ACIT, CHENNAI V. M/s. T.T.Krishnamachari & Co., CHENNAI

ITA 1184/CHNY/2009

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 51980 (ITAT-CHENNAI)
• Duration Of Justice: 2 year(s) 2 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-10-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2000-2001
• Appeal Filed On: 23-07-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: K E B RENGARAJAN JR
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Sale consideration of property below Jantri Value; Capital asset; Gift; Business income; Depreciation; Business expenditure; Cost of acquisition; Bad and doubtful debts; Valuation report; Capital receipt; Commercial expediency; Unabsorbed depreciation
• Section: 50C; 2(14); 234B; 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, CHENNAI [BEFORE SHRI HARI OM MARATHA, JUDICIAL MEMBER AND SHRI N.S. SAINI, ACCOUNTANT MEMBER] I.T.A NOS.1183 TO 1188/MDS/2009 (ASSESSMENT YEARS : 1999-2000 TO 2004-05 ) THE ACIT CIRCLE XV CHENNAI VS M/S T.T. KRISHNAMACHARI & CO. 6, CATHEDRAL ROAD CHENNAI 600 086 [PAN AAAFT0395D] (APPELLANT) (RESPONDENT) I.T.A NOS.1039 TO 1043/MDS/2009 & 448/MDS/2010 (ASSESSMENT YEARS : 2000-01 TO 2005-06 ) M/S T.T. KRISHNAMACHARI & CO. 6, CATHEDRAL ROAD CHENNAI 600 086 VS THE ACIT CIRCLE XV CHENNAI (APPELLANT) (RESPONDENT) DEPARTMENT BY : SHRI K.E.B RENGARAJAN, JR. STANDING COUNSEL ASSESSEE BY : SHRI R.VIJAYARAGHAVAN DATE OF HEARING : 12-10-2011 DATE OF PRONOUNCEMENT : 19-10-2011 O R D E R PER BENCH: THIS IS A BUNCH OF TWELVE APPEALS SIX APPEALS BY THE REVENUE FOR ASSESSMENT YEARS 1999-2000 TO 2004-05 AND SIX B Y THE ASSESSEE ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 2 -: FOR ASSESSMENT YEARS 2000-01 TO 2005-06. IN ALL TH ESE APPEALS, ALMOST IDENTICAL ISSUES ARE INVOLVED, THEREFORE, FO R THE SAKE OF CONVENIENCE AND BREVITY, WE PROCEED TO DECIDE THEM BY A COMMON ORDER. THE LEADING APPEAL WAS STATED TO BE REVENUE S APPEAL IN I.T.A.NO. 1186/MDS/2009 FOR ASSESSMENT YEAR 2002-03 , WHICH IS FILED AGAINST THE ORDER OF THE LD. CIT(A) DATED 31.3.2009 . THEREFORE, FOR THE SAKE OF CONVENIENCE, WE NARRATE THE FACTS OF TH IS APPEAL. I.T.A.NO. 1186/MDS/2009 A.Y 2002-03 2. THE ASSESSEE-FIRM DERIVES INCOME FROM ITS ACT IVITIES OF CLEARING/FORWARDING AND FROM TRADING. THE FIRM FIL ED ITS RETURN OF INCOME FOR ASSESSMENT YEAR 2002-03 ON 31.10.2002 DE CLARING NET LOSS OF ` 7,00,54,515/-. THE RETURNED INCOME WAS ACCEPTED U /S 143(1) ON 19.3.2003 AND A REFUND OF ` 1,31,60,432/- WAS ISSUED ON 31.10.2003. THE ASSESSEE IS A PARTNERSHIP FIRM CONSISTING OF TH REE PARTNERS. THE TOTAL LOSS DECLARED BY THE ASSESSEE-FIRM WAS ARRIVE D AT AFTER SETTING OFF OF BUSINESS LOSS OF ` 7,15,54,959/- AGAINST AN INCOME OF ` 13,06,365/- COMPUTED UNDER THE HEAD INCOME FROM PROPERTY AND A FURTHER INCOME OF ` 1,93,076/- HAS BEEN COMPUTED UNDER THE HEAD CAPIT AL GAINS. THE ASSESSEE-FIRM HAS COMPUTED NET LOSS UN DER THE HEAD BUSINESS. AS PER THE PROFIT & LOSS ACCOUNT FOR T HE ACCOUNTING PERIOD ENDED 31.3.2002 A NET PROFIT OF ` 8,05,57,911/- HAS BEEN REPORTED. A ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 3 -: LONG TERM CAPITAL GAINS OF ` 20,09,691/- ON THE SALE OF SHARES FOR THE ACCOUNTING PERIOD ENDED 31.3.2002 WAS COMPUTED BUT NET GAINS HAS BEEN SHOWN AT ` 1,93,076/- BECAUSE OF SETTING OFF OF THE LOSSES CARRIED FORWARD FROM THE ASSESSMENT YEARS 1998-99, 1999-2000 AND 2001-02. FINALLY, ASSESSMENT ORDER WAS MADE U/S 1 43(3) VIDE ORDER DATED 31.3.2005 DETERMINING TAXABLE INCOME AT ` 13,45,91,800/- FOR THE ASSESSMENT YEAR 2002-03. THE ASSESSING OFFICER HAS ADDED CERTAIN AMOUNTS UNDER THE HEAD BUSINESS AND HAS C ONVERTED THE LOSSES OF ` 7,15,54,959/- INTO A PROFIT OF ` 13,62,51,553/-. THE ADJUSTMENTS MADE TO THE INCOME UNDER THE HEAD BUSI NESS CAN BE SUMMARIZED AS UNDER UNDER: (I) A SUM OF ` 10,00,00,000/- CLAIMED AS DEDUCTION FROM THE PROFITS AND AS REPRESENTING CAPITAL RECEIPT WAS ADD ED BACK. THIS SUM HAD BEEN RECEIVED BY THE FIRM DURING THE ACCOUNTING PERIOD ENDED 31.3.2002 AS CONSIDERATION FOR AGREEING FOR THE REMOVAL OF THE RESTRICTIVE COVENAN T IN A JOINT VENTURE AGREEMENT IT HAD ENTERED INTO WITH A FOREIGN COMPANY, M/S. SARA LEE/D.E.N.V. IT HAS TO BE NOTED HERE THAT THIS SUM HAD BEEN HOWEVER SUBJECTED TO TAX AS CAPITAL GAINS IN THE IMPUGNED ASSESSMENT ORDER. (II) A SUM OF ` 10,25,00,000/- CLAIMED AS 'BAD DEBT' WRITTEN OFF WAS DISALLOWED AND ADDED TO THE BUSINESS INCOME. (III) AN INTEREST EXPENDITURE OF ` 46,29,782/-(NET) CLAIMED AS PAYABLE TO ICICI BANK LTD. WAS DISALLOWED AND ADDE D AS NOT RELATING TO THE FIRM'S BUSINESS. (IV) EXPENDITURE INCURRED BY THE FIRM TOWARDS PAYME NT OF COMMISSION, PROFESSIONAL FEES AND INTEREST TOTALLIN G TO ` 6,60,000/- WAS DISALLOWED. AS THESE PAYMENTS WERE CLAIMED TO HAVE BEEN MADE TO (LATE) SHRI T.T. VASU, WHO WAS RELATED TO THE PARTNERS, THE ASSESSING OFFICER WAS OF THE VIEW THAT THIS EXPENDITURE WAS UNNECESSARY AND IT DID NOT RELATE TO THE FIRM'S BUSINESS. ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 4 -: (V) A SUM OF ` 16,7301- REPRESENTING THE DIFFERENCE IN INTEREST RECEIPTS FROM ICICI BANK LTD. WAS ALSO ADDED. (VI) APART FROM THE ABOVE, THE ASSESSING OFFICER HA D RE- COMPUTED THE LONG TERM CAPITAL GAINS AT ` 7,82,884/-. AS ALREADY MENTIONED, IN THE RETURN FILED, THE FIRM HA D ADMITTED AN INCOME BY WAY OF LONG TERM CAPITAL GAINS A SUM O F ` 20,09,691/- AGAINST WHICH IT HAD CLAIMED SET OFF OF LONG TERM LOSSES CARRIED FORWARD FROM THE EARLIER YEARS 1998- 99, 1999-00 AND 2001-02 TOTALLING TO ` 18,15,615/-. OUT OF THESE LOSSES, THE ASSESSING OFFICER HAD NOT PERMITT ED THE BENEFIT OF SET OFF OF A LOSS OF ` 5,89,808/- PERTAINING TO THE ASSESSMENT YEAR 2001-02 WHEREAS, HE HAD ALLOWED THE LOSSES CARRIED FORWARD BY THE FIRM FROM THE OTHER TWO ASSESSMENT YEARS 1998-99 AND 1999-2000 TOTALLING TO ` 12,26,807/-. (VII) THUS, THE ASSESSING OFFICER HAD RAISED A NET DEMAND OF ` 6,51,54,685/- WHICH WAS INCLUSIVE OF AN INTEREST OF ` 1,45,81,770/- CHARGED U/S 234B AND AN INTEREST OF ` 11,84,436/- LEVIED U/S 234D OF THE ACT. 2. AGGRIEVED, THE ASSESSEE HAD CHALLENGED THE ABOVE AD DITIONS AND AFTER CONSIDERING THE RIVAL STANDS, THE LD. CIT(A) HAS GIVEN A PART RELIEF TO THE ASSESSEE AND THAT IS WHY BOTH THE PARTIES AR E AGGRIEVED. 3. THE FIRST TWO ISSUES IN THE REVENUES APPEAL AR E AGAINST THE ALLOWANCE OF INTEREST PAID BY THE ASSESSEE ON BORR OWALS WHICH WERE UTILIZED FOR REVIVING THE BUSINESS OF M/S TTK TEXTI LES LIMITED AND WRITE OFF OF ADVANCE OF ` 10.25 CRORES MADE TO M/S TTK TEXTILES LIMITED ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 5 -: ALLOWED AS A DEDUCTION. AS THE ISSUES ARE INTERLINK ED, THEY ARE CONSIDERED TOGETHER. 4. FOR ASSESSMENT YEAR 2002-03, THE ASSESSEE-FIRM M/S TTK & CO. HAD CLAIMED A SUM OF ` 61,81,852/- AS INTEREST PAID TO ICICI BANK LTD. AS AGAINST THIS, A SUM OF ` 15,51,070/- AS REPRESENTING INTEREST RECEIVED FROM ICICI BANK LTD. HAD BEEN ADJUSTED AND THE NET INTEREST PAID WAS SHOWN AS ` 46,29,782/-. THE ASSESSING OFFICER OBSERVED THAT THE FIRM HAD OBTAINED A TERM LOAN OF ` 10 CRORES FROM ICICI BANK LTD DURING THE ACCOUNTING PERIOD ENDED 31.3.99 AND OUT OF THIS, A SUM OF ` 2.50 CRORES WAS CONTINUED TO BE SHOWN AS LIABILIT Y AS AT 31.3.2002 ALSO AND THE INTEREST EXPENDITURE OF ` 61,81,852/- CLAIMED WAS ON THIS TERM LOAN. FURTHER HE FOUND THAT THE FIRM HAD UTILISED THESE BORROWED FUNDS TO MAKE ADVANCES TO AND INVEST MENTS IN THE SHARES OF THE COMPANY, M/S TTK TEXTILES LTD. IT WA S EXPLAINED BEFORE THE ASSESSING OFFICER AT THE STAGE OF ASSESSMENT TH AT THE TERM LOAN FROM ICICI BANK LTD., AVAILED BY M/S TTK & CO. WAS UTILISED BY THE FIRM FOR A SPECIFIC PURPOSE OF ADVANCING MONIES TO M/S TTK TEXTILES LTD, A GROUP CONCERN, AS PER A SCHEME APPROVED BY T HE BOARD FOR INDUSTRIAL AND FINANCIAL RECONSTRUCTION (BIFR). IT WAS ALSO STATED BEFORE THE ASSESSING OFFICER THAT THIS COMPANY WAS PROMOTED BY THE FIRM, M/S TTK & CO., AS PART OF ITS BUSINESS ACTIVI TY AND WAS ALSO ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 6 -: ACTING AS A DEALER OF THE PRODUCTS OF THIS COMPANY. IT WAS EXPLAINED THAT SINCE THIS COMPANY WAS BECOMING SICK AND M/S T TK & CO., WAS INTERESTED, AS ITS PROMOTER, IN ITS REVIVAL IT HAD INVESTED IN THIS COMPANY AS PER THE DIRECTIONS OF THE BIFR. SO MUC H SO, IT WAS ARGUED THAT THE INTEREST LIABILITY ON THIS TERM LOA N FROM ICICI BANK LTD MUST BE CONSIDERED AS RELATING TO THE BUSINESS OF T HE FIRM, M/S TTK & CO. AND THAT THE LOAN FUNDS CANNOT BE SAID TO HAVE BEEN DIVERTED FOR NON-BUSINESS PURPOSES. IT WAS ALSO SHOWN BEFORE THE ASSESSING OFFICER AS TO HOW THE LOAN BALANCES WERE GETTING REDUCED YE AR AFTER YEAR. BUT REJECTING ALL THE PLEA MADE BY ASSESSEE-FIRM THE A SSESSING OFFICER DISALLOWED THE INTEREST EXPENDITURE INCURRED AND CL AIMED BY THE FIRM ON THE BALANCE OUTSTANDING OUT OF THE TERM LOAN OF ` 10 CRORES FROM ICICI BANK LTD FOR THE MAIN REASON THAT THE FUNDS B ORROWED HAD NOT BEEN UTILISED IN THE BUSINESS OF THE ASSESSEE-FIRM ITSELF. THE ASSESSING OFFICER HELD THAT IT IS NOT AS IF THE MAI N BUSINESS OF THE ASSESSEE-FIRM WAS MAKING INVESTMENTS IN OTHER CONC ERNS. THE MAIN BUSINESS OF M/S TTK & CO, AS PER THE PARTNERSHIP DE ED, WAS THAT OF MANUFACTURING AND THE FIRMS ACTIVITIES WERE THOSE OF MANUFACTURERS, REPRESENTATIVES, DEALERS, IMPORTERS, EXPORTERS AND SUCH OTHER LINES AND ACTIVITIES AS MAY BE DETERMINED FROM TIME TO TIME. THE EXPENDITURE INCURRED BY M/S TTK & CO TOWARDS INTEREST ON BORROW ED FUNDS THAT WERE UTILISED FOR INVESTING IN A SICK COMPANY HAD N O NEXUS WITH THE ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 7 -: BUSINESS OF THE FIRM. THE INVESTMENT MADE IN THE SI STER CONCERN THOUGH INCIDENTAL TO CARRYING ON OF THE BUSINESS OF THE FIRM ON THE ABOVE LINES, HAD TO BE TREATED AS CAPITAL IN NATURE . THE ASSESSING OFFICER HAD MAINLY RELIED ON THE REASONS GIVEN FOR A SIMILAR DISALLOWANCE MADE IN THE ASSESSEES OWN CASE FOR TH E EARLIER ASSESSMENT YEAR 2001-02. HE HAD NOTED THAT THE ADVA NCES, DEPOSITS AND THE INVESTMENTS HAD BEEN COMING DOWN FROM WHAT IT WAS AS ON 31.3.2001 AT ` 11,11,84,117/- TO ` 6,10,46,782/- AS ON 31.3.2002. 5. TTK & CO., WAS THE PROMOTER OF ALL THE COMPANI ES. THE MAIN BUSINESS OF THE FIRM WAS TRADING, MARKETING, WAREHO USING AS WELL AS PROMOTION OF COMPANIES TO ENGAGE IN VARIOUS BUSINES SES. THE FIRM PROMOTED AND INVESTED IN THESE COMPANIES, PERMITTED THE COMPANIES TO USE THE VALUABLE NAME AND LOGO OF TTK IN TH E INITIAL YEARS THE FIRM ALSO ACTED AS A DISTRIBUTOR OF THE PRODUCTS OF THE COMPANY TILL THE COMPANIES WERE ABLE TO CARRY OUT THE MARKETING ON T HEIR OWN. THE PARTNERS OF THE FIRM ARE ALSO DIRECTORS OF THE COMP ANY. THE FIRM NOT ONLY INVESTS IN THE SHARES OF THE PROMOTED COMPANIE S, IT ALSO PROVIDES COMFORT AND GUARANTEE TO THE LENDERS OF SUCH COMPAN IES. THE FIRM IS RECEIVING HUGE ROYALTY FROM THE COMPANIES FOR THE U SE OF THE NAME AND LOGO TTK. INTERESTS EARNED ON MONIES ADVANCE D EARLIER TO THESE COMPANIES WERE BEING ASSESSED AS BUSINESS INCOME. THEREFORE, THERE ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 8 -: IS A CLOSE BUSINESS CONNECTION BETWEEN THE ASSESSEE -FIRM AND THE COMPANIES PROMOTED BY THEM. NOT ONLY WAS IT THE B USINESS OF THE ASSESSEE TO PROMOTE COMPANIES BUT ALSO INVEST IN T HE CAPITAL, PERMISSION TO USE THE NAME ON PAYMENT OF ROYALTY AN D APPOINTMENT OF DIRECTORS WOULD ALSO INDICATE THE EXISTENCE OF BUSI NESS CONNECTION. THERE IS CONTINUITY IN THE RELATIONSHIP AND USE OF THE NAME TTK IMPROVES THE PROFITABILITY OF THE COMPANIES AND ALS O RESULTS IN INCOME OF THE ASSESSEE. THE PARTNERS OF THE ASSESSEE-FIRM ALSO PARTICIPATE IN THE MANAGEMENT OF THE COMPANIES. THUS, THERE IS BUS INESS CONNECTION BETWEEN THE ASSESSEE AND THE COMPANIES PROMOTED BY THEM. PROMOTION OF NEW COMPANIES WHICH RESULTS IN EXPANSI ON OF THE BUSINESS AND INCOME OF THE FIRM IS IN THE COURSE OF BUSINESS OF THE ASSESSEE. THE ASSESSEE HAS PROMOTED MORE THAN A DO ZEN COMPANIES IN WHICH IT HAS INVESTED IN EQUITY AND HAS EARNED R OYALTY, FOR THE USE OF THE NAME. AS REGARDS M/S TTK TEXTILES LTD IN PA RTICULAR, IT WAS SUBMITTED THAT THIS COMPANY WAS PROMOTED BY M/S TTK & CO., AND THAT THE COMPANY HAD BEEN SELLING ITS PRODUCTS UNDE R THE BRAND NAME OF TANTEX HOSIERIES THE FIRM WAS RECEIVING INCOME BY WAY OF ROYALTY FROM THIS COMPANY FOR A NUMBER OF YEARS FOR USING THE NAME AND LOGO OF TTK. IT WAS STATED THAT HOWEVER, DU E TO RECESSION IN THE TEXTILE INDUSTRY. THE ENTIRE NET WORTH OF THE COMPANY M/S TTK TEXTILES LTD WAS ERODED BY THE YEAR 1997AND SO, ITS CASE WAS REFERRED ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 9 -: TO THE BIFR IT WAS SUBMITTED THAT WHEN THE MATTER OF RECONSTRUCTION OF THE COMPANY WAS DEALT WITH BY THE BIFR, THE ASSE SSEE-FIRM HAD ADVANCED HUGE FUNDS TO THE EXTENT OF ` 35.51 CRORES TO M/S TTK TEXTILES LTD ON VARIOUS DATES WITH THE AIM OF REVIV ING THIS COMPANY AND THAT THESE AMOUNTS WERE UTILISED BY THIS COMPAN Y TO SETTLE ITS VARIOUS LIABILITIES. IT WAS EMPHASIZED THAT HUGE A DVANCES HAD TO BE NECESSARILY GIVEN BY M/S TTK & CO., TO M/S TTK TEXT ILES LTD AS PER THE SCHEME LAID DOWN BY THE BIFR IN THEIR ORDER DATED 1 5.1.2001. 6. THE CIRCUMSTANCES THAT LED THE ASSESSEE-FIRM TO A DVANCE ` 35.51 CRORES TO THE COMPANY M./S TTK TEXTILES LTD., AS EXPLAINED IN THE WRITTEN SUBMISSION, IS EXTRACTED BELOW: TTK & CO ARE THE PROMOTERS OF TTK TEXTILES LTD WHI CH HAD MAINLY SPINNING DIVISION AND TEXTILE DIVISION AS IT S ACTIVITY. AMONGST OTHERS PROMOTION OF BUSINESS ENTITIES IS A BUSINESS OF TTK & CO.,PARTNERS OF TTK & CO., HAD PROVIDED GUARA NTEES TO INSTITUTIONS AND BANKS IN CONNECTION WITH THE LOANS EXTENDED BY THEM TO TTK TEXTILES LTD. DUE TO SEVERE RECESSION IN THE COTTON SPINNING INDU STRY, SPINNING DIVISION STARTED MAKING HUGE LOSSES WHICH AFFECTED THE MONIES AVAILABLE FOR PROMOTION OF TANTEX BRANDS AY HOSIERY DIVISION. THUS THIS DIVISION ALSO STARTED I NCURRING LOSSES. THE COMPANY COULD NOT HONOUR ITS COMMITMENTS OF REPAYMENTS TO THE INSTITUTIONS AS WELL AS CREDITORS WHO HAVE SUPPLIED MATERIALS. THE COMPANY WAS NOT IN A POSITI ON TO PAY WAGES IN TIME TO WORKERS. ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 10 -: IN VIEW OF THE DEFAULT IN PAYMENT OF INTEREST AND INSTALMENTS TO INSTITUTIONS .THE COMPANY WAS SADDLED WITH HUGE INT EREST BURDEN INCLUDING COMPOUND INTEREST AND PENAL INTERE ST.THE COMPANY WAS IN THE PROCESS OF BEING CLASSIFIED AS D EFAULTING COMPANY AND THE PROMOTERS (TTK & CO) AS DEFAULTING PROMOTERS BY FINANCIAL INSTITUTIONS. THE ABOVE SITUATION LED TO AFFECTING THE IMAGE OF T HE OTHER COMPANIES IN THE TTK GROUP AMONGST THE BANKS AND INSTITUTIONS. THE OTHER COMPANIES IN THE GROUP WERE FINDING IT DIFFICULT TO AVAIL APPROPRIATE CREDIT LIMITS UNDER COMPETITIVE TERMS SINCE THE PROMOTERS (TTK & CO.,) OF THESE COM PANY WERE VIEWED AS DEFAULTING PROMOTERS. IN ANY CASE, T TK & CO., HAD GIVEN GUARANTEES AND COMFORTS TO LENDING INSTIT UTIONS. TTK & CO., DERIVES ITS BUSINESS INCOME BY WAY OF LI CENSE FEES FOR USE OF ITS LOGO, COMMISSION, ETC FROM VARIOUS C OMPANIES UNDER THE GROUP TTK & CO., WAS ALSO RECEIVING LICEN SE FEE FROM TTK TEXTILES LTD ANY FALL IN THE BUSINESS OF T HESE COMPANIES DUE TO THE DEFAULTS OF TTK TEXTILES LTD O R ITS PROMOTERS WOULD HAVE SIGNIFICANTLY AFFECTED THE BUS INESS INCOME OF TTK & CO., THUS, BY WAY OF BUSINESS EXPEDIENCE TTK & CO., HAD PROVIDED MONIES TO TTK TEXTILES LIMITED TO ENABLE T HEM TO HONOUR THEIR COMMITMENTS TO VARIOUS CREDITORS INCLU DING BANKS AND INSTITUTIONS AND ALSO TO REVAMP THE BUSINESS. I T ALSO ENABLED TTK TEXTILES TO MAKE PAYMENTS TO WORKMEN AN D STATUTORY CONTRIBUTIONS LIKE PF, ESI ETC ANY DEFAUL T IN SUCH CONTRIBUTIONS WOULD HAVE INVITED CRIMINAL PROCEEDIN GS AGAINST THE PROMOTERS AND THE DIRECTORS. APART FROM THE ABOVE, AS PER BIFR SCHEME THE PROMOT ERS WERE REQUIRED TO BRING IN ADEQUATE SOURCES TO FUN D CASH LOSSES AND OTHER EXIGENCIES OF THE COMPANY. THUS THE EXPOSURE TO TTK TEXTILES WAS DONE AS PART OF THE BUSINESS AND PROTECT THE OVERALL INCOME OF TTK & CO ., OUT OF THE TOTAL AMOUNT OF ` 35.51 CRORES ADVANCED ONLY ` 3 CRORES WAS ADVANCED AS SHARE APPLICATION MONEY,. OU T OF THE BALANCE, ` 11.89 CRORES WERE CONVERTED INTO BOND/SHARES IN JUNE/SEPT/DEC. 2001. ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 11 -: 7. AS TO THE REFERENCE MADE TO BIFR OF M/S TTK TEXTILE S LTD AND THE ORDER DATED 15.1.2001 PASSED BY THE BOARD AND T HE OBLIGATION ARISING THEREFROM TO M./S TTK & CO., THE LD.AR HIG HLIGHTED THE FOLLOWING ASPECTS. (I) AS THE NET WORTH OF M/S TTK TEXTILES LTD WAS FULLY ERODED BY THE LOSSES INCURRED AS PER THE BALANCE SHEET AS AT 31 ST DECEMBER 1997 THE COMPANY WAS REGISTERED WITH BIFR IN THE YEAR 1998 AS PER PROVISIONS OF SECTION 3(1)(O) OF THE SICK INDUSTRIA L COMPANIES (SPECIAL PROVISIONS) ACT, 1985. IN THE FIRST INSTANCE BIFR ASKED THE COMPANY TO PREPARE A SCHEME ON ITS OWN UNDER SECTION 17(2) OF THE ACT. LATER THE BIFR APPOINTED BANK OF BARODA AS OPERATING AGENCY UNDER SEC 17(3) OF THE ACT. THE BIFR PROCESS WAS A TIME CONSUMING ONE AND IT WAS VERY DIFFICULT TO ARRIVE AT ANY SETTLEMENT WITH THE CREDITORS AS WELL AS TO REVIVE THE COMPANY WITHOUT THE COOPERATION AND ASSISTANCE OF THE PROMOTERS WHO HAD TO WORK WITH THE OPERATING AGENCY. IT WAS STATED THAT THE OPERATING AGENCY BEING AN INDEPENDENT AGENCY WAS ACCOUNTABLE ONLY TO THE BIFR AND HENCE THE SCHEME PREPARED BY THE OPERATING AGENCY AND AS APPROVED BY THE BIFR WAS BINDING ON THE COMPANY AND ITS PROMOTERS. (II) IT WAS FURTHER SUBMITTED THAT IF A COMPANY IS REFERRED TO BIFR AND CONTINUES TO BE REGISTERED UNDER BIFR, IT AFFECT THE IMAGE OF THE ENTIRE GROUP AND THE BANKS DO NOT CONSIDER EXPOSURE TO OTHER COMPANIES OF THE GROUP FAVOURABLY. FURTHER CONTINUING TO BE REGISTERED UNDER BIFR, REDUCES THE OPERATING FLEXIBILITY. (III) IT WAS ALSO STATED THAT A COMPANY COMES OUT OF BIFR ONLY AFTER THE NETWORTH IS MADE POSITIVE AND THAT THIS IS ACHIEVED BY SEVERAL MEASURES WHICH INCLUDE REDUCTION OF CAPITAL, CONVERTING PART OF TH E LOANS AS CAPITAL WAIVER OF INTEREST, SPLITTING OF COMPANIES ETC AND SO THE SCHEME AS APPROVED BY ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 12 -: THE BIFR FOR REVIVAL OF M/S TTK TEXTILES LTD INVOLVED THE FOLLOWING ACTIVITIES TO BE CARRIED OUT . A. SPLITTING OF THE COMPANY BY TRANSFERRING THE SPINNING DIVISION TO A SEPARATE COMPANY CALLED TTK SPINNING LTD., B. RENAMING TTK TEXTILES LTD AS TTK TANTEX LTD AS THE SPINNING DIVISION HAS BEEN HIVED OFF INT O A SEPARATE COMPANY AS REFERRED TO ABOVE. C. SETTING OFF A PART OF THE LOSSES AGAINST THE CAPITAL OF TTK TEXTILES LTD. D. CONVERTING PART OF THE LOAN EXTENDED BY TTK & CO., AND OTHERS TO TTK TEXTILES LTD AS SHARES/BONDS. E. BRINGING INTO BOOKS, THE VALUE OF TANTEX BRAND BASED ON AN EXTERNAL VALUATION REPORT AND SETTING OFF BOOK LOSSES AGAINST THE SURPLUS RECOGNIZED IN THE BOOKS DUE TO VALUATION OF THE BRAND. F. PROMOTERS WERE TO BRING IN NEEDFUL FUNDS TO MEET CASH LOSSES OF TTK TEXTILES LTD AND ALSO TO MEET ALL UNFORESEEN CONTINGENCIES. G. TTK & CO., PROVIDED A SUM OF ` 35.51 CRORES FROM 1998 TO 2003. H. PURSUANT TO BIFR ORDERS, TTK & CO., WAS TO BE ALLOTTED SHARES/BONDS INSTRUMENTS, ETC AGGREGATING TO ` 11.89 CRORES THUS LEAVING A SUM OF ` 23.62 CRORES AS UNSECURED LOANS. 8. THUS, IT MAY BE NOTED FROM THE ABOVE SYNOPSIS THA T OUT OF THE TOTAL OF THE FUNDS ADVANCED BY THE ASSESSEE-FIRM T O THE COMPANY M/S TTK TEXTILES LTD, ALLOTMENT OF SHARES, BONDS ETC WE RE FOR ` 11.89 ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 13 -: CRORES AND THE BALANCE OF ` 23.62 CRORES WERE TO BE TREATED AS UNSECURED LOANS ONLY. THAT THE ASSESSEE-FIRM WAS UNDER THE OBLIGATION TO MAKE ADVANCES TO OR INVESTMENTS IN TH E COMPANY M/S TTK TEXTILES LTD DURING THE FINANCIAL YEAR 1998-99 ITSELF, BUT WITHOUT ADEQUATE RETURNS WAS EXPLAINED BY THE ASSESSEES R EPRESENTATIVE AS UNDER IN THE WRITTEN SUBMISSION FILED. 9. THE BIFR IN THEIR ORDER FOR RECONSTRUCTION OF THE COMPANY HAS OBSERVED THAT M/S TTK TEXTILES WAS PROMOTED BY THE ASSESSEE- FIRM. THEY HAD DIRECTED THE AMOUNTS ALREADY BROUGH T BY THE PROMOTERS TO THE EXTENT OF ` 5.35 CRORES SHOULD BE CONVERTED INTO OPTIONALLY CONVERTIBLE BONDS AND OPTIONALLY CONVERT IBLE PREFERENCE SHARES. (CLAUSE 9.2 OF THE BIFRS ORDER). FURTHER THE BIFR HAS HELD IN CLAUSE 12.2.(E) AND (F) THAT INTEREST ON OPTIONALLY CONVERTIBLE BONDS SHALL BE PAID ONLY AFTER ACCUMULATED LOSS WAS WIPED OFF AND THE PROMOTERS SHALL NOT CHARGE INTEREST ON LOANS GIVEN FROM 1.4.98. UNDER CLAUSE 12.2.(G) THEY HAVE DIRECTED THAT THE P ROMOTERS SHALL BRING IN NEEDFUL FUNDS FROM THEIR OWN SOURCES TO ME ET THE CASH LOSS IN THE RESPECTIVE YEARS. 10. IT WAS FURTHER EXPLAINED BY THE LD.AR IN THE WRIT TEN SUBMISSION AS TO HOW THE STEPS TAKEN FOR REVIVAL OF THE COMPANY M/S ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 14 -: TTK TEXTILES LTD DID NOT YIELD FRUITFUL RESULTS AND ULTIMATELY, THE AMOUNTS INVESTED BY THE ASSESSEE-FIRM THAT WERE TR EATED AS UNSECURED LOANS HAD TO BE WRITTEN OFF BY IT IN THE ACCOUNTING PERIOD ENDED 31.3.2002 AS WELL AS IN THE NEXT ACCOUNTING P ERIOD. AN EXTRACT FROM THE SUBMISSION MADE IN THIS REGARD IS GIVEN BE LOW: 1. AFTER HIVING OFF SPINNING DIVISION INTO A SEPARA TE COMPANY, TTK TEXTILES LTD FOCUSED ON HOSIERY BUSINESS. 2. ONE OF THE PROPOSALS FOR TTK TANTEX WAS TO FUND A JOINT VENTURE PARTNER. 3. THE COMPANY LOOKED FOR SEVERAL OVERSEAS PARTNERS WHO WERE INTERESTED IN COMING INTO INDIA FOR EXPLOITING THE TANTEX BRAND AND AS WELL AS OUTSOURCE PRODUCTS FOR EXPORT BRANDS. 4. THE POTENTIAL JOINT VENTURE PARTNERS WANTED 51% STAKE IN THE COMPANY HOWEVER, AS THE HOSIERY MANUFACTURIN G WADS RESERVED FOR SMALL SCALE SECTOR, THE COMPANY H AD TO SEEK APPROVAL FROM FOREIGN INVESTMENT PROMOTION BOARD (FIPB). 5. DUE TO POLICY AND REGULATORY FRAMEWORK, THE COMP ANY WAS FINDING IT DIFFICULT TO OBTAIN NECESSARY CLEARA NCES AND THE POTENTIAL FOREIGN COLLABORATORS LOST INTERE ST. 6. THE COMPANY TRIED FOR PARTICIPATION OF PRIVATE E QUITY FUNDS IN THE REVIVAL OF THE COMPANY. IN FACT THE COMPANY SIGNED WITH ONE PRIVATE EQUITY PARTNER FOR INFUSION OF CAPITAL AS WELL AS STRATEGIC INPUTS. DU E TO SOUTH EAST ASAIN CAPITAL MARKET CRISIS, THE EQUITY PARTNER BACKED OUT OF ITS COMMITMENTS. 7. THE COMPANY DID REVIVE ITS PROMOTION CAMPAIGN BU T COULD NOT SUSTAIN DUE TO SEVERE COMPETITION FROM UNORGANIZED SECTOR. THE COMPANY ALSO COULD NOT ENSURE A REASONABLE MARGIN DUE TO CUSTOMER RESISTAN CE AGAINST END PRODUCT PRICE INCREASE. ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 15 -: 8. AS THE BUSINESS CONTINUED TO MAKE LOSSES DUE TO THE ABOVE FACTORS, THE PROMOTERS COULD NOT AFFORD TO KE EP PUMPING MONIES. HENCE TTK TANTEX DECIDED TO DISPOSE THE TANTEX BRAND. 11. AFTER CONSIDERING THE VARIOUS DECISIONS AND SUBMI SSION OF THE ASSESSEE, THE CIT(A) HELD AS UNDER : 10.5.1 ALL FACTS REGARDING THE REVIVAL SCHEME AS APPROVED BY THE BIFR AND AS BROUGHT OUT IN THE EARLIER PA RAGRAPHS WERE BEFORE THE ASSESSING OFFICER, BUT HE HAD STILL GONE AHEAD WITH DUE DISALLOWANCE OF THE ENTIRE INTEREST EXPEND ITURE OF RS.46,29,782/- (NET) BY CITING THE DECISION OF FOUR HIGH COURTS INCLUDING THE JURISDICTIONAL COURT. HE HAD ALSO INV OKED SECTION 14A OF THE ACT. BUT IF AN ANALYSIS OF THE UTILIZAT ION OF THE BORROWED FUNDS HAD BEEN ATTEMPTED AS SHOWN IN PARAG RAPH NOS.6.1, 6.2 (G) AND 9.2(B), 9.2(C) AND 9.2(D) ABOV E, THEN IT WILL BE CLEAR THAT THE ASSESSING OFFICER WAS CERTAINLY N OT CORRECT IN DISALLOWING THE INTEREST EXPENDITURE IN RESPECT OF BORROWED FUNDS AND FURTHER THAT HE OUGHT TO HAVE CONSIDERED AND ALLOWED THE EXPENDITURE CLAIMED ON THE BORROWED FUN DS THAT HAD BEEN INVESED IN THE COMPANY M/S.TTK TEXTILES LT D FOR WHICH SHARES AND BONDS HAD BEEN ALLOTTED UNDER THE SCHEME LAID DOWN BY THE BIFR IN THEIR ORDER DATED 15.01.20 01 CITED ABOVE. ON A COMPLETE ANALYSIS OF THE FACTS AS BROU GHT OUT IN THE EARLIER PARAGRAPHS, IT IS SEEN THAT THERE IS EN OUGH MERIT IN THE STAND TAKEN BY THE APPELLANT THAT THE WHOLE PRO CESSES CARRIED OUT BY M/S.TTK & CO ., THE APPELLANT FIRM U NDER THE SCHEME OF THE BIFR WAS OUT BUSINESS EXIGENCIES AND THAT IT WAS NOT AS IT THERE HAD BEEN DIVERSION OF THE FUNDS OF THE FIRM FOR NON BUSINESS PURPOSES. 10.5.2 IT WAS ALSO BROUGHT OUT IN THE EARLIER PA RAGRAPH WHILE GIVING AN ANALYSIS OF THE CASE OF K.SOMASUNDARAM & BROTHERS THAT THROUGH THE MADRAS HIGH COURT APPROVED THE DEPARTMENTS ACTION OF DISALLOWING INTEREST ON THE BORROWED FUNDS FOR THE REASON THAT THE ASSESSEE HAD ADDED ON TO ITS INTEREST LIABILITY UNNECESSARILY BY DIVERTING ITS F UNDS FOR NON BUSINESS PURPOSES. IT WAS OBSERVED BY THEIR LORDSH IPS THAT WHERE THE EXPENDITURE CLAIMED WAS SHOWN TO BE FOR COMMERCIAL EXPEDIENCY, THE SAME MUST BE ALLOWED U/S .36. SO, BOTH THE MADRAS HIGH COURT AS WELL AS THE SUPRE ME COURT HAVE CLARIFIED THAT WHEREVER THE DIVERSION OF THE F UNDS HAD TAKEN PLACE OUT OF COMMERCIAL EXPEDIENCY, THE INTER EST EXPENDITURE INCURRED BY AN ASSESSEE ON BORROWED FUN DS THAT WERE DIVERTED CANNOT BE DISALLOWED. THEREFORE, IN THE PRESENT ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 16 -: APPELLANTS CASE, THE QUESTION OF DECIDING THE COMM ERCIAL EXPEDIENCY IN THE APPELLANT FIRM BORROWING FROM ICI CI BANK LTD AND ADVANCING TO M/S.TTK TEXTILES LIMITED IS RE VOLVING AROUND THE SCHEME OF THE BIFR. EVEN IF IT BE THAT THE APPELLANT FIRM WAS BOUNDED BY THE REGULATIONS OF TH E BIFR TO MAKE ADVANCES TO THE SISTER CONCERN WHICH HAD BECOM E SICK, STILL, IT CAN BE SAID THAT SO LONG AS THE FUNDS BOR ROWED BY THE FIRM AND GIVEN AS ADVANCES TO THE SISTER CONCERN WE RE UITLISED ONLY IN THE BUSINESS OF THAT CONCERN AND THE APPELL ANT FIRM DID NOT DERIVE ANY BENEFIT EVEN OUT OF THE ALLOTMENT OF SHARES AND BONDS ETC.M BY THAT COMPANY, THE INTEREST ON THE BO RROWALS CLAIMED BY THE APPELLANT FIRM CANNOT BE ALLOWED AS ITS BUSINESS EXPENDITURE AS THE BORROWED FUNDS WERE NOT UTILSIED IN ITS BUSINESS. BUT THIS LINE OF ARGUMENT IS NOT CORRECT BECAUSE OF THE SIMPLE FACT THAT IT IS NOT ONLY THAT THE APPELLANT FIRM HAD TO COME INTO THE PICTURE IN THE SCHEME OF THE BIFR FOR THE REVIVAL OF THE SICK COMPANY M/S.TTK TEXTILES LT D AS ITS PROMOTER, BUT THE VERY FACT THAT ONE OF THE BUSINES S ACTIVITIES OF THE APPELLANT FIRM IS PROMOTION OF BUSINESS AND COMPANIES AS EVIDENCED BY THE PARTNERSHIP DEED AND IN THAT PR OCESS, IT HAD EARLIER PROMOTED THE SISTER CONCERN M/S.TTK TEX TILES LTD AND WHEN THAT CONCERN HAD BECOME SICK AND HAD TO BE REHABILITATED, THE RESPONSIBILITY OF SUCH REHABILIT ATION OR REVIVAL AUTOMATICALLY CAME TO THE APPELLANT FIRM IS THAT WH ICH PROVES THE COMMERCIAL EXPEDIENCY IN THE APPELLANT FIRM GO ING IN FOR THE TERM LOAN FROM ICICI BANK LTD DURING THE FINANC IAL YEAR 1998-99 WHEN ITS OWN FUNDS WERE INSUFFICIENT AND IT S PROFITS WERE INADEQUATE. THE CONTINUED ADVANCING OF FUNDS TO THE SISTER CONCERN BY THE APPELLANT FIRM DURING THE SUB SEQUENT ACCOUNTING PERIODS WAS ALSO NECESSITATED BY THE SCH EME OF THE BIFR AND THE FACT THAT AS A PROMOTER OF THE SIS TER CONCERN, WORTH TURNED POSITIVE IS SIGNIFICANT. THE SEQUENCE OF EVENTS THAT HAD TAKEN PLACE SUPPORTING THIS FINDING HAVE B EEN ELABORATED IN THE VARIOUS SUB-PARAGRAPHS OF PARAGRA PH NO.6 OF THIS ORDER. FURTHER, THE SALIENT FEATURES OF THE O RDER OF THE BIFR WERE ALSO DISCUSSED IN PARAGRAPHS NO. 7 TO 7.7 .1. 