M/s. International Bakery Products Ltd., CHENNAI V. ACIT, CHENNAI

ITA 1424/CHNY/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 64467 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 2 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-10-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 03-09-2012
• Assessment Year: 2005-2006
• Appeal Filed On: 08-08-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: K RAJAGOPAL
• Assessee Lawyers: DILIP S DAMLE
• Keywords: Condonation of delay; Revenue expenditure; Capital expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, CHENNAI BEFORE SHRI N.S. SAINI, ACCOUNTANT ME MBER AND SHRI VIKAS AWASTHY, JUDICIAL MEMBER ITA NOS.1418 TO 1420/MDS/2011, 1601/MDS/2012, 1421 TO 1424/MDS/2011 (ASSESSMENT YEARS: 1998-99 TO 2000-01, 2001-02, 200 2-03 TO 2005-06 ) M/S. INTERNATIONAL BAKERY PRODUCTS LTD. NEW NO.34, OLD NO.76, 2A, III FLOOR, C.S.TOWER, BAZULLAH ROAD, T.NAGAR, CHENNAI-600 017. PAN: AAACI3548L VS. THE ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE-II(3), CHENNAI. (APPELLANT) (RESPONDENT) APPELLANT BY : MR. DILIP S.DAMLE RESPONDENT BY : MR. K.R AJAGOPAL JCIT, DATE OF HEARING : 3 RD SEPTEMBER, 2012 DATE OF PRONOUNCEMENT : 31 ST OCTOBER, 2012 O R D E R PER BENCH: THE PRESENT SET OF EIGHT APPEALS FILED BY THE ASSESSEE RELEVANT TO THE ASSESSMENT YEAR 1998-99 T O 2005- 06 HAVE COMMON ISSUE REGARDING DISALLOWANCE OF RS. 25 LAKHS BEING AMORTIZATION OF RS.250 LAKHS PAID TO M/ S. AURO FOODS LTD. IN THE YEAR 1997 BY THE ASSESSEE AS A RE STRICTIVE COVENANT. 2. THE ASSESSEE HAD FILED ITA NO.1601/MDS/2012 RELE VANT TO THE ASSESSMENT YEAR 2001-02 WITH THE DELAY OF 34 DAYS. ITA NO. 1418 TO 1424 /MDS/201 1 & ITA NO.1601/MDS/2012 2 THE ASSESSEE HAD FILED PETITION PRAYING FOR CONDONA TION OF DELAY OF 34 DAYS STATING REASONS CAUSING DELAY IN F ILING OF THE APPEAL. THE APPLICATION FOR CONDONATION OF DELAY IS SUPPORTED BY AN AFFIDAVIT. THE D.R. DOES NOT OPPOSE THE APPLI CATION FOR CONDONATION OF DELAY. IN THE INTEREST OF JUSTICE, THE DELAY OF 34 DAYS IN FILING OF THE APPEAL RELEVANT TO THE ASSES SMENT YEAR 2001-02 IS CONDONED AND THE APPEAL IS ADMITTED FOR DISPOSAL ON MERITS. 