DCIT, New Delhi V. M/s Eicher Motors Ltd., New Delhi

ITA 2561/DEL/2013

• Counselvise Citation: [2016] 121 COUNSELVISE.COM (IT) 2710 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 8 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-01-2016
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 27-10-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 01-05-2013
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: RAVI JAIN
• Keywords: Business income; Opportunity of being heard; Earning of tax free income; Question of law; Fair market value; Corroborative evidences; Capital receipt; Revenue expenditure; Capital expenditure
• Section: 142(1); 14A; 37; 28

Judgement Text

1 I.T.A .NO.2561 & 2386/DEL/2013 IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH 'B, NEW DELHI) BEFORE SHRI N. K. SAINI, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER I.T.A. NO. 2561 /DEL/20 13 ASSESSMENT YEAR : 2009-10 DCIT, CIRCLE 11 (1), VS. M/S. EICHER MOTORS LTD . NEW DELHI, 3RD FLOOR, SELECT CITY WALK, A-3, DISTT. CENTRE, SAKET, NEW DELHI - 110017 GIR / PAN:AAACE38820 I.T.A. NO. 2386/DEL/20 13 (ASSESSMENT YEAR 2009-10) M/S. EICHER MOTORS LTD., V S. DCTT, CIRCLE 1 1( 1 ), 3RD FLOOR, SAKET CITY WALK, NEW DELHI A-3, DISTT. CENTRE, SAKET, NEW DELHI - 110 017 GIR I PAN:AAACE3882D (APPELLANT) (RESPONDENT) DEPARTMENT BY : SHRI RAVI JAIN, CIT DR ASSESSEE BY SHRI AJAY VOHRA, SR. ADV. SHRI GAURAV JAIN, ADV.. MS. BHAVITA ADV. DATE OF HEARING: 27.10.2015 DATE OF PRONOUNCEMENT:04.01.2016 ORDER PER KULDIP SINGH, JM: SINCE, IN BOTH THE AFORESAID CROSS APPEALS, IDENTIC AL GROUNDS HAVE BEEN RAISED AND EVEN THE ISSUES INVOLVED ARE IDENTI CAL QUA THE ASSESSMENT YEAR 2009-10, THE SAME ARE TAKEN UP TOGETHER FOR DI SPOSAL WITH THE 2 I.T.A .NO.2561 & 2386/DEL/2013 CONCURRENCE OF AUTHORIZED REPRESENTATIVES OF THE PA RTIES, TO AVOID REPETITION OF DISCUSSION. 2. I.T.A. NO. 25611DEIL2013: THE APPELLANT, DCIT, CIRCLE 11 (1), NEW DELHI (HERE INAFTER REFERRED AS 'THE REVENUE') BY FILING THE PRESENT APPEAL SOUGHT TO SET ASIDE THE IMPUGNED ORDER DATED 27.02.2013 PASSED BY LD. CIT(A ) XIII, NEW DELHI QUA THE ASSESSMENT YEAR 2009-10 ON THE GROUNDS INTE R ALIA THAT: '1. ON THE FACTS AND CIRCUMSTANCE OF THE CASE AND IN LAW, THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS. 6, 52. 42, 288/- MADE UNDER SECTION 35(2AB) OF INCOME TAX ACT. 2. ON THE FACTS AND CIRCUMSTANCE OF THE CASE AND IN LAW, THE ID. CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS.82, 49, 192/- MADE UNDER SECTION I4A READ WITH RULE 80 OF INCOME TAX R ULES, 1962. 3. ON THE FACTS AND CIRCUMSTANCE OF THE CASE AND IN LAW. THE ID. CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS. 40 ,00, 000/- TREATING IT AS UNASCERTAINED LIABILITY. 4. ON THE FACTS AND CIRCUMSTANCE OF THE CASE AND IN LOW (HE ID. CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS.39. 35.00,000/- MADE ON ACCOUNT OF NON COMPETE FEE TREATING IT AS B USINESS INCOME. ' 3. I.T.A. NO. 2386/DE1/2013: THE APPELLANT, M/S. EICHER MOTORS LTD., (HEREINAFTE R REFERRED AS 'THE ASSESSEE'), BY FILING THE PRESENT APPEAL, SOUGHT TO SET ASIDE THE IMPUGNED ORDER DATED 27.02.20L3 PASSED BY LD. CIT(A) XIII, N EW DELHI QUA THE ASSESSMENT YEAR 2009-10 ON THE GROUND THAT: 'THAT THE LEARNED COMMISSIONER OF INCOME TAX (A)-XI II. NEW DELHI HAS GROSSLY ERRED ON FACTS AND IN LAW IN CONF IRMING THE DISALLOWANCE OF NOTIONAL ADMINISTRATIVE EXPENSES OF RS. 20,24,169/- UIS 14.4 OF THE INCOME TAX ACT ALLEGEDL Y RELATING TO DIVIDEND INCOME. ' 3 I.T.A .NO.2561 & 2386/DEL/2013 4. BRIEFLY STATED, THE FACTS OF THIS CASE ARE: DUR ING THE PROCESSING OF RETURN OF INCOME FILED BY THE ASSESSEE QUA THE ASSE SSMENT YEAR 2009-10, THE CASE WAS SUBJECTED TO SCRUTINY UNDER CASS AND C ONSEQUENTLY, NOTICES U/S 143(2) AND 142(1) WERE ISSUED TO THE ASSESSEE A ND IN RESPONSE THERETO, SHRI ASHOK AGGARWAL, CA/ AR APPEARED FROM TIME TO T IME, FILED NECESSARY DETAILS AND THE CASE WAS ALSO DISCUSSED W ITH HIM. THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND SALE OF COMMERCIAL VEHICLES COMPONENTS INCLUDING GEARS, MOT ORCYCLES AND MOTORCYCLES SPARES ETC. DURING THE ASSESSMENT PROCE EDINGS, IT HAS COME ON RECORD THAT THE ASSESSEE HAS PAID AN AMOUNT OF R S.1,13,00,000/- TO GROUP CONCERN AS SERVICE CHARGES, HENCE, IT WAS CAL LED UPON TO EXPLAIN THE ACTUAL NATURE OF EXPENSES, NATURE OF SERVICES BEING RENDERED BY GROUP CONCERN, BASIS OF DETERMINATION OF QUANTUM AND JUST IFICATION, AS TO WHETHER IT IS PAID AT FAIR MARKET VALUE OF THE SERV ICES. THE ASSESSEE COMPANY FILED COMPREHENSIVE REPLY. THE ASSESSING OF FICER CONSIDERED THE SAME AND MADE OUT THAT SECTION 40A(2)(B) OF THE ACT IS ATTRACTED, WHICH PROVIDES THAT AN EXPENDITURE BY WAY OF PAYMEN T TO THE PERSON REFERRED TO IN CLAUSE (B) IS LIABLE TO BE DISALLOWE D IN COMPUTATION OF BUSINESS PROFITS TO THE EXTENT SUCH EXPENDITURE IS CONSIDERED TO BE EXCESSIVE AND UNREASONABLE HAVING REGARD TO THE FAI R MARKET VALUE OF THE GOODS AND SERVICES/ FACILITIES ETC. IN THIS CASE AL SO, THE ASSESSEE HAS FAILED TO SUBSTANTIATE ITS WORKING AS TO HOW THE EXPENSES UNDER DIFFERENT HEADS LIKE FINANCE AND ACCOUNTS, TAXATION AND PAYROLL, AD MINISTRATION, BUILDING RENT AND MAINTENANCE, INFORMATION TECHNOLOGY, INTER NAL AUDIT AND SENIOR MANAGEMENT, HAVE BEEN APPORTIONED BETWEEN VECV (GRO UP CONCERN) AND THE ASSESSEE. 