10.5.4 THE NATURE OF THE ACTIVITIES CARRIED ON B Y THE PARTNERSHIP FIRM HAVE BEEN BROUGHT OUT IN PARAGRAP HS NOS. 4.3.1 , 4.3.1.1. AND 4.3.2.1. ABOVE. IT WAS ALSO STATED IN PARAGRAPHS NOS.4.3.1.1, 4.3.2 AND 4.3.2.1 AS TO HOW M/S TTK & CO WAS PARTICIPATING AS A PROMOTER AND AS A SHARE HOLDER WITH SUBSTANTIAL HOLDING OF SHARES IN DIFFERENT COM PANIES THE TTK GROUP OVER A PERIOD OF YEARS EVEN PRIOR TO THE FINANCIAL YEAR 2001-02. THESE DETAILS WILL ESTABLISH THE FAC T THAT M/S TTK & CO HAD BEEN INVESTING IN OTHER CONCERNS OF TH E TTK GROUP AS A PROMOTER OF THOSE BUSINESSES WHICH WAS V ERY MUCH PART OF ITS BUSINESS ACTIVITIES. IT WAS EXPLA INED IN PARAGRAPHS NOS.4.3.2, 4.3.2.1, 4.3.3, 4.3.3.2, 7 TO 7.6 ABOVE ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 17 -: AS TO HOW M/S TTK & CO., WAS ALSO UNDER OBLIGATION TO BRING SUBSTANTIAL FUNDS IN ORDER TO REVIVE THE BUSINESS O F M/S TTK TEXTILES LTD/TTK SPINNING LTD/TTK TANTEX LTD., IT W AS ALREADY ESTABLISHED IN PARAGRAPH NO.10.5.4 AS TO HOW THE AP PELLANT FIRM HAD TO ENTER THE PROCEEDINGS BEFORE THE BIFR I N ITS CAPACITY AS A PROMOTER OF M/S TTK TEXTILES LTD WHIC H IS PART OF BUSINESS ACTIVITY. THERE WAS CERTAINLY COMMERCIAL EXPEDIENCY WHICH MADE M/S TTK & CO GO IN FOR BORROWALS IN ORDE R TO FIND RESOURCES FOR MAKING ADVANCES TO ITS SISTER CONCERN , M/S TTK TEXTILES LTD WITHOUT WHICH THE OTHER COMPANY WOULD NOT HAVE BEEN ABLE TO CARRY OUT THE ENTIRE PROGRAMME AND GET THE SCHEME FOR ITS REVIVAL APPROVED BY THE BIFR. THIS IS EVIDENT FROM THE SALIENT FEATURES OF THE ORDER OF THE BIFR THAT WERE BROUGHT OUT IN PARAGRAPHS NO. 7.1 TO 7.6 ABOVE. AN D SO, THE RATIO OF THE SUPREME COURTS DECISION IN THE CASE O F S.A. BUILDERS :LTD., IS SQUARELY APPLICABLE TO THE FACTS PREVAILING IN THE PRESENT APPELLANTS CASE. 10.5.4 THOUGH THE COMPLETE FACTS IN THE CASE OF S .A. BUILDERS LTD ARE NOT AVAILABLE IN THE DECISION REPORTED. THE VIEWS EXPRESSED BY THE SUPREME COURT ARE VERY MUCH RELEVA NT IN THE PRESENT CONTEXT. EXTRACTS OF THE RELEVANT PORT IONS OF THIS DECISION ARE GIVEN BELOW: IN ORDER TO DECIDE WHETHER INTEREST ON FUNDS BORROWED BY THE ASSESSEE TO GIVE AN INTEREST FREE LOAN TO A SISTER CONCERN (E.G. A SUBSIDIARY OF THE ASSESSEE) SHOULD BE ALLOWED AS A DEDUCTION U/S 36(1)(III) OF THE INCOME TAX ACT 1961 ONE HAS TO ENQUIRE WHETHER THE LOAN WAS GIVEN BY THE ASSESSEE AS A MEASURE OF COMMERCIAL EXPEDIENCY. THE EXPRESSION COMMERCIAL EXPEDIENCY IS ONE OF WIDE IMPORT AND INCLUDES SUCH EXPENDITURE AS A PRUDENT BUSINESSMAN INCURS FOR THE PURPOSE OF BUSINESS. THE EXPENDITURE MAY NOT HAVE BEEN INCURRED UNDER ANY LEGAL OBLIGATION. BUT YET IT IS ALLOWABLE AS A BUS INESS EXPENDITURE IF IT WAS INCURRED ON GROUNDS OF COMMERCIAL EXPEDIENCY. FOR THE PURPOSE OF BUSINESS INCLUDES EXPENDITURE VOLUNTARILY INCURRED FOR COMMERCIAL EXPEDIENCY, AND IT IS IMMATERIAL IF A TH IRD PARTY ALSO BENEFITS THEREBY. TO CONSIDER WHETHER ONE SHOULD ALLOW DEDUCTION U/S 36(1)(III) OF INTEREST P AID BY THE ASSESSEE ON AMOUNTS BORROWED BY IT FOR ADVANCING TO A SISTER CONCERN, THE AUTHORITIES AND THE COURTS SHOULD EXAMINE THE PURPOSE FOR WHICH THE ASSESSEE ADVANCED THE MONEY AND WHAT THE SISTER CONCERN DID WITH THE MONEY. THAT THE BORROWED AMOUNT IS NOT UTILISED BY THE ASSESSEE IN ITS OWN BUSINESS BUT HAD BEEN ADVANCED AS INTEREST FREE LOA N ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 18 -: TO IT SISTER CONCERN IS NOT RELEVANT. WHAT IS RELE VANT IS WHETHER THE AMOUNT WAS ADVANCED AS A MEASURE OF COMMERCIAL EXPEDIENCY AND NOT FROM THE POINT OF VIE W WHETHER THE AMOUNT WAS ADVANCED FOR EARNING PROFITS. WE WISH TO MAKE IT CLEAR THAT IT IS NOT OU R OPINION THAT IN EVERY CASE INTEREST ON BORROWED LOA N HAS TO BE ALLOWED IF THE ASSESSEE ADVANCES IT TO A SISTER CONCERN. IT ALL DEPENDS ON THE FACTS AND CIRCUMSTANCES OF THE RESPECTIVE CASE. FOR INSTANCE IF THE DIRECTORS OF THE SISTER CONCERN UTILIZE THE AMO UNT ADVANCED TO IT BY THE ASSESSEE FOR THEIR PERSONAL BENEFIT, OBVIOUSLY IF CANNOT BE SAID THAT SUCH MONE Y WAS ADVANCED AS A MEASURE OF COMMERCIAL EXPEDIENCY. HOWEVER MONEY CAN BE SAID TO BE ADVANCED TO A SISTER CONCERN FOR COMMERCIAL EXPEDIENCY IN MANY OTHER CIRCUMSTANCES (WHICH NEED NOT BE ENUMERATED HERE). HOWEVER WHERE IT IS OBVIOUS THAT A HOLDING COMPANY HAS A DEEP INTEREST IN ITS SUBSIDIARY AND HENCE IF THE HOLDING COMPANY ADVANCES BORROWED MONEY TO A SUBSIDIARY AND THE SAME IS USED BY THE SUBSIDIARY FOR SOME BUSINESS PURPOSES THE ASSESSEE WOULD IN OUR OPINION ORDINARI LY BE ENTITLED TO DEDUCTION OF INTEREST ON ITS BORROWE D LOANS. 10.5.4.1 IF THE ABOVE VIEWS ARE APPLIED TO THE P RESENT APPELLANTS CASE THEN IT IS CLEAR THAT EVEN IF THER E HAD BEEN NO REGULAR BUSINESS TRANSACTIONS OR NO PROFITS WERE EXPECTED TO BE EARNED BY THE APPELLANT FIRM FO R THE IMPUGNED ACCOUNTING PERIOD OR FOR THE SUBSEQUEN T PERIODS STILL IT HAS TO BE HELD THAT THE INTEREST EXPENDITURE INCURRED BY THE FIRM ON THE TERM LOAN W AS FOR THE PURPOSE OF THE BUSINESS OF THE APPELLANT FI RM ONLY BECAUSE AS RIGHTLY ARGUED M/S TTK & CO HAD THE BOUNDED DUTY TO PROTECT THE BUSINESS INTERESTS OF T HE CONCERNS IN THE ENTIRE TTK GROUP AND IT HAD VOLUNTE ERED TO INCUR THE EXPENDITURE TO THE BENEFIT OF THE COMP ANY M/S TTK TEXTILES LTD IN ITS CAPACITY AS PROMOTER OF THIS COMPANY. THE FIRM MIGHT HAVE LOST ULTIMATELY AND HA D NOT EARNED PROFITS OUT OF THE ENTIRE DEAL BUT STILL IT HAS TO BE HELD THAT THE AMOUNTS ADVANCED TO THE EXTENT SHA RES AND BONDS WERE ISSUED AS PER THE DIRECTIONS OF THE BIFR WERE OUT OF COMMERCIAL EXPEDIENCY AS THE FIRM S BUSINESS ITSELF WAS TO PROMOTE COMPANIES AND BUSINESSES. THE OBSERVATIONS MADE BY THE ASSESSING OFFICER IN T HE IMPUGNED ASSESSMENT ORDER WERE BROUGHT OUT IN PARAGRAPHS NOS. 4.1 TO 4.1.8. THE ASSESSING OFFICE R ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 19 -: HAD STATED THAT IT WAS NOT AS IF THE MAIN BUSINESS OF THE APPELLANT FIRM WAS MAKING INVESTMENTS IN OTHER CONCERNS. AND IN PARAGRAPH NO.4.1.2 THE MAIN ACTIVITIES OF THE APPELLANT FIRM AS SHOWN IN THE IMPUGNED ASSESSMENT ORDER WERE BROUGHT OUT. THE ASSESSING OFFICER HAD TAKEN COGNIZANCE OF ALL OTHER ACTIVITIES OF THE APPELLANT FIRM EXCEPT THE ACTIVIT Y OF PROMOTING BUSINESSES AND COMPANIES. THE COMPLETE DETAILS OF THE INCOME EARNED BY THE APPELLANT FIRM BY WAY OF COMMISSION AND ROYALTY FROM THE YEARS 1972 T O 1996 FROM THE TANTEX DIVISION AND THE SPINNING DIVI SION WERE BROUGHT OUT IN PARAGRAPH NOS. 4.3.9 & 4.3.9.1. THE ASSESSING OFFICER HAD CHOSEN TO IGNORE ALL THES E VITAL FACTS. HE HAD NOT MADE A COMPLETE ANALYSIS O F THE SCHEME OF THE BIFR AND ALSO THE MANNER IN WHICH THE OTHER CONCERN M/S TTK TEXTILES LTD., HAD UTILISED T HE ADVANCES GIVEN BY THE APPELLANT FIRM. IT WAS BROUG HT OUT IN PARAGRAPHS NOS.4.3.3.7 THAT THE FIRM HAD A H EAVY RESPONSIBILITY OF SAVING THE SICK UNIT IN ORDER TO PROTECT THE BUSINESS INTERESTS OF ALL THE CONCERNS IN THE T TK GROUP. AND IT HAD TAKEN UPON ITSELF THIS TASK IN I TS CAPACITY AS THE PROMOTER OF THE OTHER CONCERNS IN T HE GROUP. THE ASSESSING OFFICER HAD CHOSEN TO COMPLETELY SIDELINE THE COMMERCIAL EXPEDIENCY I.E. THE FACT THAT THE APPELLANT FIRM HAD A FULFIL CONCERN B USINESS COMMITMENTS IN ITS CAPACITY AS A PROMOTER WHICH IS PART OF ITS BUSINESS ACTIVITIES INVOLVED IN THE WHOLE PR OCESS. HE HAD FURTHER CHOSEN TO APPLY SEC, 14A IN SUPPORT OF THE IMPUGNED DISALLOWANCE. AND THIS LINE OF THINKIN G OF THE ASSESSING OFFICER ALSO IS NOT CORRECT. ONCE THE COMMERCIAL EXPEDIENCY IS ESTABLISHED WHETHER OR NOT THE APPELLANT FIRM BENEFITED OUT OF THE ADVANCES O R THE INVESTMENTS MADE IS IMMATERIAL. IT MAY BE A FACT T HAT THE APPELLANT FIRM HAD NOT DERIVED ANY INCOME BY WA Y OF DIVIDEND OR INTEREST FROM THE SHARES AND THE BONDS TO THE VALUE OF RS 11.89 CRORES ALLOTTED TO IT TO BY M/S TTK TEXTILES LTD/TTK SPINNING LTD/TTK TANTEX LTD AND TH E SHARES AND BONDS WERE ULTIMATELY SOLD OR REDEEMED B Y THE FIRM AT A LOSS. BUT THESE FACTS OR EVENTS THAT HAD HAPPENED LATER ON WILL NOT TAKE WAY THE COMMERCIAL EXPEDIENCY WITH WHICH THE APPELLANT FIRM HAD ACTED INITIALLY AT THE TIME OF ADVANCING MONIES TO THE SI CK CONCERN. ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 20 -: 12. THE CIT(A), THEREFORE, CONCLUDED THAT THE INTERES T PAYABLE ON THE LOANS BORROWED FOR ADVANCING TO SISTER CONCERN WAS AN ALLOWABLE DEDUCTION. AGGRIEVED THE REVENUE IS IN APPEAL. 13. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. FROM T HE FACTS CULLED OUT BY THE CIT(A) IN HIS ELABORATE ORDER, FO LLOWING EMERGE THE ASSESSEE HAS STARTED VARIOUS COMPANIES PERMITT ED THEM TO USE THE LOGO OF TTK GIVING THEM ADVANCE AND ALSO PARTICIPATED IN THEIR MANAGEMENT BY HAVING PARTNER OF THE ASSESS EE AS A DIRECTOR IN THE COMPANY. THE COMPANY ALSO RECEIVED INCOME, APART FROM DIVIDE ND DECLARED BY THE PROMOTER COMPANY BY WAY OF ROYALTY FOR THE USE OF THE NAME AS WELL AS MARKETING THEIR PRODUCT OR P ROVIDING SERVICES TO THEM. 14. HENCE, THE ASSESSEE IS IN THE BUSINESS OF PROMOT ING COMPANY AS WELL AS PROVIDING SERVICE AND EARNING INCOME THE REFROM AND APART FROM FUNDING THEM WHENEVER NECESSARY. IT IS IN THI S CONTEXT TTK TEXTILES HAS BECOME SICK AND REFERRED TO BIFR. TH E ASSESSEE-FIRM AS A PROMOTER HAVE BEEN IMPLEMENTED THE SCHEME FOR REV IVING TTK TEXTILES LTD. BIFR IN THEIR ORDER HAS CLEARLY EMBA RGO ON THE APPELLANT COMPANY TO CHARGE ANY INTEREST ON THE AMOUNTS ADVAN CED TO TTK TEXTILES. THEY ALSO DIRECTED THAT THE ASSESSEE-FIR M SHOULD PROVIDE ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 21 -: NECESSARY FUND FOR THE REVIVAL OF TTK TEXTILES LIMI TED. IT IS IN THESE CIRCUMSTANCES, THE ASSESSEE HAD ADVANCED MONEY TO TTK TEXTILES LIMITED AND IN VIEW OF STRINGENT FINANCIAL CIRCUMST ANCE DO NOT CHARGES ANY INTEREST RIGHT FROM THEIR INITIAL LOAN GIVEN FO R THE ASSESSMENT YEAR 1999-00. EVEN IF THE ASSESSEE HAD CHARGED INTERE ST M/S. TTK TEXTILES LTD WOULD NOT HAVE BEEN IN A POSITION TO P AY THE SAME AND THE ASSESSEE WOULD HAVE TO WRITE OF SUCH INTEREST CHARGED. FURTHER BY VIRTUE OF BIFR, THE ASSESSEE WOULD HAVE TO CANC EL THE INTEREST, IF ANY, CHARGED BY THEM IN TTK TEXTILES LIMITED. 15. IT IS NOT DOUBTED THAT THE ASSESSEE AS A PROMOT ER OF VARIOUS COMPANIES, HAVE A VERY CLOSE BUSINESS CONNECTION WI TH THE COMPANY PROMOTED BY THEM. THE ASSESSEE ALSO EARNED INCOME BY WAY OF ROYALTY AND OTHER SERVICE CHARGES FROM M/S. TTK TEX TILES LIMITED. AS EXTRACTED BY CIT(A) THE DECISION OF THE APEX COURT IN THE CASE OF M/S.S.A.BUILDERS REPORTED IN 288 ITR 1, IS IN FAVOU R OF THE ASSESSEE. IN THE CASE OF AMALGAMATIONS LTD, REPORTED IN 226 ITR 128 SC, HOLDING COMPANY WHICH HAD PROMOTED VARIOUS SUBSIDIARIES, HA D GUARANTEED LOANS TAKEN BY THE SUBSIDIARY. WHEN THE SUBSIDIARY WENT BANKRUPT, GUARANTEE GIVEN BY THE HOLDING COMPANY WAS INVOKED FOR PAYMENT AND THE APEX COURT ALLOWED THE PAYMENT MADE UNDER THE G UARANTEE BY THE ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 22 -: HOLDING COMPANY AS BUSINESS DEDUCTION INCURRED IN T HE COURSE OF BUSINESS. 16. THE ASSESSEE HAD ALSO RELIED ON THE DECISION OF THE W.S.INDUSTRIES LIMITED IN ITA NO 1373/MDS/08 AND V. RAMAKRISHNA AND SONS IN ITA NO 2272/MDS/08 (CONFIRMED BY THE MADRAS HIGH COURT REPORTED IN 326 ITR 315). THESE CASES SUPPORTS THE SUBMISSION OF THE ASSESSEE FOR THE ADVANCES MADE BY THE ASSESSEE IN T HE COURSE OF BUSINESS TO SAFE GUARD THEIR NAME AND PRESTIGE IN T HEIR MARKET SHOULD BE CONSIDERED AS FOR THE PURPOSE OF BUSINESS AND HE NCE, INTEREST ON SUCH LOANS ARE ALLOWABLE U/S 36(1)(III). 17. WE AGREE WITH THE IMPUGNED FINDING OF THE CIT( A) ON THIS ISSUE AND HOLD THAT THE INTEREST PAYABLE BY THE ASS ESSEE ON ITS BORROWINGS ARE ALLOWABLE AS DEDUCTION. THE GROUNDS RAISED BY THE REVENUE ON THIS ISSUE STAND DISMISSED. 18. THE NEXT ISSUE OF REVENUE APPEAL IS WRITING OFF OF BAD DEBT OF ` 10.25 CRORES OUT OF THE AMOUNT ADVANCED TO M/S.TTK TEXTILES LIMITED. HERE, AGAIN THE ASSESSEE HAD WRITTEN OFF OUT OF THE TOTAL ADVANCE OF ` 35.50 CRORES TO M/S.TTK TEXTILES A SUM OF ` 10.25 CRORES FOR THE ASSESSMENT YEAR 2002-03 AND ` 12.86 CRORES FOR THE ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 23 -: ASSESSMENT YEAR 2003-04. IT IS TO BE BORNE IN MIND THAT OUT OF THE TOTAL ADVANCE OF ` 35.50 CRORES GIVEN BY THE ASSESSEE TO M/S.TTK TEXTILES, THE ASSESSEE BEEN GRANTED OPTIONAL CONVER TIBLE BONDS OF ` 4 CRORES, EQUITY SHARES OF TTK SPINNING MILLS LTD OF ` 4 CRORES, DIFFERENCE IN SHARE IN TTK TANTEX OF ` 1.4 CRORES, OPTIONAL CONVERTIBLE BONDS OF ` 2.39 CRORES AGGREGATING TO ` 11.89 CRORES. A SUM OF ` 50 LAKHS WAS RECEIVED FROM TTK TEXTILES LIMITED. THEREFORE, THE ASSESSEE HAD WRITTEN OFF THE BALANCE ADVANCE AMOUNT OF ` 23.56 CRORES FOR THE ASSESSMENT YEARS 2002-03 AND 2003-04. BONDS AND SH ARE ISSUED FOR AND ON BEHALF OF THE TTK TEXTILES HAVE BEEN RETAINE D BY THE ASSESSEE AND HAVE NOT BEEN WRITTEN OFF. IT IS ONLY AN ADVAN CE GIVEN TO TTK TEXTILES WHICH, IN THE OPINION OF THE ASSESSEE, HAS BECOME IRRECOVERABLE INASMUCH AS THE SCHEME FOR REVIVING O F SICK COMPANY HAD NOT TAKEN OFF. THE CIT(A) HAS ALLOWED THE CLAI M OF THE ASSESSEE BY OBSERVING AS UNDER: TO CONCLUDE THE INFERENCES THAT ARE TO BE DRAWN FR OM THE DISCUSSIONS IN THE ABOVE PARAGRAPHS ARE AS FOLLOWS: (A) AS FAR AS THE INTEREST CLAIM ON THE LOAN BALANC E IN RESPECT OF THE TERM LOAN OF ICICI BANK LTD IS CONCERNED TH E FOLLOWING FINDINGS ARE GIVEN: (I) THERE EXISTS A DIRECT NEXUS BETWEEN THE BORROWE D FUNDS AND THE ADVANCES MADE BY THE APPELLANT FIRM TO M/S TTK TEXTILES LTD. (II) THE ENTIRE LOAN AMOUNT OF ` 10 CRORES HAD BEEN ADVANCED DURING THE FINANCIAL YEAR 1998-99 TO THE COMPANY M/ S TTK TEXTILES LTD., ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 24 -: (III) THOUGH THERE WERE REPAYMENTS MADE TOWARDS THE TERM LOAN BY M./S TTK & CO AND THE LOAN BALANCES WERE BE ING REDUCED FROM YEAR TO YEAR THE FACT REMAINS THAT THE LIABILITY CONTINUED TILL THE FINANCIAL YEAR 2002-03 AND IT AD DED ON TO THE INTEREST LIABILITY OF THE APPELLANT FIRM. THE A DVANCES DID NOT REMAIN AS ADVANCES BUT WERE CONVERTED IN SHARE S AND BONDS IN THE COMPANY M/S TTK TEXTILES LTD DURING TH E FINANCIAL YEAR 2001-02. (IV) ALTHOUGH THE ABOVE FACTS SEEM TO TAKE THE CA SE OF THE APPELLANT NEARER TO K. SOMASUNDARAM & BROS DEALT WI TH BY THE JURISDICTIONAL HIGH COURT AND RELIED UPON BY TH E ASSESSING OFFICER, THE RATIO OF THIS DECISION CANN OT BE SAID TO APPLY TO THE IMPUGNED DISALLOWANCE AS THE EXISTE NCE OF COMMERCIAL EXPEDIENCY IN DIVERTING THE BORROWED FU NDS TO THE SISTER CONCERN M/S TTK TEXTILES LTD HAS BEEN ESTABLISHED BY THE APPELLANT. (V) M/S TTK & CO HAD BEEN ALLOTTED SHARES AND BONDS BY M/S TTK TEXTILES /TTK SPINNING LTD/TTK TANTEX LTD COVER ING THE ENTIRE LOAN AMOUNT THAT HAD BEEN GIVEN AS ADVAN CES. IN FACT THE VALUE OF SHARES AND BONDS SO ISSUED WAS TO THE TUNE OF ` 11.89 CRORES WHICH FAR EXCEEDED THE TERM LOAN THAT HAD BEEN ADVANCED TO THE SISTER CONCERN. (VI) AS COMMERCIAL EXPEDIENCY HAD BEEN PROVED IN TH E DIVERSION OF THE BORROWED FUNDS BASED ON TWO FACTOR S THAT PROMOTING BUSINESSES AND COMPANIES IS ONE OF THE BUSINESS ACTIVITIES OF THE APPELLANT FIRM AND THE A DVANCING OF THE MONEYS TO THE SISTER CONCERN WAS IN THE COUR SE OF ITS BUSINESS AND FURTHER SUCH ADVANCING WAS NECESSITATE D OUT OF THE ORDER OF THE BIFR, THE RATIO OF THE SUPREME COURTS DECISION IN THE CASE OF S.A. BUILDERS LTD IS APPLIC ABLE TO THE INTEREST EXPENDITURE CLAIMED ON THE TERM LOAN OF IC ICI BANK LTD AND THE ASSESSING OFFICER WAS NOT CORRECT IN DISALLOWING THE INTEREST BY APPLYING THE DECISION O F THE MADRAS HIGH COURT IN THE CASE OF K. SOMASUNDARAM & BROS.. (B) AS REGARDS THE APPELLANTS CLAIM TOWARDS THE AM OUNTS OF ADVANCES GIVEN TO M/S TTK TEXTILES LTD, THAT WER E WRITTEN OFF AS IRRECOVERABLE, THE FOLLOWING FINDING S ARE GIVEN: (I) THE SUMS OF ` 10.25 CRORES AND ` 12.87 CRORES CLAIMED AS DEDUCTION FROM THE PROFITS OF THE ACCOUNTING PER IODS ENDING WITH 31.3.2002 AND 31.3.2003 DO NOT REPRESEN T ANY BAD DEBTS WRITTEN OFF WITHIN THE MEANING OF SECTI ON 36(1)(VII) R.W.S 36(2) OF THE ACT. ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 25 -: (II) THE ADVANCES MADE BY THE APPELLANT FIRM TO THE COMPANY M/S TTK TEXTILES LTD/TTK TANTEX LTD. WERE I N THE COURSE OF ITS BUSINESS OF PROMOTING BUSINESSES AN COMPANIES. FURHTER,T HE FIRM WAS COMPELLED TO MAKE A HUGE ADVANCES TO ITS SISTER CONCERN IN ORDER TO REV IVE IT AS PER THE SCHEME OF THE BIFR. WHEN M/S TTK TEXTILES LTD/TTK TANTEX LTD. BECAME INCAPABLE OF REPAYING TH E DEBTS OWING TO THE FACT THAT THERE WAS NO BUSINESS CARRIED ON BY IT AND ITS ASSETS POSITION WAS ALSO REDUCED T O MINIMAL LEVEL AND THE ADVANCES WERE WRITTEN OFF BY THE APPE LLANT FIRM, AS PER THE RATIO OF THE SUPREME COURTS DECIS ION IN THE CASE OF CIT VS AMALGAMATIONS P. LTD THE FIRM IS ENT ITLED TO CLAIM THE AMOUNTS SO WRITTEN OFF AS IRRECOVERABLE I N ITS ACCOUNTS AS BUSINESS LOSSES AND THE SAME ARE ALLOAB LE IN PRINCIPLE. (IV) THE ASSESSING OFFICER WAS CERTAINLY NOT CORREC T IN HIS OBSERVATION THAT THE APPELLANT FIRM HAD WRITTEN OFF THE AMOUNTS OF ADVANCES AS IRRECOVERABLE IN THE YEAR IN WHICH IT HAD BEEN ALLOTTED SHARES, BONDS AND OTHER SECURITIES BY THE COMPANY M/S TTK TEXTILES LTD/TTK TANTEX LTD. AND REJECTING ITS CLAIM IN RESPECT OF T HE ADVANCES WRITTEN OFF IN ITS ACCOUNTS DURING THE ACCOUNTING PERIODS ENDED 31.3.2002 AND 31.3.2003. HE OUGHT TO HAVE CONSIDERED THE TOTALITY OF THE FAC TS BEFORE HIM. (V) AS THE APPELLANT FIRM HAD ADVANCED MONIES TO M/ S TTK TEXTILES LTD/TTK TANTEX LTD. AS ITS PROMOTER AND WH EN THAT COMPANY COULD NOT BE REVIVED, IRRESPECTIVE OF THE FACT THAT THE FIRM HAD WRITTEN OFF THE ADVANCES IN ITS ACCOUNTS IN THE YEAR OF GIVING THE ADVANCES ITSELF , IT IS ENTITLED TO CLAIM THE AMOUNTS SO WRITTEN OFF AS BUS INESS LOSSES. AS HELD BY THE ITAT, CHENNAI BENCH IN THE CASE OF V.D.SWAMY & CO. LTD./M/S SOUTH INDIA CORPORATION, THE NEXUS BETWEEN THE LOSS SUFFERED BY THE APPELLANT FIRM AND THE BUSINESS CARRIED ON BY I T HAVING BEEN ESTABLISHED, THE BALANCE OF ADVANCES TH AT BECAME IRRECOVERABLE MUST BE ALLOWED AS BUSINESS LOSSES. 19. AGGRIEVED, THE REVENUE IS IN APPEAL. THE FACTS L EADING TO THE WRITE OFF OF LOAN HAVE BEEN ELABORATELY BROUGHT OUT BY THE CIT(A) IN HER ORDER. THE ASSESSEE, AS A PROMOTER OF VARIOU S COMPANIES VIZ., ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 26 -: TTK TEXTILES LIMITED, WAS OBLIGATORY TO FUND AND RE VIVE THE TTK TEXTILES LIMITED AND DIRECTED TO DO SO BY THE BIFR. THE ASSESSEE IN ALL HAD PROVIDED A STAGGERING SUM OF ` 35.35 CRORES AND OUT OF THE SAME, THE ASSESSEE WAS ALLOWED BONDS AND EQUITY SH ARES TO THE EXTENT OF ` 11.89 CRORES AND HAD GOT BACK THE AMOUNT OF ` 50 LAKHS. THEREFORE, THE BALANCE ADVANCE AMOUNTING TO ` 23.11 CRORES REMAINS OUTSTANDING AND THE ASSESSEE WAS OF THE BONAFIDE B ELIEF THAT NO AMOUNT CAN BE RECOVERED OUT OF THIS ADVANCE. THE CO MPANY , ALREADY A SICK COMPANY AND REFERRED TO BIFR, COULD NOT BE R EVIVED. IT HAD NO ASSETS OR MEANS TO REPAY THIS AMOUNT. IN FACT, THE ASSESSEE AS A PROMOTER HAD TO PUMP IN MONIES TO MEET THAT COMPANY S LIABILITIES TO OUTSIDERS. IT IS IN THESE CIRCUMSTANCES, THE ASSESS EE DECIDED THAT THE ADVANCES TO M/S TTK TEXTILES LTD HAVE BECOME IRRECO VERABLE AS THAT COMPANY HAD NO ASSETS OR MEANS TO REPAY THE SAME. H ENCE, THE ASSESSEE HAD WRITTEN OFF THE AMOUNT IN ITS BOOKS OF ACCOUNTS. AS HELD BY THE SUPREME COURT IN THE CASE OF TRF LIMITED V C IT (323 ITR 397), WHEN A DEBT IS WRITTEN OFF AS IRRECOVERABLE I N THE ACCOUNTS OF THE ASSESSEE THEN THE SAME SHOULD BE ALLOWED AS A DEDUC TION. AGAIN THE APEX COURT IN THE CASE AMALGAMATIONS LTD (226 ITR 188) HAS HELD THAT, WHEN THE ASSESSEE IS IN THE BUSINESS OF PROMO TING VARIOUS COMPANIES AND IN THE COURSE OF THE SAME COULD NOT R ECOVER ANY AMOUNT PAID FOR AND ON BEHALF OF THE PROMOTED COMPA NY, THE SAME ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 27 -: SHOULD BE ALLOWED AS BAD DEBT OR BUSINESS LOSS. THE ASSESSEE ALSO RELIED ON OTHER DECISIONS OF THE ITAT IN THE CAS ES OF W.S.INDUSTRIES LIMITED IN ITA NO 1373/MDS/08 AND V.RAMAKRISHNA AND SONS IN ITA NO 2272/MDS/08 (CONFIRMED BY THE HON'BLE MADRAS HIG H COURT REPORTED IN 326 ITR 315), CHEMPLAST SANMAR LTD IN I TA NO 911, 952/M/1993 (WHICH WAS AFFIRMED BY THE HIGH COURT IN TCA NO 844, 845/04) WHEREIN THE TRIBUNAL HAS ALLOWED THE DEDUCT ION OF ADVANCES TO ASSOCIATE CONCERN WRITTEN OFF AS IRRECOVERABLE. 20. RESPECTFULLY FOLLOWING THE RATIO OF THE ABOVE DEC ISIONS, WE FIND THAT CIT(A) HAS RIGHTLY ALLOWED THE CLAIM O F THE ASSESSEE FOR WRITE OFF OF ` 10.25 CRORES, BEING PART OF ADVANCE WHICH ARE BECO ME IRRECOVERABLE FROM TTK TEXTILES LTD. HENCE, WE DIS MISS THE GROUNDS RAISED BY THE REVENUE IN THIS RESPECT. 21. THE NEXT ISSUE OF THIS APPEAL IS AGAINST ALLOWA NCE OF 50% OF THE TECHNICAL FEES AND COMMISSION PAID BY THE ASSES SEE TO LATE SHRI TT VASU. THE CIT(A) HAS FOUND THAT IT CANNOT BE DISPUTED THA T THE CONTRIBUTION OF LATE SRI. T.T. VASU, WHETHER AS A P ARTNER OR AFTER HIS RETIREMENT TO THE GROWTH OF THE BUSINESS OF THE ASS ESSEE. LATE SHRI T.T.VASU HAS TAKEN GREAT EFFORT TO ENHANCE THE BUS INESS OF THE APPELLANT FIRM AND ON ACCOUNT OF HIS VARIOUS BUSINE SS CONTACTS AND THE ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 28 -: ASSESSEE HAS BENEFITED SUBSTANTIALLY THEREFROM. IN THE CIRCUMSTANCES WE AGREE WITH THE ORDER OF THE CIT(A) REGARDING ALL OWANCE OF COMMISSION AND 50% OF THE TECHNICAL SERVICES PAID TO LATE SHRI T.T VASU. THE GROUNDS RAISED BY THE REVENUE STAND DIS MISSED. 22. IN THE RESULT, THE APPEAL OF THE REVENUE, FOR AS SESSMENT YEAR 2002-03, STANDS DISMISSED. I.T.A.NO. 1041/MDS/09 AY : 2002-03 23. IN THIS CROSS APPEAL FILED BY THE ASSESSEE, FOR ASS ESSMENT YEAR 2002-03, THE FIRST ISSUE IS AGAINST THE TREATMENT OF ` 10 CRORES RECEIVED BY THE ASSESSEE TOWARDS NON-COMPETE FEE FR OM M/S.SARA LEE. THE ASSESSEE TREATED THE SAME AS CAPITAL RECEIPT AN D HELD IT AS NOT SUBJECT TO TAX. THE ASSESSING OFFICER HELD THE ENT IRE AMOUNT OF ` 10 CRORES AS LONG TERM CAPITAL GAINS AND CHARGED ACCOR DINGLY. ON APPEAL, THE CIT(A), HAS HELD THE SAME TO BE REVEN UE RECEIPT AND THUS ENHANCED THE ASSESSMENT BY ASSESSING THE SAID SUM O F ` 10 CRORES AS BUSINESS INCOME. ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 29 -: 24. THE ASSESSEE-FIRM HAD CREDITED IN THE PROFIT AN D LOSS ACCOUNT FOR THE ACCOUNTING PERIOD ENDED 31.3.2002 A SUM OF ` 10 CRORES WITH THE FOLLOWING NARRATION: CAPITAL RECEIPTS CONSIDERATION RECEIVED FOR REMOV AL OF RESTRICTIVE COVENANT AND DISCHARGE AND NON COMPETE AGREEMENT. 25. THE NET PROFIT SHOWN OF ` 8,05,57,911/- WAS AFTER TAKING INTO CONSIDERATION THIS RECEIPT. HOWEVER, THE ASSESSEE HAD CLAIMED THIS SUM AS EXEMPT FROM TAXATION IN THE INCOME COMPUTATI ON STATEMENT ACCOMPANYING THE RETURN FILED FOR THE ASSESSMENT YE AR 2002-03. AFTER EXCLUDING THE SUM OF ` 10 CRORES FROM THE PROFITS THE FIRM HAD SHOWN ONLY A NET LOSS OF ` 7,15,54,959/- UNDER THE HEAD BUSINESS. THIS SUM OF ` 10 CRORES WAS STATED TO HAVE BEEN RECEIVED BY THE ASSESSEE-FIRM FROM A FOREIGN COMPANY M/S. SARA LEE A MEMBER OF TH E JOINT VENTURE IN WHICH THE ASSESSEE-FIRM HAD PARTICIPATED. ON E OF THE MAIN ACTIVITIES OF THE ASSESSEE-FIRM, M/S TTK & CO, HAS BEEN TO PROMOTE COMPANIES AND BUSINESSES AND IN THAT PROCESS IT HAD BEEN ENTERING INTO JOINT VENTURE AGREEMENTS WITH DIFFERENT COMPAN IES AND MAKING INVESTMENTS IN THOSE COMPANIES. M/S KIWI TTK LTD WA S ONE SUCH JOINT VENTURE IN WHICH THE ASSESSEE-FIRM ALONG WITH M/S TTK PHARMA LTD WAS PARTICIPATING AND THIS JOINT VENTURE COMPANY WA S ENGAGED IN THE MANUFACTURED AND MARKETING OF PRODUCTS LIKE LEATHER CARE PRODUCTS, ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 30 -: DOMESTIC HYGIENE PRODUCTS SHOE POLISH ETC., KIWI IS THE SHORTENED FORM OF SARA LEE KIWI HOLDINGS INC. THIS CONCERN WANTED TO EXPAND ITS CAPACITIES AND GO IN FOR PRODUCTION OF CERTAIN NEW PRODUCTS. THE JOINT VENTURE AGREEMENT FOR EXPANSION OF THE BUSI NESS OF M/S KIWI TTK LTD WAS ENTERED INTO BETWEEN SARA LEE CORPORATI ON, TTK & CO GROUP CONSISTING OF T.T. KRISHNAMACHARI & CO., AND M/S TTK PHARMA LTD AND KIWI TTK LTD ON 17.9.1993. THE PRODUCTS TO BE MANUFACTURED UNDER THE EXPANSION PROGRAMME AND BY THE JOINT VENT URE COMPANY M/S KIWI TTK LTD WERE TOILET AND DRAIN CLEANER LIQU ID TOILET CLEANER, LEATHER GOODS FINISHING PREPARATIONS, HOUSE HOLD CL EANER, LAUNDRY CARE PRODUCTS HOUSE HOLD INSECTICIDES AND AUTOMOBILE CAR E PRODUCTS. THE NECESSARY APPROVAL FOR THE EXPANSION WAS OBTAINED F ROM THE GOVERNMENT OF INDIA, VIDE ORDER NO. FC II 282 (92) 358(92) DATED 14.8.1992 ISSUED BY THE MINISTRY OF INDUSTRY, DEPAR TMENT OF INDUSTRIAL DEVELOPMENT SECRETARIAT FOR INDUSTRIAL APPROVALS. AS PER THIS AGREEMENT KIWI WAS TO HOLD 51% OF THE SHARES IN THE JOINT VENTURE CAPITAL AND THE TTK GROUP CONCERNS WERE TO HOLD 49% . AS PER THIS AGREEMENT KIWI WAS TO PROVIDE THE NECESSARY FORMULA E, KNOW HOW OR OTHER EXPERTISE REQUIRED FOR MANUFACTURING AND MARK ETING OF THE PRODUCTS DEALT IN BY KIWI TTK. FURTHER THE MANAGE MENT AND CONTROL OF THE JOINT VENTURE COMPANY WAS TO BE IN ACCORDANC E WITH THE ARTICLES OF ASSOCIATION AND THE SHAREHOLDERS AGREEMENT. ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 31 -: 26. THE SHAREHOLDERS AGREEMENT WAS ENTERED INTO BY THESE COMPANIES ON 17./9.1993 AS PER WHICH KIWI WAS TO OF FER TO THE JOINT VENTURE COMPANY ADDITIONAL BRANDS OTHER THAN KIWI AND RIDSECT TO BE MANUFACTURED AND OR DISTRIBUTED IN INDIA FOR WHI CH PURPOSE THE PARTIES SHALL ENTER INTO A LICENSE AGREEMENT WITH K IWI. FURTHER AS PER THIS AGREEMENT TILL SUCH TIME THE NEW PRODUCTS ATT AIN 20% GROSS PROFIT AS DEFINED BY KIWI CONTROLLER MANUAL THE JOINT VENT URE COMPANY WAS TO PAY KIWI A ROYALTY EQUAL TO 5% OF THE SALES TO THE COMPANYS DISTRIBUTOR OF THE NEW BRANDS. ALSO AS PER THIS AGR EEMENT IF EITHER KIWI OR ANY CONCERN IN TTK & CO GROUP WANTED TO INTRODUC E ANY NEW PRODUCT OF THE CATEGORIES MENTIONED ABOVE IN THE IN DIAN MARKET THEN SUCH PARTY SHALL NOTIFY THE JOINT VENTURE KIWI TTK AND THE OTHER PARTY. AND THE JOINT VENTURE COMPANY KIWI TTK LTD SHALL BE GRANTED THE OPTION TO MANUFACTURE THESE NEW PRODUCTS IN ADDITIO N TO THE RANGE OF PRODUCTS IT HAD BEEN ALREADY DEALING IN. BUT THERE WAS A TIME LIMIT GIVEN TO KIWI TTK LTD TO EXERCISE OPTION IN THE SEN SE THAT IF WITHIN 3 MONTHS IT HAD NOT EXERCISED THE OPTION THEN THE PAR TY WHICH INITIALLY WANTED TO MANUFACTURE THE NEW PRODUCT SHALL BE ENTI TLED TO MANUFACTURE THE SAME BY ITSELF OR IT COULD MANUFACT URE THE PRODUCT THROUGH A THIRD PARTY IN INDIA. THIS WAS A RESTRICT IVE COVENANT IN THE JOINT VENTURE AGREEMENT. BUT LATER ON IN THE YEAR 2001, THE PARTIES TO ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 32 -: THE JOINT VENTURE AGREEMENT ENTERED INTO ANOTHER AG REEMENT WHEREBY THE RESTRICTIVE COVENANT WAS REMOVED.. THIS AGREEM ENT WAS DATED 30.9.2001. AS PER THIS AGREEMENT M/S TTK & CO THE A SSESSEE-FIRM WAS PAID A SUM OF ` 10- CRORES BY M/S SARA LEE FOR AGREEING TO GET OUT OF THE RESTRICTIVE COVENANT IN THE JOINT VENTURE AG REEMENT. 27. M/S TTK & CO HAD RECEIVED THE SUM OF ` 10 CRORES ON 5.10.2001 ACCORDING TO THE ASSESSEE-FIRM THIS RECE IPT WAS FOR RELINQUISHMENT/ RESTRICTION OF THE COMMERCIAL RIGHT ARISING FROM THE SHAREHOLDING AGREEMENT WITH M/S. SARA LEE AND THERE FORE, IT WAS A CAPITAL RECEIPT. IT HAD ALSO CLAIMED THAT THIS SUM WAS A MERE PAYMENT FOR BREACH OF THE TERMS OF THE SHAREHOLDERS AGREEM ENT AND THEREFORE IT WOULD CONSTITUTE CAPITAL RECEIPTS IN ITS HANDS. IT WAS FURTHER ARGUED THAT THAT THERE WAS NO COST OF ACQUISITION INCURRED BY THE FIRM TO ACQUIRE THIS RIGHT OF FIRST REFUSAL THROUGH THE JOI NT VENTURE AGREEMENT AND THEREFORE NO CAPITAL GAINS TAX WAS ALSO LEVIABL E ON THIS SUM. IT WAS POINTED OUT THAT THIS TYPE OF RECEIPT DOES NOT FALL INTO THE TERMS SPECIFIED IN SEC. 55(1)(B) OF THE IT ACT RELIANCE W AS PLACED ON THE FOLLOWING DECISIONS: (I) OBEROI HOTELS PVT LTD. VS CIT (1999) 236 ITR 9 03(SC) (II) GODREJ & CO. VS CIT (1959) 37 ITR 381(SC) (III) KETTLEWELL BULLEN CO. VS CIT (1946) 53 ITR 26 1(SC) ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 33 -: 28. AFTER TAKING INTO CONSIDERATION THE CONTENTS OF THE SHAREHOLDERS AGREEMENT THE JOINT VENTURE AGREEMENT AND THE SALES AGREEMENT ENTERED INTO BETWEEN M/S SARA LEE AND THE TTK GROUP OF CONCERNS OF WHICH THE ASSESSEE-FIRM IS ONE AND AFT ER GOING INTO THE OTHER DETAILS FURNISHED THE ASSESSING OFFICER HELD THAT THE ENTIRE RECEIPT OF ` 10 CRORES WOULD CONSTITUTE INCOME BY WAY OF LONG TERM CAPITAL GAINS IN THE HANDS OF THE ASSESSEE-FIRM FO R THE ASSESSMENT YEAR 2002-03 AS THERE HAD BEEN EXTINGUISHMENT OF TH E RIGHT OF NOT CARRYING ON THE BUSINESS WHICH WAS CONFERRED ORIGIN ALLY UPON M/S TTK & CO BY THE SALES AND PURCHASE AGREEMENT DATED 17 .9.93 AND OTHER SUBSEQUENT AGREEMENTS. THUS, ACCORDING TO THE ASS ESSING OFFICER, BY VIRTUE OF THE AGREEMENT DATED 30.9.2001 ENTERED INT O BY M/S TTK & CO., WITH M/S SARA LEE CORPORATION, THE RIGHT TO CA RRY ON BUSINESS IN THE VARIOUS PRODUCTS AS PER THE AGREEMENTS ENTERED INTO BY THE ASSESSEE-FIRM WITH THE OTHER CONCERNS IN THE JOINT VENTURE EARLIER GOT EXTINGUISHED AND SO THERE WAS A TRANSFER WITHIN THE MEANING OF SECTION 2(47) OF THE ACT AND THEREFORE, THE CONSIDERATION R ECEIVED BY THE ASSESSEE-FIRM WAS EXIGIBLE TO CAPITAL GAINS TAX. THE ASSESSING OFFICER HAD GONE INTO THE DEFINITION OF THE TERM CAPITAL AS SET AS GIVEN IN SEC 2(14) OF THE ACT TO INCLUDE THE RIGHT TO CARRY ON ANY BUSINESS AND ALSO THE RIGHT OF NOT CARRYING ON ANY BUSINESS. THE ASSE SSING OFFICER HAD FURTHER HELD THAT THE COST OF ACQUISITION OF THE RI GHT TO CARRY ON ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 34 -: BUSINESS SO ACQUIRED MUST BE TREATED AS NIL AND ALS O THERE WAS NO COST OF IMPROVEMENT TO THIS RIGHT. THOUGH THE ASSES SING OFFICER HAD HELD IN PARAGRAPH NO.4.1.16 OF THE IMPUGNED ORDER T HAT THE SUM OF RS 10 CRORES WAS ASSESSABLE AS LONG TERM CAPITAL GAIN S IN THE COMPUTATION PART OF THE IMPUGNED ORDER IN PAGE NO.1 8, HE HAD INCLUDED THE SAME UNDER THE HEAD BUSINESS. 