M/S. PROCTER & GAMBLE HOME PRODUCTS LTD., V. THE DY CIT CIR-7(1),

ITA 1551/MUM/2005

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 84221 (ITAT-MUMBAI)
• Duration Of Justice: 9 year(s) 8 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-11-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: F
• Next Hearing Date: 30-07-2014
• Assessment Year: 2001-2002
• Appeal Filed On: 25-02-2005
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: R R PRASAD
• Assessee Lawyers: HARESH G BUCH
• Keywords: Capital asset; Depreciation; Business expenditure; Maximum Marginal Rate; Additional evidence; Capital receipt; Commercial expediency; Revenue expenditure; Capital expenditure
• Section: 37(1); 32; 37

Judgement Text

, INCOME TAX APPELLATE TRIBUNAL,MUMBAI - F BENCH. , ! ! ! ! , S/SH. VIJAY PAL RAO,JUDICIAL MEMBER & RAJENDRA,ACCOUNTANT MEMBER /. ITA NO.1110/MUM/2005 , ' ' ' ' # # # # / ASSESSMENT YEAR-2001-02 DCIT 7(1) AAYAKAR BHAVAN MUMBAI V/S. PROCTER & GAMBLE HOME PRODUCTS LIMITED; PLOT NO.495, P&G PLAZA, CARDINAL GRACIAS ROAD, CHAKALA, ANDHERI (E) MUMBAI-400 099 PAN: AAACP 6332M /. ITA NO.1551/MUM/2005 , ' ' ' ' # # # # / ASSESSMENT YEAR-2001-02 M/S.PROCTER & GAMBLE HOME PRODUCTS LIMITED;PLOT NO.495, P&G PLAZA, CARDINAL GRACIAS ROAD, CHAKALA, ANDHERI (E) MUMBAI-400 099 V/S. DCIT 7(1) AAYAKAR BHAVAN MUMBAI ( $% / APPELLANT) ( &'$% / RESPONDENT) ( (( ( ) ) ) ) / REVENUE BY : SHRI RR PRASAD '*+ ( ) / ASSESSEE BY BY :SHRI HARESH G. BUCH & RAVI SAWANA ' ' ' ' ( (( ( +, +, +, +, / DATE OF HEARING :29/10/2014 -.# ( +, / DATE OF PRONOUNCEMENT :14/11/2014 ' ' ' ' , 1961 ( (( ( 254(1) +/+ +/+ +/+ +/+ 0 0 0 0 ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) PER RAJENDRA, AM: CHALLENGING THE ORDER DT.3011.2004 OF THE CIT(A)-XI X,MUMBAI,ASSESSEE AND THE AO (ASSESSING OFFICER)HAVE FILED CROSS APPEAL FOR THE YEAR UNDER CONSIDERATION.THE GROUNDS OF APPEAL ,FILED BY THE AO,READ AS UNDER: 1(A) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN DIRECTING THE AO TO ALLOW THE ADVERTISEMENT EXPENDI TURE AS REVENUE EXPENDITURE. 1(B) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LD. CIT(A) ERRED IN HOLDING THAT THE FACTS OF THE CASE OF CIT VS.PATEL INTERNAT IONAL FILMS LTD. 102 ITR 219 ARE ALTOGETHER DIFFERENT FROM THE CASE OF THE ASSESSEE. 1(C) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN IS, THE LD. CIT(A) ERRED IN HOLDING THAT THE VERY NATURE OF ADVERTISEMENT OF FILMS DOES NOT GIVE ANY BENEFIT OF ENDURING NATURE AS THE SAME BECOME USELESS IN THE VERY NEXT YEAR OF CREATI ON OF ADVERTISEMENT FILMS EVEN THOUGH THE FILMS ARE PROPERTIES OF THE ASSESSEE AND IT MAY USE THEM FOR ADVERTISEMENT PURPOSES EVEN AFTER 5 OR 10 YEARS AND ERRED IN HOLDING THAT THE RATIO OF THE DE CISION OF THE ITAT, AHMEDABAD IN THE CASE OF JOSHI FORMULABS P.LTD. 42 TTJ 259 WILL BE APPLICABL E IN THE CASE OF THE ASSESSEE. 2.ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN DELETING THE ADDITION OF RS.5,23,653/./ ON ACCOUNT OF DESTRUCTIO N OF OBSOLETE STOCK IN TRADE IGNORING THE FACT THE PROVISION WOULD BE ALLOWABLE ONLY IN THE YEAR IN WH ICH THE INVENTORY HAD ACTUALLY BEEN PHYSICALLY DESTROYED AND IN THE YEAR IN WHICH THE STOCK WAS AC TUALLY REDUCED BY THE AMOUNT OF INVENTORY WRITTEN OFF. 3.THE APPELLANT PRAYS THAT THE ORDER OF CIT(A) ON T HE ABOVE GROUNDS BE SET ASIDE AND THAT OF THE AO RESTORED. THE APPELLANT CRAVES LEAVE TO AMEND OR ALTER ANY GROUND OR ADD A NEW GROUND THAT MAY BE NECESSARY. ITA NO.1551/MUM/2005: 2 ITA.NO.1110&1551/M/2 005 THE ASSESSEE HAS RAISED FOLLOWING GROUNDS OF APPEAL : GROUND I 1. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) XI X, MUMBAI [THE CIT (A)] ERRED IN UPHOLDING THE ACTION OF THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 7(1) (THE A.O.) IN AMOUNT DISALLOWING RS.3 CRORES BEING AMORTISED PORT ION OF AN OF RS. 21 CRORES PAID FOR SAFEGUARD CONFIDENTIALITY AGREEMENT TO GODREJ SOA PS LIMITED (GSL) ON THE ALLEGED GROUND THAT IT WAS EXPENDITURE NOT FOR THE PURPOSE OF BUSI NESS AND WAS OF CAPITAL NATURE. 2.THE APPELLANT PRAYS THAT THE AMORTISED CLAIM OF R S. 3 CRORES OUT OF RS. 21 CRORES BE ALLOWED AS REVENUE EXPENDITURE. GROUND II 1. THE CIT (A)] ERRED IN UPHOLDING THE ACTION OF THE A.O IN DISALLOWING AN AMOUNT RS.5,21,005/- BEING PAYMENT OF LEGAL FEES FOR BRAND PROTECTION AN D TRADEMARK INFRINGEMENT,ON THE ALLEGED GROUND THAT THE SAME WAS NOT INCURRED WHOLLY AND EX CLUSIVELY FOR THE PURPOSES OF THE BUSINESS. 2.THE APPELLANT PRAYS THAT THE DISALLOWANCE OF RS.5 , 21,005/- BE DELETED. GROUND III 1.THE CIT (A) ERRED IN UPHOLDING THE ACTION OF THE A.O. I N DISALLOWING A SUM OF RS.18,04,69,729/- PAID IN CONNECTION WITH THE TERMINATION OF THE SHAM POO BUSINESS TO PROCTER AND GAMBLE HYGIENE AND HEALTH CARE ON THE ALLEGED GROUND THAT THE SAME WAS NOT FOR THE PURPOSE OF THE BUSINESS AND / OR WAS CAPITAL IN NATURE. 2.THE APPELLANT PRAYS THAT THE DISALLOWANCE OF RS. 18,04,69,729/- BE DELETED. GROUND IV THE APPELLANT CRAVES LEAVE TO ADD, AMEND, AND/OR AL TER ALL OR ANY OF THE ABOVE GROUNDS OF APPEAL AT THE TIME OF HEARING. 2. ASSESSEE-COMPANY,ENGAGED IN THE BUSINESS OF MARKETI NG, SELLING AND DISTRIBUTION OF SEVERAL CONSUMER PRODUCTS FILED ITS RETURN OF INCOME ON 29. 10.2001 DECLARING TOTAL INCOME OF RS.9,96, 64,933/-.THE AO FINALISED ASSESSMENT U/S.143(3) OF THE ACT ON 23.02.2004 DETERMINING THE INCOME OF THE ASSESSEE AT RS. NILL. 2.1. THE FIRST GROUND OF APPEAL FILED BY THE AO TO ALLOW THE ADVERTISEMENT MAKING. DURING THE ASSESSMENT PROCEEDINGS THE AO FOUND THAT THE ASSESS EE HAD CLAIMED EXPENDITURE OF RS.7.62 CRORES ON PRODUCTION OF TELEVISION. HE DIRECTED THE ASSESS EE TO EXPLAIN THE ALLOWABILITY OF THE ABOVE MENTIONED EXPENDITURE. THE ASSESSEE VIDE ITS LETTER DATED 12.02.2004 STATED THAT EXPENDITURE WAS OF PURELY REVENUE IN NATURE AS THE LIFE SPAN OF THE FILMS WAS VERY SHORT, THAT THE PRODUCTION COST COULD NOT BE TERMED AS BRAND BUILDING ACTIVITY.REFE RRING TO THE ORDER OF INTERNATIONAL FILM LTD. (1974) 102 ITR 219 HONBLE BOMBAY HIGH COURT, THE A O DISALLOWED THE AMOUNT OF RS.7,62,28,499/-. 2.2. AGGRIEVED BY THE ORDER OF THE AO, ASSESSEE FILED AN APPEAL BEFORE FIRST APPELLATE AUTHORITY (FAA), FOR DECIDING THE ISSUE IN FAVOUR OF THE ASSE SSEE FOLLOWING THE EARLIER YEAR ORDER. BEFORE US,THE DEPARTMENTAL REPRESENTATIVE (DR) AND AUTHORISED REPRESENTATIVE (AR) AGREED THAT THE ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSE E IN ASSESSEES OWN CASE FOR AY.S.1997- 98,2002 -03,2003-04 & 2004-05.IT WAS ALSO ADMITTED THAT APPEAL FILED BY THE DEPARTMENT BEFORE HONBLE HIGH COURT FOR THE AYS. 2002-03 AND 2003-0 4 WAS NOT ADMITTED. WE FIND THAT WHILE DECIDING THE APPEAL FOR THE ASSESSMENT YEAR 2004-05 (ITA1549/MUM/2009/DTD.05.10.2011),THE TRIBUNAL HAS DECIDED THE ISSUE AS UNDER: 6.WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFULL Y AND FIND THAT IN THE CASE OF CIT VS. PATEL INTERNATIONAL FILMS LTD.