Tobacco Diversification Investments Ltd., Hyderabad V. ACIT, Hyderabad

ITA 1279/HYD/2003

• Counselvise Citation: [2009] 115 COUNSELVISE.COM (IT) 1373 (ITAT-HYDERABAD)
• Duration Of Justice: 5 year(s) 11 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-11-2009
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: DB-B
• Assessment Year: 2000-2001
• Appeal Filed On: 11-12-2003
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: MRS VASUNDHARA SINHA
• Assessee Lawyers: T S AJAY
• Keywords: Capital asset; Business income; Wholly owned subsidiary; Wrong claim; Capital receipt; Commercial expediency; Onus to prove; Revenue expenditure; Capital expenditure; Set aside; Capital Gains
• Section: 143(3); 145

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER ITA NO.1233/HYD/2005 : ASSTT. YEA R : 1999-2000 ACIT, CIRCLE 3 (3), HYDERABAD VS. M/S TOBACCO DIVERSIFICATION INVESTMENTS LTD., HYDERABAD (AAACT7508B) (APPELLANT) (RESPONDENT) ITA-1234/HYD/05 & 1279/HYD/03 ASST.YR:1999-2000 & 20 00-01 M/S TOBACCO DIVERSIFICATION INVESTMENTS LTD., HYDERABAD (AAACT7508B) ACIT, CIRCLE 3 (3), HYDERABAD ASSESSEE BY : SHRI T.S. AJAY, CA DEPARTMENT BY : MRS. VASUNDHARA SINHA, DR O R D E R PER CHANDRA POOJARI , ACCOUNTANT MEMBER: FIRST TWO ARE CROSS APPEALS FOR THE ASSESSMENT YEAR 1999-2 000 AGAINST THE ORDER OF THE CIT(A) IV, HYDERABAD DT.10- 10-2005 AND THE OTHER IS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST ORDER P ASSED BY THE LEARNED CIT(A), IV HYDERABAD DATED 15.9.2003 AND P ERTAINS TO THE ASSESSMENT YEAR 2000-2001. SINCE THE ISSUES ARE COMMON IN NATURE, THEY ARE CLUBBED TOGETHER, HEARD TOGETHER AND DISPOSED OF TOGETHER FOR THE SAKE OF CONVENIENCE. 2 2. THE REVENUE RAISED THE FOLLOWING GROUNDS IN I TA NO.1233/HYD/05. 1. THE CIT(A) ERRED BOTH IN LAW AND ON FACTS. 2. THE CIT(A) OUGHT TO HAVE TREATED THE INCOME EARNED O N SECURITIZATION AS REVENUE RECEIPT SINCE THE ASSESSEE ITSELF H AS ADMITTED THAT ITS BUSINESS IS IN FINANCIAL SERVICES INCLUDI NG SECURITIZATION. 3. THE GROUNDS RAISED BY THE ASSESSEE IN ITA NO.1234/HYD/ 05 ARE AS FOLLOWS: 1(A) THE CIT(A) HAS ERRED IN LAW AND IN THE FACTS AND CIRCUMSTANCES OF THE CASE IN CONFIRMING THE DISALLOWANCE OF CLAIM OF LOSS O F RS.50 LAKHS (CLAIMED UNDER THE HEAD INTEREST) ON SETTLEMENT WITH V ST INDUSTRIES LTD., SINCE THE CORRESPONDING INTEREST INCOME EARNED OF RS.50 LAKHS FROM ICICI BONDS, WAS ALSO OFFERED TO TAX AND WAS ALSO ACCEPT ED IN THE ASSESSMENT. 1(B). THE LEARNED CIT(A) HAS ERRED IN HOLDING THAT THE ABOVE SAID SETTLEMENT LOSS OF RS.50 LAKHS IS ALSO CAPITAL IN NATURE, WHEREAS IN FACT IT IS REVENUE IN NATURE AND BOTH THE RELATED INCOME AND EXPENDITURE HAVE BEEN ROUTED THROUGH THE PROFIT AND LOSS A/C. 1: THE CIT(A) OUGHT TO HAVE ACCEPTED THE CONTENTION OF THE APPELLANT THAT THE ASSESSEE HAS INCURRED LOSS OF RS.50 LAKHS ON SETTLEME NT OF ITS TRANSACTION WITH VST INDUSTRIES LTD., THAT THE SAME IS IN CURRED DURING THE COURSE OF BUSINESS AND HENCE IS CLEARLY ALLOWABLE AS A DEDUCTION U/S 28, 29 AND OR 37 (1) OF THE ACT. 3 2(A) THE CIT(A) HAS ERRED IN THE FACTS AND CIRCUMSTANCES OF THE CASE IN CONFIRMING THE DISALLOWANCE OF THE CLAIM OF THE ASSESSEE FO R LOSS OF RS.56.50 LAKHS ON SETTLEMENT OF TRANSACTION WITH SIFCO A ND QUEST SECURITIES LTD., DURING THE COURSE OF ARBITRATION PROCE EDINGS. 2(B): THE CIT(A) OUGHT TO HAVE ACCEPTED THE CONTENTIO N OF THE ASSESSEE THAT THE SAID SETTLEMENT WAS INCURRED OUT OF COMMERCIAL E XPEDIENCY AND THAT THERE IS NO CONTRACTUAL OBLIGATION, THE ASSESSEE HAD TAKEN A DECISION KEEPING IN VIEW ALL THE RELEVANT FACTORS INCLU DING POSSIBILITY OF PROTRACTED LITIGATION AND HENCE SUCH BUSINESS JUDGEMENT OF THE SEE TAKEN IN GOOD FAITH CANNOT BE REJECTED BY THE ASSESSING O FFICER ON THE GROUND OF PRUDENCE. 3(A): THE CIT(A) HAS ERRED IN CONFIRMING THE DISALLOW ANCE OF CLAIM OF THE ASSESSEE FOR DEDUCTION OF PROFESSIONAL FEE OF RS.7.5 LA KHS PAID TO SIFCO. 3(B): THE CIT(A) OUGHT TO HAVE NOTED THAT THE PROF ESSIONAL FEE UNDER CONSIDERATION WAS PAID BY WAY OF ACCOUNT PAYEE CHEQUES. THE CIT(A) OUGHT TO HAVE FURTHER NOTED THAT HAVING REGARD TO T HE NATURE OF SERVICE NAMELY FINANCIAL CONSULTANCY. IT IS NOT POSSIBLE TO PRODU CE THE EVIDENCE IN THE FORM AND MANNER REQUIRED BY THE ASSESSING OFFICER AND THE EXPENDITURE OUGHT TO BE EXAMINED IN THE LIGHT OF EV IDENCE AVAILABLE ON RECORD AND THE CHARACTER AND NATURE OF SERVICE NAMELY CON SULTANCY. 4. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE, VIZ., TO BACCO DISINVESTMENT (P) LTD (TDIL), A 100% SUBSIDIARY VST IND USTRIES LTD., CARRIED ON BUSINESS OF INVESTMENT IN SHARES AND FINANCI AL SERVICES. THE ASSESSEE FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR 1999-2000 DECLARING A LOSS OF 22.70 LAKHS. THE ASSESSING OFFICER COMPL ETED THE ASSESSMENT ON 28.3.2002 U/S 143(3) OF THE IT ACT, DETERM INING AN INCOME OF RS.13 CRORES. AGGRIEVED BY THE SAID ORDER OF THE ASSESSING 4 OFFICER THE ASSESSEE WENT IN APPEAL BEFORE THE CIT(A). WHILE THE APPEAL AGAINST THIS ASSESSMENT WAS CONFIRMED BY THE CIT(A), THE ITAT VIDE ITS ORDER DATED 30.9.2003 HAD SET ASIDE THE ASSESSMENT HOLDIN G THAT THE FACTS OF THE CASE HAVE TO BE ASCERTAINED AFTER AFFORDING SUFFICIENT OPPORTUNITY TO THE ASSESSEE. ACCORDINGLY, REASSESSMENT PROCE EDINGS U/S 254 (1) OF THE ACT WERE TAKEN UP AND THE ASSESSMENT WAS C OMPLETED U/S 143(3) ON DATED 30.3.2005 DETERMINING THE INCOME OF RS.12.91 CRORES. THE ASSESSEE WENT IN APPEAL BEFORE THE CIT(A). THE CIT( A) HAS CONFIRMED THE LIABILITY OF RS.52 CRORES IN THE HANDS OF VST TO BE CAPITAL IN NATURE. ACCORDINGLY, THE CIT(A) DIRECTED THE ASSESSING OFFICER THAT WHILE TREATING THE AMOUNT OF RS.12 CRORES RECEIVED IN THE FORM OF ICICI BONDS AND SECURITIZED DEBT DUE FROM WOODLANDS AS A CAPITA L RECEIPT, THE PAYMENT MADE BY THE ASSESSEE COMPANY TO VST WAS ALSO TO BE TREATED AS CAPITAL EXPENDITURE IN THE SAME MANNER. HOLDING SO, HE WAS OF THE OPINION THAT THE ASSESSEE WAS NOT CORRECT TO CONTEND THAT RS.50 LAKHS COMPONENT OF 12.5 CRORES SHOULD BE ADMITTED AS REVENUE EXPENDITURE. IN OTHER WORDS, RECEIPT OF RS.12 CRORES AS WELL AS PAYMENT OF 12.5 CRORES BOTH ARE DEALT WITH CAPITAL IN NATURE. HENCE, RE VENUE IS IN APPEAL BEFORE US AGAINST THE DIRECTION OF THE LEARNED CIT(A) TO TREAT THE RS.12 CRORES AS CAPITAL RECEIPT AND THE ASSESSEE IS IN APPEAL FOR NOT ALLOWING RS.50 LACS AS REVENUE EXPENDITURE. 5. THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT THE BUSINESS OF THE ASSESSEE COMPANY IS IN FINANCIAL SERVICES IN CLUDING SECURITIZATION. AS A MATTER OF FACT, THE ASSESSEE COMPANY I N ITS LETTER DT.12-3-2002 HAS ADMITTED THAT IT IS IN THE BUSINESS OF SECURITISATION. SHE SUBMITTED THAT AS ALREADY STATED, AS AND WHEN THE A SSESSEE DISCHARGES THE FUTURE LIABILITY OF RS.52 CRORES, IT IS ENT ITLED TO RECEIVE INVESTMENTS HELD BY VST INDUSTRIES IN THE ENTITIES OF IT C-CLASSIC GROUP. IT IS FURTHER SUBMITTED THAT IF THE ASSESSEE REALIZES ON SALE OF THOSE INVESTMENTS, MORE THAN WHAT IT HAS PAID TO VST, IN TER MS OF THE FUTURE 5 LIABILITY OF RS.52 CRORES, IT WOULD BE A GAINER. IF I T FALLS SHORT, TO THAT EXTENT, IT WOULD BE THE LOSER. THAT DIFFERENCE REPRES ENTS EITHER ITS GAIN OR LOSS. IT WAS THEREFORE SUBMITTED BY THE LEARNED DE PARTMENTAL REPRESENTATIVE THAT WHATEVER THE ASSESSEE EARNS IN THE M EANTIME FROM ICICI BONDS AND SECURITIZED DEBT DIRECTLY OR FROM THEIR REALIZATIONS SUBSEQUENTLY IT REPRESENTS INCOME WHICH IS CHARGEABLE TO INCOME TAX YEAR AFTER YEAR. IT WAS SUBMITTED BY THE LEARNED DE PARTMENTAL REPRESENTATIVE THAT DURING THE YEAR, THE ASSESSEE COMPAN Y HAS EARNED RS.50 LACS AND RS.33,62,055 BY WAY OF INTEREST FROM THE TWO ASSETS MENTIONED ABOVE. IT WAS FURTHER CONTENDED BY HER THA T DURING THE FINANCIAL YEAR 1998-99 ITSELF ANOTHER SETTLEMENT TOOK PLACE BETWEEN VST INDUSTRIES AND THE ASSESSEE COMPANY TDIL) ACCORDING TO WHICH THE VST INDUSTRIES HAS RELINQUISHED THE ASSESSEE COMPANY FROM FUTUR E LIABILITY OF RS.52 CRORES PAYABLE NOT LATER THAN 12 YEARS IN CONSIDERA TION OF TDIL AGREEING TO PAY RS.12.50 CRORES IMMEDIATELY. IT WAS SU BMITTED THAT THIS WILL HAVE THE EFFECT OF NOT ONLY CANCELING THE EARLIER INCOME OF RS.12 CRORES EARNED BUT ALSO IN MAKING A FURTHER LOSS CLAIM OF RS.50 LACS ( RS.12.50 CRORES MINUS RS.12 CRORES). IT WAS CONTENDED THAT IN SUPPORT OF THIS CLAIM, THE ASSESSEE HAS FILED A DETAILED LETTER D T.12-3-2002. THE SAME IS REPRODUCED BELOW FOR CLARITY, WHICH IS FOUND RECO RDED IN PARA 2.6 OF THE ASSESSING OFFICERS ORDER. A TRIPARTITE AGREEMENT WAS ENTERED INTO BY THE COMPA NY WITH VST INDUSTRIES LTD., AND VST NATURAL PRODUCTS LTD. ON SEPT EMBER, 21, 1998 WHEREIN THE COMPANY HAD AGREED TO TAKE OVER THE LIAB ILITY OF VST NATURAL PRODUCTS LTD. TO VST INDUSTRIES LTD. OF RS.52 CRO RES PAYABLE AT THE END OF A SPECIFIED PERIOD. IN CONNECTION WITH THIS THE COMPANY HAD RECEIVED ASSETS WORTH RS.12 CRORES WHICH AREA AS UNDER: (I) 20,000 UNSECURED REDEEMABLE BONDS OF RS.4000 EACH (ICICI MONEY MULTIPLIER BONDS) R S.8,00,00,000 (II) SECURED DEBT (FROM M/S WOODLAND RESORTS PVT.LTD) RS. 4,00,00,000 6 SHE SUBMITTED THAT THE COMPANY HAS ACCRUED INTEREST OF RS. 33,62,055 FOR THE YEAR 1998-99 ON THE DEBT DUE FROM WOODLANDS AND THE SAME HAS BEEN OFFERED TO TAX. THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THA T BOTH THE INCOME OF RS.50 LACS ON DISPOSAL OF ICICI BONDS AND THE B USINESS LOSS OF RS.50 LACS ON SETTLEMENT WITH VST, WERE SHOWN UNDER THE HEAD INTEREST IN THE PROFIT AND LOSS ACCOUNT TO COMPLY WITH THE REQUIR EMENTS OF SCHEDULE VI OF THE COMPANIES ACT, 1956, EVEN THOUGH STR ICTLY SPEAKING THEY DO NOT PARTAKE THE NATURE OF INTEREST TO REPRESE NT A BUSINESS INCOME AND LOSS. SUMMING UP HER ARGUMENTS, THE LEARNE D DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT IN VIEW OF THE ABOVE SU BMISSIONS IT CAN BE CONCLUSIVELY HELD THAT NO FINAL SETTLEMENT BETWEEN A THE VST INDUSTRIES AND TDIL AS CLAIMED BY THE ASSESSEE TOOK PLACE DU RING THE FINANCIAL YEAR 1998-99 RELEVANT TO THE AY 1999-2000 . THEREFORE, THE SO CALLED EXPENDITURE OF RS.12.50 CRORES IN THE BUSINESS OF SE CURITISATION OF ASSESSEE COMPANY OR THE LOSS CLAIMED IN THIS REGARD CANNOT BE ACCEPTED. THE AMOUNT OF RS.12 CRORES EARNED IN THE FORM OF ICIC I BONDS AND SECURITIZED DEBT DUE FROM WOODLANDS SHOULD BE TREATED A S INCOME OF THE ASSESSEE IN THE FACTS AND CIRCUMSTANCES OF THE CASE FOR THE AY 1999- 2000. THE LEARNED DEPARTMENTAL REPRESENTATIVE PRAYE D THAT THE ORDER OF THE LEARNED CIT(A) SHOULD BE REVERSED AND THAT OF THE ASSESSING OFFICER BE CONFIRMED. 6. AS REGARDS THE FIRST AGROUND OF APPEAL IN THE REVE NUES APPEAL AGAINST THE DELETION OF RS.12 CRORES AS INCOME EARNED FR OM SECURITIZATION, IT WAS SUBMITTED BY THE LEARNED COUNSEL F OR THE ASSESSEE SUBMITTED THAT THE ASSESSEE, VIDE THE TRIPARTITE AGREEME NT DT.21-9-1998 HAS RECEIVED RS.12 CRORES IN THE FORM OF ASSIGNMENT OF DEB TS DUE FROM WOODLANDS LTD. OF RS.4 CRORES AND ICICI MONEY MULTIPLIE R BONDS OF THE FACE VALUE OF 8 CRORES, FROM VST NATURAL PRODUCTS LTD. (VSTNPL) AS 7 CONSIDERATION FOR UNDERTAKING THE OBLIGATION TO REPAY AN AMOUNT OF RS.52 CRORES TO VST INDUSTRIES LTD. IN NOT LATER THAN 1 2 YEARS. FURTHER, WHEN VST WAS FACING SEVERE CASH CRUNCH AND THEREFORE, IN M ARCH, 1999 VST MADE A PROPOSAL TO RELIEVE IT FROM THE SAID AGREE MENT AND OBLIGATION THERE UNDER TO PAY RS.52 CRORES IN OVER A PERIOD NOT LATER THAN 12 YEARS AND INSTEAD RECEIVE ONLY RS.12.50 CRORES I N FULL AND FINAL SETTLEMENT, A COPY OF SUCH LETTER TO THIS EFFECT DT.30-3- 1999 IS ENCLOSED AND FOUND AVAILABLE AT PAGE 31 OF THE ASSESSEES PAPER B OOK. THEREAFTER, THE BOARD OF DIRECTORS OF BOTH THE COMPANI ES AT THEIR SUBSEQUENT MEETING HELD ON 27-5-1999 APPROVED THE SETT LEMENT OF LIABILITY OF RS.52 CRORES FOR AN IMMEDIATE PAYMENT OF RS.12.50 CRORES, COPY OF THE SAID RESOLUTIONS OF VST IS FOUND ENCLOSED AS PA GE NO.33 OF THE ASSESSEES PAPER BOOK. ASSESSEES COUNSEL FINALLY SUBMITTED THAT IN THE LIGHT OF THE ABOVE FACTS AND CIRCUMSTANCES OF THE CASE THAT THE RECEIPT OF RS.12 CORES BY THE ASSESSEE IN PURSUANCE OF AGREEM ENT DT.21- 9-98 IS NOT LIABLE TO TAX FOR THE FOLLOWING REASONS. 7. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT A PERUSAL OF THE TRIPARTITE AGREEMENT DT.21-9-98 ENTERED INTO WI TH VSTNPL AND VST INDUSTRIES LTD., CLEARLY SHOWS THAT TDIL HAS RECEIVED THE FINANCIAL ASSETS WORTH RS.12 CRORES WITH A CORRESPONDING OBLIGATION ATTAC HED TO THAT, NAMELY THAT AN AMOUNT OF RS.52 CRORES IS TO BE REPAID O VER A PERIOD OF NOT LESS THAN 12 YEARS. HENCE, THE RECEIPT OF RS.12 CRORE S IS NOT IN THE CHARACTER OF INCOME. THE SECURITIZATION AGREEMENT ENTER ED INTO BY TDIL WAS A PURE AND SIMPLE AGREEMENT WHEREBY THE AMOUNT OF RS.12 CRORES WAS RECEIVED WITH AN OVERRIDING AND DEFINITE LIABILIT Y OF REPAYMENT OF RS.52 CRORES. THE ABOVE SAID AGREEMENT WAS ENTERED INTO BY TDIL WITH A BUSINESS MOTIVE NAMELY THAT IF THE RS.12 CRORES OVER A PERIOD OF 12 YEARS YIELDS MORE THAN 52 CRORES, THE SURPLUS WOULD BE IT S INCOME. THEREFORE ANY ACCRUALS FROM THE ABOVE SAID ASSETS BY OVERR IDING TITLE BELONGS TO VST INDUSTRIES LTD. UPTO THE EXTENT OF RS.52 CRORES AND IT IS 8 ONLY THE SURPLUS OVER RS.52 CRORES THAT WOULD BELONG T O TDIL. RELIANCE WAS PLACED ON THE RATIO LAID DOWN BY THE APEX COURT IN THE CASE OF 222 ITR 183 (SC) TO THE EFFECT THAT IF THERE IS ANY DIVER SION OF INCOME BY OVERRIDING TITLE THEN THERE IS NO INCOME TO THE ASSESSEE. