DCIT CIR -3(1), MUMBAI V. M/s. MECHANALYSIS (INDIA) LTD., MUMBAI

ITA 1817/MUM/2007

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 48898 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 2 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-05-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I
• Next Hearing Date: 09-03-2011
• Assessment Year: 2003-2004
• Appeal Filed On: 01-03-2007
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S K SINGH
• Assessee Lawyers: KUNJAN GANDHI
• Keywords: Capital asset; Business expenditure; Source of fund; Bad and doubtful debts; Capital receipt
• Section: 143(3); 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH I MUMBAI BEFORE SHRI BEFORE SHRI BEFORE SHRI BEFORE SHRI R.K. PANDA R.K. PANDA R.K. PANDA R.K. PANDA (AM) AND SMT. ASHA VIJAYARAGHAVAN (JM) (AM) AND SMT. ASHA VIJAYARAGHAVAN (JM) (AM) AND SMT. ASHA VIJAYARAGHAVAN (JM) (AM) AND SMT. ASHA VIJAYARAGHAVAN (JM) ITA NO.1817/MUM/2007 ASSESSMENT YEAR- 2003-04 THE ITO, WARD - 3(1)(4), AAYAKAR BHAVAN, MUMBAI-400 020 VS. M/S. MECHANALYSIS (INDIA) LTD., 47/48, JOLLY MAKER CHAMBER-II, NARIMAN POINT, MUMBAI-400 021 PAN-AAACC4509P (APPELLANT) (RESPONDENT) ITA NO.615/MUM/2007 ASSESSMENT YEAR- 2003-04 M/S. MECHANALYSIS (INDIA) LTD., 47/48, JOLLY MAKER CHAMBER-II, NARIMAN POINT, MUMBAI-400 021 PAN-AAACC4509P VS. THE ITO, WARD - 3(1)(4), AAYAKAR BHAVAN, MUMBAI-400 020 (APPELLANT) (RESPONDENT) A SSESSEE BY: SHRI KUNJAN GANDHI & MS. USHA DALAL DEPARTMENT BY: S.K. SINGH O R D E R O R D E R O R D E R O R D E R PER ASHA VIJAYARAGHAVAN (JM) PER ASHA VIJAYARAGHAVAN (JM) PER ASHA VIJAYARAGHAVAN (JM) PER ASHA VIJAYARAGHAVAN (JM) THIS SET OF CROSS APPEALS CONSISTING OF ONE APPEAL FILED BY THE ASSESSEE AND THE OTHER APPEAL FILED BY THE REVENUE IS DI RECTED AGAINST THE ORDERS DT. 29.12.2006 PASSED BY THE LD. CIT(A)-X VIII FOR THE ASSESSMENT YEAR 2003-04. ITA NO. 1817/M/2007 ITA NO. 1817/M/2007 ITA NO. 1817/M/2007 ITA NO. 1817/M/2007- -- - REVENUES APPEAL REVENUES APPEAL REVENUES APPEAL REVENUES APPEAL 2. THE FIRST TWO GROUNDS OF APPEAL BY THE REVENUE IS A GAINST DELETION BY THE LD.CIT(A) OF THE DISALLOWANCE MADE BY THE AO (I) OF `. MECHANALYSIS (I) LTD. 2 81,90,000/- PAID TO M/S CONCAST (INDIA) LTD AS PROFESSI ONAL FEES/ CONSULTANCY FEES AND (II) `. 22,35,917/- PAID TO M/S MISTRY ENGINEERS AS COMMISSION. 3. THE ASSESSING OFFICER HAS DISALLOWED A SUM OF `. 81,90, 000/- PAID TO M/S. CONCAST INDIA LTD FOR PROFESSIONAL FEES CONSULT ANCY ON THE GROUND THAT THERE IS NO EVIDENCE TO PROVE WHETHER SUC H SERVICES WERE TAKEN BY THE ASSESSEE AND OR THERE WAS NO NECESSITY FOR S UCH SERVICES AND OR THE AMOUNT PAID WAS UNREASONABLE AND EXCESSIVE THE AO FURTHER DISALLOWED `. 22,35,917/- PAID TO MISTRY ENGI NEERS FOR SALES COMMISSION. 4. THE AO IN HIS ASSESSMENT ORDER HAS OBSERVED THAT THE ASSESSEE COMPANY IS IN THE BUSINESS OF SALES AND MANUFACTURE OF VI BRATION ANALYZING EQUIPMENTS. DURING THE YEAR THE ASSESSEE COMPA NY HAS CLAIMED TO HAVE SPENT A SUM OF `. 81.90 LAKHS TOWARDS PROFESSIONAL FEES PAID TO M/S CONCAST INDIA LTD., WHICH IS A SISTER CONCERN OF THE ASSESSEE COMPANY. THE ASSESSEE WAS ASKED TO EXPLAIN THE REASON S FOR THIS PAYMENT AND THE NATURE OF SERVICES OBTAINED FROM M//S CONCAST INDIA LTD., IN ITS REPLY DATED 13.9.2005, THE ASSESSEE H AS GIVEN THE DETAILS AS PROFESSIONAL FEES PAID FOR DESIGN ENGINEERING CONSULTANCY AND TECHNICAL SUPPORT FOR SUBMISSION OF QUOTATIONS FOR LARGE VALUE OF TENDER ENQUIRY. A PERUSAL OF VARIOUS CORRESPONDENCES BE TWEEN THE ASSESSEE COMPANY AND M/S CONCAST INDIA LTD., REVEALED THA T THE SCOPE OF WORK WAS FIXED BY ASSESSEES LETTER DATED 4.3.2002 WH ERE FOUR PARAMETERS WERE LAID DOWN WHICH ARE REPRODUCED BELOW . I. YOU WILL PROVIDE US ASSIST US IN PREPARATION OF OUR QU OTATIONS (ESPECIALLY WITH REGARD TO TECHNICAL ASPECT) IN OUR PROSPECTIVE CUSTOMERS AGAINST THEIR INQUIRIES /TENDERS. YOU WILL AL SO PREPARE NECESSARY DRAWING REQUIRED FOR TENDERING. II. YOU WILL ALSO PREPARE DETAILED MANUFACTURING DRAW INGS/ DESIGNS AS ALSO PROVIDE US DETAILED MATERIALS SPECIFICATIO NS MECHANALYSIS (I) LTD. 3 REQUIREMENTS BASED ON BASIC DESIGNS SKETCHES PROVIDED BY US. III. YOU WILL PROVIDE US TECHNICAL SUPPORT IN EXECUTING VA RIOUS ORDERS AS AND WHEN REQUIRED. IV. YOU WILL DEPUTE YOUR TECHNICAL PERSONNEL FOR THE PUR POSE OF ERECT AND COMMISSIONING OF VARIOUS SYSTEMS AT OUR CUSTOME RS SITES. 5. THE AO ASKED THE ASSESSEE TO PROVE THE GENUINENESS OF THIS TRANSACTION BY PRODUCING PROJECT WISE DETAILS OF THE ABOVE SERVICES UTILIZED BY IT. IT WAS ALSO ASKED TO FURNISH THE NAMES O F TECHNICAL PERSONNEL DEPUTED BY M/S CONCAST INDIA LTD. THE ASSESSEE D ID NOT FURNISH ANY OF THESE DETAILS. THE AO HELD THAT THE ON US TO PROVE THE GENUINENESS OF THIS TRANSACTION WAS ON THE ASSESSEE WHICH IT HAS FAILED TO PROVE. 6. THE AO FURTHER CONCLUDED THAT THAT THER E WAS NO NEED FOR ANY SUCH CONSULTANCY. PREVIOUS TO THE YEAR UNDER ASSESSMENT T HERE WAS NO SUCH EXPENDITURE INCURRED BY THE ASSESSEE FOR ANY SUCH CONSULTANCY. ON BEING ASKED AS TO WHY CONSULTANCY WAS RE QUIRED THIS YEAR IN ITS REPLY VIDE LETTER DATED 30.1.2006, THE A SSESSEE HAS SUBMITTED THAT IN VIEW OF NON AVAILABILITY OF TECHNI CAL ASSISTANCE HITHERTO RENDERED BY OUR COLLABORATOR M/S ENTEK IRD UK DUE TO CESSATION OF COLLABORATION WITH THEM THE COMPANY NEED ED TECHNICAL ASSISTANCE AS THE COMPANY WAS NOT FULLY EQUIPPED WITH NE CESSARY TECHNICAL PERSONNEL AND FACILITIES. 7. THE AO CONCLUDED THAT THE ASSESSEE WAS MERELY HAND LING SALES REPRESENTATION FOR ENTEK IRD BESIDES THE ASSESSEE HAS NEITH ER OBTAINED ANY CONSULTANCY FROM ENTEK IRD NOR MADE PAY MENTS FOR ANY CONSULTANCY IN LAST FEW YEARS. THEREFORE THE QUESTION O F OBTAINING CONSULTANCY FOR TENDERS QUOTATIONS DRAWING DESIGNS ETC. FROM M/S MECHANALYSIS (I) LTD. 4 ENTEK IRD, UK IN LAST FEW YEARS DOES NOT ARISE. HENCE T HE PLEA OF THE ASSESSEE THAT IN VIEW OF CESSATION OF THE COLLABORATION I T REQUIRED TECHNICAL ASSISTANT DOES NOT HOLD GOOD. THE AO FELT THA T IT IS NOTHING BUT AN EXCUSE FABRICATED BY THE ASSESSEE TO WRIGGLE OUT OF AN UNPLEASANT SITUATION. 8. THE AO POINTED OUT THAT THE ASSESSEE COMPANY HAS EMP LOYED GOOD ENOUGH NUMBER OF ENGINEERS AND TECHNICAL PERSON NEL AS ITS OWN EMPLOYEES (AS REFLECTED BY THE PERSONAL COST AND THE E XPENDITURE TOWARD TA/DA) THE SERVICES SUPPOSEDLY OBTAINED FROM M/S CONCAST INDIA LTD FOR RUNNING OF THE BUSINESS ARE BEING RENDER ED BY ASSESSEES OWN EMPLOYEES FOR PAST SO MANY YEARS. THUS THERE WAS N O BUSINESS REQUIREMENT OF ANY SUCH CONSULTANCY. THEREFORE FROM T HE ABOVE IT CAN BE CONCLUDED THAT THE SO CALLED CONSULTANCY OBTAINED BY THE ASSESSEE HAS NEITHER BEEN ESTABLISHED AS GENUINE NOR IS ITS REASONA BLENESS OR REQUIREMENT SUBSTANTIATED. HENCE THE AO DISALLOWED THE ENTIRE TECHNICAL FEES OF `. 