[SUPRA] THE ASSESSEE WAS EN GAGED IN THE BUSINESS OF PROCESSING AND PRINTING MOVIE FILMS AND HAD PURCHASED A FILM PROCE SSOR IN A LABORATORY TO SERVE AS A MODE] FOR EXHIBITION TO INDUCE CONFIDENCE IN THE CUSTOMERS BY WAY OF ADVERTISEMENT BECAUSE OF THIS FACT THIS DECISION HAS BEEN DISTINGUISHED BY THE HONBLE BOMB AY HIGH COURT IN THE CASE OF CIT VS. GEOFFREY MANNERS & CO. LTD. (SUPRA] BY HOLDING THAT IN THAT CASE AN ASSET WAS PURCHASED. AFTER DETAILED DISCUSSION, THE HONBLE HIGH COURT HELD THAT EXPEND ITURE INCURRED ON FILM PRODUCTION BY WAY OF ADVERTISEMENT FOR MARKETING OF PRODUCT WAS IN THE N ATURE OF REVENUE EXPENDITURE. THEREFORE, FOLLOWING THIS DECISION WE DECIDE THE ISSUE AGAINST THE REVENUE. RESPECTFULLY FOLLOWING THE SAME WE DECIDE GROUND NO .1 AGAINST THE AO. 3 ITA.NO.1110&1551/M/2 005 3. SECOND GROUND OF APPEAL IS ABOUT ADDITION OF RS.5.2 3 LACKS ON ACCOUNT DESTRUCTION OF ABSOLETE STOCK IN TRADE.DURING THE ASSESSMENT PROCEEDINGS TH E AO FOUND THAT ASSESSEE HAD CLAIMED AN AMOUNT OF RS.1.36 CRORES AS EXPENDITURE UNDER THE H EAD WRITE OFF OF OBSOLETE MATERIAL. HE DIRECTED THE ASSESSEE TO FILE AN EXPLANATION IN THIS REGARD. THE ASSESSEE,VIDE ITS LETTER DATED,17.02.2004,STATED THAT EXPENSES WRITTEN OFF R EGARDING OBSOLETE MATERIAL WAS BUSINESS EXPENSES,THAT THE PROVISION WAS MADE IN THE BOOKS O F ACCOUNT ON THE BASIS OF SHORTAGES/DIMINUTION,THAT OBSOLETE MATERIAL WAS IDE NTIFIED BY ITS TECHNICAL STAFF,THAT ALL THE IDENTIFIED MATERIAL WAS DESTROYED WITHIN ONE MONTH OF ITS IDENTIFICATION.AFTER CONSIDERING EXPLANATION OF THE ASSESSEE,THE AO HELD THAT THE IS SUE HAD ALSO ARISEN IN THE ASSESSMENT OF M/S. P & G HYGIENE AND HEALTH CARE LTD.(PGHHCL),A SISTER C ONCERN, FOR THE A.Y.1999-00 AND IT WAS HELD THAT AMOUNT WAS IN THE NATURE OF A PROVISION A ND THE SAME WAS NOT ALLOWABLE.REFERING TO THE JUDGMENT OF THE HONBLE BOMBAY HIGH COURT DELIVERED IN THE CASE OF HEREDILL CHEMICALS LTD.(225ITR532),HE HELD THAT ASSESSEE HAD NOT FURNI SHED ANY DETAIL, THAT OBSOLETE MATERIAL TO THE EXTENT OF RS.5,23,653/-(BEING1/12 OF TOTAL WRITTEN OFF AMOUNT)WAS TO BE DISALLOWED. 3.1. IN THE APPELLATE PROCEEDINGS,THE FAA ALLOWED THE AP PEAL OF THE ASSESSEE FOLLOWING THE ORDER FOR THE A.Y.1996-97.BEFORE US,DR SUPPORTED THE ORDE R OF THE AO.AR STATED THAT SIMILAR ISSUE IN THE CASE OF PGHHCL WAS ALLOWED BY THE TRIBUNAL THE A.Y.1994-95 AND AY.1996-97(ITA NO.844/ M/ 2003 AND ITA NO.3833/M/2004),THAT THE DE PARTMENTAL APPEAL TO THE HIGH COURT IN THAT MATTER, FOR THE A.Y. 2001-02,WAS NOT ADMITTED. AFTER GOING THROUGH RIVAL SUBMISSION AND PERUSING R ELEVANT MATERIAL BEFORE US. WE FIND THAT WHILE DECIDING THE APPEAL NO.3883/MUM/2004 FOR THE AY.199 6-97 IN THE CASE OF PGHHCL THE TRIBUNAL HAS DEALT THE ISSUE AS UNDER: 11.WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS AND PERUSED THE RECORD. AS COULD BE NOTICED FROM THE GROUNDS OF APPEAL THE REVENUE HAS NOT CHAL LENGED THE ACTION OF THE LEARNED CIT(A) - ON THE GROUND OF LACK OF OPPORTUNITY TO THE ASSESSING OFFICER TO CROSS-VERIFY THE PARTICULARS FURNISHED BEFORE THE LEARNED CIT(A). STATUTE PROVIDES FOR FIL ING AN APPEAL BY THE DEPARTMENT ONLY AFTER OBTAINING AN AUTHORISATION FROM THE CONCERNED COMMI SSIONER. IN THE INSTANT CASE, AUTHORISATION WAS GIVEN TO THE ASSESSING OFFICER ONLY ON THE GROU ND THAT THE DECISION IN THE CASE OF ASSESSEES SISTER CONCERN, M/ S. PROCTER & GAMBLE FOR THE EARL IER YEAR WAS NOT ACCEPTED BY THE DEPARTMENT. IN OTHER WORDS, IT IS NOT THE CASE OF THE APPELLANT TH AT NO OPPORTUNITY WAS PROVIDED BY THE LEARNED CIT(A). IT IS ALSO NOT THE CASE OF THE REVENUE THAT THE DETAILS FURNISHED BEFORE THE LEARNED CIT(A) WERE INSUFFICIENT AND FACTS IN THE CASE OF SISTER C ONCERN ARE DISTINGUISHABLE ON FACTS. THEREFORE, THE LEARNED DR CANNOT RAISE A NEW ISSUE, WITHOUT PRIOR APPROVAL OF THE ADMINISTRATIVE COMMISSIONER TO RAISE A NEW GROUND. EVEN IF IT IS TREATED AS A N EW ARGUMENT IN SUPPORT OF THE ORDER PASSED BY THE ASSESSING OFFICER, WE ARE OF THE VIEW THAT IN T HE PECULIAR CIRCUMSTANCES OF THE CASE IT MAY BE DIFFICULT FOR THE ASSESSEE, AFTER A LONG GAP OF 15 YEARS, TO FURNISH BETTER EVIDENCE THAN WHAT IS SUBMITTED BEFORE THE LEARNED CIT(A). NO DOUBT, IT I S THE DUTY OF THE ASSESSEE TO FURNISH REASONABLE EVIDENCE BEFORE THE ASSESSING OFFICER AND IN THE AB SENCE OF PROPER EVIDENCE THE ASSESSING OFFICER IS AT LIBERTY TO REJECT A CLAIM OF DEDUCTION; BUSIN ESS REALITIE 5 SHOULD NOT BE ALTOGETHER BE IGNORED. HAVING REGARD TO THE FACT THAT THE DEDUCTION OF OBS OLETE STOCK WORKS OUT TO LESS THAN 1% WE ARE OF THE VIEW THAT THE CLAIM OF DEDUCTION IS REASONABLE. THEREFORE, WE UPHOLD THE ORDER OF THE LEARNED CIT(A) ON THIS ISSUE. WE FURTHER FIND THAT SIMILAR ISSUE WAS DECIDED AGAI NST THE DEPARTMENT BY THE TRIBUNAL FOR THE AY. 2001-02 AND THE HONBLE HIGH COURT HELD NOT ADMITTE D THE APPEAL FILED BY THE AO.CONSIDERING THE ABOVE ORDER OF THE TRIBUNAL,WE DECIDE GROUND NO .2 AGAINST HIM ITA/1551/M/2003: 4. FIRST GROUND OF APPEAL FILED BY THE ASSESSEE-COMPAN Y IS ABOUT DISALLOWANCE OF RS.3 CRORES,BEING AMORTISED PORTION OF AN OF RS.21 CRORES PAID BY THE ASSESSEE TO SAFEGUARD CONFIDENTIALITY AGREEMENT TO GODREJ SOAPS LIMITED (GSL).DURING TH E HEARING BEFORE US,THE AR FAIRLY CONCEDED THAT THE ISSUE IS DECIDED AGAINST THE ASSESSEE BY THE ORDER OF THE TRIBUNAL(ITA988,8868- 70/M/2001 & 2004-AY.S.1997-98TO2000-01 DATED.15. 12 .2010). 4 ITA.NO.1110&1551/M/2 005 WE FIND THAT THE TRIBUNAL HAS DECIDED THE ISSUE AS UNDER : 2.6.6WE HAVE CONSIDERED THE VARIOUS ASPECTS OF THE MATTER AND THE JUDGMENTS CITED CAREFULLY. FOR DECIDING THE NATURE OF EXPENDITURE WE HAVE TO FIRST ASCERTAIN THE TRUE NATURE OF PAYMENT. THE PAYMENT HAD BEEN MADE IN TERMS OF THE CONFIDENTIALI TY AGREEMENT DATED 30.7.96. THE SAID CONFIDENTIALITY AGREEMENT MENTIONS THAT UNDER THE M ANUFACTURING AGREEMENT AND TECHNICAL ASSISTANCE AGREEMENT BOTH DATED 22.1.93 GSL BECOME PRIVY TO CONFIDENTIAL INFORMATION IN RELATION TO ANTI BACTERIAL GERMICIDAL SOAP. HOWEVER, NO SUCH MANUFACTURING AGREEMENT AND TECHNICAL ASSISTANCE AGREEMENT HAS BEEN PLACED ON RECORD. NOR THERE IS ANY MATERIAL PLACED ON RECORD TO SHOW THAT THERE WAS ANY EXCHANGE OF CONFIDENTIAL IN FORMATION BETWEEN THE ASSESSEE AND GSL IN RELATION TO DEVELOPMENT OF ANY ANTI BACTERIAL SOAP. TO A QUERY BY THE BENCH AT THE TIME OF HEARING OF THE APPEAL THE LEARNED AR FOR THE ASSESSEE ADMIT TED THAT THERE WAS NO FURTHER MATERIAL AVAILABLE WITH THE ASSESSEE OTHER THAN THOSE PLACED IN THE PA PER BOOK WHICH DOES NOT CONTAIN ANY SUCH MANUFACTURING AGREEMENT OR EXCHANGE OF CONFIDENTIAL INFORMATION. IT IS THEREFORE NOT ESTABLISHED THAT GSL HAD ACQUIRED ANY CONFIDENTIAL INFORMATION FOR WHICH THE ASSESSEE HAD TO MAKE PAYMENT FOR PROTECTING THE INFORMATION. AS THE PURPOSE OF PAYMENT IS NOT ESTABLISHED THE EXPENDITURE CANNOT BE ALLOWED AS INCURRED WHOLLY AND EXCLUSIVEL Y FOR THE PURPOSE OF BUSINESS. 