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE CORRECT POINT OF TIME TO ASCERTAIN THE PROFIT OR LOSS FROM THE SAID TRANSACTION OF SECURITIZATION WOULD BE THE TIME WHEN THE FUTURE LIABILITY OF RS.52 CRORES IS DISCHARGED OR WHEN THE TRANSACTION IS OTHERWISE SETTLED, AS HAS ACTUA LLY HAPPENED IN THE PRESENT CASE. HOWEVER, AT NO INSTANCE THE PROFIT CAN BE COMPUTED AT THE TIME OF RECEIPT OF THE AMOUNT SINCE NO INCOME A CCRUES MERELY ON RECEIPT OF AN AMOUNT. ASSESSEES COUNSEL SUBMITTED THAT THE ABOVE SAID TRANSACTIONS COMPARABLE TO THE ANALOGY OF DEEP DISCOUNT B ONDS/ MONEY MULTIPLIER BONDS ISSUED BY FINANCIAL INSTITUTIONS. AN Y FINANCIAL INSTITUTION RECEIVES CERTAIN AMOUNT IN PRESENT WHICH IS THE DISCOUNTED VALUE OF A FUTURE LIABILITY TO BE PAID. THE AMOUNT RECEIVED IN SUCH INSTANCES CLEARLY CAPITAL IN NATURE AND IS NEVER TREATED AS REVENUE RECEI PT OF FINANCIAL INSTITUTIONS. RELIANCE WAS PLACED ON THE CBDT CIRCULAR NO.2 OF 2002 DT.15-2-2002 EXPLAINING THE TREATMENT OF DEEP DISCOU NT BONDS. RELIANCE WAS ALSO PLACED TO THE ACCOUNTING TREATMENT MADE BY ICICI LTD. IN RESPECT OF DEEP DISCOUNT BONDS VIDE EXTRACTS GIV E IN PAGE NOS. 54 TO 60 OF THE ASSESSEES PAPER BOOK. THEREFORE, EVEN THE AMOUNT OF RS.12 CRORES RECEIVED DURING THE FINANCIAL YEAR 1999-200 0 IS CLEARLY A CAPITAL RECEIPT IN NATURE AND IS NOT LIABLE TO TAX. E VEN IF IT IS ASSUMED THAT THE RECEIPT OF RS.12 CRORES IS A REVENUE RECEIPT, IT WOULD ONLY CONSTITUTE GROSS RECEIPT AND CANNOT BE ENTIRELY SUBJECTED T O INCOME TAX. IT IS A WELL SETTLED CONCEPT THAT INCOME IS TO BE COMPUTED BY ALLOWING APPROPRIATED EXPENDITURE AGAINST THE GROSS RECEIPTS. T O TREAT THE ENTIRE RECEIPT OF RS.12 CRORES WOULD AMOUNT TO A TAX ON GROSS R ECEIPT AND NOT TAX ON INCOME AND WOULD BE BEYOND THE PALE OF CHARGIN G SECTION ITSELF. 9 8. THE ASSESSEES COUNSEL SUBMITTED THAT ACCOUNTING STANDAR D 1 ISSUED BY THE CENTRAL BOARD OF DIRECT TAXES U/S 145 OF THE ACT WHICH IS MANDATORY. THE SAID ACCOUNTING STANDARD CLEARLY LAYS D OWN THE POLICY OF PRUDENCE NAMELY THAT PROVISION MUST BE MADE FOR A LL KNOWN LIABILITIES WHILE COMPUTING THE INCOME. HE SUBMITTED THAT IN THE PRESENT CASE IT IS CLEAR THAT TH ERE IS A FUTURE LIABILITY OF RS.52 CRORES, ATTACHED TO THE RECEIPT OF R S.12 CRORES WHICH IS A KNOWN AND DEFINITE LIABILITY APPROPRIATE PROVISION MUST BE MADE FOR THE SAME. HE SUBMITTED THAT SUCH A PROVISION MAY BE COMPUTED AND T AKEN AS THE PRESENT VALUE OF THE FUTURE LIABILITY OF RS.52 CRORES A ND ALLOWED AS A DEDUCTION FROM THE AMOUNT OF RS.12 CRORES AND THE BALAN CE, IF ANY WOULD ONLY CONSTITUTE THE PROFIT OR LOSS FROM THE TRANSA CTION OF SECURITIZATION. THE NET PRESENT VALUE OF THE FUTURE L IABILITY MAY BE ESTIMATED ON A FAIR AND REASONABLE BASIS HAVING REGARD TO THE THEN PREVAILING FINANCIAL MARKET CONDITIONS. HE SUBMITTED THAT THE ABOVE SAID PROPOSITIONS ARE FULLY SUPPORTED BY THE RATIO LAID DOWN BY THE SUPREME COURT IN THE CASE OF C ALCUTTA CO.LTD., V. CIT 37 ITR 1 (SC) AND IN K.C.P.LTD. V. CIT 245 IT R 421(SC) AT PAGE 432. RELEVANT OBSERVATIONS OF THE APEX COURT AT 245 ITR PAGE 432 ARE REPRODUCED BELOW FOR READY REFERENCE. HE FURTHER SUBMITTED THAT A FEW PRINCIPLES WERE LAID DO WN BY THIS COURT, THE RELEVANT OF WHICH REPRODUCED AS UNDER: I) FOR AN ASSESSEE MAINTAINING HIS ACCOUNTS ON THE MERCANTILE SYSTEM, A LIABILITY ALREADY ACCRUED, THOUGH TO BE DISCHA RGED AT A FUTURE DATE, WOULD BE A PROPER DEDUCTION WHILE WORKI NG OUT THE 10 PROFITS AND GAINS OF HIS BUSINESS, REGARD BEING HAD TO THE ACCEPTED PRINCIPLES OF COMMERCIAL PRACTICE AND ACCOUNTANCY. IT IS NOT AS IF SUCH DEDUCTION IS PERMISSIBLE ONLY IN THE CASE OF AMOUNTS A CTUALLY EXPENDED OR PAID: II) JUST AS RECEIPTS, THOUGH NOT ACTUAL RECEIPTS BUT ACCRUED D UE ARE BROUGHT IN FOR INCOME TAX ASSESSMENT, SO ALSO LIABILITIES A CCRUED DUE WOULD BE TAKEN INTO ACCOUNT WHILE WORKING OUT THE PROFITS AND GAINS OF THE BUSINESS III) A CONDITION SUBSEQUENT, THE FULFILLMENT OF WHICH MAY RE SULT IN THE REDUCTION OR EVEN EXTINCTION OF THE LIABILITY, WOULD NOT HAVE THE EFFECT CONVERTING THAT LIABILITY INTO A CONTINGENT LIA BILITY IV) A TRADER COMPUTING HIS TAXABLE PROFITS FOR A PARTICULA R YEAR MAY PROPERLY DEDUCT NOT ONLY THE PAYMENTS ACTUALLY MADE TO HIS EMPLOYEES BUT ALSO THE PRESENT VALUE OF ANY PAYMENTS IN RESPECT OF THEIR SERVICES IN THAT YEAR TO BE MADE IN A SUBSEQUEN T YEAR IF IT CAN BE SATISFACTORILY ESTIMATED. SO IS THE VIEW TAKEN IN CALCUTTA CO. LTD. V CIT (19 59) 27 ITR 1 (SC) WHEREIN THIS COURT HAS HELD THAT THE LIA BILITY ON THE ASSESSEE HAVING BEEN IMPORTED, THE LIABILITY WOULD BE ACCRUED LIABILITY AND WOULD NOT CONVERT IN TO A CONDITIONAL ONE MERELY BECAUSE THE LIABILITY WAS TO BE DISCHARGED AT A FUTURE DATE. THERE MAY BE SOME DIFFICULTY IN THE ESTIMATION THEREOF BUT THAT WOULD NOT CONVERT THE ACCRUED LIABILITY INTO A CONDITIONAL ON E; IT WAS ALWAYS OPEN TO THE TAX AUTHORITIES CONCERNED TO ARRIVE AT A PROPER ESTIMATE OF THE LIABILITY HAVING REGARD TO ALL THE CIRCUMSTANCES OF THE CASE. THE ASSESSEES COUNSEL HAS SUBMITTED THAT THE CONCEPT OF REAL INCOME HAS BEEN CONSISTENTLY UPHELD BY THE COURTS AND BY THE A PEX COURT IN THE CASE OF CIT V. MESSRS. SHOORJI VALLABHDAS AND CO., 46 ITR 144 (SC). HE SUBMITTED THAT WHAT CAN BE TAXED IS ONLY THE REAL INCOM E AND NOT ANY NOTIONAL INCOME. THE AMOUNT OF RS.12 CRORES HAS BEEN RE CEIVED IN SEPTEMBER 1998 AND BY 31 ST MARCH 1999 ULTIMATELY SETTLED TO PAY AN 11 AMOUNT OF RS.12.5 CRORES AGAINST THE SAME. EVEN IF THE SAID AGREEMENT FOR SETTLEMENT OF RS.12.5 CRORES HAS BEEN RATIFIED SUBSE QUENTLY IN MAY 1999, TAKING INTO ACCOUNT THE CONCEPT OF REAL INCOME THE SAME MUST RELATE BACK TO 31 ST MARCH 1999. HE SUBMITTED THAT IF THE RECEIPT OF RS.12 CRORES IS TO BE TREATED AS REVENUE RECEIPT, ANY ONE OF THE FOLLOWING TWO ALTER NATIVES SHOULD BE FOLLOWED NAMELY: A) TREAT THE RECEIPT OF RS.12 CRORES AS REVENUE RECEIPT FOR THE ASSESSMENT YEAR 1999-2000 AND ALLOW THE ULTIMATE SETTLEM ENT OF RS.12.5 CRORES ALSO AS A MATCHING EXPENDITURE AGAINST THE SAME FOR THE ASSESSMENT YEAR 1999-2000 ITSELF OR B) CARRY FORWARD THE AMOUNT OF RS.12 CRORES AS ADVANCE RECE IVED AND ADJUST IT AGAINST THE EXPENDITURE OF RS.12.5 CROR ES IN THE AY 2000-01, AS YEAR IN WHICH THE ASSESSING OFFICER HAS HELD TH E SETTLEMENT TO HAVE FINALLY RATIFIED. (IT IS SUBMITTED BY THE LEARNED COUNSEL THAT THE ASSESSING OFFICER DOES NOT DOUBT THE GENUI NENESS OF THE SETTLEMENT OR THE OBLIGATION OF THE ASSESSEE TO P AY RA.12.50 CRORES IN FULL AND FINAL SETTLEMENT OF THE FU TURE LIABILITY OF RS.52 CRORES. THE ASSESSING OFFICERS CONTENTION IS ONLY THAT THE SETTLEMENT DID NOT TAKE PLACE ON 31-3-1999 BUT HA S TAKEN PLACE ONLY IN MAY, 2000 WHERE THE BOARD OF DIRECTORS OF BOTH THE COMPANIES RATIFIED THE SETTLEMENT. ASSESSEES COUNSEL INVIT ED OUR ATTENTION TO THE DISCUSSION OF THE ASSESSING OFFICER IN PA RA 2.9 AND 2.9(I) OF THE ASSESSMENT ORDER. FURTHER, HE SUBMITTED T HAT IN ANY CIRCUMSTANCES, IT IS NOT CORRECT TO SEGREGATE THE ABOVE TRANSACTION INTO TWO PARTS AND TAX RS.1 CRORES AS INCOME IN THE FIRST YEAR AND ALLOW RS.12.5 CRORES AS EXPENDITURE IN T HE SUBSEQUENT