Income Tax Appellate Tribunal - Indore
H.L. Taneja vs Assistant Commissioner Of Income Tax, ... on 30 January, 2006
Equivalent citations: [2006]7SOT387(INDORE)
ORDER
I.C. Sudhir, J.M. The assessee has questioned the first appellate order on the following grounds that the learned Commissioner of Income Tax (Appeals) had erred in :
1. Not accepting the contention of the assessee that the amount of Rs. 319 lakhs received by way of non-compete fees was not taxable being a receipt of capital nature;
2. Confirming that non-compete fees received by the assessee was revenue in nature and liable to tax as profit or commission receipt, thus he has accepted the contention of the assessee that the conclusion of the assessing officer to tax Rs. 319 lakhs as dividend under section 2(22)(a) was not correct;
3. Confirming the disallowance of Rs. 8,94,698 as the payment of gratuity to the staff members without appreciating that the proprietary concern was not closed;
4. Taking the wrong plea that section 40A(7) is applicable to the assessee and the condition were not fulfilled;
5. Disallowing the amount of compensation of Rs. 16,29,343 by treating the compensation was paid after the closer of the business; and
6. Confirming the levy of interest under sections 234B and 234C which was not proper and for which no specific speaking order was passed by the assessing officer, as has been held by various High Courts as well as Supreme Court in the case of CIT v. Ranchi Club Ltd. (2001) 247 ITR 209 (SC).
2. Ground Nos, I to 3 2.1.1 The appellant is an Individual having Salary income from Eastern Air Products (P) Ltd. in which he is the Chairman and Managing Director. The Company was incorporated in 1964 and put up a Factory at Bhopal and started production in 1965.
2.1.2 Over the years, besides Bhopal he was instrumental in setting up several Gas factories at Jabalpur (1974), Indore (1979) and Dhar (1988). These factories were put up for Jabalpur Oxygen Company (JOC), Northern Air Products (P) Ltd. (NAP), Dhar Oxygen (P) Ltd. (DOPL). In J.O.C. he was Proprietor, in N.A.P. Managing Director, in D.O.P.L. Chairman & Managing Director, Besides he was also associated with Eastern Gases and Bhopal Cryogenics (P) Ltd. who also had a Gas Factory at Bhopal, and Eastern Electro Chemical Industries at Mandideep.
2.1.3 The appellant filed his Income-tax return declaring a total income at Rs. 44,24,920 on 31-10-2001. This includes salary income as well as profit of Proprietary concern M/s. Jabalpur Oxygen Co., Jabalpur. A note was also written on the computation of total income, that besides the above, the assessee had received a sum of Rs. 319 lakhs (Rupees Three hundred nineteen lakhs) as "No compete fees" which being capital receipt is not taxable.
2.1.4 The assessing officer picked up the case of the assessee for scrutiny, also referred the matter to Additional Commissioner of Income Tax, Range-I, Bhopal under section 144A and as per his direction treated the non-compete fees amount of Rs. 3,19,00,000 as deemed dividend under section 2(22)(a)/2(24)(iv) after holding that the amount received was nothing but distribution of profit/ benefit received by the assessee from the company by adopting a device to receive it directly from Inox Air Products Ltd. The learned Commissioner of Income Tax (Appeals) has upheld the same, against which the assessee is in appeal.
2.2.1 In support of the ground the learned authorised representative submits that the assessee has 45 years experience in the Gas business and over the years had made name for himself and developed good rapport both the customers as well as Government Departments, all over Central India. In 2000-01 (Assessment year 2001-02) except for Bhopal Cryogenies (P) Ltd., Eastern Electro Chemical Industries and Eastern Gases, remaining gas business were sold to Inox Air Products Ltd. a World Renowned Multi-National Company vide agreements dated 10-7-2000 (3), 21-7-2000 (2) and 17-82000 (2). Separate Sale Agreements for each concern were drawn up and entered into with each of the concerned entities. (Copy of agreements on Page Nos. 100 to 333 of the Paper Book) The sale price and Goodwill of each Unit was fixed on the basis of its Assets, Business and Profits etc. and each of the concerns were paid as per agreement and the amounts received have been shown in their income tax returns.
2.2.2 The learned authorised representative submits the detailed valuation of the assets sold by each of the Company and the basis of arriving at the price for which they were sold. He also submits the sale value, market value and the written down value of various assets in a summarized manner so that it can be seen at a glance.
Rs. in lakhs Sales value Market value W.D. Value (as per I. Tax Eastern Air Products (P) Ltd.
Building (with Furniture & Fitting and Office Equipment) 30.00 22.02 15.82 Machinery 110.00 61.00 48.50 Goodwill 154.00 294.00 83.02 64.32 Oxygen Cylinders etc. 250.00 166.00 Total 544.00 249.02 64.32 Northern Air Products (P) Ltd. Building 13.00 11.13 2.59 Machinery 17.00 11.00 5.02 Goodwill 45.00 75.00 22.13 7.61 Oxygen Cylinders etc. 52.00 33.80 Total 127.00 55.93 7.61 Jabalpur Oxygen Company Building 20.00 12.80 8.85 Machinery 22.00 10.00 1.13 Goodwill 50.00 92.00 22.80 9.98 Oxygen Cylinders etc. 21.00 13.65 Total 113.00 36.45 9.98 Dhar Oxygen (P) Ltd.
Land 15.00 15.00 6.63 Building 10.00 4.80 6.95 Machinery 23.00 10.00 2.84 Goodwill 05.00 53.00 29.80 16.42 Oxygen Cylinders etc. 24.00 15.60 Total 77.00 45.40 16.42 Central India Gases (P) Ltd.
Land & Building 10.50 10.50 3.57 Machinery 5.50 5.50 1.34 16.00 16.00 4.91 Oxygen Cylinders etc. 13.00 8.45 Total 29.00 24.45 4.91 Grand Total 890.00 411.25 103.23 From the above details, discussions and the detailed arguments, it is clear that the sale price paid by Inox Air Products Ltd., is much more than the market value and the written down value of the assets. It is not correct on the part of the assessing officer to state that the sale price has no co-relation with either the value of assets or the book value and the entire Sale has been carried out by diverting part of the actual sale consideration in the guise of 'non-compete fees' of very sizeable amount payable to the directors as to claim the same as a capital receipt and not liable for any tax. The facts stated by the assessing officer that a part of the sale consideration of the assets sold by the various companies were diverted in the shape of non-compete fees is purely based on presumptions, assumptions, surmises and conjectures.
2.2.3 The learned authorised representative submits further that the detailed valuation of each and every assets which was sold to Inox Air Products Ltd. was worked out by the assessee himself, as he had sufficient experience and knowledge to arrive at the correct valuation so far as the plant & machinery & buildings are concerned. In respect of Buildings total covered area as well as the nature of building and the period of its construction & fair market value was also taken into consideration. It may be appreciated that the value estimated by the assessee was much less than the purchasers having agreed to pay for the same, the reason being that they were keen to enter into this business in M.P. & put, Shri Taneja out of it. In respect of plant & machinery also the age of plant and machinery, its fair market value and other facts have been taken into consideration for valuing the same by the assessee.