81,90,000/- PAID TO M/S CONCAST ( INDIA) LTD AS PROFESSIONAL FEES/ CONSULTANCY FEES. 9. FROM THE DETAILS FURNISHED OF COMMISSION PAYMENTS MADE BY THE ASSESSEE, OUT OF THE TOTAL COMMISSION OF `. 25,64,222/- D EBITED DURING THE YEAR, A SUM OF `.22,35,917/- HAS BEEN PAID TO M/ S MISTRY ENGINEERS, NEW DELHI. ON FURTHER ENQUIRIES IT WAS LEARNT THAT TH E M/S MISTRY ENGINEERS IS A PROPRIETORY CONCERN OF THE RELATIVE OF ONE THE DIRECTORS. THE ASSESSEE WAS ASKED TO FURNISH COPIES OF BILLS FOR THIS PA YMENT MADE ALONG WITH AGREEMENT FOR COMMISSION AGENCY VIDE NOTICE U/S 142(1)DATED 22.8.1005 AND THIS WAS FOLLOWED BY FURTH ER REQUEST DATED 5.1.2006 AND 12.1.2006. 10. THE AO HELD THAT THE ASSESSEE HAS FAILED TO FURNISH THE BILLS AS REQUIRED. A COPY OF THE AGREEMENT FOR COMMISSION PAYM ENTS WAS FILED MECHANALYSIS (I) LTD. 5 ON 12.1.2006. THE BILLS SUPPOSE TO HAVE BEEN RECEIVED FROM M/S MISTRY ENGINEERS WERE NOT PRODUCED. A PERUSAL OF THE AGREEM ENT WITH M/S MISTRY ENGINEERS REVEALS THAT THEY WERE THE AGENTS FOR INDIGENOUS PRODUCTS AS WELL AS IMPORTED PRODUCTS TO VARIOUS PARTIE S LIKE DEFENCE SERVICES IN INDIA, STATE ELECTRICITY BOARDS POWER STAT ION IN THE STATE OF HARYANA, PUNJAB, UTTAR PRADESH AND HIMACHAL PRADESH A ND NTPC POWER STATIONS IN THESE STATES AS WELL AS OUTSIDE THESE STATES ETC . AS REGARDS TO THE RATE OF COMMISSION IT WAS STRUCTURED UPON VARIO US RIDERS AT RATES BETWEEN 4% TO 12.5%. THE ASSESSEE WAS ASKED TO FURNISH P ARTY WISE SALES FIGURES AND THE CORRESPONDING AMOUNT OF COMMISSION FOR THE DUE VERIFICATION. IT WAS ALSO ASKED TO FURNISH THE COPIES OF BILLS RECEIVED FROM M/S MISTRY ENGINEERS FOR THE SERVICES RENDERED. THE PARTY HAS COMPLIED WITH NEITHER OF THE TWO ABOVE. IT HAS FURNI SHED COPIES OF A FEW CORRESPONDENCE WHICH IS ONLY LETTERS SUPPOSEDLY WRITTEN BY THE ASSESSEE COMPANY TO ITS AGENT. THERE IS NO EVIDENCE PRO DUCED BY THE ASSESSEE IN FORM OF ANY BILLS LETTERS OR CLAIMS WHICH IT MAY HAVE RECEIVED FROM M/S MISTRY ENGINEERS ALL THE DETAILS PROD UCED BY THE ASSESSEE WERE FROM ITS OWN RECORDS. THE ASSESSEE COULD NOT P RODUCE A SINGLE LETTER BILL OR A CLAIM WHICH IT SHOULD HAVE RE CEIVED IN THE ORDINARY COURSE OF BUSINESS FROM ITS AGENTS LIKE M/S. MISTRY ENGINEE RS. THE AO OBSERVED THAT IT HIGHLY SUSPICIOUS THAT M/S MISTRY ENGIN EERS MAY HAVE RENDERED ANY SERVICES TO THE ASSESSEE AT ALL. THE STRUCTU RE OF THE ASSESSEE COMPANY IS SUCH THAT IT HAS ITS OWN LARGE TEAM OF QUALIFIED PERSONNEL WHO CARRY OUT THE JOB OF SALES AND SERVICES. T HE PAYMENT OF COMMISSION THEREFORE IS NOT ONLY UNREASONABLE BUT ALSO U NWARRANTED. FOR THE ABOVE REASONS THE AO DISALLOWED THE COMMISSION P AYABLE OF `. 22,35,197/- M/S MISTRY ENGINEERS. 11. AGGRIEVED THE ASSESSEE FILED AN APPEAL BEFORE THE LD.CIT(A). BEFORE THE CIT(A), THE ASSESSEE SUBMITTED THAT FOR THE YEAR ENDED 31.3.2003 THE COMPANY DID NOT RECEIVE ANY TECHNICAL AND PROFESSIONAL MECHANALYSIS (I) LTD. 6 ASSISTANCE FROM ITS HITHERTO PRINCIPAL IRD MECHANALYSIS ON ENTEK IRD THE COMPANY RECEIVED TECHNICAL ASSISTANCE AND PROFESSION AL GUIDANCE FROM CONCAST INDIA LTD WHO HAS BEEN IN THE BUSINESS OF RENDERING ENGINEERING SERVICES FOR THE LAST 30 YEARS. THE ASSESSEE COMPANY RECEIVED SERVICES FOR DESIGNS AND DRAWINGS AND GUIDANCE IN THE MATTER RELATING TO FILING OF TENDERS QUOTATIONS AND EXECUTIO N OF THE JOB. THE ASSESSEE FURTHER SUBMITTED AS UNDER: MECHANALYSIS (INDIA) LTD DOES NOT HAVE A DRAWING DEPARTMENT OF ITS OWN AND NO DRAWING DRAFTSMAN ON IT S PAY ROLL. BUT THEY HAVE TO SUBMIT DESIGNS AND DRAWINGS OF LAYOUT TO THEIR CUSTOMERS. THIS IS APPARENT FROM SAMPLE GIVEN AS EVIDENC E AS PART OF PAPER BOOK FILED DURING APPEAL PROCEEDINGS B EFORE CIT(A) THE DESIGNS AND DRAWINGS ARE A PART OF THE COMPILATION OF THE PAPER AND DOCUMENTS OF THE CUSTOMER VIJAYWADA THERMAL POWER STATION. THE DESIGNS AND DRAWINGS WERE PREPARED AT THE DRAWING DEPARTMENT OF CONCAST INDIA LTD IN THE PAST DESIGNS AN D DRAWINGS WERE SUPPLIED BY THE PRINCIPAL TO THE ASSESSEE COMPANY. SUBSEQUENT TO THE FINANCIAL YEAR 31.3.2003 THE ASSESSEE COMPANY HAS EMPLOYED MR. PETER AS ITS CEO FROM U.K. WH O WAS AN ASSOCIATE WITH THE ASSESSEES PRINCIPAL AND HE WAS WORK ING FULL TIME WITH ASSESSEE COMPANY FROM 1.4.2003. A DRAWI NG DRAFTS MAN WAS ALSO APPOINTED WE.F. 1.4.2003, TOGETHE R WITH THESE EMPLOYEES THE ASSESSEE COMPANY IS ABLE TO PREPARE DESIGNS AND DRAWINGS ON THEIR OWN FROM 1.4.2003. THUS THE FACT THAT THE DESIGNS AND DRAWINGS SUPPLIED BY THE ASSESSEE COMPANY TO ITS CUSTOMERS WERE PROVIDED BY CONCAST INDI A LTD IT BECOMES A FINANCIAL OBLIGATION ON PART OF THE ASSESSEE C OMPANY TO COMPENSATE CONCAST (INDIA) LTD FOR ITS EFFORTS AND SERVICES. M/S CONCAST INDIA LTD PROVIDED PROFESSIONAL ASSISTANCE TO THE ASSESSEE COMPANY IN THE MATTER RELATING TO FILING O F TENDERS QUOTATIONS AND IN EXECUTION OF THE WORK TO THE ASSESSE E COMPANY TO ITS CUSTOMERS. FROM THE COPIES OF THE VARIOU S TENDERS AND QUOTATIONS FILED BY THE ASSESSEE COMPANY F IND THAT THE ASSESSEE COMPANY HAS RECEIVED THE PROFESSIONAL ASSISTANC E FROM CONCAST INDIA LTD THROUGH VERIFICATION CONTROL S (CHECK LISTS) AND PROFESSIONAL INPUTS. FOR THESE SERVICES WHICH ARE MOR E OF AN BACK OFFICE EFFORTS AND IN THE NATURE OF PROFESSIONAL GUIDANCE THE MECHANALYSIS (I) LTD. 7 ASSESSEE COMPANY IS COMMERCIALLY BOUND TO PAY PROFESSIONAL FEES TO CONCAST INDIA LTD., THE CONSULTANCY FEES PAID BY THE ASSESSEE COMPANY TO CONCAST INDIA LTD IS ASSESSED TO TAX AS INCOME IN THE HAND S OF CONCAST INDIA LTD FOR AY 2003-04 WHILE THE INCOME IS ASSESSED THE DISALLOWANCE OF THE PAYMENT OF LEGITIMATE EXPEND ITURE CAUSES SEVERE INJUSTICE AND HARDSHIP TO THE ASSESSEE COMPANY WHICH IS A PART OF THE CONCAST GROUP BESIDES CAUSING A MISCARRIAGE OF JUSTICE. ON ONE HAND THE INCOME IS ASSES SED TO TAX WHILE ON THE OTHER HAND THE EXPENSES IS DISALLOWED . THEREFORE THE ASSESSEE SUBMITTED THAT THE CONSULTANCY F EDS PAID TO CONCAST INDIA LTD SHOULD BE ALLOWED AS BUSINESS EXPEN DITURE U/S 37(1) OF THE I T ACT 1961. AS REGARDS PAYMENTS OF SALES COMMISSION TO MISTRY ENGINEERS CONCERNED THE APPELLANT HAS ENTERED SALES A GENCY AGREEMENT FOR ENGINEERING PRODUCTS BETWEEN MISTRY ENG INEERING AND THE ASSESSEE COMPANY ON 28.12.1994. THE APPELLANT HAS OBTAINED CONFIRMATION OF MISTRY ENGINEERS WHICH IS FIL ED PAGE 94- 98 OF THE PAPER BOOK. COPY OF CORRESPONDENCE AS SAMPL E EVIDENCE FOR SERVICES RENDERED BY MISTRY ENGINEERS OF T HE PAPER BOOK 112-118 IN THE PAST ALSO SUCH COMMISSION WAS ALLOWE D BY THE ASSESSING OFFICER AFTER SCRUTINY OF THE ASSESSMENT IN A Y 2001-02 THE ASSESSMENT WAS COMPLETED U/S 143(3) AND THE COMMISSION PAID TO MISTRY ENGINEERS HAS BEEN ALLOWED AS EXPENDITURE. 