YEAR AS IT WOULD MILITATE AGAINST THE BASIC CO NCEPTS OF MATCHING PRINCIPLE AND REAL INCOME. IT IS SUBMITTED BY THE LEARNED COUNSEL THAT THE ASSESSEE HAD OFFERED RS.33.62 LACS AS 12 NET INCOME IN RESPECT OF THE ABOVE SAID TRANSACTION AND T HERE WAS NO ATTEMPT TO AVOID/EVADE TAX. THUS, THE TRANSACTION S HAVE BEEN PROPERLY AND FULLY ACCOUNTED FOR BY THE ASSESSEE AND ALL THE INCOME ARISING OUT OF THE SECURITIZATION TRANSACTION HAS B EEN DULY OFFERED BY THE ASSESSEE TO TAX. ASSESSEES COUNSEL ALSO SUBMITTED THAT THE BURDEN OF PROOF IN TAXING A RECEIP T AS INCOME IS ON THE REVENUE. IN THIS CASE, THE AGREEMENT AND THE FACTS ARE VERY CLEAR THAT AN AMOUNT OF RS.12 CRORES IS RECEIVED WIT H A CLEAR UNDERLYING LIABILITY OF RS.52 CORES. THIS IS AN UNDISPUT ED FACT AND IN FACT ACCEPTED EVEN BY THE ASSESSING OFFICER. IN THE LIG HT OF THE ABOVE, IT IS THE BURDEN OF THE ASSESSING OFFICER TO SHOW WITH PROPER AUTHORITY THAT THE RECEIPT UNDER CONSIDERATION WOULD CONSTITUTE INCOME AND IN THE ABSENCE OF ANY SUCH AUTHORITY EITHER IN THE ACCOUNTING PRINCIPLE OR IN THE ACCOUNTING STANDARD S LAID DOWN BY THE CBDT OR BY ANY PRECEDENT OF CASE LAW, THE SAME CANNOT BE TREATED AS INCOME. THE CONCLUSION ARRIVED AT BY THE ASSESSING OFFICER THAT THE AMOUNT OF RS.12 CRORES IS INCOME EARNED BY THE ASSESSEE, IS TOTALLY BASELESS, ARBITRARY AND IS OPPOSED TO REALITY AND IS NOT JUSTIFIABLE IN THE FACT S AND CIRCUMSTANCES OF THE CASE. HENCE, IN THE LIGHT OF THE ABOVE SUBMISSIONS, THE ASSESSEES COUNSEL SUBMITTED THAT THE ORDER OF THE LEARNED CIT(A) HOLDING THE RECEIPT OF RS.12 CRORES AS WELL AS PAYMENT OF RS.12.50 CRORES BOTH TOBE CAPITAL IN NATURE BE CONFIRMED. 9. AS REGARDS THE FIRST GROUND IN THE ASSESSEES APPEAL I.E . DISALLOWANCE OF CLAIM OF LOSS OF RS.50 LACS INCURRED BY THE ASSESSEE ON SETTLEMENT OF ITS FUTURE LIABILITY TO VST INDUSTRIES L TD., THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT AS ALREADY SUBMITTED THE ASSESSEE ENTERED INTO AN AGREEMENT WITH VST WHEREBY IT HAS RECEIVED FINANCIAL ASSETS WORTH RS.12 CRORES AGAINST WHICH IT HAD UN DERTAKEN TO 13 REPAY AN AMOUNT OF RS.52 CRORES TO VST OVER A PERIOD O F NOT LESS THAN 12 YEARS. HOWEVER, IN MARCH, 1999 ST INDUSTRIES MADE A PROPOSAL TO THE ASSESSEE COMPANY TO SETTLE THE FUTURE LIABILITY OF RS. 52 CRORES IMMEDIATELY BY PAYMENT OF RS.12.5 CRORES, SINCE VST WAS IN URGENT NEED OF CASH. HOWEVER, IN MARCH 1999 VST INDUSTRIES MA DE A PROPOSAL TO THE ASSESSEE COMPANY TO SETTLE THE FUTURE LIABILITY OF RS.52 CRORES, IMMEDIATELY BY PAYMENT OF RS.12.5 CRORES, SINCE VST WAS I N URGENT NEED OF CASH. THE SAID PROPOSAL WAS ACCEPTED BY TDIL AND HENCE THE DIFFERENCE OF RS.50 LAKHS BETWEEN THE INITIAL AMOUNT R ECEIVED BY IT AND THE ULTIMATE LIABILITY AGREED UPON WAS DEBITED TO TH E P&L A/C UNDER THE HEAD SETTLEMENT LOSS AND WAS CLAIMED AS A DEDUCTION. IN THIS REGARD IT IS ALSO TO BE SUBMITTED THAT AS AGAINST THE ABOVE SAID C LAIM OF LOSS OF RS.50 LAKHS THE ASSESSEE HAD OFFERED INCOME ACCRUED ON ICICI BONDS OF RS.50 LAKHS AND FURTHER INTEREST ACCRUED ON WOODLANDS OF RS.33.86 LAKHS. 10. THE ASSESSING OFFICER HOWEVER DISALLOWED THE CLAIM OF LOSS HOLDING THAT THE RATIFICATION OF THE PROPOSAL AND ACCEPTANCE WAS MADE BY THE BOARD ONLY DURING THE NEXT FINANCIAL YEAR I.E. 1998- 99. THE ASSESSING OFFICER ALSO HELD THAT THE SALE OF INVESTMENTS HAS ALSO N OT TAKEN PLACE DURING THE PREVIOUS YEAR 31.3 1999 AND THE AMOUNTS WERE ALSO PAID BY THE ASSESSEE COMPANY TO VST INDUSTRIES ONLY DURING THE SUB SEQUENT YEAR I.E. IN JUNE 1999. FURTHER, THE SETTLEMENT AND THE CONSEQUENT LIABILITY IS NOT REFLECTED IN THE BOOKS OF ACCOUNTS OF VS T AS ON 31.3.99, EVEN THOUGH THE ASSESSEE HAS ACCOUNTED FOR THE SAME AS ON 31.3.99. THE ABOVE SAID REASONING OF THE ASSESSING OFFICER ARE CONT AINED IN PARA 2.9 OF THE ASSESSMENT ORDER. IN VIEW OF THE ABOVE THE ASSESSING OFFICER CAME TO THE CONCLUSION THAT NO FINAL SETTLEMENT BETWEEN VST INDUSTRIES AND THE ASSESSEE TOOK PLACE DURING THE FINANCIAL YEAR REL EVANT TO THE ASSESSMENT YEAR 1999-2000 AND THEREFORE THE EXPENDITURE OF RS.12.5 14 CRORES IN THE BUSINESS OF SECURITIZATION OR THE LOSS CLAIMED IN THIS REGARD CANNOT BE ACCEPTED. 11. THE ASSESSEES COUNSEL SUBMITTED THAT THE DISALLOWANCE OF THE CLAIM OF LOSS OF RS.50 LAKHS MADE BY THE ASSESSING OFFICER IS NOT CORRECT FOR THE FOLLOWING REASONS: I) EVEN THOUGH THE RATIFICATION OF THE SETTLEMENT PROPOSA L AND ACCEPTANCE THEREOF WAS MADE BY THE RESPECT BOARD OF DIRECT ORS DURING THE NEXT FINANCIAL YEAR, ESSENTIALLY THEY HAVE BEEN DONE AS PART OF FINALIZATION OF ACCOUNTS FOR THE YEAR ENDING 31.3.99 AND HENCE RELATE BACK TO THE FINANCIAL YEAR ENDING 31 .3.1999. WE WOULD ALSO LIKE TO SPECIFICALLY MENTION THAT THE BOA RD MEETING HELD ON 8.5.1999 REFERRED TO AND RELIED UPO N BY THE ASSESSING OFFICER WAS IN FACT FOR THE PURPOSE OF FINALIZATI ON OF ACCOUNTS AND ADOPTION OF ACCOUNTS FOR THE YEAR ENDING 31. 3.99. THE RATIFICATION FOR THE RESOLUTION FOR SETTLEMENT HAD TAKEN PLACE IN THE PROCESS OF SUCH FINALIZATION OF ACCOUNTS AND EHNCE IS CLEARLY PERTAINING TO THE YEAR ENDING 31.3.99. II) THE ASSESSING OFFICER OBSERVATION THAT THE INVESTMENTS HELD BY THE ASSESSEE COMPANY HAD NOT TAKEN PLACE BEFORE THE END O F THE FINANCIAL YEAR HAS NO RELEVANCE AT ALL FOR DETERMI NING WHETHER THE SETTLEMENT HAS TAKEN PLACE WITH VST. THE SETTLEMENT OF LIABILITY IS TOTALLY AN INDEPENDENT TRA NSACTION AND HAS NOTHING TO DO WITH THE SALE OF INVESTMENTS. III) SIMILARLY THE OBSERVATION THAT THE PAYMENT OF THE LI ABILITY SETTLED AT RS.12.5 CRORES WAS MADE DURING THE NEXT FINAN CIAL YEAR HAS ALSO NO RELEVANCE AS TO THE POINT OF TIME AT W HICH THE LIABILITY HAS BEEN SETTLED AND THE LIABILITY HAS ACCRUE D. IT IS A WELL SETTLED PRINCIPLE OF LAW THAT THE LIABILITY MAY ARISE OR MAY BE SETTLED ON A PARTICULAR DATE AND THE SAME MAY BE CON CLUDED BY WAY OF PAYMENT IN A SUBSEQUENT PERIOD. UNDER THE 15 MERCANTILE/ACCRUAL SYSTEM OF ACCOUNTING WHAT IS RELEVANT I S THE SETTLEMENT OF LIABILITY AND NOT ITS PAYMENT. IN THE PRESENT CASE AS THE FACTS SHOW CLEARLY, THE PARTIES HAVE CLEARLY AGREE D FOR SETTLEMENT OF THE LIABILITY AS ON 31.3.1999. IN FACT THE SUBSEQUENT EVENT OF PAYMENT OF THE SAME IN JUNE 1999 W OULD ONLY ENHANCE THE CLAIM OF GENUINENESS OF THE TRANSACTIO N RATHER THAN DEFEAT IT. IV) THE OBSERVATION THAT VST INDUSTRIES HAS SOT ACCOUNTED FOR SETTLEMENT TRANSACTION AS ON 31.3.1999 SHOULD NOT RESULT IN ANY ADVERSE INFERENCE AGAINST THE ASSESSEE SINCE VST HAD NOT FOLLOWED PARTLY WISE ACCOUNTING OF THE TRANSACTION AND HAS INSTEAD FOLLOWED PARTY WISE ACCOUNTING OF THE TRANSACTION AND HAS INSTEAD ACCOUNTED FOR THE TRANSACTION UNDER THE HEAD INVESTMENTS. AS HELD BY THE SUPREME COURT IN THE CASE OF EMPIRE JUTE CO. LTD. VS. CIT (124 ITR 1 PAGE 7) ENTR IES IN THE BOOKS OF ACCOUNTS OF THE CREDITOR CANNOT BE DETERMINATIVE OF