Appeal Details
Counselvise Citation
[2015] 123 COUNSELVISE.COM (IT) 1208 (ITAT-DELHI)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
5 year(s) 10 month(s) 19 day(s)
Appellant
Respondent
Appeal Type
Cross Objection
Pronouncement Date
03-08-2015
Appeal Filed By
Assessee
Order Result
Partly Allowed
Bench Allotted
E
Next Hearing Date
18-02-2015
Assessment Year
2004-2005
Appeal Filed On
14-09-2009
Judgement Text
THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH E , NEW DELHI BEFORE SH. N. K. SAINI, AM AND SH. I. C. SUDHIR , JM ITA NO. 3388/DEL/2009 : ASSTT. YEAR : 2004 - 05 ITA NO. 340 8/ DEL/2009 : ASSTT. YEAR : 2005 - 06 ITA NO. 3841 / DEL/20 09 : ASSTT. YEAR : 2006 - 07 ITA NO. 756 /DEL/2009 : ASSTT. YEAR : 2007 - 08 ITA NO. 2331 / DEL/2011 : ASSTT. YEAR : 2008 - 09 ITA NO. 5801 / DEL/2012 : ASSTT. YEAR : 2009 - 10 DCIT, CIRCLE 13(1), NEW DELHI VS M/S NITREX CHEMICALS INDIA LTD., D - 43, SOURTH EXTENS ION PART - II, NEW DELHI (APPELLANT) (RESPONDENT) CO NO. 314 /DEL/2009 : ASSTT. YEAR : 2004 - 05 CO NO. 322 / DEL/2009 : ASSTT. YEAR : 2005 - 06 CO NO. 367/DEL/2009 : ASSTT. YEAR : 2006 - 07 M/S NITREX CHEMICALS INDIA LTD., D - 43, SOURTH EXTENSION PART - II, NEW DELHI VS DCIT, CIRCLE 13(1), NEW DELHI (APPELLANT) (RESPONDENT) PAN NO. AAACF7820L ASSESSEE BY : SH. VED JAIN , CA , MS. RANO JAIN & V. M CHORASIYA, ADVS. REVENUE BY : SH . P. DAM KANUNJNA , SR. DR DATE OF HEARING : 0 5 . 05 .2015 DATE O F PRONOU NCEMENT : 03 .08 .2015 ORDER PER N.K . SAINI , A.M. THE APPEALS BY THE DEPARTMENT AND CROSS OBJECTIONS BY THE ASSESSEE FOR THE ASSESSMENT YEARS 2004 - 05, 2005 - 06 & 2006 - 07 ARE ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 2 DIRECTED AGAINST THE ORDERS DATED 04.05.2009, 22.05.2009 & 29.06.2009 RESPECTIVELY OF THE LD. CIT(A) - XVI, NEW DELHI AND THE APPEALS BY THE DEPARTMENT FOR THE ASSESSMENT YEARS 2007 - 08, 2008 - 09 & 2009 - 10 ARE DIRECTED AGAINST THE ORDERS DATED 25.10.2010, 25.01.2011 & 24.08.2012 RESPECTIVELY PASSED BY THE LD. CIT(A) - XVI, NEW DELHI. 2. SINCE THE ISSUES INVOLVED ARE COMMON AND THE APPEALS OF THE DEPARTMENT ALONGWITH CROSS OBJECTIONS OF THE ASSESSEE WERE HEARD TOGETHER, SO THESE ARE BEING DISPOSED OFF BY THIS CONSOLIDATE D ORDER FOR THE SAKE OF CONVENIENCE AND BREVITY. 3. FIR ST WE WILL DEAL WITH THE APPEAL OF THE DEPARTMENT AND CROSS OBJECTIONS OF THE ASSESSEE FOR THE ASSESSMENT YEAR 2004 - 05. IN ITA NO.3388/DEL/2009, FOLLOWING GROUNDS HAVE BEEN RAISED BY THE DEPARTMENT: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AS WELL AS IN LAW, THE LD. CIT(A) ERRED IN DELETING THE ADDITION OF RS. 6,80,00,000/ - BEING NON - COMPETE FEE PAID BY ASSESSEE HOLDING IT TO BE REVENUE EXPENDITURE AS AGAINST CAPITAL TREATED BY THE AO. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AS WELL AS IN LAW, THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS. 41,62,213/ - BEING EXPENSES INCURRED IN CONNECTION WITH PURCHASE/ACQUISITION OF BUSINESS/ASSETS AND VALUATION ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 3 THEREOF HOLDING IT TO BE OF REVENUE NATURE AS AGAINST CAPITAL TREATED BY THE AO. 3. THE APPELLANT CARVES TO BE ALLOWED TO ADD ANY FRESH GROUNDS OF APPEAL AND/OR DELETE OR AMEND ANY OF THE GROUNDS OF APPEAL. 4. IN THE CROSS OBJECTION NO. 314/DEL/2009, THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS: 1. THAT THE ISSUE DECIDED BY THE LD. CIT(A) IS AS PER LAW AND THEREFORE APPEAL OF THE DEPARTMENT IS NOT MAINTAINABLE AND SHOULD BE DISMISSED. 2. THAT THE NON - COMPETE FEES IS TO BE ALLOWED AS DEFERRED REVENUE EXPENDITURE OVER A PERIOD OF THE NON - COMPETE TERM. 3. THAT IF NON - COMPETE IS HELD AS CAPITAL EXPENDITURE, THEN THE LEARNED AO BE DIRECTED TO ALLOW APPLICABLE DEPRECIATION THEREON. 4. THAT IF REVENUE EXPENDITURE IS HELD AS CAPITAL EXPENDITURE, THEN THE LEARNED AO BE DIRECTED TO A LLOW APPLICABLE DEPRECIATION THEREON. 5. YOUR APPELLANT CRAVES A LEAVE TO ADD, ALTER OR AMEND ANY GROUNDS AT THE TIME OF HEARING. 5. THE ASSESSEE ALSO RAISED THE ADDITIONAL GROUNDS BY STATING AS UNDER: ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 4 1. THE APPELLANT HAS FILED CROSS OBJECTION IN THE APPEAL FILED BY THE ACIT, CIRCLE 13(1), NEW DELHI IN ITA NO. 3388/DEL/2009 FOR THE ASSESSMENT YEAR 2004 - 05. 2. IN THE SAID CROSS OBJECTION THE ASSESSEE HAS TAKEN THREE GROUNDS OF CROSS OBJECTION AND HAS CHALLENGED THE ADDITION MADE BY AO WITH REGARD TO N ON - COMPETE FEE. 3(I) POSTING FILING OF THE CROSS OBJECTIONS THE HON BLE SUPREME COURT HAS DELIVERED A JUDGMENT IN THE CASE OF CIT, KOLKATA VS SMIF SECURITIES LTD. IN SLP(CIVIL) NO. 35600 OF 2009 WHEREBY IT HAS BEEN HELD THAT THE GOODWILL IS A DEPRECIABLE ASSET, AND, THEREFORE THE ASSESSEE IS ENTITLED TO CLAIM DEPRECIATION ON GOODWILL UNDER SECTION 32 OF THE INCOME TAX ACT, 1961. (II) THAT THE ABOVE JUDGMENT OF THE APEX COURT WILL BE SQUARELY APPLICABLE TO THE CASE OF THE ASSESSEE. 4. ACCORDINGLY THE ASSE SSEE WANTS TO RAISE THE FOLLOWING ADDITIONAL GROUND OF CROSS OBJECTION BEFORE YOU HONOUR: ADDITIONAL GROUNDS OF CROSS OBJECTIONS 4. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE AO HAS ERRED BOTH ON FACTS AND IN LAW IN NOT ALLOWING DEPRECIATION ON THE GOODWILL. ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 5 5. THAT THE ABOVE ISSUE IS PURELY QUESTION OF LAW AND ALL FACTS ARE ON RECORD AND NO NEW FACTS ARE TO BE BROUGHT ON RECORD. 6. THAT THIS GROUND GOES TO THE ROOT OF THE ORDER AND IS CRUCIAL FOR DETERMINING THE LIABILITY OF THE APPELLANT. PRAYE R IT IS THEREFORE PRAYED THAT THE ABOVE GROUND OF CROSS OBJECTION MAY BE ADMITTED FOR ADJUDICATION. FOR THIS ACT OF KINDNESS THE APPELLANT SHALL EVER BE GRATEFUL. FOR NITREX CHEMICALS INDIA LTD. SD/ - MANAGING DIRECTOR 6. DURING THE COURSE OF HEARING THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ADDITIONAL GROUND GOES TO ROOT OF THE MATTER AND ALL THE FACTS ARE ALREADY AVAILABLE ON THE RECORD. IT WAS STATED THAT THE DEPRECIATION TO BE ALLOWED ON GOODWILL IS A PURE QUESTION OF LAW, T HEREFORE, THE ADD ITIONAL GROUND MAY BE ADMITTED. THE RELIANCE WAS PLACED ON THE JUDGMENT OF THE HON BLE SUPREME COURT IN THE CASE OF NATIONAL THERMAL POWER COMPANY LTD. VS CIT REPORTED AT 229 ITR 383. 7. IN HIS RIVAL SUBMISSIONS THE LD. DR OPPOSED THE ADMISSION OF THE ADD ITIONAL GROUND AND SUBMITTED THAT THE ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 6 ASSESSEE NEITHER RAISED THIS ISSUE BEFORE THE AO NOR BEFORE THE LD. CIT(A), THEREFORE, IT SHOULD NOT BE ADMITTED. 8. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND CAREFULLY GONE THROUGH THE MATERIAL AVAIL ABLE ON THE RECORD. IN THE PRESENT CASE, IT IS AN ADMITTED FACT THAT THE ASSESSEE RAISED THE ADDITIONAL GROUND RELATING TO DEPRECIATION ON GOODWILL AFTER THE JUDGMENT OF THE HON BLE SUPREME COURT IN THE CASE OF CIT, KOLKATA VS SMIF SECURITIES LTD. IN SLP(C IVIL) NO. 35600 OF 2009 AND ALL THE FACTS ARE ALREADY AVAILABLE ON RECORD AND THIS GROUND GOES TO THE ROOT OF THE MATTER. THEREFORE, ADDITIONAL GROUND RAISED BY THE ASSESSEE IS ADMITTED. 9 . THE FIRST ISSUE OF THE DEPARTMENTAL APPEAL AND THE ONLY ISSUE AGI TATED BY THE ASSESSEE IN ITS CROSS OBJECTION RELATES TO NON - COMPETE FEE AMOUNTING TO RS. 6.80 CRORES WHICH WAS DIRECTED BY THE LD. CIT(A) TO BE TREATED AS REVENUE EXPENDITURE AS AGAINST THE CAPITAL EXPENDITURE TREATED BY THE AO. 10 . FACTS OF THE CASE IN B RIEF ARE THAT THE ASSESSEE FILED ITS RETURN OF INCOME ON 30.10.2004, DECLARING A LOSS OF RS. 15,17,73,780/ - WHICH WAS PROCESSED U/S 143(1) OF THE ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 7 INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT) ON 29.03.2005. LATER ON, THE CASE WAS SELECTED FOR S CRUTINY. THIS WA S THE FIRST YEAR DURING WHICH THE ASSESSEE COMPANY STARTED ITS BUSINESS AND PURCHASED ONE DIVISION OF NITRO CELLULOSE & C HEMICAL S T RADING (NCT) BUSINESS FROM ICI INDIA LTD. ON SLUM P SALES BASIS AND INCURRED FOLLOWING EXPENDITURE IN CONNECTIO N WITH THE ACQUIRING OF ASSETS: A) PAYMENT MADE FOR LEGAL ADVICE TAKEN FROM WADIA GHANDY & CO. IN CONNECTION WITH PURCHASE OF NCT BUSINESS RS. 16,01,585 B) PAYMENT MADE TO MOTT MACDONALD FOR VALUATION OF FIXED ASSETS RS. 1,62,000 C) PAYMENT MADE TO KPM G INDIA PVT. LTD. FOR PROFESSIONAL ADVICE TAKEN FOR THE PURCHASE OF DIVISION RS. 5,66,810 D) DUA ASSOCIATES - PROFESSIONAL SERVICES IN RELATION WITH THE DOCUMENTATION ETC. RS. 11,79,818 E) BHARAT S. RAWAT & CO. PAYMENT FOR ADVISORY SERVICES RS. 6,52,000 RS. 41,62,213 11 . THE AO DURING THE COURSE OF ASSESSMENT PROCEEDINGS NOTED THAT IN THE NO T E S FORMING PART OF COMPUTATION OF INCOME, THE ASSESSEE COMPANY HAD MENTIONED THAT A SUM OF RS. 6.80 CRORES WAS PAID TO ICI INDIA LTD. AS A CONSIDERATION FOR N OT TO COMPETE WITH THE COMPANY FOR THREE YEARS IN THE NITRO CELLULOSE & CHEMICALS TRADING BUSINESS WHICH WAS TRANSFERRED TO THE ASSESSEE COMPANY BY WAY OF SLUM P SALES, T HE ASSESSEE TREATED THOSE EXPENDITURE AS REVENUE IN NATURE. ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 8 THE AO OBSERVED THAT M/S NI TRATES MAURITIUS LTD. ENTERED INTO BUSINESS TRANSFER AGREEMENT (BTA) FOR PURCHASE OF NCT BUSINESS WITH ICI LTD. ON 30.12.2003, THE BUSINESS ACQUISITION WAS COMPLETED ON 16.03.2004 AND THE COMPANY M/S NITRATES MAURITIUS LTD. AS PER THE BUSINESS TRAN SFER AGR EEMENT DATED 30.12.2003 AND THE ICI INDIA LTD. TRANSFERRED THE BUSINESS OF NC (NITRO CELLULOSE) AS A WHOLE AND AS A GOING CONCERN BY WAY OF SLUMP SALE. THE AO FURTHER OBSERVED THAT THE SAID TRANSFER OF THE BUSINESS WAS ON THE BASIS OF FOLLOWING TERMS AND C ONDITIONS: 1. ICI INDIA WOULD RECEIVE A COMPOSITE SLUMP PRICE OF RS. 75 CRORE SUBJECT TO ADJUSTMENT FOR NET LIQUID ASSETS. AT THE TIME OF AGREEMENT NET LIQUID ASSETS WERE ESTIMATED AT RS. 9,02,53,634/ - . LATER NET LIQUID ASSETS WERE FINALLY REWORKED OUT TOTALING RS. 11.88.29.338/ - AND THEREFORE FINAL CONSIDERATION OF THE SLUMP SALE INCREASED FROM RS. 75 CRORE TO RS. 77.85 CRORE. 2. THE SALE CONSIDERATION WAS BASED ON THE VALUATION OF BUSINESS AS A WHOLE AND PAYMENT OF RS. 62,25,00,000/ - WAS MADE TO ICI L TD. AT COMPLETION DATE AND BALANCE AMOUNT WERE TO BE PAID IN THREE EQUAL INSTALLMENTS WITHIN SEVEN DAYS FROM THE FIRST, SECOND AND THIRD ANNIVERSARY OF COMPLETION DATE. 3. THE NC BUSINESS AND THE TRADING BUSINESS WAS COMPRISED OF FOLLOWING ITEMS AS PER AG REEMENT: - ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 9 I) THE ASSETS. II) THE LIABILITIES III) THE TRANSFERABLE MARKETING INFRASTRUCTURE INCLUDING DISTRIBUTION NETWORK. IV) THE INTELLECTUAL PROPERTY RIGHTS INCLUDING THE TECHNOLOGY AND THE KNOW - HOW. V) THE CONTRACTS. VI) THE EMPLOYEES AND VII) THE REC ORDS. THE ASSETS WERE DEFINED AS: OWNERSHIP, FREEHOLD, LEASEHOLD, USER AND/OR OTHER RIGHTS IN THE PROPERTY AND ASSETS WHETHER TANGIBLE OR INTANGIBLE, OWNED, HELD AND/OR CURRENTLY AND/OR IMMEDIATELY PRIOR TO SIGNING DATE AND/OR COMPLETION DATE (AS THE CA SE MAY BE) USED BY ICI INDIA RELATING EXCLUSIVELY TO THE BUSINESS AND SHALL INCLUDE WITHOUT OTHER TERMS LIKE NET LIQUID ASSETS, PRODUCTS, PERMITS, RECORDS, STOCKS, TECHNOLOGY ETC. WERE ALSO DEFINED IN THE DEAL. 4. CONDITIONS PRECEDENT TO THE COMPLETION DAT E, MUTUAL COVENANTS AND WARRANTIES/INDEMNITY WERE PART OF THE AGREEMENT VIDE CLAUSES 4 TO 11 OF THE DATE VIDE CLAUSE 12 OF THE BCT. 5. SEVERAL MUTUAL PRE/AT/POST COMPLETION OBLIGATIONS WERE ALSO MENTIONED IN THE DATE VIDE CLAUSE 12 OF THE BCT. 6. VIDE CL AUSE 13 AND 14 OBLIGATIONS REGARDING CONFIDENTIALITY AND NON COMPETIT I ON WERE ALSO MENTIONED. AS PER THIS ICI INDIA INCLUDING ITS AFFILIATE FOR A PERIOD OF FIV E YEARS AFTER THE ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 10 COMPLETION DATE SHALL NOT USE OR DISCLOSE FOR ANY PERSON A N Y INFORMATION RELATI NG TO THE BUSINESS. IT WAS FURTHER UNDERTAKEN THAT FOR A PERIOD OF THREE YEARS AFTER THE COMPLETION DATE ICI INDIA SHALL NOT DIRECTLY OR INDIRECTLY CARRY ON OR BE ENGAGED IN ANY BUSINESS COMPETING WITH THIS BUSINESS. 7. CONSIDERATION WAS NOT FOR DIFFEREN T TANGIBLE ASSETS, INTANGIBLE ASSETS ETC. THE TRANSFER OF BUSINESS WAS ON SLUMP SALE BASIS HENCE, NOWHERE IN THE AGREEMENT SEPARATE CONSIDERATION WAS MENTIONED. 8. THIS WAS A COMPOSITE AGREEMENT TO TRANSFER BUSINESS AS A WHOLE ONGOING CONCERN BASIS ALONG WITH VARIOUS MUTUALLY AGREED CONDITIONS/OBLIGATIONS PRECEDENT TO AN D SUBSEQUENT TO THE TRANSFER. THESE CONDITIONS INCLUDED THOSE OF WARRANTY, KNOW - HOW, AND CONFIDENTIALITY AND NOT TO COMPETE IN THE SAME BUSINESS ETC. NO SEPARATE AGREEMENT AND CONSIDERATION WAS FIXED FOR THE CONDITION OF NON COMPETITION BY THE ICI LTD. WITH THE ASSESSEE COMPANY. 12 . THE AO POINTED OUT THAT THE ASSESSEE FOR THE PURPOSE OF CLAIMING DEPRECIATION HAD TAKEN THE VALUATION OF TANGIBLE AND INTANGIBLE ASSETS AS UNDER: PLANT AND MA CHINERY RS. 28,32,84,910/ - FURNITURE AND FIXTURE RS. 20,96,800/ - ROLLING STOCK RS . 6,17,600/ - RS. 28,59,99,310/ - ============ ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 11 FACTORY LAND RS. 1,53,46,000/ - BUILDING RS . 7,22,52,000/ - RS. 8,75,98,000/ - ============ TOTAL VALUE OF FIXED ASSETS: RS. 37,35,97,310/ - TRADING ASSETS RS. 6,30,062/ - TOTAL VALUE OF FIXED ASSETS: RS. 37,42,27,372/ - VALUE OF INTANGIBLES: RS. 25,20,00,000 / - (EXCLUDING GOODWILL) VALUE OF GOODWILL (RESIDUAL) RS. 3,35,18,994/ - WORK ING CAPITAL RS. 11,88,29,338/ - (NET LIQUID ASSETS) -------------------- TOTAL CONSIDERATION RS. 77,8 5,75,704 / - = === ========= 13 . THE AO FURTHER OBSERVED THAT THE VALUE OF INTANGIBLE S IS DIVIDED BY THE ASSESSEE INTO THREE PART S AND FURTHER ESTIMATE S WERE MADE AS UNDER: VALUE OF TECHNICAL KNOW - HOW RS. 18,40,00,000/ - VALUE OF NON COMPETE RS. 6,80,00,000/ - VALUE OF GOODWILL (RESIDUAL) RS. 3,50,00,000/ - TOTAL INTANGIBLES RS. 28,60,00,000/ - ============ 14 . T HE AO POINTED OUT THAT THE VALUATION OF ONLY FIXED ASSETS, WORKING CAPITAL WAS BASED ON TANGIBLE ASSETS AND SINCE NO CONSIDERATION WAS SEPARATEL Y FIXED FOR INTANGIBLE ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 12 ASSETS, T HE ASSESSEE COMPANY ON ITS OWN TRIED TO ASSIGN THE SEPARATE VALUE FOR INTANGIBLE S. THE AO ALSO POINTED OUT THAT FROM THE COPY OF VALUATION REPORT IN RESPECT OF KNOW - HOW FOLLOWING ASSUMPTIONS WERE NOTED: A. INITIAL ROYALTY PAYMENT WAS ASSUMED AT $1 MILLION B. ROYALTY RATES ARE ASSUMED AS 5% OF SALES FOR DOMESTIC BUSINESS AND 7% OF S ALES FOR EXPORT BUSINESS. C. TAX RATE OF 20% IS ASSUMED ON ROYALTY PAYMENT. D. THEREAFTER, DISCOUNT PERIOD OF 5 YEARS AND DISCOUNT FACTOR OF 13.95% WAS ALSO ASSUMED TO ARRIVE AT THE VALUE OF TECHNICAL KNOW - HOW OF THE BUSINESS WHICH WAS SELF GENERATED IN THIS CASE. 15 . THE AO WAS OF THE VIEW THAT VALUATION OF NON - COMPETE INTANGIBLE WAS BASED ON HYPOTHE TICAL SITUATIONS THAT IF ICI LT D . WOULD CAPTURE A PART OF THE SHARE IN THE MARKET WHAT WOULD BE THE FALL IN THE TOTAL VALUE OF THE BUSINESS AND FINALLY EVE N VALUER COULD NOT WORKED OUT THE GOODWILL OF BUSINESS HENCE, RESIDUAL FIGURE WAS ADOPTED AS THE GOODWILL OF THE BUSINESS. THE AO OBSERVED THAT IN THE BOOKS OF ACCOUNTS, THE ASSESSEE TREATED ENTIRE PAYMENT RELATED TO THE TRANSFER BUSINESS AS CAPITAL EXPEND ITURE AND ALL THE ASSETS ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 13 WERE MADE PART OF THE BLOCK OF ASSETS FOR THE PURPOSE OF BOOKS AND DEPRECIATION WAS CLAIMED ON THE ASSETS ACQUIRED AS PART OF BUSINESS TRANSFER , BUT IN THE STATEMENT OF TOTAL INCOME PREPARED FOR THE PURPOSE OF INCOME TAX, OUT OF TO TAL COMPOSITE CONSIDERATION FOR ACQUIRING THE BUSINESS , RS. 6.80 CRORES WAS CLAIMED AS REVENUE EXPENDITURE AND BALANCE AMOUNT CONTINUED AS CAPITAL EXPENDITURE. THE AO ASKED THE ASSESSEE TO SHOW CAUSE AS TO WHY THE PAYMENT OF RS. 6.80 CRORES CLAIMED AS NON - COMPETE CONSIDERATION AFTER UNILATERALLY ASSIGNING VALUE TO ONE OF THE SEVERAL OBLIGATIONS OF BTA OUT OF SLUMP SALE CONSIDERATION , BE NOT TREATED AS CAPITAL EXPENDITURE INCURRED FOR ACQUISITION OF BUSINESS. 