3. THE BRIEF FACTS OF THE CASE ARE THAT M/S.AURO FO ODS LTD. (HEREINAFTER REFERRED TO AS AFL) IS CARRYING ON THE BUSINESS OF MANUFACTURE AND MARKETING OF BISCUITS AND BAKERY PRODUCTS. M/S. BRITANNIA INDUSTRIES LTD. (HEREINAFT ER REFERRED TO AS BIL) ONE OF THE LEADING INDIAN FMCG FIRM IS A LSO IN THE BUSINESS OF MARKETING OF BISCUITS AND BAKERY PRODUC TS ON PAN INDIA BASIS. ON 20.12.1996 AFL AND BIL ENTERED IN TO AN AGREEMENT REFERRED AS SHAREHOLDERS AGREEMENT TO FORM A JOINT VENTURE COMPANY WITH THE HOLDING OF 49% AND 5 1% EQUITY RESPECTIVELY. PURSUANT TO THE AGREEMENT THE ASSESSEE COMPANY WAS INCORPORATED AS JOINT VENTURE COMPANY (HEREINAFTER REFERRED TO AS JVCO). AS PER THE TE RMS AND ITA NO. 1418 TO 1424 /MDS/201 1 & ITA NO.1601/MDS/2012 3 CONDITIONS OF THE AGREEMENT, AFL TRANSFERRED ITS MANUFACTURING UNDERTAKING AND PRODUCTIVE ASSETS TO THE NEWLY FORMED COMPANY JVCO. FURTHER AS PER THE TERMS AND CONDITIONS OF THE AGREEMENT 50% OF THE PRODUCTION O F JVCO WOULD BE ON ACCOUNT OF AFL AND BIL EACH. SUBSEQUEN TLY, WITH THE EXPANSION OF PRODUCTION CAPACITY OF THE J VCO AT LEAST 80% OF THE PRODUCTION WOULD BE FOR BIL AND TH E REMAINING PRODUCTION FOR AFL. A SUPPLEMENTARY AGRE EMENT DATED 25.9.1997 WAS EXECUTED BETWEEN ALF & BIL WHER EIN IT WAS AGREED BETWEEN THE PARTIES THAT, IN NO CIRCUMST ANCES, AFL WAS ENTITLED TO CLAIM PRODUCTION IN EXCESS OF 4 00 TONS PER MONTH DURING THE TENURE OF JOINT VENTURE AGREEM ENT. FOR ACCEPTING RESTRICTIVE COVENANT AFL AGREED TO RECEI VE SEPARATE CONSIDERATION AS A NON-COMPETE FEE TERMED AS GOODWILL. AN AGREEMENT DATED 25.9.1997 WAS ALSO EXECUTED BETWEEN AFL AND JVCO/ASSESSEE FOR TRANSFER OF AFL S MANUFACTURING UNDERTAKING AND PAYMENT OF AFORESAID GOODWILL. IN ITS ANNUAL ACCOUNTS, JVCO/ASSESSEE WROTE OFF THE CONSIDERATION PAID ON ACCOUNT OF GOODWILL IN 1 0 EQUATED ITA NO. 1418 TO 1424 /MDS/201 1 & ITA NO.1601/MDS/2012 4 ANNUAL INSTALLMENTS OF RS.25 LAKHS EACH STARTING FR OM ASSESSMENT YEAR 1998-99 ONWARDS. 4. THE ASSESSING OFFICER VIDE ASSESSMENT ORDER DATE D 28.12.2005 RELEVANT TO THE ASSESSMENT YEAR 1998-99 DISALLOWED THE AFORESAID CLAIM OF THE ASSESSEE ON T HE GROUND THAT THE ASSESSEE IS NOT A PARTY TO THE RESTRICTIVE COVENANT. RESTRICTIVE COVENANT OPERATES BETWEEN AFL AND BIL O NLY. THUS, THE RESTRICTIVE COVENANT HAS NO IMPLICATIONS ON THE ASSESSEE. THE ASSESSING OFFICER HAS FURTHER OBSERV ED THAT CLAUSE 7.01 OF THE SHAREHOLDERS AGREEMENT STATES T HAT A SEPARATE CONSIDERATION HAS ALREADY BEEN PAID TO AF L BY BIL RELATING TO RESTRICTIVE COVENANT. HOWEVER, THE ASSE SSING OFFICER ADMITTED THAT THE AMOUNT HAS ACTUALLY BEE N PAID BY THE ASSESSEE TO AFL BUT THE ASSESSEE IS NOT ENTITL ED FOR ANY DEDUCTION IN RESPECT OF THE AMOUNT SO PAID. 5. AGGRIEVED BY THE ASSESSMENT ORDER, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A). THE CIT(A) VIDE ORDER DATED 10.6.2011 DISMISSED THE APPEAL OF THE ASSESS EE CITING