5. IN SOME HEADS, 10% EXPENSES ALLOCATED TO ASSESS EE COMPANY AND IN SOME OTHER HEADS, IT WENT UP TO 75% OF THE TOTAL EXPENSES. THE ASSESSEE 4 I.T.A .NO.2561 & 2386/DEL/2013 HAS NOT DERIVED ANY SCIENTIFIC FORMULA BASED ON THE ACTUALS. EVEN THE ASSESSEE HAS GONE BY THE MIXED SYSTEM WHERE NO JUST IFICATION IS REGARDING QUANTIFICATION OF THE FAIR MARKET VALUE OF THE SERV I.CES ON ACCOUNT OR SUCH SERVICE CHARGES ARE PAID TO ASSOCIATED CONCERNS AND AS SUCH, PAYMENTS APPEAR TO BE EXCESSIVE. CONSEQUENTLY, ASSESSING OFF ICER MADE AN ADDITION TO THE TUNE OF RS.33,00,000/-. 6. DURING ASSESSMENT PROCEEDINGS, IT HAS FURTHER C OME ON RECORD THAT THE ASSESSEE HAS CLAIMED DEDUCTION OF RS.8,92, 70,1 021- ON ACCOUNT OR RESEARCH AND DEVELOPMENT EXPENDITURE U/S 35/35(2AB) @ 150% OF THE TOTAL EXPENSES CLAIMED TO BE INCURRED UNDER NOMENCL ATURE WEIGHTED DEDUCTION. ON INQUIRY, THE ASSESSEE SUBMITTED THE D ETAILS OF EXPENSES AND THE ASSESSING OFFICER AFTER CONSIDERING APPLICABILI TY OF SECTION 35 I 35(2AB), DISALLOWED THE DEDUCTION OF RS.6,52,42,288 /- FOR LACK OF SUPPORTING EVIDENCE AND CONSEQUENTLY, MADE AN ADDIT ION OF RS.6,52,42,288/-. 7. DURING ASSESSMENT PROCEEDINGS, IT HAS ALSO COME OUT ON RECORD THAT THE ASSESSEE COMPANY HAS RECEIVED AN AMOUNT OF RS.3 9.35 CRORES AS NON COMPETE FEE FROM A CONCERN NAMED M/S. AB VOLVO WHIC H IS CLAIMED TO BE ON ACCOUNT OF A NON COMPETE AGREEMENT WHEREBY TH E ASSESSEE AGREED TO TRANSFER ITS EXCLUSIVE RIGHT TO CONDUCT COMMERCI AL VEHICLE BUSINESS IN FAVOUR OF AB VOLVO. THE ASSESSEE WAS CALLED UPON TO EXPLAIN AS 0 WHY THE PROVISIONS OF SECTION 28(VA) OF THE ACT SHOULD NOT BE APPLIED WHILE TREATING THE RECEIPT OF NON COMPETE FEE AS BUSINESS RECEIPT. THE ASSESSEE FILED COMPREHENSIVE REPLY. WHILE CONSIDERING THE IS SUE OF NON COMPETE FEE RECEIVED FOR AN AMOUNT OF RS.39,35,00,000/- FRO M AB VOLVO AS CAPITAL RECEIPT IN VIEW OF THE PROVISO (1) TO SECTI ON 28(VA) OF THE ACT, IT IS FOUND THAT THE ASSESSEE HAS TRIED TO COVER ITS CASE UNDER THE PROVISO (I) TO SECTION 28(VA) OF THE ACT. HOWEVER, THE AFORESAID P ROVISO IS NOT 5 I.T.A .NO.2561 & 2386/DEL/2013 APPLICABLE IN THE CASE OF THE ASSESSEE AS THIS CASE FALLS UNDER CLAUSE (B) OF SECTION 28( VA) OF THE ACT. SINCE THE ASSESSEE SOLD ITS ENTIRE COMMERCIAL BUSINESS TO AB VOLVO SUBSEQUENTLY SECOND CONSIDERAT ION TO BE RECEIVED ~Y THE ASSESSEE, PROVISO (1) TO SECTION 28(VA) WOUL D BE ATTRACTED. IN THE PRESENT CASE, THE ASSESSEE HAD RECEIVED RS.39,3S,00 ,0001- ON ACCOUNT OF TRANSFER OF BUSINESS, THE COMMERCIAL RECEIPT IN THE EYES OF LAW MENTIONED IN CLAUSE (B) TO SECTION 28(VA) OF THE ACT AND CONS EQUENTLY, MADE THE ADDITION OF RS.39,35,00,000/-. 8. DURING THE ASSESSMENT YEAR UNDER CONSIDERATION, THE ASSESSEE CLAIMED TO HAVE EARNED DIVIDEND INCOME OF RS.6,39,0 0,000/-. ON CALLING UPON THE ASSESSEE TO EXPLAIN AS TO WHY EXPENSES ATT RIBUTABLE TO IN EARNING OF DIVIDEND INCOME, SHOULD NOT BE DISALLOWED U/S 14 A OF THE INCOME TAX ACT, 1961 AND FURNISH THE WORKING OF DISALLOWANCE I N VIEW OF RULE 80 OF THE I T RULES, ASSESSEE SUBMITTED THAT NEITHER INTE REST NOR ANY ADMINISTRATIVE EXPENSES RELATE TO EARNING OF DIVIDE ND AND AS SUCH DISALLOWANCE U/S 14A CANNOT BE MADE. 9. THE ASSESSING OFFICER CONSIDERED THE MATTER AND CAME TO THE CONCLUSION THAT IN VIEW OF THE PROVISION OF SUB-SEC TION (2) OF SECTION 14A AND RULE 8D OF I. T. RULES, DISALLOWED THE EXPENSES TO THE TUNE OF RS.L,02,73,361/- AND CONSEQUENTLY MADE THE ADDITION OF RS.L,02,73,36 1/-. 10. DURING THE YEAR UNDER ASSESSMENT, ASSESSEE MAD E PROVISION FOR WARRANTY AT RS.L.57 CRORES AND DEBITED IT TO THE P & L ACCOUNT. THE ASSESSEE WAS CALLED UPON TO EXPLAIN, AS TO WHY THE EXCESS PROVISION OF RS.L.57 CRORES SHOULD NOT BE DISALLOWED BEING NOT A N ASCERTAINED LIABILITY. THE ASSESSEE FILED COMPREHENSIVE SUBMISSIONS DATED 09.09.201 I. THE ASSESSING OFFICER CONSIDERED THE SAME AND CAME TO T HE CONCLUSION THAT ASSESSEE HAS FAILED TO FURNISH SCIENTIFIC BASIS FOR MAKING SUCH A PROVISION 6 I.T.A .NO.2561 & 2386/DEL/2013 BUT HAS MADE THE SAME PURELY ON ESTIMATE BASIS AND AS SUCH, IS NOT AN ASCERTAINED LIABILITY. SO, THE AMOUNT OF PROVISION FOR WARRANTY IN EXCESS OF ACTUAL WARRANTY, CAME TO AN AMOUNT OF RS.0.40 CR ORES, IS DISALLOWED AND MADE ADDITION OF RS.40,00,000/- 11. THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFO RE LD. CIT(A) WHO HAS PARTLY ALLOWED THE APPEAL. FEELING AGGRIEVED, T HE REVENUE AS WELL ASSESSEE HAVE CHALLENGED THE IMPUGNED ORDER BY WAY OF CROSS APPEALS BEFORE THE TRIBUNAL. 