16. THE ASSESSEE SUBMITTED THAT THE EXPENDITURE INCURRED FOR NON - COMPETE WAS OUT OF BUSINESS EXPEDIENCY, TO AUGMENT THE PRODUCTIVITY OF THE PROFIT MAKING STRUCTURE, TO EFFICIENT CONDUCT OF BUSINESS AND THERE WAS NEXUS WITH THE BUSINESS. THE RELIANCE WAS PLACED ON THE FOLLOWING CASE LAWS: CIT VS G.D. N AIDU & OTHERS 165 ITR 63 (MAD.) CIT VS MOTOR INDUSTRIES CO. LTD. 223 ITR 112 (KER.) CIT VS BAWRI SHANKARA STEAM FERRY CO. 87 ITR 650 (AP) ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 14 CIT VS LAHOTY BROS. 19 CTR 425 (CAL.) CIT VS M/S PIGEOT CHAPMAN & CO. 17 ITR 317 (CAL.) SMARTCHEM TECHNOLOGY LTD. VS I TO 97 TTJ ITAT (AHMADABAD) 17 . THE AO AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE OBSERVED THAT THE CASES RELIED BY THE ASSESSEE WERE DISTINGUISHABLE ON FACTS BECAUSE IN THOSE CASES THERE WAS NO TRANSFER OF BUSINESS ON THE SLUMP SALE BASIS AND PRED ETERMINED AND AGREED AMOUNT WAS PAID TO WARD OFF THE COMPETITION FOR A SHORT PERIOD. HOWEVER, IN THE ASSESSEE S CASE, THE TRANSFEROR COMPANY HAD RECEIVED THE CONSIDERATION AS A LUMP SUM AMOUNT FOR TRANSFER OF ALL THE ASSETS, LIABILITIES, EMPLOYEES, RECORDS AND ALSO FOR AGREEING TO CONDITIONS OF WARRANTY AND NOT TO COMPETE FOR NEXT THREE YEARS. THEREFORE, THE ENTIRE PAYMENT WAS FOR THE PURPOSE OF ACQUIRING THE BUSINESS AS A GOING CONCERN AND NO PART OF CONSIDERATION WAS SPECIFICALLY ASSIGNED IN THE AGREEMENT TO DIFFERENT TYPES OF INTANGIBLES OR MUTUALLY AGREED OBLIGATIONS WHICH WERE PART OF THE COMPOSITE DEAL. HE FURTHER OBSERVED THAT HAD THE CONSIDERATION FOR NON - COMPETE BEEN AGREED UPON AND RECEIVED SPECIFICALLY OTHER THAN AS SLUMP SALE FOR TRANSFER OF BUSI NESS SAME WOULD HAVE BECOME A REVENUE RECEIPTS IN THE HANDS OF THE TRANSFEROR U/S 28(VA) OF THE ACT ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 15 BUT IT WAS NOT THE CASE IN THIS AGREEMENT. THE AO CATEGORICALLY STATED THAT THE CONSIDERATION IN THIS CASE WAS PAID FOR ACQUISITION OF WHOLE BUSINESS , HENCE , THE VALUATION BASED ON SEVERAL ASSUMPTION AND HYPOTHETICAL SITUATIONS COULD NOT BE CONSIDERED AS PAYMENT SEPARATELY MADE FOR THE PURPOSE OF NON - COMPETE OR GOODWILL. HE ALSO OBSERVED THAT AS PER THE NORMAL PRINCIPLES OF ACCOUNTANCY, IF ANY, BUSINESS WAS A CQUIRED ON GOING CONCERN BASIS THEN AFTER ASSIGNING VALUES AND WORKING CAPITAL, THE AMOUNT PAID IN EXCESS OF SUCH VALUE IS TREATED AS GOODWILL OF THE BUSINESS AND IN THIS CASE ALSO THE ASSESSEE COMPANY HAD TAKEN THE RESIDUAL AMOUNT AS GOODWILL. ACCORDING T O THE AO, THE ASSESSEE ON THE ONE HAND CONTENDED THAT THE RUNNING BUSINESS WAS ACQUIRED OUT OF THE MAN Y BUSINESS OF ICI LTD. HENCE, VALUATION OF GOODWILL WAS NOT POSSIBLE , ON THE OTHER HAND, THE ASSESSEE COULD ASSIGN VALUE ON LOSS IN VALUE OF BUSINESS AS N ON - COMP ETE INTANGIBLE. T HE AO TREATED THE CONSIDERATION AS CAPITAL FOR ACQUIRING THE BUSINESS BY OBSERVING AS UNDER: I) ASSESSEE COMPANY PURCHASED A DIVISION FROM ICI LTD. ON A SLUMP SALE BASIS THROUGH A COMPOSITE BUSINESS TRANSFER AGREEMENT. THE CONSIDE RATION INCLUDED PAYMENTS FOR FIXED ASSETS, KNOW - HOW, THE ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 16 CONDITION OF WARRANTY, CONFIDENTIALITY, NON - COMPETE AND HOST OF OTHER MUTUALLY AGREED OBLIGATIONS. II) IN THE BOOKS OF ACCOUNTS ASSESSEE COMPANY HAD CAPITALIZED THE ENTIRE PAYMENT EXCEPT FOR WORKING CAPITAL AS PART OF SCHEDULE OF FIXED ASSETS. III) THERE IS NO SEPARATE AGREEMENT FOR NOT COMPETING WITH THE ASSESSEE COMPANY AND ALSO NO SEPARATE CONSIDERATION WAS AGREED UPON. IV) ASSESSEE COMPANY SPLIT THE SLUMP CONSIDERATION IN VARIOUS PAYMENTS THAT OF FIXED ASSETS, INTANGIBLES, KNOW - HOW AND RESIDUAL WAS TREATED AS GOODWILL. V) WHEN ASSESSEE COMPANY COULD NOT WORK OUT THE GOODWILL OF THE DIVISION IN VIEW OF THE NCT BUSINESS BEING ONE OF THE DIVISION OF THE ICI LTD. HOW IT COULD HYPOTHETICALLY WORKED OUT VALUE OF NON - COMPETE CONSIDERATION WHICH WAS ONE OF THE MANY OBLIGATIONS. VI) AS PER PRINCIPAL OF ACCOUNTANCY IF A BUSINESS IS PURCHASED ON A GOING CONCERN BASIS PAYMENT IN EXCESS OF THE VALUE OF TANGIBLE/INTANGIBLE ASSETS IS THE GOODWILL OF THE BUSIN ESS. 18 . THE AO ACCORDINGL Y HELD THAT THE AMOUNT OF RS. 6, 80 ,00,000/ - CLAIMED AS FEE FOR NON - COMPETE WAS NOTHING BUT GOODWILL OF THE BUSINESS AND A CAPITAL EXPENDITURE. ACCORDINGLY, THE DISALLOWANCE OF RS. 6,80,00,000/ - WAS MADE. THE RELIANCE WAS PLACED ON THE FOLLOWING CASE LAWS: ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 17 CIT VS HINDUSTAN PILKINGTON GLASS WORKS 139 ITR 581 (CAL.) BLAZE AND CENTRAL PVT. LTD. VS CIT 120 ITR 33 (MAD.) CHELPARK CO. LTD. VS CIT 191 ITR 249 (MAD.) 19 . BEING AGGRIEVED THE ASSESSEE CARRIED THE MATTER TO THE LD. CIT(A) AND SUBMITTED AS UNDER: 1. THAT THE VALUATION OF ALL TANGIBLE AND INTANGIBLE ASSETS INCLUDING NON - COMPETE CONSIDERATION WAS DONE BY THE INDEPENDENT EXPERTS OF THE FIELD BEFORE IT WAS ADOPTED BY THE COMPANY. THE APPELLANT COMPANY AND ICI INDIA LIMITED WE RE NOT THE COMPETITORS IN THE BUSINESS. IN FACT, ICI INDIA LTD. HAS SOLD THE TWO DIVISIONS OUT OF MANY DIVISIONS TO THE APPELLANT COMPANY, WHO IS NEW IN BUSINESS OF NITRO CELLULOSE AND TRADING OF CHEMICALS. IT WAS A PRUDENT DECISION AND BUSINESS EXPEDIENCY TO BIND THE OTHER PERSON (I.E. ICI INDIA LTD.) SO THAT THEY CANNOT CONTINUE THE SAME LINE OF BUSINESS, WHICH WAS SOLD TO THE APPELLANT, AT LEAST FOR 3 YEARS. IT WAS NOT IN THE INTEREST OF THE COMPANY TO ALLOW THE ICI INDIA LTD. TO OPERATE IN THE SAME LINE OF BUSINESS WITHOUT PUTTING THE RESTRICTING CLAUSE IN THE BUSINESS TRANSFER AGREEMENT. 2. RESTRICTIVE CLAUSE WAS NECESSARY FOR THE BUSINESS EXPEDIENCY AND COMMERCIAL REQUIREMENT OF THE APPELLANT COMPANY AND MAINLY TO PUT CHECK ON THE SELLER COMPANY AND I TS AFFILIATES, SO THAT APPELLANT CAN EFFICIENTLY CONDUCT THE BUSINESS WITHOUT ANY ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 18 HURDLE AT LEAST FROM THE SAME PERSON OR GROUP OF PERSONS WHO HAS SOLD THE BUSINESS. IN FACT, DUE TO THAT RESTRICTIVE CLAUSE ICI INDIA LTD. WAS CONTRACTUALLY BOUNDED WITH THE APPELLANT FOR SUPPORTIVE IN THE BUSINESS AND NOT TO BECOME COMPETITOR FOR AT LEAST 3 YEARS FOR WHICH THEY TOOK THE PRICE. THE RESTRICTIVE CLAUSE WAS NOT IN ANY WAY ADVANTAGEOUS OF ENDURING NATURE AS OBSERVED BY THE LEARNED ASSESSING OFFICER. 3. IF SUCH KI ND OF CLAUSE WAS NOT PLACED IN THE BUSINESS TRANSFER AGREEMENT THEN BUYING A DIVISION AS SLUMP SALE WOULD BE DISASTROUS IN TERMS OF BUSINESS AND PROFITABILITY. THEREFORE, ASSIGNING THE VALUE OF NON - COMPETE CONSIDERATION WAS AN INTEGRAL PART OF THE TERMS OF THE AGREEMENT AND NECESSARY AND ESSENTIAL FOR THE SMOOTH RUNNING OF THE BUSINESS. THE RESTRICTIVE CLAUSE IS ONLY FOR 3 YEARS WHICH IS NECESSARY TO ESTABLISH INTO THE BUSINESS AS THE APPELLANT COMPANY WAS NEW IN THE TRADE. 4. IT WAS ILLOGICAL AND WITHOUT APPLICATION OF MIND TO SUGGEST THAT RESTRICTIVE BUSINESS CLAUSE HAS NO VALUE, MEANING, COMMERCIAL EXPEDIENCY AND NECESSITY TO BUSINESS AND ESPECIALLY TO A COMPANY WHO IS NOT INTO THE BUSINESS OF NITRO CELLULOSE AND CHEMICAL TRADING BUSINESS AND THE SAME WA S FINALLY EQUATED/ASSESSED WITH THE GOODWILL OF THE BUSINESS. 5. THEREFORE, RAISING THE DOUBT BY MENTIONING THAT THE VALUATION IS BEING DONE ON THE BASIS OF HYPOTHETICAL SITUATION AND THERE WAS NO SEPARATE CONSIDERATION FOR NON - COMPETE FEE IS ABSOLUTELY W RONG WHERE THE PRICE WAS FIXED ON THE BASIS OF ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 19 SLUMP SALE. IN SLUMP SALE, IT IS THE ONLY PROCEDURE TO CONSIDER THE VARIOUS TERMS AND CONDITIONS OF THE AGREEMENT AND TO ALLOCATE THE VALUE ACCORDING TO ITS NATURE AND LIFE EXPECTANCY. 6. IF THE BUSINESS ASS ETS AND LIABILITIES CAN BE EASILY VALUED AS SUGGESTED BY THE ASSESSING OFFICER THEN THERE WOULD BE NO NEED TO ENTER INTO AN AGREEMENT AS SLUMP SALE. SLUMP SALE MEANS THE TRANSFER OF ONE OR MORE UNDERTAKINGS AS A RESULT OF THE SALE FOR A LUMP SUM CONSIDERAT ION WITHOUT VALUES BEING ASSIGNED TO THE INDIVIDUAL ASSETS AND LIABILITIES IN SUCH SALES. (SECTION 2(42C)). 7. FURTHER, THE LEARNED ASSESSING OFFICER OBSERVED THAT NO SPECIFIC CONSIDERATION WAS FIXED FOR THE CONDITION OF NON COMPETITION BY THE ICI INDIA L TD. AND THE ASSESSEE ON ITS OWN TRIED TO ASSIGN THE SEPARATE VALUE. IN THIS REGARD IT IS MOST RESPECTFULLY SUBMITTED THAT SINCE IT IS SLUMP SALE OF AN UNDERTAKING, ITEM - WISE CONSIDERATION CANNOT BE ASCERTAINED FROM THE BUSINESS TRANSFER AGREEMENT. FOR THE DETERMINATION OF THE COST OF THE ASSETS, RIGHTS ACQUIRED, THE CONSIDERATION/COST PAID HAS TO BE DETERMINED ON THE BASIS OF REPORT OF TECHNICAL PERSON AND ACCORDINGLY, WE HAVE TAKEN VALUATION REPORT FOR THE FIXED ASSET FROM DALAL MOTT MACDONALD AND THE INTA NGIBLES, FROM KPMG INDIA PVT. LTD. COPY OF THE SAID VALUATION REPORTS OF FIXED ASSETS AND INTANGIBLES ARE SUBMITTED AS ANNEXURE 2 & 3 , RESPECTIVELY. 8. HERE, WE WOULD LIKE TO SUBMIT THAT EXCEPT FOR VALUE OF NON - COMPETE, ALL OTHER VALUES AS PER THE VALUATIO N REPORTS HAVE BEEN ACCEPTED BY THE ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 20 LEARNED AO AND THEREFORE THERE SHOULD NOT ANY DOUBT FOR THE VALUE OF NON - COMPETE CONSIDERATION ALSO. IF THE LEARNED AO HAVE ANY DOUBT, THE LEARNED AO COULD HAVE SUMMONED THE VALUER FOR THE VERIFICATION OF THE FACTS OR GE TTING INFORMATION/DETAILS IN THIS REGARD. BUT HE HAS NOT DONE SO AND THEREFORE THE VALUE OF NON - COMPETE CONSIDERATION CANNOT BE DOUBTED AND SHOULD BE ACCEPTED IN TOTO. IN THIS REGARD RELIANCE IN PLACED ON THE ADVANCE RULING GIVEN IN THE CASE FOSTER S AUSTR ALIA LTD. IN RE 302 ITR 289, WHEREIN QUESTION WAS ANSWERED AS UNDER: - 15. QUESTION NO.(2): IF THE ABOVE MENTIONED RECEIPT IS HELD TAXABLE IN INDIA, THEN WHETHER THE APPLICANT IS JUSTIFIED IN CONTENDING THE TAX SHOULD BE COMPUTED BASED ON THE CONSIDERAT ION AS PER THE INDEPENDENT VALUATION ADOPTED BY THE APPLICANT?. 15.1 IT IS THE CASE OF THE APPLICANT THAT IT HAS OBTAINED AN INDEPENDENT VALUATION REPORT RELATING TO TRADEMARKS AND FOSTER S BRAND IP AS ON 30 TH APRIL, 2006. THE VALUES ARE SET OUT IN THE PE NULTIMATE PARA AT ATTACHMENT (2). HOWEVER, THE REPORT HAS NOT BEEN FILED. 15.2 WE CAN ONLY ANSWER THIS QUESTION BY OBSERVING THAT INDEPENDENT VALUATION REPORT CAN CERTAINLY BE RELIED UPON BY THE APPLICANT. IT IS FOR THE CONCERNED IT AUTHORITIES TO EXAMI NE WHETHER IT REPRESENTS TRUE AND CORRECT VALUE AND APPLY SUCH RELEVANT FACTORS THAT HAVE MATERIAL BEARING ON ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 21 QUANTIFICATION OF THE CONSIDERATION RELATED TO THE TAXABLE ITEMS. 9. FURTHER, ASSESSING OFFICER HAS RAISED THE CONTRADICTORY STATEMENT THAT HA D THE CONSIDERATION OF NON COMPETE BEEN AGREED UPON AND RECEIVED SPECIFICALLY OTHER THAN AS SLUMP SALE FOR TRANSFER OF BUSINESS SAME WOULD HAVE BECOME A REVENUE RECEIPT IN THE HANDS OF TRANSFEROR U/S 28(VA). IT IS NOT THE LAW OF THE LAND THAT IF THE ONE P ARTY HAS CONSIDERED THE TRANSACTION AS REVENUE RECEIPT THEN ONLY SECOND PARTY WOULD CLAIM THE EXPENSE IN THE BOOKS OF ACCOUNTS AS REVENUE EXPENDITURE. WHEREAS, IN THE HANDS OF THE TRANSFEROR THE COMPUTATION OF CAPITAL GAINS IN CASE OF SLUMP SALE SHALL BE C OMPUTED AS PER SECTION 50B OF THE INCOME TAX ACT, 1961. IT IS NO BUSINESS OF THE APPELLANT TO UNDERSTAND THE TREATMENT AND TAXABILITY OF TRANSFEROR OF THE SAID BUSINESS FOR DETERMINING THE POSITION OF ALLOWABILITY OR NON ALLOWABILITY OF THE EXPENSES. 20 . THE RELIANCE WAS PLACED ON THE FOLLOWING CASE LAWS: SMARTCHEM TECHNOLOGIES LTD. VS ITO (2005) 97 TTJ (AHD) 818 CIT VS HINDUSTAN PILKINGTON GLASS WORK 139 ITR 581 (CAL) BLAZE AND CENTRAL PVT. LTD. VS CIT 120 ITR 33 (MAD) CHELPARK CO. LTD. VS CIT 191 ITR 249 (MAD.) JCIT VS SYNERGY CREDIT CORPN. LTD. (2006) 9 SOT 75 (MUM) CIT VS LAHOTY BROTHERS LTD. (1951) 19 ITR 425 (CAL.) ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 22 DCIT VS MOTOR INDUSTRIES CO. LTD. 223 ITR 112 (KAR) 21 . IT WAS SUBMITTED THAT THE ASSESSEE HAD NOT ACQUIRED ENDURING BENEFIT BY PUTTIN G RESTRICTIVE CLAUSE IN THE BUSINESS TRANSFER AGREEMENT. IT WAS FURTHER SUBMITTED THAT THE AO HAD IGNORED THOSE DECISION WHERE THE EXPENDITURE AS NON - COMPETE FEE WAS CONSIDERED AS REVENUE EXPENDITURE. IT WAS ALSO SUBMITTED THAT SINCE SEPARATE VALUE FOR INT ANGIBLE ASSET AND GOODWILL HAD BEEN ASSIGNED BY THE VALUER. T HE AO, IN ABSENCE OF ANY ADVERSE EVIDENCE COULD NOT HAVE TREATED THE NON - COMPETE PAYMENT AS GOODWILL. THE RELIANCE WAS PLACED ON THE FOLLOWING CASE LAWS: CIT, TAMIL NADU - IV VS OFFICIAL LIQUIDATO R (1985) 151 ITR 781 (MAD.) CIT VS SRINIVASA SETTY (1981) 128 ITR 294 (SC) CIT VS CHUNILAL PRABHUDAS & CO. (1970) 76 ITR 566 (CAL) SMT. VINDOOR BAI VS CED (1981) 132 ITR 421 22 . IT WAS CONTENDED THAT THE ASSESSEE HAD PURCHASED THE BUSINESS OF NITROCELLULO SE AND CHEMICAL TRADING BUSINESS WITHOUT THE BRAND/TRADE NAME OF ICI INDIA LTD. AND THE OWNERSHIP WAS ALSO TRANSFERRED. THE ASSESSEE FURTHER CONTENDED THAT TO KEEP AND MAINTAIN THE REPUTATION INTACT WITH CUSTOMERS, EMPLOYEES AND ASSOCIATES WAS A QUESTION O F ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 23 SUBJECTIVE NATURE AND COULD NOT BE VALUED. IT WAS STATED THAT THE ASSESSEE HAD NOT BEEN ABLE TO BAR ANY COMPETITION IN THE MARKET OTHER THAN RESTRAINING THE TRANSFEROR FOR FURTHER PRODUCING AND SUPPLYING THE SAME MATERIALS IN THE MARKET FOR A LIMITED SHO RT PERIOD AND THE ASSESSEE HAD USED THEIR TRADE NAME NITREX IN THE BUSINESS . THE ASSESSEE FURTHER STATED THAT THE EXPERT INDEPENDENT VALUERS WERE HIRED FOR THE EVALUATION OF THE TANGIBLE, INTANGIBLE ASSETS INCLUDING THE GOODWILL AND THE ASSESSEE FOLLOWED THE ADVICE OF THE EXPERTS OF THE FIELD AND ACCORDINGLY SEGREGATED THE ENTIRE CONSIDERATION IMPARTIALLY . IT WAS SUBMITTED THAT THE AO HAD NOT APPLIED HIS MIND BEFORE SUGGESTING THAT ANYTHING OVER AND ABOVE THE COST OF ASSET WAS GOODWILL, T HEREFORE, THE VAL UATION OF GOODWILL ON THE BASIS OF RESIDUAL VALUE AFTER ASCERTAINING REALISTIC FIGURES TO EACH AND EVERY ITEM WAS CORRECT ON THE PART OF THE INDEPENDENT VALUERS AS WELL AS ON THE ASSESSEE COMPANY. IT WAS FURTHER SUBMITTED THAT THE ACTION OF THE AO WAS TOTA LLY UNJUSTIFIED AND NOT IN ACCORDANCE TO THE LAW. IT WAS CONTENDED THAT THE ACCOUNTING ENTRY IN THE BOOKS OF ACCOUNTS WAS IRRELEVANT FOR THE DETERMINATION OF THE ALLOWABILITY OF EX PENSES BECAUSE IT WAS TO BE SEEN IN THE LIGHT OF THE PROVISIONS OF INCOME TA X AND WHETHER THE PAYMENT WAS ALLOWABLE OR NOT. IT WAS CLARIFIED ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 24 THAT WHILE COMPUTING THE TOTAL INCOME UNDER THE INCOME TAX ACT , THE DEPRECIATION ON THE NON - COMPETE CONSIDERATION HAD NOT BEEN CLAIMED AND THE VALUE OF THE NON - COMPETE CONSIDERATION WAS CONSI DERED AS REVENUE EXPENSES. IT WAS FURTHER STATED THAT THE INCOME TAX ACT & COMPANIES ACT ARE INDEPENDENT, SO IT IS NOT NECESSARY THAT ANY AMOUNT WHICH WAS BEING CONSIDERED AS REVENUE EXPENDITURE UNDER INC OME TAX ACT CANNOT BE SHOWN AS C APITAL E XPENDITURE U NDER COMPANIES ACT OR V ICE VERSA, T HEREFORE, THE ACTION OF THE AO WAS TOTALLY UNJUSTIFIED AND NOT IN ACCORDANCE WITH LAW. THE RELIANCE WAS PLACED ON THE FOLLOWING CASE LAWS: GURUJI ENTERTAINMENT NETWORK LTD. 108 TTJ(DEL) 180 KEDARNATH JUTE MFG. CO. LTD. V S CIT 82 ITR 363 (SC) TUTICORIN ALKALI CHEMICALS & FERTILIZERS LTD. VS CIT 227 ITR 172 (SC) DCIT VS MC DOWELL & CO. LTD. 291 ITR 107 (KAR) CIT VS EICHER LTD. 302 ITR 249 (DEL) 23 . THE LD. CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE OBSERVED T HAT THE ASSESSEE COMPANY ACQUIRED NITROCELLULOSE AND CHEMICAL TRADING BUSINESS OF ICI INDIA LTD. AS GOING CONCERN ON SLUMP SALE BASIS, VIDE BUSINESS ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 25 TRANSFER AGREEMENT DATED 30.12.2003, THE SAID ACQUISITION WAS COMPLETED ON 16.03.2004 AND AFTER ACQUIRING T HE BUSINESS OF GOING CONCERN, THE ASSESSEE COMPANY GOT THE VALUATION OF ALL THE TANGIBLE AND INTANGIBLE ASSETS DONE THROUGH THE PROFESSIONAL VALUERS IN THIS FIELD, NAMELY M/S DALAL MOTT MCDONALD P. LTD. AND M/S K.P.M.G. (I) P. LTD. AND BASED ON THE VALUATI ON REPORTS, VALUES WERE ASSIGNED TO THE PLANT & MACHINERY, OTHER MISCELLANEOUS ASSETS AND TANGIBLE AND INTANGIBLE ASSETS. THE LD. CIT(A) POINTED OUT THAT AS PER THE VALUATION REPORT OF THE VALUER DATED 05.04.2004, THE VALUE OF NON - COMPETE COVENANT WAS COMP UTED AT RS. 6,80,00,000/ - AND IN THE BUSINESS TRANSFER AGREEMENT NO SEPARATE VALUE HAD BEEN ASSIGNED FOR THIS RESTRICTIVE COVENANT CLAUSE AS ENTIRE BUSINESS WAS TAKEN UP ON SLUMP SALE BASIS. HOWEVER, THE RESTRICTIVE COVENANT WAS PART OF THE AGREEMENT, THER EFORE, THE VALUE OF THE SAME WAS INBUILT IN THE AGREEMENT. THE LD. CIT(A) OBSERVED THAT THE RESTRICTIVE CLAUSE, FORMING PART OF AGREEMENT ITSELF , SUGGESTED THAT THERE WAS SOME CONSIDERATION , WHICH THE ASSESSEE HAD PAID FOR KEEPING THE ICI INDIA LTD. AND IT S AFFILIATES AWAY FROM DOING SAME OR SIMILAR BUSINESS IN INDIA FOR A PERIOD OF THREE YEARS FROM THE DATE OF COMPLETION OF AGREEMENT , WHICH WAS DONE TO PROTECT THE BUSINESS INTEREST ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 26 OF THE ASS ESSEE COMPANY AND HAD THIS BEEN NOT PART OF THE AGREEMENT, THE N C OMPETITION WITH ICI WHO WAS MARKET LEADER IN THE NITROCELLULOSE BUSINESS. THE LD. CIT(A) POINTED OUT THAT THERE WAS NO SEPARATE CONSIDERATION ASSIGNED IN THE AGREEMENT BUT THE RESTRICTIVE COVENANT UNDER CLAUSE 14 WAS THE PART OF THE AGREEMENT WHICH CLEARLY SHO WED THAT THE CONSIDERATION WAS PAID FOR THIS RESTRICTIVE COVENANT TO PROTECT THE BUSINESS INTEREST OF THE ASSESSEE COMPANY AND TO CAPTURE THE MARKET AND THE ANOTHER PURPOSE OF RESTRICTIVE COVENANT WAS TO INCREASE THE PROFITABILITY OF THE ASSESSEE COMPANY. THEREFORE, THE PAYMENT OF NON - COMPETE FEES, THE QUANTUM OF WHICH WAS DETERMINED LATER ON, UPON THE VALUATION OF THE ASSETS BY THE PROFESSIONAL VALUER , WAS WHOLLY AND EXCLUSIVELY FOR THE PROFITABILITY OF THE ASSESSEE S BUSINESS. 