beautiful atmosphere for running business of a hotel, cannot be treated as a capital expenditure. On same analogy, assessee's counsel submitted, the expenditure incurred by the assessee being consultancy charges be treated as revenue expenditure.
36. Hearing the rival submissions, we find no much credence in the submission of the assessee. In the case before the Hon'ble Madras High Court, reported in (1999) 157 CTR (Mad) 291 : (1999) 237 ITR 902 (Mad)(supra), assessee was running a hotel. Beautification was to attract customers. It is not so in the instant case of the assessee. Consultancy fee paid of Rs. 1,00,000, therefore, is to be taken as capital expenditure. The appeal by the assessee on this ground fails and (is) dismissed.
37. Coming to the second part of the claim, i.e., ground No. 10, with regard to repairs at various places disallowed, it is submitted that this issue now stands covered in assessee's favour by the decision of the Tribunal, in assessee's own case for the asst. yr. 1987-88, vide paras 15 and 16 of its order dt. 11th Oct., 2004, in ITA No. 4557/Mum/1991 and also for the subsequent asst. yr. 1994-95, vide paras 25 to 27 of the order dt. 28th Dec, 2004 in ITA No. 1534/Mum/1999. Since the issue on identical facts has been decided in assessee's favour, we have no reason to take a contrary view for the year under consideration. The appeal by the assessee on this ground is allowed.
38. The next ground (ground No. 11) of objection by the assessee is directed against the order of the CIT(A) in confirming the addition of Rs. 3,56,000 being commission paid and holding the same as non-genuine.
39. This issue has been dealt with by the AO at pp. 27 to 29 of his order. AO noticed that the assessee had paid an amount of Rs. 3,56,000 to Himalaya Electrical Industries (India)(P) Ltd. (for short 'HEI'). It was stated that Government of India floated a global tender for installation of CT scanner at DDU Hospital through DGS&D and the assessee-company succeeded in winning the contract for installation. CT scanner was procured from Hitachi Medical Corporation, Japan, for about Rs. 1.95 crores. Regarding the payment to HEI, Shri Sharma was unable to recollect anything except stating that he does not know any person in HEI and also not aware of their addresses. The letter was signed at the instance of Shri D.D. Bhatia. Shri Sharma was asked to explain who Shri Bhatia was and in reply he stated that Shri Bhatia was no more in BSL (assessee). On 8th Jan., 1993 Shri Sharma appeared before the AO and filed letters exchanged between HEI and assessee. From these letters AO noticed that on behalf of Shri D.D. Bhatia a letter was addressed to HEI stating that they had not received the rates for civil work, fire alarm system and intercom, etc., though the work of furnishing of tender of CT scanner was done sometime in third week of July. In response to the above, Shri K.C. Jain, director of HEI (had) written a letter addressed to the assessee-company, informing that lot of civil work/demolition work is involved and hence certain cabling may have to be carried out due to breaking of wall and also ducting, false ceiling, flooring, painting of walls, fitting of fire alarm and intercom in different rooms have to be carried out. Thereafter, a debit note dt. 24th Dec, 1990 was submitted. It was stated by Shri Sharma that he himself prepared the tender and did the work of technical comparison of various companies, met doctors and explained them the merits and demerits. He was further asked to inform as to whether he was aware of service agreement entered into between HEI and the assessee. He replied in the negative. Regarding the nature of services rendered, it was submitted, he was not aware. HEI was a manufacturer of electrical goods. But Shri Jain failed to justify the nature of services reridered on the ground that the negotiations were made through one ex director, Shri R.K. Kapur. AO came to the conclusion that HEI was technically not qualified for such services said to be rendered. He further noted that the assessee preferred to award the entire contract of civil work to Vohras and separately paid a huge amount of Rs. 3,56,000 to the assessee. Hence, he came to the conclusion that actually there was no service rendered. He issued a show-cause notice to the assessee to explain why the amount should not be disallowed. It was submitted, Shri Jain had not denied the receipt and also explained the services rendered. AO held that in fact there is no material to show that the commission was paid for any services rendered. Aggrieved by the above order, assessee approached the first appellate authority.
40. Before the CIT(A) it was submitted, the payments were made by cheque and accounted by the other party as income and offered it to tax. It was claimed that HEI introduced themselves for helping the assessee in obtaining the rates from various parties, who can do their site job and help them in installing the equipment efficiently. CIT(A) records that investigation made at Delhi by the ITO who is assessing the company, i.e. HEI, indicates that the payment has not been made to above company and he further records that investigation makes clear that it was paid not for rendering any service. Hence, the CIT(A) confirmed the addition. Being aggrieved, assessee is in appeal before the Tribunal.