DIFFERENT REASONS. THE CIT(A) HELD THAT THE AMOUNT PAID BY THE ASSESSEE TOWARDS NON-COMPETE FEE IS CAPITAL IN NATURE. ITA NO. 1418 TO 1424 /MDS/201 1 & ITA NO.1601/MDS/2012 5 THE CIT(A) RELYING ON THE JUDGEMENT OF THE HONBLE SUPREME COURT OF INDIA IN THE CASE OF GUFFIC CHEM PVT.LTD., VS. CIT REPORTED AS 332 ITR 602(SC) DISMISSED THE APPEAL OF THE ASSESSEE. SIMILARLY, FOR THE REMAINING ASSESSMENT YEARS I.E. FROM ASSESSMENT YEAR 1999-2000 TO 2005-06 ALL THE A PPEALS OF THE ASSESSEE WERE DISMISSED BY THE CIT(A) ON SIM ILAR GROUNDS. NOW, THE ASSESSEE HAS APPROACHED THE TRIBU NAL IN SECOND APPEAL IMPUGNING THE ORDER OF THE CIT(A) FOR DIFFERENT ASSESSMENT YEARS IN EIGHT SEPARATE APPEALS. 6. MR. DILIP S.DAMLE APPEARING ON BEHALF OF THE ASS ESSEE SUBMITTED THAT BOTH THE AUTHORITIES BELOW HAVE DISM ISSED THE CLAIM OF THE ASSESSEE CITING DIFFERENT REASONS. THE ASSESSING OFFICER DISALLOWED THE CLAIM OF THE ASSESSEE ON THE GROUND THAT PAYMENT OF RS.250 LAKHS HAS BEEN MADE IN TERM S OF THE AGREEMENT BETWEEN THE AFL AND BIL TO WHICH THE ASSE SSEE WAS NOT A PARTY. THE ASSESSEE IS NOT ENTITLED TO CL AIM ANY DEDUCTION AS EXPENDITURE INCURRED DOES NOT RELATE T O THE BUSINESS OF THE ASSESSEE. ON THE OTHER HAND, THE CIT(A) HELD THAT THE PAYMEN T OF RS.250 LAKHS INDEED HAS BEEN MADE BY THE ASSESSEE TO AFL ITA NO. 1418 TO 1424 /MDS/201 1 & ITA NO.1601/MDS/2012 6 AND THE SAME IS ALSO ACCOUNTED IN THE BOOKS OF THE ASSESSEE. ALTHOUGH THE AMOUNT ACCOUNTED IN THE BOOKS OF THE A SSESSEE IS SHOWN AS GOODWILL IN FACT THE AMOUNT IS PAID B Y THE ASSESSEE TO ALF FOR ACCEPTING RESTRICTIVE COVENANT. HE FURTHER CONTENDED THAT THE CIT(A) HAS ERRED IN COMI NG TO THE CONCLUSION THAT THE AMOUNT PAID REPRESENTS CAPITAL EXPENDITURE WHICH WOULD NEITHER BE CONSIDERED NOR A LLOWED AS REVENUE EXPENDITURE OR DEFERRED REVENUE EXPENDIT URE. THE CIT(A) THUS DID NOT ACCEPT THE ASSESSING OFFICERS REASON FOR DISALLOWING THE ASSESSEES CLAIM BUT UPHELD THE DIS ALLOWANCE ON ENTIRELY DIFFERENT GROUND AND REASONING. SINCE T HE REVENUE HAS NOT FILED ANY APPEAL AGAINST THE ORDER OF THE CIT(A), THE FINDING OF THE ASSESSING OFFICER FOR TH E REASONS OF DISALLOWANCE HAVE BEEN UPSET BY THE CIT(A), WHICH H AS NOW ATTAINED FINALITY. THE A.R. SUBMITTED THAT THE AMO UNT PAID BY THE ASSESSEE IS A DEFERRED REVENUE EXPENDITURE WHIC H IS SPREAD OVER THE PERIOD OF TEN YEARS AND NOT CAPITA L EXPENDITURE AS HAS BEEN HELD BY THE CIT(A). IN ORDE R TO SUPPORT HIS CONTENTIONS, HE RELIED ON THE DECISION OF THE CO- ORDINATE BENCH OF THE TRIBUNAL IN ORCHID CHEMICALS & ITA NO. 1418 TO 1424 /MDS/201 1 & ITA NO.1601/MDS/2012 7 PHARMACEUTICALS LTD. VS. ACIT., REPORTED AS 48 DTR 441 : 7 ITR (TRIB) 601, WHEREIN IT HAS BEEN HELD THAT NON-C OMPETE FEE IS AN ALLOWABLE EXPENDITURE AND CAN BE TREATED AS D EFERRED REVENUE IN NATURE. THE TRIBUNAL WHILE COMING TO THE CONCLUSION HAS RELIED ON THE DECISION OF THE HONBL E SUPREME COURT OF INDIA IN THE CASE OF MADRAS INDUSTRIAL INV ESTMENT CORPORATION LTD. VS. CIT., REPORTED AS 225 ITR 802( SC) AND THE JUDGEMENT OF THE HONBLE DELHI HIGH COURT IN TH E CASE OF CIT VS. EICHER LTD., REPORTED AS 302 ITR 249(DEL). 7. ON THE OTHER HAND, MR. K.RAJAGOPAL APPEARING ON BEHALF OF THE REVENUE SUBMITTED THAT THE CIT(A) HAS PASSED A WELL- REASONED AND DETAILED ORDER AND DISMISSED THE APPEA L OF THE ASSESSEE. THE AMOUNT PAID BY THE ASSESSEE AS NON-CO MPETE FEE CANNOT BE TREATED AS REVENUE EXPENDITURE OR DEF ERRED REVENUE EXPENDITURE. THE COURTS HAVE REPEATEDLY HE LD THAT PAYMENT MADE ON ACCOUNT OF NON-COMPETE FEE IS CAPIT AL IN NATURE WHICH IS NOT AN ALLOWABLE EXPENDITURE. IN O RDER TO SUPPORT HIS CONTENTIONS HE RELIED ON THE JUDGEMENT OF THE HONBLE SUPREME COURT OF INDIA IN THE CASE OF GUFFI C CHEM PVT. LTD., VS. CIT (SUPRA) AND THE JUDGEMENT OF TH E HONBLE ITA NO. 1418 TO 1424 /MDS/201 1 & ITA NO.1601/MDS/2012 8 MADRAS HIGH COURT IN THE CASE OF TAMIL NADU DAIRY DEVELOPMENT VS. CIT., REPORTED AS 239 ITR 142. 8. WE HAVE HEARD THE SUBMISSIONS MADE BY THE RESPEC TIVE PARTIES AND HAVE PERUSED THE JUDGEMENTS REFERRED TO BY BOTH THE SIDES. THE ASSESSING OFFICER VIDE ASSESSMENT OR DER RELEVANT TO THE ASSESSMENT YEAR 1998-99 AND SUBSEQU ENT YEARS HAVE DISALLOWED THE CLAIM OF THE ASSESSEE WIT H RESPECT TO PAYMENT OF GOODWILL/RESTRICTIVE COVENANT FEE PUR SUANT TO SHAREHOLDERS AGREEMENT BETWEEN AFL AND BIL. ACCOR DING TO ADDITIONAL AGREEMENT BETWEEN AFL AND THE ASSESSEE A N AMOUNT OF RS.250 LAKHS HAS BEEN PAID BY ASSESSEE TO AFL AS GOODWILL. THE CIT(A) WHILE DISMISSING THE APPEAL OF THE ASSESSEE HELD THAT THE AMOUNT PAID BY THE ASSESSEE THOUGH TERMED AS GOODWILL IS IN FACT NON-COMPETE FEE PAI D BY THE ASSESSEE, BINDING AFL NOT TO MANUFACTURE ITS PRODUC TS BEYOND THE AGREED QUANTITY. 