12. THE CIT(A) FORWARDED VARIOUS EVIDENCES REGARDING SERVICES RENDERED BY THE CONCAST INDIA P LTD., TO THE ASSESSEE C OMPANY FOR WHICH CONSULTANCY CHARGES WERE PAID AND CONFIRMATION OF MISTRY ENGINEERS TO THE AO REQUIRING HIM TO A REMAND REPORT AS THE EVIDENCES PRODUCED BY THE ASSESSEE CANNOT BE ADMITTED WITHOUT AFF ORDING OPPORTUNITY TO ASSESSING OFFICER TO EXAMINE THE EVIDENC E THE REMAND REPORT WAS CALLED FOR VIDE LETTER DATED 29.8.2006 WH ICH IS REPRODUCED AS UNDER: THE INCOME TAX OFFICER 3(1)(4) MUMBAI. MECHANALYSIS (I) LTD. 8 SUB:APPEAL NO. CIT(A) XXVIII /3/(1)(4)IT 42/06-07 F OR AY 2003-04 IN THE CASE OF MECHANALYSIS INDIA LTD -REG. PLEASE REFER TO THE ABOVE. THE ABOVE CASE WAS FILED FOR HEARING ON 28.8.2006 THE APPELLANT HAS FILED A PAPER BOOK IN WHICH IT HAS CHALLENGED THE VARIOUS ADDITIONS MADE BY YOU. A COPY OF THE PAPER BOOK IS EN CLOSED FOR READY REFERENCE. THE APPELLANT HAS FILED EVIDENCES RE GARDING THE SERVICES RENDERED BY CONCAST (INDIA) LTD TO WHOM PROFE SSIONAL FEES OF RS 8190000/- WERE PAID. THIS DOCUMENTS WERE NOT FILED BY THE ASSESSEE IN THE ASSESSMENT PROCEEDINGS. THEREFORE THE SAME IS FRESH EVIDENCE. THE APPELLANT HAS ALSO FILED COP IES OF DEBIT NOTES RAISED BY CONCAST (INDIA) LTD IN RESPECT OF EXPENDITURE INCURRED FOR RENOVATION OF THE RESIDENCE OF DIRECTOR OF THE COMPANY. YOU ARE THEREFORE REQUESTED TO EXAMINE THE FRESH EVID ENCE FILED BY THE APPELLANT AND SEND YOUR REMAND REPORT BY 20.9 .2006 ALONG WITH CASE RECORDS. SD/- (D.V. SINGH) CIT (A)XXVIII,MUMBAI. 13. THE REMAND REPORT OF THE ASSESSING OFFICER IS REPROD UCED AS UNDER: THE COMMISSIONER OF INCOME TAX (A)XXVIII,MUMBAI. *THROUGH THE ADDL. CIT RANGE 3 (1) MUMBAI. SIR, SUB: REMAND REPORT IN THE CASE OF MECHANALYSIS (INDIA ) LTD AY 2003-04 *************** KINDLY REFER TO LETTER NO CIT(A)XXVIII/REMAND REPOR T 2006-07 DATED 29.8.2006 IN APPEAL NO.CIT(A) XXVIII/3/(1)(4) IT 42/06-07. THE ASSESSEE HAS NOW FILED VARIOUS EVIDENCES OF SERVICES RENDERED BY CONCAST INDIA P. LTD. THESE EVIDENCES OF SERVICES RENDERED BY CONCAST INDIA P. LTD THESE EVIDENCES ARE VERIFIED AND FOUND IN ORDER. MECHANALYSIS (I) LTD. 9 THE ASSESSEE HAS ALSO FILED THE CONFIRMATION FOR COMMISSION PAID TO MISTRY ENGINEERS. THE SAME IS ALSO VERIFIED AND FOUN D IN ORDER. THE MATTER MAY KINDLY BE DECIDED ON THE MERITS OF TH E CASE. SD/- (R.K. JAIN) DCIT CIR 3(1)MUMBAI. 14 . THE CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE HOLDING AS UNDER: THE ASSESSING OFFICER HIMSELF HAS FOUND THE SERVICES RENDERED BY CONCAST (INDIA) P. LTD IS IN ORDE R ON THE BASIS OF EVIDENCE PRODUCED THEREFORE THERE IS NO JUSTIFICATION FOR MAKING DISALLOWANCE OF RS 8190000/ - ON ACCOUNT OF CONSULTANCY FEES PAID TO M/S CONCAST INDIA LTD MOREOVER THE CONCAST (INDIA) RENDERED THE SERVICES OF TECHNICAL ASSISTANCE DRAWING A DESIGNE PREPARED BY THE ENGINEERS OF CONCAST INDIA LTD THERE WAS NO ENGINEER ENGAGED FOR DESIGNING IN THE COMPANY. THE CONCAST IND IA LTD HAS ALSO PROVIDED PROFESSIONAL ASSISTANCE IN FILING TENDER ETC. IN VIEW OF THE ASSESSING OFFICERS REPORT AN D DETAILS FILED BY THE APPELLANT PAYMENT HAS BEEN MADE FOR BUSINESS PURPOSE AND HENCE ALLOWABLE AS BUSINESS EXPENDITURE SIMILARLY THE COMMISSION PAID TO M/SMISTRY ENGINEERS HAS BEEN ALLOWED IN EARLIER ALSO WHICH HAVE BEEN ACCEPTED AS GENUINE WHILE PASSING ORDER U/S 143(3) AND THE ASSESSING OFFICER HAS VERIFIED THE CONFIRMATION OF M /S MISTRY ENGINEERS AND FOUND IN ORDER. THEREFORE THERE IS NO JUSTIFICATION FOR MAKING DISALLOWANCE OF RS 2235917/ - ON ACCOUNT OF COMMISSION PAID TO M/S MISTRY ENGINEERS. THE ASSESSING OFFICER IS DIRECTED TO DELETE THE ADDITION OF RS 8190000/- ON ACCOUNT OF CONSULTANCY CHARGES AND RS 2235917/- ON ACCOUNT OF COMMISSION PAID TO M/S MISTRY ENGINEERS. 15. THE REVENUE IS ON APPEAL. THEIR GRIEVANCE IS THAT THE AO IN HIS REMAND REPORT HAS MERELY HELD THE ADDITIONAL EVIDENC E SUBMITTED BY THE ASSESSEE IS IN ORDER AND HAS STATED THAT THE LD. CIT(A ) CAN DECIDE ON THE MERITS. THE DISALLOWANCE MADE BY THE AO IN THE ASSESSMENT ORDER IS ON THE GROUND THAT PAYMENT MADE TO THESE TWO PARTIES ARE UNREASONABLE IN VIEW OF THE SERVICES RENDERED AND HENC E DISALLOWED THE SAME U/S 40A(2). WHEN THE LD. CIT(A) HAS SPECIFICAL LY ASKED THE MECHANALYSIS (I) LTD. 10 COMMENTS OF AO ABOUT THE CLAIM OF THE ASSESSEE BASED ON T HE EVIDENCE SUBMITTED BY THE ASSESSEE, THE AO HAD REPLIED T HAT THE EVIDENCES FURNISHED BY THE ASSESSEE, THE AO IN HIS REMAN D REPORT HAS STATED THAT THE EVIDENCES OF SERVICES RENDERED BY CONCA ST INDIA P. LTD HAVE BEEN VERIFIED AND FOUND IN ORDER. ON THE BASIS O F THIS, THE LD. CIT(A) CANNOT BE FAULTED FOR COMING TO THE CONCLUSIO N THAT THE PAYMENTS WERE FOR THE SERVICES RENDERED AND HENCE IS A N ALLOWABLE DEDUCTION. IN THE ASSESSMENT ORDER THE AO HAS HELD THAT THE SERVICES OF THE CONSULTANT ARE NOT REQUIRED AT ALL FOR THE ASSE SSEE NO SERVICES HAVE BEEN RENDERED BY M/S CONCAST INDIA LTD. WHEN THE EVIDENCE FURNISHED BY THE ASSESSEE WAS FORWARDED TO HIM, HE ACCEP TS THE SAME. THIS WOULD MEAN THAT M/S CONCAST INDIA LTD HAS RENDERE D ALL THE SERVICES AS CLAIMED BY THE ASSESSEE. FURTHER THERE IS NO WH ISPER IN THE REMAND REPORT, TO THE EFFECT THE PAYMENT IS UNREASONA BLE HAVING REGARD TO SERVICES RENDERED BY M/S CONCAST INDIA LTD. A S PER THE EVIDENCE FURNISHED COME TO THE CONCLUSION THAT THE PA YMENT IS UNREASONABLE. IF THE PAYMENT WAS CONSIDERED AS UNREASONA BLE, UNDER SEC 40A(2), IT IS FOR THE AO TO DETERMINE THE REASONAB LE CHARGES FOR SUCH SERVICES, HAVING REGARD TO MARKET RATES FOR SUCH SER VICES. THEREFORE WE CONCUR WITH THE DECISION OF THE CIT(A) REGARDING THE ALLOWABILITY OF THE AMOUNT OF `.. 81,90,000/- PAID TO M/S. CONCAST INDIA LTD ON THE BASIS OF THE REMAND REPORT OF THE AO. FURT HER REVENUE, APART MERELY RAISING THE GROUND, HAD NOT LED IN FURTHER EV IDENCE ABOUT THE UNREASONABLENESS OF THE PAYMENT TO THE CONSULTANT. 16. SIMILARLY, THE EVIDENCE REGARDING THE COMMISSION PAYMENT M/S MISTRY ENGINEERS HAS ALSO BEEN ACCEPTED BY THE AO. SIMI LAR COMMISSION PAYMENT BY THE ASSESSEE TO THE SAME PARTY HAS BE EN ACCEPTED BY THE DEPARTMENT. NO FURTHER EVIDENCE HAS BEEN BROUGHT TO OUR NOTICE FOR US TO DOUBT THAT THE COMMISSION PAYMENT . MECHANALYSIS (I) LTD. 11 17. IN THE CIRCUMSTANCES WE UPHOLD THE ORDER OF THE C IT(A) DELETING THE DISALLOWANCE OF `. 