2.6.7SECONDLY, EVEN IF IT IS ASSUMED THAT THE GSL D ID BECOME PRIVY TO ANY SUCH CONFIDENTIAL INFORMATION, THE PAYMENT AS PER THE CONFIDENTIALITY AGREEMENT HAD BEEN MADE FOR UNDERTAKING FROM GSL NOT TO MANUFACTURE AND PROCESS ANY ANTI BACTERI AL GERMICIDAL SOAP (SAFEGUARD) AND FOR NOT DISCLOSING THE CONFIDENTIAL INFORMATION TO ANYONE. THE PURPOSE OF NOT ALLOWING GSL TO MANUFACTURE THE PRODUCT IS ONLY TO WARD OFF COMPETITION. SIMILA RLY THE PURPOSE FOR NOT DISCLOSING THE INFORMATION TO ANY ONE ELSE BY GSL IS ALSO TO WARD OFF COMPETIT ION BY NOT ALLOWING OTHERS TO USE THE INFORMATION FOR MANUFACTURE OF PRODUCT. THEREFORE THE REAL PURP OSE OF PAYMENT IN SUCH SCENARIO ASSUMING THAT GSL DID HAVE IN ITS POSSESSION SOME CONFIDENTIAL IN FORMATION WOULD BE TO WARD OFF COMPETITION. THE EXPENDITURE INCURRED TO WARD OFF COMPETITION IS NOT THE SAME AS EXPENDITURE ON DEVELOPMENT OF PRODUCT OR THE EXPENDITURE TO PROTECT THE PRODUCTS. THE EXPENDITURE TO WARD OFF COMPETITION IS CAPITAL IN NATURE AS HELD BY HONBLE SUPREME COURT IN CASE OF ASSAM BENGAL CEMENT CO. LTD. VS CIT (SUPRA) AND IN CASE OF CIT VS COAL SHIPMENT PVT . LTD. (SUPRA) AND AS DISCUSSED IN DETAIL IN PARA 2.4.2 EARLIER. THE EXPENDITURE THEREFORE CANNO T BE ALLOWED. THE ASSESSEE HAS PLACED RELIANCE ON THE JUDGMENT OF HONBLE SUPREME COURT IN CASE OF MALAYALAM PLANTATION (53 ITR 140) WHICH IS DISTINGUISHABLE AS THE ISSUE OF NATURE OF EXPENDITU RE INCURRED TO WARD OFF COMPETITION WAS NOT BEFORE THE SUPREME COURT. IN ANY CASE, THE CLAIM OF THE ASSESSEE THAT PAYMENT WAS MADE FOR PROTECTION AND PREVENTION OF CONFIDENTIAL INFORMATI ON RELATING TO DEVELOPMENT OF ANTI BACTERIAL NOT SUPPORTED BY ANY EVIDENCE. THEREFORE THE CLAIM CANN OT BE ALLOWED. THE PAYMENT IN OUR VIEW WAS FOR TERMINATION OF THE JVA WHICH AS HELD EARLIER WA S FOR RESTRUCTURING AND REORGANIZATION OF THE PROFIT EARNING APPARATUS OF THE GROUP WHICH CONSTIT UTED A CAPITAL ASSET.THEREFORE THE EXPENDITURE WAS CAPITAL IN NATURE AND CANNOT BE ALLOWED ON THIS GROUND ALSO. THE ALTERNATE PLEA OF THE ASSESSEE TO AMORTIZE THE AMOUNT OVER THE PERIOD OF 7 YEARS A ND ALLOW A SUM OF PS. 3 CRORES THIS YEAR CAN ALSO NOT BEEN ACCEPTED AS THERE IS NO PROVISION FOR AMORTIZATION OF SUCH EXPENDITURE. WE ACCORDINGLY CONFIRM THE ORDER OF CIT(A) DISALLOWING THE CLAIM. RESPECFULLY,FOLLOWING THE SAME WE DECIDED FIRST GRO UND OF APPEAL AGAINST THE ASSESSEE. 5. NEXT GROUND OF APPEAL IS ABOUT DISALLOWANCE OF RS.5 .21 LAKHS PAID IN CONNECTION WITH LEGAL FEES FOR BRAND PROTECTION AND TRADEMARK INFRINGEMENT.BEF ORE US REPRESENTATIVE OF BOTH THE SIDES AGREED THAT THE ISSUE HAS BEEN DECIDED IN FAVOUR OF THE AS SESSEE BY THE TRIBUNAL WHILE ADJUDICATING THE APPEAL FOR THE AY.2002-03 &2003-04.WE FIND THAT THE TRIBUNAL,FOLLOWING THE ORDER FOR THE EARLIER YEAR,HAS DEALT THE ISSUE OF BRAND PROTECTION AND TR ADEMARK INFRINGEMENT(ITA/4309/MUM/2006- AY.2002-03 DATED 20.04.2012)AS UNDER: 5.1WE HAVE HEARD THE LD. AR OF THE ASSESSEE AS WELL AS THE LD.DR AND CONSIDERED THE RELEVANT MATERIAL ON RECORD.THE LD. AR HAS POINTED OUT ISSUE HAS BEEN DECIDED BY THE TRIBUNAL IN ASSESSEES OWN CASE ASSESSMENT YEAR 200 1-02 VIDE ORDER DATED 25.1.2012. 5.2WE FIND THAT THE TRIBUNAL HAS CONSIDERED AND ADJ UDICATED THIS ISSUE 51 OF THE ORDER DATED 25.1. 2012 AS UNDER: 5.1. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. WE HAVE A/READY CLAUSE (8)(I) OF THE USER AGREEMENT DATED 7/8/2003 BETWEEN THE ASSESSEE AND THE OWNER OF THE TRADEMARK, 5 ITA.NO.1110&1551/M/2 005 IT IS DEAR FROM THE SAID CLAUSE THAT ASSESSEE HAD T O BEAR THE EXPENSES FOR PROTECTING THE TRADEMARK AND INFRINGEMENT THEREOF WE ARE OF THE VI EW THAT THE ASSESSEE WOULD DERIVE A BENEFIT BY ANY LEGAL RECOURSE TAKEN BY THE PROPRI ETOR OF THE TRADEMARK FOR PROTECTING THE TRADEMARK, IF THE ASSESSEE DOES THAT ON ITS OWN EVEN THAT WOULD PROTECT THE BUSINESS INTEREST OF THE ASSESSEE, WE ARE ALSO OF T HE VIEW THAT THE AGREEMENT DEARLY ENVISAGES THAT THE ASSESSEE WILL BEAR COST AS MUTUA LLY AGREED BETWEEN THE ASSESSEE AND THE OWNER OF THE TRADEMARK. WE ARE OF THE VIEW THAT THERE IS NO REQUIREMENT FOR ANY FURTHER WRITTEN AGREEMENT BETWEEN THE OWNER OF THE TRADEMARK AND THE ASSESSEE FOR SHARING OF COST.THE GENUINENESS OF THE PAYMENT AND THE PURPOSE OF THE PAYMENT BY THE ASSESSEE IS NOT DISPUTED. AS HELD IN THE DECISIONS RELIED UPON BY THE ASSESSEE THE FACT THAT THIRD PARTY ALSO DERIVES BENEFIT BY REASON OF INCURRING OF EXPENDITURE BY THE ASSESSEE IS NO GROUND TO DENY DEDUCTION OF EXPENDIT URE WHICH IS FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE.IN SUCH CIRCUMSTANCES WE A RE OF THE VIEW THAT THE CLAIM MADE BY THE ASSESSEE FOR DEDUCTION HAS TO BE ACCEPTED. G ROUND NO.X IS ACCORDINGLY ALLOWED. 5.3 ACCORDINGLY, FOLLOWING THE EARLIER ORDER OF THE TRIBUNAL, WE DECIDE THIS ISSUE IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. RESPECTFULLY,FOLLOWING THE ABOVE WE DECIDE GROUND N O.2 IN FAVOUR OF THE ASSESSEE. 6. LAST GROUND OF APPEAL DEALS WITH DISALLOWANCE OF RS .18,04,69,729/- PAID IN CONNECTION WITH THE TERMINATION OF SHAMPOO BUSINESS.DURING THE ASSESSME NT PROCEEDINGS,THE AO FOUND THAT THE ASSESSEE HAD INCURRED EXPENDITURE UNDER THE FOLLOWI NG HEADS: A) COMPENSATION PAID TO PGHHCL FOR TERMINATION OF S HAMPOO BUSINESS RS.6,00,00,000/- B) REIMBURSEMENT OF EXPENSES TO PGHHCL FOR TERMINATION OF SHAMPOO BUSINESS RS 5,00,00,000/- C) LOSS OF FIXED ASSETS/CAPITAL WORK IN PROGRESS BO UGHT FROM PGHHCL RS. 7,04,69,729/- HE FURTHER FOUND THAT IN THE PROFIT AND LOSS A/C,TH E ABOVE STATED EXPENSES WERE DEBITED AS EXCEPTIONAL ITEMS,AS PER SCHEDULE-18 OF THE AUDITED PROFIT AND LOSS ACCOUNT AND BALANCE SHEET. AFTER OBTAINING THE EXPLANATION FROM THE ASSESSEE-C OMPANY,THE AO HELD THAT THE ASSESSEE WAS NOT CONTRACTUALLY BOUND TO PAY ANY COMPENSATION ON TERMINATION OF THE AGREEMENTS,THAT IT HAD UNILATERALLY AND WITHOUT ANY OBLIGATION AGREED TO P AY THE COMPENSATION TO PGHHCL,THAT IT HAD AGREED TO PURCHASE THE PRODUCTS MANUFACTURED SPECIA LLY UNDER THE BRAND NAME 'ARIEL MICRO SYSTEM' AND 'ARIEL' AT THE RATES AS MIGHT BE AGREED ,THAT IT WAS TOTALLY PROTECTED BY THE CONFIDENTIALITY