2 4 . AS REGARDS TO THE AO S COMMENTS THAT NO VALUE OF THE GOODWILL WAS WORKED OUT , T HE LD. CIT(A) POINTED OUT THAT THE SAME VALUERS HAD DETERMINED THE VALUE OF GOODWILL AS RESIDUAL AT RS. 3,50,00,000/ - AND AS NO OTHER METHOD OF VALUATION OF GOODWILL WAS APPLICABLE TO THE ASSESEE S CASE , T HE SAID VALUE HAD BEEN CAPITALIZED IN THE BOOKS OF ACCOUNTS BY THE ASSESSEE COMPANY. HOWEVER, IN THE CASE OF NON - ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 27 COMPETE FEE, THE SAME WAS SEPARATELY IDENTIFIED AND PAYMENT WAS INBUILT IN THE LUMP SUM CONSIDERATION WHICH WAS LATER ON VALUED SEPARATE LY, THEREFORE, THE SAME COULD NOT BE TERMED AS GOODWILL. THE LD. CIT(A) OBSERVED THAT THE BUSINESS TRANSFER AGREEMENT WAS A COMPOSITE AGREEMENT AND THE VALUE OF NON - COMPETE FEE WAS NOT ASSIGNED IN THE AGREEMENT, T HEREFORE, THE AO HAD HELD THAT THE ENTIRE C ONSIDERATION PAID WAS A CAPITAL EXPENDITURE BUT IN THE BUSINESS TRANSFER AGREEMENT, THERE WAS A CLAUSE 14 WHICH DEALS WITH THE RESTRICTIVE COVENANT THEREBY THE TRANSFEROR M/S ICI INDIA LTD. AND ITS AFFILIATES WERE RESTRAINED INTO ENTERING THE SAME BUSINESS FOR THREE YEARS AND THE ASSESSEE HAD WARDED OFF A POTENTIAL COMPETITIO N FROM THE TRANSFEROR IN THE SAM E AGREEMENT. ACCORDING TO THE LD. CIT(A) THE MERE NON - ASSIGNMENT OF THE AMOUNT IN THE BUSINESS TRANSFER AGREEMENT ON ACCOUNT OF NON - COMPETE FEE COULD NOT CHANGE ITS NATURE FROM REVENUE TO CAPITAL. THE LD. CIT(A) ALSO POINTED OUT THAT THE ASSESSEE HAD DISTINGUISHED THE CASES RELIED BY THE AO BY STATING THAT THE PAYMENT WAS MADE TO A STRONG COMPETITOR IN ALL THOSE CASES AND THE DESIRE WAS TO WARD OFF COMPET ITION PERMANENTLY AND THERE WERE COMPOSITE BENEFITS INCLUDED IN THE TOTAL AMOUNT OF PAYMENT INCLUDING WARDING OFF COMPETITION WHICH WERE NOT SIMILAR TO ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 28 THE ASSESSEE S CASE. THE LD. CIT(A) OBSERVED THAT THE VALUER DETERMINED THE VA L UE OF NON - COMPETE FEE AT RS. 6,80,00,000/ - WHICH WAS PAID FOR THREE YEARS TO ELIMINATE THE COMPETITION FROM THE TRANSFEROR AND FOR SMOOTH RUNNING OF THE BUSINESS AND THAT THE ASSESSEE HAD NOT ACQUIRED ANY CAPITA L ASSET BY PAYING THIS AMOUNT, T HEREFORE, THE NON - COMPETE FEE HAS BEEN TREATED AS REVENUE EXPENDITURE. HE FURTHER OBSERVED THAT THE RESTRICTIVE COVENANT S WERE ONLY NEGATIVE AGREEMENT S, WHICH DID NOT BRING INTO EXISTENCE OF ANY ASSET S FOR THE ASSESSEE AND THE EXPENDITURE COULD NOT BE TREATED AS CAPITAL EXPENDITURE AS IT DID N OT BRING ANY ASSET OF ENDURING ADVANTAGE , THE PAYMENT WAS ONLY TO RESTRAIN THE ICI LTD. FOR ENTERING INTO SAME BUSINESS FOR THREE YEARS. THE LD. CIT(A) WAS OF THE VIEW THAT FOR TREATING ANY EXPENDITURE AS REVENUE, THE FOLLOWING TEST ARE ESSENTIAL: A) TH E EXPENDITURE TO BE LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR PURPOSE OF BUSINESS OR PROFESSION. B) EXPENDITURE SHOULD NOT BE PERSONAL EXPENDITURE. C) EXPENDITURE SHOULD NOT BE COVERED UNDER SECTION 30 TO 36. D) EXPENDITURE SHOULD NOT BE CAPITAL IN NATURE. ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 29 E) EXPENDITURE SHOULD HAVE BEEN LAID OUT IN THE RELEVANT PREVIOUS YEAR. 25 . THE LD. CIT(A) POINTED OUT THAT THE ABOVE PARAMETERS MADE IT CLEAR THAT PAYMENT OF NON - COMPETE FEE WAS NOT AN EXPENDITURE COVERED BY SECTION 30 TO 36, IT WAS ALSO NOT A PERSONAL EXPENDITURE AS THE DIRECTORS OF THE ASSESSEE COMPANY HAD NOT BEEN BENEFITED FOR THIS PAYMENT, IT WAS ALSO NOT A CAPITAL EXPENDITURE AS NO ASSET OF ENDURING NATURE HAD BEEN ACQUIRED BY PAYING THE NON - COMPETE FEE AND THE PAYMENT OF NON - COMPETE FEES WAS MADE IN THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION , IT WAS LAID OUT WHOLLY AND EXCLUSIVELY FOR THE PURPOSE, I.E. TO PROTECT THE BUSINESS OF THE COMPANY FROM THE COMPETITION FROM M/S ICI LTD. WHO WAS THE ONLY MANUFACTURER OF THIS PRODUCT AND TO ENHANCE THE PROFITABILITY. THE LD. CIT(A) ACCORDINGLY HELD THAT THE EXPENDITURE OF NON - COMPETE FEE IN THE INSTANT CASE WAS REVENUE EXPENDITURE AND THE SAME WAS ALLOWABLE AS EXPENDITURE. THE RELIANCE WAS PLACED ON THE FOLLOWING CASE LAWS : DCIT VS MC DOWELL & CO. LTD. 291 ITR 107 (KAR) CIT V S EICHER LTD. (2008) 302 ITR 249 (DEL.) SMARTCHEM TECHNOLOGIES LTD. VS ITO (2005) 97 TTJ (AHD) 818 ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 30 JCIT VS SYNERGY CREDIT CORPN. LTD. (2006) 9 SOT 75 (MUM) CIT VS LAHOTY BROTHERS LTD. (1951) 19 ITR 425 (CAL) 26 . THE LD. CIT(A) ALSO HELD THAT THE GROUND RAISED BY THE ASSESSEE FOR ALLOWING THE DEPRECIATION ON THE PAYMENT OF NON - COMPETE FEE BECAME INFRUCTUOUS AS THE PAYMENT OF NON - COMPETE FEE WAS HELD AS REVENUE EXPENDITURE. AS REGARDS TO THE ALTERNATIVE CLAIM OF THE ASSESSEE THAT THE PAYMENT MAY BE TREATED AS DEFERRED REVENUE EXPENDITURE. THE LD. CIT(A) OBSERVED THAT THIS GROUND HAS BECOME IN FRUCTUOUS BECAUSE THE ENTIRE EXPENDITURE OF NON - COMPETE FEES WAS HELD TO BE ALLOWABLE AS REVENUE EXPENDITURE. 27 . NOW THE DEPARTMENT IS IN APPEAL . THE LD. DR STRONGLY SUPPORTED THE ORDER OF THE AO AND FURTHER SUBMITTED THAT THE ASSESSEE WAS HAVING ENDURING BENEFIT OF THE GOODWILL AND THE PAYMENT WAS MADE FOR NON - COMPETE, T HEREFORE, THE ASSESSEE WAS BENEFITED , SO, THE EXPENDITURE WAS CAPITAL IN NATURE AND THE AO RIGHTLY HELD SO. THEREFORE, THE LD. CIT(A) WAS NOT JUSTIFIED IN TREATING THE NON - COMPETE FEE AS REVENUE EXPENDITURE AND DIRECTING THE AO TO ALLOW THE CLAIM OF THE ASSESSEE. ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 31 28 . IN HIS RIVAL SUBMISSIONS THE LD. COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSION MADE BEFORE THE AUTHORITIES BELOW AND FURTHER SUBMITTED THAT N O NEW ASSET CAME INTO EXISTENCE, T HEREFORE, THE EXPENSES WERE REVENUE IN NATURE AND THE LD. CIT(A) RIGHTLY DIRECTED THE AO TO ALLOW THE SAME AS REVENUE EXPENDITURE. ALTERNATIVELY, IT WAS SUBMITTED THAT IF THE NON - COMPETE EXPENSES ARE TO BE TREATED TO BE CAPITAL IN NATURE AND FOR GOODWILL THEN THE BENEFIT OF DEPRECIATION WAS TO BE ALLOWED TO THE ASSESSEE. THE RELIANCE WAS PLACED ON THE FOLLOWING C ASE LAWS: GURUJI ENTERTAINMENT NETWORK LTD. 108 TTJ(DEL) 180 KEDARNATH JUTE MFG. CO. LTD. VS CIT 82 ITR 363 (SC) TUTICORIN ALKALI CHEMICALS & FERTILIZERS LTD. VS CIT 227 ITR 172 (SC) DCIT VS MC DOWELL & CO. LTD. 291 ITR 107 (KAR) CIT VS EICHER LTD. 302 IT R 249 (DEL) CIT, KOLKATA VS SMIF SECURITIES LTD. IN SLP(CIVIL) NO. 35600 OF 2009 2 9 . WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND CAREFULLY GONE THROUGH THE MATERIAL AVAILABLE ON THE RECORD. IN THE PRESENT CASE, IT IS AN ADMITTED FACT THAT T HE ASSESSEE PURCHASED ONE DIVISION OF NITROCELLULOSE CHEMICALS ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 32 TRADING (NCT) BUSINESS WHICH WAS TRANSFERRED TO THE ASSESSEE COMPANY BY WAY OF SLUMP SALE S . THE ASSESSEE TREATED THE SAME AS CAPITAL EXPENDITURE IN THE BOOKS OF ACCOUNTS AND CLAIMED THE DEPRECI ATION . H OWEVER, FOR THE PURPOSE OF COMPUTING TOTAL INCOME UNDER THE INCOME TAX ACT, T HE ASSESSEE TREATED RS. 6.80 CRORES AS NON - COMPETE FEE ON THE BASIS OF THE VALUE OF THE INTANGIBLES DETERMINED BY THE VALUERS. THE SAID VALUE OF NON - COMPETE FEE WAS ASSIGN ED BY THE ASSESSEE. THE AO TREATED THE SAID AMOUNT AS CAPITAL IN NATURE BY OBSERVING THAT THE AMOUNT OF RS. 6.80 CRORES CLAIMED AS FEE FOR NON - COMPETE WAS NOTHING BUT GOODWILL O F THE BUSINESS AND WAS CAPITAL EXPENDITURE. THE AO ALSO HELD THAT IF A BUSINESS IS PURCHASED ON A GOING CONCERN BASIS , PAYMENT IN EXCESS OF THE VALUE OF TANGIBLE/INTANGIBLE ASSET WAS GOODWILL OF THE BUSINESS. HOWEVER, THE AO DID NOT ALLOW THE ALTERNATIVE CLAIM OF THE ASSESSEE FOR ALLOWING THE DEPRECIATION. 30 . WHEN THE MATTER WAS T AKEN TO THE LD. CIT(A), THE SAID AMOUNT OF RS. 6.80 CRORES WAS DIRECTED TO BE CONSIDERED AS REVENUE IN NATURE BY OBSERVING THAT BY THIS RESTRICTIVE COVENANT, THE ASSESSEE HAD WARDED OFF A POTENTIAL COMPETITION FROM THE TRANSFEROR. IN THE PRESENT CASE, IT I S ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 33 NOTICED THAT THERE WAS NO SEPARATE CONSIDERATION ASSIGNED FOR NON - COMPETE FEE IN THE AGREEMENT BUT THERE WAS A RESTRICTIVE COVENANT UNDER CLAUSE 14 OF THE AGREEMENT. THE SAID RESTRICTIVE COVENANT WAS TO PROTECT THE BUSINESS INTEREST OF THE ASS ESSEE AND T O CAPTURE THE MARKET. I N THE INSTANT CASE THE NON - COMPETE FEE ALTHOUGH IDENTIFIED SEPARATELY BY THE VALUER BUT IT WAS INBUILT IN THE LUMP SUM CONSIDERATION. THE ASSESSEE SPLIT THE LUMP SUM CONSIDERATION IN VARIOUS TANGIBLE AND INTANGIBLE ASSETS ON THE BASI S OF REPORT OF THE VALUERS WHICH WAS NOT DOUBTED EITHER BY THE AO OR BY THE LD. CIT(A). IN THE PRESENT CASE, THE ONLY DISPUTE WAS RELATING TO THE NON - COMPETE FEE OF RS. 6.80 C RORES, T HE SAID AMOUNT WAS DIFFEREN CE IN THE VALUE OF TANGIBLE/INTANGIBLE ASSETS OF THE GOING CONCERN WHICH WAS PURCHASED BY THE ASSESSEE AND THE LUMP SUM AMOUNT WAS PAID FOR TAKING OVER THE BUSINESS , SO IT WAS IN THE NATURE OF THE GOODWILL AND SINCE THE ASSESSEE WAS HAVING THE ENDURING BENEFIT PARTICULARLY WHEN THERE WAS A COVENANT ON THE SELLER FOR NOT TO RUN THE SIMILAR TYPE OF BUSINESS FOR THREE YEARS. THEREFORE, THE SAID AMOUNT CANNOT BE CONSIDERED AS REVENUE IN NATURE AS HAS BEEN HELD BY THE LD. CIT(A) . S INCE THE AMOUNT UNDER CONSIDERATION WAS IN EXCESS OF THE VALUE OF TANGIBLE & INTA NGIBLE ASSET AND WAS A PART OF THE LUMP SUM ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 34 CONSIDERATION FOR ACQUIRING THE BUSINESS, SO IT WAS A GOODWILL. ON A SIMILAR ISSUE THE HON BLE CALCUTTA HIGH COURT IN THE CASE OF CIT VS HINDUSTAN PILKINGTON GLASS WORKS 139 ITR 581 HAS HELD AS UNDER: THE EXPE NDITURE WAS INCURRED WITH THE DECLARED INTENTION OF PREVENTING WHAT THE PARTIES TO THE AGREEMENT DESCRIBED AS ANNIHILATION FROM BUSINESS. THE EXPENDITURE WOULD, IN ALL PROBABILITY, SECURE A GOODWILL FOR THE ASSESSEE IN ITS FIELD BY STERILIZING THE OPERATIO N OF A COMPETITOR FOR FIVE YEARS, AND THE BENEFIT WOULD LAST BEYOND THE PERIOD OF FIVE YEARS. THE PROFIT MAKING APPARATUS OF THE ASSESSEE WAS THEREBY VASTLY IMPROVED. THE EXPENDITURE IN QUESTION WAS, THEREFORE, OF A CAPITAL NATURE. 31 . SIMILARLY, THE HON BLE MADRAS HIGH COURT IN THE CASE OF CHELPARK COMPANY LTD. VS CIT 191 ITR 249 (SUPRA) HAS HELD AS UNDER: THAT THOUGH, UNDER THE AGREEMENT, THE BENEFIT OF THE RESTRICTIVE COVENANT WAS FOR A PERIOD OF FIVE YEARS, FROM THE TERMS OF THE DISSOLUTION DEED AS WELL AS FROM THE FACTS STATED IN THE TRIBUNAL S ORDER THAT THE PARTNERSHIP WHICH WAS A POTENTIAL COMPETITOR TO THE ASSESSEE HAD VANISHED AND THAT THE EX - MANAGING DIRECTOR HAD ALSO LEFT INDIA, IT WAS CLEAR THAT THE ASSESSEE PAID THE AMOUNT TO THE PARTNERSHI P IN ORDER TO WARD OFF DAMAGING COMPETITION FROM A POTENTIAL COMPETITOR, RESULTING IN THE ACQUISITION BY THE ASSESSEE OF A RIGHT AS WELL AS THE ASSESSEE CARRIED ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 35 ON SUCH BUSINESS. CONSEQUENTLY, THE PAYMENT BY THE ASSESSEE WAS IN THE NATURE OF A CAPITAL EXPE NDITURE AND NOT REVENUE EXPENDITURE. 32 . WE, THEREFORE, BY CONSIDERING THE TOTALITY OF THE FACTS AS DISCUSSED HEREINABOVE SET ASIDE THE FINDINGS OF THE LD. CIT(A) ON THIS ISSUE AND UPHELD THE VIEW TAKEN BY THE AO THAT THE NON - COMPETE FEE OF RS. 6.80 CRORES WAS NOTHING BUT GOODWILL OF THE BUSINESS AND A CAPITAL EXPENDITURE. NOW QUESTION ARISES AS TO WHETHER THE ASSESSEE IS ELIGIBLE FOR DEPRECIATION ON THE GOODWILL . I N THIS REGARD, IT IS RELEVANT TO POINT OUT THAT THE HON BLE SUPREME COURT IN THE CASE OF CIT, KOLKATA VS SMIF SECURITIES LTD. IN SLP(CIVIL) NO. 35600 OF 2009 (SUPRA) HELD THAT THE GOODWILL IS ELIGIBLE FOR DEPRECIATION U/S 32 OF THE ACT AND THEIR LORDSHIPS IN THE SAID CASE OBSERVED AS UNDER: IT WAS FURTHER EXPLAINED THAT EXCESS CONSIDERATION PAID BY THE ASSESSEE OVER THE VALUE OF NET ASSETS ACQUIRED OF YSN SHARES AND SECURITIES PVT. LTD. (AMALGAMATING COMPANY) SHOULD BE CONSIDERED AS GOODWILL ARISING ON AMALGAMATION. IT WAS CLAIMED THAT THE EXTRA CONSIDERATION WAS PAID TOWARDS THE REPUTATION WHICH THE AMALGAMATING COMPANY WAS ENJOYING IN ORDER TO RETAIN ITS EXISTING CLIENTELE. THE ASSESSING OFFICER HELD THAT GOODWILL WAS NOT AN ASSET FALLING UNDER EXPLANATION 3 TO SECTION 32(1) OF THE INCOME TAX ACT, 1961 ( ACT , FOR SHORT). ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 36 WE QUOTE HERE IN BELOW EXPLANATION 3 TO SECTION 32(1) OF THE ACT: EXPLANATION 3: FOR THE PURPOSES OF THIS SUB - SECTION, THE EXPRESSIONS ASSETS AND BLOCK OF ASSETS SHALL MEAN; (A) TANGIBLE ASSETS, BEING BUILDINGS, MACHINERY, PLANT OR FURNITURE; (B) INTANGIBLE ASSETS, BEING KNOW - H OW, PATENTS, COPYRIGHTS, TRADEMARKS, LICENCES, FRANCHISES OR ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE. EXPLANATION 3 STATES THAT THE EXPRESSION ASSET SHALL MEAN AN INTANGIBLE ASSET, BEING KNOW - HOW, PATENTS, COPYRIGHTS, TRADEMARKS, LICE NCES, FRANCHISES OR ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE. A READING THE WORDS ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE IN CLAUSE (B) OF EXPLANATION 3 INDICATES THAT GOODWILL WOULD FALL UNDER THE EXPRESSION ANY OTHER BUSINESS OR COMMERCIAL RIGHT OF A SIMILAR NATURE . THE PRINCIPLE OF EJUSDEM GENERIS WOULD STRICTLY APPLY WHILE INTERPRETING THE SAID EXPRESSION WHICH FINDS PLACE IN EXPLANATION 3(B). IN THE CIRCUMSTANCES, WE ARE OF THE VIEW THAT GOODWILL IS AN ASSET UND ER EXPLANATION 3(B) TO SECTION 32(1) OF THE ACT. ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 37 33 . IN VIEW OF THE ABOVE, WE HOLD THAT THE NON - COMPETE FEE AMOUNTING TO RS. 6.80 CRORES PAID BY THE ASSESSEE WAS CAPITAL IN NATURE AND GOODWILL, IT WAS ELIGIBLE FOR DEPRECIATION U/S 32 OF THE ACT . 34 . AC CORDINGLY, T HE GROUND NO. 1 OF THE DEPARTMENTAL APPEAL IS ALLOWED AND CROSS OBJECTION OF THE ASSESSEE IS PARTLY ALLOWED. 35 . THE ANOTHER GROUND RAISED BY THE DEPARTMENT I.E. GROUND NO. 2 RELATES TO T HE DELETION OF ADDITION OF RS. 4 1,62,213/ - MADE BY THE AO BEING EXPENSES INCURRED IN CONNECTION WITH PURCHASE/ACQUISITION OF BUSINESS ASSETS. 36 . FACTS RELATED TO THIS ISSUE IN BRIEF ARE THAT THE ASSESSEE HAD TAKEN OVER BUSINESS ON SLUMP SALE BASIS AND INCURRED FOLLOWING EXPENSES FOR ACQUIRING OF ASSET S : PA YMENT MADE FOR LEGAL ADVICE TAKEN FROM WADIA GHANDY & CO. IN CONNECTION WITH PURCHASE OF NCT BUSINESS RS. 16,01,585 PAYMENT MADE TO MOTT MACDONALD FOR VALUATION OF FIXED ASSETS RS. 1,62,000 PAYMENT MADE TO KPM G INDIA PVT. LTD. FOR PROFESSIONAL ADVICE TAK EN FOR THE PURCHASE OF DIVISION RS. 5,66,810 DUA ASSOCIATES - PROFESSIONAL SERVICES IN RELATION WITH THE DOCUMENTATION ETC. RS. 11,79,818 BHARAT S. RAWAT & CO. PAYMENT FOR ADVISORY SERVICES RS. 6,52,000 RS. 41,62,213 ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 38 37 . THE ABOVE EXPENDITURE WERE CL AIMED AS REVENUE EXPENDITURE. THE AO ASKED THE ASSESSEE TO SHOW CAUSE AS TO WHY THE EXPENDITURE IN CONNECTION WITH THE ACQUISITION OF ASSETS OR ACQUIRING OF BUSINESS SHOULD NOT BE CAPITALIZED AND DEPRECIATION TO BE ALLOWED THEREON. THE CONTENTION OF THE AS SESSEE WAS THAT THE EXPENDITURE HAD NOT RESULTED INTO ENDURING BENEFIT. THE AO HOWEVER, DID NOT ACCEPT THE CONTENTION OF THE ASSESSEE BY OBSERVING THAT THE EXPENSES WERE INCURRED TO BRING THE ASSETS INTO EXISTENCE , RESULTING IN THE BENEFIT OF ENDURING NATU RE. HE, THEREFORE, TREATED THOSE EXPENSES AS CAPITAL IN NATURE , HOWEVER , HE DID NOT ALLOW THE DEPRECIATION BY STATING THAT THE EXPENDITURE WAS NOT INCURRED FOR SPECIFIC ASSET AND WAS RELATING TO PURCHASE OF DIVISION ON SLUMP SALE BASIS. 