THE NATURE OF TRANSACTION. RELEVANT OBSERVATIONS OF TH E COURT ARE AS BELOW: IT IS ALSO SETTLED LAW THAT TREATMENT IN THE BOOKS OF ACCOUNTS IS NOT RELEVANT FOR DETERMINING TAXABILITY OF AN AMOUN T AND ONE NEEDS TO LOOK INTO THE NATURE AND CHARACTER OF A RE CEIPT OR PAYMENT TO DECIDE THE TREATMENT FOR TAX PURPOSES. THEREFORE THE ACCOUNTING TREATMENT MADE BY PFIZER HAS NO RELEVANC E TO DECIDE THE ISSUE UNDER CONSIDERATION. IN VIEW OF THE ABOVE, THE ASSESSEES COUNSEL REITERATES HIS SUBMISSION THAT THE TRANSACTION OF SETTLEMENT HAD GENUINELY TAKE N PLACE AS ON 31.3.1999 AS IS ALSO CLEAR FROM THE SUBSEQUENT EVENTS AND HENCE HAS TO BE ACCEPTED. FURTHER THE ASSESSING OFFICER CANNOT CHOOSE TO ACCEPT A PART OF THE TRANSACTION NAMELY THE INCOME OFFERED AND IGNORE THE OTHER PART OF CLAIM REGARDING EXPENDITURE. THIS WOULD NOT ONLY VIOLATE THE 16 MATCHING PRINCIPLES BUT WOULD ALSO BE RESULTING IN GRO SS RECEIPTS BEING TAXED INSTEAD OF THE REAL INCOME WHICH ONLY CAN BE THE SUBJECT MATTER OF TAX UNDER THE INCOME TAX ACT. THE LEARNED COUNSEL FOR THE ASSESSEE PRAYED FOR DELETION OF THE ADDITION OF RS.50 LAKHS. 12. THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT FOR THE SAME REASONS AND CONTENTIONS PUT FORTH BY HER IN THE RE VENUES APPEAL, IT SHOULD BE HELD THAT NO FINAL SETTLEMENT BETWEEN T HE VST INDUSTRIES AND TDIL AS CLAIMED BY THE ASSESSEE TOOK PLACE DURING THE FINANCIAL YEAR 1998-99 RELEVANT FOR THE ASSESSMENT YEAR 1999-2000. IT IS CONTENDED BY HER THAT THE SO CALLED EXPENDITURE OF RS.12.50 CROR ES IN THE BUSINESS OF SECURITIZATION OF THE ASSESSEE-COMPANY OR THE LOSS CLAIMED IN THIS REGARD CANNOT BE ACCEPTED. THE AMOUNT OF RS.12 CRORES E ARNED IN THE FORM OF ICICI BONDS AND SECURITIZED DEBT DUE FROM WOOD LANDS WAS RIGHTLY TREATED AS INCOME OF THE ASSESSEE AND CONSIDERED F OR THE ASSESSMENT YEAR 1999-2000. SHE PRAYED FOR CONFIRMING TH E ACTION OF THE ASSESSING OFFICER IN THIS REGARD. 13. AS REGARDS THE NEXT GROUND OF APPEAL OF THE ASSESSE E AGAINST DISALLOWANCE OF SETTLEMENT CLAIM OF RS.56.5 LAKHS BEING SE TTLEMENT MADE WITH QUEST SECURITIES LTD. AND SIFCO, IT WAS SUBMITTED B Y THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE ASSESSEE COMPANY ENTERED INT O FINANCIAL SERVICES BUSINESS AND NSE MEMBERSHIP THROUGH M EMORANDUM OF UNDERSTANDING ENTERED INTO ON 19.6.1995 WITH MR.P .MURALIKRISHNA, CHENNAI FINANCE LIMITED AND QUEST SECURITIES LIMITED. THE ASSESSEE SUBMITS THAT THE ASSESSING OFFICERS DISALLOWANCE OF THE SAME IS BASED UPON MERE SUSPICION AND SURMISES AND IS NOT BASED ON ANY EV IDENCE TO DISBELIEVE THE SAME. HOWEVER, THE SAID BUSINESS VENTURE RAN INTO A TROUBLE ON ACCOUNT OF VARIOUS REASONS INCLUDING THE CRISIS I N CAPITAL MARKETS. IN THE PROCESS THE SAID COMPANY QUEST SECURITIES L TD. AND ITS ASSOCIATE COMPANY SIFCO MADE VARIOUS CLAIMS ON THE ASSESSEE 17 COMPANY, WHICH WOULD HAVE RESULTED IN PROTRACTED LEGAL PROCEEDINGS AND LITIGATION. THE ASSESSEE HAS EXPLAINED THE BACKGROUND AN D DETAILS OF THE SAID TRANSACTION BEFORE THE ASSESSING OFFICER VIDE ITS LETT ER DT.21-3-2002 TO WHICH THE ASSESSING OFFICER MADE REFERENCE IN HIS ASSESSME NT ORDER. ASSESSEES COUNSEL SUBMITTED THAT IN THE LIGHT OF THE DIFFI CULTIES FACED BY THE ASSESSEE ON ACCOUNT OF ITS DIVERSION INTO VARIOUS FINA NCIAL SERVICE BUSINESS AND WITH A VIEW TO QUIT THE BUSINESSES AND PUT A N END TO AL SUCH LITIGATIONS THE ASSESSEE COMPANY REFERRED THE DISPUTE S WITH QSL FOR ARBITRATION AND AS PER THE ARBITRATORS AWARD PAID AN AMOUNT OF RS.47.50 LACS TO SIFCO AND RS.9 LACS TO QSL IN FULL AND FINAL SETT LEMENT OF THEIR CLAIMS. THE SAID AMOUNT HAD BEEN PAID BY THE COMPANY O NLY WITH A VIEW TO PUT AN END TO ALL LITIGATIONS AND AVOID FURTHER L OSSES. IT IS FURTHER SUBMITTED THAT THE SAID DECISION WAS TAKEN BY THE ASSESSEE IN GOOD FAITH ON ACCOUNT OF COMMERCIAL EXPEDIENCY AND HENCE IS ALLOWABLE AS A DEDUCTION WHILE COMPUTING ITS INCOME. THE LEARNED COUN SEL SUBMITTED THAT THE ASSESSING OFFICERS ACTION IN DISALLOWANCE OF THE SA ME IS BASED UPON MERE SUSPICIONS AND SURMISES AND IS NOT BASED ON ANY EV IDENCE TO DISBELIEVE THE SAME. IT IS SUBMITTED THAT THE VARIOUS REASONS ADDUCED IN THE ASSESSMENT ORDER FOR DISALLOWANCE OF THE ABOVE SAID CL AIM AREA ALL EXTRANEOUS AND DO NOT DISPROVE THE CLAIM OF THE ASSESSEE OF BUSINESS EXPEDIENCY. THE ASSESSING OFFICER FAILED TO APPRECIATE T HAT INITIATION OF A LEGAL ACTION CANNOT BE DONE UNIFORMLY IN ALL CASES AND T HE PRUDENCE OF THE ASSESSEE CANNOT BE QUESTIONED. IT WAS FURTHER SUBMITTE D THAT IT IS A FULLY OWNED SUBSIDIARY COMPANY IN WHICH PUBLIC ARE INTE RESTED AND WHICH IS RUN BY PROFESSIONAL MANAGERS. THE DECISIONS OF THE BOA RD OF DIRECTORS OF THE PARENT COMPANY AND THE ASSESSEE COMPANY ARE ALL DO NE BY INDEPENDENT PROFESSIONAL MANAGERS AND HENCE HE GENUINEN ESS OF SUCH TRANSACTIONS ARE BEYOND DOUBT. SUMMING UP HIS ARGUMENT S, THE LEARNED COUNSEL SUBMITTED THAT THE LOSS OF RS.56.50 LACS WAS GENUINE LY INCURRED BY THE ASSESSEE AND IS THEREFORE ALLOWABLE AS A DEDUCTION AND PRAYED FOR THE DELETION OF THE DISALLOWANCE MADE IN THIS REGARD. 18 14. THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT AS SEEN FROM THE ACCOUNTS, ONE M/S PATHEJA FORGING AND AUTO MA NUFACTURING PVT.LTD. OWESRS.25.49 LACS AND DEFAULTED IN PAYING FURT HER LEASE RENTALS. SHE FURTHER SUBMITTED THAT AS RIGHTLY HELD BY THE ASSESSI NG OFFICER THAT THOUGH THIS IS SAID TO BE A SICK COMPANY, TDIL WAS SAID TO HAVE RESOLVED IN ITS BOARD MEETING HELD ON 28-9-1998 TO TAKE APPRO PRIATE LEGAL PROCEEDINGS AGAINST THE SAID COMPANY INCLUDING WINDING U P PETITION U/S 433 OF THE COMPANIES ACT. BUT IT IS NOT KNOWN WHY SIMI LAR LEGAL ACTION IS NOT CONTEMPLATED AGAINST PMK OR QUEST OF SIFCO WHEN THEY HAD MADE FALSE CLAIMS AGAINST THE ASSESSEE AND SOUGHT HEAVY C OMPENSATION. IT IS ALSO NOT KNOWN WHY PMK HAD MADE CLAIMS AFTER A PE RIOD OF TWO YEARS WHEN THE ASSESSEE WITHDREW FROM JV. IT WAS SUBMIT TED BY THE LEARNED DEPARTMENTAL REPRESENTATIVE THAT AS PER AGREE MENTS OF JV AND SUBSEQUENT DOCUMENTS, TDL WAS NOT AT ALL BINDING FOR ANY ACTIONS OR LOSSES OF QUEST/SIFCO FROM THE VERY BEGINNING. FINALL Y, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT IN VIEW OF THE FOREGOING, THERE IS NO MERIT IN THE DOCUMENTS PRODUCED IN CONNECTION WITH THE SO CALLED CLAIM AND SUBSEQUENT SETTLEMENT OF CLAIMS AND THAT THE CLAIM OF RS.56.50 LACS TOWARDS CLAIMS SETTLED HAS RIGHTLY BEEN DI SALLOWED BY THE ASSESSING OFFICER. SHE PRAYED THAT THE ORDER OF THE ASSESSI NG OFFICER BE RESTORED IN THIS REGARD. 