12. WE HAVE HEARD AUTHORIZED REPRESENTATIVES OF BO TH THE PARTIES, GONE THROUGH MATERIAL PLACED ON RECORD IN THE LIGHT OF FACTS AND CIRCUMSTANCES OF THE CASE AND ORDERS OF TAX AUTHORI TIES BELOW. L3. I.T.A. NO. 2561/DEL/2013: GROUND NO.1 : WHETHER, ' ON THE FACTS AND CIRCUMSTANCE OF THE CASE AND IN LAW, THE LD. CIT(A) HAS ERRED IN DELETING TH E ADDITION OF RS.6,52,42,2881- MADE UNDER SECTION 35(2AB) OF INCO ME TAX ACT. LD. D.R. CHALLENGING THE IMPUGNED ORDER CONTENDED T HAT SINCE THE ASSESSEE HAS FAILED TO BRING ON RECORD AS TO WHICH NEW VARIANTS FOR DOMESTIC MARKET HAVE BEEN INTRODUCED, THE ASSESSING OFFICER HAS RIGHTLY MADE THE ADDITION BY INVOKING THE PROVISIONS CONTAI NED U/S 3 S(2AB) OF THE ACT. 14. ON THE OTHER HAND, LD. A.R. REPELLED THE ARGUM ENTS ADVANCED BY LD. D.R. BY CONTENDING THAT SINCE THE ASSESSING OFF ICER HIMSELF HAS ADMITTED THAT THE ASSESSEE HAS AN APPROVED R&D, ADD ITION CANNOT BE MADE. 15. WHILE DEALING WITH THE ISSUE UNDER CONSIDERATI ON, THE ASSESSING OFFICER RETURNED THE FINDINGS TO REACH AT THE CONCL USION THAT DEDUCTION OF RS.6,52,42,288/- IS BEING DISALLOWED, WHICH ARE TO THE FOLLOWING EFFECT: 7 I.T.A .NO.2561 & 2386/DEL/2013 '1 HAVE CONSIDERED THE SUBMISSION OF THE ASSESSEE A ND GIVEN A CAREFUL THOUGHT. SECTION 35(2AB) PROVIDES FOR A WEI GHTED DEDUCTION IN RESPECT OF EXPENDITURE ON IN HOUSE RES EARCH AND DEVELOPMENT FACILITY SUBJECT TO THE FOLLOWING: 1) THE TAX PAYER IS A COMPANY. 2) IT IS ENGAGED IN THE BUSINESS OF BIO TECHNOLOGY OR IN THE BUSINESS OF MANUFACTURE OR PRODUCTION OF ANY DRUGS, PHARMACEUTICALS, ELECTRONICS EQUIPMENTS, CHEMICALS OR ANY OTHER ARTICLE OR THING NOTIFIED BY THE BOARD I.E. M ANUFACTURE OR PRODUCTION OF HELICOPTER OR AIRCRAFT OR COMPUTER SOFTWARE OR AUTOMOBILE INCLUDING AUTOMOBILE COMPONENTS. 3) IT INCURS AN EXPENDITURE ON SCIENTIFIC RESEARCH AND SUCH EXPENDITURE IS OF CAPITAL NATURE OR REVENUE NATURE. 4) THE ABOVE EXPENDITURE IS INCURRED ON IN HOUSE RE SEARCH AND DEVELOPMENT FACILITY UP TO MARCH 31, 2012. 5) ON THE APPLICATION OF THE COMPANY IN FORM 3CK TH E RESEARCH AND DEVELOPMENT FACILITY IS APPROVED BY TH E PRESCRIBED AUTHORITY. IF ALL THE CONDITIONS ARE SATISFIED THEN A SUM EQUA L TO ONE AND A HALF TIMES OF THE EXPENDITURE SO INCURRED SHALL BE ALLOWED AS DEDUCTION. HERE, IT IS PERTINENT TO MENTION THAT ALL THE ABOVE CONDITIONS ARE TO BE SATISFIED IN TOTALITY. DURING THE YEAR AS PER ASSES SEE'S OWN SUBMISSION. RESEARCH AND DEVELOPMENT HAS BEEN CARRIED OUT IN IT S THREE R&D CENTRE IN THE FOLLOWING MANNER:- SR. NO. TITLE AND SCOPE OF R&D PROJECT NAME OF PROJECT LEADER YEAR IN WHICH STARTED REMARKS 1 BULLET ELECTRA TWINSPARK S.M. HAMEED 2009 NEW VARIANT OF BULLET WITH UCE TWINSPARK 2 BULLET 350 TWINSPARK - DO - 2009 - DO - 3 CLASSIC CHROME 350&500 -DO- 2009 NEW VARIANTS FOR DOMESTIC MARKET AS REGARDS EXPENSES INCURRED ON R&D IN RESPECT OF T ITLE AND SCOPE OF R&D PROJECT MENTIONED AT SR. NO.1 AND 2 ARE CONCERN ED, THESE ARE SPECIFICALLY RELATED TO NEW VARIANTS OF BULLET WITH UCE TWINS PARK WHICH IS BEING STARTED DURING THE YEAR UNDER CONSID ERATION. HOWEVER, AS 8 I.T.A .NO.2561 & 2386/DEL/2013 REGARDS THE CLAIM OF EXPENSES TO BE INCURRED ON THI RD TITLE MENTIONED AT SR. NO.3 ABOVE, IT IS MENTIONED AS NEW VARIANTS FOR DOMESTIC MARKET. THE ASSESSEE HAS NOT BEEN ABLE TO SPECIFICALLY PROV E AS TO WHICH NEW VARIANTS AND AS TO HOW THESE ARE NEW VARIANTS FOR D OMESTIC MARKET. THE PROPOSED OBJECTIVES OF SCIENTIFIC RESEARCH CONTEMPL ATED BY THE ASSESSEE ARE THE FOLLOWING:- (I) ENVIRONMENT RELATED - TO BRING DOWN THE NOISE L EVEL, INTAKE AND EXHAUST SYSTEM ARE REDESIGNED. TO REDUCE ENVIRONMEN TAL POLLUTION ON ACCOUNT OF UNBURNT GASES. (II) SAFETY RELATED - TO PREVENT STARTING OF VEHIC LES WHEN SIDE STAND IS 'ON', LED BRAKE LAMPS ETC. (III) CUSTOMER RELATED ERGONOMICALLY REDESIGNED SEA T, HANDLE BAR AND SWITCH CONTROLS, FOOT RESTS, CARBURETOR REDESIG N, ENGINE MANAGEMENT SYSTEM ETC. AS HAS BEEN DISCUSSED ABOVE, THE EXPENSES INCURRED FOR R&D MENTIONED AT SR. NO.1 AND 2 ARE QUITE SPECIFIC AND ARE IN CON FORMITY WITH THE PROPOSED OBJECTIVES OF SCIENTIFIC RESEARCH CONTEMPL ATED BY THE ASSESSEE, HOWEVER, THE EXPENSE PERTAINING TO WORK RELATING TO 3RD WORK ARE GENERAL IN NATURE, AND ARE NOT IN CONFORMITY WITH THE PROPO SED OBJECTIVES OF SCIENTIFIC RESEARCH, AS IT IS NOT SUPPORTED BY ANY DOCUMENTARY EVIDENCE, ACCORDINGLY NOT ELIGIBLE FOR WEIGHTED DEDUCTION. TH E INTENTION OF LAW, IN GIVING WEIGHTED DEDUCTION TO COMPANIES IS TO ENCOUR AGE THE RESEARCH AND DEVELOPMENT IN SPECIFIED AREAS SO AS TO DISCOURAGE IMPORT OF R & D AND RELATED TECHNOLOGY WHICH MAY HELP THE COUNTRY IN BE COMING SELF-RELIANT IN THESE FIELDS. TO AVAIL THIS DEDUCTION/BENEFIT, ASSE SSEE HAS TO PROVE BEYOND DOUBT THE FULFILLMENT OF ALL CONDITIONS WITH SUPPOR TING EVIDENCES. THE ASSESSEE HAS NOT SUBMITTED QUANTUM OF ACTUAL EXPENS ES INCURRED FOR THIS WORK SO THAT EXCESS CLAIM OF DEDUCTION COULD BE ALL OWED. ACCORDINGLY, DEDUCTION FOR R&D IS WORKED OUT AS: DE DUCTION U/S 35. AS PER TAX AUDIT REPORT: RS.195, 726,863/-. ' LESS :ALLOWABLE CAPITAL EXPENDITURE U/S 35: RS.24, 027,8/4/- LESS: ALLOWABLE REVENUE EXPENDITURE U/S 35: RS. 10 6,456, 761/- ADDITIONAL WEIGHTED DEDUCTION CLAIMED: RS. 130.48 4.575/- RS. 65,242.288/- ACCORDINGLY, EXCESS CLAIM OF DEDUCTION OF RS. 6,52, 42,288/- IS BEING DISALLOWED AND ADDED TO THE INCOME OF THE ASSESSEE. F AM SATISFIED THAT ASSESSEE HAS FURNISHED INACCURATE PARTICULARS OF IN COME. PENALTY U/S 271(L)(C) INITIATED. 