38 . BEING AGGRIEVE D THE ASSESSEE CARRIED THE MATTER TO THE LD. CIT(A) AND SUBMITTED AS UNDER: THE LD. ASSESSING OFFICER HAS ERRED IN LAW AND ON FACTS IN DISALLOWING THE EXPENSES AMOUNTING TO RS. 41,62,213/ - INCURRED IN CONNECTION WITH LEGAL ADVICE, VALUATION OF ASSETS, DO CUMENTATION CHARGES IN CONNECTION WITH PURCHASE OF NC AND CHEMICAL TRADING BUSINESS. IN THIS REGARD THE LEARNED AO HAS OBSERVED THAT THE EXPENDITURE HAS RESULTED INTO ENDURING BENEFIT AND THE EXPENDITURE ARE RELATED TO ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 39 BRINGING IN THE ASSETS IN EXISTENCE. THE ALTERNATIVE CLAIM OF DEPRECIATION HAS ALSO NOT BEEN ACCEPTED AS EXPENDITURE WAS NOT INCURRED FOR SPECIFIC ASSET AND RELATED TO PURCHASE OF DIVISION ON SLUMP SALE BASIS. THE ASSESSING OFFICER HAS MADE CONTRADICTORY STATEMENT WHILE PASSING THE ORDER. IN FIRST INSTANCE HE ISSUED SHOW CAUSE AS TO WHY THE EXPENDITURE IN CONNECTION WITH THE ACQUISITION OF ASSETS OR BUSINESS BE NOT TREATED AS CAPITAL EXPENDITURE. WHEN APPELLANT STATED THAT NO ENDURING BENEFIT HAS ARISEN AND ALTERNATIVELY CLAIMED FOR DEPRECIAT ION IF CAPITALIZED, THEN HE DENIED THE BENEFIT BY STATING THAT EXPENDITURE WAS NOT INCURRED FOR SPECIFIC ASSET. FIRSTLY, THERE IS NO CREATION OF ANY ASSET BY SPENDING THE SAID AMOUNT. IT WAS SPENT FOR VARIOUS LEGAL ISSUES WHICH ARE BENEFICIAL TO THE COMPAN Y S INTEREST. SECONDLY, BUSINESS/ASSETS HAVE COME INTO EXISTENCE AND THEIR LOCATION BY SIGNING THE BUSINESS TRANSFER AGREEMENT AT AGREED PRICE. THE SAID AMOUNT WAS SPENT TO GIVE LEGAL AND AUTHENTIC VALUES TO EACH AND EVERY ITEM FOR THE USER OF FINANCIAL ST ATEMENT AND OTHER PURPOSES. 39 . THE RELIANCE WAS PLACED ON THE FOLLOWING CASE LAWS: CIT VS HINDUSTAN ZINC. LTD. (2009) 221 CTR 631 (RAJ) EMPIRE JUTE CO. LTD. VS CIT (1980) 124 ITR 1 (SC) CIT VS MADRAS AUTO SERVICE (P) LTD. (1998) 233 ITR 468 (SC) CIT VS TAMIL NADU INDUSTRIAL DEVELOPMENT CORPORATION LTD. (2008) 215 CTR 90 (MAD) ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 40 40 . THE LD. CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE OBSERVED THAT THE ASSESSEE INCURRED LEGAL AND ADVISORY EXPENSES WITH RELATION TO ACQUIRING THE NCT BUSINES S FROM ICI INDIA LTD. AND THE SAID EXPENDITURE WAS LAID OUT WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE, IT HAD NOT RESULTED INTO THE ACQUISITION OF ANY CAPITAL ASSET, SO IT WAS DEDUCTIBLE AS REVENUE EXPENDITURE. 41 . NOW THE DEPARTM ENT IS IN APPEAL. THE LD. DR STRONGLY SUPPORTED THE ORDER OF THE AO AND REITERATED THE OBSERVATION MADE IN THE ASSESSMENT ORDER DATED 19.12.2006. IN HIS RIVAL SUBMISSIONS THE LD. COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSION MADE BEFORE THE AUTHORITIE S BELOW AND STRONGLY SUPPORTED THE IMPUGNED ORDER PASSED BY THE LD. CIT(A). 4 2 . WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND CAREFULLY GONE THROUGH THE MATERIAL AVAILABLE ON THE RECORD. IN THE PRESENT CASE, IT IS AN ADMITTED FACT THAT THE IM PUGNED EXPENDITURE WAS INCURRED IN CONNECTION WITH THE ACQUIRING OF ASSETS AND SINCE THE EXPENSES INCURRED WERE RELATED TO BRING THE ASSETS INTO EXISTENCE THOSE WERE CAPITAL IN NATURE AND NOT THE REVENUE IN NATURE. WE, THEREFORE, ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 41 REVERSE THE FINDINGS OF TH E LD. CIT(A) ON THIS ISSUE AND HOLD THAT THE EXPENSES INCURRED BY THE ASSESSEE FOR ACQUIRING THE ASSETS WERE CAPITAL IN NATURE, SO THOSE TO BE CAPITALIZED AND THE AO IS DIRECTED TO ALLOW THE DEPRECIATION AS PER LAW ON THOSE CAPITALIZED EXPENDITURE. ACCORDI NGLY, THE GROUND RAISED BY THE DEPARTMENT IS PARTLY ALLOWED. ITA NO. 3408/DEL/2009 FOR ASSESSMENT YEAR 2005 - 06 4 3 . IN ITA NO. 3408/DEL/2009 FOR ASSESSMENT YEAR 2005 - 06 , THE DEPARTMENT HAS RAISED THE FOLLOWING GROUND S : 1. ON THE FACTS AND IN THE CIRCUMS TANCES OF THE CASE AS WELL AS IN LAW, THE LD. CIT(A) ERRED IN DELETING THE ADDITION OF RS. 1,20,00,000/ - BEING PAYMENT MADE TO THE HOLDING COMPANY TREATING THE SAME AS A REVENUE EXPENDITURE INSTEAD OF CAPITAL AS TREATED BY AO. 2. ON THE FACTS AND CIRCUMST ANCES OF THE CASE AS WELL AS IN LAW, THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS. 1,36,78,560/ - BEING DISALLOWANCE OF EXCESSIVE COMMISSION BY ADMITTING FRESH EVIDENCES WITHOUT CALLING FOR A REPORT FROM THE AO IN VIOLATION OF RULE 46A OF I.T. RU LES, 1962. 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AS WELL AS IN LAW, THE LD. CIT(A) HAS ERRED IN REDUCING THE DISALLOWANCE OF RS. 42,27,758/ - TO RS. 20,79,886/ - ON ACCOUNT OF WATER CHARGES BY ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 42 ADMITTING FRESH EVIDENCES WITHOUT CALLING FOR A REPORT F ROM THE AO IN VIOLATION OF RULE 46A OF I.T. RULES, 1962. 4. THE APPELLANT CRAVES TO BE ALLOWED TO ADD ANY FRESH GROUNDS OF APPEAL AND/OR DELETE OR AMEND ANY OF THE GROUNDS OF APPEAL. 4 4 . THE ASSESSEE IN ITS CROSS OBJECTION HAS RAISED ADDITIONAL GROUND I N THE SAME FASHION AS WAS RAISED FOR THE ASSESSMENT YEAR 2005 - 06. 4 5 . IN THE DEPARTMENTAL APPEAL , THE FIRST ISSUE RELATES TO THE DELETION OF ADDITION OF RS. 1,20,00,000/ - BEING PAYMENT MADE TO THE HOLDING COMPANY TREATING THE SAME AS REVENUE EXPENDITURE INSTEAD OF CAPITAL AS TREATED BY THE AO. 4 6 . FACTS RELATED TO THIS ISSUE IN BRIEF ARE THAT THE AO, DURING THE COURSE OF ASSESSMENT PROCEEDINGS NOTICED THAT THE ASSESSEE HAD DEBITED AN AMOUNT OF RS. 1,20,00,000/ - UNDER THE HEAD TECHNO COMMERCIAL & LICENS I NG FEE STATED TO BE PAID TO THE HOLDING COMPANY, NAMELY, M/S NITREX MAURITIUS LTD. THE SUBMISSION OF THE ASSESSEE BEFORE THE AO WAS THAT THE FEE WAS PAID FOR THE USE OF BRAND NAME OF NITREX ALONGWITH THE LOGO , AND INFORMATION & EXPERTISE AVAILABLE WITH M/S NITREX MAURITIUS LTD. THE AO AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE OBSERVED THA T THERE WERE TWO AGREEMENTS - BRAND LICENSING AGREEMENT AND TECHNO COMMERCIAL ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 43 A GREEMENT , WHICH WERE EXECUTED ON 14.03.2005 FOR A PERIOD OF THREE YEARS EFFECTIVE FROM 01.04.2004 ON ANNUAL PAYMENT OF RS. 40 LAKHS AND RS. 80 LAKHS RESPECTIVELY. THE AO WAS OF THE VIEW THAT THE SERVICES TO BE PROVIDED WERE IN THE NATURE OF BRAND BUILDING, THEREFORE, THE SAME APPEARS TO BE CAPITAL IN NATURE AND M/S NITREX MAURITIUS LTD. WAS UNDER OBLIGATION TO PROVIDE SERVICES , WHICH WERE NECESSARY FOR BETTERMENT IN THE FIELD OF MANUFACTURE, FINANCIAL AS WELL AS PERSONNEL ACTIVITIES OF THE BUSINESS. THEREFORE, THE ASSESSEE HAD DEFINITELY GOT BENEFITE OF ENDURING NATURE AND THE EXPENSES W ERE CAPITAL IN NATURE. THE AO ACCORDINGLY DISALLOWED THE EXPENSES OF RS. 1,20,00,000/ - AND ADDED BACK TO THE TOTAL INCOME OF THE ASSESSEE. 4 7 . BEING AGGRIEVED THE ASSESSEE CARRIED THE MATTER TO THE LD. CIT(A) AND SUBMITTED AS UNDER: DISALLOWANCE OF FEE S OF TECHNO COMMERCIAL OF RS. 80,00,000/ - AND BRAND LICENSING OF RS. 40,00,000/ - , AS REVENUE EXPENDITURE. IN THIS REGARD WE ALSO MOST RESPECTFULLY SUBMIT THAT THE SAID EXPENDITURE IS ANNUAL PAYMENT FOR THE USE OF BRAND NAME AND IT IS NOT TOWARDS THE PURCH ASE OF THE BRAND NAME AND IT IS ANNUAL OUTGOINGS AS ROYALTY AND THIS REGARD CLAUSE 2, OF THE SAID AGREEMENT IS RELEVANT, WHICH READS AS UNDER: SUBJECT TO THE APPROVAL OF THE REGULATORY AUTHORITIES IN INDIA, IF ANY REQUIRED, DURING THE CURRENCY OF THIS A GREEMENT, NITREX MAURITIUS SHALL GRANT A LICENCE TO NITREX ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 44 INDIA FOR USING THE TRADEMARK/ BRAND NAME AND LOGO, WITH NO TERRITORIAL LIMITS TO THE LICENCE AND IN RETURN NITREX INDIA SHALL PAY TO NITREX MAURITIUS, A ROYALTY FOR THE WORLDWIDE LICENCE TO USE TRA DEMARK, BRAND NAME NITREX AND LOGO AS DISPLAYED IN ANNEXURE TO THE AGREEMENT . WE FURTHER SUBMIT THAT AS PER THE CLAUSE 10 OF THE SAID AGREEMENT, ON TERMINATION OF THE AGREEMENT UNDER CLAUSE 6, THE APPELLANT HAS TO RETURN TO NITREX MAURITIUS ALL DATA WH ICH THE APPELLANT HAD RECEIVED BY VIRTUE OF THE AGREEMENT UNDER CONSIDERATION. ACCORDINGLY, IT IS EVIDENT THAT WE HAVE NOT PURCHASED THE SAID DATA AND WE HAVE TAKEN RIGHT TO USE THE DATA AND FOR WHICH SAID PAYMENT HAS BEEN MADE. IN THIS REGARD WE RELY ON THE FOLLOWING JUDGMENTS: A. CIT VS EICHER MOTORS LIMITED (2008) 293 ITR 464 (MP) B. DCIT VS DCM BENETTON INDIA LTD. (2008) 9 DTR 587 (DEL) C. DERBERTSONS LTD. VS DCIT (2004) 87 TTJ 840 (MUM) D. CIT VS ARVIND MILLS LTD. 248 ITR 187 (GUJ) E. CIT VS ARVIND MILLS LTD. 25 4 ITR 529 (GUJ) F. CIT VS MIHIR TEXTILES LTD. 218 ITR 600 (GUJ) IN VIEW OF THE ABOVE FACTS AND LEGAL POSITION, THE EXPENDITURE IS ALLOWABLE REVENUE EXPENDITURE AND IT SHOULD BE ALLOWED IN FULL UNDER SECTION 37(1) OF THE ACT. 4 8 . THE LD. CIT(A) AFTER CONSID ERING THE SUBMISSIONS OF THE ASSESSEE DIRECTED THE AO TO TREAT THE IMPUGNED AMOUNT AS REVENUE EXPENDITURE BY OBSERVING AS UNDER: ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 45 I HAVE GONE THROUGH THE OBSERVATIONS MADE BY THE AO IN THE ASSESSMENT ORDER AND ALSO PERUSED THE SUBMISSIONS FILED BY THE A PPELLANT ON THE ISSUE AND CASE LAWS RELIED UPON. IT IS SEEN THAT DURING THE YEAR UNDER CONSIDERATION, THE APPELLANT COMPANY HAS ENTERED INTO AN AGREEMENT WITH M/S NITREX MAURITIUS LTD. THROUGH ITSELF AND ITS AFFILIATES FOR OBTAINING INFORMATION AND EXPERTI SE AVAILABLE WITH IT OR TO RENDER ANY FINANCIAL ASSISTANCE REQUESTED FOR TIME TO TIME FOR CONDUCTING AND EXPANDING OF THE BUSINESS OF THE M/S NITREX CHEMICALS INDIA LTD. IN CONSIDERATION OF ALL THE SERVICES TO BE RENDERED BY M/S NITREX MAURITIUS LTD. UNDER THIS AGREEMENT AS ENUMERATED IN THE ANNEXURE TO THIS AGREEMENT IN THE FORM OF COMMERCIAL, MARKETING, LOGISTICS, RESEARCH RESULTS, SAFETY, SECURITY, HEALTH AND ENVIRONMENT POLICY, THE NITREX CHEMICALS INDIA LTD. HAS AGREED TO PAY ANNUALLY A SUM OF RS. 80,0 0,000/ - W.E.F 1 ST APRIL, 2004 AT QUARTERLY RESTS DURING THE CONCURRENCE OF THIS AGREEMENT. VIDE CLAUSE 8 OF THE AGREEMENT, IT WAS MADE EFFECTIVE FROM 1 ST APRIL, 2004 FOR A PERIOD OF THREE YEARS AND WHICH MAY BE REVIEWED BY MUTUAL CONSENT OF BOTH THE PARTIE S. SIMILARLY, THE APPELLANT COMPANY ENTERED INTO ANOTHER AGREEMENT WITH M/S NITREX MAURITIUS LTD. UNDER THE HEAD BRAND LICENSING AGREEMENT . THIS AGREEMENT WAS MADE ON 14 TH MARCH, 2005 AND WAS EFFECTIVE FROM 1 ST APRIL, 2004. UNDER THIS AGREEMENTS, THE NI TREX MAURITIUS, AGREED TO ALLOW TO THE APPELLANT COMPANY I.E. M/S NITREX CHEMICALS INDIA LTD. TO BUILD AN INTERNATIONAL IMAGE TO ITS PRODUCTS UNDER THE NITREX BRAND. THE NITREX MAURITIUS, ALSO AGREED TO PROVIDE ALL NECESSARY SUPPORT AND EXPERTISE TO BUIL D NITREX AS AN INTERNATIONAL BRAND. IN C ONSIDERATION OF THE ABOVE SERVIC ES, NITREX CHEMICALS INDIA LTD. AGREED TO PAY RS. 40,00,000/ - PER ANNUM FOR A PERIOD OF THREE YEARS AT QUARTERLY RESTS. ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 46 FROM THE ABOVE AGREEMENT, IT IS SEEN THAT AMOUNT OF RS. 80,00, 000/ - PAID BY THE APPELLANT COMPANY IN THE FORM OF TECHNO COMMERCIAL FEES WAS FOR AVAILING THE EXPERTISE OF M/S NITREX MAURITIUS IN THE FIELD OF COMMERCIAL, MARKETING, LOGISTICS, RESEARCH RESULTS, SAFETY SECURITY, HEALTH AND ENVIRONMENT POLICY AND IN THE AREAS OF EXPERTISE WHICH WAS TO BE PROVIDED BY THE NITREX MAURITIUS DESCRIBED IN THE ANNEXURE TO THE AGREEMENT. SUCH EXPERTISE WAS NECESSARY FOR SMOOTH RUNNING OF BUSINESS OF THE APPELLANT COMPANY AND TO TAKE ADVANTAGE OF THE EXPERTISE AVAILABLE WITH THE SAID COMPANY. IT IS ALSO SEEN THAT THIS PAYMENT IS ON YEARLY BASIS AND NO ASSET HAS BEEN ACQUIRED BY MAKING THIS PAYMENT. THE APPELLANT COMPANY WAS NEW IN THIS BUSINESS AS IT ACQUIRED THIS BUSINESS ONLY ON 16.03.2004 AND WAS ALSO NOT HAVIN G ANY PREVIOUS EX PERIENCE I N THE SAID BUSINESS . THEREFORE, THE EXPERTISE AND ASSISTANCE OF M/S NITREX MAURITIUS WAS NECESSARY FOR RUNNING THE NITROCELLULOSE BUSINESS. HAD THE SERVICES OR EXPERTISE OF M/S NITREX MAURITIUS WHICH WAS SUBSIDIARY OF THE CDC/ACTIS U.K. AND HAD A CCESS TO LARGE DATABASE OF RELEVANT INFORMATION AND MEN POWER AND PERSONNEL, WAS NOT AVAILABLE TO THE APPELLANT COMPANY, THE COMPANY WOULD NOT HAVE BEEN IN A POSITION TO ESTABLISH ITSELF IN THE INTENTIONAL MARKET AND WOULD NOT HAVE ACHIEVED THE RESULTS, WH ICH IT WAS ABLE TO ACHIEVE WITH SUCH ASSISTANCE. THEREFORE, IT APPEARS THAT THE PAYMENT MADE TO THE NITREX MAURITIUS LTD. FOR USING TECHNO COMMERCIAL INFORMATION AND LICENSE TO USE BRAND NAME NITREX AND LOGO WAS IN FURTHERANCE OF THE BUSINESS INTERES T OF THE APPELLANT COMPANY. THESE PAYMENTS WERE TO BE MADE ON QUARTERLY BASIS AND NO ASSET OR ENDURING BENEFIT HAS BEEN ACQUIRED BY MAKING SUCH PAYMENTS. IT IS ALSO SEEN THAT THIS EXPENDITURE HAS BEEN INCURRED IN THE COURSE OF CARRYING ON ITS BUSINESS AND FOR EARNING BETTER RESULTS AND ALSO TO ESTABLISH THE COMPANY S BUSINESS IN INTERNATIONAL ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 47 MARKET. FURTHER, IT IS ALSO SEEN FROM THE AGREEMENT THAT THESE AGREEMENTS WERE SUBJECT TO THE MODIFICATIONS OR TERMINATIONS AT ANY TIME. THEREFORE, THESE AGREEMENTS WE RE NOT PERPETUAL OR PERMANENT AND PAYMENTS MADE ON PERIODIC BASIS IN FURTHERANCE OF SUCH AGREEMENT CANNOT BE TERMED AS CAPITAL EXPENDITURE . THE AO HAS TREATED THE SAID PAYMENTS AS CAPITAL IN NATURE. THE WORD CAPITAL CONNOTES PERMANENCY AND CAPITAL EXPE NDITURE IS, THEREFORE, CLOSELY AKIN TO THE CONCEPT OF SECURING SOMETHING TANGIBLE OR INTANGIBLE PROPERTY, OR CORPOREAL/INCORPOREAL RIGHT, SO THAT THEY COULD BE OF A LASTING OR ENDURING BENEFIT TO THE ENTERPRISE IN ISSUE. THE CAPITAL EXPENDITURE MUST THEREF ORE GENERALLY MEAN AN ACQUISITION OF AN ASSET AND THE ASSET MUST BE INTENDED TO BE OF A LASTING VALUE. WHEREAS REVENUE EXPENSES ARE GENERALLY RUNNING EXPENSES INCURRED IN EARNING PROFIT OR EXPENSES INCURRED WITH THE PRIMARY OBJECT OF AN IMMEDIATE RETURN OR ACQUISITION OF ASSETS WHICH ARE NOT OF LASTING VALUE AND ARE LIKELY TO GET EXHAUSTED OR CONSUMED IN THE PROCESS OF THE RETURN. FURTHER REVENUE EXPENDITURE ARE OPERATIONAL IN ITS PERSPECTIVE AND SOLELY INTENDED FOR THE FURTHERANCE OF THE ENTERPRISE. IN VI EW OF THE ABOVE DISCUSSION, IT IS CLEAR THAT THE PAYMENT MADE BY THE APPELLANT WERE ONLY IN FURTHERANCE OF APPELLANT BUSINESS AND NONE OF THE PAYMENT OR PART THEREOF WAS INCURRED FOR ACQUIRING ANY CAPITAL ASSET OR TANGIBLE/INTANGIBLE ASSET WHICH HAS ANY LA STING OR ENDURING BENEFIT TO THE APPELLANT S BUSINESS. THESE PAYMENTS WERE MADE FOR ONLY ONE YEAR IN CONSIDERATION OF USING THE TRADE MARK OF M/S NITREX MAURITIUS AND TO OBTAIN EXPERTISE IN THE FIELD OF COMMERCIAL, MARKETING, LOGISTICS, RESEARCH RESULTS, S AFETY SECURITY, HEALTH AND ENVIRONMENT POLICY. THIS EXPERTISE WAS NECESSARY FOR SMOOTH RUNNING OF THE BUSINESS AND TO MAKE IT TECHNICALLY VIABLE, EFFICIENT AND PROFITABLE ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 48 UNIT, WITH A VIEW TO YIELD LARGER PROFITS AND ESTABLISH ITSELF IN THE INTERNATIONAL M ARKET. 4 9 . NOW THE DEPARTMENT IS IN APPEAL. THE LD. DR STRONGLY SUPPORTED THE ORDER OF THE AO AND REITERATED THE OBSERVATIONS MADE IN THE ASSESSMENT ORDER DATED 20.12.2007. 50 . IN HIS RIVAL SUBMISSIONS THE LD. COUNSEL FOR THE ASSESSEE STRONGLY SUPPORTE D THE IMPUGNED ORDER PASSED BY THE LD. CIT(A) AND REITERATED THE SUBMISSION S MADE BEFORE HIM. 5 1 . AFTER CONSIDERING THE SUBMISSIONS OF BOTH THE PARTIES AND PERUSING THE MATERIAL ON RECORD, I T IS NOTICED THAT THE AO DID NOT DOUBT THE GENUINENESS OF THE EXP ENSES. HE ONLY DOUBTED THE NATURE OF EXPENSES WHICH WERE CLAIMED BY THE ASSESSEE AS REVENUE IN NATURE BUT THE AO WAS OF THE VIEW THAT IT WAS CAPITAL IN NATURE. IN THE PRESENT CASE, BY INCURRING THE IMPUGNED EXPENSES, THE ASSESSEE HAD NOT ACQUIRE D ANY TANGI BLE/INTANGIBLE ASSET WHICH HAD ANY LASTING AND ENDURING BENEFIT TO THE ASSESSEE S BUSINESS. THE PAYMENTS WERE MADE FOR USING THE TRADE MARK OF M/S NITREX MAURITIUS AND TO OBTAIN EXPERTISE IN THE FIELD OF COMMERCE, FINANCE, MANUFACTURING ETC. WHICH WERE NEE DED FOR SMOOTH RUNNING OF THE BUSINESS AS THE ASSESSEE WAS NEW IN THIS BUSINESS AND THE EXPENSES WERE PAID ONLY FOR ONE YEAR. THEREFORE, WE ARE OF THE VIEW THAT THE LD. CIT(A) WAS FULLY JUSTIFIED ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 49 IN DIRECTING THE AO TO TREAT THOS E EXPENSES AS REVENUE IN NA TURE, WE DO NOT SEE ANY INFIRMITY IN THE ORDER OF THE LD. CIT(A) ON THIS ISSUE. 5 2 . NEXT ISSUE GROUND NO. 2 RELATES TO THE DELETION OF ADDITION OF RS. 1,36,78,560/ - MADE BY THE AO ON ACCOUNT OF EXCESSIVE COMMISSION, ANOTHER GRIEVANCE OF THE DEPARTMENT IS THAT THE LD. CIT(A) HAD VIOLATED THE PROVISIONS OF RULE 46A OF IT RULES, 1962. 