15. AS REGARDS THE LAST GROUND OF APPEAL AGAINST DISALLOWANCE OF RS.7.50 LAKHS BEING PROFESSIONAL FEES PAID TO SIFCO, THE CIT(A) HELD THAT FIRST OF ALL THE ASSESSEE HAS NOT PRODUCED ANY EVIDEN CE TO SHOW THAT SIFCO HAS ACTUALLY RENDERED SERVICES IN THIS REGARD. SE CONDLY, EVEN IF IT IS ASSUMED THAT SIFCO HAS RENDERED SOME SERVICES TO THE ASSESSE E COMPANY, ADMITTEDLY THIS IS IN CONNECTION WITH MAKING IN VESTMENTS. THE CIT(A) HELD THAT ANY PAYMENT MADE FOR CONSULTANCY SERVICES IN THIS FIELD IS TO BE TREATED A CAPITAL EXPENDITURE ONLY. R ELYING ON THE DECISION 19 OF THE HONOURABLE SUPREME COURT IN THE CASE OF BROOKBO ND INDIA LIMITED 225 ITR 798 (SC) LAYING DOWN THE PRINCIPLE T HAT ANY EXPENDITURE DIRECTLY RELATED TO THE CAPITAL FABRIC OF THE COMPANY I S CAPITAL EXPENDITURE EVEN THOUGH IT MAY INCIDENTALLY HELP IN THE BUSINESS OF THE COMPANY AND IN THE PROFIT MAKING. THUS, THIS GROUND O F THE ASSESSEE WAS REJECTED BY THE CIT(A). AGGRIEVED BY THIS ORDER OF THE CIT(A), THE ASSESSEE IS IN APPEAL BEFORE US. 16. THE LAST GROUND OF APPEAL IS AGAINST THE DISALLOWAN CE OF RS.7.50 LACS BEING PROFESSIONAL FEES PAID TO SIFCO. THE ASSESSEES COUNSEL SUBMITTED THAT IT HAD RETAINED THE SERVICES OF SIFCO FO R PROVIDING VARIOUS ADVISORY AND CONSULTANCY SERVICES FOR INVESTMENTS IN FINANCIAL SERVICES AND THAT THE DISALLOWANCE OF THE SAID EXPENSES BY THE ASSESSING OFFICER WAS WITHOUT ANY BASIS AND MERELY MADE ON THE BA SIS OF SUSPICIONS AND SURMISES. IT WAS SUBMITTED THAT THE EXPENSE S HAVE BEEN GENUINELY INCURRED AND, THEREFORE, THE SAME QUALIFIES FOR DEDUCTION. HE PRAYED FOR THE DELETION OF THE SAID EXPENSES. 17. THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTE D WITH REGARD TO THE LAST GROUND OF APPEAL AGAINST DISALLOWANCE OF RS.7.50 LAKHS, BEING PROFESSIONAL FEES PAID TO SIFCO, THE CIT(A) HELD THAT FIRST OF ALL THE ASSESSEE HAS NOT PRODUCED ANY EVIDENCE TO SHOW THAT SIF CO HAS ACTUALLY RENDERED SERVICES IN THIS REGARD. SECONDLY, EVE N IF IT IS ASSUMED THAT SIFCO HAS RENDERED SOME SERVICES TO THE ASSESSEE COMPANY, ADMITTEDLY THIS IS IN CONNECTION WITH MAKING IN VESTMENTS. THE CIT(A) HELD THAT ANY PAYMENT MADE FOR CONSULTANCY SERVICES IN THIS FIELD IS TO BE TREATED A CAPITAL EXPENDITURE ONLY. R ELYING ON THE DECISION OF THE HONOURABLE SUPREME COURT IN THE CASE OF BROOKBO ND INDIA LIMITED 225 ITR 798 (SC) LAYING DOWN THE PRINCIPLE T HAT ANY EXPENDITURE DIRECTLY RELATED TO THE CAPITAL FABRIC OF THE COMPANY I S CAPITAL EXPENDITURE EVEN THOUGH IT MAY INCIDENTALLY HELP IN THE BUSINESS OF THE 20 COMPANY AND IN THE PROFIT MAKING. THUS, THIS GROUND O F THE ASSESSEE WAS RIGHTLY REJECTED BY THE CIT(A). SHE PRAYED FOR CO NFIRMING THE ORDER OF THE LEARNED CIT(A) ON THIS ISSUE. 18. FINDINGS ON REVENUE APPEAL 1233/HYD/2005 AND GR OUND NO.1(A), (B) AND (C) OF ASSESSEES APPEAL NO.1234/H YD/2005: 18.1 WE HAVE HEARD BOTH SIDES AND PERUSED THE MATERIAL ON RECORD. IN THE PRESENT CASE, THE ASSESSEE IS ENGAGED IN THE BUSINESS OF SECURITIZATION OF DEBTS. IN THE COURSE OF THIS BUSINESS, TH E ASSESSEE- TDIL HAD TAKEN THE RESPONSIBILITY OF SETTLING THE DUES OF RS.52 CRORES OF VST INDUSTRIES LTD. ON ACCOUNT OF INVESTMENT MADE BY THE M IN THE ITC GROUP OF COMPANIES I.E., ITCATF FOR A CONSIDERATION OF RS.12 CRORES THROUGH A TRIPARTITE AGREEMENT SINCE THE VST WAS FACING SEVERE FINANCIAL CRISIS THE SAID LIABILITY IS REQUIRED TO BE SETTLED BY TH E ASSESSEE IN ONE STRETCH AT RS.12.50 CRORES VIDE ITS LETTER DT.30-3-1999 W HICH WAS ACCEPTED BY TDIL VIDE ITS LETTER DT.31-3-1999, WHICH IS AS FOLLOWS. S.NO. DATE OF PAYMENT AMOUNT RS. 1 9.6.99 RS.10,000.000 2. 14.6.99 25,00,000 3. 4.6.99 94,007,013 4. 30.3.2000 5,000,000 5. BALANCE OUTSTANDING AS 13,492,987 AS ON 31.3.2000 TOTAL RS. 12,50,0 0,000 FOR TAKING OVER THE LIABILITY OF RS.52 CRORES OF ITCAT F BY THE ASSESSEE, IT IS ENTITLED TO A CONSIDERATION OF 12 CRORES WHICH SHALL BE RECEIVED AS FOLLOWS: THE CONSIDERATION OF RS.12 CRORES WAS RECEIVED BY NPL AS UN DER: I) BANKERS CHEQUE OF RS.8 CRORES 21 II) ASSIGNMENT ON DEBT FROM WOODLAND RESORTS (P) LTD., RS. 4 CRORES 19. NPL UTILIZED THE AMOUNT OF RS.8 CRORES MENTIONED A S ABOVE TO SUBSCRIBE TO 20,000 ICICI MONEY MULTIPLIER BONDS OF FACE VALUE OF RS.8,000/- EACH AGGREGATING TO RS.8 CRORES. VST WAS IN T HE PROCESS OF DIVESTING OUT OF NPL. HENCE, THE BUSINESS ARRANGEMENT BE TWEEN VST AND NPL AND NPL AND ATF WAS SUBSTITUTED BY A TRIPARTIT E AGREEMENT DATED 21.9.98 BETWEEN VST NPL AND TDIL. IT IS AT TH IS JUNCTURE THAT THE ASSESSEE COMPANY I.E. TDIL COMES INTO PICTURE. UNDER THE T ERMS OF THIS AGREEMENT TDIL TOOK OVER THE LIABILITY OF NPL TO PA Y VST RS.52 CRORES OVER A PERIOD NOT LATTER THAN 12 YEARS AND FOR THIS IT RECEIVED FINANCIAL ASSETS WORTH RS.12 CRORES FROM NPL AS UNDER I) ICICI MONEY MULTIPLIER BONDS OF RS.8 CRORES II)ASSIGNMENT OF DEBTS FROM WOODLANDS RESORTS (P) LTD., RS.4 CRORES 20. MEANWHILE VST WAS PASSING THROUGH SEVERE CASH CRUNCH AND THEREFORE, IT MADE A PROPOSAL TO TDIL SO THAT THE LI ABILITY OF RS.52 CRORES OVER A PERIOD OF 12 YEARS SHOULD BE SETTLED IN FULL AN D FINAL MANNER FOR A CONSIDERATION OF RS.12.50 CRORES. THIS PROPOSAL VIDE LETT ER DATED 30.3.1999 WAS ACCEPTED BY TDIL VIDE ITS LETTER DATED 31 .3.1999. CONSEQUENTLY, TDIL PAID VST AS UNDER: S.NO. DATE OF PAYMENT AMOUNT RS. 1 9.6.99 RS.10,000.000 2. 14.6.99 2,500.00 3. 4.6.99 94,007,013 4. 30.3.2000 5,000,000 5. BALANCE OUTSTANDING AS 13,492,987 AS ON 31.3.2000 22 TOTAL RS. 12,50,00,000 THE ASSESSING OFFICER TREATED THE ABOVE AMOUNT OF RS.12. 50 CRORES AS THE INCOME OF THE ASSESSEE AS A REVENUE RECEIPT. HOWEVER, HE CIT(A) TREATED THE SAME AS CAPITAL RECEIPT. FURTHER, THE CT(A ) TREATED THE PAYMENT OF RS.12 CRORES TO VST ALSO AS A CAPITAL RECEIPT A S AGAINST THE ASSESSING OFFICER TREATING THE PAYMENT OF RS.12 CRORES AS NO T REVENUE EXPENDITURE IN THE ASSESSMENT YEAR UNDER CONSIDERATION SIN CE NO FINAL SETTLEMENT BETWEEN VST INDUSTRIES LTD AND TDIL TOOK PL ACE. 21. IN THE PRESENT CASE, AN AMOUNT OF RS.12.5 CRORES HA BEEN RECEIVED ON ACCOUNT OF SECURITIZATION OF DEBT. NOW, THE CONTROVE RSY S WHETHER THIS RECEIPT IS A CAPITAL RECEIPT OR REVENUE RECEIPT. T HE RECEIPT WOULD BE ON CAPITAL ACCOUNT WHERE THE TRANSACTION MERELY AMOUNTS TO CHANGE OF INVESTMENT OR IS FOR THE PURPOSE OF REALIZATION OF CAPI TAL. WHERE, HOWEVER, SUCH TRANSACTION IS ONE ENTERED INTO IN THE ORD INARY COURSE OF BUSINESS IT WOULD BE A REVENUE RECEIPT. WHEN ANY INCOME IS GENERATED WHILE CARRYING ON OR CARRYING OUT OF ASSESSEES BUSINESS IN T HE NORMAL COURSE OF BUSINESS, IT WOULD BE A REVENUE RECEIPT. WE HA VE TO SEE WHETHER THE SAID GAIN THAT HAS BEEN MADE A MERE ENHA NCEMENT OF VALUE BY REALIZING A SECURITY OR IS IT A GAIN MADE IN THE OP ERATION OF BUSINESS IN CARRYING OUT A SCHEME FOR PROFIT MAKING. IF A TRANSACT ION HAS BEEN MADE AS A BUSINESS TO MAKE PROFIT AND BY DEALING IN SUCH TRANSA CTION AS A BUSINESS, MAKES A GAIN THAT IS NOT A CASE OF MERE REALIZA TION OF ASSETS OR CONVERSION OF ONE FORM OF ASSET INTO ANOTHER BUT WILL CL EARLY FALL WITHIN THE NET OF TAX. IN THE PRESENT CASE, THE ASSESSEES MAIN B USINESS IS SECURITIZATION OF DEBT AND THAT IN THE COURSE OF THIS