41. However, assessee's counsel brought our attention to certain correspondence between the parties. At p. 62 of the paper book is a debit note dt. 14th Dec, 1990. At p. 63 is the intimation from HEI of receipt of the amount. Inviting our attention to p. 68 of the paper book, which is part of the assessment order in the case of HEI for the asst. yr. 1991-92, assessee's counsel submitted that this payment was made for the services rendered. At p. 55 of the paper book is a letter from HEI dt. 11th June, 1990, offering their services in obtaining rates from various parties who can do the site job and who can help in installing the CT scanner. At p. 56 of the paper book is the reply of the assessee to HEI. At p. 57 is again letter from the assessee to HEI in regard to payment of approximately 2 per cent of total value of the order towards rendering of professional services. In the light of the facts, assessee's counsel submitted, the payment made to other party, i.e., HEI was for the services rendered. In support of the above contention, assessee's counsel relied on the decision of the Tribunal in the case of VIP. Industries Ltd. v. IAC (1991) 36 YTD 70 (Bom)(TM).
42. The learned Departmental Representative supported the orders of the Revenue authorities.
43. Hearing the rival submissions, we are of the view that the claim of the assessee is to be allowed. The reasoning of the CIT(A) that the assessee is such a famous company, that does not call for any assistance from a small company like HEI to do this kind of work and in fact no such services rendered, etc., does not appear to be a conclusion on the basis of records available. There is lot of correspondence pointed out in the preceding para between the two parties. The amount paid was also offered and it is accepted in the case of HEI. Of course, it is not necessary to see as to whether the amount was received by the other party or any services rendered, since the amount was offered by the assessee itself. Still the fact remains that it is taxed. The letter hereinabove mentioned clearly indicates that HEI has offered its services and it was accepted as well. In the premises of the above facts, we are of the view that the claim of the assessee is to be allowed. Order accordingly.
44. The next ground (ground No. 12) of objection by the assessee is directed against the order of the CIT(A) in confirming the addition of Rs. 14,40,000 made as notional interest with respect to investment made by the assessee in Motorola Blue Star Ltd.
45. The contending parties conceded that this issue stands covered in assessee's favour by the order of the Tribunal in assessee's own case for the asst. yr. 1994-95, vide paras 22 to 24, in ITA Nos. 1534 and 1421/Mum/1999, dt. 28th Dec, 2004. Hence, this ground by the assessee is allowed.
46. The next ground (ground No. 13) of objection by the assessee is directed against the order of the CIT(A) in confirming the addition of Rs. 6,80,000 treating the same as revenue receipt in relation to amount received by the assessee for release of employees, which was capital receipt in nature.
47. This issue is discussed by the AO vide para 20 of his order. Assessee received an amount of Rs. 6,80,000 in lieu of releasing its five employees to HPI. Assessee treated this as capital expenditure because the payment was received against the loss of services of five employees. AO treated this as casual receipt. AO did not accept the above explanation in the light of the decision of the Hon'ble Allahabad High Court in the case of CIT v. Gulabchand . Aggrieved by the above order, the assessee approached the first appellate authority.
48. CIT(A) held, there was no capital loss to the assessee by transfer of the employees. The employees working with the assessee were transferred to another company and, therefore, this cannot be treated as capital receipt as there was no capital loss. Hence, he confirmed the addition made by the AO.
49. Contending parties reiterated their respective stands. Considering the rival submissions, we are of the view that the assessee lost the services of employees permanently, which is to be treated as capital in nature. The appeal by the assessee on this ground (is) also allowed.
50. The next ground (ground No. 14) of objection by the assessee is directed against the order of the CIT(A) in confirming the addition of Rs. 40,70,175 being capital receipt on account of compensation received for cancellation of contract from M/s Narang Towers.
51. This issue has been dealt with by the AO vide pp. 31 and 32 of his order. An amount of Rs. 40 lakhs was received from Jain Developers (P) Ltd. as a result of out of Court settlement and withdrawing the suit. But it was treated as capital receipt. In response to notice, assessee stated that it entered into an agreement with Western Builders for purchase of property and advanced Rs. 24,29,825. Since the property was not clear, it led to litigation. Assessee filed claim against the other party. Rupees 40 lakhs were promised as compensation to withdraw the suit. However, the assessee got only Rs. 25 lakhs from M/s Narang Towers. Assessee did not withdraw the suit from the Court. Subsequently Jain Developers (P) Ltd. took the property and came forward for out of Court settlement and Rs. 40 lakhs were received from Jain Developers (P) Ltd. It was contended that this is capital receipt. AO held, this is not a capital receipt, relying on the decision of the Hon'ble Allahabad High Court cited supra. Aggrieved by the above addition, assessee approached the first appellate authority.