9 I.T.A .NO.2561 & 2386/DEL/2013 16. DURING APPEAL BEFORE LD. CIT(A), THE ISSUE RAI SED IN GROUND NO. 1HAS BEEN DISCUSSED IN PARA 6.2 PAGE 22 OF THE IMPU GNED ORDER AND DECIDED THAT CAPITAL OF REVENUE EXPENDITURE INCURRE D BY THE APPELLANT AS CLAIMED, WERE FOR IN HOUSE R&D ACTIVITIES FOR ITS C ENTRE AT PITHAPUR AND CHENNAI WHICH HAVE BEEN DULY APPROVED FOR DEVELOPME NT OF SCIENTIFIC AND INDUSTRIAL RESEARCH. THE EXPENDITURE WAS INCURR ED FOR DEVELOPMENT OF NEW VARIANTS OF MGC AND ALSO MADE IMPROVED DESIGN A ND ALLOWED THE WEIGHTED DEDUCTION U/S 35(2AB) OF THE ACT AND EXPEN DITURE INCURRED DURING THE YEAR. 17. UNDISPUTEDLY, THE APPELLANT WAS HAVING R&D CEN TRE AT PITHAPUR AND CHENNAI DULY APPROVED BY DEPARTMENT OF SCIENTIF IC AND INDUSTRIAL RESEARCH. THE ASSESSING OFFICER DISALLOWED THE WEIG HTED DEDUCTION U/S 35(2AB) ON THE SOLE GROUND THAT THE ASSESSEE HAS NO T BEEN ABLE TO SPECIFICALLY PROVE AS TO WHICH NEW VARIANT AND AS T O HOW THESE ARE NEW VARIANT FOR DOMESTIC MARKET HAS BEEN DEVELOPED. WHE N THE ASSESSING OFFICER HAS SPECIFICALLY NOT DENIED THAT THE AMOUNT HAS BEEN SPENT FOR R&D AND HAS FAILED TO APPRECIATE THE DOCUMENTARY EV IDENCE BROUGHT ON RECORD, THE DEDUCTION SHOULD NOT HAVE BEEN DISALLOW ED BY DECIDING THE ISSUE SUMMARILY. MORE SO, ASSESSEE HAS BROUGHT ON R ECORD DETAILS OF REVENUE AND CAPITAL EXPENDITURE INCURRED ON R&D DUR ING THE PREVIOUS YEAR RELEVANT TO THE YEAR UNDER ASSESSMENT, WHICH H AS BEEN DULY CERTIFIED BY THE ASSESSING OFFICER HIMSELF IN SUB-PARA 6 OF P ARA 6 OF THE ASSESSMENT ORDER. THE ASSESSING OFFICER, WITHOUT RETURNING ANY FINDING ON THE REVENUE AND CAPITAL NATURE OF EXPENDITURE, CERTIFIE D REPORT OF TAX AUDITORS CERTIFYING THE AMOUNT OF R&D EXPENDITURE, PROCEEDED TO DISALLOWED THE DEDUCTION U/S 35(2AB). 18. LD. CIT(A) DURING APPELLATE PROCEEDINGS, HAS A LSO NOT PREFERRED TO CALL UPON ANY REMAND REPORT FROM THE ASSESSING OFFI CER REGARDING HIS 10 I.T. A.NO.2561 & 2386/DEL/2013 OPINION THAT DETAILS OF REVENUE AND CAPITAL EXPENDI TURE INCURRED ON R&D DURING THE RELEVANT PERIOD AND REPORT OF TAX AUDITO RS CERTIFYING THE AMOUNT OF R&D EXPENDITURE RATHER PROCEEDED TO DELETE THE A DDITION BY ALLOWING DEDUCTION U/S 35(2AB) OF THE ACT. EVEN THE ASSESSIN G OFFICER HAS HIMSELF ADMITTED THAT THE ASSESSEE HAS APPROVED R&D CENTRE TO CARRY OUT THE R&D ACTIVITIES. SO, WE ARE OF THE VIEW THAT THE MAT TER IS REQUIRED TO BE RESTORED TO THE ASSESSING OFFICER TO DECIDE AFRESH AFTER PROVIDING OPPORTUNITY OR BEING HEARD TO THE PARTIES ON GROUND NO.1. ACCORDINGLY, GROUND NO.1 IS DETERMINED IN FAVOUR O F THE ASSESSEE FOR STATISTICAL PURPOSE. 19. GROUND NO.2: OF APPEAL NO.25611DEL/2013 AND GROUND NO.1 OF APPEAL NO.2386/DEL/2013: WHETHER, 'ON THE FACTS AND CIRCUMSTANCE OF THE CASE AND IN L AW, THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION O F RS.82.49,192/- MADE UNDER SECTION 14A READ WITH RULE 80 OF INCOME TAX RULES. 1962. BARE PERUSAL CONTAINED IN SECTION 14A GOES TO PROVE THAT SECTION 14A IS APPLICABLE ONLY WHEN THE ASSESSING OFFICER AT THE O UTSET HAS RETURNED THE FINDING THAT THE ASSESSEE HAS ACTUALLY INCURRED EXP ENSES WHICH HAVE PROXIMATE NEXUS WITH THE EARNING OF EXEMPT DIVIDEND INCOME AND NOT OTHERWISE. SO, THE ONUS IS ON THE ASSESSING OFFICER TO FIND PROXIMATE/ DISTINCT NEXUS OF THE EXPENSES WITH THE EARNING OF EXEMPT INCOME BEFORE REJECTING THE CLAIM OF THE ASSESSEE AND COMPUTING D ISALLOWANCE U/S 14A OF THE ACT. 20. LD. D.R. CHALLENGING THE IMPUGNED ORDER CONTEN DED THAT THE ASSESSING OFFICER HAS RIGHTLY MADE DISALLOWANCE U/S 14A OF THE ACT AND RULE 8D OF I. T. RULES AND RELIED UPON THE ORDER OF THE ASSESSING OFFICER. 21. ON THE OTHER HAND, LD. A.R. CONTENDED THAT LD. CIT(A) HAS ERRED IN 11 I.T. A.NO.2561 & 2386/DEL/2013 DISALLOWING THE NOMINAL ADMINISTRATIVE EXPENSES OF RS.20,24, 169/- U/S 14A OF THE ACT ALLEGEDLY RELATING TO DIVIDEND INCOM E AND THE REMAINING PART OF THE SAME ALLOWED U/S 14A OF THE ACT. LD. A. R. RELIED UPON THE JUDGEMENT CITED AS CIT VS HERO CYCLES LTD. 323 ITR 518 (P&H) AND CIT VS GUJARAT STATE FERTILIZERS AND CHEMICALS LTD. , 358 ITR 323 (GUJ.). 22. ADMITTEDLY, ASSESSEE COMPANY HAS RECEIVED DIVI DEND INCOME OF RS.6.39 CRORES FROM THE INVESTMENT MADE IN VARIOUS MUTUAL FUNDS, FOREIGN COMPANIES, EXEMPT U/S 10(34) OF THE ACT. THE ASSESS ING OFFICER BY APPLYING PROVISION CONTAINED U/S 14A OF THE ACT REA D WITH RULE 80, HAS DISALLOWED RS. L ,02,73,361/- AS EXPENSES RELATING TO EARNING EXEMPT INCOME CONSISTING OF DISALLOWANCE OF EXPENDITURE OF RS.25,94,361/- AND ADMINISTRATIVE EXPENSES OF RS. 76,79,000/-. 