CLAUSE,THAT THE AGREEMENT WAS BETWE EN CLOSELY RELATED ENTITIES,THAT THERE WAS NO POSSIBILITY OF ANY INFRINGEMENT OF THE RIGHTS OR PR OPERTIES BELONGING TO THE ASSESSEE,THAT EACH OF THE PARTY WAS AT LIBERTY TO TERMINATE THE AGREEMENT BY GIVING A SIX MONTHS NOTICE AFTER THE EXPIRY OF THREE YEARS PERIOD OF THE ORIGINAL AGREEMENT,THA T THERE WAS NO OBLIGATION OF THE ASSESSEE ASSESSEE TO BEAR ANY COST WHATSOEVER TO PGHHCL ON A CCOUNT OF TERMINATION OF THE AGREEMENT,THAT THERE WAS NO AGREEMENT BETWEEN THE ASSESSEE AND PGH HCL FOR MANUFACTURING OF SHAMPOO UNDER BRAND NAME PANTENE AND HEAD & SHOULDERS,THAT THER E WAS NO JUSTIFICATION IN THE SUBMISSION OF THE ASSESSEE THAT COMPENSATION WAS PAID FOR TERMINATION OF THE SHAMPOO MANUFACTURING AGREEMENT.THE AO ALSO HELD THAT THE COMPENSATION PA ID WAS NEITHER FOR THE PURPOSES OF THE BUSINESS OF THE ASSESSEE NOR ARISING DURING THE COU RSE OF CARRYING ON THE BUSINESS,THAT THE ASSESSEE HAD NOT DERIVED ANY BENEFIT FOR TERMINATING THE AGR EEMENT,THAT THERE WAS NO COMMERCIAL EXPEDIE NCEY THAT ASSESSEE'S RIGHTS,TITLE AND INTEREST WER E FULLY PROTECTED BY THE CONFIDENTIALITY AGREEMENT,THAT THERE WAS NO NECESSITY FOR MAKING TH E PAYMENT EVEN FOR THE PURPOSE OF PRESERVING ITS TRADING STRUCTURE FOR THE REASON THA T PRODUCT FORMULATION HAD UNDERGONE A FUNDAMENTAL CHANGE,THAT THERE WAS NO PERCEIVABLE TH REAT OR FEAR OF COMPETITION FROM PGHHCL,THAT THE EXPENDITURE INCURRED BY THE ASSESSE E WAS OF CAPITAL NATURE.ABOUT THE PAYMENT OF RS.5 CRORES,PAINTING TO SHUT DOWN COSTS' REIMBUR SEMENT,THE AO HELD THAT THE EXPENDITURE WAS CAPITAL IN NATURE,THAT IT WAS NOT INCURRED FOR CARRYING ON THE BUSINESS OPERATIONS OR FOR ACQUISITION OF ANY BUSINESS ASSETS REGARDING TH E COMPENSATION OF RS.7,04,69,729/- \ 6 ITA.NO.1110&1551/M/2 005 PERTAINING TO LOSS ON FIXED ASSETS/CAPITAL WORK-IN- PROGRESS BROUGHT FROM PGHHCL AND DISCARDED,THE AO HELD THAT SAME WERE NOT ACQUIRED F OR THE PURPOSE OF THE BUSINESS OF THE COMPANY,THAT SAME DID NOT NOT QUALIFY FOR DEDUCTION U/S 32 FOR DEPRECIATION,THAT ASSETS WERE WRITTEN OFF AND THE LOSS WAS CLAIMED,THAT THE ASSET S WERE NEVER ACQUIRED FOR THE BUSINESS PURPOSES,THAT THE REALISABLE VALUE OF THE ASSETS WR ITTEN OFF HAD NOT BEEN STATED BY THE ASSESSEE,THAT THE VALUE OF THE WRITTEN OFF ASSETS COULD NOT BE AL LOWED AS REVENUE EXPENDITURE,THAT EVEN IF THE ASSESTS WERE ACQUIRED FOR THE PURPOSES OF THE ASSES SEE'S BUSINESS THE EXPENDITURE WAS RELATED TO THE ACQUISITION OF ASSETS AND A CAPITAL EXPENDITURE,THAT SAME COULD NOT BE ALLOWED AS REVENUE EXPENDITURE,THAT NO DEPRECIATION COULD BE ALLOWED FOR THE REASON THAT THE ASSETS WERE NEVER PUT TO USE FOR THE BUSINESS OF TH E ASSESSEE. 5.1. BEFORE THE FAA THE ASSESSEE SUBMITTED THAT PGHHCL HAD SET UP THE SHAMPOO MANUFACTURING FACILITY SOLELY FOR SUPPLYING SHAMPOOS TO THE ASSES SEE COMPANY,THAT IN ORDER FOR PGHHCL TO RECOVER ITS COSTS AND TO MAKE PROFITS THROUGH THE M ANUFACTURE OF SHAMPOOS IT WAS EXTREMELY IMPERATIVE THAT THE PLANT SHOULD HAVE CONTINUED TO FUNCTION WITH THE THEN EXISTING PRODUCT FORMULATIONS OVER SOME LENGTH OF TIME,THAT THE FORM ULATION CHANGES PROPOSED BY THE ASSESSEE COMPANY WOULD HAVE NECESSITATED CONSIDERABLE INVEST MENT IN NEW MACHINERY WHICH PGHHCL COULD NOT MAKE AT THAT POINT IN TIME,THAT THE PGHHC L PLANT WAS SET UP TO CATER EXCLUSIVELY TO THE ASSESSEE COMPANY'S REQUIREMENTS THE PLANT WOULD HAV E TO BE SHUT DOWN BY PGHHCL IT DECIDED TO IMPORT SHAMPOOS WITH CHANGED FORMULATIONS FROM THE P&G AFFILIATE IN THAILAND,THAT THE IMPORT OF THE SHAMPOOS MADE GREATER BUSINESS SENSE FOR THE IT SINCE THE THAILAND PLANT ENJOYED CONSIDERABLE ECONOMIES OF SCALE AND WAS ABLE TO PRO VIDE THE PRODUCT FORMULATION THAT THE CONSUMERS IN INDIA DESIRED,THAT PAYMENT OF COMPENSA TION WAS A COMMON BUSINESS PRACTICE FOLLOWED IN THE INDUSTRY WHEREBY THE CONTRACT MANUF ACTURER IS COMPENSATED FOR THE LOSS OF BUSINESS AND LOSS ON DISPOSAL OF ASSETS WHERE A MANUFACTURIN G AGREEMENT IS TERMINATED BEFORE THE CONTRACT MANUFACTURER CAN RECOVER HIS INVESTMENT IN THE BUSI NESS AND MAKE PROFIT COMMENSURATE WITH THE RISK AND EFFORTS INVOLVE, THAT THE PROCTER & GAMBLE DIST RIBUTION COMPANY LIMITED HAD MADE SIMILAR PAYMENTS TO GODREJ SOAPS LIMITED ON TERMINATION OF THE DETERGENT MANUFACTURING AGREEMENT, THAT SIMILAR PAYMENTS WERE ALSO MADE BY THE ASSESSE E COMPANY TO THE THIRD PARTY CONTRACTOR WHO MANUFACTURED 'ARIEL SUPERSOAKER', A PRODUCT THAT WA S DISCONTINUED FOR WANT OF CONSUMER DEMAND,THAT IT HAD A SIMILAR PRINCIPAL TO PRINCIPAL MANUFACTURING AGREEMENT WITH PGHHCL FOR LAUNDRY PRODUCTS NAMELY, ARIEL AND TIDE,THAT TERMIN ATION OF THE SHAMPOO MANUFACTURING AGREEMENT WITH A LESS THAN FAIR BUSINESS DEAL TO PG HHCL WOULD HAVE MEANT PULLING BUSINESS RELATIONS IN JEOPARDY,THAT SETTLING THE TERMINATION OF THE SHAMPOO BUSINESS AMICABLY WAS A PRUDENT DECISION THAT ENSURED THAT THE BUSINESS RELATIONSHI P IN THE LAUNDRY CATEGORY COULD FLOURISH AND TRANSLATE INTO A GROWTH OPPORTUNITY FOR THE ASSESSE E COMPANY,THAT THE EXPENDITURE HAD BEEN INCURRED KEEPING IN MIND COMMERCIAL PRUDENCE AND FU TURE POTENTIAL AND WAS A DEDUCTIBLE BUSINESS EXPENDITURE,THAT EVEN THE EXPENDITURE INCURRED VOLU NTARILY ON THE GROUND OF COMMERCIAL EXPEDIENCY AND IN ORDER INDIRECTLY TO FACILITATE TH E CARRYING ON BUSINESS WOULD ALSO BE DEDUCTIBLE,THAT THE COMMERCIAL EXPEDIENCY HAS TO BE DECIDED FROM THE POINT OF VIEW OF BUSINESSMAN AND NOT BY THE SUBJECTIVE STANDARD OF T HE REASONABLENESS OF THE REVENUE. 5.2. AFTER CONSIDERING THE ASSESSMENT ORDER AND THE SUBM ISSIONS OF THE ASSESSEE,THE FAA HELD THAT THE AO WAS JUSTIFIED TO REFUSE THE DEDUCTION O F RS. 18,04,69,729/-.,THAT THE ASSESSEE AND PGHHCL WERE CLOSELY RELATED GROUP COMPANIES,THAT TH EY WERE CONTROLLED AND HELD BY THE SAME GROUP,THAT BECAUSE OF THEIR CLOSE PROXIMITY IN TERM S OF THE CONTROLLING INTEREST AND ALSO IN TERMS OF THE BUSINESS INTEREST IT WAS IMPERATIVE TO TAKE INTO CONSIDERATION WHETHER THE TRANSACTIONS BETWEEN THE TWO COMPANIES ARE WITH BONAFIDE PURPOSE S AND BORNE OUT OF THE TRANSACTIONS CONDUCTED AT ARMS LENGTH. DISCUSSING THE MANUFACTURING AGREEMENT,THE FAA HELD THAT IT WAS MADE EFFECTIVE FROM 19/ 11/1993,THAT IT WAS ON PRINCIPAL TO PRINCIPAL BASIS ,THAT THE ASSESSEE AND THE SUPPLIER HAD BOUND THEMSELVES REGARDING CONFIDENTIALITY, TRADEMARK AND OTHER RIGHTS, TITLES AND INTEREST RELATING TO THEIR RESPECTIVE BUSINESSES AND KNOW-HOWS,THAT THE PURCHASE PRICE FOR THOSE PRODUCTS WAS TO BE 7 ITA.NO.1110&1551/M/2 005 DETERMINED FROM TIME TO TIME,THAT ARTICLE 8.1 SPECI FICALLY MENTIONED THAT THE AGREEMENT WOULD COMMENCE ON THE DATE THEREOF AND REMAIN IN FORCE FO R THREE