2.2.4 The assessee has 45 years experience in the Gas business and over the years had made name for himself and developed good rapport both with the customers as well as Government Departments, all over Central India.
2.2.5 The Appellant supported the Company at all times by providing :
(a) Efficient Technical services.
(b) Establishment of good dealer network in the State of Madhya Pradesh, in the neighbouring States and the Central Government Departments.
(c) Maintenance of personal rapport with dealers and big customers.
(d) Maintenance of good relationship with employees and labourers in the Factory.
(e) Establishment of efficient transportation network.
(f) Establishment of good marketing system and advertisement.
(g) Efficient financial management and good relationship with the financial institutions and banks.
2.2.6 In 2000-01 (Assessment year 2001-02) except for Bhopal Cryogenics (P) Ltd., Eastern Electro Chemical Industries and Eastern Gases, remaining gas business were sold to Inox Air Products Ltd. a World Renowned Multi-National Company vide agreements dated 10-7-2000 (3), 21-7-2000 (2) and 17-8-2000 (2) separate sale agreements for each Concern were drawn up and entered into with each of the concerned entities. (Copy of agreements on Page Nos. 100 to 333 of the Paper Book) The Sale Price and Goodwill of each Unit was fixed on the basis of its Assets, Business and Profits etc. and each of the concerns were paid as per agreement and the amounts received have been shown in their Income-tax Returns.
2.2.7 He submits further that the detailed valuation of each and every asset which was sold to Inox Air Products Ltd. was worked out by the assessee himself, as he had sufficient experience and knowledge to arrive at the correct valuation so far as the Plant & Machinery & Buildings are concerned. In respect of Buildings total covered area as well as the nature of building and the period of its construction & fair market value was also taken into consideration. It may be appreciated that the value estimated by the assessee was much less than the purchasers having agreed to pay for the same, the reason being that they were keen to enter into this business in M.P. & put, Shri Taneja out of it. In respect of plant & machinery also the age of plant and machinery, its fair market value and other facts have been taken into consideration for valuing the same by the assessee.
He also refers the detailed valuation giving the basis of arriving at the price for which these assets were sold in respect of all the Companies.
2.2.8 The learned AR submits that considering the Appellant's knowledge, skill, commitment, marketing talent, technical talent and his association with various departments Inox Air Products Ltd. entered into a non-compete agreement with the appellant with a view to keep the appellant and other covenantors to refrain from Gas business. The company offered him a sum of Rs. 367 lakhs (Rupees Three hundred sixty seven lakhs) as non-compete fees, for not to compete with them in gas business for a period of 5 years after completion of the sale of said business. This amount includes Rs. 319 lakhs for the appellant and balance for the remaining family members.
2.2.9 The appellant accepted their offer and no compete agreement dated 17-8-2000 was entered into with Inox Air Products Ltd. for the purpose. (Copy of agreement on Page Nos. 84 to 99 of the Paper Book) As per the said Agreement the assessee was restricted from doing any gas business in Madhya Pradesh for a period of 5 years whether alone or in association with others, either directly or indirectly and/or in association with others and in any capacity whatsoever from carrying on any business in competition with the business being taken over by Inox Air Products Ltd. and carried on by them.
2.2.10 In lieu of the above restriction and other conditions mentioned in the Agreement, Non-compete fee was paid to him. This non-compete fee having been received by him on account of restriction imposed on him i.e., for agreeing not to compete with Inox Air Products Ltd. has been claimed as "Capital Receipts" not liable to tax on the basis of various decisions of Income Tax Tribunals, High Court and Supreme Court.
2.2.11 Non-compete fee was a capital receipt and was not liable to be taxed. This was the position till assessment year 2003-04. But with a view to make such payments taxable, the Income Tax Act was amended w.e.f. assessment year 2003-04 for specific purpose of making such payments taxable. This being the position, it is obvious that any such payments received prior to 31-3-2002 are not taxable. Since assessee received non-compete fee before this date i.e., during assessment year 2001-02, it obviously is not taxable.
2.2.12 The above case was selected for scrutiny and the assessing officer had asked for various details, documents and other papers relating to the various matters for the above years, which were submitted and examined from time to time.
2.2.13 As submitted above, the assessee had received "No compete fees" during the above year amounting to Rs. 319 lakhs which was claimed as capital receipt and hence not taxable. The assessing officer had asked for various details and documents which were submitted from time to time. The assessing officer had asked us to justify our claim with reasons why it should not be taxed as revenue receipt. The detailed letters dated 28-8-2003, 24-1-2004 and 5-2-2004 with all supporting documents and evidence were submitted before the assessing officer as well as Additional Commissioner of Income Tax, Range-I, Bhopal. He refers (Page Nos. 34 to 60 of the paper book) in support.
2.2.14 He points out that the assessing officer has also sought directions under section 144A from Additional Commissioner of Income Tax, Range-I, Bhopal, in respect of which also the assessee had appeared before him and submitted various details, documents, letters, agreements and other necessary papers from time to time.
2.2.15 The assessing officer has passed the assessment order on 29-3-2004 according to which the amount of Rs. 319 lakhs is assessed as deemed dividend under section 2(22)(a)/ 2(24)(iv) of the Income Tax Act, treating the same as the distribution of profit/benefit received by the assessee from the company by adopting the device to receive it directly from M/s. Inox Air Products Ltd. to which the assessee had objected.
2.2.16 The learned authorised representative submits that during the above year the appellant had received a sum of Rs. 319 lakhs as non-compete fees on the basis of the non-compete agreement dated 17-8-2000 executed between Taneja Group and Inox Air Products Ltd. He refers the important terms of agreement, pleaded as page Nos. 84 to 333 of paper book.
2.2.17 The learned authorised representative also comments upon the observations of the lower authorities on the issue and the judgments relied upon by them and as to how these are mispleaded and misdirected. The learned authorised representative cites the following decisions wherein amount received for agreeing not to engage incompeting business has been treated as capital receipt :
(i) CIT v. A.S. Wardekar (2005) 151 Taxman 303 (Cal)
(ii) CIT v. Saroj Kumar Poddar (2005) 279 ITR 573 (Cal).
(iii) CIT v. Best & Co. (P) Ltd. (1964) 60 ITR 11 (SC)
(iv) Kettlewell Bullen & Co. Ltd. v. CIT (1964) 53 ITR 261 (SC)
(v) Gillanders Arbuthnot & Co. Ltd. v. CIT (1964) 53 ITR 283 (SC)
(vi) CIT v, Saraswathi Publicities (1981) 132 ITR 207 (Mad)
(vii) CIT v. Ambadi Enterprises Ltd. (2004) 267 ITR 702 (Mad)
(viii) CIT v. G.D. Naidu (1987) 165 ITR 63 (Mad)
(ix) P.L. Chemical Ltd. v. Assistant CIT (1972) 86 ITR 46 (Mad)
(x) R.K. Swamy v. Assistant CIT (1984) 88 ITD 185 (Chen)
(xi) ITO v. Smt. Sarojben v. Gandhi (2004) 83 TTJ (Ahd). 716
(xii) Saroj Kumar Poddar v. Jt. CIT (2001) 77 ITD 326 (Cal)
(xiii) Assistant CIT v. A.S. Wardekar (2001) 77 ITD 405 (Cal).