23. IT IS SETTLED PRINCIPLE OF LAW THAT TO APPLY T HE PROVISIONS CONTAINED U/S 14A OF THE ACT FOR THE DETERMINATION OF AMOUNT OF EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME, THE ASSESSIN G OFFICER IS MANDATORILY REQUIRED TO RETURN A FINDING THAT HE IS NOT SATISFIED WITH THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITUR E AND THEREFORE, HE HAS NOT RETURNED FINDINGS THAT AS TO WHETHER THE EXPEND ITURE INCURRED ARE ACTUAL EXPENDITURE AND NOT IMAGINED EXPENDITURE. 24. HON'BLE PUNJAB & HARYANA HIGH COURT IN CASE CI TED AS CIT VS HERO CYCLES LTD., 323 ITR 518 HELD THAT DISALLOWANCE U/S 14A REQUIRES FINDING OF INCURRING THE EXPENDITURE AND WHERE, IT WAS FOUND THAT FOR EARNING EXEMPT INCOME, NO EXPENDITURE HAD BEEN INCU RRED, DISALLOWANCE U/S 14A COULD NOT STAND. OPERATIVE PART OF THE JUDG EMENT IN CASE OF HERO CYCLES LTD. (SUPRA) IS REPRODUCED AS UNDER FOR READ Y REFERENCE: 12 I.T. A.NO.2561 & 2386/DEL/2013 'DEDUCITON-DISALLWOANCE OF EXPENDITLR.L IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME-DIVIDEND INOCME-DISALLWONCE NO PERMISSIBLE WHERE NO NEXUS BETW3EEN EXPNEDITURE INCURRED AND INCOME GSAENERATED-1NCOME TAX ACT, 1961, S.14A. THE ASSESSEE WAS ENGAGED IN MANUFACTURE OF CYCLES A ND PARTS OF TWO WHEELERS IN MULTIPLE UNITS. IT EARNED DIVIDEND INCOME. WHICH WAS EXEMPTED UNDER SECTION /0(34) AND (35) OF THE I NCOME TAX ACT, 1961. THE ASSESSING OFFICER MADE AN INQUIRY WHETHER ANY EXPENDITURE WAS INCURRED FOR EARNING THIS INCOME AN D AS A RESULT OF THE INQUIRY MADE ADDITION BY WAY OF DISALLOWANCE UN DER SECTION 14A(3), WHICH W PARTLY UPHELD BY THE CIT(A). THE TR IBUNAL HELD THAT THERE WAS NO NEXUS BETWEEN THE EXPENDITURE INC URRED AND THE INCOME GENERATED. THEREFORE, IT HELD THAT MERELY BE CAUSE OF THE ASSESSEE HAD INCURRED INTEREST EXPENDITURE ON FUNDS BORROWED IN THE MAIN UNIT IT WOULD NOT IPSO FACTO INVITE THE DI SALLOWANCE UNDER SECTION 14A, UNLESS THERE WAS EVIDENCE TO SHOW THAT SUCH INTEREST BEARING FUNDS HAD BEEN INVESTED IN THE INVESTMENTS WHICH HAD GENERATED THE 'TAX EXEMPT DIVIDEND INCOME '. ON APPEAL: HELD, DISMISSING THE APPEAL, THAT THE EXPENDITURE O N INTEREST WAS SET OFF OF AGAINST THE INCOME FROM INTEREST AND THE INVESTMENT IN THE SHARES AND FUNDS WERE OUT OF THE DIVIDEND PROCEEDS. IN VIEW OF THIS FINDING OF FACT, DISALLOWANCE UNDER SECTION 14A WAS NO SUSTAINABLE. WHETHER, IN A GIVEN SITUATION, ANY EXPENDITURE WAS INCURRED WHICH WAS TO BE DISALLOWED, WAS A QUESTION OF/ACT. THE CO NTENTION OF THE REVENUE THAT DIRECTLY OR INDIRECTLY SOME EXPENDITUR E 3WAS ALWAYS INCURRED WHICH MUST BE DISALLOWED UNDER SECTION 14A AND THE IMPACT OF EXPENDITURE SO INCURRED COULD NOT BE ALLO WED TO BE SET OFF AGAINST THE BUSINESS INCOME WHICH MAY NULLIFY THE M ANDATE OF SECTION 14A, COULD NOT BE ACCEPTED. DISALLOWANCE UN DER SECT ION 14A REQUIRED FINDING OF INCURRING OF EXPENDITURE WH ERE IT WAS FOUND THAT FOR EARNING EXEMPTED INCOME NO EXPENDITU RE HAD BEEN INCURRED, DISALLOWANCE UNDER SECTION 14A COULD NOT STAND. CONSEQUENTLY, THE DISALLOWANCE WAS NOT PERMISSIBLE. ' 13 I.T. A.NO.2561 & 2386/DEL/2013 25. SIMILARLY, HON'BLE GUJARAT HIGH COURT, IN THE J UDGEMENT CITED AS CIT VS GUJARAT STATE FERTILIZERS AND CHEMICALS LTD. 358 ITR 323 (GUJ.) HELD THAT: 'WHEN FROM THE FACTS ON RECORD, THE EMPLOYMENT OF S ECTION 14A OF THE INCOME TAX ACT, 1961, IS NOT FOUND CORRECT, THE RE DOES NOT ARISE ANY QUESTION OF DETERMINING THE AMOUNT OF EXPENDITU RE IN THE ABSENCE OF RULE 8D OF THE INCOME TAX RULES, 1962, O N THE BASIS OF A REASONABLE AND ACCEPTABLE METHOD OF APPORTIONMENT. ' 26. HON'BLE SUPREME COURT IN THE CASE CITED AS CIT VS WALLFORT SHARE AND STOCK BROKERS 326 ITR 01 HAS HELD THAT THERE MUST BE PROXIMATE RELATIONSHIP OF EXPENDITURE WITH THE EXEM PT INCOME FOR THE PURPOSE OF MAKING DISALLOWANCE CLAIMED U/S 14A OF T HE ACT. 27. HON'BLE JURISDICTIONAL HIGH COURT IN THE JUDGE MENT CITED AS MAXOPP INVESTMENT LTD. VS CIT, 347 ITR 272 STRETCHED THE SCOPE OF THE PROVISIONS OF SECTION 14A AND THE POWERS VESTED WITH THE ASSESSING OFFICER AND HELD THAT THE EXPRESSION EXPENDITURE 'I NCURRED' REFERS TO ACTUAL EXPENDITURE AND NOT TO SOME IMAGINED EXPENDITURE. P ROVISIONS OF SECTION 14AREAD WITH RULE 8D OF I T RULES, CAN BE APPLIED F OR THE ASSESSMENT YEAR 2008-09 FOR THE REJECTION OF CLAIM OF ASSESSEE FOR NOT HAVING INCURRED ANY EXPENDITURE IN RELATION TO EARNING THE EXEMPT INCOME WITH COGENT REASONS. 28. IN THE LIGHT OF LAW LAID DOWN BY HON'BLE SUPRE ME COURT AND HON'BLE HIGH COURT REFERRED TO ABOVE, THE QUESTION ARISES FOR DETERMINATION IN THIS CASE IS, 'AS TO WHETHER THE A SSESSING OFFICER HAS SATISFIED HIMSELF BEFORE INVOKING THE PROVISIONS CO NTAINED U/S 14A READ WITH RULE 8D OF I T RULES THAT ASSESSEE HAS INCURRE D EXPENSES HAVING PROXIMATE NEXUS WITH EARNING OR EXEMPT DIVIDEND INC OME AND THAT ASSESSING OFFICER HAS REJECTED THE CLAIM OF ASSESSE E HAVING NOT INCURRED ANY EXPENDITURE IN RELATION TO EARNING THE EXEMPT I NCOME WITH COGENT 14 I.T. A.NO.2561 & 2386/DEL/2013 REASON. BOTH THE AFORESAID CONDITION PRECEDENTS HAV E NOT BEEN COMPLIED WITH BY THE ASSESSING OFFICER BEFORE INVOKING THE P ROVISIONS CONTAINED U/S 14A READ WITH RULE 8D OF I T RULES. 