52. The learned first appellate authority confirmed the order of the AO. Aggrieved by the above order, the assessee is in appeal before the Tribunal.
53. Assessee's counsel submitted, the case (supra) is not applicable in the instant case of the assessee. In support of the case, assessee relied on the following decisions:
(i) CIT v. J. Dalmia SLP rejected by Supreme Court in (1991) 189 ITR (St) 122
(ii) CIT v. Ashoka Marketing Ltd.
(iii) Baroda Cement & Chemicals Ltd v. CIT
(iv) Cadell Weaving Mill Co. (P) Ltd. v. CIT
54. Hearing the rival submissions and going through the orders of the Revenue authorities, we are of the view that the receipt cannot be treated as casual receipt. It is a receipt arising out of the agreement connected with capital assets and the receipt of the amount for defaulting the agreement also should be taken in the same character. Hence, the appeal by the assessee on this ground is allowed.
55. Next ground (ground No. 15) of objection by the assessee is directed against the order of the CIT(A) in confirming the disallowance of loss on forfeiture of licence deposit of Rs. 78,00,000 treating the same as capital loss.
56. This issue has been dealt with by the AO at p. 32 of his order. The addition is made by the AO vide para 21 of his order, on the following lines:
During the year under consideration, the assessee-company has claimed a loss of Rs. 78 lakhs being loss on forfeiture of licence deposit. The assessee-company has decided to amortise the deposit of Rs. 78 lakhs in respect of premises over a period of 5 years commencing from 1990-91 and accordingly, an amount of Rs. 62.40 lakhs is carried forward under the head 'Miscellaneous expenditure'. Accordingly, the assessee-company has treated the said loss as revenue loss and has made a claim of the same against the profit of this year. This view of the assessee-company is not acceptable at all, because the said loss was not in the regular course of the business of it. It was on account of loss of forfeiture of licence deposit made with a third party and, therefore, the same is treated, as capital loss. I, therefore, disallow the entire amount of Rs. 78,00,000, treating the same as capital loss and add back to the total income of it for being taxed.
Being aggrieved, assessee approached the first appellate authority.
57. The CIT(A) held that licence is a capital asset in nature and, therefore, the loss on account of forfeiture of the same also should be treated on the same line. Aggrieved by the above order, the assessee is in appeal before the Tribunal.
58. Relying upon the following judgments, assessee's counsel contended, the addition is liable to be deleted:
(1) Empire Jute Co. Ltd. v. CIT (2) CIT v. Associated Cement Co. Ltd. (1994) 116 CTR (Bom) 593 : (1994) 172 ITR 257 (SC) (3) CIT v. Madias Auto Service (P) Ltd. .
59. Considering the rival submissions and going through the facts recorded by the Revenue authorities, we are of the view that the claim of the assessee was rightly rejected by the learned Revenue authorities. The decisions relied by the assessee are distinguishable on facts. In the case cited supra, the Hon'ble Supreme Court held that the allotment of loom hours under the working time agreement to different mills constituted not a right conferred but. merely a contractual restriction on the right of every mill to work its looms to their full capacity, and porches of loom hours by a mill had, therefore, the effect of relaxing the restriction on the operation of looms to the extent of the number of working hours per week transferred to it, so that the transferee mill could work its looms for longer hours than permitted. In other words, it is an extension of time by which it increases its profitability. The Hon'ble Supreme Court held, expenditure incurred for the purpose of operating the looms for longer working hours is primarily and essentially related to the operation or working of the looms which constituted the profit-making apparatus and, therefore, it should be treated as revenue expenditure.
60. In the case (supra), the assessee taking the premises on lease for a specified period, demolished and constructed new buildings at its own expense. The Hon'ble Supreme Court held, by demolishing and reconstruction of the work, assessee has not obtained any enduring benefit because after some time, the assessee had to part with the building it reconstructed.
61. In the case cited supra, the assessee, who agreed to provide water pipelines and electricity facilities to municipality, was exempted from payment of municipal taxes for 15 years, which the Hon'ble Supreme Court held, because the advantage secured by the assessee is in the field of revenue.
62. Coming to the licence deposit, as rightly noted by the Revenue authorities, licence is a capital asset in nature. The loss on account of forfeiture of licence is also to be treated as such. The Revenue authorities were right in disallowing the claim of the assessee and not treating it as revenue loss. Hence, this ground by the assessee fails and is dismissed.