BU SINESS THE ASSESSEE HAD TAKEN THE LIABILITY OF PAYMENT TO VST INDU STRIES OF RS.52 CRORES FOR A CONSIDERATION OF RS.12.50 CRORES. THAT RS.52 CRORES HAS BEEN FINALLY SETTLED BY THE ASSESSEE BY PAYING RS.12.50 CR ORES AS 23 AGAINST RECEIPT OF RS.12 CRORES AS DISCUSSED EARLIER. THE RECEIPT OF RS. 12 CORES BY THE ASSESSEE IS AN ADVENTURE IN THE NATURE OF TRADE. AS SUCH PROFIT WOULD BE ON REVENUE ACCOUNT ONLY. THIS IS BE CAUSE IT IS A TRADING RECEIPT IN THE COURSE OF THE BUSINESS OF THE ASSESSEE AND THE ASSESSEE HAS NOT RECEIVED THIS AMOUNT IN A CAPITAL FIELD. THE RECEIPT IS NOT ASSOCIATED WITH THE STERILIZATION OR INJURY TO THE CAPITAL ASSET OR THAT THE SOURCE OF INCOME CEASED TO EXIST. THE CHARACTER OF THE RECEIPT TO BE JUDGED WITH REFERENCE TO THE REASONS FOR THE COLLECTION AND THE LIABILITY FOR MEETING WHICH THE COLLECTION WAS MADE. IN THE PRE SENT CASE, THE RECEIPT WAS DIRECTLY ASSOCIATED WITH THE ASSESSEES NORMAL BUS INESS OF SECURITIZATION OF DEBTS AND, THUS, THE TRUE CHARACTER OF THE RECEIPT IS A TRADING RECEIPT. IN OUR OPINION, THE CIT(A) IS NOT JUSTIFIED IN TREATING THE RECEIPT AS DIRECTLY ASSOCIATED WITH THE ASSESSEES SECURITIZATI ON BUSINESS AS CAPITAL RECEIPT. ACCORDINGLY, WE REVERSE THE ORDER OF THE CIT(A) ON THIS ISSUE. 22. FURTHER, THE PAYMENT OF 12.5 CRORES BY THE ASSESSEE TO VST INDUSTRIES LIMITED ALSO CANNOT BE TREATED AS CAPITAL EXPE NDITURE AS THIS EXPENDITURE IS MADE TOWARDS THE TRADING TRANSACTION OF THE ASSESSEE IN ITS NORMAL BUSINESS. FURTHER, NOW THE QUESTION IS WHETH ER THIS LIABILITY OF PAYMENT OF 12.5 CRORES ACCRUED ION THE YEAR UNDER AP PEAL. ACCORDING TO THE ASSESSING OFFICER THE PROPOSAL OF PAYMENT OF RS.12. 5 CRORES WAS MADE BY THE HOLDING COMPANY ON 30.3.1999 WAS ACCEPTED B Y THE ASSESSEE ON 31.3.1999. HOWEVER, THE PROPOSAL AND ACCEPTANCE OF THE SAME ARE SUBJECT TO THE RATIFICATION OF THE BOARD OF DI RECTORS OF BOTH THE COMPANIES. THE RATIFICATION OF THE SAID PROPOSAL AND ACCEPTANCE WAS GIVEN IN THE NEXT FINANCIAL YEAR ON 8.5.1999. ACCORDI NG TO THE ASSESSEE THE LIABILITY OF 12.5 CRORES WAS ACCRUED. ACCORDING TO TH E ASSESSING OFFICER THERE WAS NO SINGLE PAYMENT IN THE YEAR UNDER CONSIDERATION. THE PAYMENT STARTED ONLY FROM 9.6.1999 ONWARDS. IT I S FURTHER AN ADMITTED FACT THAT THOUGH THE ASSESSEE HAS SHOWN VST IND USTRIES 24 LIMITED AS CREDITOR AS ON 31.3.1999, WHETHER VST THE H OLDING COMPANY HAS NOT REFLECTED THE FACT OF THE ACCEPTANCE OF THE ASSE SSEE IN THEIR ACCOUNTS BY SHOWING THE ASSESSEE AS A DEBTOR FOR RS.12.5 CROR ES. WE HAVE CAREFULLY GONE THROUGH THE LETTER DATED 30.3.19 99 WRITTEN BY VST TO TDIL WHICH READS AS FOLLOWS: DY. MANAGING DIRECTOR VST INDUSTRIES LTD. MARCH 30,1999 MR. SANJAY KHANNA DIRECTOR TOBACCO DIVERSIFICATION INVESTMENTS LTD. HYDERABAD DEAR SIR, SETTLEMENT OF FUTURE OBLIGATION TO PAY RS.52 CRORES VST INDUSTRIES LTD. (VST) HAD ENTERED INTO A TRIPART ITE AGREEMENT WITH ITC AGROTECH FINANCE AND INVESTMENT LTD (ATF) AND VST NATURAL PRODUCTS LTD. (NPL) DATED MAY 19, 1998 WHEREUPON, NPL HAD AGREED TO TAKE OVER THE LIABILITY OF ATF TO PAY RS.52 CRORES AS P ROVIDED IN THE ABOVE AGREEMENT. SUBSEQUENTLY, YOUR COMPANY HAD ENTERED INTO AN AGREEM ENT ON SEPTEMBER 21, 1998 WITH NPL WHEREUPON YOU HAD AGREE D TO TAKE OVER ICICI BONDS OF THE FACE VALUE OF RS.8 CRORES AND DEBTS DU E FROM WOODLANDS RESORTS (P) LTD. OF RS.4 CRORES AND IN LIEU THE REOF, PAY US AN AMOUNT OF RS.52 CRORES NOT LATER THAN 12 YEARS FROM THE DATE OF THIS AGREEMENT. EVEN THOUGH, VST WOULD PREFER TO RECEIVE 52 CRORES AS P ER THE TERMS AND CONDITIONS OF THE SAID AGREEMENT, THERE IS AN URGEN T NEED TO AUGMENT OUR CASH RESOURCES PARTICULARLY DUE TO WITHDRAWAL OF THE PROPOSED RIGHTS ISSUE DUE TO NO AVAILABILITY OF THE GO VERNMENTAL APPROVAL. WE THEREFORE, PROPOSE THAT IN LIEU OF PAYMENT OF RS.5 2 CRORES OVER A PERIOD NOT LATER THAN 12 YEARS YOU MAY PAY US IMMEDIA TELY AN AMOUNT OF RS.12.50 CRORES IN FULL AND FINAL SETTLEMENT OF AL L YOUR OBLIGATIONS UNDER THE ABOVE AGREEMENT DATED SEPTEMBER, 21 1998. WE SHALL APPRECIATE YOUR CONFIRMATION OF THE ABOVE PROPOSAL. 25 PLEASE NOTE THAT THE ABOVE PROPOSAL MADE BY US IS S UBJECT TO THE NECESSARY APPROVALS AS MAY BE REQUIRED. (EMPHASIS SUPPLIED BY US.) YOURS FAITHFULLY VST INDUSTRIES LIMITED SD/- (S. THIRUMALAI) IN REPLY TO THIS, THE ASSESSEE WROTE A LETTER TO VST IND USTRIES LTD. WHICH IS AS FOLLOWS: TOBACCO DIVERSIFICATION INVESTMENTS LIMITED REGISTERED OFFICE: 1-7-1063/1065 AZAMABAD, HYDERABAD. MARCH 31, 1998 TO MR. S. THIRUMALAI DY. MANAGING DIRECTOR AND SECRETARY VST INDUSTRIES LIMITED HYDERABAD. DEAR SIR, RE: SETTLEMENT OF FUTURE OBLIGATION TO PAY RS.52 CR ORES IN RESPONSE TO YOUR LETTER DATED 30 TH MARCH 1999, WE CONFIRM THAT THE PROPOSAL MADE BY YOU IS ACCEPTABLE TO US. WE SHALL MAKE NECESSARY ARRANGEMENTS TO PAY YOU RS.12.5 CRORES AT THE EARLIEST B Y LIQUIDATING ICICI BONDS AND OTHER INVESTMENTS HELD BY US. PLEASE NOTE THAT THE ABOVE ACCEPTANCE OF YOUR PROPO SAL IS SUBJECT TO THE NECESSARY APPROVAL OF OUR BOARD.(EMP HASIS SUPPLIED BY US) THANKING YOU, YOURS TRULY FOR TOBACCO DIVERSIFICATION INVESTMENTS LTD. 26 SD/- SANJAY KUMAR DIRECTOR THESE LETTERS ARE SUBJECT TO NECESSARY APPROVAL BY COMPETE NT AUTHORITY AND BOTH PARTIES AGREED THAT THESE LETTERS ARE SUBJECT T O NECESSARY APPROVAL AND THERE IS NO FINAL QUANTIFICATION OF THE LIABILITY IN THE YEAR UNDER APPEAL. IT IS ONLY IN THE FORM OF OFFER/PROPO SAL STAGE ONLY. THERE IS NO ACCEPTANCE BY THE OTHER PARTY WHICH IS VERY MUCH NE CESSARY. IN VIEW OF THIS NON ACCEPTANCE WHICH IS NOT ON RECORD, THE L IABILITY DID NOT ACCRUE IN THE YEAR UNDER APPEAL. AS SUCH, IN THE AY UN DER CONSIDERATION THERE IS NO QUESTION OF TREATING ANY PORTION OF CONSIDE RATION OF RS.12.50 CRORES AS INCOME. IN THE RESULT, THE GROUND RAISED BY THE REVENUE IN IT S APPEAL IS ALLOWED AND GROUND NOS.1 (A), (B), (C) IN ASSESSEES APPEAL ARE DISMISSED. 23. FINDING ON GROUNDNO.2(A) AND (B) OF ASSESSEES APPEAL 1234/HYD/2005: 23.1 WE HAVE CAREFULLY GONE THROUGH THE FACTS OF THE CASE AND PERUSED THE MATERIAL ON RECORD. THE PAYMENT OF 47.5 LAKHS T O SIFCO AND RS.9 LAKHS TO QSL ON ACCOUNT OF CAPITAL TRANSITION, THE MOU W AS ENTERED ON 19.6.1995 BY THE ASSESSEE WITH SHRI P.MURALI KRISHNA, C HENNAI FINANCE CO. LTD. AND WITH QSL LTD. ALONG WITH OTHER VST GRO UP OF COMPANIES HOLDING 49% OF EQUITY OF RS.1 CRORE AND BALANCE BEING HELD BY P. MURALI KRISHNA AND QSL. THE OBJECT OF THE MOU WAS TO MAKE IN VESTMENT IN SHARE MARKET AFTER SECURING NSC MEMBERSHIP. LATER, SIF CO CAME INTO PICTURE WHEN TDIL AND VST SOLD THEIR RESPECTIVE HOLDING IN QSL. IT WAS THE WITHDRAWAL OF SUPPORT FROM TDIL/VST IN A DEPRESSED FINANCIAL SITUATION THAT PMK SOUGHT FOR SUITABLE COMPENSATION. ON ARBITRATION 27 TDIL AGREED TO BEAR THE LOSS TO THE TUNE OF RS.56.5 LA KHS. THE PAYMENT OF RS.56.50 LACS IS FOR COMPENSATING CAPITAL OBLIGATION ON THE PART OF TADIL TO THE EFFECTED PARTY. HENCE, THE CIT(A) WAS JUST IFIED IN DISALLOWING THE SAME. THE SAME IS CONFIRMED. THE GROUN D OF ASSESSEE IS DISMISSED. 