81,90,000/- ON ACCOUNT OF CON SULTANCY CHARGES PAID TO M/S CONCAST INDIA LTD AND `. 22,35,917/- ON A CCOUNT OF COMMISSION PAID TO M/S MISTRY ENGINEERS. 18. THE NEXT GROUND IS AGAINST THE DELETION BY THE L D. CIT(A) OF THE DISALLOWANCE BY THE AO OF `.23,50,717/-. THE ASSESSEE HA D WRITTEN OF DEBTS AMOUNTING TO `.24,00,717/-. THIS CONSISTS OF `. 20 ,76,185/- BEING BAD DEBT WRITTEN OFF, `. 2,58,235/-TOWARDS DEPOSITS AN D `. 66,297/- TOWARDS ADVANCES WRITTEN OFF. THE AO ALLOWED ONLY `. 50,000/- OUT OF THE DEPOSITS WRITTEN OFF AND DISALLOWED THE BALANCE. REGARDING THE ISSUE OF WRITE OFF OF BAD DEBTS AMOUNTING TO `. 2076 185/- THE AO HAD MADE ENQUIRIES. HE FOUND THAT A SUM OF `. 1,26,770/- HAS BEEN WRITTEN OFF ON ACCOUNT OF AMOUNTS RECEIVABLE FROM COCHIN SH IPYARD LTD ON ENQUIRIES CONDUCTED WITH M/S COCHIN SHIPYARD LTD A RE PLY WAS RECEIVED FROM THEM ON 18.2.2006 SAYING THAT THE PAYMENTS HAVE BEEN MADE TO THE ASSESSEE COMPANY ON 8.9.2004. SIMILALRLY THE AO FOU ND THAT AMOUNT DUE FROM BHEL WHICH HAS BEEN WRITTEN OFF ALS O HAS BEEN SUBSEQUENTLY RECEIVED. THEREFORE THE AO CONCLUDED THA T RECOVERABILITY OF THIS DEBT WAS NEVER IN DOUBT AND THE ASSESSEE HAD NO R EASON TO WRITE OFF THIS AMOUNT. 19. THE AO CONCLUDED THAT THE ASSESSEE HAS WRITTEN OFF T HE DEBTS PERTAINING TO THE SUMS WHICH ARE NOT ONLY RECOVERABL E BUT HAVE ALSO BEEN RECOVERED IN THE COURSE OF FUTURE BUSINESS. THE AS SESSEE HAS ADOPTED A SIMPLE FORMULA WHERE BY ALL THE DEBTS OUTSTA NDING FOR MORE THAN 3 YEARS HAVE BEEN WRITTEN OFF BY IT. THE REQUIR EMENT THAT THE DEBTS SHOULD ACTUALLY BE BEYOND RECOVERY HAS NOT BEEN APPLIED AT ALL. THERE IS NEITHER A VALID REASON NOR ANY BASIS FOR WRITI NG OFF THESE DEBTS. AO FELT THAT THE ASSESSEE DOES NOT APPEAR TO HAVE TAKEN HONEST JUDGMENT THAT THE SAID DEBTS HAVE BECOME BAD. THE PR OVISIONS OF BAD MECHANALYSIS (I) LTD. 12 DEBT WRITE OFF HAS BEEN USED BY THE ASSESSEE AS AN INSTRUM ENT FOR THE PURPOSE OF MANIPULATION OF ITS ACCOUNTS SO AS TO REDUC E THE PROFITS IN ALMOST ALL THE CASES THE SAID DEBTS HAVE NOT BECOME BAD . THEY ARE GOOD AND RECOVERABLE OR REALIZABLE. IN SOME CASES THE ASSESSEE HAS RECOVERED THE DEBTS IN SUBSEQUENT YEARS. THE CORRESPON DENCE OF THE ASSESSEE WITH THE DEBTORS ALSO DOES NOT REFLECT ANY SUCH SIT UATION WHERE THE DEBTS MAY HAVE BECOME UNREALIZABLE. THEREF ORE THE AO HELD THAT THE WRITE OFF OF BAD DEBTS BY THE ASSESSEE WAS A UNI LATERAL ENTRY PASSED BY THE ASSESSEE AND THE DEBTS HAVE NOT BEEN WRITTE N OFF IN A BONAFIDE MANNER. THE SUM OF `. 2076185/- WRITTEN OF F AS BAD DEBTS WAS DISALLOWED AND ADDED TO THE TOTAL INCOME OF THE A SSESSEE. HE THEREFORE HELD THAT THE ASSESSEE HAS NOT PROVED THAT THE DEBTS WERE BEYOND RECOVERY. HE THEREFORE ALLOWED ONLY `. 50,00 0/- OUT OF THE DEPOSITS, AS THEY WERE OUTSTANDING FOR A LONG PERIOD AN D DISALLOWED THE BALANCE CLAIM OF `. 23,50,717/-. 20. AGGRIEVED THE ASSESSEE PREFERRED AN APPEAL BEFORE THE LD. CIT(A). BEFORE THE FIRST APPELLATE AUTHORITY, ASSESSEE SU BMITTED THAT THE ASSESSEE IS IN THE BUSINESS OF SUPPLYING VIBRATING MACHI NES WHERE CONTRACTS INVOLVE A PERIOD OF TIME. THUS THE CUSTOMERS RETAIN CERTAIN PORTION OF AMOUNT FOR CONTINGENT EXPENSES ON ACCOUNT OF REPAIRS DURING THE PERIOD OF WARRANTY OF ONE YEAR. THE ASSESSEE COMPAN Y SUFFERS BAD DEBTS ON ACCOUNT OF THIS AMOUNTS WHICH ARE WITHHELD BY THE CUSTOMERS WHEN THERE ARE CERTAIN REPAIRS CLAIMED BY THEM. THE ASSESSEE COMPANY CARRIES OUT SIGNIFICANT EFFORTS AND IN FACT AP POINTED AN EMPLOYEE ONLY FOR SUCH RECOVERIES. 21. THE ASSESSEE COMPANY HAS WRITTEN OFF THE BAD DEBTS OF THOSE CUSTOMERS WHO HAVE FAILED TO PAY AFTER THREE YEARS OF SALE AND IN SPITE OF CONSTANT REMINDERS. THEREFORE RESPECTFULLY SUBMITTED THAT KEEPING OF THESE PROVISIONS OF INCOME TAX ACT THE ASSESSING OFFIC ER WAS NOT MECHANALYSIS (I) LTD. 13 JUSTIFIED DISALLOWING BAD DEBTS AND THE ASSESSEE IS A RIGHT PERSON TO JUDGE THE DEBTS HAVE BECOME BAD AND THUS WRITTEN OFF. LIST OF ADVANCES AND DEPOSITS WRITTEN OFF DURING THE YEAR WAS FURNISHED AND THIS ADVANCES AND DEPOSITS ARE OLD ADVANCES AND HAVE BEE N ADJUSTED AGAINST PROVISION MADE IN THE PAST AND THUS NOT DEBITE D TO P & L ACCOUNT. ONLY `. 21,34,982/- IS DEBITED OUT OF WHICH `. 20,76,185/- ARE BAD DEBTS. AND THE DETAILS OF WHICH ARE ON RECORD. TH E ASSESSEE SUBMITTED THAT UNDER THE CIRCUMSTANCES THE ADVANCES AND DEPOSITS WRITTEN OFF CANNOT BE DISALLOWED AS THE SAME IS ADJUSTE D AGAINST THE PROVISIONS MADE AND NOT DEBITED TO P & L ACCOUNT. 22. FURTHER THE ASSESSEE SUBMITTED THAT HONBLE TRIBUNA L IN THE CASE OF ITO VS MECHETONIC WEKDERS P.LTD IN ITA NO 3013/M/0 3 IN AY 1998-99 DATED 14.6.2006 IN WHICH THE HIONBLE TRIBUNAL HAVE HELD THAT WHERE IN RESPECT OF ANY PARTICULAR TRANSACTION IF THE APPELL ANT ON BUSINESS EXPEDIENCY ARRIVES AT A BONA FIDE CONCLUSION THAT THE DEBT HAS BECOME BAD AND WRITES OFF THE SAID AMOUNT IN THE DEBTORS ACCO UNT SUCH AMOUNT IS TO BE HELD AS ADMISSIBLE FOR DEDUCTION U/S 36 (1)(VII) OF THE ACT EVEN IF THE APPELLANT HAS TRANSACTION WITH THE SAI D CONCERN IN THE SUBSEQUENT PERIOD CANNOT BE A GROUND FOR MAKING THE D ISALLOWANCE WHERE AT THE RELEVANT POINT OF TIME WHEN THE DEBT I S WRITTEN OFF THERE IS NO INDICATION OF POSSIBILITY OF SUCH RECOVERY AT THE SU BSEQUENT DATE. THE ACT PROVIDES FOR TAXATION OF SUCH RECEIPTS IN THE SUBSEQUENT YEAR WHICH HAS BEEN DONE BY THE APPELLANT COMPANY IN THE INSTANCE CASE AS WELL. THEREFORE THE BAD DEBTS CLAIMED BY THE ASSESSEE I S ALLOWABLE. IN VIEW OF THIS FACT THE DISALLOWANCE MADE BY THE AO MA Y BE DELETED. 23. THE CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE BY OBSE RVING AS UNDER: THE AO HAS DISALLOWED BAD DEBTS OF RS. 20,76,185/- AS BAD DEBT ON THE GROUND THAT THIS AMOUNT HAS NOT BECOM E BAD AS MECHANALYSIS (I) LTD. 14 A PART OF THE AMOUNT HAS BEEN RECOVERED BY THE APPE LLANT IN THE SUBSEQUENT YEAR. THE APPELLANT HAS CLAIMED THAT THE ASSE SSEE IS IN THE BUSINESS OF SUPPLYING VIBRATING MACHINES, WHERE CONTRACTS INVOLVE A PERIOD OF TIME. THUS THE CUSTOMER RETAIN CE RTAIN PORTION OF AMOUNT FOR CONTINGENT EXPENSES ON ACCOUNT OF REPAI RS DURING THE PRIOD OF WARRANTY OF ONE YEAR. THE COMPANY HAS A LREADY DISCLOSED THE RECEIPTS FROM THESE PARTIES IN ITS P&L ACCO UNT BUT DUE TO CERTAIN DEFECTS IN SUPPLY, CERTAIN PORTION OF PAYMENT HAS BEEN WITHHELD BY THE PARTIES. THE APPELLANT HAS POINT ED OUT THAT THE AMOUNT PERTAINS TO 3 YEARS OLD WHERE THE RECOVERY COULD NOT BE MADE DESPITE CONSTANT REMINDERS AND PERSONAL APPROAC H WITH THE PARTIES. SINCE THE AMOUNT HAS BECOME BAD DURING T HE YEAR AS PER TE JUDGMENT OF THE APPELLANT AND THE SAME HAS BEEN WRITTEN OFF IN THE BOOKS OF ACCOUNTS, THEREFORE THE SA ME IS ALLOWABLE AS DEDUCTION U/S 36(10(VII) OF THE ACT. ANY SUBSEQUENT RECOVERY OF THE AMOUNT WRITTEN OFF HAS BEEN DISCLOSED BY THE APPELLANT IN THE YEAR IN WHICH THE AMOUNT OF BAD DE BTS HAS BEEN RECOVERED. THE HONBLE ITAT IN AN IDENTICAL CASE OF ITO V M/S MECHELONIC WELDERS P LTD IN ITA NO 3013?M?03 DATED 14.6.2006 HAS ALLOWED THE CLAIM OF THE BAD DEBTS OF THE ASSESSEE. I N THIS VIEW OF THE FACT THE A.O. IS NOT JUSTIFIED IN DISALLO WING BAD DEBTS WRITTEN OFF OF RS. 20,76,185/-. THE A.O> IS DIRECTED TO DELETE THIS ADDITION 24. THE CIT(A) ALSO FOUND THAT THE AMOUNT OF `. 