(xiv) Assistant CIT v. Ashit M. Patel (2005) 96 TTJ (Mum) 439
(xv) N. Sandeep Reddy v. Assistant CIT (2005) 96 TTJ (Hyd) 315 (xvi) CIT v. Podar Cement (P) Ltd. (1997) 226 ITR 625 (SC) (xvii) CIT v. Union Saw Mills (1993) 203 ITR 581 (Ker) 2.3.1 The Learned Departmental Representative, on the other hand, places reliance on the orders of the lower authorities and on the decisions followed by them, He submits that the assessing officer has rightly held that when the assessee had already sold the plant, there was no question of payment of non-compete fees in question. He submits further that the assessee was not holding any brand name to fetch the payment of huge amount in the name of non-compete fee. The lower authorities had thus rightly denied the claim of the assessee treating the action as colourable device to avoid the payment of due tax. The decisions relied by him are as under :
(i) K. Ramaswamy v. CIT (2003) 261 ITR 358 (Mad)
(ii) KCP Ltd. v. CIT (2000) 245 ITR 421 (SC)
(iii) Neroth Oils Co. Ltd. v. CIT (1987) 166 ITR 418 (Ker)
(iv) CIT v. Smt. Minal Remesh Chandra (1987) 167 ITR 507 (Guj)
(v) Delhi Stock Exchange v. CIT (1961) 41 ITR 495 (SC) (w) S. Raghbir Singh Sandhawalia v. CIT (1958) 34 ITR 719 (Pun) (viz) Tarulata Shyam v. CIT (1977) 108 ITR 345 (SC)
(viii) Upper India Sugar Exchange Ltd. v. CIT (1969) 72 ITR 331 (All)
(ix) P.H. Divecha v. CIT (1963) 48 ITR 222 (SC)
(x) CIT v. Kolhia Hiradgarh Co. Ltd. (1949) 17 ITR 545 (Bom)
(xi) Delhi Stock Exchange Ltd. v. CIT (1961) 41 ITR 495 (SC)
(xii) RM.AR.AR.RM.AR.AR. Ramnathan Chettiar v. CIT (1967) 63 ITR 458 (SC)
(xiii) National Cement Mines Industries Ltd. v. CIT (1961) 42 ITR 69 (SC)
(xiv) Chunduri Venkata Reddi v. CIT (1959) 35 ITR 87 (Ahd)
(xv) Ghasi Ram Padhi & Co. v. CIT (1991) 192 ITR 334 (Ori) 2.4.1 We have considered the arguments advanced by the parties, orders of the lower authorities and materials available on record. We have also gone through the decisions relied on by the parties. During the year under consideration the assessee had received a sum of Rs. 319 lakhs as non-compete fees on the basis of a non-compete agreement dated 17-8-2000 executed between Shri H.L. Taneja, who was in the industrial and medical gas manufacturing and selling business for about 45 years, his daughters and son in law, who was looking after different companies of the group through various companies as one part' and Inox Air Products Ltd. as 'other part'. The basic covenants of the non-compete agreement placed on record at page Nos. 84 to 99 and others of the paper book, are as under :
(i) In consideration of INOXAP agreeing to acquire Assets and Complete Gax Business from each of the Taneja Group Entities in terms of the said agreements and in further consideration of the sum of Rs. 3,67,00,000 (Rupees Three Crore Sixty Seven Lakhs only) agreed to be paid as compensation for non-compete by INOXAP to the Covenantors in the manner as specified in Schedule 4 hereunder written each of the Covenantors hereby irrecoverably agree and undertake in favour of INOXAP, that from the 1-9-2000, when INOXAP is scheduled to commence its Industrial and Medical gases manufacturing activities in the State of Madhya Pradesh or such other date on which INOXAP commences its Industrial and Medical gas manufacturing activities in the State of Madhya Pradesh and for a period of five years thereafter calculable from the date on which the last if the transferof business and/or asset in terms of the said agreements is completed or in the event of completion not achieved by 31-12-2000 and INOXAP terminating the agreements after giving 90 days notice for a period of five years from the date of such termination of the agreements :
(ii) Each of the Covenantors shall discontinue their respective Industrial and Medical gases manufacturing and selling activities in the State of Madhya Pradesh with effect from 1-9-2000 or such other date on which INOXAP commences its Industrial and Medical gas manufacturing activities in the State of Madhya Pradesh.
(iii) Each of the Covenantors, for a period of five years from the date specified in article 1(1) above, shall not (whether acting alone or with others), in relation to the business of INOXAP be engaged concerned or interested either directly or indirectly and whether on the Covenantor's own behalf or on behalf of any constituent member of the covenantors or on behalf of or in association which others, and in any capacity whatsoever, in carrying on business in competition with the business presently being carried on by INOXAP, other than as the holder of not more than five per cent of the equity shares listed on a public Stock Exchange.
(iv) Either on the Covenantor's own behalf or on behalf of any constituent member of the Covenantors or on behalf of any other person, firm or company, directly or indirectly :
(a) canvass, solicit the custom of or endevour to entice away from INOXAP or from the Taneja Group Entities or any one of them, any person, firm or company which has at any time during the previous 12 months been a customer of INOXAP or of the Taneja Group Entities or any one or more of them.
(b) Employ, or offer employment to, or solicit the resignation of any person who is an employee of INOXAP.
(v) Each of the Covenantors hereby expressly agree and recognize that the restriction contained in this Agreement are reasonable and the obtaining of them by INOXAP to agree to acquire the business from each of the Taneja Group entities as specified in the Agreements.
(vi) Compensation for non-compete (consideration) will become due and payable on :
(a) Transferors obtaining certificate under section 269UC of the Income Tax Act, 1961.
(b) INOXAP commencing its Industrial and Medical gases manufacturing activities in Madhya Pradesh.
(c) Taneja Group and Taneja Group entities discontinuing its industrial and Medical gases manufacturing and selling activities.
(vii) Agreed and declared that all the three conditions listed in 1.3.1 are conditions precedent for the purpose of payment of consideration by INOXAP.