29. BEFORE THE CIT(A), WHILE OBJECTING TO THE LEVY OF CAPITAL GAINS TAX ON THE SUM OF ` 10 CRORES RECEIVED BY THE ASSESSEE FROM M/S SARA LEE CORPORATION DURING THE ACCOUNTING PERIOD ENDED 31.3.2002 THE APPELLANT HAS SUBMITTED THAT THE AMOUNT RECEIVED BY THE FIRM M/S TTK & CO., WAS FOR GIVING UP CERTAIN RIGHTS OF THE FIRM ARISING FROM A CONTRACT AND AS THERE WAS NO COST OF ACQUISITION FO R SUCH RIGHTS THE SUM OF ` 10 CRORES WAS NOT TO BE SUBJECTED TO THE LEVY OF C APITAL GAINS TAX. RELIANCE WAS PLACED ON THE DECISION OF THE HO N'BLE SUPREME COURT RENDERED IN THE CASE OF CIT , BANGALORE V B. C. SRINIVASA SETTY, REPORTED IN 128 ITR 294, WHEREIN IT WAS HELD THAT I F THERE WERE NO COST OF ACQUISITION CAPITAL GAINS TAX CANNOT BE LEVIED. WITHOUT PREJUDICE TO THE ABOVE ARGUMENTS, IT WAS CONTENDED THAT THE ASSE SSING OFFICER ERRED IN NOT LEVYING TAX ON ` 10 CRORES AT THE RATES APPLICABLE TO INCOME BY WAY OF CAPITAL GAINS. ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 35 -: 30. DURING THE COURSE OF HEARING BEFORE THE CIT(A), T HE ASSESSEES REPRESENTATIVE FURNISHED DETAILS AND COPIES OF THE VARIOUS AGREEMENTS ENTERED INTO BY THE TTK GROUP OF COMPANIES WITH SA RA LEE AND ALSO THE AGREEMENT UNDER WHICH THE ASSESSEE-FIRM HAD RE CEIVED THE SUM OF ` 10 CRORES. THE CIRCUMSTANCES UNDER WHICH M/S TTK & CO., WAS ENTITLED TO THE SUM OF ` 10 CRORES ARE BRIEFLY NARRATED AS UNDER: M/S KIWI TTK LTD WHICH WAS FORMERLY KNOWN AS NEW WAY CHEMICALS AND POLISHES (P) LTD WAS A JOINT VE NTURE BETWEEN KIWI AN AFFILIATE OF SARA LEE CORPORATION A ND M/S T.T.KRISHNAMACHARI & CO., THE APPELLANT FIRM. THER E WAS AN AGREEMENT ENTERED INTO ON 17 TH SEPTEMBER 1993 BETWEEN TTK & CO., GROUP CONCERNS THE FIRM M/S TTK & CO., AND M/S TTK PHARMA LTD AND THE JOINT VENTURE COMPANY M/S KIWI TTK LTD FOR THE SALE OF THE PRODUC TS OF KIWI TTK. THIS JOINT VENTURE AGREEMENT WAS ALSO GOVERNED BY A SHAREHOLDERS AGREEMENT. KIWI WAS HOLDING 25% OF THE SHARE CAPITAL OF KIWI TTK AND TH E REMAINING 75% WAS HELD BY M/S TTK & CO., GROUP. BY VIRTUE OF KIWI AMALGAMATING WITH M/S SARA LEE, THE SHARES IN M/S KIWI TTK LTD., WERE HELD BY M/S SARA LEE KIWI HOLDING INC. AND M/S TTK & CO., AND SO, ACTUAL LY, SARA LEE WAS HOLDING 25% OF THE SHAREHOLDING OF KI WI TTK AND THE REMAINING 75% WAS OWNED BY THE TTK GROUP THE FIRM M/S TTK & CO., AND THE COMPANY, M/S TTK PHARMA LTD, AND LATER ON, KIWIS SHAREHOLDING W AS INCREASED TO 51% AND THE HOLDING OF M/S TTK & CO GROUP WAS ONLY 49%. M/S KIWI TTK LTD WAS ALSO MANUFACTURING KIWI SHOE POLISHES. AND BY VIRTUE OF THE JOINT VENTURE AGREEMENTS ENTERED INTO IN THE YEAR 1 993, THE PARTNERS OF THE JOINT VENTURE WERE TO GO IN FOR THE MANUFACTURE AND MARKETING OF NEW PRODUCTS. IT HAS TO BE NOTED HERE THAT BEFORE THE YEAR 1992, THE PRODUCTS MANUFACTURED BY THE JOINT VENTURE COMPANY, NEW WAY CHEMICALS AND POLISHES (P) LTD WERE MAINLY KIWI SHO E POLISH AND DRANEX. WHEREAS AS PER THE AGREEMENTS ENTERED INTO IN THE YEAR 1993, THE JOINT VENTURE CO MPANY ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 36 -: HAD EXPANDED ITS BUSINESS BY INCLUDING IN ITS AGEND A MANUFACTURE AND SALE OF PERSONAL CARE PRODUCTS VIZ. , HAIR CARE AND COSMETICS UNDER THE BRAND BRYLCREAM AND THE LIKE. THE TURNOVER OF THE JOINT VENTURE COMPANY IN CREASED FROM RS 3 CRORES IN THE YEAR 1992 TO OVER RS 30 CRO RES IN 2000-01. BUT SUDDENLY THE FOREIGN COMPANY SARA LEE DECIDED TO TAP THE INDIAN MARKET THROUGH CERTAIN O THER JOINT VENTURE CONCERN IN WHICH THE FIRM TTK & CO WA S NOT A PARTNER FOR MANUFACTURE AND SALE OF SOME NEW PROD UCTS IN THE INSECTICIDE CATEGORY WHICH WERE, OF COURSE, COMING UNDER HOUSEHOLD PRODUCTS. AND WITH THAT MOTIVE, SAR A LEE WANTED TO REMOVE THE RESTRICTIVE COVENANT WHERE BY THE MEMBERS OF THE TTK GROUP WERE HITHERTO EXERCISI NG THE FIRST RIGHT OF REFUSAL AND THE FOREIGN COMPANY WAS PREPARED TO PAY A COMPENSATION OF RS 10 CRORES TO T HE APPELLANT FIRM. FURTHER, SARA LEE WANTED TO ACQUIR E THE ENTIRE STAKE OF THE TTK GROUP IN THE JOINT VENTURE SARA LEE TTK SO THAT THE JOINT VENTURE WOULD BECOME 100 % SUBSIDIARY OF THE FOREIGN COMPANY. THAT IS HOW AN AGREEMENT WAS ENTERED INTO BETWEEN THE PARTIES ON 30.9.2001 AS PER WHICH TTK & CO., AGREED FOR THE REMOVAL OF THE RESTRICTIVE COVENANT IN THE JOINT VE NTURE AGREEMENT DATED 17 TH SEPTEMBER 1993 FOR A CONSIDERATION OF ` 10 CRORES. AND ULTIMATELY TTK & CO., GROUP HAD DISPOSED OF THE SHARES IN THE JOINT VENTU RE. THUS IT MAY BE GATHERED FROM THE ABOVE NARRATION TH AT THE PARTICIPANTS IN THE JOINT VENTURE WANTED TO EXP AND THEIR BUSINESS BY MANUFACTURING CERTAIN NEW PRODUCT S IN ADDITION TO THE RANGE OF PRODUCTS THAT WERE BEING MANUFACTURED BY THEM ALREADY AND KIWI WAS TO SUPPLY THE REQUISITE KNOWHOW. IT IS NOT ONLY THAT THE FOREIGN SHAREHOLDING WAS INCREASED TO 51% BY THE AGREEMENT DATED 17.9.93 BUT THERE WERE CERTAIN OTHER CONDITIO NS IMPOSED BY THE MANAGEMENT OF THE JOINT VENTURE COMPANY IN RESPECT OF SALES, TRADEMARK, WARRANTIES, ETC., AS PER ARTICLE 10 OF THIS AGREEMENT WHICH IS A REST RICTIVE COVENANT IF EITHER KIWI OR TTK INTENDED TO INTRODUC E ANY NEW PRODUCT IN THE INDIAN MARKET AND SUCH PRODUCT BELONGED TO THE CATEGORY PRODUCTS FOR SHOE AND LEAT HER CARE OR HOUSEHOLD AND PERSONAL CARE PRODUCTS. SUCH PARTY SHALL NOTIFY THE JOINT VENTURE KIWI TTK AND THE OTHER PARTY AND KIWI TTK SHALL BE GRANTED THE OPT ION TO ADD THE MANUFACTURING OF THESE NEW PRODUCTS TO THE ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 37 -: PRESENT RANGE OF PRODUCTS. IT WAS FURTHER STIPULAT ED IN THIS ARTICLE THAT SHOULD SUCH OPTION NOT BE EXERCISED BY KIWI TTK WITHIN THREE MONTHS AFTER THE DATE OF SUCH NOTI CE FROM EITHER PARTY THEN SUCH PARTY SHALL BE ENTITLED TO MANUFACTURE SUCH PRODUCT BY ITSELF OR TO APPOINT A THIRD PARTY FOR THE MANUFACTURE OF SUCH PRODUCT IN INDIA. AND ALSO, BOTH KIWI AND TTK RESERVED THE RIGHT TO EXCLU DE FROM THE PROCEDURE SET FORTH IN THIS ARTICLE PRODUC TS THAT EITHER OF THEM MAY ACQUIRE FROM THIRD PARTIES. AS PER ARTICLE 10.2, EXCEPT AS PERMITTED UNDER ARTI CLE 10.1, NEITHER TTK NOR KIWI SHALL EITHER DIRECTLY OR INDIRECTLY UTILISE ITS GOODWILL, KNOW HOW OR OTHER RESOURCES I N A WAY DETRIMENTAL TO KIWI TTK, ITS ORGANISATION OR BUSINE SS IN INDIA. AS PER ARTICLE 10 OF THE JOINT VENTURE AGREEMENT D ATED 17 TH SEPTEMBER, 1993 TTK GROUP ALWAYS ENJOYED THE FIRST RIGHT OF REFUSAL FOR MANUFACTURE/DEALING WITH ANY P RODUCTS IN THE HOUSEHOLD AND PERSONAL CARE SEGMENT AND THE SAID PRODUCT SHALL HAVE TO BE FIRST OFFERED TO THE INDIA N ENTITY IN WHICH TTK GROUP HAD STAKES. IN OTHER WORDS, SARA L EE WOULD NOT BE ABLE TO BRING INTO INDIA ANY PRODUCTS IN THE HOUSEHOLD AND PERSONAL CARE SEGMENTS WITHOUT FIRST OFFERING THE SAME TO TTK GROUP. THE PRODUCT COULD BE EXPLOITED BY ANY CONSTITUENT OF TTK GROUP INCLUDING THE JV IN WHICH TTK. GROUP WAS HOLDING SIGNIFICANT STAK E. BEFORE 1992, THE PRODUCTS WERE MAINLY KIWI SHOE POL ISH AND DRANEX. POST 1993, THE PRODUCT PORTFOLIO EXP ANDED TO COVER PERSONAL CARE PRODUCTS CONSISTING OF HAIR CARE AND COSMETICS UNDER THE BRAND BRYCREAM. WHILE SKTT K WOULD ARRANGE FOR MANUFACTURE OF PRODUCTS, THE DISTRIBUTION OF THE SAME WOULD BE DONE BY TTK GROUP THROUGH ITS CONSTITUENT TTKHC. THE BUSINESS WAS PROGRESSING WELL AND TURNOVER WHICH WAS AROUND RS 3 CRORES IN 1992 EXCEEDED RS 30 CRORES IN 2000-01. 31. IT WAS THE ARGUMENT OF THE LD.AR THAT ON A CO MBINED READING OF THE VARIOUS AGREEMENTS, THE RECEIPT OF ` 10 CRORES WOULD ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 38 -: TAKE THE CHARACTER OF A CAPITAL RECEIPT ONLY. THE F OLLOWING POINTS WERE HIGHLIGHTED: (I) IF SARA LEE TTK INTRODUCES A NEW PRODUCT OR A N EW BRAND THE SAME SHALL BE OFFERED TO THE JOINT VENT URE FOR EXPLOITATION IN WHICH TTK GROUP IS A MAJOR PARTNER. (II)THE PRODUCTS MANUFACTURED BY THE JOINT VENTURE SHALL BE OFFERED FOR DISTRIBUTION THROUGH TTK GROUP. (III) IF THERE WAS A DILUTION OF RIGHT TO DO BUSI NESS IN THE JOINT VENTURE, THE SAME WOULD RESULT IN DILUTION OF BUSINESS INTERESTS OF TTK GROUP WHICH WAS HOLDING 49% IN THE JOINT VENTURE INITIALLY. (IV) IN THE YEAR 2001, A MAJOR CHANGE TOOK PLACE BECAUSE THE FOREIGN COMPANY WAS DESIROUS OF INTRODU CING NEW PRODUCTS NOT THROUGH THE JOINT VENTURE AND NOT THROUGH THE MEMBERS OF THE TTK GROUP BUT ON ITS OWN OR THROUGH THIRD PARTIES. AND IN THAT PROCESS, THE TT K GROUP AGREED TO WAIVE THE RIGHT OF FIRST REFUSAL FOR PAYM ENT OF RS 10 CRORES AS CONSIDERATION. 32. THUS, IT WAS HIS CONTENTION THAT THE RIGHT TO DO B USINESS IN A NEW PRODUCT IS A MAJOR RIGHT AND AS THE TTK GROUP H AD TO GIVE UP THIS RIGHT FOR CAPITAL CONSIDERATION THE SUM OF ` 10 CRORES DID NOT FALL INTO ANY CATEGORY OF INCOME LIABLE TO BE TAXED UNDER THE INCOME TAX ACT. 33. AFTER CONSIDERING THE VARIOUS ARGUMENTS BY THE ASSE SSEE AS WELL AS CASE LAWS CITED BY THEM, THE CIT(A) HELD THAT RECEIPT WAS REVENUE RECEIPT OBSERVING AS UNDER:- ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 39 -: IT WAS NOTED IN PARAGRAPHS NOS. 8,9 & 13.4.2. ABOV E THAT ONE OF THE MAIN ACTIVITIES OF M/S TTK & CO WAS TO PROMO TE COMPANIES AND BUSINESSES. AND SO THE JOINT VENTURE AGREEMENT IT HAD ENTERED INTO WITH SARA LEE CORPORA TION WAS IN THE COURSE OF ITS BUSINESS ACTIVITY, THAT IS, PR OMOTION OF BUSINESSES AND COMPANIES. AND THE APPELLANT FIRM HA D ALSO MADE SUBSTANTIAL INVESTMENTS IN THE SHARES OF THE J OINT VENTURE COMPANY KIWI TTK LTD., ALL THESE ACTIVITIES WERE GO VERNED BY THE JOINT VENTURE AGREEMENT DATED 17.9.1993 THE AME NDED AGREEMENT DATED 12.10.1993 SHAREHOLDERS AGREEMENT DATED 17.9.1993 AND THE SALES AND PURCHASE AGREEMENT DATE D 17.9.1993. SO IT IS CLEAR THAT ALL THESE ACTIVITIE S UNDERTAKEN BY THE APPELLANT FIRM WITH SARA LEE CORPORATION WERE I N THE NORMAL COURSE OF ITS BUSINESS. IT WAS ALSO POINTED OUT IN PARAGRAPHS NOS. 13.1 AND 13.3.2 ABOVE THAT BY ENTER ING INTO ALL THESE AGREEMENTS THE PARTIES TO THE JOINT VENTU RE WERE GOING IN FOR EXPANSION OF THE PRODUCTS OR THE MANUF ACTURING OF NEW PRODUCTS. IT IS ONLY BY VIRTUE OF THE AGREEMENT DATED 30.9.2001 THAT THE RESTRICTIVE COVENANT PRESENT IN THE EARLIER AGREEMENT DATED 17.9.1993 AS AMENDED BY AGREEMENT D ATED 12.10.1993 WAS DELETED AND THE APPELLANT FIRM WAS E NTITLED FOR A COMPENSATION OF ` 10 CRORES. SO, ON GOING THROUGH THE VARIOUS CLAUSES OF THE AGREEMENT DATED 30.9.2001 IT IS CLEAR THAT THERE IS NOTHING FOUND IN THIS AGREEMENT TO IN DICATE THAT THE REMOVAL OF THE RESTRICTIVE COVENANT AFFECTED TH E PROFIT MAKING STRICTURE OF THE APPELLANT FIRM OR IT INVOLV ED A LOSS OF AN ENDURING TRADING ASSET. BY LOSING THE RIGHT OF FIR ST REFUSAL IN RESPECT OF INTRODUCTION, MANUFACTURE AND DISTRIBUTI ON OF ANY NEW PRODUCT INTRODUCED BY THE JOINT VENTURE COMPANY OR SARA LEE CORPORATION, THE APPELLANT FIRM M/S TTK & CO., WAS NOT DEPRIVED OF ANY OF ITS TRADING AVENUES OR ITS PROFI T MAKING STRUCTURE WAS NOT AFFECTED IN ANY MANNER,. IN FACT, THE APPELLANT FIRM WAS JUST AS FREE AS IT WAS BEFORE TO DEVOTE ITS ENERGIES TO THE WHOLE OF ITS BUSINESS EVEN AFTER CA NCELING THE RESTRICTIVE COVENANT IN THE JOINT VENTURE AGREEMENT S DATED 17 TH SEPTEMBER 1993. SO, IF WE APPLY THE PRINCIPLES SET FORTH IN THE VAR IOUS DECISIONS OF THE SUPREME COURT AN ANALYSIS OF WHICH WAS MADE AS BROUGHT OUT IN THE EARLIER PARAGRAPHS, IT W ILL BE CLEAR THAT THE SUM OF ` 10 CRORES RECEIVED BY THE FIRM M/S TTK & CO FROM SARA LEE CORPORATION WOULD CONSTITUTE REVENUE RECEIPT ONLY. AND NONE OF THE APPELLANTS CONTENTIONS ARE A CCEPTABLE. IT FOLLOWS THAT THE ASSESSING OFFICERS VIEW THAT T HE DEAL ARISING OUT OF THE AGREEMENT DATED 30.9.2001 WOULD BE HIT BY THE MISCHIEF OF SEC 2(47) OF THE ACT IS ALSO NOT CO RRECT. THE ASSESSING OFFICER HAD TAKEN THE AGREEMENT DATED 30. 9.2001 IN ISOLATION AND HAD GIVEN SUCH A FINDING. IT IS NE CESSARY TO TAKE COGNIZANCE OF THE FACT THAT THE APPELLANT FIRM HAD BEEN ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 40 -: ENTERING INTO VARIOUS TYPES OF JOINT VENTURE AGREEM ENTS AS PART OF ITS BUSINESS ACTIVITIES WHICH IS TO PROMOTE BUSI NESSES AND COMPANIES, ETC., AND, BY THIS AGREEMENT DATED 30.9 .2001 IT HAD NOT LOST ANY CAPITAL ASSET WHICH WOULD DENY THE FIRM ITS PROFIT EARNING APPARATUS. IN FACT IT WAS BROUGHT OU T IN PARAGRAPHS NOS. 13.3.5, 13.3.9 &13.3.9.1 ABOVE THAT EVEN AFTER THE REMOVAL OF THE RESTRICTIVE COVENANT THE T TK GROUP CONCERNS WERE DEALING IN PRODUCTS LIKE BRYLCREAM. IN VIEW OF WHAT IS STATED ABOVE, IT IS CLEAR THAT T HE SUM OF ` 10 CRORES HAS TO BE TAXED AS REVENUE RECEIPT UNDER THE HEAD, BUSINESS AND IN SUCH AN EVENT, THE ASSESSMENT WIL L GET ENHANCED. WHEN THE ABOVE VIEWS WERE PUT FORTH BEFORE THE APPE LLANTS REPRESENTATIVES THEY DID NOT COME UP WITH SUBSTANTI AL ARGUMENTS OR OBJECTIONS AS TO HOW AND WHY THE ASSES SMENT SHOULD NOT BE ENHANCED. THE RATIO OF THE SUPREME C OURTS DECISION IN THE CASE OF CIT V GANGADHAR BAIJNATH (8 6 ITR 19) HAS TO BE NECESSARILY APPLIED IN THE PRESENT CONTEX T. IT HAS TO BE MENTIONED HERE THAT THIS DECISION HAS FOUND APPL ICATION IN VARIOUS OTHER DECISIONS RENDERED BY COURTS LATER ON . SO, IN THE LIGHT OF THIS DECISION, THE APPELLANTS ARGUMENTS T HAT THE SUM OF RS 10 CRORES WAS TO BE TREATED AS CAPITAL RECEIPT A RE NOT ACCEPTABLE. THIS SUM BECOMES TAXABLE IN THE HANDS OF THE APPELLANT FIRM AS A REVENUE RECEIPT. 34. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE U S. IT IS AN UNDISPUTED FACT THAT IT HAD ENTERED INTO SHAREHOLDE RS AGREEMENT WITH M/S.SARA LEE. AS PER THE SHAREHOLDERS AGREEMENT, V ARIOUS JOINT VENTURE PARTNERSHIP M/S.SARA LEE HAD TO MAKE OFFER FOR INTRODUCING ANY NEW PRODUCT IN INDIA, TO BE MANAGED BY THE JV. M/S.SARA LEE APPARENTLY WANTED TO HAVE ITS OWN SUBSIDIARY AS WEL L OTHER OUT LET TO MARKET THIS PRODUCT IN INDIA. CONSEQUENTLY M/S. SA RA LEE HAD AGREED TO PURCHASE THE SHARES HELD BY THE ASSESSEE IN JV AND HAD ALSO PRELUDE TO THE SAME REQUIRED THE APPELLANT TO GIVE UP ITS RIGHT UNDER ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 41 -: THE SHAREHOLDERS AGREEMENT FOR THE FIRST REFUSAL O F INTRODUCING OF THE NEW PRODUCT BY M/S. SARA LEE THROUGH JV. THIS RIGH T WAS AVAILABLE TO THE ASSESSEE AS MAJOR SHAREHOLDER IN THE JV UNDER THE SHAREHOLDERS AGREEMENT. THEREFORE THE ASSESSEE HAD GIVEN UP ITS RIGHT UNDER THE SHAREHOLDERS AGREEMENT FOR A CONSIDERATION OF ` 10 CRORES. WE ARE OF THE OPINION THAT CONSIDERATION RECEIVED IN CONNECTI ON WITH NEGATIVE OR RESTRICTIVE COVENANT IS COVERED BY THE DECISION OF THE APEX COURT IN THE CASE OF GUFFIC CHEM P LTD VS CIT, 332 ITR 602. I N THAT CASE, THE ASSESSEE HAD AGREED THAT IT SHALL NOT CARRY ON BUSI NESS DIRECTLY, BUSINESS HITHERTO CARRIED ON BY IT ON THE TERMS AND CONDITIONS APPEARING IN THE AGREEMENT FOR WHICH CONSIDERATION OF ` 50 LAKHS AS NON COMPETITION FEE WAS PAID. THE APEX COURT HAS HE LD THAT PAYMENT RECEIVED UNDER NEGATIVE COVENANT WAS ALWAYS CAPITAL RECEIPT TILL THE ASSESSMENT YEAR 2003-04. IT IS ONLY BY THE FINANCE ACT 2002 WITH EFFECT FROM 01.40.2003 THAT THE SAID CAPITAL RECEIP T WAS MADE TAXABLE U/S 28(VA). FINANCE ACT, 2002 ITSELF INDICATES TH AT IN THE EARLIER ASSESSMENT YEARS COMPENSATION RECEIVED BY THE ASSES SEE UNDER NON COMPETITION AGREEMENT WAS CAPITAL RECEIPT NOT SUBJE CT TO TAX. IN THE INSTANT CASE ALSO, THE ASSESSEE HAD RESTRICTED ITS ELF OR GIVEN UP ITS COMMERCIAL RIGHTS AS SHAREHOLDER TO INSIST JV PARTN ER, BY THE VIRTUE OF THE SHAREHOLDERS AGREEMENT, TO INTRODUCE ALL THEIR PRODUCTS THROUGH JV. THEREFORE, RESPECTIVELY APPLYING THE RATIO OF T HE APEX COURT IN THE ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 42 -: CASE OF GUFFIC CHEM PVT LTD(SUPRA) WE ALLOW THE CLA IM OF THE ASSESSEE AND HOLD THAT ` 10 CRORES RECEIVED BY THE ASSESSEE FOR AGREEING T O GIVE UP THE RESTRICTIVE COVENANT IS A CAPITAL RECEI PT. THE FACT THAT THE ASSESSEE IS IN THE BUSINESS OF PROMOTING COMPANIES WOULD NOT IN ANY WAY ALTER THE CHARACTER OF THE RECEIPT FOR ACCEPTIN G A NEGATIVE COVENANT AS A CAPITAL RECEIPT. AS THERE IS NO COST OF ACQUISITION FOR THE SAME IT IS NOT TAXABLE AS CAPITAL GAINS. IT CANNOT ALSO BE TAXED AS REVENUE RECEIPT U/S 28(VA) AS THE SECTION IS NOT A PPLICABLE TO THE YEAR UNDER APPEAL. 35. THE NEXT ISSUE OF THIS APPEAL RELATES TO DISALLO WANCE OF 50% OF THE TECHNICAL FEES OF ` 3 LAKHS AND THE INTEREST OF ` 60,000/- PAID TO LATE SHRI T.T.VASU. AS AGAINST THE FEE PAID TO S HRI T.T.VASU AND THE INTEREST PAYMENT TO HIM, THE CTI(A) HAS HELD AS UND ER:- THE ABOVE SUMS WERE DISALLOWED FOR THE ONLY REASON THAT THESE PAYMENTS HAD BEEN MADE TO (LATE) SHRI T.T.VASU WHO WAS JUST A RELATIVE TO THE PARTNERS. A S REGARDS THE CLAIM TOWARDS INTEREST EXPENDITURE OF ` 60,000/- IT WAS SPECIFICALLY NOTED BY THE ASSESSING OFFICER THAT NO PRUDENT BUISNESSMAN WOULD INCUR EXPENDITURE BY WAY OF INTEREST WHEN ALREADY HUGE BALANCE WERE DUE FROM THIS PERSON. IN THIS CONNECTION, IT HAS TO BE STATED THAT IDENTI CAL AMOUNTS OF EXPENDITURE WERE CLAIMED AS PAYABLE BY T HE APPELLANT FIRM TO (LATE) SHRI T.T.VASU FOR THE EARL IER ASSESSMENT YEAR 2001-02 WHICH THE ASSESSING OFFICER HAD DISALLOWED IN THE ASSESSMENT ORDER DATED 26.03.2004 PASSED U/S.143(3) FOR THE ASSESMENT YEAR 2001-02. ON AN APPEAL FILED BY THE APPELLANT, THE ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 43 -: FOLLOWING FINDINGS WERE GIVEN IN THE APPELLATE ORDE R IN ITA NO 14/04-05 OF EVEN DATE. (I) THE COMMISSION EXPENDITURE OF ` 3 LAKHS CLAIMED BY THE APPELLANT FIRM WAS TO BE FULLY ALLOW ED . (II) AS REGARDS THE PROFESSIONAL FEE OF ` 3 LAKHS, THE DISALLOWANCE WAS TO BE RESTRICTED TO 50%. (III) AS FAR AS THE INTEREST OF ` 60,000/- WAS CONCERNED, THE DISALLOWANCE WAS CONFIRMED IN TOTO AS THERE ARE NO CHARGES IN THE FACTS AND CIRCUMSTAN CES FOR THE CURRENT YEAR UNDER APPEAL, THE SAME VIEWS A S ABOVE HOLD GOOD FOR THIS ASSESSMENT YEAR ALSO. ACCORDINGLY, OUT OF THE EXPENDITURE OF ` 6 LAKHS REPRESENTING PAYMENT TO (LATE) SHRI T.T.VASU, IT IS HELD THAT ` 4.5 LAKHS IS ALLOWABLE AND THE BALANCE OF ` 1.5 LAKHS IS TO BE DISALLOWED. AND FURTHER, THE DISALLO WANCE OF THE INTEREST EXPENDITURE OF ` 60,000/- IS CONFIRMED. 36. WE HAVE HEARD BOTH THE PARTIES. NO ARGUMENTS OR FRE SH EVIDENCE WERE ADDUCED BY EITHER PARTY TO PERSUADE U S TO TAKE A VIEW FROM THAT OF THE CIT(A). WE, THEREFORE, UPHOLD THE ORDER OF THE CIT(A) ON THIS ISSUE AND DISMISS THE APPEAL OF THE ASSESSE E. 37. IN THE RESULT THE APPEAL FILED BY THE ASSESSEE F OR ASSESSMENT YEAR 2002-03 STANDS PARTLY ALLOWED. I.T.A.NO. 1042/MDS/2009 A.Y 2003-04 ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 44 -: 38. THIS APPEAL FILED BY THE ASSESSEE, FOR ASSESSMENT YEAR 2003- 04, IS DIRECTED AGAINST THE ORDER OF THE LD. CIT(A) -XII, CHENNAI, DATED 31.3.2009. 39. THE FIRST ISSUE OF THIS APPEAL RELATES TO ADOPTI ON OF ` 4,23,30,000/- AS SALE CONSIDERATION OF PROPERTY IN BANGALORE INVOKING THE PROVISIONS OF SECTION 50C. THE ASSESSEE-FIRM H AD SHOWN INCOME BY WAY OF LONG TERM CAPITAL GAINS OF ` 3,21,14,748/- THAT HAD ARISEN ON SALE OF A LAND SITUATED AT NO 2/1, INFANTRY ROAD, B ANGALORE, FOR A TOTAL CONSIDERATION OF ` 3,49,59,600/- DURING THE ACCOUNTING PERIOD ENDED 31.3.2003. THE WORKING FOR THIS SUM IS AS UNDER: SALE CONSIDERATION RECEIVED ` 3,49,59,600/- LESS: INDEXED COST OF ACQUISITION (RS.8,46,455 X 447/133) ` 28,44,852/- ------------------------ LONG TERM CAPITAL GAINS ` 3,21,14,748/- ------------------------ 40. THE ASSESSING OFFICER HAD RECOMPUTED THE INCOM E BY WAY OF LONG TERM CAPITAL GAINS AT ` 3,94,85,148/- BY ADOPTING THE SALE CONSIDERATION AT ` 4,23,30,000/- IN THE ABOVE WORKING. THE ASSESSING OFFICER HAD ENHANCED THE SALE CONSIDERATION BY APPL YING SECTION 50C OF THE ACT. THE FACTS APROPOS THIS ISSUE ARE THAT I NITIALLY THE ASSESSEE- FIRM, M/S T.T. KRISHNAMACHARI & CO., ENTERED INTO AN AGREEMENT ON ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 45 -: 19.2.2001 WITH A COMPANY M/S DYNASTY DEVELOPERS PVT . LTD (DDPL) FOR THE SALE OF LAND AT NO.2/1 INFANTRY ROAD , BAN GALORE FOR A CONSIDERATION OF ` 3,49,59,600/-. ON THE BASIS OF THIS AGREEMENT, A NO OBJECTION CERTIFICATE WAS ALSO OBTAINED FROM T HE APPROPRIATE AUTHORITY, BANGALORE. IT WAS STATED THAT M/S DDPL H AD ALSO PAID THE SALE CONSIDERATION OF ` 3,49,59,600/- TO THE ASSESSEE-FIRM. LATER ON, THE PURCHASER COMPANY WANTED TO SELL THE LAND TO AN OTHER COMPANY M/S TOPAZ INVESTMENTS P. LTD (TIPL) JUST BEFORE R EGISTRATION OF THE SALE DEED THAT WAS ALREADY EXECUTED IN THEIR NAME. AND SO, M/S DDPL REQUESTED THE ASSESSEE-FIRM TO TRANSFER THE LAND D IRECTLY IN THE NAME OF M/S TIPL AND AGAIN ANOTHER NO OBJECTION CERTIFI CATE DATED 17.5.2001 WAS OBTAINED FROM THE APPROPRIATE AUTHORI TY. ACCORDINGLY, THE ASSESSEE-FIRM HAD REGISTERED THE PROPERTY IN T HE NAME OF M/S TIPL. THE VALUE OF THE LAND THAT WAS ADOPTED FOR T HE PURPOSES OF STAMP DUTY AT THE TIME OF REGISTRATION OF THE SALE WAS ` 4,23,30,000/-. IT IS THE CONTENTION OF THE ASSESSEE-FIRM THAT AS IT WAS BOUND BY THE AGREEMENT ENTERED INTO BETWEEN ITSELF AND M/S DDPL ONLY AND FURTHER IT HAD RECEIVED ` 3,49,59,600/- ALONE AS SALE CONSIDERATION FOR THE TRANSFER OF THE LAND AND IT HAD NOT RECEIVED ANY FU RTHER AMOUNT IN RESPECT OF THIS DEAL, EITHER FROM M/S DDPL OR FROM M/S TIPL, THE ASSESSING OFFICER WAS NOT CORRECT IN ADOPTING A HIG HER FIGURE OF SALE ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 46 -: CONSIDERATION IN THE IMPUGNED ORDER BY INVOKING SEC TION 50C OF THE ACT. 41. THE ASSESSING OFFICER HAD HELD THAT THE ASSESSE E HAD INITIALLY ENTERED INTO AN AGREEMENT TO SELL WITH M/S. DDPL FO R A CONSIDERATION OF ` 3,49,59,600/-. THE ASSESSEE ENTERED INTO SECOND AGREEMENT TO SELL THE SAME PROPERTY WITH THE TIPL WITH M/S DDPL AS A CONFIRMING PARTY FOR A SALE CONSIDERATION OF ` 4,23,30,000/-. AS THE ASSESSEE-FIRM HAD NOT PRODUCED A COPY OF THE AGREEMENT FOR SALE WITH M/S. TIPL DATED 11.4.2002, HE COULD NOT VERIFY WHETHER ANY S UM BECAME PAYABLE TO M/S DDPL OUT OF THE TOTAL SALE CONSIDERA TION OF ` 4,23,30,000/-. BUT BY REFERRING TO CLAUSE XII OF T HE DEED DATED 30.5.2002 REGISTERED DOCUMENT NO. BNG (U) SNGR -805 /-02-03 BK I, THE ASSESSING OFFICER HIMSELF HAD NOTED THAT OUT OF THE TOTAL SALE CONSIDERATION OF ` 4,23,30,000/-, ONLY ` 3,49,59,600/- WAS RECEIVED BY THE ASSESSEE-FIRM AND THE BALANCE OF ` 73,70,400/- WAS RECEIVED BY M/S DYNASTY DEVELOPERS P. LTD IN THEIR CAPACITY AS A CONFIRMING PARTY. THOUGH THE ASSESSING OFFICER HAD TAKEN COGNI ZANCE OF THE FACT THAT THE ASSESSEE RECEIVED ONLY THE SUM OF ` 3,49,59,600/- ON THE SALE OF THE SAID LAND AND HAD NOT RECEIVED ANYTHING EXTR A IN THE DEAL, STILL, HE ADOPTED ` 4,23,30,000/- AS THE SALE CONSIDERATION BY REFERR ING TO CLAUSE IX OF THE AGREEMENT DATED 19.9.2001 ENTERED INTO BETWEEN THE ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 47 -: FIRM AND M/S DDPL, A SPECIFIC FINDING WAS GIVEN BY THE ASSESSING OFFICER IN PARAGRAPH NO.8.4.11 OF THE IMPUGNED ORDE R THAT AS PER THE TERMS OF CLAUSE IV OF THE AGREEMENT DATED 19.9. 200 1 THE TRANSFER OF THE LAND SHOULD HAVE BEEN COMPLETED WITHIN 30 DAYS, I.E. BY 13.1.2002 OR A FEW DAYS LATER DEPENDING ON THE DATE OF RECEIP T OF THE ORDER OF THE APPROPRIATE AUTHORITY, BANGALORE, AND AS THE SA LE DEED WAS NOT EXECUTED BY THIS TIME AND FURTHER THE SALE DEED WAS EXECUTED ONLY ON 30.5.2002 AND IT WAS REGISTERED ON 31.5.2002, CLAUS E IX OF THE AGREEMENT DATED 19.9.2001 BECAME OPERATIVE. THE ASS ESSING OFFICER HAD ADOPTED THE VALUE TAKEN BY THE STAMPING AUTHORI TIES AS THE SALE CONSIDERATION RECEIVED BY THE ASSESSEE AND COMPUTE D CAPITAL GAINS ACCORDINGLY. THE ASSESSEE HAS OBJECTED TO THE ENHANCEMENT OF THE SALE CONSIDERATION FOR THE LAND SOLD FROM ` 3,49,59,600/- TO ` 4,23,30,000/-. 42. THE ASSESSING OFFICER OUGHT TO HAVE APPRECIATED THA T UNDER THE AGREEMENTS OF SALE ENTERED INTO BY THE ASSESSEE -FIRM AS ALSO ACCORDING TO THE FINAL SALE DEED EXECUTED, THE FIRM HAD RECEIVED ONLY ` 3,49,59,600/- AS SALE CONSIDERATION FOR THE SUBJECT LAND. IT WAS ARGUED THAT THE ASSESSING OFFICER OUGHT TO HAVE APP RECIATED THAT THE SALE CONSIDERATION OF ` 3,49,59,600/- HAVING BEEN APPROVED BY THE APPROPRIATE AUTHORITY MUST ALONE BE CONSIDERED AS M ARKET PRICE FOR ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 48 -: THE SAID PROPERTY. IT WAS CONTENDED THAT OUT OF TH E TOTAL SALE CONSIDERATION OF ` 4,23,30,000/- PAID BY THE ULTIMATE PURCHASER FINDE R FEE/COMMISSION OF ` 73,70,400/- WAS PAYABLE TO M/S DDPL AND THE SAME OUGHT TO HAVE BEEN ALLOWED AS DEDUCTION IN COM PUTING THE INCOME FROM CAPITAL GAINS. 43. THE ASSESSEE SUBMITTED THAT ALTHOUGH CLAUSE IX OF THE AGREEMENT FOR SALE DEED DATED 19.9.2001 WITH M/S DD PL DEALT WITH CONSEQUENCE OF BREACH, ASSESSEE DID NOT ENFORCE TH E SAME IN VIEW OF THE STAKES INVOLVED AND ALSO IN LIEU OF THE LIABILI TY ASSESSEE WOULD HAVE TO BEAR IN CASE THE AGREEMENT WAS TERMINATED. HENCE, THE ASSESSEE DID NOT EXERCISE ANY OPTION TO TERMINATE THE AGREEMENT AS PER CLAUSE IX. IT WAS ORALLY AGREED BETWEEN THE P ARTIES THAT FURTHER TIME SHOULD BE GIVEN FOR PAYMENT OF THE AGREED SALE CONSIDERATION AND THIS M/S DDPL, HAD COMPLIED WITH. NO MONETARY BENE FIT WAS RECEIVED BY THE ASSESSEE FOR ENTERING INTO A FRESH AGREEMEN T OF SALE WITH M/S TIPL AS THE ASSESSEE HAD TO COMPLY WITH THE AGREEM ENT ENTERED INTO WITH M/S DDPL. IT WAS ARGUED THAT EVEN IF AS PER THE SALE DEED THA T WAS ULTIMATELY EXECUTED THE SALE CONSIDERATION WAS TO BE CONSIDERED AS ` 423,30,000/- IN RESPECT OF THE SALE OF THE SUBJEC T LAND THE CAPITAL GAINS ASSESSABLE IN THE HANDS OF THE ASSESSEE-FIRM WOULD NOT BE AFFECTED IN ANY MANNER AS THE AMOUNT OF ` 73,70,400/- THAT WAS ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 49 -: ACTUALLY APPROPRIATED BY M/S DDPL MUST BE ALLOWED AS A DEDUCTION. THUS, IT WAS THE CONTENTION OF THE LD.AR THAT IN E ITHER OF THE ABOVE TWO SITUATIONS THE QUESTION OF APPLICABILITY OF SEC TION 50C OF THE ACT WILL NOT ARISE. 44. T HE CIT(A) HAS DISMISSED THE CLAIM OF THE ASSESSEE B Y OBSERVING AS UNDER: 4.5 THE ARGUMENTS PUT FORTH BY THE APPELLANTS REPRESENTATIVE WERE CAREFULLY CONSIDERED. EVEN AT THE APPEAL STAGE THE APPELLANTS REPRESENTATIVES HAVE NOT FILE D A COPY OF THE SALE AGREEMENT DATED 30.4.2002 ENTERED INTO BET WEEN THE APPELLANT FIRM AND M/S TOPAZ INVESTMENTS P. LTD IT WAS ONLY A COPY OF THE SALE DEED DATED 30.5.2002 WHICH WAS REG ISTERED ON 31.5.2002 THAT WAS MADE AVAILABLE. IN THE ABSEN CE OF THE SALE AGREEMENT DATED 30.4.2002 ENTERED INTO BETWEEN THE APPELLANT FIRM AND M/S TOPAZ INVESTMENTS P. LTD IT IS NOT POSSIBLE TO COMMENT ANYTHING ABOUT THE CORRECTNESS OF THE AMOUNT OF EXTRA SALE CONSIDERATION IF ANY, WHICH TH E APPELLANT FIRM WAS ACTUALLY ENTITLED TO, IN THE ENTIRE DEAL. 4.5.1 SO, IF WE GO BY THE SALE AGREEMENT DATED 19. 9.2001 AND THE SALE DEED DATED 30.5.2002 IT IS CLEAR THAT THE APPELLANT FIRM WAS ENTITLED FOR A SALE CONSIDERATION OF ` 3,49,59,600/- ONLY. IT IS A FACT THAT THE APPELLANT FIRM ORIGINALLY ENTERE D INTO A SALE AGREEMENT WITH M/S DYNASTY DEVELOPERS P. LTD TO SEL L THE SUBJECT LAND FOR A CONSIDERATION OF ` 3,49,59,600/- AND IT IS ALSO A FACT THAT M/S DYNASTY DEVELOPERS P. LTD WAS TO BE PAID A SUM OF ` 73,70,400/- BY THE ULTIMATE PURCHASER M/S TOPAZ INVESTMENTS P. LTD AS A CONFIRMING PARTY AS PER T HE SALE DEED DATED 30.5.2002 . SO THERE IS NOTHING IN THESE DOCUMENTS TO INDICATE THAT .THE APPELLANT FIRM HAD ANY RIGHT TO RECEIVE A FURTHER SUM OF ` 73,70,400/- OVER AND ABOVE THE SALE CONSIDERATION IT WAS ENTITLED TO AS PER THE SALE AG REEMENT DATED 19.9.2001 . IT IS ONLY THE COMPANY M/S DYNAS TY DEVELOPERS P. LTD THAT HAD THE RIGHT TO RECEIVE THE SUM OF ` 73,70,400/- IN ITS CAPACITY AS CONFIRMING PARTY C LEARLY THE SUM OF ` 73,70,400/- BECAME PAYABLE TO M/S DYNASTY DEVELOPERS P. LTD FOR FOREGOING ITS RIGHT OVER THE PROPERTY AND ALLOWING THE PROPERTY TO BE REGISTERED IN FAVOUR OF THE ULTIMATE PURCHASER. THESE FACTS WILL MAKE IT CLEAR THAT THE SUM OF ` 73,70,400/- IS NOT IN THE NATURE OF EXPENDITURE ALL OWABLE EITHER UNDER CLAUSE (I) OR CLAUSE (II) OF SECTION 48. AND SO THE ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 50 -: APPELLANTS ARGUMENT THAT THE SUM OF ` 73,70,400/- MUST BE ALLOWED AS DEDUCTION AS FINDING FEE/COMMISSION, EVE N IF THE SALE CONSIDERATION WERE TO BE ADOPTED AS ` 423,30,000/- IS NOT ACCEPTABLE. THE TOTALITY OF THE FACTS AVAILABL E ON RECORD DO NOT JUSTIFY THE APPELLANTS VIEWS. FURTHER AS THE APPELLANT FIRM HAD REGISTERED THE SU BJECT LAND ULTIMATELY IN FAVOUR OF M/S TOPAZ INVESTMENTS P. LT D AND THE VALUE DETERMINED FOR THE PURPOSES OF STAMP DUTY WAS ` 4,23,30,000/- THE ASSESSING OFFICER HAD RIGHTLY INV OKED SECTION 50C. IT IS NOT THE CASE OF THE APPELLANT THAT THER E WERE ANY APPEAL PROCEEDINGS PENDING AGAINST THE VALUE DETERM INED BY THE STAMP VALUATION AUTHORITY AT THE TIME OF REGIST RATION OF THE SUBJECT LAND. THEREFORE, SEC 50C BEING MANDATORY H AS TO BE APPLIED TO THE APPELLANTS CASE AND THE ASSESSING O FFICER WAS RIGHT IN ADOPTING THE SALE CONSIDERATION AS ` 4,23,30,000/- IN THE PLACE OF ` 3,49,59,600/-. 