5 3 . FACTS RELATED TO THIS ISSUE IN BRIEF ARE THAT THE AO DURING THE COURSE OF ASSESSMENT PROCEEDINGS NOTICED THAT THE ASSESSEE HAD CLAIMED SEL LING COMMISSION OF RS. 3,56,60,672 / - . HE ASKED THE ASSESSEE FOR GENUINENESS OF THOSE EXPENSES . I N RESPONSE THE ASSESSEE SUBMITTED AS UNDER: T HAT AFOREMENTIONED SELLING COMMISSION COMPRISES OF COMMISSION PAID TO COMMISSION AGENTS FOR SALE OF NITREX S PRODUCTS IN AND OUTSIDE INDIA. DURING THE CAPTIONED YEAR, DOMESTIC SALES COMMISSION OF RS. 82,20,656/ - AND EXPORT SALES COMMISSION OF RS. 2,74,40,015/ - WERE PAID. FOR YOU R PERUSAL A COPY OF AGREEMENT ENTERED FOR EXPORT SALES COMMISSION AND A COPY OF AGREEMENT FOR DOMESTIC SALES COMMISSION (AM ONG OTHERS) HAVE BEEN ENCLOSED AS ANNEXURE 2. 5 4 . THE AO AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE OBSERVED THAT FOR EXPORT SALES , TH E RATE OF COMMISSION WAS 10% FOB VALUE OF THE PRODUCT S AND FOR DOMESTIC SALES COMMISSION WAS PAID @ ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 50 RS. 1.50 PER KG PLUS PROMPT PAYMENT DISCOUNT OF RE . 1 PER KG. THE AO FURTHER OBSERVED THAT IN THE ABSENCE OF COMPARATIVE FIGURES OF COMMISSION PAID ON EXPORT SALES , THERE WAS NO ALTERNATIVE EXCEPT TO ESTIMATE THE QUANTUM OF DISALLOWANCE TO BE MADE. THE AO DISALLOWED 50 % OF SUCH COMMISSION PAID BY THE ASSESSEE AMOUNTING TO RS. 2,73,57,119/ - ON EXPORT SALES AND ACCORDINGLY THE DISALLOWANCE OF RS. 1,36,78,560/ - WAS MADE. 5 5 . THE ASSESSEE CARRIED THE MATTER TO THE LD. CIT(A) AND SUBMITTED THAT THE COMMISSION WAS NOT PAID T O THE PARTIES COVERED U/S 40A(2)(B) OF THE ACT AND THIS PAYMENT FOR EXPORT COMMISSION WAS BEING REGULARLY PAID BY ICI INDIA LTD. FROM WHOM THE ASSESSEE PURCHASED THE BUSINESS ON SLUMP SALE BASIS. IT WAS FURTHER SUBMITTED AS UNDER: THE COMPANY HAS ENTERE D INTO EXPORT AGENCY AGREEMENT (AGREEMENT) WITH ASHA EXPORTS ( ASHA EXPORTS ), A COPY OF THE AGREEMENT IS SUBMITTED HEREWITH (ANNEXURE 1). AS PER THE AGREEMENT, ASHA EXPORTS SELLS COMPANY S GOODS DIRECTLY AND THROUGH SUB AGENTS, APPOINTED BY ASHA EXPORTS, FOR COMMISSION. THE COMMISSION AS PER PERCENTAGE AGREED UPON IN THE AGREEMENT, IS PAID DIRECTLY BY THE COMPANY TO ASHA EXPORTS AND THE SUB AGENTS APPOINTED BY ASHA EXPORTS. THE COMMISSION PAYABLE TO THE SUB AGENTS IS REDUCED FROM THE COMMISSION PAYABLE TO ASHA EXPORTS. THE DETAILS PERTAINING TO THE COMMISSION PAYMENT ON EXPORT OF RS. 2,73,57,119/ - ALONG WITH COMPARATIVE STATEMENT FOR COMMISSION PAID IN THREE FINANCIAL YEARS (ANNEXURE 2) IN ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 51 PURSUANCE TO THE SAID AGREEMENT ARE SUBMITTED HEREWITH FOR YOUR KIND PERUSAL. WE ALSO SUBMIT THAT THE AGREEMENT WAS ENTERED BETWEEN ASHA EXPORTS AND M/S ICI INDIA LTD. (I.E. TRANSFEROR OF THE NCT BUSINESSES) AND THAT THE BUSINESS WAS PURCHASED FROM ICI INDIA LTD. ON SLUMP SALE BASIS AND THE AGREEMENT WAS PART OF THE BUSIN ESS TRANSFER AGREEMENT. IN THE CASE OF THE TRANSFEROR COMPANY VIZ. ICI INDIA LTD., THE COMMISSION PAYMENT TO THE SAID PARTY ON THE SAME RATE OF COMMISSION HAS BEEN CLAIMED AND ALLOWED WHILE COMPUTING THE TOTAL INCOME. THAT THE APPLICABLE TDS ON THE COMMIS SION PAID TO ASHA EXPORT HAS BEEN DEDUCTED AND PAID TO THE CENTRAL COMMISSION. COPY OF THE TDS RETURN IS SUBMITTED HEREWITH (ANNEXURE 3). HOWEVER, TDS IS NOT DEDUCTIBLE ON THE COMMISSION PAID TO THE SUB AGENTS, APPOINTED BY ASHA EXPORTS, AS THEY DO NOT HAV E PERMANENT BUSINESS ESTABLISHMENT IN INDIA. THE SAID POSITION HAS BEEN CLARIFIED AND CONFIRMED BY THE INCOME - TAX DEPARTMENT VIDE ITS CIRCULAR NO. 786, DATED 7.2.2000 (ANNEXURE 4). IN VIEW OF THE ABOVE FACTS AND OUR EARLIER SUBMISSIONS THE COMMISSION PAYM ENT IS GENUINE BUSINESS EXPENSES, ALLOWABLE U/S 37 OF THE ACT AND THEREFORE THE LEARNED AO MAY BE DIRECTED TO ALLOW THE SAME WHILE COMPUTING THE TOTAL INCOME. 5 6 . THE LD. CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE DELETED THE IMPUGNED ADDIT ION BY OBSERVING AS UNDER: ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 52 I HAVE CONSIDERED THE FACTUAL POSITION OF THE CASE AND COPIES OF VARIOUS AGREEMENT AND LETTERS SUBMITTED BY THE APPELLANT IN THIS REGARD AND ALSO THE COMMISSION PAYMENTS HAVE BEEN CLAIMED AS PAID TO M/S ASHA EXPORTS AND OTHER INTERNATIONAL PARTIES, IN F.Y. 2003 - 04 WHICH RANGES FROM 9.40% TO 10.50%, AND THE SAME HAVE BEEN ALLOWED BY THE AO IN THE ASSESSMENT FINALIZED U/S 143(3) OF THE I.T ACT. IN EARLIER YEARS ALSO, THE COMMISSION PAYMENT WAS CLAIMED AT SAME OR HIGHER RATE, WHIC H WAS NEVER DISALLOWED BY THE DEPARTMENT. IN THE INSTANT YEAR ALSO, THE COMMISSION PAYMENT HAS BEEN CLAIMED TO SAME PARITIES ON EXPORT SALES, WHICH RANGES FROM 8.5% TO 10.2% OF THE SALES MADE. ON THIS COMMISSION PAYMENT, TDS WHEREVER APPLICABLE, HAS DULY B EEN DEDUCTED AND DEPOSITED INTO THE TREASURY BY THE APPELLANT COMPANY. ALL THESE FACTS ESTABLISH THAT THE COMMISSION WAS PAID BY THE APPELLANT COMPANY, IN FURTHERANCE TO THE AGREEMENT ENTERED BY IT WITH M/S ASHA EXPORTS AND SUB AGENTS OF ASHA EXPORTS, FOR ITS BUSINESS EXPEDIENCY. ON THE BASIS OF THE FACTS AND DOCUMENTS FILED BY THE APPELLANT, IT IS ESTABLISHED THAT THE COMMISSION ON EXPORT HAS BEEN PAID BY THE APPELLANT FOR ITS BUSINESS PURPOSE. THE AO WAS NOT JUSTIFIED IN DISALLOWING 50% OF THE COMMISSION PAID ON THE GROUND THAT THE SAME WAS EXCESSIVE. IT HAS BEEN HELD IN PLETHORA OF CASE LAWS THAT ONCE IT IS ESTABLISHED THAT THERE WAS NEXUS BETWEEN THE EXPENDITURE AND PURPOSES OF BUSINESS, THE DEPARTMENT CANNOT JUSTIFIABLY CLAIM TO PUT ITSELF IN THE ARM CHAIR OF THE BUSINESSMAN OR IN THE POSITION OF BOARD OF DIRECTORS AND ASSUME THE ROLE TO DECIDE HOW MUCH IS REASONABLE EXPENSE, HAVING REGARD TO THE CIRCUMSTANCES OF THE CASE. ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 53 IN VIEW OF FACTUAL POSITION DISCUSSED ABOVE AND PLETHORA OF JUDICIAL PRONOUNCEM ENTS ON THE ISSUE, IT IS WELL SETTLED THAT THE COMMISSION EXPENSES CLAIMED BY THE APPELLANT ON EXPORT SALES WERE GENUINE EXPENSES, EXPENDED AND LAID OUT WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS. FURTHER, SUCH EXPENSES HAVE BEEN CLAIMED AND AL LOWED IN EARLIER YEARS IN TERMS OF THE AGREEMENT. DURING THE YEAR UNDER CONSIDERATION, THE AO HAS NOT BROUGHT ON RECORD AND NEW INFORMATION OR FACTS, WHICH MAY LEAD TO DISALLOWANCE OF PART OF THE COMMISSION EXPENSES. HENCE, THERE IS NO JUSTIFICATION, IN DI SALLOWING PART OF THE EXPENSE ON THE BASIS OF EXCESSIVENESS OF THE EXPENSES. THE AO IS DIRECTED TO ALLOW THE COMMISSION EXPENSE, AS CLAIMED BY THE APPELLANT, IN ITS ENTIRETY. 5 7 . NOW THE DEPARTMENT IS IN APPEAL. THE LD. DR REITERATED THE OBSERVATIONS MAD E BY THE AO IN PARA 4.1 AND 4.2 OF THE ASSESSMENT ORDER AND STRONGLY SUPPORTED THE ORDER OF THE AO. 5 8 . IN HIS RIVAL SUBMISSIONS THE LD. COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSION S MADE BEFORE THE AUTHORITIES BELOW AND FURTHER SUBMITTED THAT THE O NLY OBJECTION OF THE DEPARTMENT RELATES TO THE ADDITION AL EVIDENCES, HOWEVER IT HAS NOT BEEN POINTED OUT WHAT WERE THE ADDITIONAL EVIDENCES PARTICULARLY WHEN THE AO HIMSELF ADMITTED THAT THE COMM ISSION WAS PAID BY THE ASSESSEE, H E ONLY CONSIDERED THIS COMM ISSION AS EXCESSIVE BUT WITHOUT BRINGING ANY MATERIAL ON RECORD TO SUBSTANTIATE THE SAME. THEREFORE, THE LD. CIT(A) RIGHTLY DELETED THE ADDITION MADE BY THE AO. ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 54 5 9 . WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND CAREFULLY GONE THROUGH THE MATER IAL AVAILABLE ON THE RECORD. IN THE PRESENT CASE, I T IS NOTICED THAT THE AO DID NOT DOUBT THE INCURRING OF EXPENSES BY THE ASSESSEE, HE ONLY CONSIDERED THE COMMISSION PAID ON EXPORT SALES TO M/S ASHA EXPORT S AS EXCESSIVE . O N THE CONTRARY, THE CONTENTION OF THE ASSESSEE WAS THAT THE COMMISSION WAS PAID AT THE SAME RATE WHICH WAS PAID BY THE SELLER OF THE BUSINESS I.E. M/S ICI INDIA LTD. , T HE SAID CONTENTION HAD NOT BEEN REBUTTED. IT IS ALSO NOTICED THAT M/S ASHA EXPORT IS NOT RELATED TO THE ASSESSEE AND THE COMMISSION WAS PAID FOR THE SERVICE S PROVIDED BY M/S ASHA EXPORT. IN THE PRESENT CASE, T HE AO DID NOT BRING ANY MATERIAL ON RECORD TO SUBSTANTIATE THAT THE COMMISSION PAID BY THE ASSESSEE WAS EXCESSIVE. WE, THEREFORE, DO NOT SEE ANY INFIRMITY IN THE ORDER OF THE LD. CIT(A) ON THIS ISSUE. IT IS ALSO NOTICED THAT NOTHING IS BROUGHT ON RECORD TO SUB STANTIATE THAT ANY NEW EVIDENCE WAS FURNISHED BY THE ASSESSEE BEFORE THE LD. CIT(A) IN VIOLATION OF RULE 46A OF THE IT RULES, 1962. 60 . THE LAST ISSUE VIDE GROUND NO. 3 AGITATED BY THE DEPARTMENT RELATES TO THE R EDUCTION IN DISALLOWANCE MADE BY THE AO ON ACCOUNT OF WATER CHARGES BY ADMITTING FRESH EVIDENCES. 6 1 . THE FACTS RELATED TO THIS ISSUE IN BRIEF ARE THAT THE ASSESSEE DEBITED WATER CHARGES OF RS. 72,92,206/ - IN THE PROFIT AND LOSS ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 55 ACCOUNT. THE AO ASK ED THE ASSESSEE TO FURNISH THE B ILLS OF WATER CHARGES . I N RESPONSE THE ASSESSEE FURNISHED BILLS OF RS. 30 ,64,348/ - AND SIN CE THE B ILLS IN RESPECT OF REMAINING AMOUNT OF RS. 4 2,27,858/ - WERE NOT FURNISHED, T HE AO MA DE THE ADDITION FOR THOSE EXPENSES I.E. RS. 42,27,858/ - . W HEN THE MATTER WAS TAKEN TO THE LD. CIT(A), THE ADDITION TO THE EXTENT OF RS. 20,79,886/ - WAS CONFIRMED BY OBSERVING AS UNDER: I HAVE CONSIDERED THE OBSERVATIONS OF THE AO AND THE SUBMISSION MADE BY THE APPELLANT AS WELL AS THE SUPPORTING DOCUMENTS FILED BEFORE ME. IT IS SEEN THAT THE APPELLANT HAS CLAIMED WATER CHARGES EXPENSES OF RS. 72,92,206/ - . OUT OF THIS THE AO DISALLOWED A SUM OF RS. 42,27,858/ - , ON ACCOUNT OF NON FURNISHING OF SUPPORTING B ILLS BY THE APPELLANT. DURING THE COURSE OF APPELLATE PROCEEDING, THE APPELLANT HAS FILED COPY OF THE BILLS FROM APRIL 2004 TO MARCH 2005 RAISED BY THE GUJARAT IRRIGATION DEPARTMENT, OF THE FOLLOWING AMOUNTS: APRIL, 2004 4,52,447 MAY, 2004 10,72,457 JUL Y, 2004 2,45,516 AUG, 2004 4,14,340 SEP, 2004 4,24,055 OCT, 2004 4,65,168 NOV, 2004 3,86,681 DEC, 2004 4,56,976 JAN, 2005 4,41,324 FEB, 2005 4,12,781 MARCH, 2005 4,40,575 TOTAL 51,12,320 ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 56 THE APPELLANT HAS FURTHER SUBMITTED THAT REMAINING AMOUNT O F RS. 20,79,886/ - RELATES TO THE PROVISION OF THE EXPENSES AND THE SAME HAS BEEN PAID/REVERSED IN THE NEXT ASSESSMENT YEAR AND OFFERED AS INCOME. SINCE THE APPELLANT COULD PROVE ONLY PAYMENT OF RS. 51,12,320/ - TO GUJARAT IRRIGATION DEPARTMENT TOWARDS WATER CHARGES THE SAME ARE HELD TO BE ALLOWABLE. THE REMAINING PROVISION OF RS. 20,79,886/ - WAS AN UNASCERTAINED LIABILITY AND THE SAME IS NOT ALLOWABLE, IN COMPUTING THE INCOME OF THE APPELLANT FOR THE YEAR UNDER CONSIDERATION. THEREFORE, THE DISALLOWANCE, MAD E BY THE AO ON THIS ISSUE TO THE EXTENT OF RS. 20,79,886/ - IS CONFIRMED . 6 2 . NOW THE DEPARTMENT IS IN APPEAL. 6 3 . WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND CAREFULLY GONE THROUGH MATERIAL AVAILABLE ON THE RECORD. IN THE PRESENT CASE, IT IS NOTICED THAT THE ASSESSEE PRODUCED THE B ILLS OF RS. 30,64,348/ - OUT OF TOTAL WATER CHARGES OF RS. 72,92,206/ - . HOWEVER, BEFORE THE LD. CIT(A) , THE DETAILS OF BILLS FROM APRIL 4 TO MARCH 5 AMOUNTING TO RS. 52,12,320/ - WERE FURNISHED. IN THE PRESENT CASE , IT APPEARS THAT NEW EVIDENCES WERE FURNISHED BEFORE THE LD. CIT(A) WHICH WERE NOT BEFORE THE AO. WE, THEREFORE, TO MEET THE ENDS OF JUSTICE, DEEM IT APPROPRIATE TO SEND THIS ISSUE BACK TO THE FILE OF THE AO FOR PROPER VERIFICATION AND ADJUDICATION AF TER PROVIDING DUE AND REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. ACCORDINGLY, THE APPEAL OF THE DEPARTMENT IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 57 6 4 . IN THE CROSS OBJECTION NO. 322/DEL/2009 FOR THE ASSESSMENT YEAR 2005 - 06 , THE ASSESSEE HA S RAISED ADDITIONAL GROUND IN THE SAME MANNER AS WAS RAISED FOR THE ASSESSMENT YEAR 2004 - 05 AND AN OTH E R ISSUE RELATING TO DEPRE C I ATION IS ALSO SAME . THEREFORE, OUR FINDINGS GIVEN FOR THE ASSESSMENT YEAR 2004 - 05 SHALL APPLY MUTATIS MUTANDIS FOR THIS YEAR AL SO. ACCORDINGLY, THE CROSS OBJECTION OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ITA NO. 3841/DEL/2009 AND CO NO. 367 /DEL/2009 FOR THE A.Y. 2006 - 07 6 5 . FIRST ISSUE IN THIS APPEAL OF THE DEPARTMENT RELATES TO THE DIRECTION OF THE LD. CIT(A) TO AL LOW THE EXPENSES OF RS. 8,43,000/ - , RS. 3,57,206 AND RS. 6,00,000/ - AGAINST BUSINESS INCOME. 6 6 . F ACTS RELATED TO THIS ISSUE IN BRIEF ARE THAT THE AO DURING THE COURSE OF ASSESSMENT PROCEEDINGS NOTICED THAT THE ASSESSEE HAD CLAIMED TO HAVE INCURRED EXPEN SES OF RS. 40,90,048/ - IN CONNECTION TO THE TRANSFER WHICH INCLUDED FOLLOWING EXPENSES: (A) R. R. ENTERPRISES - LEGAL NOTICE ISSUED RS. 8,43,500/ - (B) INSURANCE CLAIM NOT RECOVERED RS. 3,57,206/ - (C) PERFORMANCE INCENTIVE FOR AY 20 05 - 06 RS. 6,00,000/ - THE AO ASKED THE ASSESSEE TO JUSTIFY THE CLAIM . I N RESPONSE , THE ASSESSEE SUBMITTED THAT M/S R.K. ENTERPRISES WAS A TRADE DEBTOR ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 58 PERTAINING TO THE TRADING BUSINESS OF THE ASSESSEE AND AS PER THE BUSINESS TRANSFER A GREEMENT, THE ASSESSEE HAS TO RETAIN THE DEBTOR S RELATING TO BUSINESS , WHOSE COLLECTABILITY WAS IN DOUBT. THE AO DID NOT ACCEPT THE CLAIM OF THE ASSESSEE BY OBSERVING THAT THE SAME WAS NOT ALLOWABLE AS BAD DEBTS U/S 48 OF THE ACT. HE ADDED RS. 8,43,500/ - UNDER THE HEAD SHORT TERM CAPITAL GAIN OF THE ASSESSEE. AS R EGARDS, TO THE INSURANCE CLAIM NOT RECOVERED, THE ASSESSEE SUBMITTED THAT IT SUFFERED SOME LOSSES ON ACCOUNT OF DELUGE IN MUMBAI AGA INST WHICH THE INSURANCE CLAIM WAS LODGED. THE AO ALSO DID NOT ALLOW THIS CLAIM BY STATING THAT IT HAD NO RELATION TO THE TRANSFER OF BUSINESS AND ACCORDINGLY MADE THE ADDITION AT RS. 3,57,2 0 6 / - TO THE SHORT TERM CAPITAL GAIN. AS REGARDS TO THE PERFORMANCE INCENTIVE AMOUNTING TO RS. 6,00,000/ - , THE ASSESSEE SUBMITTED THAT IT HAD A PO LICY OF ANNUAL PERFORMANCE INCENTIVE AND THE ASSESSEE HAD PAID TO EMPLOYEES WHICH WERE SUBSEQUENTLY TRANSFERRED ON ACCOUNT OF BUSINESS TRANSFER. THE AO DID NOT ALLOW THE CLAIM ALSO BY STATING THAT THE PAYMENTS WERE MADE PRIOR TO TRANSFER AND IT HAD NOTHING TO DO WITH TRANSFER. ACCORDINGLY, A SUM OF RS. 6,00,000/ - WAS ADDED TO THE SHORT TERM CAPITAL GAIN. 6 7 . BEING AGGRIEVED THE ASSESSEE CARRIED THE MATTER TO THE LD. CIT(A) WHO ALLOW ED THE CLAIM OF THE ASSESSEE BY OBSERVING T HAT THE EXPENDITURE OF RS. 18,00 ,5 00/ - WAS CLAIMED AGAINST THE SHORT TERM ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 59 CAPITAL GAIN PERTAINING TO WRITING OFF OF DEBT OF RS. 8,43,500/ - OUTSTANDING IN THE NAME OF R . R ENTERPRISES , SHORT RECEIP T OF INSURANCE CLAIMED OF RS. 3,57,206/ - AND THE PAYMENT OF INCENTIVE BONUS OF RS. 6,00,000/ - TO THE EMPLOYEES WHO HAD BEEN TRANSFERRED ALONGWITH TRANSFER OF BUSINESS. HE FURTHER OBSERVED THAT AS PER THE PROVISIONS OF SECTION 36(1)(VII) OF THE ACT , IF THE ASSESSEE WRITES OFF ANY AMOUNT IN ITS BOOKS OF ACCOUNTS , RECOVERY OF WHICH IS DOUBTFUL , THEN SUCH WRITING OFF OF BAD DEBTS IS AN ALLOWABLE EXPENDITURE. AS REGARDS TO THE INSURANCE CLAIM , THE LD. CIT(A) OBSERVED THAT SUCH CLAIM RAISED IN EARLIER YEAR WAS SHOWN AS INCOME IN THE BOOKS AND WHEN THE CLAIM ACTUALLY MATERIALIZE D , T HE ASSESSEE RECEIVED SH ORT CLAIM TO THE EXTENT OF RS. 3,57,206/ - AND SINCE IT WAS A BUSINESS LOSS RELATING TO THE TRADING BUSINESS, THE SAME WAS ALLOWABLE EXPENDITURE U/S 37(1) OF THE ACT. AS REGARDS TO THE ANNUAL PERFORMANCE INCENTIVE PAYABLE TO THE EMPLOYEES OF THE TRADING UNI T WHO HAD BEEN SUBSEQUENTLY TRANSFERRED, THE LD. CIT(A) POINTED OUT THAT IT WAS RELATED TILL 14.10.2005 , WHICH HAD BEEN OFFERED IN THE PROFIT AND LOSS ACCOUNT. THEREFORE, INCENTIVE TILL THAT DATE HAD TO BE PAID BY THE ASSESSEE. THE LD. CIT(A) HELD THAT ALL THE AFORESAID EXPENSE S WERE BUSINESS EXPENDITURE AND ALLOWABLE AGAINST THE INCOME UNDER THE HEAD BUSINESS AND PROFESSION . ACCORDINGLY, THE AO WAS DIRECTED TO ALLOW THE SAME AGAINST THE ASSESSEE S BUSINESS INCOME . ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 60 6 8 . NOW THE DEPARTMENT IS IN APPEAL. TH E LD. DR SUPPORTED THE ORDER OF THE AO AND REITERATED THE OBSERVATIONS MADE IN THE ASSESSMENT ORDER. IN HIS RIVAL SUBMISSIONS THE LD. COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSION S MADE BEFORE THE LD. CIT(A) AND STRONGLY SUPPORTED THE IMPUGNED ORDER. 