63. The next ground (ground No. 16) of objection by the assessee is directed against the order of the CIT(A) in confirming the addition of Rs. 27,112 in respect of commission paid to Silverline Electronics (P) Ltd. as payment out of undisclosed income.
64. This issue is dealt with by the AO at pp. 32 and 33, para 23 of his order. Assessee (had) shown Rs. 2,24,000 as commission paid to various parties. It was submitted that Silverline Electronics (P) Ltd. received Rs. 2,51,112 from assessee-company, whereas in the books of the assessee, the amount paid was shown at Rs. 2,24,000. Hence, payment of Rs. 27,112 was not shown. Assessee was asked as to why this should not be disallowed, treating it as assessee's undisclosed income under Section 69A. There was no reply for the queries.
65. The CIT(A) has dealt with the issue at pp. 34 and 35 of his order. In the absence of any explanation, the addition was confirmed by the CIT(A). Aggrieved by the above order, the assessee is in appeal before the Tribunal.
66. The same submission was reiterated before us. We find no reason to disturb the order of the learned first appellate authority. Hence, the appeal by the assessee on this ground fails and is dismissed.
67. The next ground (ground No. 17) of objection by the assessee is directed against the order of the CIT(A) in confirming the addition of Rs. 24,86,000 paid under Early Voluntary Scheme to the employees.
68. Assessee's counsel submitted, he is under instruction not to press this ground. Hence, this ground is dismissed as not pressed.
69. The last ground (ground No. 18) of objection by the assessee is directed against the order of the CIT(A) in treating the interest charged under Sections 234B and 234C as consequential.
70. Regarding the interest charged under Section 234C, the submission of the assessee is that it is charged on the returned income; hence not consequential. Coming to interest under Section 234B, it cannot be levied, according to the assessee, when conflicting views are possible as regards the disallowances. Reliance is placed on the following decisions:
(1) CIT v. Sedco Forex International Drilling Co. Ltd.
(2) CIT v. Halliburton Offshore Services Inc. >
71. We have heard the rival submissions. The decisions relied by the assessee, with regard to interest under Section 234B, we are afraid, not applicable in the instant case of the assessee. There were conflicting decisions of the Tribunal at that point of time. Hence, the Hon'ble High Court held, interest under Section 234B cannot be levied without hearing the parties. Nothing brought on record to show that the same facts stood at the point of time in the instant case of the assessee as well. Coming to interest under Section 234C also, we find no merit in the contention of the assessee. Hence, this ground fails and is dismissed.
72. ITA No. 1176/Bom/1995 : The first ground of objection by the Revenue is directed against the order of the CIT(A) in deleting the disallowance of Rs. 3,02,444 on account of non-repatriable foreign asset being only the provision made, for bad debts in the account.
73. On going through the order of the CIT(A), it is clearly mentioned that the amount was written off by the assessee in its books of account. The CIT(A) allowed the claim of the assessee, following the decision of the Hon'ble junsdictional High Court in the case of CIT/EPT v. Jwala Prasad Tiwati and the decision of the Hon'ble Gujarat High Court in the case of Vithaldas H. Dhangibhai Bardanwala v. CIT . Since the amount is actually written off and not a provision, the claim of the assessee was rightly allowed by the CIT(A).
Hence, the appeal by the Revenue on this ground fails and is dismissed.
74. The second ground of objection by the Revenue is directed against the order of the CIT(A) in deleting the disallowance of Rs. 1,92,521 made by the AO under Rule 6D.
75. Assessee's counsel submitted, this issue has been decided against the assessee by the decision of the Tribunal in assessee's own case for the asst. yr. 1994-95, in ITA No. 1421/Mum/1999, vide paras 30 to 32 of its order dt. 28th Dec, 2004.
76. No distinguishing facts brought to our notice for the year under consideration. Hence, the appeal by the Revenue on this ground is allowed.
77. Coming to the third ground of objection by the Revenue, it is against the order of the CIT(A) in valuing the closing stock at net of Modvat and thereby allowing an amount of Rs. 75,57,187.
78. This issue has to go in assessee's favour in the light of the decision of the Hon'ble Supreme Court in the case of CIT v. Indo Nippon Chemical Co. Ltd. . The same view has been taken in assessee's own case by the Tribunal for the asst. yr. 1994-95, in ITA No. 1534/Mum/1999, vide paras 7 and 8 of its order dt. 28th Dec, 2004. Hence, this ground by the Revenue fails and is dismissed.
79. The fourth ground of objection by the Revenue is general in nature and does not call for any specific dealing as such.
80. In the result, appeal of the assessee as well as the appeal by the Revenue stands allowed in part.