24. FINDINGS ON GROUND NO. 3(A) AND (B) OF ASSESSEE S APPEAL NO.1234/HYD/2005: 24.1 WE HAVE HEARD BOTH SIDES AND PERUSED THE MATER IAL ON RECORD. AS RIGHTLY OBSERVED BY THE AUTHORITIES BELOW, AND AFT ER GOING THROUGH THE ENTIRE BACKGROUND OF THE MATTER, THE CIT(A) HAS N OTED THAT FIRSTLY, THE ASSESSEE HAS NOT PRODUCED ANY EVIDENCE TO SHOW THAT SIF CO HAS ACTUALLY RENDERED ITS SERVICES IN THIS REGARD. SECONDLY, EVEN IF IT IS ASSUMED THAT SIFCO HAS RENDERED SOME SERVICES TO THE ASSESSEE COMPANY, THE CIT(A) IS OF THE OPINION THAT RENDERING OF SERVICES IS ADMITTEDLY IN CONNECTION WITH MAKING INVESTMENTS. THE REFORE, WHATEVER SERVICES HAVE BEEN PROVIDED ARE IN THE CAPITAL FIELD. ANY PAYMENT MADE FOR CONSULTANCY SERVICES IN THIS FIELD IS THEREFORE TO BE T REATED AS CAPITAL EXPENDITURE ONLY. IN THIS CONTEXT, RATIO OF THE DECISI ON OF THE HONBLE SUPREME COURT IN THE CASE OF BROOKBOND INDIA LTD (225 ITR 798) IS VERY MUCH APPLICABLE. IN THIS CASE THE HONBLE SUPREME COURT HAS LAID DOWN THE PRINCIPLE THAT ANY EXPENDITURE DIRECTLY RELATED T O THE CAPITAL FABRIC OF THE COMPANY IS CAPITAL EXPENDITURE EVEN THOUGH IT MAY INCIDENTALLY HELP IN THE BUSINESS OF THE COMPANY AND IN THE PROFIT MAKIN G. HENCE THE ACTION OF THE ASSESSING OFFICER IS CORRECT IN UPHOLDING THE AMOUNT. ACCORDINGLY, THIS GROUND OF THE ASSESSEE IS DISMISSED. 24.2 IN THE RESULT ITA 1233/HYD/05 BY THE REVENUE IS A LLOWED AND ITA 1234/HYD/05 BY THE ASSESSEE IS DISMISSED. 28 25. NOW WE WILL TAKE UP THE ASSESSEES APPEAL IN ITA NO. 1279/ OF 2005. 26. THE ASSESSEE RAISED THE FOLLOWING GROUNDS. 1. THE LEARNED CIT(A) HAS ERRED IN LAW AND IN THE F ACTS AND CIRCUMSTANCES OF THE CASE IN CONFIRMING THE ADDITION OF RS. 50 LACS BEING THE SURPLUS ON SALE OF ICICI BONDS AS SHORT TERM CAPITAL GAINS. 2. THE LEARNED CIT(A) ERRED IN HOLDING THAT CBDT C IRCULAR NO.2/2002 DT.15-2-2002 IS NOT APPLICABLE TO THE AY UNDER CONSIDER ATION. THE LEARNED CIT(A) ALSO OUGHT TO HAVE NOTED THAT THE SA ID CIRCULAR HAS BEEN ISSUED AFTER REVIEWING THE EARLIER CIRCULARS ISSUED BY THE CBDT ON THE ABOVE SUBJECT AND HENCE IS APPLICABLE EVEN FOR THE AY 19 99-2000 AND 2000-01. THE LEARNED CIT(A) OUGHT TO HAVE NOTED T HAT IN ANY CASE BOARD CIRCULARS ARE APPLICABLE FOR ALL ASSESSMENTS COMPLETED AFTER THE DATE OF ISSUE OF SUCH CIRCULAR AND HENCE THE ASSESSING OFFICER OUGHT TO HAVE FOLLOWED THE SAID CIRCULAR. 3.A THE LEARNED CIT(A) ERRED IN FACTS IN HOLDING TH AT THE SURPLUS WAS NOT OFFERED AS BUSINESS INCOME FOR THE AY 1999-2000 WHEN IN FACT THE SAME WAS OFFERED AS BUSINESS INCOME AND ALSO ACCEPTED IN THE ASSESSME NT FOR THE ASSESSMENT YEAR 1999-2000. 3.B THE LEARNED CIT(A) OUGHT TO HAVE NOTED THAT SI NCE THE SAME INCOME WAS ALREADY OFFERED TO TAX IN THE EARLIER AY 1999-20 00 ALSO AND ACCEPTED IN THE ASSESSMENT THE SAME INCOME CANNOT BE TAXED TWICE IN TWO DIFFERENT YEARS. 27 . BRIEF FACTS OF THE CASE ARE THAT DURING THE YEAR THE ASSE SSEE COMPANY HAS SOLD 20,000 ICICI BONDS AT RS.4,250 AND REAL IZED RS.8,50,000. THE SAME WERE ACQUIRED BY THE ASSESSEE IN T HE IMMEDIATELY PRECEDING YEAR FOR RS.8 CRORES. AS SEEN FROM THE CONTRACT NOTE AND SUBSEQUENT CONFIRMATION LETTER, THESE BONDS WER E SOLD ON PRINCIPLE TO PRINCIPLE BASIS TO DARSHAW & CO.LTD. ON 29- 4-1999 WHICH WERE ACTUALLY SOLD ON 3-5-1999 @ RS.4,250 PER BOND. I T WAS OBSERVED BY THE ASSESSING OFFICER THAT THE 0% OF ICICI 2009 BONDS WOULD MATURE ON 18-6-2009 @ RS.16,000 PER BOND. THESE BONDS DO NOT CARRY ANY COUPON RATE OF INTEREST ARE TRADABLE. NO INTEREST IS P AYABLE ON THE 29 SAME. SINCE THE SAID BONDS WERE SOLD DURING THE YEAR T HE PROFIT OF RS.50 LACS ( RS.8.50 CRORES RS.8 CRORES) IS ASSESSABLE AS SHORT TERM CAPITAL GAIN FOR THE AY 2000-01. ACCORDING TO THE ASSESSE E NO INTEREST ACCRUED ON THE SAID BONDS AND THE SURPLUS OF RS.50 LACS EAR NED ON SALE OF THE SAME DURING THE CURRENT YEAR HAS TO BE ASSESSED UND ER THE HEAD CAPITAL GAIN IRRESPECTIVE OF THE FACT THAT IT WAS RIGH TLY OR WRONGLY, OFFERED THE SAME FOR TAX FOR ASSESSMENT YEAR 1999-2000. ACCORDINGLY, THE ASSESSING OFFICER BROUGHT THE SAME TO TAX AS SHORT TERM CAPITAL GAIN. FURTHER APPEAL TO THE CIT(A), HE HAS CONFIRMED THE OR DER OF THE ASSESSING OFFICER. 28.FINDINGS ON ASSESSEES APPEAL IN ITA NO.1279/HYD /2005: 28.1 WE HAVE HEARD BOTH SIDES AND PERUSED THE MATERIAL ON RECORD. THE ASSESSEE ACQUIRED 20,000 BONDS FOR A CONSIDERATION OF 8 CRORES IN SEPTEMBER, 1998. THESE BONDS WERE SOLD IN MAY, 1999 F OR RS.8.550 CRORES. THE DIFFERENCE OF RS.50 LAKHS IS ASSESSABLE AS ASSESSEES I NCOME AS SHORT TERM CAPITAL GAINS. THE ASSESSEE CLAIMS TO HAVE OFF ERED THE ACCRUED INCOME ON THE BONDS OF RS.50 LAKHS AS BUSINESS INCOME FOR THE AY 1999-2000. THE CBDT CIRCULAR RELIED UPON BY THE A SSESSEE IS ISSUED ON 15-2-2002 AND THE CLARIFICATIONS ARE NOT APPLICABLE TO THE AY 1999- 2000 AND 2000-01. IT IS A FACT THAT THE BONDS ACQUIRED BY THE ASSESSEE ARE INVESTMENTS AD THE SURPLUS IS HENCE ASSESSABLE AS SHORT TER M CAPITAL GAINS. THE SALE OF THE BONDS HAS TAKEN PLACE IN MAY, 1 999 DURING THE PREVIOUS YEAR RELEVANT FOR THIS AY. THE SURPLUS REALIZ ED OF RS.50 LAKHS IS HENCE ASSESSABLE AS SHORT TERM CAPITAL GAIN FOR THIS ASSESSMENT YEAR. THE ASSESSEES CONTENTION THAT THE SURPLUS IS OFFERED AS BUSIN ESS INCOME FOR THE ASSESSMENT YEAR 1999-2000 HAS NO BASIS. THE ASSESSEE S CONTENTION THAT THE REALIZATION OF SALE EFFECTED IN M AY, 1999 IS CONSIDERED FOR THE YEAR ENDING 31-3-1999 IS WITHOUT AN Y LEGAL BASIS. AS NOTED EARLIER, CIRCULAR HAS NO APPLICABILITY TO THE FAC TS AND CIRCUMSTANCES 30 OF THE ASSESSEES CASE AND HENCE NOT APPLIED. THE TRANSACTI ON OF SALE IS EFFECTED IN MAY, 1999 AND HENCE THE INCOME IS CORRECTLY A SSESSED FOR THIS AY 2000-01. THUS, THE LEARNED CIT(A) DIRECTED T HE ASSESSING OFFICER TO DELETE THIS INCOME FROM THE ASSESSMENT YEAR 19 99-2000. THE ASSESSMENT OF THIS INCOME FOR THIS ASSESSMENT YEAR IS CONFIRME D. WE ARE IN AGREEMENT WITH DECISION OF THE LEARNED CIT(A) IN UPHOLDING THE ACTION OF THE ASSESSING OFFICER ON THIS ISSUE. THE SAME IS CO NFIRMED. 29. IN THE RESULT, REVENUES APPEAL ITA NO.1233/HYD/20 05 IS ALLOWED AND THAT OF THE ASSESSEES APPEALS IN ITA NO.1234/HYD/2005 AND IN ITA NO.1279/HYD/2005 ARE DISMISSED. THE ORDER WAS PRONOUNCED IN THE OPEN COURT ON 20-1- 2009. SD/- SD/- N.R.S. GANESAN CHANDRA POOJARI JUDICIAL MEMBER ACCOUNTANT MEMBER. DT/- 20TH NOVEMBER, 2009. *VNR COPY FORWARDED TO: 1. M/S TOBACCO DIVERSIFICATION INVESTMENTS (P) LTD., (NOW MERGED WITH VST DISTRIBUTION, STORAGE AND LEADING CO . (P) LTD., 1-7-1063/1065, AZAMABAD, HYDERABAD. 2 ACIT, CIRCLE 3 (3), HYDERABAD 3. 4 CIT(A)-, IV, HYDERABAD CIT, HYDERABAD. 4. THE D.R., ITAT, HYDERABAD.