69 . AFTER CONSIDERING THE SUBMISSIONS OF BOTH THE PARTIES, WE DO NOT SEE ANY INFIRMITY IN THE ORDER OF THE LD. CIT(A) , PARTICULARLY WHEN THE ASSESSEE HAD WRITTEN OFF BAD DEBTS IN ITS BOOKS OF ACCOU NTS AND INSURANCE CLAIM RELATING TO THE BUSINESS WAS LESS RECOVERED TO THE EXTENT OF RS. 3,57,206/ - WHICH WAS ALLOWABLE AS A BUSINESS LOSS U/S 37(1) OF THE ACT. SIMILARLY, THE ANNUAL PERFORMANCE INCENTIVE PAYABLE WAS RELATED TO THE TRADING BUSINESS OF THE ASSESSEE WHICH HAD SUBSEQUENTLY BEEN TRANSFERRED BUT SINCE THE INCOME TILL 14.10.2005 HAD BEEN OFFERED BY THE ASSESSEE IN THE PROFIT AND LOSS ACCOUNT AND THIS PERFORMANCE INCENTIVE PAYABLE WAS RELATED TO THE PERIOD ENDING ON 14.10.2005, T HEREFORE, IT WAS TO BE PAID BY THE ASSESSEE AND WAS ALLOWABLE AS EXPENDITURE . IN THAT VIEW OF THE MATTER, WE DO NOT SEE ANY VALID GROUND TO INTERFERE WITH THE FINDINGS OF THE LD. CIT(A). 70 . VIDE GROUND NO. 2 THE GRIEVANCE OF THE DEPARTMENT RELATES TO THE DELETION OF DISALLOWANCE OF RS. 1,39,76,352/ - . THE FACTS RELATED TO THIS IS SUE IN BRIEF ARE THAT THE AO DURING THE COURSE OF ASSESSMENT ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 61 PROCEEDINGS NOTICED THAT THE ASSESSEE CLAIMED COST OF PURCHASE OF SHARES TO THE EXTENT OF RS. 1,39,76,352/ - , AS EXPENSES INCURRED IN CONNECTION WITH TRANSFER. THE AO TREATED THOSE EXPENSES AS NOT RELATED TO SLUMP SALE AND WERE NOT ALLOWABLE. HE ADDED THE SAME TO THE SHORT TERM CAPITAL GAIN OF THE ASSESSEE FOR THE FOLLOWING REASONS: 4.1 THE BUY BACK SHARES OF THE MANAGEMENT HOLDING OF THE OUTGOING COMPANIES WAS A VOLUNTARY ACT OF THE TRUST T O MA INTAIN THE OWNERSHIP OF THE TRUST OVER THE SHARES. THE FUNDING BY THE ASSESSEE COMPANY WAS MERELY TO RETAIN OWNERSHIP OVER THE SHARE CAPITAL; AS THE TRUST WAS FORMED MERELY AS A CUSTODIAN OF THE EMPLOYEE SHARES. THE ACT OF BUY BACK WAS INDEPENDENT TO THE TRANSACTION OF SLUMP SALE PER SE. 4.2 THE BTA LAYS TRANSFER ON A SLUMP SALE BASIS AS A GOING CONCERN ON AN AS IS WHERE IS BASIS AND BY VIRTUE OF THE NATURE OF SLUMP SALE THE SELLER CANNOT WITHDRAW ANY ASSET (BOTH MOVABLE AND IMMOVABLE) OR LIABILITY FRO M THE BUSINESS SOLD OR THE PURCHASER CANNOT REJECT ANY ASSET OR LIABILITY COMPRISED IN THE BUSINESS. 4.3 THE ETA DATED 14.10.2005 DOES NOT IN ANY MANNER WHATSOEVER CASTS ANY OBLIGATION ON THE ASSESSEE COMPANY TO BUY BACK THE SHARES HELD BY THE OUTGOING EMP LOYEES OR FUND THE TRUST FOR THIS PURPOSE. IN FACT THE ETA AS PER CLAUSE 4.4 LAYS THAT EAC AND/OR NEWCO SHALL EMPLOY THE EMPLOYEES FROM THE COMPLETION DATE ON TERMS AND CONDITIONS OF SERVICE WHICH ARE NO LESS FAVORABLE THAN THOSE WHICH THE EMPLOYEES ENJOYE D IMMEDIATELY PRIOR TO THE COMPLETION DATE WITH NITREX INDIA WITHOUT ANY INTERRUPTION OR BREAK IN SERVICE. ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 62 4.4 AS SUCH THE LEGAL ONUS IN CAST ON EAC/NEWCO TO SUITABLY COMPENSATE THE EMPLOYEES AND NO ADVERSE TERMS OF EMPLOYMENT IS IMPOSED ON THEM ON ACCOUN T OF THE BUSINESS TRANSFER. THE ACT OF FUNDING THE BUY BACK OF THE MANAGEMENT SHARES IS AN EXPENDITURE WHICH IS INDEPENDENT OF THE BUSINESS TRANSFER AND CANNOT BE ALLOWED U/S 48 OF THE ACT FOR COMPUTATION OF SHORT TERM CAPITAL GAIN. 7 1 . BEING AGGRIEVED THE ASSESSEE CARRIED THE MATTER TO THE LD. CIT(A) AND SUBMITTED AS UNDER: THAT THE ASSESSEE COMPANY WAS FORMED BY NITREX MAURITIUS LTD. AFTER ACQUIRING NITROCELLULOSE AND TRADING BUSINESS FROM ICI LTD. VIDE ETA DATED 3 RD DECEMBER 2003. IT WAS AGREED T HAT FOR THE SMOOTH RUNNING OF THE BUSINESS OF THE COMPANY, IT WOULD BE PRUDENT THAT THE EMPLOYEES OF THE BUSINESS ACQUIRED BY THE COMPANY MAY ALSO HAVE STAKE IN THE COMPANY. THEREFORE, 5.5% OF THE SHARES WERE SUBSCRIBED BY THE MANAGEMENT TEAM. THE COMPANY ALSO ENTERED INTO AN ESOP SCHEME UNDER WHICH FURTHER SHARES WERE TO BE ALLOTTED TO THE EMPLOYEES (COPY OF THE SAID TRUST DEED IS SUBMITTED HEREWITH AS ANNEXURE 11). AN ESOP TRUST WAS ALSO CREATED AS A CUSTODIAN OF THE EMPLOYEES SHARES. (COPY OF THE SAID TR UST DEED IS SUBMITTED HEREWITH AS ANNEXURE 12). ICI LTD. ALSO SUBSCRIBED TO 10% OF THE EQUITY SHARE CAPITAL OF ASSESSEE COMPANY WITH AN UNDERTAKING TO MAKE THE SHARES AVAILABLE TO THE MANAGEMENT TEAM AS PER THE ESOP SCHEME. 1. SUBSEQUENTLY, THE ASSESSEE COMP ANY DECIDED TO SELL THE TRADING BUSINESS ORIGINALLY ACQUIRED FROM ICI TO EAC VIDE BTA DATED 14.10.2005. AS PER THE EMPLOYEE TRANSFER AGREEMENT (ETA) OF THE EVEN DATE, IT WAS A CONDITION ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 63 PRECEDENT TO THE COMPLETION OF TRANSACTIONS CONTEMPLATED IN BTA THAT H E MANAGEMENT STAFF SHALL HAVE CONFIRMED TO ACCEPT THE EMPLOYMENT IN THE NEW COMPANY INSTEAD OF THE ASSESSEE COMPANY (PLEASE REFER CLAUSE NO. 3 OF ETA DATED 14.10.2005). FURTHER, IT WAS AGREED THAT ON SUCH ACCEPTANCE, THE NEW COMPANY SHALL EMPLOY THE EMPLOY EES ON TERMS AND CONDITIONS OF SERVICE WHICH ARE NO LESS FAVORABLE THAN THOSE WHICH THE EMPLOYEES ENJOYED IMMEDIATELY PRIOR TO COMPLETION DATE OF BUSINESS TRANSFER WITHOUT ANY INTERRUPTION OR BREAK OF SERVICE. 2. FURTHER AS PER THE EMPLOYEES STOCK OPTION PLA N 2004, IN THE VENT OF SEPARATION OF THE EMPLOYEES FOR REASONS OTHER THAN RETIREMENT, THE EMPLOYEES HAD TO EXERCISE THE OPTION VESTED ON THEM WITHIN THREE MONTHS OF DATE OF RESIGNATION. THE EMPLOYEES ALSO HAD TO DIVEST WITH THEIR OTHER SHAREHOLDINGS IN THE COMPANY ON ACCOUNT OF SUCH TRANSFER. 3. THAT IN ORDER TO EFFECT THE BUSINESS TRANSFER TRANSACTIONS, IT BECAME NECESSARY FOR THE APPELLANT COMPANY TO ENSURE THAT THE MANAGEMENT STAFF ACCEPTS TO PART WITH THEIR EMPLOYMENT WITH THE ASSESSEE COMPANY AND ACCEPT THE EMPLOYMENT OF THE NEW COMPANY, AS THE SAME WAS A PRE - REQUISITE FOR CONSUMMATION OF THE TRANSACTIONS UNDER BTA. ACCORDINGLY, IN THIS REGARD ACCEPTANCE LETTER DATED 9.12.2005, WITH THE AGREEMENT OF NITREX CHEMICALS EMPLOYEES STOCK OPTION TRUST, FROM SAID MANAGEMENT EMPLOYEES (COPY OF THE SAID LETTERS ARE SUBMITTED AS ANNEXURE 17), WERE OBTAINED BY THE COMPANY AND WHEREBY, THE TRADING BUSINESS HAD BEEN TRANSFERRED TO EAC, WITHOUT ANY HINDRANCES OR LITIGATION FROM THE PART OF THE SAID SHAREHOLDERS. AT THE T IME OF PARTING THE ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 64 AFORESAID EMPLOYEE THEIR MANAGEMENT HOLDING WAS BOUGHT BACK BY THE TRUST AT FOLLOWING RATE. NAME SHAREHOLDING MANAGEMENT HOLDING RATE OF BUY BACK BY TRUST PAID TO THEM ON TRANSFER MR. SANJAY GUPTA 120000 85.00 RS.10,200,000 MR. MANISH BAHUGUNA 40000 60.46 RS.2,418,400 MR. MURALI DUVVURI 32000 30.46 RS.1,934,720 MR. SATISH KUMAR 32000 60.46 RS.1,934,720 TOTAL 224000 RS.1,64,87,840 4. THAT IN PURSUANCE TO SAID BUSINESS TRANSFER AGREEMENT AND EMPLOYEE TRANSFER AGREEMENT, ESOP SCHEME , CONSENT OF THE MANAGEMENT EMPLOYEE DATED 9 TH DECEMBER 2005, THE AFORESAID BUY BACK WAS REQUIRED TO BE FUNDED BY THE ASSESSEE COMPANY AND THEREFORE, SAID AMOUNT OF RS.1,39,76,352/ - (RS. 1,64,87,840 RS. 25,11,488), WAS NON - RECOVERABLE FROM THE TRUST. TH E AMOUNT FROM THE TRUST IS NON - RECOVERABLE, AS THE ULTIMATE LOSS, ON THE SAID ACQUISITION OF THE SHARES BY ESOP TRUST, ON ACCOUNT OF BUSINESS TRANSFER, IN PURSUANCE TO THE BTA AND ETA WAS THE CONTRACTUAL LIABILITY OF THE COMPANY. SINCE THE BUY BACK OF THE SHARES FROM THE EMPLOYEES WAS NECESSITATED BY THE TRANSFER OF TRADING BUSINESS TO EAC AND THE SUCH TRANSFER WOULD NOT HAVE BEEN POSSIBLE HAD SUCH BUY BACK NOT HAVE BEEN MADE, THE AMOUNT PAID IN RESPECT THEREOF, IS AN EXPENSE INCURRED WHOLLY AND EXCLUSIVELY IN CONNECTION WITH TRANSFER AS CONTEMPLATED UNDER SECTION 48 OF THE ACT AND THEREFORE THE SAID AMOUNT IS REQUIRED BE ALLOWED TO BE DEDUCTED WHILE COMPUTATION OF CAPITAL GAIN IN RESPECT OF SLUMP SALE OF TRADING BUSINESS. ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 65 7 2 . THE LD. CIT(A) AFTER CONSIDER ING THE SUBMISSIONS OF THE ASSESSEE DELETED THE ADDITION BY OBSERVING AS UNDER: I HAVE GONE THROUGH THE OBSERVATIONS OF THE ASSESSING OFFICER AS CONTAINED IN THE ASSESSMENT ORDER, SUBMISSIONS OF THE APPELLANT FILED DURING THE COURSE OF APPELLATE PROCEED ING AND VARIOUS JUDICIAL PRONOUNCEMENTS RELIED UPON BY THE APPELLANT ON THE ISSUE. I HAVE ALSO EXAMINED THE CONTENTS OF BUSINESS TRANSFER AGREEMENT (BTA) ENTERED BETWEEN NITREX CHEMICALS INDIA LTD. AND EAC, INDUSTRIAL INGREDIENTS PTE LTD., THE EMPLOYEES TR ANSFER AGREEMENT (ETA) AND THE EMPLOYEES STOCK OPTION PLAN, 2004 (ESOP, 2004). IT IS SEEN THAT THE APPELLANT COMPANY ENTERED INTO AN AGREEMENT TO SELL THE TRADING DIVISION OF THE COMPANY WHICH WAS ENGAGED IN THE BUSINESS OF WHOLE SALES TRADING IN CHEMICALS AND WHOLE SALE TRADING BUSINESS WITH M/S EAC, INDUSTRIAL INGREDIENTS PTE. LTD. ON 14.10.2005 FOR A CONSIDERATION OF RS. 22,15,00,000/ - SUBJECT TO THE ADJUSTMENT REGARDING NET LIQUID ASSETS AND MOVABLE ASSETS WHICH ARE GIVEN IN SCHEDULE J OF BTA. ON THE SAME DATE, THE APPELLANT SIGNED AN ETA AGREEMENT WITH M/S EAC ALSO FOR EMPLOYEES TRANSFER. AS PER CLAUSE 2 OF THIS AGREEMENT, IT WAS DECIDED THAT - 2. PRE - COMPLETION MATTER - PRIOR TO COMPLELTION, THE EMPLOYEES SHALL BE JOINTLY APPROACHED BY EAC AND OR NE WCO AND NITREX FOR THE PURPOSE OF BTAINING THEIR ACCEPTANCE TO BECOMING EMPLOYEES THAN THEIR CURRENT TERMS AND CONDITIONS BUT WHICH SHALL NOT INCLUDE ANY STOCK HOLDING AND SHARE HOLDING OPTION IN NITREX INDIA LTD. ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 66 3. CONDITION PRECEDENT - IT SHALL BE A CON DITION PRECEDENT TO COMPLETION OF THE TRANSACTION CONTEMPLATED BY THE BTA THAT THE MANAGEMENT STAFF SHALL HAVE CONFIRMED THAT SUBJECT TO THE COMPLETION THEY WILL ACCEPT TO BE EMPLOYEE BY NEWCO INSTEAD OF NITREX INDIA LTD. 4.4 EAC AND/OR NEWCO SHALL EMPLOY THE EMPLOYEES FROM THE COMPLETION DATE ON TERMS AND CONDITIONS OF SERVICE WHICH ARE NO LESS FAVORABLE THAN THOSE WHICH THE EMPLOYEES ENJOYED IMMEDIATELY PRIOR TO THE COMPLETION DATE WITH NITREX INDIA WITHOUT ANY INTERRUPTION AND BREAK IN SERVICE (BUT EXCL UDING EMPLOYEES STOCK SHARE HOLDING OPTION) . AS PER THE TERMS AND CONDITIONS LISTED ABOVE, IT WAS THE CONDITION PRECEDENT TO THE COMPLETION OF TRANSACTION CONTEMPLATED IN THE BTA THAT THE MANAGEMENT STAFF SHALL HAVE CONFIRMED TO ACCEPT THE EMPLOYMENT IN THE NEW COMPANY INSTEAD OF THE APPELLANT COMPANY. IT WAS ALSO A CONDITION THAT ON ACCEPTANCE OF EMPLOYMENT, THE NEW COMPANY SHALL EMPLOY THE EMPLOYEES ON TERMS AND CONDITIONS OF SERVICE WHICH ARE NO LESS FAVOURABLE THAN THOSE WHICH THE EMPLOYEES WERE ENJOY ING IMMEDIATELY PRIOR TO COMPLETION DATE OF BUSINESS TRANSFER WITHOUT ANY INTERRUPTION OR BREAK UP OF SERVICE. HOWEVER, IN THE AGREEMENT IT IS CLEARLY MENTIONED THAT IN THE NEW COMPANY THEY WILL NOT BE GIVEN ANY EMPLOYEE STOCK OR SHARE HOLDING OPTIONS. IT IS SEEN THAT THE MANAGEMENT EMPLOYEE OF THE NITREX WERE HAVING ESOP WHICH WAS ALLOWED TO THEM BY THE APPELLANT COMPANY IN 2004 AS PER ESOP 2004 SCHEME. AS PER THIS, ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 67 5.5% OF THE SHARES OF THE COMPANY WERE SUBSCRIBED BY THE MANAGEMENT TEAM. THE COMPANY HAS ALSO ENTERED INTO ESOP SCHEME UNDER WHICH FURTHER SHARES TO BE ALLOTTED TO THE EMPLOYEES AND AN ESOP TRUST WAS CREATED ON 20 TH JUNE, 2005 AS A CUSTODIAN OF THE EMPLOYEES SHARES. AS PER THE BTA AND ETA, CERTAIN EMPLOYEES OF MANAGEMENT TEAM WERE WORKING WITH THE TRADING DIVISION OF THE APPELLANT COMPANY AND IN THE EVENT OF THEIR JOINING NEW COMPANY, THE EMPLOYEES HAD TO DIVEST WITH THEIR SHARE HOLDING IN THE COMPANY WHICH WAS IN THE CUSTODY OF TRUST. AS PER THE ESOP - 2004 IN THE VEST OF SEPARATION OF EMPLOYEES FOR REASON OTHER THAN RETIREMENT, THE EMPLOYEE HAD TO EXERCISE THE OPTION VESTED ON THEM WITHIN THREE MONTHS OF THE DATE OF RESIGNATION. ON THE JOINING OF THE NEW COMPANY, THE EMPLOYEE WOULD HAVE LOST THE BENEFIT OF ESOP WHICH WOULD HAVE EFFECTED THEM FIN ANCIALLY. HOWEVER, AS PER THE TERMS AND CONDITIONS OF BTA, THE MANAGEMENT TEAM HAS TO AGREE TO JOIN THE NEW COMPANY WHICH WAS A PRE - CONDITION FOR BUSINESS TRANSFER AGREEMENT. IN SUCH A SITUATION, IT BECAME NECESSARY FOR THE APPELLANT COMPANY TO ENSURE THAT THE MANAGEMENT STAFF ACCEPTS TO PART WITH THEIR EMPLOYMENT WITH THE APPELLANT COMPANY AND ACCEPT THE EMPLOYMENT OF NEW COMPANY. ACCORDINGLY, MANAGEMENT OF TEAM SUBMITTED ACCEPTANCE LETTER ON 09.12.2005 WITH THE AGREEMENT OF NITREX CHEMICALS STOCK OPTION T RUST, THEREBY, THE EMPLOYEES AGREED TO OFFER THE SHARES HELD BY THEM TO THE TRUST OF NITSOP, 2004 AND THE CONSIDERATION FOR SUCH SHARES WAS TO BE DETERMINED BY APPLYING A PRICE EARNINGS MULTIPLE OF FIVE TO THE COMPANY S PROFIT AFTER TAX FOR THE FINANCIAL Y EAR 2004 - 05. HOWEVER, THE MANAGEMENT TEAM REQUESTED THE APPELLANT COMPANY TO CALCULATE THE PRICE OF SHARE BY SUING THE PROFIT AFTER TAX OF THE COMPANY FOR F.Y 2005 - 06 ADJUSTED FOR EAC WARRANTY CLAIM. AS A RESULT OF ACCEPTANCE LETTER FROM THE MANAGEMENT TEA M, THE APPELLANT COMPANY WAS ABLE ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 68 TO TRANSFER ITS TRADING BUSINESS TO M/S EAC WITHOUT ANY HINDRANCE. FOR BUY BACKING, THE MANAGEMENT SHARES BY THE TRUST, THE APPELLANT COMPANY PROVIDED THE MONEY TO TRUST. IT IS CLAIMED BY THE APPELLANT THAT SAID MONEY IS N OT RECOVERABLE FROM THE TRUST. HOWEVER, THE COMPANY HAS PAID SAID MONEY IN PURSUANCE TO THE BTA AND ETA WHICH WAS A CONTRACTUAL LIABILITY OF THE COMPANY. WITHOUT BUY BACK OF THE SHARES FROM THE EMPLOYEES, THE BUSINESS TRANSFER OF THE TRADING DIVISION WOULD NOT HAVE BEEN POSSIBLE. IT IS CLAIMED BY THE APPELLANT THAT THE AMOUNT SPENT ON BUY BACK OF SHARES BY THE TRUST HAS BEEN INCURRED WHOLLY AND EXCLUSIVELY IN CONNECTION WITH THE TRANSFER OF THE CAPITAL ASSETS AS CONTEMPLATED IN SECTION 48 OF THE IT ACT. HEN CE, THE SAME HAS TO BE ALLOWED AS DEDUCTION WHILE COMPUTING THE CAPITAL GAIN IN RESPECT OF THE SLUMP SALE OF TRADING BUSINESS. 7 3 . WHILE DELETING THE IMPUGNED ADDITION THE LD. CIT(A) ALSO OBSERVED AS UNDER: ON GOING THROUGH THE VARIOUS CLAUSES OF NI TREX CHEMICALS EMPLOYEES STOCK OPTION TRUST AND NITREX CHEMICALS EMPLOYEES STOCK OPTION PLAN - 2004, LIKE OBJECTIVES, BENEFICIARIES AND ELIGIBILITY AS DISCUSSED ABOVE, IT IS OBSERVED THAT ESOP - 2004 SCHEME AND THE TRUST WERE CREATED FOR ATTRACTING THE TALENTE D MANAGEMENT TEAM AND RETAIN AND REWARD THEM FOR PERFORMING SERVICES FOR THE GROWTH AND PROFITABILITY OF THE COMPANY AND NOT PART OF THESE SCHEME WERE MEANT FOR THE DIRECT BENEFIT OF THE COMPANY AND THEIR STOCK HOLDER. THE AMOUNT PAID TO THE TRUST FOR RETA INING THE SHARES OF THE MANAGEMENT TEAM IS NOT GOING TO COME BACK TO THE COMPANY AND SHARES WHICH HAVE BEEN KEPT IN THE TRUST WILL BE FOR THE BENEFIT AND WELFARE OF THE EMPLOYEES AND MANAGEMENT TEAM. THEREFORE, THE AMOUNT ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 69 PAID BY THE APPELLANT COMPANY WAS WHOLLY AND EXCLUSIVELY TO FACILITATE THE TRADING BUSINESS TRANSFER AGREEMENT WITH M/S EAC. IF THE APPELLANT COMPANY HAS NOT EXECUTED THE TRANSFER AGREEMENT FOR THE TRANSFER OF MANAGEMENT TEAM, THE TRANSACTION OF SALE OF TRADING BUSINESS WOULD NOT HAVE MATE RIALIZED. THE TRANSFER OF THE SAID EMPLOYEES WAS A KEY TO THE TRANSFER OF TRADING BUSINESS. IT MAY BE ALSO MENTIONED HERE THAT LOSS ON ACQUISITION OF SHARES FROM MANAGEMENT TEAM BY THE NITREX CHEMICALS EMPLOYEES STOCK OPTION TRUST HAS BEEN TRANSFERRED TO T HE ACCOUNT OF THE APPELLANT COMPANY AND IT IS A LIABILITY FOR THE APPELLANT COMPANY. THE ENTRIES TO THAT EFFECT HAVE BEEN PASSED IN THE BOOKS OF ACCOUNT AND SAME HAVE BEEN EXAMINED BY THE AUDITORS AND COPIES THEREOF HAVE BEEN FILED BEFORE ME. THEREFORE, TH E EXPENDITURE INCURRED WAS WHOLLY AND EXCLUSIVELY FOR TRANSFER OF TRADING BUSINESS TO M/S EAC, THAILAND. HENCE, THE SAME IS ALLOWABLE FROM THE CAPITAL GAINS ARISEN TO THE APPELLANT. 7 4 . THE RELIANCE WAS PLACED ON THE FOLLOWING CASE LAWS: CIT VS BRADFOR D TRADING COMPANY PVT. LTD. (2003) 261 ITR 222 (MAD.) GOPEE NATH PAUL & SONS & ANR. VS DCIT (2005) 278 ITR 240 (CAL.) 7 5 . NOW THE DEPARTMENT IS IN APPEAL. THE LD. DR STRONGLY SUPPORTED THE ORDER OF THE AO AND REITERATED THE OBSERVATIONS MADE IN THE ASSESS MENT ORDER. ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 70 7 6 . IN HIS RIVAL SUBMISSIONS THE LD. COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSION MADE BEFORE THE LD. CIT(A) AND STRONGLY SUPPORTED THE IMPUGNED ORDER. 