2.4.2 The assessing officer has treated this amount of Rs. 319 lakhs as deemed dividend under section 2(22)(a)/2(24)(iv) in paragraph 4.17 page No. 26 of the assessment order. As per this paragraph this amount was received by the company by way of distribution of the profit/benefit from the company by adopting the device to receive it directly from M/s. Inox Air Products Ltd. In this connection, it would be pertinent to consider the definition given under section 2(22)(a) - Dividend includes - (a) any distribution by a company of accumulated profits, whether capitalised or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets of the Company." It appears that the assessing officer has treated this amount as deemed dividend as per the definition under this section. However, it is relating to a company who distributes accumulated profit or it would be taken as release of all or any part of the asset of the company. In the present case before us the amount has not been received by the assessee from a company in which he was shareholder or director. Rather the amount was directly received from another company, who had purchased the total business of the assessee and the company has given this amount by way of non-compete fees, which is definitely a separate amount and cannot be treated as dividend/deemed dividend. Likewise the income defined under section 2(24)(iv) includes the value of any benefit or perquisite, whether convertible into money or not, obtained from a company either by a director or by a person who has substantial interest in the company, or by relative of the director or such person, and any sum paid by any such company in respect of any obligation which, but for such payment, would have been payable by the director or other person aforesaid. From the above definition it is clear that the payment of non-compete fees will not be covered under section 2(24)(iv) of the Income Tax Act. Admittedly Shri H.L. Taneja, the assessee was neither a shareholder nor a director of the paying company. During the assessment year under consideration, the dividend income was exempted under section 10(33)110(34) of the Income Tax Act. Section 115(0) was introduced w.e.f. from 1-6-1997 by which tax was levied on distribution of profit of domestic companies. According to this section the domestic company is chargeable to tax and the dividends. According to this section the domestic company is chargeable to tax and the dividends received by the shareholders of such a company would be exempt under section 10(33) and 10(34). The tax is payable by the company who declared the dividend, This additional tax is chargeable at the rate of 10 per cent and is to be paid by the domestic company. This clearly shows that the dividend income will be exempt in the hands of the shareholders. The assessing officer was thus not justified in assessing the sum of Rs. 319 lakhs as deemed income. The assessing officer's view that the appellant had no capacity to compete because the entire assets were sold and the manufacturing activities stopped, and hence, the amount received cannot be non-compete fee, is totally misconceived and wrong. The machinery and other assets that were sold were merely tools for running the factory and can easily be acquired. The appellant was the driving force behind these operations. It was for this reason, the non-compete fee was paid to the assessee. It was not given for the assets, plant & machinery etc., and other manufacturing activities, but for the experience, technical competence and in depth knowledge of the business gained during the last 45 years by the appellant to prevent the assessee from starting or giving assistance/ consultancy for similar type of manufacturing business, existing or new. The observation of the assessing officer that the assets were not got valued before sale is irrelevant in the context of deciding the matter regarding the taxability of the sum of Rs. 319 lakhs. The contention of the assessee in this regard remained that no valuation of assets was done before sale either by the seller by the purchaser. A query in this regard was also raised by the assessing officer by issuing summons under section 131 of the Act to Inox Air Products Ltd., who has confirmed the same. About the observation of the assessing officer that some of the undertaking whose names have been included in the Schedule-II, forming part of the non-compete agreement between Taneia and Inox are partnership firm or sole proprietary concerns of Taneia Group or parties to non-compete agreement but have not transferred any of the assets to Inox, the reply of the assessee remained that this comment is based on wrong understanding of the practices relating to arrangements concerning noncompetition. The arrangement agreed upon can certainly envisage that no competition would be resorted to even by the concerns undertakings left with the recipients after sale of some of his units. We find substance in this contention of the assessee. The observations of the assessing officer that the price paid for the goodwill over and above the price recorded in the books of account has also been made without making remarks in the assessment order in regard to the amount shown as income for goodwill by the assessee and accepted as such by the assessing officer.
2.4.3 The reliance by the assessing officer on the decision of Hon'ble Supreme Court of McDowell & Co. Ltd. v. CTO (1985) 154 ITR 148 (SC) that the agreement concerning non compete fee is a colourable device to avoid tax payment it is of a sham nature, is misplaced in absence of specific findings supported by evidence in this regard. Because as per the decision of Hon'ble Supreme Court in the case of Union of India v. Aazadi Bachao Andolan (2003) 263 ITR 706 (SC) it has been made clear that an act which is otherwise valid in law cannot be treated as non est merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to the national interests.
2.4.4 The learned Commissioner of Income Tax (Appeals) while upholding the assessment order has narrated some reasons for the same. These reasons with the comments of the assessee thereto are as under :
(i) No exercise about valuation of assets was undertaken by the buyer. The buyer had agreed to buy cylinders at the rate of Rs. 2,000 per cylinder and also agreed to complete the execution of pending contracts. The bifurcation of mutually negotiated consideration between concerns and members of Taneja Group lacked basis and in any case it was at the instance of members of Taneja Group.
Comments:
The basis of the valuation of the assets has already been given by the appellant and it is purely on the agreed price which has been worked out and considered by the buyer, who are world renowned Multinational Co., looking to the market conditions. The reasons given by the learned Commissioner of Income Tax is based only on presumptions and assumptions.
(ii) The amount had not been paid to concerned companies/units who had earned a goodwill, were running business concern and having liabilities (creditors, bank overdrafts, gratuity, compensation to workers etc.). It was not a sale of business as a going concern. The restrictive covenant not to carry on business for 5 years may be relevant for the concerns whose assets were transferred and payment of goodwill was also made.
Comments:
The Company M/s. Inox Air Products Ltd., have purchased assets of various companies i.e., Building, Plant & Machinery and Cylinders etc. the liabilities relating to all these concerns are of the companies themselves. The details are as under :
1999-00 2000-01 (Rs.) (Rs.) Eastern Air Products (P) Ltd.
5,15,67,598 4,21,44,730 Northern Air Products (P) Ltd.
41,91,358 39,72,389 Dhar Oxygen Company (P) Ltd.
59,48,454 53,64,162 Jabalpur Oxygen Co.
1,20,75,558 1,06,41,161 Central India Gases (P) Ltd.
34,07,840 From the above it is evident that these companies have to clear of all the above liabilities.
Restrictive covenants not relevant for the concerns. As restrictive covenant applies only to persons /directors who are running the concerns or business. The technical expertise in a business concern is the persons/ directors which is the moving force. The land, plant and machinery etc. in a concern are only the tools for running of a business concern. As such no compete was payable to the appellant only and not to the concerns.
(iii) No obligation was impliedly cast upon any member of Taneja Group to pay the said non-compete fee to meet the liabilities of the concerns.
Comments:
The liabilities has to be paid by the concern from the sale proceeds and goodwill receipts. This was the reason that goodwill was substantial and the sale proceeds were more than market value.
(iv) No exercise to work out the net worth of the concerns agreeing to transfer the assets was undertaken.
Comments:
The net worth of all the concerns could be submitted by the appellant but that was never asked for by the assessing officer or Commissioner of Income Tax, as the assets were only sold.
(v) The basis of goodwill/ non-compete fee which together constitutes 69 per cent of the compensation (excluding the consideration for cost of cylinders) of the package deal is absent.
Comments:
The percentage taken out by the learned Commissioner of Income Tax is not proper and is irrelevant.
(vi) The beneficiaries namely the members of Taneja Group by executing separate agreement namely consideration of transfer of assets and payment of non-compete fee did not loose the source of income. They were having other concerns in their control and possession.