45. NOW, THE ASSESSEE IS AGGRIEVED. 46. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND HAVE PERUSED THE ENTIRE MATERIAL AVAILABLE ON RECORD. AS CAN BE SEEN FROM THE ABOVE, THAT THE ASSESSEE HAD ENTERED INTO AN AGRE EMENT TO SELL WITH M/S.DDPL FOR A SALE CONSIDERATION OF ` 3,49,59,600/-. EVEN THOUGH M/S DDPL DID NOT PAY THE FULL VALUE OF THE SALE CON SIDERATION WITHIN THE STIPULATED TIME, THE ASSESSEE HAD TACITLY EXTE NDED THE TIME OF PAYMENT AND HAS IN FACT RECEIVED THE FULL CONSIDERA TION FROM M/S.DDPL . THUS M/S DDPL HAD THE RIGHT OF SPECIFIC PERFORMAN CE FOR INSISTING THAT THE ASSESSEE TO SELL THE PROPERTY TO THEM. FU RTHER, AS PER THE AGREEMENT, THE ASSESSEE IS TO SELL THE PROPERTY TO M/S/DDPL OR THEIR NOMINEE AT THE REQUEST OF DDPL. HAVING RECEIVED THE FULL VALUE OF CONSIDERATION AS PER AGREEMENT WITH M/S. DDPL, THE ASSESSEE SOLD ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 51 -: THE PROPERTY TO M/S.TIPL NOMINATED BY M/S. DDPL. TH E DEED OF CONVEYANCE HAS CLEARLY SPECIFIED THAT THE SALE CONS IDERATION IS TO BE SPLIT UP WHEREBY A SUM OF ` 3,49,69,600/- HAS TO BE PAID TO THE APPELLANT AND ` 73,70,400/- WAS TO BE PAID TO DDPL AS THE CONFIRMI NG PARTY. THUS, THE ASSESSEE HAS THE RIGHT TO RECEIVE ONLY A SUM OF ` 3,49,69,600/- ON THE SALE OF THE PROPERTY. THE PA YMENT IS IN THE NATURE OF IMPROVING THE TITLE OF THE ASSESSEE IN TH E PROPERTY AND HENCE, THE AMOUNT SHOULD BE ALLOWED AS A DEDUCTION UNDER SECTION 48. THE HON'BLE MADRAS HIGH COURT IN THE CASE OF CIT V A.VENKATRAMAN (137 ITR 846) HAS HELD THAT THE AMOUNT PAID TO THE EXISTING TENANT TO VACATE THE PREMISES SHOULD BE ALLOWED AS A DEDUCTIO N U/S 48 IN COMPUTING THE CAPITAL GAINS. APPLYING THE SAME RATI O, THE AMOUNT PAID TO THE AGREEMENT HOLDER FOR GIVING UP ITS RIGHTS FO R SPECIFIC PERFORMANCE SHOULD ALSO BE CONSIDERED AS EXPENDITUR E INCURRED IN CONNECTION WITH TRANSFER FOR THE PURPOSE OF IMPROVI NG THE TITLE OF THE ASSESSEE AND HENCE, SHOULD BE ALLOWED AS A DEDUCTI ON IN COMPUTING THE CAPITAL GAINS. IN THE CIRCUMSTANCES, THE CLAIM OF THE ASSESSEE THAT CAPITAL GAINS IN ITS HANDS ON THE SALE OF BANGALORE PROPERTY SHOULD BE CONSIDERED BY TAKING INTO ACCOUNT THE NET SALE CONS IDERATION OF ` 3,49,69,600/- INSTEAD OF ` 4,23,30,000/- IS UPHELD. IT IS HEREBY CLARIFIED THAT IN THIS TRANSACTION THE ADOPTION OF THE SALE C ONSIDERATION AS PER SECTION 50C IS UPHELD. BUT IN COMPUTING THE CAPITA L GAINS THE AMOUNT ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 52 -: OF ` 73,70,400/- HAS BEEN ALLOWED AS A DEDUCTION U/S 48 AS EXPENDITURE FOR IMPROVEMENT OF TITLE OF THE ASSESSE E IN THE TRANSFERRED PROPERTY AND IS NOT IN ANY WAY AGAINST THE APPLICABILITY OF PROVISIONS OF SECTION 50C. THE GROUNDS RAISED BY THE ASSESSEE ARE, THEREFORE, ALLOWED. 47. THE NEXT ISSUE OF THIS APPEAL RELATES TO DISALLOWA NCE OF 50% OF THE TECHNICAL FEES OF ` 3 LAKHS AND THE INTEREST OF ` 60,000/- PAID TO LATE SHRI T.T.VASU. FOR THE REASONS STATED ON THIS ISSUE FOR THE ASSESSMENT YEAR 2002-03 IN I.T.A.NO. 1041/MDS/2009, WE UPHOLD THE ORDER OF THE CIT(A) ON THIS ISSUE. THE GROUNDS RAI SED BY THE ASSESSEE STAND DISMISSED. 48. THE NEXT ISSUE OF THIS APPEAL RELATES TO LEVY OF I NTEREST UNDER SECTION 234D AMOUNTING TO ` 55,552/- . THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF EKTA PROMOTERS AS WELL AS THE HON'BLE DELHI HIGH COURT IN THE CASE OF DIRECTOR OF INCOME-TAX VS JACABS CIVIL INCORPORATED, 330 ITR 578, HAS HELD THAT LEVY OF IN TEREST UNDER SECTION 234D WITH EFFECT FROM 01.06.2003 WILL BE APPLICABLE ONLY FOR THE ASSESSMENT YEAR 2004-05 ONWARDS. BY RESPECTFULLY F OLLOWING THE ABOVE DECISIONS, WE HOLD THAT LEVY OF INTEREST 234 D IS NOT CORRECT FOR THE ASSESSMENT YEAR UNDER APPEAL. ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 53 -: 49. IN THE RESULT, THE APPEAL OF THE ASSESSEE FOR ASSE SSMENT YEAR 2003-04 STANDS PARTLY ALLOWED. I.T.A.NO. 1187/MDS/2009 A.Y 2003-04 50. IN THIS CROSS APPEAL FILED BY THE REVENUE, FOR ASSESSMENT YEAR 2003-04, THE FIRST ISSUE RAISED VIDE GROUND NO S.2 AND 2.1 IS AGAINST THE ALLOWANCE OF 50% OF TECHNICAL FEE PAID TO LATE SHRI T.T.K.VASU. IN VIEW OF DECISION ON THE SAME ISSUE IN I.T.A.NO. 1186/MDS/2009 FOR ASSESSMENT YEAR 2002-03, WE DI SMISS THE GROUNDS RAISED BY THE REVENUE. 51. THE NEXT ISSUE IS REGARDING THE ALLOWANCE OF ` 20,29,291/- INTEREST PAID BY THE AS ON THE LOAN OBTAINED FOR G RANTING ADVANCE TO ITS SISTER CONCERN TTK TEXTILES LIMITED AS WELL AS WRITE OFF OF ` 12,86,70,007/- BEING THE ADVANCE, CONSIDERED AS IRR ECOVERABLE FROM M/S.TTK TEXTILES LTD. WE FIND THAT SIMILAR ISSUE C AME UP FOR CONSIDERATION FOR THE ASSESSMENT YEAR 2002-03. WIT H SIMILAR REASONING, WE UPHOLD THE ORDER OF CIT(A) ALLOWING T HE DEDUCTION OF INTEREST PAYABLE OF ` 20,29,291/- AND ADVANCE WRITTEN OFF OF ` 12,86,70,007 IN CONNECTION WITH REVIVAL OF THE SIST ER CONCERN OF M/S.TTK TEXTILES LIMITED. ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 54 -: 52. IN THE RESULT, THE APPEAL FILED BY THE REVENUE FOR ASSESSMENT YEAR 2003-04 STANDS DISMISSED. I.T.A.NO. 1043/MDS/2009 A.Y 2004-05 53. THIS APPEAL OF THE ASSESSEE, FOR ASSESSMENT YEAR 20 04-05, IS DIRECTED AGAINST THE ORDER OF THE LD. CIT(A)-XII, C HENNAI, DATED 31.3.2009. 54. THE FIRST ISSUE OF THIS APPEAL RELATES TO DISALLO WANCE OF ADVERTISEMENT EXPENDITURE OF ` 3,33,334/-. THE COMPANY HAD COMPLETED 75% YEARS OF BUSINESS SUCCESSFULLY. THEY ARE PROMOTERS AND KEY SHAREHOLDERS OF VARIOUS TTK GROUP. THEY RE NDER VARIOUS SERVICES LIKE WAREHOUSING, DEALER RELATIONS, INVOIC ING, CLEARING AND FORWARDING, SELLING ETC. THEREFORE, THE ASSESSEE H AS DEVELOPED VAST CONTACTS AND BUSINESS LINKS IN THE INDUSTRY. TO CE LEBRATE THE COMPLETION OF 75 YEARS IN BUSINESS, THE ASSESSEE H AS GIVEN VARIOUS GIFTS TO CLIENTS AND ASSOCIATES. THEY HAD GIVEN PAI NTINGS WORTH OF ` 10 LAKHS AS MEMENTO TO VARIOUS PEOPLES CONNECTED WITH THE BUSINESS. THE ASSESSING OFFICER HAD DISALLOWED THE ENTIRE EX PENDITURE FOR THE SIMPLE REASON THAT RECEIPT OF THE MEMENTOS WERE NOT PRODUCED BEFORE HIM. THE ASSESSEE CONTENDED THAT BY THE VERY NATU RE OF EXPENDITURE, ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 55 -: THE SAME HAD BEEN INCURRED IN THE COURSE OF BUSINES S AND IT WILL BE DIFFICULT TO BRINGING ALL THE RECEIPTS BEFORE THE A SSESSING OFFICER AT THIS POINT OF TIME. WHILE AGREEING WITH THE CONTENTION OF THE ASSESSEE, THE CIT(A) HAS HELD THAT SUCH EXPENSES WERE INCUR RED FOR THE PURPOSES OF BUSINESS, SHE DISALLOWED ` 3,33,334/- OUT OF THE TOTAL EXPENSES OF ` 10 LAKHS FOR THE DEFICIENCIES POINTED BY THE ASSES SING OFFICER. NOW THE ASSESSEE IS AGGRIEVED. 55. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND HA VE PERUSED THE ENTIRE MATERIAL AVAILABLE ON RECORD. IT WAS C ONTENDED BY THE LD.AR THAT HAVING HELD THAT THE EXPENSES WERE FOR THE PURPOSES OF BUSINESS, AD HOC DISALLOWANCE IS NOT CALLED FOR. A T THE TIME OF HEARING, THE LD DR SUBMITTED THAT SOME OF THE PAINTINGS WER E PURCHASED FROM THE DIRECTORS/CLOSE RELATIVES. WHILE THIS FACT ALO NE CANNOT BE THE REASONS FOR DISALLOWANCE OF EXPENSES INCURRED BY TH E ASSESSEE, BUT IN VIEW OF THE CLOSE CONNECTION BETWEEN THE ASSESSEE A ND THE PERSONS FROM WHOM GIFTS WERE PURCHASED, WE ARE INCLINED TO AGREE WITH THE DISALLOWANCE OF ` 3,33,334/- MADE BY THE CIT(A) OUT OF ` 10 LAKHS. THE GROUNDS RAISED BY THE ASSESSEE ON THIS ISSUE A RE DISMISSED. 56. THE NEXT ISSUE OF THIS APPEAL RELATES TO DISALLO WANCE OF 50% OF THE PROFESSIONAL/TECHNICAL FEE AND DISALLOWANCE OF INTEREST OF ` ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 56 -: 60000/- PAID TO LATE SHRI T.T.VASSU. FOR THE REASO NS STATED IN THE ASSESSEES APPEAL IN I.T.A.NO. 1041/MDS/09, FOR THE ASSESSMENT YEAR 2002-03, WE UPHOLD THE ORDER OF THE CIT(A) ON THIS ISSUE AND DISMISS THE APPEAL OF THE ASSESSEE. 57. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE FOR ASSESSMENT YEAR 2004-05 STANDS DISMISSED. I.T.A.NO. 1188/MDS/2009 A.Y 2004-05 58. IN THIS CROSS APPEAL FILED BY THE REVENUE, T HE FIRST ISSUE IS AGAINST THE ALLOWANCE OF BAD DEBTS OF ` 33,39,065/- BEING THE AMOUNT PAID BY THE ASSESSEE FOR STANDING AS GUARANTOR TO T HE TERM LOAN AND CREDIT FACILITIES ENJOYED BY ANOTHER COMPANY BY NAM E M/S.SASMI ORGANICS PVT. LTD. AS BUSINESS LOSS. BEFORE THE L D. CIT(A), THE ASSESSEES REPRESENTATIVE SUBMITTED AS UNDER: SASMI ORGANIC CHEMICALS PVT LTD, WAS MANUFACTURING AND SUPPLYING NIACINAMIDE CHEMICALS AND WE WERE DOING BUSINESS ON CONSIGNMENT BASIS. COMMISSION EARNED ON CONSIGNMENT SALES WAS TAKEN AS INCOME DURING THOSE YEARS. THEY WERE ENJOYING TERM LOANS AND OTHER CREDIT FACILITIES AGAINST THE UNDERTAKING GIVEN BY T.T.KRISHNAMACHARI & CO. THE BUSINESS DID NOT PROGRESS AS PER THE EXPECTATION AND THE BANK DECIDED TO ENFORCE THE BANK GUARANTEE GIVEN BY T.T.KRISHNAMACHARI & CO AS PER THE UNDERTAKING AGREEMENT. BANK OF BARODA PROCEEDED THROUGH THE DEBT RECOVERY TRIBUNAL ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 57 -: AND DECREE WAS PASSED AGAINST T.T.KRISHNAMACHARI & CO. THE FIRM NEGOTIATED WITH THE BANK OF BARODA AND ARRIVED AT A SETTLEMENT WHEREBY AN AMOUNT OF ` 33,39,065/- WAS PAID IN FULL SETTLEMENT AS PER BANK OF BARODA LETTER (ENCLOSED HEREWITH). AS SASMI ORGANIC PVT LTD BECAME DEFUNCT AND THERE WAS NO POSSIBILITY OF RECOVERING ANY AMOUNT FROM THEM. THEREFORE, THE FIRM DECIDED TO WRITE OFF THE SAID AMOUNT AS A PRUDENT MEASURE. THE EXPENSES HAVING INCURRED IN CONNECTION WITH THE BUSINESS OF THE COMPANY, THE SAME MAY BE ALLOWED AS BAD DEBTS OR BUSINESS LOSS. 4.3 HE ALSO FILED THE FOLLOWING EVIDENCE A. COPY OF THE CERTIFICATE LETTER IN BOB/RTM/ADV/34/225 DATED 13.06.2003 ISSUED BY THE SENIOR BRANCH MANAGER, RUTLAM BRANCH, RUTLAM. B. COPY OF THE LETTER OF UNDERTAKING DATED 02.01.1980 ISSUED BY THE REPRESENTATIVES OF THE COMPANY M/S.SASMI ORGANIC PVT LTD, BANK OF BARODA AND M/S. T.T.KRISHNAMACHARI & CO WHEREIN TTK & CO HAD AGREED TO REPAY THE AMOUNTS ADVANCED BY BANK OF BARODA TO M/S.SASMI ORGANIC PVT LTD IN CASE THERE WAS ANY FAILURE ON THE PART OF THE COMPANY TO REPAY THE ADVANCES. 59. THE CIT(A) HAS ALLOWED THE CLAIM OF THE ASSESSEE BY HOLDING AS UNDER:- 4.6.2 THE APPELLANT FIRM HAD TRADE RELATIONS WITH M/S.SASMI ORGNIC LIMITED AND THE FIRM WAS EARNING COMMISSION OUT OF THE CONSIGNMENT SALES OF THE PRODUCTS OF NIACHINAMIDE CHEMICALS MANUFACTURED BY THE COMPANY. AND IN THAT PROCESS, M/S.TTK & CO HAD GIVEN LETTER OF UNDERTAKI NG TO BANK ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 58 -: OF BARODA NOT ONLY GUARANTEEING THE LIABILITIES OWE D BY THAT COMPANY TO THE BANK BUT HAD ALSO UNDERTAKEN NOT TO WITHDRAW ITS FUNDS ADVANCED TO M/S.SASMI ORGANICS CHEMICALS PVT LTD. AND THE APPELLANT FIRM HAD GONE TO THE EXTENT OF FO REGOING ITS 5% COMMISSION FROM M/S.SASMIC ORGANICS P LTD AS LON G AS THE INSTALLMENTS OR INTEREST TO THE BANK WERE IN AR REARS. HAVING ENTERED INTO SUCH A DEAL AND HAVING FOUND TH AT THE COMPANY M/S.SASMI ORGANIC PVT LTD HAD BECOME DEFUNC T AND THAT THERE WAS NO POSSIBILITY OF RECOVERING AMOUNT FROM THE COMPANY, THE APPELLANT FIRM HAD WRITTEN OFF THE SUM OF ` 33,39,065/- WHICH IT HAD PAID TO BANK OF BARODA ON BEHALF OF THAT COMPANY. AND THIS IS IN ORDER. 4.7 IT WAS ALREADY HELD IN THE APPELLATE ORDER IN ITA NO 41/05-06 OF EVEN DATE FOR THE ASSESSMENT YEAR 2002- 03 IN THE APPELLANTS CASE THAT THE BALANCES OF ADVANCES GRAN TED BY THE APPELLANT FIRM TO SISTER CONCERN WHICH BECAME IRREC OVERABLE THAT WERE WRITTEN OFF IN ITS ACCOUNTS DURING THE FI NANCIAL YEAR 2001-02 AND 2002-03 WERE ALLOWABLE AS BUSINESS LOSS ES, BECAUSE, THOSE ADVANCES HAD BEEN GIVEN TO THE SISTE R CONCERN BY THE APPELLANT FIRM UNDER THE SCHEME OF REVIVAL O F THE SISTER CONCERN THAT HAD BECOME SICK WHOSE CASE WAS TAKEN T O THE BIFR, AND FURTHER, IT WAS HELD THAT THE APPELLANT F IRM HAD GOT A VITAL ROLE TO PLAY IN THE WHOLE SCHEME, BECAUSE, IT WAS THE PROMOTER OF THE SISTER CONCERN AND PROMOTING BUSINE SSES AND COMPANIES IS ONE OF ITS BUSIENSS OBJECTIVES AND IN THAT PROCESS IT HAD TO INCUR THESE LOSSES. THE SAME PRIN CIPLE APPLIES TO THE SUM OF ` 33,39,065/- WRITTEN OFF BY THE FIRM IN ITS ACCOUNTS FOR THE ASSESSMENT YEAR 2004-05 ALSO. IT IS IN THE COURSE OF THE FIRMS BUSINESS THAT IT HAD TO GUARAN TEE THE LOANS AND CREDIT FACILITIES SANCTIONED TO THE COMPANY M/S .SASMI ORGANIC P LTD BY BANK OF BARODA AND ONCE THAT COMPA NY FAILED, THE APPELLANT FIRM WAS UNDER OBLIGATIONS TO MAKE GOOD THE DEBTS TO THE BANK. 4.7.1 THUS, IT IS HELD THAT THE SUM OF ` 33,39,065/- IS ALLOWABLE AS A BUSINESS LOSS IN THE HANDS OF THE APPELLANT FI RM. 60. NOW THE REVENUE IS AGGRIEVED. 61. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND HAVE PERUSED THE ENTIRE MATERIAL AVAILABLE ON RECORD . IT IS AN UNDISPUTED FACT THAT THE ASSESSEE-FIRM HAD TRADING RELATIONSHIP WITH M/ S SASMI ORGANICS ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 59 -: PVT. LTD. AND THEREFORE, EARNING COMMISSION INCOME OUT OF THE CONSIGNMENT SALE OF THE PRODUCT OF THAT COMPANY. IN ORDER TO FACILITATE M/S SASMI ORGANICS PVT. LTD. OBTAINED CREDIT FOR MA NUFACTURE OF THE PRODUCT THE ASSESSEE HAD GIVEN LETTER OF UNDERTAKI NG TO THE BANK OF BARODA NOT ONLY GUARANTYING THE LIABILITY OWED BY T HAT COMPANY TO THE BANK BUT ALSO AGREED NOT TO WITHDRAW THE AMOUNTS AD VANCED TO M/S SASMI ORGANICS PVT. LTD. IN THESE CIRCUMSTANCES, G IVING GUARANTEE ON BEHALF OF THE CONCERN TO ENABLE THAT CONCERN TO OBT AIN CREDIT ESSENTIAL FOR MANUFACTURING AND SELLING TO THE ASSESSEE IS E SSENTIALLY CONNECTED WITH THE BUSINESS OF THE ASSESSEE. THEREFORE, FURN ISHING OF GUARANTEE BY THE ASSESSEE TO M/S. SASMI ORGANICS LTD. IS IN T HE COURSE OF TRADING BUSINESS OF THE ASSESSEE. IN VIEW OF THE ABOVE, THE AMOUNT HAD TO PAY ON ACCOUNT OF GUARANTEE GIVEN BY IT TO M/S.SASMI OR GANICS PVT. LTD IS ALLOWABLE AS BUSINESS LOSS AND AS SUCH WE UPHOLD TH E ORDER OF THE CIT(A) ALLOWING THE CLAIM OF ` 33,39,065/- PAID TO THE BANK ON ACCOUNT OF SASMI ORGANIC PVT. LTD. AS BUSINESS LOSS. CONSE QUENTLY, THE GROUNDS RAISED BY THE REVENUE ARE DISMISSED. 