YEARS, THAT THERE AFTER IT WOULD STAND TERMINATED UNLESS RENEWED,THAT THE SAID ARTIC LE MADE IT CLEAR THAT THE AGREEMENT WAS NOT IN PERPETUITY,THAT THE AGREEMENT WAS TERMINABLE AND REVOCABLE,THAT INITIALLY IT WAS SUPPOSED TO STAND TERMINATED ON THE EXPIRY OF THREE YEARS FROM 19/11/1993,THAT THE ASSESSEE HAD CLAIMED THAT THE AGREEMENT WAS RENEWED FROM TIME TO TIME,THAT CO PIES OF THE RENEWED AGREEMENTS WERE NOT PRODUCED DURING THE HEARING OF THE APPEAL,THAT AS P ER ARTICLE 8.2. OF THE AGREEMENT BOTH THE PARTIES RESERVED THE RIGHT IMMEDIATELY TO CANCEL AN D TERMINATE THE AGREEMENT AT ANY TIME BY NOTICE TO THE OTHER PARTY,THAT ARTICLE 8.3 PROVIDED THAT THE AGREEMENT COULD ALSO BE TERMINATED BY OTHER PARTY AT 180 DAYS ADVANCE WRITTEN NOTICE, WITHOUT CAUSE,THAT A COMBINED READING OF ARTICLES 8.1,8.2 AND 8.3 MADE IT ABUNDANTLY CLEAR THAT ANY P ARTY WAS FREE TO TERMINATE THE AGREEMENT BY ADVANCE NOTICE,THAT THE TERMINATION OF THE AGREE MENT BETWEEN THE ASSESSEE AND PGHHCL WAS NEITHER UNFORESEEN NOR UNEXPECTED NOR BEYOND TH E TERMS OF THE AGREEMENT DATED 19/11/1993. DELIBERATING UPON THE ISSUE AS TO WHETHER THE TERMI NATION OF THE AGREEMENT CAST ANY MONETARY OBLIGATIONS ON ONE PARTY IN FAVOUR OF THE OTHER PAR TY,THE FAA HELD THAT THE ARTICLE 8.4 DEALT WITH SUCH SITUATION,THAT A PLAIN READING OF ARTICLE 8.4 MADES IT CLEAR THAT THERE WAS NO MONETARY OBLIGATION ATTACHED TO THE DETERMINATION ENVISAGED IN ANY OF THE ARTICLES 8.1,8.2 OR 8.3.,THAT THE ONLY OBLIGATION WAS THAT THE PGHHCL WOULD FORTHWITH RETURN THE ASSESSEE ALL DOCUMENTS COMPRISING THE FP SPECIFICATION AND WOULD NOT MAKE ANY USE OF THE FP SPECIFICATION THEREAFTER,THAT THE ASSESSEE WOULD PURCHASE FROM PG HHCL ALL OR THE BALANCE OF THE PRODUCTS ORDERED BY IT AND LYING IN STOCK WITH PGHHCL,THAT I F DESIRED IT WOULD ALSO PURCHASE THE RAW MATERIALS AND PACKING MATERIALS LYING IN STOCK WITH PGHHCL PROVIDED THAT PGHHCL WOULD NOT, IN ANY EVENT, USE THE BALANCE RAW MATERI ALS AND PACKING MATERIALS FOR THE MANUFACTURE OF THE PRODUCTS OR DISPOSE THEM OF IN A NY MANNER WHATSOEVER WITHOUT ASSESSEE'S PERMISSION,THAT THERE WAS NO MONETARY OBLIGATION AT TACHED TO ANY PARTY,THAT THE ORIGINAL MANUFACTURING AGREEMENT,THE MOTHER OF ALL AGREEMENT S,DID NOT CAST ANY OBLIGATION TO PURCHASE THE ASSETS USED BY PGHHCL IN THE MANUFACTURING OF T HE PRODUCTS UNDER AGREEMENT AND TO BEAR ANY OTHER COSTS REGARDING SHUT DOWN OF THE BUSINESS OR IN LIEU OF THE PROJECTED FUTURE PROFITS,THAT ON THE FACE OF SUCH MOTHER AGREEMENT T HE TERMINATION AGREEMENT COULD NOT COMPEL ONE OF THE PARTIES TO COMPENSATE THE OTHER PARTY,THAT I F PAYMENT OF COMPENSATION WOULD HAVE BEEN THE INTENTION THEN INTENTION SHOULD HAVE BEEN PUT ON RE CORD AT THE INCEPTION OF THE AGREEMENT,THAT THE TERMINATION AGREEMENT WAS AN OPEN ENDED AGREEMENT,T HAT IN THE TERMINATION AGREEMENT CERTAIN MONETARY OBLIGATIONS WERE THRUST UPON THE APPELLANT COMPANY OR WERE ACCEPTED BY THE APPELLANT COMPANY SHOWED THAT THE TERMINATION AGREE MENT WAS NOT MADE WITH BONAFIDE PURPOSES AND IT WAS NOT MADE IN A MANNER WHICH WOULD HAVE BE EN MADE BETWEEN TWO INDEPENDENT ENTITIES HAVING NO COMMON INTEREST OF CONTROL AND G ROUP AFFINITY, THAT THE TERMINATION AGREEMENT WAS NOT IN CONFORMITY WITH THE TERMS AND CONDITIONS OF THE MANUFACTURING AGREEMENT. HE FURTHER HELD THAT THE ASSESSEE WAS NOT FINDING I T COMMERCIALLY VIABLE/PROFITABLE TO PURCHASE AND SELL CERTAIN SHAMPOO BRANDS MANUFACTUR ED BY PGHHCL AS PER THE MANUFACTURING AGREEMENT,THAT IN SUCH CIRCUMSTANCES IT REQUIRED PGHHCL TO CHANGE THE FORMULATIONS, THAT PGHHCL DID NOT FIND THE OFFER AC CEPTABLE APPARENTLY FOR THE REASON OF HIGH INVESTMENT OF CAPITAL,THAT IT WAS NOT EXPLAINED AS HOW THE ASSESSEE COULD HAVE BEEN COMPELLED TO PAY CERTAIN AMOUNTS TO PGHHCL,THAT IT HAD BEEN E MPHASISED REPEATEDLY IN THE MANUFACTURING AGREEMENT THAT THE AGREEMENT WAS ON P RINCIPAL TO PRINCIPAL BASIS,THAT BOTH THE PARTIES WERE ON EQUAL FOOTING,THAT BOTH THE PARTIES HAD TO LOOK AFTER AND SAFEGUARD THEIR OWN BUSINESS INTERESTS,THAT IT WAS NOT THE CASE THAT TH E ASSESSEE REFUSED TO PURCHASE THE GOODS FROM PGHHCL ON ACCOUNT OF COST ESCALATION,THAT THE ONLY REASON SUGGESTED IN THE TERMINATION AGREEMENT WAS THE CHANGE IN FORMULATIONS,THAT IT EN TAILED THAT THE ASSESSEE WAS NOT ABLE TO MARKET THE PRODUCTS UP TO ITS PROJECTIONS AND EXPECTATIONS ,THAT THERE WAS NO AGREEMENT TO THE EFFECT THE A MINIMUM QUANTITY WOULD BE PURCHASED BY THE AP PELLANT COMPANY,THAT THE MAGNITUDE OF 8 ITA.NO.1110&1551/M/2 005 THE PURCHASE ALWAYS DEPENDED ON THE MARKET SITUATIO N,THAT IT WAS IN THE INTEREST OF BOTH THE PARTIES THAT IS THE ASSESSEE-COMPANY AND PGHHCL TO CHANGE THE FORMULATIONS ACCORDING TO THE MARKET ACCEPTABILITY AND LOOKING TO THE COMPETITION FROM RIVAL MANUFACTURERS,THAT IT WAS NOT AT ALL A BUSINESS NECESSITY OF THE APPELLANT TO COMPEN SATE PGHHCL ON CAPITAL ACCOUNT AS WELL AS ON REVENUE ACCOUNT,THAT THE TERMINATION AGREEMEN T DID NOT EXPLAIN AS WHY PGHHCL SHOULD BE COMPENSATED BY THE ASSESSEE, THAT THE INVESTMENT MADE BY THE PGHHCL IN THE FIXED ASSETS WAS TO EARN PROFIT ON THE GOODS MANUFACTURED BY IT,THAT A NY INDEPENDENT THIRD PARTY WOULD HAVE NOT AGREED TO COMPENSATE THE MANUFACTURE R WITHOUT ANY CONTRACTUAL OBLIGATION CAST UPON SUCH OTHER PARTY BY THE INITIAL MANUFACTURING AGREEMENT,THAT THERE WAS NO MUTUAL CONTRACT TO THIS EFFECT IN THE AGREEMENT FOR THE MA NUFACTURING OF THE PRODUCTS WAS ENTERED INTO,THAT THERE WAS NO STIPULATION IN ANY OF THE RE NEWAL AGREEMENTS ALSO,THAT THE PAYMENTS WERE MADE BY THE ASSESSEE TO THE GROUP CONCERN BECAUSE O F THEIR CLOSE PROXIMITY AND NOT BECAUSE OF THE BUSINESS CONSIDERATIONS,THAT IT WAS BASICALLY A CASE OF TRANSFERRING THE CAPITAL OF ONE COMPANY TO THE OTHER COMPANY. THE FAA FURTHER HELD THAT TWO OF THE ACCOUNTS (RS.7 .04 CRORES AND RS.5 CRORE)WERE IN THE NATURE OF CAPITAL EXPENDITURE,THAT RS. 7.05 WERE PAID TOWA RDS THE FIXED ASSETS APPEARING IN THE BOOKS OF ACCOUNT OF PGHHCL DEDICATED TO THE MANUFAC TURER OF SHAMPOO PRODUCTS, THAT DISREGARDING THE FACT THAT WHATEVER COULD BE THE SC RAP /FACE VALUE OF THE ASSETS THE FACT REMAINED THAT THE PAYMENT OF RS.7.05 CRORES HAD BEE N MADE TOWARDS PURCHASE OF THE CAPITAL ASSETS,THAT NO DEPRECIATION WAS ADMISSIBLE ON SUCH ASSETS,THAT SAME WERE NEVER PUT TO USE FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE ,THAT THEY WERE NOT PURCHASED TO BE USED IN ANY BUSINESS OF THE ASSESSEE,IT HAD NOT BEEN EXPLAI NED WHETHER THOSE ASSETS WERE ACTUALLY TAKEN POSSESSION BY THE ASSESSEE OR NOT AND HOW THE SAME WERE DISPOSED.ABOUT THE EXPENDITURE OF RS.5 CRORE,PAID AS SHUT DOWN COST,THE FAA HELD THAT IT WAS IN THE