7 7 . WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND CAREFULLY GONE THROUG H THE MATERIAL AVAILABLE ON THE RECORD. IN THE PRESENT CASE, IT IS AN ADMITTED FACT THAT THE ASSESSEE ON ACQUIRING THE BUSINESS FROM ICI INDIA LTD. AGREED THAT FOR THE SMOOTH RUNNING OF THE BUSINESS , I T WOULD BE PRUDENT THAT THE EMPLOYEES OF THE BUSINESS A CQUIRED MAY ALSO HAVE STAKE IN THE ASSESSEE COMPANY. THEREFORE, 5.5% OF THE SHARES WERE SUBSCRIBED AND THE ASSESSEE ALSO ENTERED INTO ESOP SCHEME UNDER WHICH FURTHER SHARES TO BE ALLOTTED TO THE EMPLOYEES. THE ICI LTD. ALSO AGREED TO SUBSCRIBE 10% OF THE E QUITY SHARE CAPITAL OF THE ASSESSEE WITH AN UNDERTAKING TO MAKE THE SHARES AVAILABLE TO THE MANAGEMENT TEAM AS PER THE ESOP SCHEME. IN ORDER TO GIVE EFFECT TO THE BUSINESS TRANSFER TRANSACTION , IT BECAME NECESSARY FOR THE ASSESSEE TO ENS URE THAT THE MANAGE MENT STAFF AC CEPTS TO PART WITH THEIR EMPLOYMENT WITH THE ASSESSEE COMPANY AND ACCEPT THE EMPLOYMENT OF THE NEW COMPANY , AS THE SAME WAS A PRE - REQUISITE FOR CONSUMMATION OF THE TRANSACTION S . AT THE TIME OF PARTING SHARE HOLDING FROM MANAGEMENT WAS BOUGHT B ACK WHICH WAS REQUIRED TO BE FUNDED BY THE ASSESSEE COMPANY. HOWEVER, THE IMPUGNED AMOUNT WAS NON - RECOVERABLE AND WAS A LOSS ON ACCOUNT OF BUSINESS TRANSFER, ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 71 SO IT WAS REQUIRED TO BE DEDUCTED FROM THE CAPITAL GAIN IN RESPECT OF SLUMP SALE OF TRADING BUSINE SS. IN OUR OPINION THE LD. CIT(A) WAS JUSTIFIED IN HOLDING THAT THE IMPUGNED AMOUNT WAS ALLOWABLE FROM THE CAPITAL GAIN ARISEN TO THE ASSESSEE. WE DO NOT SEE ANY VALID GROUND TO INTERFERE WITH THE FINDINGS OF THE LD. CIT(A) ON THIS ISSUE. 78 . VIDE GROUND NO. 3 THE GRIEVANCE OF THE DEPARTMENT RELATES TO THE DELETION OF ADDITION OF RS. 10,00,000/ - MADE BY THE AO ON ACCOUNT OF TECHNO COMMERCIAL LICENSING FEES. 79 . THE FACTS RELATED TO THIS ISSUE ARE IDENTICAL TO THE FACTS INVOLVED IN THE ASSESSMENT YEAR 2005 - 06 WHICH WE HAVE ALREADY ADJUDICATED IN THE FORMER PART OF THIS ORDER WHILE DECIDING THE APPEAL FOR THE SAID YEAR . THEREFORE, OUR FINDINGS GIVEN THEREIN SHALL APPLY MUTATIS MUTANDIS. IN THAT VIEW OF THE MATTER, WE DO NOT SEE ANY MERIT IN THIS GROUND OF TH E DEPARTMENTAL APPEAL. 80 . THE NEXT ISSUE VIDE GROUND NO. 4 RELATES TO THE DELETION OF DISALLOWANCE OF RS. 92,28,471/ - MADE BY THE AO ON ACCOUNT OF COMMISSION PAID ON SALE. 8 1 . A SIMILAR ISSUE HAS ALSO BEEN DECIDED IN THE PRECEDING ASSESSMENT YEAR I.E. 2005 - 06 IN THE FORMER PART OF THIS ORDER AND SINCE THE FACTS FOR THIS YEAR ARE SIMILAR TO THE PRECEDING YEAR, T HEREFORE, OUR ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 72 FINDINGS GIVEN IN THE FORMER PART OF THIS ORDER FOR AN IDENTICAL ISSUE SHALL APPLY WITH THE SAME FORCE FOR THIS YEAR ALSO. ACCORDIN GLY, THIS GROUND OF THE DEPARTMENTAL APPEAL IS ALSO DISMISSED AS WAS DONE IN THE PRECEDING YEAR. 8 2 . IN THE CROSS OBJECTION NO. 367/DEL/2009 FOR THE ASSESSMENT YEAR 2006 - 07 , THE ASSESSEE HAS RAISED THE ADDITIONAL GROUND IN THE SIMILAR MANNER AS WAS DONE F OR THE PRECEDING YEARS 2004 - 05 & 2005 - 06 , THEREFORE, BY CONSIDERING THE SIMILARITY IN THE FACTS AND RIVAL CONTENTION THE ADDITIONAL GROUND FOR THIS YEAR IS ALSO ADMITTED AND THE AO IS DIRECTED TO ALLOW THE CLAIM OF DEPRECIATION ON GOODWILL U/S 32 OF THE AC T AS WAS DIRECTED IN THE PRECEDING ASSESSMENT YEARS I.E. 2004 - 05 & 2005 - 06 IN THE FORMER PART OF THIS ORDER. 8 3 . THE ANOTHER ISSUE RAISED BY THE ASSESSEE IN THIS CROSS OBJECTION RELATES TO THE EXPENDITURE OF RS. 10,00,000/ - WHICH WAS CONSIDERED TO BE CAPI TAL IN NATURE BY THE AO, SINCE THIS ISSUE HAS BEEN DECIDED IN THE DEPARTMENTAL APPEAL, SO THIS GROUND OF THE ASSESS EE S CROSS OBJECTION BECOMES IN FRUCTUOUS AS THE EXPENSES WERE DIRECTED TO BE ALLOWED WHILE DECIDING THE DEPARTMENTAL APPEAL. ACCORDINGLY, THE DEPARTMENTAL APPEAL IS DISMISSED AND THE CROSS OBJECTION OF THE ASSESSEE IS PARTLY ALLOWED FOR THE ASSESSMENT YEAR 2006 - 07 . ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 73 ITA NO. 756/DEL/2009 FOR THE ASSESSMENT YEAR 2007 - 08. 8 4 . FIRST ISSUE VIDE GROUND NO. 1 IN THIS APPEAL RELATES TO THE D E LETION OF DISALLOWANCE OF RS. 58 ,55,345/ - MADE BY THE AO ON ACCOUNT OF ESOP EXPENSES. 8 5 . FACTS RELATED TO THIS ISSUE IN BRIEF ARE THAT THE AO DURING THE COURSE OF ASSESSMENT PROCEEDINGS NOTICED THAT THE ASSESSEE HAD CLAIMED EXPENSE S OF RS. 53,98,874/ - TOWARDS E MPLOYEES STOCK C OMPENSATION EXPENSE . THE AO ALSO OBSERVED THAT NITREX CHEMICALS EMPLOYEES STOCK OPTION T RUST ACQU IRED SHARES FROM EXISTING SHARE HOLDERS OUT OF FUNDS BORROWED FROM THE ASSESSEE COMPANY AND ISSUED THESE SHARES TO THE EMPLOYEES ELIGIBLE TO EXE RCISE STOCK OP TION. THE AO OBSERVED THAT TH E TRUST HAD PURCHASED 421,727 SHARES BEL ONGING TO THE EMPLOYEES OF THE TRADING B USINESS . OUT OF THE ABOVE SHARES 2 24,000 PERTAINED TO THE ORIGINAL ALLOTMENT OF SHARES TO THESE EMPL OYEES AND THE BALANCE 197 ,727 SHA RES PERTAINED TO SHARE ALLOTTED IN EXERCISE OF OPTIONS VESTED ON THEM. THE AO ASKED THE ASSESSEE TO EXPLAIN THE ESOP AND TO JUSTIFY AS TO HOW THE EXPENSES CLAIMED ON PURCHASE OF SHARES WERE REVENUE EXPENDITURE. 86 . IN RESPONSE, T HE ASSESSEE SUBMITTED AS UNDER: ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 74 WITH REFERENCE TO YOUR QUERY FOR DEDUCIBLE AMOUNT OF RS. 58,55,345/ - FOR ESOP, PAYMENTS RELATING TO TRADING BUSINESS, WE SUBMIT HEREWITH AS FOLLOWS: - DURING THE A.Y 2006 - 07 (IN DEC 05), THE ASSESSEE COMPANY HAD SOLD THE TRADING BUSINESS ORIGINAL LY ACQUIRED FROM ICI TO EAC VIDE BTA DATED 14.10.2005. AS PER THE EMPLOYEE TRANSFER AGREEMENT OF THE EVEN DATE, IT WAS A CONDITION PRECEDENT TO THE COMPLETION OF TRANSACTIONS CONTEMPLATED IN BTA THAT THE MANAGEMENT STAFF SHALL HAVE CONFIRMED TO ACCEPT THE EMPLOYMENT IN THE NEW COMPANY. FURTHER, IT WAS AGREED THAT ON SUCH ACCEPTANCE, THE NEW COMPANY SHALL EMPLOY THE EMPLOYEES ON TERMS AND CONDITIONS OF SERVICE WHICH ARE NO LESS FAVORABLE THAN THOSE WHICH THE EMPLOYEES ENJOYED IMMEDIATELY PRIOR TO COMPLETION DATA OF BUSINESS TRANSFER WITHOUT ANY INTERRUPTION OR BREAK OF SERVICE (BUT EXCLUDING EMPLOYEE STOCK SHARE HOLDING OPTIONS). FURTHER, AS PER THE EMPLOYEES STOCK OPTION PLAN 2004, IN THE E VENT OF SEPARATION OF THE EMPLOYEES FOR REASONS OTHER THAN RETIREMEN T, THE EMPLOYEES HAD TO EXERCISE THE OPTION VESTED ON THEM WITHIN THREE MONTHS OF DATE OF RESIGNATION. THE EMPLOYEES ALSO HAD TO DIVEST WITH THEIR OTHER SHARE HOLDINGS IN THE COMPANY ON ACCOUNT OF SUCH TRANSFER. IT WAS AGREED WITH THE MANAGEMENT STAFF OF T HE TRADING BUSINESS THAT EXERCISED OPTIONS OF THE ESOP SHARES WOULD BE BROUGHT BACK ON THE PRICE BASED ON THE AUDITED PAT OF F. Y 2005 - 06 AND WOULD BECOME PAYABLE IN THE MONTH OF DECEMBER, 2006. AS A PART OF THIS CONTRACTUAL OBLIGATION TO THE MANAGEMENT ST AFF HOLDING THE ESOPS, THE FOLLOWING PAYMENTS WERE MADE IN DECEMBER, 2006: - ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 75 NAME ESOP RS. MR. SANJAY GUPTA 180000 57,92,092 MR. MURALI DUVVURI 5997 27,710 MR. SATISH KUMAR 6193 35,168 TOTAL 58,55,345 IN PURSUANCE TO THE TERMS OF SCHEME, THE PAYMENT OF AFORESAID BUY BACK WAS MADE AND THEREFORE, SUCH AN AMOUNT OF RS. 58,55,345/ - IS THE LIABILITY OF THE COMPANY. ACCORDINGLY, THE PAYMENT IS FOR THE PURPOSE OF THE BUSINESS SOLD AND THEREFORE ALLOWABLE EXPENSES AND ALTERNATIVELY, THE AMOUNT MAY BE ALLOWE D AS DEDUCTION AGAINST CAPITAL GAIN OFFERED FOR TAXATION IN A.Y 2006 - 07, AS THE SAID AMOUNT HAS NOT BEEN CLAIMED AS EXPENSES, WHILE COMPUTING THE CAPITAL GAIN. HOWEVER, T HE AO REJECTED THE CLAIM OF THE ASSESSEE AS WAS DONE IN THE EARLIER YEAR I.E. ASSES SMENT YEAR 2006 - 07. 8 7 . BEING AGGRIEVED THE ASSESSEE CARRIED THE MATTER TO THE LD. CIT(A) WHO ALLOW ED THE CLAIM AS WAS DONE IN THE IMMEDIATELY PRECEDING YEAR I.E. ASSESSMENT YEAR 2006 - 07. 8 8 . NOW THE DEPARTMENT IS IN APPEAL. 8 9 . WE HAVE CONSIDERED THE S UBMISSIONS OF BOTH THE PARTIES AND CAREFULLY GONE THROUGH THE MATERIAL AVAILABLE ON THE RECORD. IT IS NOTICED THAT THE FACTS FOR THE YEAR UNDER CONSIDERATION RELATING TO THIS ISSUE ARE IDENTICAL TO THE FACTS INVOLVED IN THE EARLIER YEAR IN GROUND ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 76 NO. 2 OF THE DEPARTMENTAL APPEAL , WHICH WE HAVE ALREADY ADJUDICATED IN THE FORMER PART OF THIS ORDER. THEREFORE, OUR FINDINGS GIVEN IN RESPECT OF THIS ISSUE WHILE DECIDING THE APPEAL FOR THE PRECEDING ASSESSMENT YEAR I.E. ASSESSMENT YEAR 2006 - 07 SHALL APPLY MUTATIS MUTANDIS FOR THIS YEAR ALSO. IN THAT VIEW OF THE MATTER, WE DO NOT SEE ANY MERIT IN THIS GROUND OF THE DEPARTMENTAL APPEAL. 90 . NEXT ISSUE VIDE GROUND NO. 2 RELATES TO THE DELETION OF DISALLOWANCE OF RS. 85,2 3,127/ - MADE BY THE AO OUT OF SEL LING COMMISSI ON. 9 1 . THE FACTS RELATED TO THIS ISSUE ARE SIMILAR TO THE FACTS INVOLVED IN THE PRECEDING ASSESSMENT YEARS WHICH WE HAVE ALREADY ADJUDICATED IN THE FORMER PART OF THIS ORDER. THEREFORE, OUR FINDINGS GIVEN IN THE FORMER PART OF THI S ORDER RELATING THE ISS UE OF SEL LING COMMISSION SHALL BE APPLICABLE WITH THE SAME FORCE FOR THIS YEAR ALSO. IN THAT VIEW OF THE MATTER, WE DO NOT SEE ANY MERIT IN THIS GROUND OF THE DEPARTMENTAL APPEAL. 9 2 . THE LAST ISSUE VIDE GROUND NO. 3 RELATES TO THE RELIEF ALLOWED TO THE A SSESSEE OUT OF THE DISALLOWANCE MADE BY THE AO OUT OF THE DIVIDEND INCOME. 9 3 . FACTS RELATED TO THIS ISSUE IN BRIEF ARE THAT THE ASSESSEE DURING THE YEAR, EARNED DIVIDEND OF RS. 3,77,330/ - ON MUTUAL FUND AND ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 77 CLAIMED THE SAME AS EXEMPT. THE ASSESSEE STATED BEFORE THE AO THAT NO EXPENDITURE HAD BEEN INCURRED FOR EARNING THIS INCOME. THE AO INVOKED THE PROVISIONS OF S ECTION 14A OF THE ACT R.W. RULE 8D OF THE IT RULES, 1962 AND DISALLOWED A SUM OF RS. 3,97,880/ - UNDER RULE 8D OF THE IT RULES, 1962. 9 4 . BEING AGGRIEVED THE ASSESSEE CARRIED THE MATTER TO THE LD. CIT(A) AND SUBMITTED THAT THE ASSESSEE HAD INTEREST FREE FUND OF RS. 60.59 CRORES BEING SHARE CAPITAL OF RS. 10 CRORES , RESERVES & SURPLUS OF RS. 26.24 CRORES AND DEPRECIATION OF RS. 24.07 CRORES , AGAINS T THE INVESTMENT OF RS. 1 CRORE, THEREFORE, THERE CANNOT BE ANY DISALLOWANCE U/S 14A OF THE ACT. THE ASSESSEE ALSO SUBMITTED THAT THE CALCULATION S FOR MAKING THE DISALLOWANCE UNDER RULE 8D , BY THE AO WERE WRONG. 9 5 . THE LD. CIT(A) AFTER CONSIDERING THE S UBMISSIONS OF THE ASSESSEE OBSERVED THAT THE DIVIDEND INCOME OF RS. 3,77,330/ - WAS EXEMPT U/S 10(35) OF THE ACT. HE FURTHER OBSERVED THAT THE FUNDS OF THE ASSESSEE IN THE FORM OF SHARE CAPITAL , RESERVES & SURPLUS AND INTEREST FREE FUNDS HAD BEEN INVESTED I N THE ASSETS OF THE ASSESSEE COMPANY AND NO PART OF THOSE FUNDS WAS AVAILABLE FOR MAKING INVESTMENT IN MUTUAL FUND S AND THAT THE INVESTMENT IN MUTUAL FUND S HAD BEEN MADE BY ISSUING CHEQUES FROM THE CURRENT ACCOUNT OF THE ASSESSEE S BANK. THE LD. CIT(A) ALS O OBSE RVED THAT BESIDES ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 78 EXPENDITURE ON MANAGEMENT WHICH TAKES CRUCIAL DECISION ON WHERE AND WHEN TO INVEST WAS ALSO TO BE ATTRIBUTED TO THE RECEIPT OF DIVIDEND INCOME. THE LD. CIT(A) UPHELD THE DISALLOWANCE U/S 14A OF THE ACT TO THE EXTENT OF 10% OF THE DI VIDEND INCOME RECEIVED BY THE ASSESSEE. HE ALSO POINTED OUT THAT PROVISIONS OF RULE 8D AS APPLIED BY THE AO WERE NOT APPLICABLE TO THE ASSESSMENT YEARS PRIOR TO ASSESSMENT YEAR 2008 - 09 AS PER THE JUDGMENT OF THE HON BLE BOMBAY H IGH COURT IN THE CASE OF GOD REJ BOYCE MANUFACTURING COMPANY LTD. VS DCIT (2010) 234 CTR 1. 9 6 . NOW THE DEPARTMENT IS IN APPEAL. THE LD. DR STRONGLY SUPPORTED THE ORDER OF THE AO AND FURTHER SUBMITTED THAT THE ASSESSEE MADE THE INVESTMENT IN THE MUTUAL FUND S AND WAS NOT HAVING ANY SU RPLUS FUND S . THEREFORE, THE INTEREST BEARING BORROWED FUNDS WERE USED FOR MAKING THE INVESTMENT IN THE MUTUAL FUNDS. AS SUCH DISALLOWANCE U/S 14A OF THE ACT READ WITH RULES 8D OF I.T RULES, 1962, WAS RIGHTLY MADE BY THE AO AND THE LD. CIT(A) WAS NOT JUSTIF IED IN RESTRICTING THE DISALLOWANCE TO RS. 37,740/ - ONLY AS AGAINST RS. 3,97,880/ - MADE BY THE AO. 9 7 . IN HIS RIVAL SUBMISSIONS THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE AO WAS NOT JUSTIFIED IN APPLYING RULE 8D WHILE MAKING THE DISALLOWANCE U/S 14A OF THE ACT BECAUSE THE SAID RULE IS ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 79 APPLICABLE W.E.F ASSESSMENT YEAR 2008 - 09 AND NOT FOR THE ASSESSMENT YEAR UNDER CONSIDERATION. THE LD. COUNSEL FOR THE ASSESSEE STRONGLY SUPPORTED THE ORDER OF THE LD. CIT(A). 9 8 . WE HAVE CONSIDERED THE SUBMISSIONS O F BOTH THE PARTIES AND CAREFULLY GONE THROUGH THE MATERIAL AVAILABLE ON THE RECORD. IN THE PRESENT CASE, IT IS NOTICED THAT THE ASSESSEE EARNED THE DIVIDEND INCOME OF RS. 3,77,330/ - WHILE THE AO WORKED OUT THE DISALLOWANCE AT RS. 3,97,880/ - WHICH WAS MORE THAN THE SAID INCOME . THE DISALLOWANCE WAS MADE BY THE AO IN ACCORDANCE WITH RULE 8D OF THE I . T RULES, 1962. THE SAID RULE IS APPLICABLE FOR THE ASSESSMENT YEAR 2008 - 09 WHILE THE ASSESSMENT YEAR UNDER CONSIDERATION IS 2007 - 08. THEREFORE, THE AO WAS NOT JUS TIFIED IN WORKING OUT THE DISALLOWANCE BY APPLYING THE PROVISIONS OF RULE 8D. IN OUR OPINION , THE LD. CIT(A) WAS FAIR AND REASONABLE IN RESTRICTING THE DISALLOWANCE OF RS. 37,740/ - . WE DO NOT SEE ANY MERIT IN THIS GROUND OF THE DEPARTMENTAL APPEAL. ITA NO . 2331/DEL/2011 FOR THE ASSESSMENT YEAR 2008 - 09 9 9 . THE ONLY ISSUE INVOLVED IN THE APPEAL RELATES TO THE DELETI ON OF DISALLOWANCE OF RS. 55,04,390/ - MADE BY THE AO OUT OF THE SEL LING COMMISSION. THE SIMILAR ISSUE WE HAVE ALREADY ADJUDICATED IN THE PRECEDI NG YEARS IN FORMER PART OF THIS ORDER. THEREFORE, OUR FINDINGS GIVEN IN RESPECT OF EARLIER YEARS ON THE SIMILAR ISSUE SHALL APPLY ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 80 MUTATIS MUTANDIS FOR THIS YEAR ALSO. IN THAT VIEW OF THE MATTER, WE DO NOT SEE ANY MERIT IN THIS APPEAL OF THE DEPARTMENT. I TA NO. 5801/DEL/2012 FOR THE ASSESSMENT YEAR 2009 - 10 100 . THE FIRST ISSUE VIDE GROUND NO. 1 IN THIS APPEAL RELATES TO THE DELETION OF DISALLOWANCE OF RS. 42,37,552/ - MA DE BY THE AO ON ACCOUNT OF SALE COMMISSION. THE SIMILAR ISSUE WAS INVOLVED IN ASSESSMEN T YEARS 2006 - 07 TO 2008 - 09 , WHICH WE HAVE ALREADY ADJUDICATED IN THE FORMER PART OF THIS ORDER AND HAVE UPHELD THE FINDINGS OF THE LD. CIT(A) IN DELETING THE DISALLOWANCE MADE BY THE AO. WE, THEREFORE, DO NOT SEE ANY MERIT IN THIS GROUND OF THE DEPARTMENTA L APPEAL. 10 1 . THE NEXT ISSUE VIDE GROUND NOS. 2 & 3 RELATES TO THE DELETION OF DISALLOWANCE OF RS. 2,77,72,900/ - MADE BY THE AO ON ACCOUNT OF FOREIGN EXCHANGE F LUCTUATION LOSS. 10 2 . F ACTS RELATED TO THIS ISSUE IN BRIEF ARE THAT THE AO DURING THE COURSE OF ASSESSMENT PROCEEDINGS NOTICED THA T THE ASSESSEE HAD OUTSTANDING FOREIGN CURRENCY TERM LOAN S FOR AN AMOUNT OF RS. 3 8 ,0 5, 0 4,063/ - , WHICH COMPRISES OF ECB TO US DOLLAR 31,00,000 AND OTHER LOAN IN JPY FOR RS. 4 3,74,45,319 / - AND BOTH HAVE THE FIRST ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 81 CHARGE O N THE FIXED ASSETS OF THE ASSESSEE COMPANY. THE AO ALSO NOTICED T HAT THE ASSESSEE HAD CLAIMED AN AMOUNT OF RS. 7,28,74,037/ - AS FOREIGN EXCHANGE FLUCTUATION LOSS. HE ASKED THE ASSESSEE TO FILE DETAILS OF THE AFORESAID SUMS ALONGWITH THE JUSTIFICATION , VOUC HERS ETC. THE ASSESSEE GAVE THE BREAK - UP OF FOREIGN E XCHANGE LOSS AS UNDER: PARTICULARS NET LOSS/(GAIN) REMARK EXPORT SALES (9364096) EXPORT DEBTORS COMMISSION 1853626 COMMISSION ON EXPORT SALE BOOKED ON ACTUAL REALIZATION INSTEAD OF SALE VALUE IN 2008 - 09 RECTIFIED. FORWARD CONTRACT (734748) SHORT ACCOUNTING OF FORWARD CONTRACT GAIN IN PREVIOUS YEAR, NOW BOOKED. IDBI LOAN OF YEN 437445319.34 48369188 REINSTATEMENT OF IDBI YEN TERM LOAN AS ON 31.3.2009 ECB LOAN OF USD 3100000 32674000 REINSTATEMENT O F LOAN AS ON 31.3.2009 OTHERS 76067 TOTAL 72874037 10 3 . FROM THE ABOVE DETAILS , THE AO NOTICED THAT THE SUBSTANTIAL PORTION WAS ON ACCOUNT OF RE IN STATEMENT OF LOAN AS ON 31. 03.2009. HE ALSO OBSERVED THAT O N ACCOUNT OF REGULAR SALE/PURCHASE TRANSACTIO N S , THE ASSESSEE HAD ACCRUED A GAIN ON ACCOUNT OF INCREASE IN EXCHANGE RATE S . HOWEVER, OUT OF FOREX LOSS OF RS. 7,28,74,037/ - , A SUM OF RS. 3,26,74 ,000/ - PERTAINED TO ECB L OAN OF US DOLLAR 31,00,000. THE AO ASKED THE ASSESSEE TO SHOW C AUSE AS TO HOW THE FO REX LOSS ON ECB LOANS , AVAILED FOR CAPITAL EXPENDITURE WAS ALLOWABLE AS REVENUE EXPENDITURE. IN RESPONSE THE ASSESSEE SUBMITTED AS UNDER: ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 82 THE PURPOSE OF TAKING THE FOREIGN LOANS IS TO GET THE BENEFIT OF INTEREST COST AS COMPARED TO LOAN TAKEN FROM INDIA AS THE INTEREST ON THIS LOANS ARE MUCH LESSER. MAINLY, THE DIFFERENCE BETWEEN COST OF FUNDS, INCLUDING THE FOREX LOSS OR GAIN IS MUCH LOWER THAN INTEREST RATE IN INDIA AND THEREFORE SAME IS IN INTEREST ONLY, AS DEFINED UNDER SEC. 2(28A) OF THE ACT. WITHOU T PREJUDICE TO THE ABOVE, IF ANY PART OF THE SAID LOSS IS TREATED AS CAPITAL IN NATURE THEN SUBSEQUENTLY IN NEXT YEAR S THE FLUCTUATION EFFECT SHOULD BE GIVEN ACCORDINGLY AND DEPRECIATION SHALL BE ALLOWED ON THE SAID LOSS FOR THE YEAR UNDER CONSIDERATION A ND SUBSEQUENT YEAR(S). 