29. LD. CIT(A) WHILE PASSING THE IMPUGNED ORDER, T HRASHED THE LAW ON THE SUBJECT THREAD BARE BUT HAS ASSUMED THE POWERS OF ASSESSING OFFICER IN DECIDING THE MATTER AND PROCEEDED TO PARTLY ALLO W THE APPEAL OF THE ASSESSEE EXCEPT FOR DISALLOWANCE OF RS.20,24, 169/- AGAINST RS.1,02,73,361/- MADE BY THE ASSESSING OFFICER. LD. CIT(A) HAS NOT PREFERRED TO CALL FOR ANY REMAND REPORT DIRECTING T HE ASSESSING OFFICER TO RECORD HIS SATISFACTION AND COGENT REASONS BEFORE I NVOKING THE PROVISIONS CONTAINED U/S 14A READ WITH RULE 8D OF I. T RULES. SO, WE ARE OF THE CONSIDERED VIEW THAT THE MATTER IS REQUIRED TO BE R ESTORED TO THE FILE OF LD. CIT(A) TO DECIDE AFRESH AFTER PROVIDING OPPORTUNITY OF BEING HEARD TO THE PARTIES. CONSEQUENTLY, GROUND NO.2 OF THE APPEAL NO .2561/DEL/1013 AND GROUND NO.1 OF APPEAL 2386/DEL/2013 ARE DECIDED ACC ORDINGLY. 30. GROUND NO.3: IT IS A MATTER OF RECORD THAT DURING THE YEAR UNDER ASSESSMENT, PROVISIONS FOR GUARANTEE OF RS.L.57 CRORES HAVE BEE N MADE AND DEBITED TO P & L ACCOUNT. THE ASSESSING OFFICER DISALLOWED THI S AMOUNT AS PROVISIONS FOR WARRANTY IN EXCESS AND ACTUAL WARRAN TY CLAIMED AMOUNTING TO RS.40 CRORES AND ADDED THE SAME TO THE TOTAL INC OME OF THE ASSESSEE ON THE GROUND THAT NO SCIENTIFIC BASIS FOR MAKING SUCH PROVISIONS, HAS BEEN FURNISHED AND THAT THE PROVISIONS HAS BEEN MADE PUR ELY ON THE BASIS OF ESTIMATION AND AS SUCH, IS NOT ASCERTAINED LIABILIT Y. 31. UNDISPUTEDLY, ASSESSEE IS ENGAGED IN THE BUSIN ESS OF MANUFACTURING AND SALE OF COMMERCIAL VEHICLES, TRACTORS, TWO WHEE LERS AND GEARS. LD. A.R. CONTENDED THAT VARIOUS PRODUCTS OF THE COMPANY ARE SOLD ALONG WITH 15 I.T. A.NO.2561 & 2386/DEL/2013 WARRANTY AND ASSESSEE IS UNDER OBLIGATION TO REPLAC E ANY COMPONENT BEARING MANUFACTURING DEFECT FREE OF COST AND AT TH E END OF THE RELEVANT PREVIOUS YEAR, ASSESSEE HAD MADE AGGREGATE PROVISIO NS FOR WARRANTY AT RS.7,38,00,000/-. 32. LD. D.R. RELIED UPON THE ORDER PASSED BY ASSES SING OFFICER. HOWEVER, LD. A.R. RELIED UPON THE ORDER PASSED BY L . CIT(A) AND CONTENDED THAT THE ASSESSEE ONLY CLAIMED REGARDING DEDUCTION OF AMOUNT EARMARKED FOR PROVISION FOR WARRANTY, HAS BEEN ALLO WED BY THE REVENUE DURING THE ASSESSMENT YEARS 2002-03, 2003-04, 2006- 07 AND 2007-08 AND NO APPEAL HAS BEEN FILED BY THE DEPARTMENT AGAI NST LD. CIT(A)'S ORDER. LD. A.R. ALSO RELIED UPON THE DECISION DELIV ERED BY INCOME TAX APPELLATE TRIBUNAL DELHI BENCH 'B', NEW DELHI IN AS SESSEE'S OWN CASE ENTITLED DCIT VS M/S. EICHER MOTORS LTD. IN I.T.A. NO. 3560/DEL12008 ORDER DATED 18.09.2009 . LD. A.R. ALSO RELIED UPON THE JUDGMENT OF HON'BLE SUPREME COURT IN THE CASE ENTIT LED ROTORK CONTROLS INDIA PVT. LTD. VS CIT, 314 ITR 62 (S.C.). THE RATIO OF JUDGMENT (SUPRA) IS THAT ESTIMATED PROVISIONS FOR WARRANTY A RE ALLOWABLE FOR DEDUCTION. OPERATIVE PART OF THE JUDGEMENT (SUPRA) IS REPRODUCED BELOW FOR FACILITY OF REFERENCE: 'HELD, REVERSING THE DECISION OF THE HON'BLE HIGH C OURT, THAT THE VALVE ACTUATORS, MANUFACTURED BY THE ASSESSEE, WERE SOPHISTICATED GOODS AND STATISTICAL DATA INDICATED THAT EVERY YEAR SOME OF THESE WERE FOUND DEFECTIVE; THAT VALVE ACTU ATOR BEING A SOPHISTICATED ITEM NO CUSTOMER WAS PREPARED TO BUY A VALVE ACTUATOR WITHOUT A WARRANTY. THEREFORE, THE WARRAN TY BECAME AN INTEGRAL PART OF THE SALE PRICE: IN OTHER WORDS, TH E WARRANTY STOOD ATTACHED TO THE SALE PRICE OF THE PRODUCT. IN THIS CASE, THE WARRANTY PROVISIONS HAD TO BE RECOGNIZED BECAUSE THE ASSESSE E HAD A PRESENT OBLIGATION AS A RESULT OF PAST EVENTS RESULTING IN AN OUTFLOW OF RESOURCES AND A RELIABLE ESTIMATE COULD BE MADE OF THE AMOUNT OF OBLIGATION. THEREFORE, THE ASSESSEE HAD INCURRED A LIABILITY DURING 16 I.T. A.NO.2561 & 2386/DEL/2013 THE ASSESSMENT YEAR WHICH WAS ENTITLED TO DEDUCTION UNDER SECTION 37 OF THE INCOME TAX ACT, 1961. THE PRESENT VALUE OF A CONTINGENT LIABILITY, LIKE T HE WARRANTY EXPENSE, IF PROPERLY ASCERTAINED AND DISCOUNTED ON ACCRUAL BASIS CAN BE AN ITEM OF DEDUCTION UNDER SECTION 37. THE P RINCIPLE OF ESTIMATION OF THE CONTINGENT LIABILITY IS NOT THE N ORMAL RULE. IT WOULD DEPEND ON THE NATURE OF THE BUSINESS, THE NAT URE OF SALES, THE NATURE OF THE PRODUCT MANUFACTURED AND SOLD AND THE SCIENTIFIC METHOD OF ACCOUNTING ADOPTED BY THE ASSESSEE. IT WO ULD ALSO DEPEND UPON THE HISTORICAL TREND AND UPON THE NUMBE R OF ARTICLES PRODUCED. A PROVISION IS A LIABILITY WHICH CAN BE MEASURED ON LY BY USING A SUBSTANTIAL DEGREE OF ESTIMATION. A PROVISI ON IS RECOGNIZED WHEN: (A) AN ENTERPRISE HAS A PRESENT OBLIGATION AS A RESULT OF A PAST EVENT: (H) IT IS PROBABLE THAT AN OUTFLOW OF R ESOURCES WILL BE REQUIRED TO SETTLE THE OBLIGATION, AND (C) A RELIAB LE ESTIMATE CAN BE MADE OF THE AMOUNT OF THE OBLIGATION. IF THESE COND ITIONS ARE NOT MET, NO PROVISION CAN BE RECOGNIZED. THE