NATURE OF A CAPITAL EXPENDITURE,THAT IT WAS NOT PROVED THAT PGHHCL HAD REALLY INCURRED ANY COST TO SHUT DOWN THE MANUFACTURING FACILITY,THAT IT WAS NOT THE CASE OF THE REIMBURSEMENT,THAT TO THAT EXTENT THE NARRATION IN SCHEDULE-18 OF THE AUDITED PROFIT AND LOSS ACCOUNT AND THE BALANCE SHEET WAS MISLEADING,THAT IT WAS THE CASE OF OUTRIGHT COMPENS ATION. THE FAA ALSO HELD THAT THE AMOUNT PAID OF RS. 6 CRO RES REPRESENTED NET PRESENT VALUE OF THE INCOME STREAM FOR FIVE YEARS THAT PGHHCL WAS EXPECT ED TO LOOSE AS A RESULT OF TERMINATION OF THE MANUFACTURING AGREEMENT,THAT AMOUNT IN QUESTION WA S NOT A REVENUE EXPENDITURE OF THE ASSESSEE,THAT THE EXPENDITURE WAS NOT INCURRED TO E ARN ANY INCOME,THAT NO EXPENDITURE COULD BE ALLOWED UNLESS IT HAD BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS OF THE ASSESSEE,THAT THE ONUS WAS ON THE A SSESSEE TO PROVE THAT THE EXPENDITURE WAS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS,THAT THE PAYMENT MADE BY THE ASSESSEE WAS NOT ADMISSIBLE AS A REVENUE EXPENDITUR E,THAT IT WAS AN APPLICATION OF THE INCOME ALREADY EARNED AND A CAPITAL OUTLAY,THAT THERE WAS NO MATCHING REVENUE EARNED,THAT THERE WAS NO EXPECTATION OR POSSIBILITY TO EARN ANY INCOME BY SPENDING OR EXPENDING THE AMOUNT OF RS. 6 CRORES,THAT IT WAS PURE AND SIMPLE CASE OF DISBURSE MENT OF THE INCOME OR CAPITAL.FINALLY,HE HELD THAT THE AMOUNT OF RS. 18,04,69,729/ - WAS NOT PAID BY THE ASSESSEE FOR REASON OF ANY CON TRACT,THAT PAYMENT WAS VOLUNTARILY AND WITHOUT ANY CONTRACTUAL OR STATUTORY OBLIGATION, THAT THE GROUP CONCERNS WERE WORKING ON PRINCIPAL TO PRINCIPAL BAS IS, THAT THE COMPANIES WERE CONTROLLED BY THE SAME GROUP, THAT THEY WERE WORKING IN CLOSE PROXIMI TY WITH EACH OTHER, THAT THE BUSINESS TRANSACTIONS WERE SO ARRANGED THAT THEY COMPLEMENTE D AND SUPPLEMENTED THE WORK OF EACH OTHER,THAT THE CONFIDENTIALITY OF THE INFORMATION O R KNOWHOW WAS WELL PROTECTED BY THE MUTUAL AGREEMENT. 5.3. THE AR STATED THAT THERE WAS NO BAR ON THE PAYMENT OF COMPENSATION UNDER THE AGREEMENT,THAT ASSESSEE HAD ENTERED INTO AN AGREEMENT TO TERMINATE SHAMPOO MANUFACTURING AGREEMENT WITH PGHHLC,THAT THE ASSESSEE WAS BENEFITED BY TERMINATI ON OF AGREEMENT, THAT LATER ON IT STARTED IMPORTING SHAMPOO, THAT IT HAD REPLACED THE SUPPLIE R, THAT NO NEW ARTICLE FORMULATION WAS ACQUIRED, THAT PGHHCL WAS NOT SUPPLYING THE SHAMPOO AS PER THE NEW FORMULATION,THAT 9 ITA.NO.1110&1551/M/2 005 VOLUNTARY PAYMENT OUT OF COMMERCIAL EXPEDIENCY WAS ALLOWABLE, THAT COMPENSATION WAS PAID FOR LOSS OF BUSINESS BASED ON AN INDEPENDENT VALUATION, THAT THE ASSESSEE WAS NOT COMPENSATING FOR SUPPLY OF NEW PRODUCT, THAT THE ASSESSEE HAD TAKEN OVER THE ASSETS FROM PGHHCL THAT IT WAS PART OF THE BLOCK OF THE ASSETS OF THE ASSESSEE, THAT IT WAS PART OF TOTAL COMPENSATION PAID BY IT, THAT TH E MANUFACTURING AGREEMENT WAS RENEWED TWICE BEFORE TE RMINATION, THAT THE ASSESSEE AND PGHHCL WERE NOT RELATED PARTIES, THAT BOTH WERE PAYING TAX ES AT MAXIMUM MARGINAL RATE. HE RELIED UPON THE CASES OF MOTOR INDUSTRIES CO. LTD. (223 ITR 11 2) GLAXO LTD. (114 ITR 110), KASHMIRA RADHAKISHAN (155 ITR 609),TATA SONS LTD.(18 ITR 460 )HEALTH & CO. PVT. LTD. (114 ITR 605)J.S.S.PVT. LTD. (19 TAXMANN 521),WESTERN INDIA OIL DISTRIBUTING CO. LTD.( 77 ITR 140) BIKANER GYPSUMS LTD.(53 TAXMAN 279)ASHOK LEYLAND (8 6 ITR 459),SENAIRAM DOONGARAMALL (42 ITR 392). DR ARGUED THAT ASSESSEE HAD MADE PAYMENT TO RELATED PARTY, THAT IT WAS HIT BY THE PROVISIONS OF SECTION 40A(2)(B) OF THE ACT,THAT IT WAS DIVERSION OF PROFIT TO SISTER CONCERN BY THE ASSESSEE, THE PAYMENT MADE BY THE ASSESSEE WAS NOT CONTRACTUAL PA YMENT, THAT IT WAS VOLUNTARY PAYMENT, THAT IT HAD NOT PAID ANY COMPENSATION TO OTHER PARTIES WITH WHOM SIMILAR KIND OF TERMINATION AGREEMENT WERE ENTERED INTO, THAT ASSESSEE HAD PURCHASED ASSE TS THAT WERE USABLE BY THE SISTER CONCERN, THAT SAME WERE PURCHASED FOR BUSINESS PURPOSES. ON A QUE RY BY THE BENCH ABOUT THE BASIS AND JUSTIFICATION OF PAYMENT OF RS. 7.40 CRORES, THE AR STATED THAT IT WAS ON THE BASIS OF INSURED VALUE. ON A FURTHER QUERY ABOUT THE BASIS FOR PAYMENT OF R S. 6 CRORES, 5 CRORES AND RS. 7.04 CRORES THE AR STATED THAT SAME WERE PAID ON AN ESTIMATED BASIS AND THERE WERE NOT ON THE BASIS OF ACTUAL COST. IT WAS ALSO STATED THAT ONE COMMITTEE HAD REC OMMENDED THE VALUATION. IN THE REJOINDER THE AR STATED THAT BOOKS OF ACCOUNTS OF THE ASSESSEE WE RE NOT REJECTED BY THE AO THAT PAYMENT WAS MADE IN PURSUANCE OF THE AGREEMENT. 5.4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US. WITH REGARD TO ADDITION EVIDENCES SUBMITTED,THE AR STATED THAT THERE WERE F INANCIAL STATEMENTS OF EARLIER AND SUBSEQUENT YEARS, THAT IN THAT SENSE THERE WERE NOT FRESH EVID ENCES.AR LEFT THE ISSUE OF ADMISSION OF ADDITIONAL EVIDENCES TO THE DISCRETION OF THE BENCH AFTER GOIN G THROUGH THE FINANCIAL STATEMENTS OF EARLIER AND SUBSEQUENT YEAR, WE ARE OF THE OPINION THAT SAME SH OULD BE ADMITTED,AS PER THE PROVISIONS OF RULE 29 OF THE ITAT RULES,1963. THE BASIC PRINCIPLES OF TAXATION JURISPRUDENCE HOLD THAT TO BE AN ALLOWABLE EXPENDITURE,WITHIN THE MEANING OF PROVISIONS OF SECTION 37(1) OF THE ACT, IT HAS TO BE EXAMINED WHETHER THE EXPENSE HAS BEEN INCURRED WITH THE SOLE OBJECT OF FURTHERING TH E TRADE OR BUSINESS INTEREST OF THE ASSESSEE UNALLOYED OR UNMIXED WITH ANY OTHER CONSIDERATION. IF THE EXPENSE IS FOUND TO BEAR AN ELEMENT OTHER THAN THE TRADE OR BUSINESS INTEREST OF THE AS SESSEE THE EXPENDITURE IS NOT ALLOWABLE ONE.TO BE A PERMISSIBLE DEDUCTION, THERE MUST BE A DIRECT AND INTIMATE CONNECTION BETWEEN THE EXPENDITURE AND THE CHARACTER OF THE ASSESSEE AS A TRADER. THE OTHER PRINCIPLE OF TAXATION HOLD THAT THE TEST OF COMMERCIAL EXPEDIENCY CANNOT BE REDUCED TO THE SHAPE OF A RITUALISTIC FORMULA,NOR CAN IT BE PU T IN A WATER-TIGHT COMPARTMENT,THAT ITEMS OF EXPENDITURE ARE TO BE CONSIDERED FROM THE POINT OF VIEW OF A NORMAL, PRUDENT BUSINESSMEN,THAT THE APPELLATE AUTHORITIES HAVE TO PLACE THEMSELVES IN T HE POSITION OF A BUSINESSMAN AND FIND OUT WHETHER THE EXPENSES INCURRED COULD BE SAID TO HAVE BEEN LAID OUT FOR THE PURPOSES OF THE BUSINESS. WHILE DEFINING THE PHRASE COMMERCIAL EXPEDIENCY,THE LUCKNOW BENCH OF HONBLE ALLAHABAD HIGH COURT(352ITR8)HAS,IN THE CASE OF SAHU ENTERPRI SES PVT. LTD.,HELD AS UNDER: THE COMMERCIAL EXPEDIENCY WOULD INCLUDE SUCH PURPOS E AS IS EXPECTED BY THE ASSESSEE TO ADVANCE ITS BUSINESS INTEREST AND MAY INCLUDE MEASURES TAKE N FOR PRESERVATION, PROTECTION OR ADVANCEMENT OF ITS BUSINESS INTERESTS. THE BUSINESS INTEREST OF THE ASSESSEE HAS TO BE DISTINGUISHED FROM THE PERSONAL INTEREST OF ITS DIRECTORS OR PARTNERS, AS