2,08 ,235/-WRITTEN OFF, REPRESENTED DEPOSITS MADE BY THE ASSESSEE TOWARDS TENDER M ONEY/ TENDER DEPOSITS WITH GOVERNMENT AGENCIES LIKE HARYANA STATE BOARD, ONGC ETC. THE ASSESSEE HAS ALSO WRITTEN OFF `. 66,297/- D EPOSITS WITH GOVERNMENT AUTHORITIES IN RESPECT OF SUPPLY OF PETROL ETC AND WERE DUE FROM 1989 TO 2000. THE ASSESSEE HAS WRITTEN OFF THESE AM OUNTS AS IRRECOVERABLE. THE CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE ON THE GROUND THAT THEY HAVE BECOME IRRECOVERABLE. THUS THE CIT(A) DELETED THE ENTIRE ADDITION OF `. 23,50,717/- BEING DEBTS WR ITTEN OFF AS IRRECOVERABLE BY THE ASSESSEE. 25. AGGRIEVED THE REVENUE IS ON APPEAL BEFORE US. THE ISSUE OF ALLOWANCE OF BAD DEBTS U/S 36(1)(VII) HAS BEEN DECIDED BY THE APEX COURT IN THE CASE OF TRF LTD (323 ITR 397). IN THAT CASE THE SUPREME COURT HAS HELD THAT AFTER THE AMENDMENT OF SEC 36(1)( VII) FROM MECHANALYSIS (I) LTD. 15 1.4.1989, THAT FOR CLAIMING DEDUCTION U/S 36(1)(VII) , IT WILL BE SUFFICIENT IF THE ASSESSEE WRITES OFF THE DEBT IN THEIR ACCOUNTS. IT IS NOT NECESSARY FOR THE ASSESSEE TO ESTABLISH THAT THE DEBTS HAVE BECOME IRRECOVERABLE. THEREFORE THE AMOUNTS WRITTEN OFF BY THE ASSESSEE IN THE BOOKS, REQUIRE TO BE ALLOWED U/S 36(1)(VII) AND CANNO T BE DISALLOWED ON THE GROUND THAT THE ASSESSEE HAS NOT PROVEN THAT THE DEB TS HAVE BECOME IRRECOVERABLE. 26. HOWEVER AS PER EXPLANATION TO SEC 36(1)(VII), BAD DEBTS WRITTEN OFF SHALL NOT INCLUDE ANY PROVISION MADE FOR BAD DEBT S. HENCE CLAIM FOR BAD DEBTS SHALL BE ALLOWABLE ONLY WHEN THE ACCOUNTS OF THE INDIVIDUAL PARTIES ARE CREDITED. THE ASSESSEE HAD DEBITED THIS AMOUN T TO THE P&L IN AN EARLIER YEAR BUT HAS CREDITED TO PROVISION FOR BAD DEBT INSTEAD OF CREDITING THE INDIVIDUAL PARTYS ACCOUNT. WITH THE I NTRODUCTION OF THE EXPLANATION TO SEC 36(1)(VII), THE DEDUCTION TOWARDS BAD DEBT SHALL BE ALLOWED ONLY IN THE YEAR IT IS ACTUALLY WRITTEN OFF. THEREFORE, EVEN THOUGH THE ASSESSEE DEBITED THE AMOUNT OF THE DEBT IN A N EARLIER YEAR, THE ALLOWANCE U/S 36(1)(VII) IS POSTPONED TO THE YEAR IN WHICH THE AMOUNT IS CREDITED TO THE ACCOUNT OF THE DEBTOR. IN THIS CASE THE ACTUAL WRITING OFF OF THE BAD DEBT WAS CARRIED OUT THIS YEAR AND HENCE THE CLAIM OF THE ASSESSEE OF `. 23,50,717/- BEING DEBTS WR ITTEN OFF, IS ALLOWABLE THIS YEAR. IN THE RESULT WE UPHOLD THE ORDE R OF THE CIT(A) AND DISMISS THE APPEAL BY THE REVENUE ON THIS ISSUE. 27. THE NEXT GROUND OF APPEAL OF THE REVENUE IS AGAI NST THE CIT(A) DELETING THE DISALLOWANCE OF `.250,000/- ON ACCOUNT OF REPAIRS AND RENOVATION CARRIED OUT IN ANDHERI OFFICE BY THE COM PANY. THE AO DISALLOWED THIS AMOUNT ON THE GROUND THAT THIS WAS BORN E BY M/S. CONCAST INDIA LTD AND THE SAME WAS NOT BORNE BY THE AS SEESEE. THE LD. CIT(A) ALLOWED THE CLAIM BY OBSERVING AS UNDER: AS REGARDS THE PAYMENT OF RS 493090/- ON ACCOUNT OF RENOVATION OF OFFICE PREMISES AT ANDHERI (E) MUMBAI A RE MECHANALYSIS (I) LTD. 16 CONCERNED THE APPELLANT HAS DEBITED RS 493090/- TOW ARDS RENOVATION OF OFFICE PREMISES. THE OFFICE PREMISES IS PE RTAIN TO THE APPELLANT AND EXPENDITURE INCURRED FOR REPAIR E TC IS AN ALLOWABLE EXPENDITURE. THE EXPENDITURE HAS BEEN BOR NE BY M/S CONCAST INDIA LTD AND SUBSEQUENTLY REIMBURSED BY THE A PPELLANT THEREFORE THERE IS NO JUSTIFICATION OF MAKING DISALLOW ANCE OF RS 250000/- OUT OF RENOVATION EXPENSES. THE ASSESSING OFFIC ER IS DIRECTED TO DELETE THE ADDITION OF RS 250000/- 28. IN VIEW OF THE SPECIFIC FINDING GIVEN BY THE CIT (A) THAT THE EXPENDITURE OF `. 2,50,000/- WAS INCURRED BY THE ASSESSE E TOWARDS REPAIRS OF THEIR OFFICE PREMISES AND THE AMOUNT WAS INI TIALLY PAID BY M/S CONCAST INDIA LTD WHICH WAS LATER REIMBURSED BY THE ASS ESSEE, WE UPHOLD THE ORDER OF THE LD.CIT(A) IN ALLOWING THE C LAIM FOR REPAIRS OF `. 2,50,000/- AND DISMISS THE APPEAL OF THE REVENUE. 29. IN THE RESULT THE APPEAL FILED BY THE REVENUE I S DISMISSED. ITA ITA ITA ITA NO. NO. NO. NO. 615/M/07 615/M/07 615/M/07 615/M/07- -- - ASSESSEES APPEAL ASSESSEES APPEAL ASSESSEES APPEAL ASSESSEES APPEAL 30. THE ONLY ISSUE IN ASSESSEES APPEAL IS AGAINST THE DECI SION OF THE COMMISSIONER OF INCOME TAX (APPEALS) XXVIII, MUMBAI CO NFIRMING THE COMPENSATION OF `. 1,16,51,240/- RECEIVED BY THE ASSESSE E FROM ENTEK IRD, U.K. IS TAXABLE U/S 28(II) OF THE INCOME TAX AC T 1961. 31. THE ASSESSING OFFICER IN HIS ASSESSMENT ORDER HAS OBSERVE D THAT THE ASSESSEE HAS CLAIMED TO HAVE RECEIVED A SUM EQUIVALE NT TO RS. 1,16,51,240/- ON ACCOUNT OF COMPENSATION FOR DISCONTI NUATION OF JOINT VENTURE FROM ITS FOREIGN COLLABORATOR M/S ENTEK IRD I NTERNATIONAL LTD., U.K. THE SUM SO RECEIVED HAS BEEN CLAIMED EXEMPT BY TH E ASSESSEE AS CAPITAL RECEIPT ON THE GROUND THAT IT IS COMPENSATION OF DISCONTINUATION OF JOINT VENTURE. THE ASSESSEE WAS ASKED TO PROVE THAT THE SUM SO RECEIVED IS INDEED ON ACCOUNT OF DISCONTINUATION OF JOINT VENTURE. THE ASSESSEE WAS ASKED TO FURNISH A COPY OF THE AGREEMENT/ UND ERSTANDING MECHANALYSIS (I) LTD. 17 REGARDING TERMINATION OF JOINT VENTURE. FURTHER HE WAS ASKED TO FILE A COPY OF AGREEMENT OF JOINT VENTURE WHICH HAD EXPIRE D ON 1992. IT IS CLAIMED THAT THE JOINT VENTURE CONTINUED THEREAFTER WITHOUT ANY PERMISSION FROM THE CENTRAL GOVERNMENT. ASSESSING OFFICE R CONCLUDED THAT THERE WAS NO JOINT VENTURE WITH THE FOREIGN COL LABORATOR DURING THE YEAR 2001-02 AND 2002-03 I.E THE PERIOD WHEN THE SEP ARATION FROM M/S ENTEK IRD INTERNATIONAL LTD., U.K. HAS OCCURRED. 32. THE AO HELD THAT THE ASSESSEE COMPANY HAS BEEN ACTIN G AS TRADING AGENT ON BEHALF OF M/S ENTEK IRD INTERNATION AL LTD., U.K. AND THE TERMINATION IS THAT OF THE AGENCY AND NOT THAT O F ANY JOINT VENTURE. HE FURTHER OBSERVED THAT THE ASSESSEE HAS BEEN OFFERING I NCOME FROM COMMISSION ON ACCOUNT OF THIS AGENCY OF M/S ENTEK IRD I NTERNATIONAL LTD.., U.K. IN ITS RETURN OF INCOME FOR THE PAST FEW YEARS. THIS IS ALSO CORROBORATED BY THE FACT THAT THERE IS NO PAYMENT OF ANY ROYALTY AS REQUIRED IN THE CASE OF JOINT VENTURE. 