Comments:
It is not correct to say that the appellant did not loose sources of income. There was no source of income available in other concerns which were not transferred to the buyers.
During the financial year 2001-02 there was no sales in the company M/s. Bhopal Cryogenic (P) Ltd., M/s. Eastern Electro Chemicals Industries and Eastern Gases hence there was no source of income. Thus this reason taken by the learned Commissioner of Income Tax is based only on presumptions, assumptions and surmises.
(vii) The payment of non-compete fee to the appellant and other members was not for loss of capital asset.
Comments:
The payment of non-compete fees of the appellant and other members was on the basis of restrictive covenant and loss of profit making apparatus. Compensation received for immobilization, sterlisation, destruction or loss, total or partial, of a capital asset would be capital receipt and it is also held that if payment received is towards compensation for extinction of sterilisation partly or fully of a profit earning source (Capital Asset), such receipt will not be in the ordinary course of assessee's business, and it must be construed as a "Capital Receipt".
(viii) There were other competitors in Madhya Pradesh for supply of Industrial gases/Medical gases.
Comments:
The Appellant is not concerned with other competitors in M.P. and the reasons taken by learned Commissioner of Income Tax is irrelevant.
(ix) The age, deteriorating health of the appellant, poor management behind loss making units apparently compelled the appellant and the members to carve out a profit/ commission for themselves by entrusting the assets, cylinders and pending contracts to buyer who in lieu agreed to pay Rs. 5.30 crorcs to the concerns being party to transfer of assets and Rs. 3.67 crores to Taneja Group members in proportion to their request and for the direct gain in the deal. As the buyerwas claiming the payments as revenue expenditure, it mattered little when Taneja Group wanted part of consideration in the disguise of non-compete fee.
Comments:
The above reason is based purely on presumption, assumption, surmises and having no basis. The buyers have agreed to pay Rs. 8.90 crores for assets, cylinders and goodwill and not Rs. 5.30 crores as stated by learned Commissioner of Income Tax. The market value of these assets were only Rs. 4.11 crores and the amount received by these concerns were Rs. 7.87 crores by way of goodwill. The statement of the learned Commissioner of Income Tax about the appellant age and health has no relevance in this matter. It is already now 5 years since the business was sold and even the appellant is fully competent to establish a factory and compete with the buyer. In any case this reason is not relevant. Though the buyer has claimed this amount as revenue expenditure, but it was not allowed.
2.4.5 From the above comments submitted by the assessee on various observations and reasons given by learned Commissioner of Income Tax, it is quite evident that the basis for arriving that 'No compete fees' received by the appellant was revenue nature and was liable to tax as profit or commission receipt is not at all correct and logical. The learned Commissioner of Income Tax has in his Appellate order in Point No. 9.29 on Page 11 has indirectly accepted assessee's arguments that non-compete fees cannot be taxed in view of the Apex Court ruling in the case of Gillanders Arbuthnot & Co. Ltd. v. CIT (1964) 53 ITR 283 (SC), which judgment squarely applies to the appellant.
2.4.6 After having carefully gone through the aforesaid observations of the learned Commissioner of Income Tax (Appeals) and the comments of the assessee thereto, we find substance in the submissions of the assessee. The contentions of the assessee are also supported by the decisions relied by him.
In the case of Best & Co. (P) Ltd. (supra), the Hon'ble Supreme Court has been pleased to hold that the compensation agreed to be paid was not only in lieu of the loss of the agency but also for the respondent accepting a restrictive covenant for a specified period and that the restrictive covenant was an independent obligation which came into operation only when the agency was terminated and that part of the compensation which was attributable to the restrictive covenant was a capital receipt and hence not taxable.
In the case of Kettlewell Bullen & Co. Ltd. (supra), the Hon'ble Supreme Court held that having regard to the vast area of business done by the assessee as an agent, it was held that the acquisition of an agency was in the normal course of business and determination of individual agencies a normal incident not affecting or impairing the trading structure and, therefore the amount received for the cancellation of such agency did not represent price paid for loss of a capital asset. However, if the compensation was for agreeing to refrain from carrying on a competitive business in the commodities in respect of the agency terminated, or for loss of goodwill, such receipt was held to be in the nature of a capital receipt. In the case of Gillanders Arbuthnot & Co. Ltd. (supra), the Hon'ble Supreme Court was pleased to hold that there is no immutable principle that compensation received on cancellation of an agency must always be regarded as capital. if by cancellation of an agency the trading structure of the assessee is impaired, the payment should be treated as a capital receipt. In the case of Saraswathi Publicities (supra), the Hon'ble Madras High Court has held that as the receipt was referable to the restrictive covenant, it was a capital receipt not liable to Income-tax. The S.L.P. preferred against this judgment has been dismissed by the Hon'ble Supreme Court reported in 142 ITR (ST) 6. In the case of Ambadi Enterprises Ltd. (supra), the Hon'ble Madras High Court was pleased to hold that one test for ascertaining as to whether what was received was a capital receipt or a revenue to receipt is to find out whether the assessee had snapped his link with the profit making apparatus, that was transferred. In this case, in pursuance of termination agreement, the source of income is totally severed whereby the profit earning apparatus could never be utilized by the assessee. In the case of G.D. Naidu (supra), the Hon'ble Madras High Court has held that the amount received by assessee and son is not liable to take either as income or capital gains since in this case the assessee and son partners in firms were carrying on bus business, the new partners to cover the firm and payments by firms were made to the assessee and son for not carrying on bus business for five years.
The Hon'ble Madras High Court in the case of P.L. Chemicals Ltd. (supra) held that restriction placed on the assessee not to be its competitor for the next five years, deprived the assessee of its main profit earning apparatus, therefore, the amount realized was clearly capital in nature. In the case of A.S. Wardekar (supra), the Hon'ble Calcutta High Court held that the agreement was a restrictive covenant between the assessee and the UBL (who acquired controlling interest is WIEL). This receipt, thus, was capital in nature and not liable to income tax. Hence, the Commissioner (Appeals) rightly deleted the addition as the amount received was not casual in nature and was received by virtue of restrictive or non-competitive covenant and so the receipt was outside the purview of definition of income. In the case of Saroj Kumar Poddar (supra), the Hon'ble Calcutta High Court has held that the amount under the agreement had been paid to the assessee to restrain the assessee from engaging, whether directly or indirectly in any business which undertook or was engaged in the manufacture or marketing or distribution of razor blades, shaving systems, or shaving preparations. That amount could not be taxed as a revenue receipt.
The Chennai Bench of the Tribunal in the case of R.K. Swamy (supra) has held that clause (va) of section 28 along with proviso and Explanation was introduced only prospectively and not retrospectively. Hence, up to 1-4-2003 the amounts referred to in clause (va) received by any assessee were not taxable under section 28(va). Thus non-compete fee received by him was capital in nature not subject to income tax. Therefore, the amount received by the assessee was the outcome of the non-competition agreement in view of the restrictive covenant put on him for a period of five years and such amount received by the assessee for restrictive covenant was not to be subjected to income-tax.