10 4 . THE AO AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE OBSERVED THAT AS PER THE EXCHANGE REGULATIONS IN INDIA , ECB IS ST RICTLY PROHIBITED FOR THE PURPO SE OF UTILIZATION FOR WORKING CAPITAL, GENERAL CORPORATE PURPOSE OR REPA YMENT OF EXISTING LOAN S , FOR ON - LENDING OR INVESTMENT IN CAPITAL MARKET OR ACQUIRING A COMPANY OR PART THEREOF I N INDIA AND INVESTMENT IN REAL ESTATE. THE AO ALSO OBSERVED THAT THERE WAS NO EVIDENCE ON RECORD TO PROVE THAT THE ASSESSEE HAD OBTAINED ANY SPE CIFIC APPROVAL FROM THE RBI F OR UTILIZING THIS ECB FOR THE PURPOSES WHICH WERE OTHERWISE NOT ALLOWED BY THE INDIAN EXCHANGE REGULATIONS. HE, THEREFORE, HELD THAT RE IN STATEMENT OF ECB WHICH WAS UTILIZED FOR THE PURPOSE OF CAPITAL OR INVESTING ACTIVITIES SHA LL NOT BE ALLOWED AS A REVENUE EXPENDITURE U/S 37(1) OF THE ACT. THE AO ALSO OBSERVED THAT FOREIGN EXCHANGE FLUCTUATION LOSS WOULD BE OF CAPITAL NATURE AND ALLOWED DEPRECIATION @ 15% WHICH WORKED ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 83 OUT AT RS. 49,01, 100/ - . THE AO ACCORDINGLY DISALLOWED A SUM OF RS. 2,77,72,900/ - (RS. 3,26,74 ,000 RS. 49,01,100). THE RELIANCE WAS PLACED ON THE FOLLOWING CASE LAWS: CIT VS WOODWARD GOVERNOR INDIA (P) LTD. AND HONDA SIEL POWER PRODUCTS LTD. 312 ITR 254 (SC) SUTLEJ COTTON MILLS LTD. VS CIT REPORTED IN 116 ITR 1 (SC) 10 5 . BEING AGGRIEVED THE ASSESSEE CARRIED THE MATTER TO THE LD. CIT(A) AND SUBMITTED AS UNDER: (A) THE LD. ASSESSING OFFICER HAS ERRED IN LAW AND FACTS BY DISALLOWING A SUM OF RS. 2,77,72,900/ - ON ACCOUNT OF FOREIGN EXCHANGE LOSS ON ECB LOAN OF USD 31,00,000, BY TREATING THE SAME TO BE CAPITAL EXPENDITURE. (B) THE LD. AO WHILE PASSING THE SAID ORDER HAS NOT PROPERLY TAKEN INTO CONSIDERATION THE DETAILED WRITTEN SUBMISSION DATED 27.12.2011 SUBMITTED DURING THE ASSESSMENT PROCEEDINGS. THE COPY OF THE SAID WRITTEN SUBMISSION IS SUBMITTED HEREWITH AS ANNEXURE 1. (C) THAT THE SAID LOANS ARE FOR THE PURPOSE OF THE BUSINESS OF THE COMPANY AND IT IS OLD ONE AND NO NEW LOANS HAVE BEEN TAKEN DURING THE YEAR UNDER CONSIDERATION AND THAT WHENEVER THERE IS GAIN OR LOSS IN RESPECT OF FOREIGN EXCHANGE FLUCTUATION OF LOAN THE SAME TREATMENT IS GIVEN IN THE EARLIER YEAR AS IN THE CURRENT YEAR AND IN SUBSEQUENT YEARS I.E. IT HAS BEEN TRANSFERRED TO THE PROFIT AND LOSS ACCOUNT AND SAME WAS ALLOWED IN THE EARLIER YEARS BY THE LD. AO. IN THE EARLIER YEAR THERE WAS FOREIGN EXCHANGE GAIN WHICH WAS SHOWN IN THE PROFIT AND LOSS ACCOUNT AND THUS ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 84 WAS OFFERED FOR TAXATION. THEREFORE, FOLLOWING THE PRINCIPLE OF CONSISTENCY THE LOSS SHOULD BE ALLOWED THIS YEAR. SUPPORTING EVIDENC ES IN THIS REGARD ARE SUBMITTED HEREWITH AS ANNEXURE 2. IN THIS REGARD, RELIANCE IS PLACED ON THE DECISION OF HON BLE DELHI HIGH COURT IN CIT VS INDIAN TONERS AND DEVELOPERS LIMITED (2010) 326 ITR 435 (DELHI) WHEREIN IT WAS HELD THAT SUCH GAINS WERE ASSE SSED AS BUSINESS INCOME IN THE EARLIER ASSESSMENT YEARS. IF THIS WAS THE CASE THEN THE ASSESSEE WOULD BE ENTITLED TO TREAT THE SAID INCRE ASED LIABILITY ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION IN THE REVENUE ACCOUNT. (D) IN AS - 11 (REVISED) ACCOUNTING FOR EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES, IT HAS BEEN CLEARLY STATED THAT EXCHANGE DIFFERENCES ARISING ON REPAYMENT OF LIABILITIES INCURRED FOR PURCHASE OF FIXED ASSETS SHALL BE EXPENSED THROUGH PROFIT AND LOSS ACCOUNT. COPY OF THE SAME IS SUBMITT ED HERE WITH AS ANNEXURE 3. (E) SECTION 43A OF THE ACT, SAYING TO GIVE EFFECT TO THE COST OF FIXED ASSET ON PAYMENT BASIS, IS ALSO NOT APPLICABLE TO US, AS SECTION 43A OF THE ACT IS APPLICABLE IN THE CASE OF IMPORTED FIXED ASSETS I.E. 43A APPLIES ONLY IN RESPECT OF ASSETS ACQUIRED FROM A COUNTRY OUTSIDE INDIA THROUGH A LOAN IN FOREIGN CURRENCY OR A FOREIGN SUPPLIERS CREDIT. IN OUR CASE, THE LOAN UNDER CONSIDERATION IS NOT FOR THE PURPOSE OF IMPORT OF FIXED ASSETS. THEREFORE, IN CASE THE ASSET IS NOT IMPORT ED THEN SECTION 43A WOULD NOT BE APPLICABLE. SECTION 43A PROVIDES GENERALLY FOR MODIFICATION OF THE ACTUAL COST OF THE ASSET CONSEQUENT ON THE VARIATION IN EXCHANGE RATE IN THE YEAR IN WHICH THE INCREASE OR REDUCTION IN LIABILITY ARISES. (F) SINCE SECTION 43A IS NOT APPLICABLE AND THERE IS NO PROVISION IN THE INCOME TAX ACT RELATING TO THE FOREIGN ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 85 EXCHANGE LOSS INCURRED ON A FOREIGN CURRENCY LOAN TAKEN TO PURCHASE AN INDIGENOUS ASSET; HENCE ACCOUNTING STANDARDS MAY BE FOLLOWED. THEREFORE FOLLOWING AS 11, F OREIGN EXCHANGE FLUCTUATION HAS TO BE DEBITED/CREDITED TO PROFIT AND LOSS ACCOUNT. 10 6 . THE RELIANCE WAS PLACED ON THE FOLLOWING CASE LAWS: PRAKASH LEASING LTD. VS DCIT, ITA NOS. 301, 302 & 491 OF 2007 (KAR) ORDER DATED 27.02.2012 MKB ASIA (P) LTD. VS CIT (2007) 294 ITR 655 (GAU) CIT VS STATE BANK OF INDORE (2005) 196 CTR 153 (MP) CIT VS VIRTUAL SOFT SYSTEMS LTD. (2012) 341 ITR 593 (DEL.) OIL AND NATURAL GAS LTD. VS CIT 322 ITR 180 (SC) CIT VS WOODWARD GOVERNOR INDIA (P) LTD. 312 ITR 254 (SC) CIT VS IND IAN TONERS AND DEVELOPER LTD. 326 ITR 435 (2010) (DEL) CIT VS LG ELECTRONICS INDIA (P) LTD. 309 ITR 265 (DEL) CIT VS GOYAL M.G. GLASSES PVT. LTD. 320 ITR 669 (DEL) 10 7 . THE LD. CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE OBSERVED THAT THE ASS ESSEE HAD BEEN DISCLOSING IN ITS RETURN OF INCOME, THE GAIN RESULTING FROM THE FLUCTUATION FROM THE FOREIGN EXCHANGE IN THE EARLIER AS WELL AS SUBSEQUENT YEAR S AND IF THE AO HAD ACCEPTED THE FOREIGN EXCHANGE FLUCTUATION GAINS, THE LOSS RESULTING ON THAT SC ORE DURING THE YEAR UNDER CONSIDERATION HAS ALSO TO BE ACCEPTED. THE LD. CIT(A) ALSO OBSERVED THAT THE PROVISIONS OF SECTION 43A OF THE ACT ARE NOT APPLICABLE TO THE ASSESSEE S CASE. HE, THEREFORE, DELETED THE ADDITION MADE BY THE AO. ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 86 10 8 . NOW THE DEPARTM ENT IS IN APPEAL. THE LD. DR STRONGLY SUPPORTED THE ORDER OF THE AO AND FURTHER SUBMITTED THAT ECB LOAN HAD BEEN AVAILED FOR ACQUISITION OF CAPITAL ASSET , SO IT WAS CAPITAL IN NATURE. THEREFORE, THE AO RIGHTLY DISALLOWED THE FOREIGN EXCHANGE FLUCTUATION LO SS CLAIMED AS REVENUE EXPENDITURE BY THE ASSESSEE AND THE LD. CIT(A) WAS NOT JUSTIFIED IN DELETING THE ADDITION MADE BY THE AO. 10 9 . IN HIS RIVAL SUBMISSIONS THE LD. COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW AND STRONGLY SUPPORTED THE IMPUGNED ORDER. 1 10 . WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND CAREFULLY GONE THROUGH THE MATERIAL AVAILABLE ON THE RECORD. IN THE PRESENT CASE, IT IS NOTICED THAT THE ECB LOAN TAKEN BY THE ASSESSEE WAS OLD ONE AND I N PRECEDING AND SUBSEQUENT YEAR, T HERE WAS GAIN ON ACCOUNT OF INCREASE IN EXCHANGE RATES WHICH HAD BEEN ACCEPTED BY THE AO BUT THE LOSS ON ACCOUNT OF THE D ECREASE IN EXCHANGE RATE HAD BEEN DISALLOWED. IT IS WELL SETTLED THAT NO ONE CAN BLOW HOT AND COLD FROM THE SAME WINDPIPE. HOWEVER, I N THE PRESENT CASE, THE AO ACCEPTED THE GAINS BUT DISALLOWED THE LOSS WHICH IS NOT PERMISSIBLE. ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 87 111 . ON A SIMILAR ISSUE THE HON BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS INDIAN TONERS AND DEVELOPERS LTD. 326 IT R 435 HELD AS UNDER: THAT THE ASSESSEE WOULD BE ENTITLED TO TREAT THE INCREASED LIABILITY ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION AS ON REVENUE ACCOUNT. 112 . SIMILARLY, THE HON BLE SUPREME COURT IN THE CASE OF CIT VS WOODWARD GOVERNOR INDIA P. LTD. REPORTED AT 312 ITR 254 HELD AS UNDER: LOSS SUFFERED BY THE ASSESSEE ON ACCOUNT OF FLUCTUATION IN THE RATE OF FOREIGN EXCHANGE AS ON THE DATE OF THE BALANCE - SHEET IS AN ITEM OF EXPENDITURE UNDER SECTION 37(1) OF THE INCOME - TAX ACT, 1961. 11 3 . AS REGAR DS TO THE NATURE OF THE LOSS OCCURRED DUE TO FOREIGN EXCHANGE FLUCTUATION , THE HON BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS GOYAL M. G. GASES LTD. REPORTED AT 320 ITR 669 HELD AS UNDER: THAT THE AMOUNT WAS UTILIZED BY THE ASSESSEE FOR ITS BUSI NESS OF MONEY - LENDING AND BILL DISCOUNTING. THOUGH THE ASSESSEE MIGHT HAVE ORIGINALLY BORROWED THE AMOUNT FOR THE PURPOSE OF IMPORT OF CAPITAL GOODS OR SETTING UP OF A PLANT, AT THE TIME WHEN THE AMOUNT WAS UTILIZED THE LOAN AMOUNT HAD UNDERGONE A CHANGE A ND HAD ASSUMED A NEW CHARACTER OF ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 88 STOCK - IN - TRADE OR CIRCULATING CAPITAL AND, THEREFORE, ANY LOSS SUFFERED BY THE ASSESSEE ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION WOULD HAVE TO BE TREATED AS REVENUE LOSS AND NOT CAPITAL LOSS. 114 . WE, THEREFORE, CONSID ERING THE TOTALITY OF THE FACTS AND THE RATIO LAID DOWN BY THE HON BLE COURTS IN THE VARIOUS JUDICIAL PRONOUNCEMENT AS DISCUSSED HEREINABOVE , ARE OF THE VIEW THAT THE LD. CIT(A) WAS FULLY JUSTIFIED IN DIRECTING THE AO TO DELETE THE IMPUGNED ADDITION. WE DO NOT SEE ANY INFIRMITY IN THE ORDER OF THE LD. CIT(A) ON THIS ISSUE. 115 . THE LAST ISSUE AGITATED BY THE DEPARTMENT VIDE GROUND NO. 4 RELATES TO THE DELETION OF DISALLOWANCE OF RS. 12,09,198/ - MADE BY THE AO U/S 14A OF THE ACT R.W RULE 8D OF THE I.T RULES , 1962. 116 . FACTS RELATED TO THIS ISSUE IN BRIEF ARE THAT THE AO DURING THE COURSE OF ASSESSMENT PROCEEDINGS NOTICED THAT THE ASSESSEE HAD MADE THE FOLLOWING INVESTMENT S OVER THE CURRENT YEAR AND THE IMMEDIATELY PRECEDING YEAR: PARTICULARS FY 2008 - 09 F Y 2007 - 08 EXCELEX BIOPOLYMERS PVT. LTD. 95,759,000 10,000,000 ECO ACQUA LTD. 3,932,500 3,932,500 MUTUAL FUNDS - 500,000 TOTAL 99,682,500 14,432,500 ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 89 117 . THE AO ALSO OBSERVED THAT THE ASSESSEE EARNED THE DIVIDEND ON MUTUAL FUND AMOUNTING TO RS. 1,06,49 8/ - . THE AO WAS OF THE VIEW THAT AS PER SUB - SECTION ( 2 ) OF SECTION 14A OF THE ACT, EXPENSES CONNECTED WITH THE EXEMPT INCOME (RECEIVED OR RECEIVABLE) HAVE TO BE NECESSARILY DISALLOWED REGARDLESS OF WHETHER THEY WERE DIRECT OR INDIRECT, FIXED OR VARIABLE AN D MANAGERIAL OR FINANCIAL. THE AO WORKED OUT THE DISALLOWANCE OF RS. 12,09,198/ - BY OBSERVING AS UNDER: I) THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME. RS. 2,85,288 II) IN A CASE WHERE THE ASSESSEE HAS I NCURRED EXPENDITURE BY WAY OF INTEREST DURING THE PREVIOUS YEAR WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT, AN AMOUNT COMPUTED IN ACCORDANCE WITH THE FOLLOWING FORMULA, NAMELY: - A B/C A - AMOUNT OF EXPENDITURE BY WAY OF INTEREST O THER THAN THE AMOUNT OF INTEREST INCLUDED IN CLAUSE (I) INCURRED DURING THE PREVIOUS YEAR: B - THE AVERAGE OF VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOR FORM PART OF THE TOTAL INCOME AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE F IRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR; C - THE AVERAGE OF TOTAL ASSETS AS APPEARING IN THE BALANCE SHEET OF A INTEREST : 1,92,21,813/ - B AVERAGE INVESTMENT : RS.5 ,70,57,500/ - C AVERAGE ASSETS : RS.118,70,73,412/ - = A B/C = 9,23,910 ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 90 THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR. III) AN AMOUNT EQUAL TO ONE - HALF PER CENT OF THE AVERAGE OF THE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARING IN T HE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR. AVERAGE INVESTMENT : RS. 5,7,57,500 =0.5% OF RS.5,70,57,500 = RS. 2,85,288 - FOR THE PURPOSES OF THIS RULE, THE TOTAL ASSETS SHALL MEAN, TOTAL ASSETS AS APPEARI NG IN THE BALANCE SHEET EXCLUDING THE INCREASE ON ACCOUNT OF REVALUATION OF ASSETS BUT INCLUDING THE DECREASE ON ACCOUNT OF REVALUATION OF ASSETS. DISALLOWANCE UNDER RULE 8D = AGGREGATE OF (I) + (II) + (III) = 2,85,288 + 9,23,910 + 2,85,288 = RS. 14,94 ,486/ - THE ASSESSEE HAS SUO MOTU DISALLOWED RS. 2,85,288/ - IN THE COMPUTATION OF INCOME AND THEREFORE, THE BALANCE AMOUNT OF RS. 12,09,198/ - (RS. 14,94,486 RS. 2,85,288) IS ADDED BACK TO THE INCOME OF THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION. (DISA LLOWANCE UNDER RULE 8D : RS. 12,09,198/ - ) 118 . BEING AGGRIEVED THE ASSESSEE CARRIED THE MATTER TO THE LD. CIT(A) AND SUBMITTED AS UNDER: ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 91 THE LD. ASSESSING OFFICER HAS ERRED IN LAW AND FACTS BY DISALLOWING A SUM OF RS. 12,09,198/ - U/S 14A R.W RULE 8D. TH E ASSESSEE HAS SUO MOTU MADE A DISALLOWANCE OF RS. 2,85,288/ - ON THE SAID ACCOUNT IN THE COMPUTATION OF INCOME. THE AO HAS STRAIGHTAWAY DISREGARDED THE CLAIM OF THE ASSESSEE, MADE HIS OWN COMPUTATION BY APPLYING RULE 8D, WITHOUT RECORDING ANY SATISFACTION AS TO HOW THE ASSESSEE S CALCULATION OF SECTION 14A WAS INCORRECT. 119 . THE RELIANCE WAS PLACED ON THE FOLLOWING CASE LAWS: MAXOPP INVESTMENT LTD. (2012) 247 CTR 162 (DEL) DCIT VS JINDAL PHOTO LTD., ITA NO. 4539/DEL/2010 (ITAT DELHI) 120 . IT WAS FURTH ER SUBMITTED THAT THERE WAS NO FINDING FOR NON - SATISFACTION FOR THE AMOUNT DISALLOWED BY THE ASSESSEE, THEREFORE THE DISALLOWANCE MADE BY THE AO MAY BE DELETED. 121 . THE LD. CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE DELETED THE ADDITION BY OBSERVING AS UNDER: AFTER CONSIDERATION OF THE FACTS OF THE CASE AND THE DISCUSSION IN THE ASSESSMENT ORDER, I AM INCLINED TO CONCUR WITH THE APPELLANT THAT THE ASSESSING OFFICER HAS NOT GIVEN ANY FINDING THAT THERE WAS ANY NEXUS OF ANY PART OF THE EXPE NSES CLAIMED BY THE APPELLANT WITH THE TAX FREE INCOME. IN THE ABSENCE OF ANY SUCH FINDINGS AND IN VIEW OF THE JUDGMENT OF HON BLE COURTS RELIED UPON BY THE APPELLANT, THE ASSESSING ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 92 OFFICER IS DIRECTED TO DELETE THE ADDITION MADE TO INCOME ON THIS ACCOUNT. THIS GROUND OF APPEAL IS ALSO ALLOWED. 12 2 . NOW THE DEPARTMENT IS IN APPEAL. THE LD. DR STRONGLY SUPPORTED THE ORDER OF THE AO AND REITERATED THE OBSERVATION MADE IN THE ASSESSMENT ORDER. 12 3 . IN HIS RIVAL SUBMISSION THE LD. COUNSEL FOR THE ASSESSEE SU BMITTED THAT THE ASSESSEE GAVE THE WORKING FOR DISALLOWANCE U/S 14A OF THE ACT R.W. RULE 8D OF THE I.T RULES, 1962 TO THE AO WHO HAD NOT GIVEN ANY FINDINGS FOR NON - SATISFACTION FOR THE AMOUNT DISALLOWED BY THE ASSESSEE. THEREFORE, THE DISALLOWANCE MADE BY THE AO WAS NOT JUSTIFIED AND THE LD. CIT(A) RIGHTLY DELETED THE SAME . 12 4 . WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND CAREFULLY GONE THROUGH THE MATERIAL AVAILABLE ON THE RECORD. IN THE PRESENT CASE, IT IS NOTICED THAT THE ASSESSEE EARNED THE DIVIDEND INCOME OF RS. 1,06,498/ - . HOWEVER, THE AO MADE THE DISALLOWANCE OF RS. 12,09,198/ - , THE SAID DISALLOWANCE WAS MORE THAN THE INCOME EARNED BY THE ASSESSEE. IN THE PRESENT CASE, THE ASSESSEE SUO MOTU DISALLOWED A SUM OF RS. 2,85,288/ - IN ACCORDA NCE WITH THE ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 93 PROVISIONS CONTAINED U/S 14A OF THE ACT R.W RULE 8D OF THE I.T RULES, 1962. T HE AO HAD NOT GIVEN ANY FINDINGS FOR NON - SATISFACTION ABOUT THE DISALLOWANCE MADE BY THE ASSESSEE . THEREFORE, THE AO WITHOUT ESTABLISHING THE NEXUS BETWEEN THE EXPENS ES CLAIMED AND THE TAX FREE INCOME WAS NOT JUSTIFIED IN MAKING THE DISALLOWANCE OF RS. 12,09,198/ - AS AGAINST THE DISALLOWANCE OF RS. 2,85,288/ - SUO MOTU MADE BY THE ASSESSEE. IT IS ALSO NOT THE CASE OF THE AO THAT THE DISALLOWANCE WORKED OUT SUO MOTU BY T HE ASSESSEE U/S 14A OF THE ACT R.W. RULE 8D OF I.T RULES AT RS. 2,85,288/ - WAS WRONG SINCE NO DISCREPANCY WAS POINTED OUT IN THE SAID WORKING OF THE ASSESSEE. WE, THEREFORE, ARE OF THE VIEW THAT THE LD. CIT(A) RIGHTLY DELETED THE DISALLOWANCE MADE BY THE A O. WE DO NOT SEE ANY VALID GROUND TO INTERFERE WITH THE FINDINGS OF THE LD. CIT(A). IN THE RESULT, THE APPEAL OF THE DEPARTMENT FOR THE ASSESSMENT YEAR 2009 - 10 IS DISMISSED. 12 5 . IN THE RESULT, APPEAL OF THE DEPARTMENT FOR THE ASSESSMENT YEAR 2004 - 05 IS PARTLY ALLOWED, FOR THE ASSESSMENT YEAR 2005 - 06 IS PARTLY ALLOWED FOR STATISTICAL PURPOSES AND FOR THE ASSESSMENT YEARS 2006 - 07, 2007 - 08, 2008 - 09 & 2009 - 10 ARE DISMISSED WHILE THE CROSS OBJECTION ITA NO S . 3388, 3408, 3841, 756/DEL/2009 2331/DEL/2011 & 5801/DEL/2012 CO 314, 322 & 367 /DE L/2009 NITREX CHEMICALS INDI LTD. 94 OF ASSESSEE FOR THE ASSESSMENT YEARS 2004 - 05, 2005 - 06 & 2006 - 07 ARE PARTLY ALLOWED. ( ORDER PRON OUNCED IN THE COURT ON 03 /0 8 / 2015) . SD/ - SD/ - (I. C. SUDHIR ) ( N. K. SAINI ) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 03 /08 /2015 *SUBODH* COPY FORWAR DED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR
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