33. THE A.O. HAS GIVEN A SHOW CAUSE NOTICE BY LETTER D ATED 10.3.2006 WHICH IS REPRODUCED AT PAGE 2 OF THE ASSESSMEN T ORDER. THE ASSESSEE IN ITS REPLY TO THIS SHOW CAUSE NOTICE HAS STATED TH AT THE COMPANY HAD ENTERED IN TO TWO SEPARATE AGREEMENTS, N AMELY COLLABORATION AGREEMENT AND SALES REPRESENTATIVE AGREE MENT. THROUGH THE COLLABORATION AGREEMENT, ENTEK IRD, U.K. WERE T O EXTEND TECHNICAL AND FINANCIAL SUPPORT FOR MANUFACTURE OF VARIOUS INSTR UMENTS INDIGENOUSLY, WHEREAS SALES REPRESENTATION AGREEMENT GI VES THE ASSESSEE RIGHT TO REPRESENT THEM AND TO SELL ENTEK IRD, U .K. PRODUCTS TO THEIR CUSTOMERS IN INDIA FOR WHICH WERE ENTITLED F OR AGENCY COMMISSION. ASSESSEE SUBMITTED THAT BOTH THE AGREEMENTS H AVE TO BE READ IN CONJUNCTION. THE COLLABORATION AGREEMENT HA D EXPIRED AND HENCE NO ROYALTY WAS PAID IN FINANCIAL YEAR 2000-01 AND 2001-02. HOWEVER SALES REPRESENTATION AGREEMENT CONTINUED TILL IT WAS MECHANALYSIS (I) LTD. 18 TERMINATED DURING THE YEAR 2002-03 (A.Y. 2003-04) T HE COPIES SALES REPRESENTATION AGREEMENT WAS FILED. IN THE LETTER BY ENTEK IRD U.K. ACCOUNTING THE PAYMENT OF THE LUMPSUM PAYMENT, REFE RENCE MADE TO JOINT VENTURE REFERRED TO BOTH THE AGREEMENT AND IN CONJUNCTION WITH EACH OTHER. 34. THE ASSESSEE COMPANY IN THEIR REPLY DATED 16.3.200 6 HAS CLAIMED THAT THE COMPENSATION RECEIVED FOR TERMINATI ON OF JOINT VENTURE IS CAPITAL RECEIPT NOT SUBJECT TO TAX. FURT HER THE ENTIRE SOURCE OF INCOME EARNING APPARATUS OF THE COMPANY HAS BEEN LOST ON THE TERMINATION OF THE JOINT VENTURE IMPAIRING THE COMP LETE MANUFACTURING APPARATUS AND TRADING STRUCTURE OF THE ASSESSEE COMPANY F ROM GAINING ANY INCOME. THE ASSESSEE CONTENDED THAT THE COMPENSATIO N PAYMENT RECEIVED BY THE ASSESSEE COMPANY FOR SUCH IMPAIRMENT AND STERILIZATION WOULD BE CHARACTERIZED ONLY AS A CAPITA L RECEIPT NOT TAXABLE. THIS EXPLANATION OF THE ASSESSEE WAS NOT ACCEP TED BY THE AO. THE AO OPINED THAT THERE WAS NO JOINT VENTURE IN EXI STENCE AT THE TIME OF SEPARATION AND THE JOINT VENTURE EXPIRED IN 1992. ALSO THERE IS NEITHER ANY EXTENSION OF THIS AGREEMENT NOR ANY FURTH ER PERMISSION REGARDING THE ROYALTY PAYMENTS THEREAFTER FROM THE G OVERNMENT AGENCIES CONCERNED HAS BEEN OBTAINED. THE AO CONCLUDE D THAT ONLY AN AGENCY AGREEMENT EXISTED WITH M/S. ENTEK IRD INTERN ATIONAL, U.K. LTD., AT THE TIME OF SEPARATION. IT WAS THIS AGENCY TH AT HAS BEEN TERMINATED AND NOT ANY JOINT VENTURE. THEREFORE THE A.O. HELD THAT COMPENSATION HAS BEEN RECEIVED FOR DISCONTINUATION OF AGENCY AND NOT ANY JOINT VENTURE AND THAT THE LAW IS VERY CLEAR RE GARDING THE TAXABILITY OF ANY COMPENSATION RECEIVED ON TERMINATION OF ANY A GENCY. SECTION 28(II) (C) OF THE I.T. ACT 1961 APPLICABLE IN THE C ASE OF THE ASSESSEE. 35. THE A.O. FURTHER HELD AS FOLLOWS: MECHANALYSIS (I) LTD. 19 THE ASSESSEE HAS BEEN DERIVING AGENCY COMMISSION FROM THE TERMINATED AGENCY WHICH FORMED LESS THAN 10% OF T HE RECEIPTS OF THE ASSESSEE COMPANY. THE TERMINATION OF AGE NCY IS NOT ABSOLUTE SINCE THE ASSESSEE COMPANY HAS BEEN DEALING W ITH THE SUCCESSOR OF M/S ENTEK IRD INTERNATIONAL LTD., U.K. M/S ROCKWELL AUTOMATION LTD., IN FACT THE TURNOVER OF T HE ASSESSEE COMPANY HAS RISEN FROM 3.42 CRORES TO RS 4.87 CRORES WHI CH PROVES THAT THERE IS NO IMPAIRMENT OF THE MANUFACTURI NG APPARATUS AND TRADING STRUCTURE OF THE ASSESSEE COMPANY. THUS, THERE IS NO QUESTION OF LOSS OF ENDURING ASSET IN THIS CA SE. BESIDES THE ASSESSEES CLAIM OF TREATING THE COMPENSATION RECEIVED AS CAPITAL RECEIPTS WAS BASED ON ITS CONTENTIO N THAT THE SAME WAS FOR DISCONTINUATION OF JOINT VENTURE. THIS CON TENTION OF THE ASSESSEE HAS BEEN ESTABLISHED TO BE FALSE. THEREFORE TH E RECEIPT OF COMPENSATION OF RS 1,16,51,240/- HAS RIGH TLY BEEN HELD AS REVENUE RECEIPT AND THE SAME HAS BEEN ADDED BACK T O THE INCOME OF THE ASSESSEE ACCORDINGLY. 36. IN APPEAL BEFORE LD. CIT(A), THE ASSESSEE SUBMITTED AS FOLLOWS: THERE WAS A COLLABORATION AGREEMENT OR JOINT VENTU RE AGREEMENT BETWEEN IRD MECHANALYSIS INC. USA AND THE A SSESSEE COMPANY IRD MECHANALYSIS INDIA LTD., EXECUTED ON 11.3 .1979 AND SUBSEQUENTLY RENEWED ON 12.10.1990 AS PER PAGE 1 T O 21 PAPER BOOK. UNDER THE SAID AGREEMENT, THE APPELLANT COMPANY WAS ENTITLED TO MAKE USE OF THE TRADE NAME / PATENTS O F IRD, USA AND ITS ASSOCIATE CONCERNS AND LICENSED TO MANUFACTURE AND SALE CERTAIN PREDICTORS IN INDIA. THUS THE COMPANY ESTABLI SHED ITS MARKET IN INDIA UNDER THE NAME OF IRD MECHANALYSIS. BY A SEPARATE SALES REPRESENTATIVE AGREEMENT DATED 1.1.1989 AMENDED BY AN AGREEMENT DATED 1.4.1991 WITH IRD, U. K. THE COMPANY WAS ENTITLED TO REPRESENT IN INDIA IN RESPECT OF GOODS/ PRODUCTS MANUFACTURED AND PRODUCED BY UK COMPANY, FO R WHICH THE COMPANY WAS RECEIVING COMMISSION FOR SALES. THE SA LES REPRESENTATIVE AGREEMENT HAS BEEN CONTINUED AND IT IS IN RESPECT OF PRODUCTS NOT MANUFACTURED BY THE ASSESSEE COMPANY. IT IS SUBMITTED THAT NO LICENSE OR EXTENSION OF THE LIC ENSE WAS REQUIRED FOR MANUFACTURE OF THE PRODUCTS OF IRD AFTER 1993- 94 AS THE AUTOMATIC ROUTE FOR APPROVAL BECAME EFFECT IVE. HENCE THERE CAN BE NO COMPENSATION FOR NOT GETTING APPROVA L FROM THE GOVERNMENT OR NOT ACTING UPON SOME PART OF THE JOINT VENTURE AGREEMENT. IN FACT, THE PAYMENT OF ROYALTY UNDER T HE SAID MECHANALYSIS (I) LTD. 20 AGREEMENT DATED 12.10.1990 WAS TO BE MADE BY THE ASSE SSEE COMPANY. HENCE THE PAYMENT RECEIVED WAS NOT FOR TERMINATION O F AGENCY IN FACT THERE WAS NO AGENCY OR TERMINATION OF SALES REPRESENTATIVE AGREEMENT. HOWEVER, AS COMPENSATION WAS PAID BY IRD, UK FOR AND ON BEHALF OF IRD MECHANALYSIS, USA FOR DISCONTINUATION OF THE COLLABORATION AGREEMENT DATED 11.3.1979 AS EVIDENCED, BY THE LETTER DATED 31.5.2002 FOR LOSS O F MARKET OF IRD PRODUCTS IN INDIA BUILT BY THE COMPANY SINCE LAST 20 YEARS. THIS IS A CAPITAL RECEIPT FOR IT IS FOR LOSS OF CAPITAL OR INTANGIBLE ASSETS I.E. MARKET BUILT BY EFFORTS OF THE COMPANY QUALITY OF THE PRODUCT, SERVICES AND TIME BOUND PERFORMANCE. TH ESE INTANGIBLE RIGHTS ARE CAPITAL ASSETS OF THE COMPANY ( CIT B.C. SRINIVAS SHETTY 1981 128 ITR 294 (S.C) THUS COMPENSATION RECEIVED WAS FOR DISCONTINUATION OF T HE JOINT VENTURE AGREEMENT DATED 25.10.1990 ORIGINALL Y ENTERED INTO ON 11.3.1979. THE SUM PAID WAS AFTER ADJUSTMENT O F SUMS PAYABLE BY THE ASSESSEE COMPANY ATTENTION IS INVITED T O THE ANNEXURE TO THE LETTER DATED 