2.4.7 The Learned Departmental Representative has referred the decisions relied on by the learned Lower authorities. We have gone through these and find that the facts therein are distinguishable from the facts of the present case under consideration, hence these are not helpful to the revenue. In the case of K. Ramasamy v. CIT (2003) 261 ITR 358 (Mad), a firm was constituted by 4 persons these persons promoted a corporate entity. The company leased the hotel business run by the firm. An amount of Rs. 20 lakhs was paid to these persons calling it as compensation for not conducting similar business. The Hon'ble Court held that the persons concerned with the firm and the company are the same. The genuineness of the transaction was not accepted the Hon'ble Court treated the amount paid as revenue receipts. This is not the position in the present case before us. The assessee is in no way connected with the buyer company (as the brothers were) and also because the assessee cannot do gas business in any manner, whatsoever, while the brothers could and were doing there hotel business through their company. In the case of KCP Ltd. v. CIT (2000) 245 ITR 421 (SC), the matter of accrual of income was related to the trading receipts. It was held that a trading receipt when transferred in a separate account will not alter the nature of receipt. The facts in this case are different as in the present case before us the non-compete fee is involved on account of a restrictive covenant in the agreement. In the case of Neroth Oils Co. Ltd. v. CIT (1987) 166 ITR 418 (Ker) the judgment is relating to the assessee transferring the licenses, which he was not entitled to sell the licenses as they were obtained by it for its own manufacturing purposes as an actual user and registered exporter. The sale of licences was, therefore, an illegal transaction. This was an attempt to defeat the law, and no court would countenance it. In the case of CIT v. Smt. Minal Ramesh Chandra (1987) 167 ITR 507 (Guj), it was held that the court is entitled to unravel the device where a device has been adopted to evade tax. The Hon'ble Gujarat High Court have also enunciated the principles laid down by the Hon'ble Supreme Court in the case of McDowell & Co. Ltd. v. CTO (1985) 154 ITR 148. Unless the revenue establishes in specific term that there was colourable devices adopted by the assessee to avoid the payment of due tax, the judgment in the case of McDowell & Co. Ltd. (supra) is not applicable in the present case before us. in the case of Delhi Stock Exchange v. CIT (1961) 41 ITR 495 (SC), the assessee-company had shown the admission fees as capital in its books. It was held that it is not as to how an assessee treats any money but it is the true nature of the receipt which is decisive of its being taxable.
The facts of this case are totally different and are not applicable in the present case.
In the case of S. Raghbir Singh Sandhawalia v. CIT (1958) 34 ITR 719 (Pun), the judgment was related to gift by karta to his wife of family property. Likewise, in the case of Smt. Tarulata Shyam v. CIT (1977) 108 ITR 345 (SC), it was held that once it is shown that the case of assessee comes within the letter of law he must be taxed, however great the hardship may appear to judicial mind to be. This case has different facts from the present case. In the case of Upper India Sugar Exchange Ltd. v. CIT (1969) 72 ITR 331 (All), it was held that the taxability of an amount depends upon the nature and the matter of receipts at the initial stage. In this judgment the amounts initially received by the assessees were its trading liabilities and, therefore, the amount in question is not liable to be assessed as the income of the assessee. This judgment is also not applicable in the present case having different facts. The decision in the case of P.H. Divecha v. CIT (1963) 48 ITR 222 (SC), rather supports the case of assessee. In that case a firm which was conducting business in electrical goods entered into an agreement with a company under which the firm was given exclusive rights to purchase and sell electric lamps manufactured by the company. Upon termination of such agreement, the company paid compensation. The court observed that the agreement secured to the firm an advantage of an enduring nature and was not an ordinary trading agreement and thus the receipt is capital in nature. In the case of CIT v. Kolhia Hiragdgarh Co. Ltd. (1949) 17 ITR 545 (Bom), it was held that in all taxable matter greater emphasis must be given to the business aspects of the transactions rather than to its purely legal and technical aspects. It is also not helpful to the revenue in the present case having different facts. In the case of Delhi Stock Exchange v. CIT (1961) 41 ITR 495 (SC), it was held that how an assessee treats any monies received is not decisive of the matter, what is relevant for taxability is the nature of receipt. It is also not helpful to the revenue in the present case having different facts. The decision in the case of RM.AR.AR.RM.AR. Ramnathan Chettiar v. CIT (1967) 63 ITR 458 (SC) related to the issue of refund of Estate duty, hence not applicable in the present case. In the case of Chunduri Venkata Reddi v. CIT (1959) 35 ITR 87 (AP), it was held that the cost of oil expellers supplied to the assessee was in the nature of compensation for the termination of agency business which he had with the principals and it was, therefore, in the nature of capital in his hands arid was not assessable to income tax.
It is an established position of law that exact nature of a written contract can be ascertained by examining the intention of the parties therein, which can be made possible after going through the wordings of the document only and not by going outside the wordings of the document. The very wordings of the contract between the parties, relevant portion whereof we have already discussed hereinabove, suggest that the main reason for entering into non-compete condition by the other side was that they were interested in the business of various companies and not in the assets, factories so that the assessee is out of the business and will not compete with them in the similar type of business during the next five years. This judgment rather supports the case of the assessee.
2.4.8 The definition of income as amended in section 2(24), clause (va) was inserted in section 28 by which the non-compete amount has been made chargeable to the income tax under the head "Profits and gains of business or profession" and also section 55 was simultaneously amended by adding the words 'or right to carry on any business'. All these amendments undisputedly will take effect from 1-4-2003 that is assessment year 2003-04, whereas in the present case before us the assessment year involved is 2001-02 which is out of the purview of all these amendments.
2.4.9 We thus find that the decisions relied on by the lower authorities do not support the case of the department that the amount in question claimed to have been received by the assessee as no compete fees is revenue in nature. The facts as narrated above and discussed in view of the arguments advanced by the parties as well as the terms of the agreement entered into between the assessee and the other side suggest that the entire purpose behind the payment of amount termed as no compete fees by them was to keep out the assessee from the business in which the assessee equipped with around 45 years of experience and high goodwill had been enjoying monopoly. The amount i.e. no compete fees was paid by the buyer of the unit to secure their monopoly in the business for the period for which the agreement was entered into that the assessee will not do the same business in any manner whatsoever. Thus, it was in the interest of business of the other side to enter into such an agreement with the condition and for the same the amount in question has been paid as no compete fees. Till the amendment in sections 58 and 28 read with section 2 with effect from 1-4-2003 i.e. assessment year 2003-04 this practice of payment of non-compete fees was very much recognized. The assessment year under consideration before us is 2001-02. Hence, during this assessment year this practice of payment of non-compete fees was very much allowed within the then prevailing provisions of law. When the wordings of contract between the parties and the very intention behind the same is apparent, as discussed above, the lower authorities are not justified to go beyond the terms of agreement to treat the amount paid as non-compete fees as revenue in nature. The judgments of the Hon'ble Supreme Court, High Courts and Income Tax Appellate Tribunal, relied on by the learned authorised representative which we have already discussed above, support the case of the assessee that non-compete fees will be treated as capital receipt and will not be liable to income-tax. In a recent judgment in the case of Saroj Kumar Poddar (supra), the Hon'ble Calcutta High Court under similar facts of the case and the issue while referring several decisions of the Hon'ble Supreme Court and of the High Courts, has been pleased to hold that the amount under the agreement had been paid to the assessee to restrain the assessee from engaging whether directly or indirectly in any business which undertook or was engaged in the manufacture or marketing or distribution of razor blades, shaving systems, or shaving preparations, that amount could not be taxed as revenue receipt, especially when no material had been brought on record by the assessing officer to justify that the agreement dated 15-12-1996 was a colourable device. Likewise in the present case, the assessing officer has thoroughly failed to establish that the agreement entered into between the parties relating to payment of non-compete fees was a colourable device. We thus while setting aside the orders of the lower authorities hold that the amount of Rs. 319 lakhs received by way of non-compete fees was not taxable being a receipt of capital nature and direct the assessing officer accordingly. The ground Nos. 1 and 2 are thus allowed in favour of the assessee.