PRINCIPLE IS THAT IF THE HISTORICAL TREND INDIC ATES THAT A LARGE NUMBER OF SOPHISTICATED GOODS WERE BEING MANU FACTURED IN THE PAST AND THE FACTS SHOW THAT DEFECTS EXISTED IN SOME OF HT ITEMS MANUFACTURED AND SOLD, THEN PROVISION MADE FOR WARR ANTY IN RESPECT OF SUCH SOPHISTICATED GOODS WOULD BE ENTITL ED TO DEDUCTION FROM THE GROSS RECEIPTS UNDER SECTION 37. ' 33. THE COORDINATE BENCH OF INCOME TAX APPELLATE T RIBUNAL BY RELYING UPON THE JUDGEMENT CITED AS ROTORK CONTROLS INDIA L TD. (SUPRA) IN THE ASSESSEE'S OWN CASE FOR THE ASSESSMENT YEAR 2002-03 HELD THAT ASSESSEE HAD ESTIMATED THE PROVISIONS FOR WARRANTY ON THE BA SIS OF PAST HISTORY. THE ESTIMATE OF WARRANTY MADE BY THE ASSESSEE ON THE BA SIS OF PAST HISTORY CANNOT BE TREATED AS A PROVISION FOR ANY ASCERTAINE D LIABILITY AND ALLOWED THE PROVISION FOR WARRANTY AS DEDUCTION. FOLLOWING THE LAW LAID DOWN BY HON'BLE SUPREME COURT IN THE JUDGEMENT (SUPRA), DEC ISION OF COORDINATE BENCH IN THE ASSESSEE'S OWN CASE, WE FIND THAT THER E IS NO INFIRMITY OR PERVERSITY IN THE FINDINGS RETURNED BY LD. CIT(A) I N ALLOWING THE 17 I.T. A.NO.2561 & 2386/DEL/2013 ASCERTAINED LIABILITY AS ALLOWABLE EXPENDITURE U/S 3 7( 1) OF THE ACT. SO, GROUND NO.3 IS DETERMINED IN FAVOUR OF THE ASSESSEE . 34. GROUND NO.4: UNDISPUTEDLY, ASSESSEE HAS RECEIVED AN AMOUNT OF RS.39,35,00,000/- AS NON COMPETE FEE FROM M/S. AB V OLVO ON THE BASIS OF NON COMPETE AGREEMENT VIDE WHICH ASSESSEE AGREED TO TRANSFER ITS EXCLUSIVE RIGHT TO CONDUCT COMMERCIAL VEHICLE BUSIN ESS IN FAVOUR OF AB VOLVO. IT IS NOT DISPUTED THAT THIS AMOUNT OF NON C OMPETE FEE HAS BEEN RECEIVED BY THE ASSESSEE AND THE SAME HAS BEEN OFFE RED TO TAX UNDER THE HEAD 'LONG TERM CAPITAL GAIN'. THE ASSESSING OFFICE R MADE AN ADDITION OF RS.39,35,00,000/- ON THE GROUND THAT THE ASSESSEE' S CASE FALLS UNDER CLAUSE (B) OF SECTION 28(VA) WHICH IS TERMED AS LIC ENSE AND IN SIMILAR NATURE. HENCE, PROVISO TO CLAUSE (A) TO SECTION 28( VA) IS NOT APPLICABLE. RELEVANT PORTION OR THE ASSESSMENT ORDER PASSED BY ASSESSING OFFICER IS REPRODUCED AS UNDER: 'I HAVE CONSIDERED THE SUBMISSION OF THE ASSESSEE A ND GIVEN A CAREFUL THOUGHT. WHILE CONSIDERING THE ISSUE OF NON COMPETE LEE RECEIVED FOR AN AMOUNT OF RS. 39,35,00,000/- FROM A S VOLVO AS CAPITAL RECEIPT IN VIEW OF PROVISO (I) TO SECTION 2 8 (VA) OF IT ACT, HOWEVER, ON PERUSAL OF CLAUSES OF AGREEMENT IT IS S EEN /170/ THE ASSESSEE HAS SOMEHOW TRIED TO BRING ITS CASE UNDER THE PROVISO (I) TO SECTION 28 (VA) WHICH READS AS: '(VA) ANY SUM, WHETHER RECEIVED OR RECEIVABLE. IN C ASH OR' KIND UNDER AN AGREEMENT FOR- (A) NOT CARRYING OUT ANY ACTIVITY IN RELATION TO A NY BUSINESS; OR PROVIDED THAT SUB CLAUSE (A) SHALL NOT APPLY TO- (I) ANY SUM, WHETHER RECEIVED OR RECEIVABLE IN CASH OR KIND, ON ACCOUNT OF TRANSFER OF THE RIGHT TO MANUFACTURE, PRODUCE OR PROCESS ANY ARTICLE OR THING OR RIGHT TO CARRYON ANY BUSINESS WHICH IS CHARGEABLE UNDER THE HEAD 'CAPITA L GAINS ': 18 I.T. A.NO.2561 & 2386/DEL/2013 THE ABOVE PROVISO IS APPLICABLE ONLY IN CASES WHERE CLAUSE (A) IS APPLICABLE, HOWEVER THE SAID PROVISO IS NOT APPLICABLE IN THOSE CASES WHICH FALL UNDER CLAUSE (B) OF SECTION 28 (VA) OF IT ACT. IN THIS CASE THE ASSESSEE SOLD ITS ENTIRE COMMERCIA L VEHICLE BUSINESS TO VOLVO SUBSEQUENTLY, FOR SEPARATE CONSID ERATION TO BE RECEIVED BY THE ASSESSEE, HOWEVER THE ASSESSEE HAS SEPARATED NON COMPETENT FEE TRANSACTION FROM THE MAIN TRANSACTION AS IT WAS EXECUTED ONE MONTH BEFORE THE MAIN TRANSACTION, IF THE ASSESSEE WOULD HAVE SOLD ITS ENTIRE BUSINESS INCLUDING THE N ON COMPETE TRANSACTION AT ONE OCCASION THEN THE PROVISO OF SEC TION 28 (VA)(A) WOULD HAVE BEEN APPLICABLE AND AUTOMATICALLY PROVIS O (I) TO SECTION 28 (VA) WOULD HAVE BECOME OPERATIONAL. BUT HERE IN INSTANT CASE, THE ASSESSEE HAS RECEIVED THE AMOUNT OF RS. 3 9,35, 00, 000/- ON ACCOUNT OF TRANSFER OF BUSINESS OF COMMERCIAL RI GHTS IN THE NATURE OF LICENSE AS INAUGURATED IN CLAUSE (B) TO S ECTION 28 (VA) OF THE IT ACT. THE ASSESSEE HAS FURTHER TRIED TO INCLU DE THE TRANSACTION IN CLAUSE (A) SO THAT THE ASSESSEE MAY AVAIL THE BE NEFIT OF PROVISO (1) MAINLY TO REDUCE THE TAX LIABILITY UNDER THE HE AD CAPITAL GAIN. IN THIS CONNECTION THE HON'BLE SUPREME COURT IN HAS GI VEN THE JUDGMENT ON THE INITIATION OF TAXING STATUTES IN TH E CASE OF CIT VS KASTURI & SONS LTD. 237 ITR 24. AT PAGE NO. 29 THE HON'BLE COURT HAS RULED IT AS UNDER: 'THE PRINCIPLE THAT A TAXING STATUTE SHOULD BE STRI CTLY CONSTITUTE IS WELL SETTLED. IN PRINCIPLE OF STATUTO RY INTERPRETATION BY JUSTICE GP SINGH SIX EDITION 1966, IT IS STATED, TH E WELL ESTABLISHED RULE IN THE FAMILIAR WORDS OF LORD WENSLERY REAFFIR MED WITH LORD HALSBORY ONE LORD SYMONDS MEANS THE SUBJECT IS NOT TO BE TAXED WITHOUT CLEW' WORDS FOR THAT PURPOSE AND ALSO THAT EVERY ACT OF PARLIAMENT MUST HE READ ACCORDING TO THE NATURAL CO NSTRUCTION OF ITS WORDS. IN A CLASSIC PASSAGE, LORD CAIRNS STATED THE PRINCIPLE THUS. IF THE PERSON SOUGHT TO BE TAXED COMES WITHIN THE