31.3.2002 ITEM NO.2 LUMP SUM COMPENSATION FOR DISCONTINUATION OF JOINT VENTURE AS D ISCUSSED UKPDS 153000). ATTENTION IS ALSO INVITED TO THE FACT THAT THE COMPAN Y WAS NOT HOLDING ANY AGENCY IN INDIA BUT WAS SALES REPRESENT ATIVE OF U.K. COMPANY UNDER THE AGREEMENT DATED 1.1.1989, WH ICH WAS NOT TERMINATED. THE COMPANY IS A DISTRIBUTOR OF THE ROCKWELL, U.K. IN INDIA TO WHICH COMPANY THE BUSINESS HAS BEEN ASSI GNED BY IRD MECHANALYSIS, USA. HENCE, THERE IS NO TERMINAT ION OF AGENCY AGREEMENT. IN ANY EVENT, THE ASSESSEE COMPANY W AS AND IS A SALES REPRESENTATIVE WHOSE JOB IS TO PROMOTE SALES OF GOODS MANUFACTURED BY U.K. FIRM IN INDIA, THE SUPPLIES BEIN G AFFECTED EITHER DIRECTLY BY UK FIRM OR OUTRIGHT PURCHASE OF S UCH GOODS BY THE APPELLANT ON PRINCIPAL TO PRINCIPAL BASIS RELIANC E IS PLACED ON THE DECISION OF DARUWALA BROS PVT. LTD., VS CIT (1971) 80 ITR 213 (BOM). FURTHER THE APPELLANT COMPANY WAS NOT MANAGING THE BUSINESS OF IRD USA OR IRD U.K. BUT UNDER COLLABORATIO N OR JOINT VENTURE UNDER WHICH IT HAD RIGHT TO USE THE NAME OF THE COLLABORATOR NAMELY IRD WHICH WAS A CAPITAL ASSET. THESE BENEFIT OF USE OF THE ASSET TRADE NAME IS LOST UPON DISCONTINUATION OF THE JOINT VENTURE AGREEMENT. HENC E IT IS A CAPITAL LOSS AND THEREFORE THE AMOUNT RECEIVED IS A C APITAL MECHANALYSIS (I) LTD. 21 RECEIPT. THIS CAPITAL RECEIPT IS NOT TAXABLE AS CAPI TAL GAINS AS THERE IS NO TRANSFER OF ANY ASSET BY THE COMPANY TO THE COLLABORATOR. AT THE SAME TIME, IT IS NOT AN INCOME ( I) BECAUSE IT IS A ONE TIME PAYMENT (B) THERE IS NO SOURCES OF INCOME A SOURCE FROM WHERE SUCH SUMS CONTINUE TO BE RECEIVED WIT H REGULARITY OR SOME SORT OF REGULARITY (C) IT IS NOT A CASUAL INCOME BECAUSE IT IS NOT AN INCOME FOR THE PAYMENT RECEIVE D IS TO COMPENSATE FOR LOSS OF MARKET OF THE PRODUCT-NON USE OF MACHINERIES, TRAINED STAFF ETC., WHICH WAS ESTABLISHED F OR THE MANUFACTURE AND SALES OF IRD PRODUCTS (D) THE APPELLAN T HAS LOST MARKET OF IRD GOODS MANUFACTURED BY IT BECAUSE OF THE DISCONTINUATION OF COLLABORATION AGREEMENT, THIS IS EV IDENT BY THE FACT THAT THE SALES FOR THE SUBSEQUENT YEARS IS LOWE R AS CAN BE APPRECIATED FROM THE TABLE ATTACHED HEREWITH. T HE MARGINS HAVE GONE DOWN SUBSTANTIALLY.HENCE IT IS A CAPITAL RE CEIPT NOT TAXABLE UNDER THE ACT. AS PER CIT VS GROZ BEEKERT SAHOO LTD (1979) 116 ITR 125 (S.C). 37. THE CIT(A) REJECTED THE CONTENTION OF THE ASSESSEE OBSERVING AS UNDER: I HAVE CAREFULLY CONSIDERED THE REPLY GIVEN BY THE APPELLANT AND PERUSED THE ASSESSMENT ORDER. THE APPELLANT COMPANY HAS ENTERED INTO A JOINT VENTURE WITH M/S ENTEK IRD, USA AND THE ASSESSEE COMPANY ON 11.3.1979 AND SUBSEQUENTLY RENEWED ON 1990. UNDER THE SAID AGREEMENT THE APPELLANT COMPANY WAS ENTITLED TO MAKE USE OF THE TRADE NAME/PATENTS OF IR D, USA AND ITS ASSOCIATE CONCERNS AND LICENSED TO MANUFACTURE AND SA LE CERTAIN PRODUCTS IN INDIA. THIS JOINT VENTURE AGREEME NT HAS BEEN EXPIRED IN THE YEAR 1992 AS NO LICENSE OR EXTENSION O F LICENSE WAS TAKEN BY THE APPELLANT. THE APPELLANT HAS ALSO NOT PAID ANY ROYALTY TO THE USA COMPANY IN A.Y. 2002-03 AND 2003 -04. THE APPELLANT HAS RECEIVED AN AMOUNT OF PDS. 55,064/- (POUNDS STERLING FIFTY FIVE THOUSAND AND SIXTY FOUR ONLY) IN FULL AND FINAL SETTLEMENT FROM ENTEK IRD. THE CONTENTION OF THE LE TTER IS REPRODUCED AS UNDER FOR SAKE OF CONVENIENCE. WE REFER TO OUR RECENT DISCUSSIONS IN THE CONTENT OF T HE DISCONTINUANCE OF THE JOINT VENTURE INVOLVING YOUR C OMPANY AND TO THE VARIOUS SUMS OWED UPTO AND INCLUDING 31.5.2002 , BOTH BY YOUR COMPANY TO US (AND/OR OUR SUCCESSOR IN BUSINESS, ROCK WELL AUTOMATION LIMITED) AND BY US(AND/OR OUR SUCCESSOR IN BUSINESS, ROCKWELL AUTOMATION LIMITED) TO YOU. MECHANALYSIS (I) LTD. 22 WE CONFIRM HAVING REMITTED TO YOU AN AMOUNT OF PDS. 55,064.00 (POUNDS STERLING FIFTY FIVE THOUSAND AND SIXTY FOUR O NLY) IN FULL AND FINAL SETTLEMENT OF ALL SUCH SUMS. PERUSAL OF THIS LETTER SHOWS THAT THE PAYMENTS HAS BEEN R ECEIVED TO THE VARIOUS SUMS OWED UP TO AND INCLUDING 31.5.200 2, BOTH BY THE COMPANY AND/OR SUCCESSOR IN BUSINESS. (ROCKWELL AUTOM ATION LTD) AND BY THEM. THUS IT IS CLEAR THAT THE AMOUNT HAS NOT BEEN PAID ON ACCOUNT OF JOINT VENTURE ENTERED INTO IN TH E YEAR 1979. THE APPELLANT HAS SIMULTANEOUSLY ENTERED INTO SALE REPRESENTATIVE AGREEMENT ON 1.4.1991 WITH ENTEK IR D M U.K. LTD., THE SALE REPRESENTATIVE AGREEMENT IS TO SELL PRO DUCTS OF THE ENTEK IRD, U.K. LTD., DURING THE ASSESSMENT PROCEE DINGS, THE A.O. HAS ISSUED LETTER DATED 10.3.2006 TO EXPLAIN WHY NOT THE RECEIPT FROM ENTEK IRD, U.K. LTD., SHOULD BE ASSESSED AS INCOME. THE APPELLANT IN HIS REPLY DATED 16.3.2006 HAS CLEARL Y STATED THAT THE COLLABORATION AGREEMENT HAD EXPIRED AND HENCE NO ROYALTY WAS PAID IN FINANCIAL YEAR 2001-02 AND 2002-03 . THE SALE REPRESENTATIVE AGREEMENT TERMINATED DURING THE YEAR 2002-03 (A.Y. 2003-04). IN VIEW OF THE ABOVE FACTS IT IS CLEAR THAT THE JOIN T VENTURE COLLABORATION WAS NOT IN EXISTENCE DURING THE YEAR RE LEVANT TO A.Y. 2002-03 AS NO ROYALTY HAS BEEN PAID BY THE APPEL LANT TO THE ENTEK IRD, U.K. THEREFORE THE SUM, RECEIVED FROM EN TEK IRD U.K. IS NOT ON ACCOUNT OF TERMINATION OF JOINT VENTURE WH ICH WAS ALREADY EXPIRED IN THE YEAR 1992. THE APPELLANT HA S ALSO ENTERED INTO SALE REPRESENTATIVE AGREEMENT ON 1.4.1991 WHICH WAS SUBSEQUENTLY AMENDED. THE APPELLANT HIMSELF CONSIDERED IN HIS REPLY DATED 16.3.2006 THE SAME AGREEMENT IS TERMINATE D DURING THE YEAR 2002-03 RELEVANT TO AY 2003-04. THEREFORE THE AMOUNT OF RS 1,16,51,240/- HAS BEEN RECEIVED ON ACCOUNT OF T ERMINATION OF AGENCY WHICH IS TAXABLE U/S 28(II) OF THE I.T. ACT . THE APPELLANT DURING THE APPELLATE PROCEEDINGS HAS STA TED THAT THE PAYMENT RECEIVED WAS NOT FOR TERMINATION OF AGEN CY IN FACT THERE WAS NO AGENCY OR TERMINATION OF SALES REPRESENTA TIVE AGREEMENT. HOWEVER, AS COMPENSATION WAS PAID BY IRD, U .K. FOR AND ON BEHALF OF IRD MECHANALYSIS, USA FOR DISCONTINUA TION OF THE COLLABORATION AGREEMENT DATED 11.3.1979 AS EVIDENCED , BY THE LETTER DATED 31.5.2002, FOR LOSS OF MARKET OF IRD PRO DUCTS IN INDIA BUILT BY THE COMPANY FOR THE LAST 20 YEARS. THIS IS A C APITAL RECEIPT FOR IT IS FOR LOSS OF CAPITAL OR INTANGIBLE ASSE T. MECHANALYSIS (I) LTD. 23 38. THE CIT(A) DISMISSED THE CONTENTION OF THE ASSESSEE HO LDING AS UNDER: THE CONTENTION OF THE ASSESSEE IS NOT ACCEPTABLE. DU RING THE ASSESSMENT PROCEEDINGS, THE APPELLANT HIMSELF HAS STATED T HAT THE SALES REPRESENTATIVE AGREEMENT HAS BEEN TERMINATED DURING THE F.Y. 2002-03. THEREFORE, THE CONTENTION OF THE APPELLANT IS INCORRECT TO