3.1.1 Ground Nos. 3 & 4 - The brief facts are that the assessing officer noticed in the P & L account of the proprietary concern of the assessee that is M/s. Jabalpur Oxygen Co. that the assessee had debited a sum of Rs. 8,94,678 under the head 'Gratuity'. He was of the view that the assessee had sold his entire business to the buyer and so the business was closed and consequently deduction on account of gratuity is inadmissible. The amount of Rs. 8,94,678 was accordingly added to the income of the assessee. The assessing officer also found that gratuity amount of Rs. 1,43,731 was outstanding but not paid till the filing of the return of income. He, therefore, disallowed the same and added to the assessee's income. The learned Commissioner of Income Tax (Appeals) has upheld the assessment order.
3.2.1 In support of the grounds the learned authorised representative submits that it is the statutory liability according to the labour laws and amount has to be paid to the staff members who are working for the assessee for the last so many years. The gratuity amount has actually been paid during the above year and has been calculated on the basis of the rules prescribed under the Payment of Gratuity Act. He refers to the judgment of CIT v. Union Saw Mills (1993) 203 ITR 581 (Ker) in which it has been held that the liability accrued to the assessee and closure of the business simultaneously resulted ere just two events that happened at the same time. That would not make any difference. The assessee was entitled to deduction of the gratuity liability. He submits that there was an agreement between the appellant and its workers on 11-11-2000 at Jabalpur, according to which all workers will retire voluntarily on 15-11-2000 and they will be paid gratuity according to the rules prevalent at this time. If the workers were not paid gratuity according to the labour laws then the assessee would have been in great trouble. The assessee has to maintain proper goodwill and better relationship with the workers who were with the company for the last so many years. It was due to business expediency and expenditure was incurred wholly and exclusively for the business of the assessee. He submits further that statements giving the names of the workers, their designations, date of joining, total service, salary and the amount of gratuity paid to them were available with the assessee. The payments were made to all the workers by cheques only. He submits that the decisions in the cases of P.N. Ganeshan (P) Ltd. v. CIT (1990) 52 Taxman 461 (Mad) and CIT v. Central Art Press (1990) 53 Taxman 157 (Mad) relied on by the lower authorities are not applicable in the present case having different facts. In those cases the company was wound up voluntarily and in lieu of the said decision, the assessee-company decided to retrench its employees and pay them compensation the company was not allowed a deduction as the business was closed. Similarly the amount of gratuity was not allowable as deduction due to the closure of the business. There was no agreement between the management and the workers. The business were closed due to financial problem as well as labour problem. However in the present case of the assessee the facts were altogether different. The assessee had transferred the assets of the business to another company and got the sale price of the building, machinery and the cylinders etc. as well as amount of goodwill.
3.2.2 The learned authorised representative has also tried to distinguish the decisions relied on by the learned Commissioner of Income Tax (Appeals). He submits that in the case of Ghasi Ram Padhi & Co. v. CIT (1991) 192 ITR 334 (Ori), the payment of gratuity and compensation to the workers was not an allowable deduction. However, the Hon'ble High Court has decided that if the Tribunal came to the conclusion that the business had not been closed down, the payment made on account of compensation and gratuity would be deductible provided the payment had been made for purposes of business expediency. In the case of assessee, the assessee has transferred the assets of the business to another company and got the sale price of building, machinery and cylinders etc. as well as the amount of goodwill. In the case of assessee the payment were made by the Appellant for purposes of business expediency. In the cases of Crompton Engg. Co. Ltd. v. CIT (1992) 193 ITR 483 (Mad) and CIT v. Gaekwar Mills Ltd. (1993) 202 ITR 272 (Guj) the judgments are relating to provisions of section 40A(7) of the Act are applicable whereas in the case of present assessee the gratuity payment was made during the assessment year and hence there was no question of approved gratuity fund.
3.3.1 The learned Departmental Representative on the other hand justifies the orders of the lower authorities and places reliance on the decisions followed by them.
3.4.1 We have considered the arguments advanced by the parties and have gone through the orders of the lower authorities as well as the judgments relied by them. It appears from the records that the payment of gratuity amount were made on the following dates :
16-12-2000 6,75,023 31-3-2001 25,390 29-9-2001 32,232 26-10-2001 18,032 Total 7,50,947 The facts of the case of the assessee are thus different from those relied on by lower authorities, since in the present case, the aforesaid gratuity amount was paid during the above year and has been calculated on the basis of the rules prescribed under the Payment of the Gratuity Act. In the present case no provision for gratuity was made hence, also the judgments relied on by the lower authorities are not applicable. In the case of Union Saw Mills (supra) relied on by learned authorised representative, it has been held that the liability accrued to the assessee and closure of the business simultaneously resulted are just two events that happened at the same time. That would not make any difference and the assessee was entitled to the deduction of the gratuity liability. In the present case admittedly there was agreement between the assessee and its workers dated 11-11-2000 according to which workers were to retire voluntarily on 15-11-2000 and they will be paid gratuity according to the rules prevalent at that time. The decision of Hon'ble Kerala High Court in the aforecited case of Union Saw Mills (supra) squarely covers the present case of the assessee. It is not out of place to mention here that the prohibition under section 40A(7) is on the deduction of any provision made for payment in future to an employee of gratuity on his retirement or termination of service unless it satisfies the requirements of section 40A(7)(b). It does not deal with any actual payment of gratuity amount during the accounting year itself. Actual payment of gratuity on the retirement of an employee during the relevant previous year does not fall under section 40A(7)(a) because it is a payment which is actually made and is not a provision for payment for a later date. In this regard we find support from the decision of Hon'ble Bombay High Court in the case of CIT v. Colgate Palmolive (I) (P) Ltd. (1994) 210 ITR 770, 774 (Bom). The only condition or precaution in such situation to be taken as per Explanation to section 40A(7)(b) is that where any provision made by the assessee for the payment of gratuity to his employees on their retirement or termination of their employment for any reason has been allowed as a deduction in computing the income of the assessee for any assessment year, any sum paid out of such provision by way of contribution towards an approved gratuity fund or by way of gratuity to any employee shall not be allowed as a deduction in computing the income of the assessee of the previous year in which the sum is so paid. We thus while setting aside the orders of the lower authorities direct the assessing officer to verify the claim of the assessee as per Explanation to section 40A(7)(b) and allow the claimed deduction on those payments of gratuity which have been made during the accounting year relevant to the assessment year under consideration. The ground Nos. 3 and 4 are thus, partly allowed,
4.1.1 Ground No. 5The claim of deduction of Rs. 16,29,343 towards payment of compensation to the workers against their retirement from the job has been denied by the lower authorities on the basis that the concern was closed after selling the entire business to the buyer.