THE CASE MAY BE. HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF HAS EXPLAINED THE CONCEPT OF COMMERCIAL EXPEDIENCY IN FOLLOWING MANNER: 10 ITA.NO.1110&1551/M/ 2005 THE COMMERCIAL EXPEDIENCY WOULD INCLUDE SUCH PURPO SE AS IS EXPECTED BY THE ASSESSEE TO ADVANCE ITS BUSINESS INTEREST AND MAY INCLUDE MEASU RES TAKEN FOR PRESERVATION, PROTECTION OR ADVANCEMENT OF ITS BUSINESS INTERESTS. THE BUSINESS INTEREST OF THE ASSESSEE HAS TO BE DISTINGUISHED FROM THE PERSONAL INTEREST OF ITS DIRECTORS OR PART NERS, AS THE CASE MAY BE.. THE APPROPRIATE TEST IN SUCH A CASE IS TO FIND OUT AS TO WHETHER A REASONABLE PERSON,STEPPING INTO THE SHOES OF THE DIRECTORS/PARTNERS OF THE ASSESSEE AND WORKING SOLELY IN THE INTEREST OF THE ASSESSEE, WOULD HAVE INCURRED SUCH EXPENDITURE OR N OT. IN THE MATTER OF J. K. PANTHAKI AND CO. THE HONBLE KARNATAKA HIGH COURT(344ITR 329) HAS HELD: IN ORDER TO BE DEDUCTIBLE UNDER SECTION 37 OF THE INCOME-TAX ACT, 1961, THE MONEY PAID OUT MUST BE WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BU SINESS AND FURTHER MUST NOT BE (I) CAPITAL EXPENDITURE,OR(II)PERSONAL EXPENSE.THE EXPENDITURE INCURRED MUST BE FOR COMMERCIAL EXPEDIENCY. THE EXPRESSION COMMERCIAL EXPEDIENCY IS AN EXPRESSI ON OF WIDE IMPORT AND INCLUDES SUCH EXPENDITURE AS A PRUDENT BUSINESSMAN INCURS FOR THE PURPOSE OF BUSINESS. FROM THE ABOVE IT IS CLEAR THAT COMMERCIAL EXPEDIEN CY AND PRUDENCE OF A BUSINESSMAN ARE INSEPARABLE. WE ARE ALSO OF THE VIEW THAT MERE EXIS TENCE OF AGREEMENT NOT SUFFICIENT NOR THE GENUINENESS OF THE PAYMENT ALONE CAN TILT THE SCALE IN FAVOUR OF THE ASSESSEE FOR ALLOWING THE EXPENDITURE IN THE NAME OF COMMERCIAL EXPEDIENCY.IF THE ASSESSEE CANNOT PROVE THE EXISTENCE OF PRUDENCE OF A BUSINESSMAN FOR AN EXPENSE INCURRED,I T CANNOT CLAIM THAT COMMERCIAL EXPEDIENCY WAS INVOLVED IN THE TRANSACTION IN QUESTION. HERE W E WOULD ALSO LIKE TO REFER TO THE CASE OF (327ITR150) DELIVERED BY THE HONBLE DELHI HIGH COU RT.IN THAT MATTER YUM RESTAURANTS (INDIA) P. LTD.,THE ASSESSEE HAD MADE CONTRIBUTION TO ITS S UBSIDIARY COMPANY TOWARDS ADVERTISEMENT EXPENSES,THOUGH THERE WAS NO OBLIGATION TO MAKE SUC H CONTRIBUTION.TAKING IN TO CONSIDERATION THE FACTS AND CIRCUMSTANCES OF THE CASE,THE HONBLE COU RT HELD THAT EXPENDITURE WAS NOT ALLOWABLE BECAUSE OF THE ABSENCE OF OBLIGATION OF THE TO INCU R THE EXPENDITURE. IN SHORT,IF A PAYMENT IS DICTATED BY BUSINESS NECES SITY AND COMMERCIAL EXPEDIENCY AND RELATED TO ENHANCEMENT OF ITS PROFITABILITY OF THE BUSINESS OF AN ASSESSEE,SAME IS ALLOWABLE U/S.37(1) OF THE ACT,BUT NOT OTHERWISE. 5.4.1. BEFORE PROCEEDING FURTHER,IT WILL BE USEFUL TO CONS IDER THE BACKGROUND OF THE TRANSACTION.WE FIND THAT THE ASSESSEE HAS MADE PAYMENT OF RS.18,04 ,69,729/-TO PGHHCL,THAT THE PAYMENT WAS MADE UNDER THREE DIFFERENT HEADS I.E.COMPENSATION F OR TERMINATION OF SHAMPOO BUSINESS(RS.6 CRORES),REIMBURSEMENT OF EXPENSES OF SHAMPOO BUSINE SS(RS.5 CRORES) AND LOSS ON FIXED ASSETS BOUGHT FROM PGHHCL(RS.7.04CORES),THAT THE AO AND TH E FAA HAD DISALLOWED THE CLAIM MADE BY THE ASSESSEE. PERUSAL OF THE ORIGINAL MANUFACTURING AGREEMENT(MA) ,DATED 19.11.1993REVEAL THAT IT WAS ENTERED INTO ON PRINCIPAL TO PRINCIPAL BASIS,IT WAS EFFECTI VE FOR A PERIOD OF THREE YEARS FROM THE DATE OF COMMENCEMENT(CL.8)AND COULD BE RENEWED,THAT ANY OF THE PARTIES COULD TERMINATE THE AGREEMENT BY SERVING A 180 DAYS ADVANCE NOTICE,THAT THE RIGH TS AND DUTIES OF BOTH THE PARTIES WERE CLEARLY MENTIONED IN THE AGREEMENT,THAT NONE OF THE CLAUSE EXPECTED THE OTHER PARTY TO PAY ANY COMPENSATION FOR TERMINATION OF AGREEMENT,THAT ON T HE TERMINATION OF AGREEMENT PGHHCL HAD TO RETURN ALL THE DOCUMENTS COMPRISING THE FP SPECIFIC ATION SUPPLIED TO IT BY THE ASSESSEE AND WAS NOT TO MAKE ANY USE OF THOSE SPECIFICATION,THAT THE ONLY OBLIGATION ON PART OF THE ASSESSEE,IN MONETARY TERMS,WAS TO PURCHASE ALL OR THE BALANCE O F THE PRODUCTS ORDERED BY IT AND LYING IN STOCK WITH THE SUPPLIER.PURCHASE OF THE RAW MATERIA LS AND PACKING MATERIALS LYING IN STOCK WITH PGHHCL WAS LEFT TO THE DISCRETION OF THE ASSES SEE.IT WAS NOT BOUND TO PURCHASE THE SAME,AS WAS THE CASE OF FINISHED GOODS. THE ASSESSEE HAD NOT PRODUCED ANY EVIDENCE REGARDIN G RENEWAL OF THE ORIGINAL AGREEMENT THAT WAS TO BE TERMINATED AFTER THREE YEARS.NEITHE THE AO/FAA NOR WE ARE AWARE AS TO WHETHER THERE WAS ANY CHANGE IN THE TERMS AND CONDI TIONS OF RENEWED AGREEMENTS ENTERED IN TO BY THE ASSESSEE WITH PGHHCL.IT WAS ALSO NOT C LARIFIED,FOR THE REASONS BEST KNOWN TO THE ASSESSEE, AS WHY THE SUBSEQUENT AGREEMENT COULD NOT BE PRODUCED BEFORE ANY OF THE AUTHORI -TIES.IN THESE CIRCUMSTANCES,IF HAS TO BE H ELD THAT EITHER NO AGREEMENT/AGREEMENTS 11 ITA.NO.1110&1551/M/ 2005 WERE ENTERED IN TO 1996,AND 1999 OR EVEN IF ENTERED IN TO THERE WAS NO DIFFERENCE IN THEM AND THE MA.THE ORIGINAL AGREEMENT DOES NOT CAST ANY OBLIGATION ON PART OF THE ASSESSEE TO PURCHASE THE ASSETS USED BY PGHHCL IN THE MANUFACTU RING OF THE PRODUCTS OR TO BEAR ANY OTHER COSTS REGARD -ING SHUT DOWN OF THE BUSINESS O R IN LIEU OF THE PROJECTED FUTURE PROFITS.IN SHORT,THE ORIGINAL AND EFFECTIVE AGREEMENT DOES NOT PROVIDE FOR ANY MONETARY COMPENSATION BY OTHER PARTY IN CASE OF TERMINATION OF AGREEMENT. NOW WE WOULD CONSIDER THE TERMINATION AGREEMENT(TA) AND ITS BACKGROUND.AS PER THE ASSESSEE IT FOUND THAT SELLING CERTAIN SHAMPOO BRANDS WAS N OT VIABLE OR PROFITABLE COMMERCIALLY THAT WERE BEING MANUFACTURED BY PGHHCL.THERREFORE,IT ASKED TH E SUPPLIER TO CHANGE FORMULATIONS BUT OFFER MADE BY IT WAS NOT ACCEPTED BY THE SUPPLIER F OR CERTAIN REASONS.WHILE GOING THROUGH THE TA,DATED 01.08.2000,WE HAVE NOTICED THAT THE ASSESS EE HAD TAKEN OVER CERTAIN FINANCIAL OBLIGATION ON ITS OWN,THOUGH THEY WERE NOT THE PART OF THE ORIGINAL AGREEMENT.IN THESE CIRCUMSTANCES THE PAYMENT MADE BY THE ASSESSEE IS A VOLUNTARY PAYMENT.THE ASSESSEE HAS JUSTIFIED IT ARGUING THAT EXPENDITURE WAS INCURRED BECAUSE OF COMMERCIAL EXPEDIENCY. THE ORIGINAL MA MENTIONS IN CLEAR TERMS THAT THE AG REEMENT WAS ON PRINCIPAL TO PRINCIPAL BASIS AND BOTH THE PARTIES TO THE AGREEMENT WERE ON EQUAL FOOTING.FROM THE TA IT IS EVIDENT THE ASSESSEE HAD NOT REFUSED TO PURCHASE GOODS FROM ITS SUPPLIER-THE BASIC REASON FOR TERMINATING THE AGREEMENT WAS CHANGE IN FORMULATION.WE FIND THA T NEITHER IN THE MA OR THE TA THERE WAS ANY CONDITION THAT THE ASSESSEE WOULD PURCHASE MINI MUM QUANTITY OF GOODS ANNUALLY OR THAT IN CASE OF FAILURE ON PART OF THE ASSESSEE PGHHCL W OULD BE COMPENSATED.IN THESE CIRCUMSTANCES COMPENSATION PAID BY IT TO THE SUPPLI ER CANNOT BE TERMED BUSINESS EXPEDIENCY.IN OUR OPINION,THE ASSESSEE HAD MADE THE PAYMENT OF RS. 6 CRORES AND RS.5 CRORES TO PGHHCL ON ITS OWN WITHOUT ANY LEGAL BINDI NG.WE DO NOT KNOW HOW THE ASSESSEE HAD ARRIVED AT THE FIGURE OF RS.5 CRORES FOR THE SO CALLED LOSS OF SHUT DOWN OF THE BUSINESS BY THE SUPPLIER. 