SAY THAT SALES REPRESENTATIVE AGREEMENT IS STILL CONTINUE. MOREOVER THE ASSESSEE HAS RECEIVED COMPENSATION ON ACCOUNT OF TERMINATION OF SALES REPRESENTATIVE AGREEME NT WHICH IS NOT A CAPITAL RECEIPT BUT AS A REVENUE RECEIPT AS P ER SEC. 28(II) OF THE I.T. ACT. AS THE INCOME OF THE AGENCY COMMISSIO N WAS ONLY 10% OF THE ENTIRE INCOME, THEREFORE IT IS INCORRECT TO SAY THAT ENTIRE BUSINESS APPARATUS HAS BEEN DESTROYED HENCE ANY COMPENSATION RECEIVED IS CAPITAL RECEIPT. THE APPELLANT HAS RELIED ON THE DECISION OF H ONBLE SUPREME COURT IN THE CASE OF CIT VS B.C. SRINIVAS SHETTY 198 1 128 ITR 294 (SC). THE FACT OF THIS CASE IS DIFFERENT AND NOT APPLICABLE IN THE CASE OF THE ASSESSEE AS THE SUPREME COURT HAVE HELD THAT GOODWILL GENERATED IN A NEWLY COMMERCIAL BUSINESS CANN OT BE DESCRIBED AS AN ASSET AND TRANSFER OF GOODWILL INITIALL Y GENERATED IN A BUSINESS DOES NOT GIVE RISE TO CAPITAL GAINS. IN THE CASE OF APPELLANT THERE IS NOT A CASE OF G OODWILL GENERATED BUT THE TERMINATION OF AGENCY. THE APPELL ANT HAS ALSO RELIED ON THE DECISION OF DARUWALS BROS. P. LTD VS CIT( BOM) 80 ITR 213. THE FACTS OF THIS CASE IS ALSO DIFFERENT AND NOT A PPLICABLE IN CASE OF THE APPELLANT ,IN THE CASE OF DARUWALA (SUPRA ) THERE WAS NO AGREEMENT OF AGENCY BUT A DISTRIBUTOR AND IN THE CASE OF APPELLANT IT IS A SALES REPRESENTATIVE AGENCY. IN VIE W OF THE ABOVE DISCUSSION IT IS CLEAR THAT THE AMOUNT OF RS 1,16, 51,240/- IS NOTHING BUT A REVENUE RECEIPT ON ACCOUNT OF TERMIN ATION OF SALES REPRESENTATIVE AGENCY. HENCE THE A.O. IS RIGHTLY HELD IT IS A REVENUE RECEIPT. THE ACTION OF THE A.O. IS JUSTIFIED AND CONFIRMED. 39. AGGRIEVED THE ASSESSEE IS ON APPEAL BEFORE US. THE A SSESSEE HAD ENTERED INTO AN AGREEMENT FOR JOINT VENTURE WIT H IRD MECHANANALYSIS INC. USA ON 11.3.1979. IT WAS SUBSEQUENT LY RENEWED ON 12.10.1990. UNDER THE AGREEMENT THE APPLICANT C OMPANY WAS ENTITLED TO MAKE USE OF THE TRADE NAME/PATENTS OF IRD , USA AND ITS MECHANALYSIS (I) LTD. 24 ASSOCIATE CONCERNS AND LICENSED TO MANUFACTURE AND SALE CERTAIN PRODUCTS IN INDIA. THE COMPANY ESTABLISHED ITS MARKETS I N INDIA UNDER THE NAME OF IRD MECHANALYSIS. BY A SEPARATE SALES RE PRESENTATIVE AGREEMENT DT.1.1.1989 AMENDED BY AN AGREEMENT DT.1. 4.1991 WITH IRD, U.K., THE ASSESSEE WAS ENTITLED TO REPRESENT THE U. K. COMPANY IN INDIA IN RESPECT OF GOODS/PRODUCTS MANUFACTURED BY U. K. COMPANY FOR WHICH THE ASSESSEE WAS RECEIVING COMMISSION FOR SALES. THE JOINT VENTURE AGREEMENT GRANTING LICENSE TO MARKET EXPIRED IN 2000-01 AND HENCE NO ROYALTY WAS PAID FOR THE FINANCIAL YEAR 200 1-02 AND 2002-03. THE SALE REPRESENTATIVE AGREEMENT CONTINUED TILL IT WAS TERMINATED DURING THE ASSESSMENT YEAR 2003-04. IT IS THE CONTENTIO N OF THE ASSESSEE THAT THE COMPENSATION RECEIVED FOR TERMINATION OF THE JOINT VENTURE IS A CAPITAL RECEIPT NOT SUBJECT TO TAX. ACC ORDING TO THE ASSESSEE THE INCOME EARNING APPARATUS OF THE COMPANY HAS BEEN LOST OR IMPAIRED ON THE TERMINATION OF THE JOINT VENTURE AGREEMENT, IMPAIRING THE COMPLETE MANUFACTURING APPARATUS AND T RADING STRUCTURE OF THE ASSESSEE COMPANY FROM GAINING ANY INCOME. BUT T HE FACTS PROVE OTHERWISE. THE ASSESSEE COMPANY HAD DISCONTINUED OR NOT RENEWED THE COLLABORATION AGREEMENT WITH M/S. ENTEK IRD INTE RNATIONAL U.K. LTD. BUT THEY GOT THE HELP OF M/S. CONCAST INDIA LTD FOR P ROVIDING THE TECHNICAL KNOWHOW FOR CONTINUATION OF THE BUSINESS. T HE ASSESSEE VIDE LETTER DT.30.01.2006 HAD SUBMITTED THAT DUE TO NON A VAILABILITY OF TECHNICAL ASSISTANCE HITHERTO RENDERED BY M/S. ENTEK IR D DUE TO CESSATION OF COLLABORATION WITH THAT COMPANY HAD TO A PPROACH M/S. CONCAST INDIA LTD FOR PROVIDING CONSULTANCY. THIS ITSE LF WOULD SHOW THAT THE TERMINATION OF COLLABORATION WITH M/S. ENTE K IRD, U.K. WAS REPLACED BY TECHNICAL CONSULTANCY SUPPORT GIVEN BY M/ S. CONCAST INDIA LTD. THE ROYALTY PAYABLE TO M/S. ENTEK IRD, U.K, FO R THEIR TECHNICAL ASSISTANCE WAS REPLACED BY TECHNICAL FEES PROVIDED BY M/ S. CONCAST INDIA LTD. ELSEWHERE, IN THE APPEAL BY THE DEPARTME NT FOR THE VERY SAME ISSUE WE HAVE UPHELD THE PAYMENT OF TECHNICAL SERV ICES PAYABLE MECHANALYSIS (I) LTD. 25 TO M/S. CONCAST INDIA LTD. UNDER THE CIRCUMSTANCES WE ARE NOT SATISFIED THAT DISCONTINUATION OF THE JOINT VENTURE RE SULTED IN ANY SERIOUS IMPAIRMENT OF THE PROFIT MAKING APPARATUS OF T HE ASSESSEE, WHO HAD CONTINUED THE BUSINESS WITH THE TECHNICAL CONSU LTANCY OBTAINED FROM M/S. CONCAST INDIA LTD. 40. FURTHER THERE IS NOTHING ON RECORD, BY WAY CORRE SPONDENCE OR AGREEMENT THAT THE LUMP SUM PAYMENT IS FOR TERMINATIO N OF JOINT VENTURE WHICH HAD TAKEN PLACE EARLIER AND THE BASIS O N WHICH THE AMOUNT WAS ARRIVED AT. AGAIN THE COMPENSATION PAID BY M/S. ENTEK IRD, UK CAN NOT BE SAID TO BE TOWARDS IMPAIRMENT OF T HE PROFIT MAKING APPARATUS OF THE ASSESSEE. THE PROFIT MAKING APPARATUS O F THE ASSESSEE APPEAR TO HAVE CONTINUED WITH THE TECHNICAL ASSI STANCE RECEIVED FROM M/S. CONCAST INDIA LTD. FURTHER, THE A GREEMENTS FOR COLLABORATION WITH M/S. ENTEK IRD DO NOT PROVIDE FOR PAYMENT OF COMPENSATION ON TERMINATION. WE ARE THEREFORE OF TH E VIEW THAT THE PAYMENT MAKE BY M/S. ENTEK IRD IS TOWARDS THE TERMINA TION OF THE AGENCY AGREEMENT WHICH WAS TERMINATED DURING THE YEA R UNDER APPEAL. HENCE THE AMOUNT RECEIVED BY THE ASSESSEE IS BUSI NESS INCOME U/S 28(II). WE THEREFORE, UPHOLD OF THE ORDER OF CIT(A) CONFIRMING THAT PAYMENT OF RS.1,16,51,240 RECEIVED B Y THE ASSESSEE AS REVENUE RECEIPT. ACCORDINGLY THE APPEAL OF THE A SSESSEE ON THIS ISSUE IS DISMISSED. 41. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS DI SMISSED. ORDER PRONOUNCED ON THIS 18 TH DAY OF MAY, 2011 SD/- SD/- (R.K. PANDA) (ASHA VIJAYARAGHAVAN) ACCOUNTANT MEMBER JUDICIAL MEM BER MUMBAI, DATED 18 TH MAY , 2011 RJ MECHANALYSIS (I) LTD. 26 COPY TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT-CONCERNED 4. THE CIT(A)-CONCERNED 5. THE DR B BENCH TRUE COPY BY ORDER ASSTT. REGISTRAR, I.T.A.T, MUMBAI DATE INITIALS 1 DRAFT DICTATED ON: 4 .0 5 .2011 SR. PS/PS 2. DRAFT PLACED BEFORE AUTHOR: 5 .0 5 .2011 ______ SR. PS/PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER: _________ ______ JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER: _________ ______ JM/AM 5. APPROVED DRAFT COMES TO THE SR. PS/PS: _________ ______ SR. PS/PS 6. KEPT FOR PRONOUNCEMENT ON: _________ ______ SR. PS/PS 7. FILE SENT TO THE BENCH CLERK: _________ ______ SR. PS/PS 8. 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK: DATE ON WHICH FILE GOES TO AR _________ ______ 10. DATE OF DISPATCH OF ORDER: _________ ______