4.2.1 In support of this ground, the learned authorised representative submits that it was agreed upon that all the workers opting for voluntary retirement will be paid compensation of 40 days for each completed year of service as on 15-11-2000. It was also agreed that all the workers who have signed this agreement will be covered by the scheme provided they opted for voluntary retirement in writing. The officers and senior staff of the company were not covered by this scheme. If the workers were not paid compensation according to the labour laws, then the assessee would have been in great trouble. He has to maintain proper goodwill and better relationship with the workers who were with the company for the last so many years. This step was taken and they were paid gratuity as well as amount of compensation as per rules. It was due to the business expediency and the expenditure was incurred wholly and exclusively for the business. The learned authorised representative refers copy of the agreement placed in the paper book filed by the assessee. He also refers vouchers giving the receipts from the workers as well as the letter received from them for voluntary retirement. He points out that the assessee had also made available the statements giving the names of the workers, his designation, date of joining, total service, salary, and the amount of compensation paid to them. The payment was made to all the workers by cheques only. The learned authorised representative submits further that the judgments relied on by the lower authorities are not applicable in the case of the assessee because in those judgments the company was wound up voluntarily and hence, the compensation was not allowed as a deduction. Similarly in those cases there was no agreement between the management and the workers and besides therein the business was closed due to financial problem as well as labour problem. The same is not the position in the case of the assessee because the assessee had transferred the assets of the business to another business and got the sale price of building and machinery as well as the amount of goodwill. The learned authorised representative submits that in the cases of P.N. Ganesan (P) Ltd. (supra) and Art Press (supra) relied on by the assessing officer, the company was wound up voluntarily and in view of the decision of winding up, the assessee-company decided to retrench its employees and pay them compensation, whereas in the case of Ghasi Ram Padhi & Co. v. CIT (1991) 192 ITR 334 (Ori), it was held that if the Tribunal came to the conclusion that the business had not been closed down, the payment made on account of compensation and gratuity would be deductible provided the payment had been made for the purposes of business expediency. Likewise, in the case of M. Seshadri Iyengar & Sons v. CIT (1985) 152 ITR 734 (Mad), it was held on the basis of debit entries in profit and loss account in respect of retrenchment compensation and other documents that the amount was not actually paid. In the case of T. Satyanarayana Murty v. ITO (1986) 16 ITD 420 (Hyd) the payment of retrenchment compensation was made after the closure of the business. These judgments relied on by the lower authorities having distinguishable facts are not applicable to the present case as there was closure of business nor the company was wound up due to some problem. The learned authorised representative refers the decision in the case of Ambala Cantt. Electric Supply Corpn. Ltd. v. CIT (1982) 133 ITR 343 (P&H) which supports the case of assessee, as in the present case as well the retrenchment compensation on transfer of the undertaking was there during the continuance of business but before actual transfer.
4.2.2 The learned Departmental Representative, on the other hand, justifies the orders of the lower authorities and places reliance on the judgments relied on by them.
4.3.1 The orders of the lower authorities and the material available on record have been perused in view of the aforesaid arguments advanced by the parties and the judgment cited by them have been gone through. We find substance in the submissions of the learned authorised representative that the facts of the present case are distinguishable from those of the cases relied on by the lower authorities. Admittedly, the retrenchment of workers for which compensation claimed to have been paid in the present case was not due to closure of the business or due to some external problem but under a scheme option was sought for from the workers who were willing to discontinue their services with new management. It is not a case of retrenchment simplicitor that a workman who had rendered continuous services for a prescribed minimum period should not be retrenched at the sweet will of the employer without letting him have compensation therefor, nor is it a part of an arrangement for the purchase of shares by a certain person who wants to get rid of the agreement of services with employees. Had it been so, the assessee would certainly have not entitled to the claim of deduction on the payment of compensation. Here in the present case, though the transfer of ownership was there, but the very business was still continuing and an option was given to those employees under a scheme and as an inducement to resign who did not want to continue with new management. Whatever payment by way of compensation has been made, it has been admittedly made in the terms of the agreement between the assessee and those employees interested in resignation in lieu of compensation. There may be several reasons behind the scheme. May be the new management/ employer did not want to bear the liability of those employees who did not with to work with the new management. May be that the new employer wished to continue with only those employees who were willing to work with them so as to accelerate their promotion only with a view to promote the business smoothly. In the case of CIT v. J.C. Budharaj & Co. (1993) 204 ITR 656 (Ori) retrenchment compensation was held allowable as a deduction where the finding was that the business as a whole continued. Likewise, in the case of CIT v. Turner Morrison & Co. (P) Ltd. (1968) 68 ITR 147 (Cal), payment of compensation to Directors for premature termination of the contract with a view to reduce administration costs and also to accelerate the promotion of the junior employees, was held to be an allowable expenditure. On the other hand, in the case of Travancore Tea Estates Co. Ltd. v. CIT (1985) 154 ITR 745 (Ker) compensation paid to former Directors who have already resigned voluntarily, held not allowable because the payment was neither in terms of contract nor under the compulsion of statute nor as an inducement to resign. We thus are of the view that the assessee is entitled for the deduction claimed on compensation paid to the workers under a scheme. In the case of Ambala Cant Electric Supply Corpn. Ltd. (supra) the retrenchment compensation paid by the assessee-company under section 25FF of the Industrial Disputes Act, 1947 as transfer of its undertaking to the State Electricity Board during the continuance of business but before actual transfer, held allowable business expenditure under section 37 of the Income Tax Act. The S.L.P. filed against this judgment has been disallowed by the Hon'ble Supreme Court, reported in 149 ITR 92 (ST). We thus while setting aside the order of the lower authorities in this regard direct the assessing officer to allow the claimed deduction on account of compensation paid to the workers during the year relevant for the assessment year under consideration. The ground No. 5 is thus allowed in favour of the assessee.
5.1.1 Ground No. 6-The assessee has questioned the levy of interest under sections 234B and 234C of the Act made and confirmed by the lower authorities. In view of the aforesaid findings, the present ground being consequential in nature does not need separate adjudication.
6. In the result, the appeal is partly allowed.