5.4.2. AS FAR AS INVESTMENT MADE BY THE SUPPLIER IN MACHIN ERY IS CONCERNED IT HAS TO BE REMEMBERED THAT AS AN INDEPENDENT BUSINESS ENTITY I T HAD DECIDED TO MANUFACTURE GOODS FOR THE ASSESSEE AND FOR THAT MATTER IT HAD MADE INVEST MENT.THE SUPPLIER FOUND IT A PROFITABLE VENTURE AND ACCORDINGLY MADE INVESTMENT IN MACHINER Y TO MANUFACTURE SHAMPOO.THE MA OR THE TA NOWHERE MENTION THAT THE ASSESSEE HAD COMPEL LED THE SUPPLIER TO MANUFACTURE GOODS. PHHHCL INVESTED IN PLANT AND MACHINERY FOR MAKING P ROFIT AND FROM 1993 TILL THE TA IT WAS UTILISING THE MACHINERY TO SUPPLY GOODS TO THE ASSE SSEE AND ENJOYING THE FRUITS OF ITS INVESTME -NT.IN CASE OF TERMINATION OF THE AGREEMENT IF ANY LOSS WAS TO ARISE THEN IT HAS TO BE SUFFERED BY PGHHCL.BUT,IN A GRATUITOUS MOVE THE ASSESSEE DEC IDED TO TAKE OVER THE MACHINERY THAT WAS NEVER PUT TO USE B IT TO MANUFACTURE SHAMPOO AN D THUS IT SAVED PGHHCL FROM SUFFERING LOSSES.IN OUR OPINION,NO PRUDENT BUSINESSMAN WOULD BE READY FOR TAKING OVER LOSSES OF OTHERS. IT IS TRUE THAT THE REVENUE AUTHORITIES ARE NOT ENTITLED TO DECIDE AS TO WHAT THE DECISIONS BUSINESSMEN SHOULD TAKE,BUT IT IS ALSO A FACT THAT THEY CAN STEP IN TO THE SHOES OF AN ASSESSEE TO DETERMINE THE TRUE NATURE OF A TRANSACTION.IN TH E CASE UNDER CONSIDERATION,AFTER DELIBERATING UPON THE AVAILABLE FACTS IF THE AO AND THE FAA REAC HED AT THE CONCLUSION THAT EXPENDITURE INCURRED BY THE ASSESSEE WAS NOT BECAUSE OF BUSINES S EXPEDIENCY,THEN,IN OUR OPINION,THEY WERE JUSTIFIED.DURING THE COURSE OF HEARING THE AR STATED THAT THE MACHINERY WAS PURCHASED AT INSURED VALUE.THUS,THE METHOD OF VALUATION IS NO T ONE OF THE NORMAL METHOD OF VALUATION.IN OUR OPINION,THE PAYMENT WAS MADE BY TH E ASSESSEE ON AD HOC BASIS. NORMALLY,WHENEVER MA ARE INKED BOTH PARTIES TO THE AGREEMENT ABIDE BY CERTAIN CONDITIONS AND THE MA BEFORE US IS OF SIMILAR NATURE.NONE HAD TAKEN ANY EXTRA FINANCIAL BURDEN IN CASE OF DISCONTINUATION OF BUSINESS.AGREEMENTS HAVING SU CH CONDITIONS CAN EASILY BE TERMED A DECISION OF A PRUDENT BUSINESSMAN.IT IS SAID THAT T HE GUIDING FORCE OF ANY BUSINESS IS EARNING PROFIT THEREFORE IF ANY TRANSACTION RESULTS IN DELI BERATE TRANSFER WITHOUT ANY OSTENSIBLE REASON IT CAN BE ANYTHING-CHARITY,DONATION,GRATUITOUS/BENE VOLENT PAYMENT OR VOLUNTARY PAYMENT-BUT NOT A BUSINESS EXPEDIENCY.IF A BUSINESSMAN PURCHASE S PLANT AND MACHINERY FOR NOT USING THE 12 ITA.NO.1110&1551/M/ 2005 SAME FOR ITS BUSINESS,THE DECISION TO MAKE INVESTME NT IN MACHINERY CANNOT BE HELD TO BE A BUSINESS EXPEDIENCY.TA WAS ENTERED IN TO BECAUSE TH E MACHINERY OWNED BY PGHHCL WERE NOT FIT TO MANUFACTURE SHAMPOO THAT WERE MARKETABLE IN THE YEAR 2000.KNOWING THE OBSOLETENESS OF THE MACHINERY VERY WELL AND BEFOREH AND IF THE ASSESSEE DECIDED TO PURCHASE THE ASSESSEE WAS WELL WITHIN HIS RIGHT TO MAKE THE INVESTMENT.ASSESSEES ARE ENTITLED TO SPEND THEIR INCOMES IN THE MANNER THEY LIKE.BUT,CLAIMING SUCH EXPENDITURE AS ALLOWABLE EXPENDITURE,WHILE COMPUTING THE TAXABLE INCOME,IS N OT AS PER THE ESTABLISHED PRINCIPLES OF TAXATION JURISPRUDENCE.AO.S,AS THE REPRESENTATIVES OF THE STATE ARE AUTHORISED TO QUESTION THE ALLOWABILITY OF SUCH CLAIM.IN THE CASE UNDER CONSID ERATION THE AO HAS FOLLOWED THE SAME PATH.PAYMENT MADE BY THE ASSESSEE TO ITS SUPPLIER I S NOT ADMISSIBLE AS REVENUE EXPENDITURE BECAUSE IT WAS NOT INCURRED FOR EARNING ANY INCOME. WE ARE OF THE OPINION THAT THE FAA HAS RIGHTLY HELD THAT THE PAYMENT IN QUESTION WAS AN OUTRIGHT A PPLICATION OF INCOME OR DISBURSEMENT OF CAPITAL. IN SHORT,WE DO NOT FIND THAT THE PAYMENT WAS RELATE D TO FACILITATE AND AUGMENT ITS PROFIT-EARNING CAPACITY OF THE ASSESSEE.SO,IT CANNOT BE HELD THAT EXPENDITURE INCURRED BY IT WAS DICTATED BY COMMERCIAL EXPEDIENCY AND WAS AIMED AT ENHANCEMENT OF ITS PROFITABILITY. FINALLY,WE WOULD LIKE TO DISCUSS THE CASES RELIED U PON THE ASSESSEE.IN THE MATTER OF MOTOR INDUSTRIES CO. LTD.,(SUPRA)THE PAYMENT WAS CONSIDER ED EXPEDIENT TO REMOVE A RESTRICTION IN ITS RIGHT TO OPERATE IN A PARTICULAR TERRITORY WITHOUT ANY LET OR HINDRANCE FROM THE ERSTWHILE SOLE DISTRIBUTOR.GLAXO LTD.HAS INCURRED EXPENDITURE WHEN IT TERMINATED THE DISTRIBUTION AGENCY.IT HAD PAID THE AMOUNT TO ENSURE SMOOTH TRANSITION WITHOUT INTERFERENCE BY AGENTS.THUS, THE FACTS OF THE CASE UNDER CONSIDERATION ARE DIFFERENT FROM THE FAC TS OF GLAXO LTD. (SUPRA).IN THE MATTER OF KASHMIRA RADHAKISHAN (SUPRA),THERE WAS NOT AGREEMEN T BETWEEN THE PARTIES AND AMOUNT WAS PAID TO ASSOCIATION.IN THE CASE OF SENAIRAM DOONGARMALL( 42ITR392)THE ISSUE TO BE DECIDED BY THE HONBLE APEX COURT WAS WHETHER THE AMOUNT RECEIVED BY THE ASSESSEE WAS TO BE TAXED AS REVENUE RECEIPT OR CAPITAL RECEIPT.THE HONBLE COURT DID NO T DECIDE THE ISSUE OF COMMERCIAL EXPEDIENCY. SIMILAR IS THE SITUATION OF THE OTHER CASES.FACTS O F THE CASE UNDER CONSIDERATION ARE TOTALLY DIFFEREN T AND ONE OF THE IMPORTANT FACTOR IS THAT BOTH THE EN TITIES ARE OF THE SAME GROUP. WE HAVE ALSO TAKEN NOTE OF THE FACT THAT BOTH THE P ARTIES ARE OF THE SAME GROUP-THEY ARE CONTROLLED BY THE PARENT COMPANY LOCATED IN THE U S A-ONE IS C ONTROLLED DIRECTLY AND THE OTHER IS CONTROLLED THROUGH A SUBSIDIARY.WE HAVE GONE THROUGH THE SHARE HOLDING PATTERNS OF BOTH THE ENTITIES.IF THE PRINCIPLE OF SURROUNDING CIRCUMSTANCES,AS ENUMERA TED IN THE CASES OF DURGA PRASAD MORE (82 ITR 540)AND OF SUMATI DAYAL (214 ITR 801)IS CONSIDE RED,WITH REGARD TO THE MA AND THE TA,IT BECOMES CLEAR THAT THE ORDER OF THE FAA DOES NOT SU FFER FROM ANY LEGAL OR FACTUAL INFIRMITY.SO, AFTER,DELIBERATING UPON THE PECULIAR FACTS AND CIRC UMSTANCES OF THE CASE,WE DO NOT WANT TO INTERFERE WITH HIS ORDER.GROUND NO.3 IS DECIDED AGAINST THE A SSESSEE. AS A RESULT,APPEAL FILED BY THE AO IS DISMISSED AND THE APPEAL OF THE ASSESSEE STANDS PARTLY ALLOWED . +3 '*+ , ( '4 ( + 56 7 '*+ ( 0+3 4 ( + 56 ORDER PRONOUNCED IN THE OPEN COURT ON 14TH NOVEMBER,2014 . 0 ( -.# 8 9' 14 UOACJ UOACJ UOACJ UOACJ , 201 4 . ( / : SD/- SD/- ( / VIJAY PAL RAO ) ( ! ! ! ! / RAJENDRA) /JUDICIAL MEMBER /ACCOUNTANT MEMBER / MUMBAI, 9' /DATE: 14.11.2014 S.K. 13 ITA.NO.1110&1551/M/ 2005 0 0 0 0 ( (( ( &+ &+ &+ &+ ; #+ ; #+ ; #+ ; #+ / COPY OF THE ORDER FORWARDED TO : 1. ASSESSEE / $% 2. RESPONDENT / &'$% 3. THE CONCERNED CIT(A)/ < = , 4. THE CONCERNED CIT / < = 5. DR F BENCH, ITAT, MUMBAI / >/ &+' , . . . 6. GUARD FILE/ / '+ &+ //TRUE COPY// 0' / BY ORDER, ? / 5 DY./ASST. REGISTRAR , /ITAT, MUMBAI .