62. THE NEXT ISSUE OF THIS APPEAL IS REGARDING ALLOWANC E OF 2/3 RD OF ADVERTISEMENT EXPENDITURE INCURRED BY THE ASSES SEE ON COMPLETION OF 75 YEARS OF BUSINESS. THE ASSESSEE HAD COMPLETED 75 YEARS OF BUSINESS AND DECIDED TO COMMEMORATE THE O CCASION BY ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 60 -: DISTRIBUTING MEMENTO OF SOME VALUE TO THE PERSONS A ND CLOSE ASSOCIATES WITH THE BUSINESS. IN THIS CASE, THE ASS ESSEE CHOSE TO PURCHASES TANJORE PAINTINGS FOR GIVING TO THE ASSOC IATES. THEREFORE THIS EXPENDITURE HAS TO BE HELD AS INCURRED FOR THE PURPOSE OF BUSINESS. WE HAVE DECIDED SIMILAR ISSUE IN ASSES SEES APPEAL IN I.T.A.NO.1043/MDS/2009 AND IN VIEW OF OUR FINDING T HEREIN, WE CONFIRM THE ORDER OF THE LD. CIT(A) ON THIS ISSUE AND DISM ISS THE GROUNDS RAISED BY THE REVENUE 63. THE NEXT GROUND OF APPEAL IS AGAINST THE ALLOWANCE OF 50% OF THE TECHNICAL FEES AND COMMISSION PAID TO LA TE SHRI T.T.VASU. FOR THE REASONS STATED IN THE REVENUES APPEAL IN I .T.A.NO. 1186/MDS/2009 FOR THE ASSESSMENT YEAR 2002-03, WE D ISMISS THE GROUNDS RAISED BY THE REVENUE. 64. IN THE RESULT, THE APPEAL OF THE REVENUE, FOR ASSES SMENT YEAR 2004-05, STANDS DISMISSED. I.T.A.NO. 1040/MDS/2009 A.Y 2001-02 65. IN THIS APPEAL OF THE ASSESSEE, FOR ASSESSMENT YEAR 2001-02, WHICH IS DIRECTED AGAINST THE ORDER OF THE LD. CIT( A)-XII, CHENNAI, DATED 31.3.2009, THE ONLY ISSUE INVOLVED IS REGARDING DISALLOWANCE OF ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 61 -: 50% OF THE PROFESSIONAL FEES AND DISALLOWANCE OF IN TEREST OF ` 60000/- PAID TO LATE SHRI T.T.VASU. 66. WE HAVE DECIDED SIMILAR ISSUE IN ASSESSEES APPEAL IN I.T.A.NO. 1041/MDS/2009, FOR ASSESSMENT YEAR 2002- 03. WITH SIMILAR REASONING, WE UPHOLD THE ORDER OF THE CIT(A) AND DI SMISS THE ASSESSEES APPEAL. 67. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE FO R ASSESSMENT YEAR 2001-02 STANDS DISMISSED. I.T.A.NO. 1185/MDS/2009 A.Y 2001-02 68. IN THIS CROSS APPEAL BY THE REVENUE, THE FIRST ISSU E RAISED VIDE GROUND NOS.2 AND 2.1, IS AGAINST ALLOWING TH E CLAIM OF ` 3 LAKHS AS COMMISSION AND ` 1.5 LAKHS AS TECHNICAL FEES PAID TO LATE SHRI T.T.VASU. WE HAVE DECIDED SIMILAR ISSUE IN ASSES SEES APPEAL AS WELL AS IN REVENUES APPEAL IN THE FORMER PART OF THIS O RDER. WITH THE SIMILAR REASONING, WE UPHOLD THE ORDER OF THE CIT (A) ON THIS ISSUE AND DISMISS THE GROUNDS RAISED BY THE REVENUE ON TH IS ISSUE. 69. THE NEXT ISSUE RAISED VIDE GROUND NOS.3 AND 3.1 IS AGAINST THE ALLOWANCE OF ` 89,04,253/- BEING INTEREST PAYABLE ON TERM ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 62 -: LOAN OBTAINED FOR THE PURPOSE OF GROUNDS OF ADVANCE GIVEN TO ITS ASSOCIATE CONCERN M/S.TTK TEXTILES LTD. 70. WE FIND THAT THIS ISSUE HAS COME UP FOR CONSIDER ATION FOR ASSESSMENT YEAR 2002-03. FOR THE REASONS STATED I N THE REVENUES APPEAL IN I.T.A.NO. 1186/MDS/09 FOR THE ASSESSMENT YEAR 2002-03, WE UPHOLD THAT THE AMOUNT BORROWED FROM THE BANK SH OULD BE CONSIDERED TO HAVE BEEN USED FOR THE PURPOSE OF BUS INESS OF THE ASSESSEE AND HENCE THE ENTIRE PAYMENT OF INTEREST OF ` 89,04,253/- IS ALLOWABLE UNDER SECTION 36(1)(III). 71. IN THE RESULT THE APPEAL FILED BY THE REVENUE FOR ASSESSMENT YEAR 2001-02 STANDS DISMISSED. I.T.A.NO. 1039/MDS/2009 A.Y 2000-01 72. THE ONLY ISSUE INVOLVED IN THIS APPEAL OF THE A SSESSEE IS AGAINST THE TREATMENT OF NON COMPETE FEE OF ` 1,90,74,000/- RECEIVED FROM NEW BRIDGE HONGKONG LTD AS REVENUE RECEIPT. THE FACTS APROPOS THIS ISSUE ARE THAT TTK BIOMED LIMITED, WHI CH WAS A GROUP COMPANY OF TTK AND WHICH ENGAGED IN THE BUSINESS OF MANUFACTURING AND MARKETING OF RUBBER CONTRACEPTIVES HAD ENTERED INTO A NON- COMPETE AGREEMENT WITH LONDON INTERNATIONAL GROUP P LC (LIG). TTK BIOMED MERGED WITH TTK PHARMA LTD., ANOTHER TTK GRO UP COMPANY. ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 63 -: TTK, THE ASSESSEE FIRM, AS A PROMOTER, HAVING CONTR OLLING STAKES IN VARIOUS TTK GROUP COMPANIES, UNDERTOOK TO EXERCISE ALL ITS POWERS AND RIGHTS AS A MAJOR SHAREHOLDER, SUCH THAT PHARMA OR ITS SUCCESSOR OR ASSIGNEES AND ANY OF THE TTK COMPANIES SHALL, AL L TIMES, HONOUR THE NON-COMPETE AGREEMENT ENTERED INTO THE NEW BRID GE HONG KONG LTD., A MEMBER OF THE LONDON INTERNATIONAL GROUP, P LC. SINCE THE PAYMENT WAS RECEIVED FOR THE RESTRICTIVE COVENANT, NOT TO COMPETE WITH THE BUSINESS OF NEW BRIDGE HONG KONG LTD., THE SAME IS CAPITAL IN NATURE. IT IS ONLY WITH EFFECT FROM THE ASSESSMENT YEAR 2003-2004, THE CONSIDERATION RECEIVED FOR NON-COMPETE AGREEMENT HA S BEEN BROUGHT TO TAX. THE ASSESSING OFFICER AFTER CONSIDERING THE RECITALS OF THE NON-COMPETE AGREEMENT DATED 16.2.2000, CAME TO THE CONCLUSION THAT AS THE RIGHT TO CARRY ON BUSINESS IN ANY MANNER WOU LD CONSTITUTE A CAPITAL ASSET AND IN THE ASSESSEES CASE, SUCH RIGH T WAS PARTLY EXTINGUISHED BY VIRTUE OF THE NON-COMPETE AGREEMEN T, THERE WAS A TRANSFER OF THE RIGHT WITHIN THE MEANING OF SEC.2(4 7) OF THE ACT AND SO, THE CONSIDERATION RECEIVED OF ` 1,90,74,000/- WAS TO BE SUBJECTED TO CAPITAL GAINS TAX. FURTHER, IN HIS ORDER, THE ASS ESSING OFFICER HAD OBSERVED THAT THE COST OF ACQUISITION OF THIS RIGHT AS ALSO THE COST OF IMPROVEMENT WAS NIL AS THE ASSESSEE-FIRM HAD NOT INCURRED ANY COST IN ACQUIRING THIS RIGHT. HENCE, THE ENTIRE COMPENS ATION WAS ASSESSED AS CAPITAL GAINS. ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 64 -: 73. ON APPEAL BEFORE THE CIT(A), THE ASSESSEE REITE RATING ITS STAND THAT THE AMOUNT IS A CAPITAL RECEIPT NOT SUBJ ECT TO TAX, ALSO SUBMITTED THAT LIG HAD PAID 4,99,000 POUNDS AS NON- COMPETE FEE ( ` 344.92 LAKHS) TO TTK BIOMED LIMITED BUT SINCE TTK B IOMED LIMITED HAS GOT MERGED WITH TTK HEALTHCARE LIMITED THIS REC EIPT WAS REFLECTED IN THE ACCOUNTS OF TTK HEALTHCARE LIMITED WHICH IT HAD CLAIMED AS EXEMPT FROM TAXATION. IT WAS ARGUED THAT THIS SUM WAS NOT TAXABLE, BECAUSE, THE WHOLE STRUCTURE OF THE ASSESSEE COMPAN YS PROFIT MAKING APPARATUS HAD BEEN GIVEN UP BY THE COMPANY. ON THI S BASIS, THE ITAT ALLOWED THE NON-COMPETE CONSIDERATION AS CAPIT AL RECEIPT IN THE HANDS OF TTK HEALTHCARE LIMITED. THE LD. CIT(A) HAS OBSERVED THAT THE SITUATION IN THE PRESENT ASSESSEES CASE IS NOT THE SAME AS THAT OF TTK HEALTHCARE LIMITED. IN RESPECT OF THE SAME TRAN SACTION WHICH TTK HEALTHCARE LIMITED HAD ENTERED INTO WITH LIG THAT C OMPANY HAD RECEIVED ` 344.92 LAKHS AS COMPENSATION WHICH THE ITAT HAD HE LD AS NOT LIABLE TO TAX, BECAUSE, THE NON-COMPETE FEE REC EIVED, RESULTED IN LOSS OF PARTICULAR SOURCE OF INCOME, THE COMPANY HA D TO STOP MANUFACTURING OF CONTRACEPTIVES AS A CONSEQUENCE OF THE NON-COMPETE AGREEMENT. WHEREAS IN THE CASE OF ASSESSEE-FIRM, I T WAS NOT INVOLVED IN ANY ACTIVITY OF MANUFACTURING AND SELLING OF CON TRACEPTIVES BEFORE THE NON-COMPETE AGREEMENT WHICH IT HAD TO GIVE UP A FTER THE ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 65 -: AGREEMENT, BUT, ITS ROLE WAS THAT OF A PROMOTER ONL Y. THE LD. CIT(A) FURTHER OBSERVED THAT THE FIRM, M/S. TTK & CO. HAD NOT DIRECTLY INVOLVED ITSELF IN THE BUSINESS OF MANUFACTURING AN D SELLING RUBBER CONTRACEPTIVES, AND IT HAD NOT LOST ANY RIGHT TO DO BUSINESS THAT WAS EXISTING BEFORE. ITS INTEREST IN THE AGREEMENT WAS ONLY IN ITS CAPACITY AS A PROMOTER OF M/S. TTK PHARMA LTD. IN FACT, M/ S. TTK & CO. WAS MADE A PARTY TO THIS NON-COMPETE AGREEMENT FOR THE ONLY REASON THAT AS A PROMOTER OF THE COMPANIES IN THE ENTIRE TTK GR OUP, IT WOULD RESTRICT THE OTHER MEMBERS OF THE GROUP FROM COMPET ING WITH LIG EITHER IN ITS INDIVIDUAL CAPACITY OR IN JOINT VENTU RE WITH ANY OTHER COMPANY. SO, IT IS CLEAR THAT THERE WAS NO CAPITAL ASSET OVER WHICH THE ASSESSEE-FIRM HAD LOST ITS INTEREST OR RIGHT F OR WHICH IT HAD RECEIVED THE IMPUGNED SUM. WHATEVER STAKES IT HAD WAS IN THE COMPANY M/S. TTK PHARMA LTD. ONLY. AND IT IS ONLY M/S. TTK PHARMA LTD. THAT HAD LOST THE RIGHT TO DO BUSINESS IN RUBB ER CONTRACEPTIVES. THE AGREEMENT DATED 16.2.2000 UNDER WHICH THE ASSES SEE-FIRM BECAME ENTITLED TO THE IMPUGNED AMOUNT, IT IS EVIDE NT THAT THE PROFIT EARNING APPARATUS OF THE ASSESSEE-FIRM WAS NOT IMP AIRED IN ANY MANNER BECAUSE OF THIS AGREEMENT. THERE HAD BEEN N O LOSS OF ANY SOURCE OF INCOME TO THE ASSESSEE-FIRM. THERE COULD HAVE BEEN A LOSS OF A SOURCE OF INCOME BECAUSE OF THE NON-COMPETE A GREEMENT TO THE COMPANY, M/S. TTK PHARMA LTD., BUT, NOT TO M/S. TTK & CO. THE ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 66 -: ASSESSEE-FIRM WAS NOT CARRYING ON THE MANUFACTURIN G OF CONDOMS WHICH IT HAD TO STOP BECAUSE OF THE NON-COMPETE AGR EEMENT. ITS ROLE IN THE NON-COMPETE AGREEMENT WAS TO RESTRAIN THE ME MBERS OF THE TTK GROUP AS A PROMOTER OF THOSE CONCERNS FROM ENTE RING INTO COMPETITIONS WITH THE LIG GROUP OF COMPANIES IN THE BUSINESS OF MANUFACTURE OF CONDOMS WHICH IT HAD PERFORMED IN TH E NORMAL COURSE OF ITS BUSINESS WHICH IS TO PROMOTE BUSINESSES AND COMPANIES WITHOUT THERE BEING ANY LOSS OR DAMAGE CREATED TO ITS BUSIN ESS STRUCTURE AS SUCH. THE LD. CIT(A) HAS HELD THAT THE SUM OF ` 1,90,74,000/- RECEIVED IS TAXABLE AS REVENUE RECEIPT. THE ASSESSEE IS NO W AGGRIEVED. 74. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND HAVE P ERUSED THE ENTIRE MATERIAL AVAILABLE ON RECORD. THE ISSU E REGARDING TREATMENT OF NON COMPETE IS NOW WELL SETTLED IN VIE W OF THE DECISION OF THE SUPREME COURT IN THE CASE OF GUFFICHEM VS CIT R EPORTED IN 332 ITR 602. THE APEX COURT IN THAT CASE HAS HELD THA T PAYMENT FOR RESTRICTIVE COVENANT HAS TO BE HELD AS CAPITAL RECE IPT AND THE AMENDMENT MADE TO SECTION 28(V)(A) IS PROSPECTIVE A ND APPLICABLE ONLY FOR THE ASSESSMENT YEAR 2003-04 ONWARDS. FURT HER, WE FOUND THAT NON COMPETE FEE ON SAME TRANSACTION WITH M/S.T TK HEALTHCARE LIMITED (FORMERLY KNOWN AS TTK PHARMA LTD) OF ` 34492820/- HAS BEEN HELD BY THE ITAT AS CAPITAL RECEIPT NOT SUBJEC T TO TAX. THE ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 67 -: ASSESSEE BEING A PROMOTER AND HAVING A NAME OF R EPUTE IN THE FIELD OF MANUFACTURING CONDOMS COULD HAVE STARTED COMPANI ES IN COMPETITION WITH THE BUSINESS TRANSFERRED. IT IS TO AVOID THIS COMPETITION. NEW BRIDGE HONG KONG LTD. HAD ENTERED INTO A NON COMPETE AGREEMENT WITH THE ASSESSEE. APPLYING THE R ATIO OF THE DECISION OF THE APEX COURT AS WELL AS THE DECISION OF THE ITAT IN RESPECT OF NON COMPETE FEE RECEIVED BY TTK HEALTHCA RE LIMITED FROM THE SAME TRANSACTION, WE HOLD THAT THE AMOUNT OF ` 1,90,74,000/- RECEIVED BY THE ASSESSEE AS CAPITAL RECEIPT NOT SU BJECT TO TAX. 75. IN THE RESULT, THE APPEAL OF THE ASSESSEE FOR ASS ESSMENT YEAR 2000-01 STANDS ALLOWED. I.T.A.NO. 1184/MDS/2009 A.Y 2000-01 76. THE ONLY ISSUE INVOLVED IN THIS CROSS APPEAL FILED BY THE REVENUE, FOR ASSESSMENT YEAR 2000-01, IS AGAINST A LLOWANCE OF ` 1,47,62,787/- BEING INTEREST PAYABLE ON TERM LOAN O BTAINED FOR THE PURPOSE OF ADVANCE GIVEN TO ITS ASSOCIATE CONCERN M/S.TTK TEXTILES LTD. 77. WE HAVE DECIDED IDENTICAL ISSUE IN ITA NO 1186/-09 FOR ASSESSMENT YEAR 2002-03. IN VIEW OF OUR FINDING THE REIN, WE UPHOLD THE ORDER OF THE CIT(A) ALLOWING THE INTEREST PAYAB LE ON THE LOAN TAKEN IN CONNECTION WITH ADVANCE TO ITS SISTER CONCERN M/ S.TTK TEXTILES LTD. ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 68 -: 78. IN THE RESULT, THE APPEAL FILED BY THE REVENUE FO R ASSESSMENT YEAR 2000-01 STANDS DISMISSED. I.T.A.NO. 1183/MDS/2009 A.Y 1999-2000 79. THIS APPEAL OF THE REVENUE, FOR ASSESSMENT YEAR 1999-2000, IS DIRECTED AGAINST THE ORDER OF THE LD. CIT(A)-XII , CHENNAI, DATED 31.3.2009. 80. THE ONLY ISSUE INVOLVED IN THIS APPEAL RELATES TO ALLOWANCE OF ` 71,29,987/- BEING INTEREST PAYABLE ON TERM LOAN OB TAINED FOR THE PURPOSE OF ADVANCE GIVEN TO ITS ASSOCIATE CONCERN M/S.TTK TEXTILES LTD. 81. WE HAVE DECIDED SIMILAR ISSUE IN I.T.A.NO. 1186/MDS /2009 FOR ASSESSMENT YEAR 2002-03 AND IN VIEW OF OUR FIN DING THEREIN, WE UPHOLD THE ORDER OF THE CIT(A) ALLOWING THE INTERES T PAYABLE ON THE LOAN TAKEN IN CONNECTION WITH ADVANCE TO ITS SISTER CONCERN M/S.TTK TEXTILES LTD. 82. IN THE RESULT, THE APPEAL FILED BY THE REVENUE, F OR ASSESSMENT YEAR 1999-2000, STANDS DISMISSED. ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 69 -: I.T.A.NO. 448/MDS/2010 A.Y 2005-06 83. THIS APPEAL OF THE ASSESSEE, FOR ASSESSMENT YEAR 2 005-06, IS DIRECTED AGAINST THE ORDER OF THE LD. CIT(A)-XII, CHENNAI, DATED 26.2.2010. 84. THE FIRST ISSUE IN THE ASSESSEE APPEAL RELATES TO D ISALLOWANCE OF 50% OF THE PROFESSIONAL FEES AND DISALLOWANCE OF IN TEREST OF ` 60000/- PAID TO LATE SHRI T.T.VASU. FOR THE REASONS STATE D IN THE ASSESSEES APPEAL FOR ASSESSMENT YEAR 2002-03 ON THIS ISSU E, WE UPHOLD THE ORDER OF THE CIT(A) AND DISMISS THE GROUNDS RAISED BY THE ASSESSEE. 85. THE NEXT ISSUE RELATES TO SETTING OFF OF BROUGHT F ORWARD DEPRECIATION/BUSINESS LOSS. BROUGHT FORWARD LOSS A ND UNABSORBED DEPRECIATION AS CLAIMED BY THE ASSESSEE ARE NOT SE T OFF IN VIEW OF THE SCRUTINY OF ASSESSMENT FOR THE EARLIER YEARS WHEN T HE INCOME WAS SUBSTANTIALLY INCREASED AND HENCE THERE WAS NO LOSS DEPRECIATION TO BE CARRIED FORWARD FOR THIS YEAR. HOWEVER, ON THE BAS IS OF THE TRIBUNAL ORDER FOR THESE YEARS, THE ASSESSING OFFICER WILL REWORK THE LOSS OR DEPRECIATION TO BE CARRIED FOR EARLIER YEARS AND TO SET OFF THE AMOUNT SO CARRIED AGAINST THE INCOME OF THE YEAR IN ACCORD ANCE WITH LAW. ITA 1183 TO 1188/09 1039 T O 1043/09 & 448/10 :- 70 -: 86. IN THE RESULT, THE APPEAL OF THE ASSESSEE FOR 20 05-06 STANDS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 87. TO SUMMARIZE THE RESULT - REVENUES APPEALS - I.T.A.NOS.1183 TO 1188/MDS/2009 - DISMI SSED. ASSESSEES APPEALS I.T.A.NO.1039/MDS/2009 - ALLOWED I.T.A.NOS.1041 & 1042/MDS/2009 - PARTLY ALLOWED I.T.A.NOS.1040 & 1043/MDS/2009 - DISMISSED I.T.A.NO. 448/MDS/2010 - PARTLY ALLOWED F OR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 19.10.2011. SD/- SD/- (N.S. SAINI) ACCOUNTANT MEMBER ( HARI OM MARATHA ) JUDICIAL MEMBER DATED: 19 TH OCTOBER, 2011 RD COPY TO: APPELLANT/RESPONDENT/CIT(A)/CIT/DR