9. IT IS AN ADMITTED FACT THAT AN AMOUNT OF ` 250 LAKHS HAS BEEN PAID BY THE ASSESSEE TO AFL ON ACCOUNT OF RES TRICTIVE COVENANT AND HAS BEEN SHOWN AS GOODWILL IN THE BOOKS OF ACCOUNTS OF AFL. THE ASSESSEE HAS AMORTIZED THE PAY MENT ITA NO. 1418 TO 1424 /MDS/201 1 & ITA NO.1601/MDS/2012 9 MADE IN TEN ANNUAL INSTALLMENTS OF ` 25 LAKHS EACH STARTING FROM ASSESSMENT YEAR 1998-99 ONWARDS TREATING IT AS DEFERRED REVENUE EXPENDITURE. THE CIT(A) HAS DISALL OWED THE EXPENDITURE TERMING IT AS A CAPITAL EXPENDITURE BY RELYING ON THE JUDGEMENT OF THE HONBLE SUPREME COURT OF INDIA IN GUFFIC CHEM PVT.LTD. VS. CIT (SUPRA). IN THE SAID CASE, TH E HONBLE APEX COURT HAS HELD THAT PAYMENT RECEIVED UNDER THE NEGATIVE COVENANT IS IN THE NATURE OF CAPITAL RECEI PT. IN THE PRESENT CASE, THE ASSESSEE IS A PAYER. THE POINT OF DIFFERENCE BETWEEN THE AFOREMENTIONED JUDGEMENT AND THE INSTA NT CASE IS WITH REGARD TO TREATMENT OF EXPENDITURE IN THE H ANDS OF RECIPIENT AND IN THE HANDS OF PAYER. THEREFORE, TH E RATIO LAID DOWN BY THE HONBLE SUPREME COURT OF INDIA IN THE C ASE OF GUFFIC CHEM PVT. LTD.(SUPRA) IS NOT APPLICABLE IN THE FACTS AND CIRCUMSTANCES OF THE CASE IN HAND. 10. THE ASSESSEE HAS RELIED ON THE JUDGEMENT OF THE HONBLE APEX COURT IN THE CASE OF MADRAS INDUSTRIAL INVESTMENT CORPORATION LTD. VS. CIT., REPORTED AS 2 25 ITR 802. THE A.R. IN ORDER TO FURTHER STRENGTHEN HIS SUBMISSIONS ITA NO. 1418 TO 1424 /MDS/201 1 & ITA NO.1601/MDS/2012 10 HAS FURTHER RELIED ON THE ORDER OF THE CO-ORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF ORCHID CHEMICALS & PHARMACE UTICALS LTD. (SUPRA). THE TRIBUNAL AFTER RELYING ON THE JUD GMENT OF THE HONBLE SUPREME COURT OF INDIA IN THE CASE OF MAD RAS INDUSTRIAL INVESTMENT CORPORATION LTD (SUPRA) HELD THAT THE AMOUNT PAID ON ACCOUNT OF NEGATIVE COVENANT/NON-COM PETE FEE SHOULD BE TREATED AS DEFERRED REVENUE IN NATUR E AND HENCE ALLOWABLE. 11. A SPECIFIC QUERY WAS PUT TO THE LEARNED AR T HAT WHETHER BIL HAS CLAIMED ANY BENEFIT OUT OF THE RESTRICTIVE COVENANT . THE AR ANSWERED THE QUERY IN NEGATIVE. 12. THE CASE IS REMITTED BACK TO THE ASSESSING OFFI CER FOR LIMITED PURPOSE TO ASCERTAIN WHETHER BIL HAS CLAIME D ANY BENEFIT IN ITS BOOKS OF ACCOUNT FOR THE PAYMENTS MA DE TO AFL ON ACCOUNT OF RESTRICTIVE COVENANT? IN CASE ANSWER TO THE ABOVE QUESTION IS IN NEGATIVE , THE ASSESSING OFFICER IS DIRECTED TO ALLOW THE CLAIM OF THE ASSESSEE BY TREATING THE PAYMENT MADE BY THE ASSESS EE AS DEFERRED REVENUE EXPENDITURE. ITA NO. 1418 TO 1424 /MDS/201 1 & ITA NO.1601/MDS/2012 11 13. THUS, THE APPEALS OF THE ASSESSEE ARE ALLOWED F OR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON WEDNESDAY, THE 31 ST DAY OF OCTOBER, 2012 AT CHENNAI. SD/- SD/- ( N.S. SAINI ) ( VIKAS AWASTHY ) ACCOUNTANT MEMBER JUDICIAL MEMBER CHENNAI, DATED THE 31 ST OCTOBER, 2012. SOMU COPY TO: (1) APPELLANT (4) CIT(A) (2) RESPONDENT (5) D.R. (3) CIT (6) G.F.