LATTER OF THE LAW HE MUST BE TAXED HOWEVER GREAT THE HARDSHIP MAY APPEAR IN THE JUDICIAL MIND TO BE. ON THE OTHER HAND, IF THE CROWN SEEKING TO RECOVER THE TAX CANNOT BRING THE SUBJECT WITHIN THE LETTER OF THE LAW, THE SUBJECT IN FREE, HOWEVER, APPARENTLY WITHIN THE SPIRIT OF LAW THE CASE MIGHT OTHERWISE APPEAR TO BE IN OTHER WORDS, I F THERE BE ADMISSIBLE IN ANY STATUTE, WHAT IS CALLED AN EQUITA BLE CONSTRUCTION CERTAINLY, SUCH A CONSTRUCTION IS NOT ADMISSIBLE IN A TAXING STATUTE WHERE YOU CAN SIMPLY ADHERE TO THE WORDS OF THE STA TUTE. IN A TAXING ACT ONE HAS TO LOOK MERELY AT WHAT IS CLEARL Y SAID. THERE IS NO PRESUMPTION AS TO TAX. NOTHING IS TO BE READ NOT HING IS TO BE IMPLIED. ONE CAN ONLY LOOK FAIRLY AT THE LANGUAGE R EAD. ' 19 I.T. A.NO.2561 & 2386/DEL/2013 35. NOW, THE QUESTION ARISES FOR DETERMINATION IN THIS CASE IS, AS TO WHETHER THE NON COMPETE FEE OF RS. 39,35, 00, 0001- RECEIVED BY THE ASSESSEE COMPANY FROM A B VOLVO IS TAXABLE UNDER TH E HEAD 'CAPITAL GAIN' OR NOT U/S 28BA'. THE ASSESSING OFFICER RELIED UPON THE JUDGEMENT CITED AS CIT VS KASTURI & SONS, 237 ITR 24 WHEREIN HON'BLE SUPREME COURT HAS HELD THAT THE PRINCIPLE THAT HAS BEEN TAKEN BY THE STATUTE SHOULD BE STRICTLY CONSTRUED IS WELL SETTLED AND PROCEEDED TO DECIDE THE MATTER AGAINST THE ASSESSEE BY HOLDING THAT THE ASSESSEE'S CASE FALLS UNDER CLAUSE (B) OF SECTION 28(VA) WHICH IS TERMED AS LICENSE OR IN THE SIMILAR NATURE. HENCE, PROVISO TO CLAUSE (A) TO SECTION 28(VA) IS N OT APPLICABLE. TO PROCEED FURTHER, THE PROVISIONS CONTAINED U/S 28(VA ) ARE REPRODUCED AS UNDER FOR FACILITY OF REFERENCE: '(VA) ANY SUM, WHETHER RECEIVED OR RECEIVABLE, IN C ASH OR KIND UNDER AN AGREEMENT FOR- (A) NOT CARRYING OUT ANY ACTIVITY IN RELATION TO A NY BUSINESS: OR PROVIDED THAT SUB CLAUSE (A) SHALL NOT APPLY TO- (I) ANY SUM, WHETHER RECEIVED OR RECEIVABLE IN CASH OR KIND. ON ACCOUNT OF TRANSFER OF THE RIGHT TO MANUFACTURE PRO DUCE OR PROCESS ANY ARTICLE OR THING OR RIGHT TO CARRYON ANY BUSINE SS, WHICH IS CHARGEABLE UNDER THE HEAD 'CAPITAL GAINS '': 36. BARE PERUSAL OF CLAUSE (A) OF SECTION 28(VA) G OES TO PROVE THAT ANY AMOUNT, THE AMOUNT OFRS.39,35,00,000/- RECEIVED AS NON COMPETE FEE BY THE ASSESSEE COMPANY FROM A B VOLVO ON ACCOUNT OF T RANSFER OF RIGHT TO MANUFACTURE IN THIS CASE, PRODUCE AND PROCESS ANY A RTICLE OR THING AND RIGHT TO CARRY OUT ANY BUSINESS, IS CHARGEABLE UNDE R THE HEAD 'CAPITAL GAIN'. 37. THE HON'BLE SUPREME COURT IN THE JUDGEMENT CIT ED AS GUFFIC CHEM. P. LTD. VS CIT AND CIT VS MANDALAY INVESTMENT P. LTD.(20 11) 332 ITR 602 (S.C.) DECIDED THE SUBSTANTIAL QUESTION OF LAW THAT 'AS T O WHETHER THE AMOUNT RECEIVED BY ASSESSEE PURSUANT TO NON COMPETITION 20 I.T. A.NO.2561 & 2386/DEL/2013 AGREEMENT ENTERED INTO BY THE ASSESSEE WITH OTHER C OMPANY, IS TO BE TREATED AS CAPITAL RECEIPT AND NOT REVENUE RECEIPT '. THE HON'BLE SUPREME COURT DECIDED THE ISSUE IN PARA 5AND 6 OF THE JUDGE MENT WHICH ARE REPRODUCED AS UNDER: 'DECISION: 5. THE POSITION IN LAW IS CLEAR AND WELL SELL LED . THERE IS A DICHOTOMY BETWEEN RECEIPT OF COMPENSATION BY AN A SSESSEE FOR THE LOSS OF AGENCY AND RECEIPT OF COMPENSATION ATTR IBUTABLE TO THE NEGATIVE/RESTRICTIVE COVENANT. THE COMPENSATION REC EIVED FOR THE LOSS OF AGENCY IS A REVENUE RECEIPT WHEREAS THE COM PENSATION ATTRIBUTABLE TO A NEGATIVE/RESTRICTIVE COVENANT IS A CAPITAL RECEIPT. 6. THE ABOVE DICHOTOMY IS CLEARLY SPELT OUT IN THE JUDGEMENT OF THIS COURT IN GILLANDERS' CASE (SUPRA) IN WHICH THE FACTS WERE AS FOLLOWS. THE ASSESSEE IN THAT CASE CA RRIED ON BUSINESS IN DIVERSE FIELDS BESIDES ACTING AS MANAGING AGENTS , SHIPPING AGENTS, PURCHASING AGENTS AND SECRETARIES. THE ASSE SSEE ALSO ACTED AS IMPORTERS AND DISTRIBUTORS ON BEHALF OF FOREIGN PRINCIPALS AND BOUGHT AND SOLD ON ITS OWN ACCOUNT. UNDER AN AGREEM ENT WHICH WAS TERMINABLE AT WILL THE ASSESSEE ACTED AS A SOLE AGENT OF EXPLOSIVES MANUFACTURED BY IMPERIAL CHEMICAL INDUST RIES (EXPORT) LTD. THAT AGENCY WAS TERMINATED AND BY WAY OF COMPE NSATION THE IMPERIAL CHEMICAL INDUSTRIES (EXPORT) LTD., PAID FO R FIST THREE YEARS AFTER THE TERMINATION OF THE AGENCY TWO FIFTH S OF THE COMMISSION ACCRUED ON ITS SALES IN THE TERRITORY OF THE AGENCY OF THE APPELLANT AND IN ADDITION IN THE THIRD YEAR FUL L COMMISSION WAS PAID FOR THE SALES IN THAT YEAR. THE IMPERIAL CHEMI CAL INDUSTRIES (EXPORT) LTD. TOOK A FORMAL UNDERTAKING FROM THE AS SESSEE TO REFRAIN FROM SELLING OR ACCEPTING ANY AGENCY FOR EX PLOSIVES. 38. NOW ADVERTING TO THE CASE AT HAND, IT IS UNDIS PUTED FACT THAT THE ASSESSEE COMPANY WAS ENGAGED IN THE BUSINESS OF MAN UFACTURE AND SALE OF COMMERCIAL VEHICLES SINCE 1986 ALONG WITH OTHER BUSINESS OF MANUFACTURING AND SALE AND ENGINEERING SERVICES AND HAD ACQUIRED CONSIDERABLE KNOWLEDGE AND EXPERTISE IN THE FIELD O F COMMERCIAL VEHICLE BUSINESS. THE ASSESSEE COMPANY ENTERED INTO AN AGRE EMENT WITH MIS. A B VOLVO TO TRANSFER ITS EXCLUSIVE RIGHT TO CONDUCT CO MMERCIAL VEHICLES 21 I.T. A.NO.2561 & 2386/DEL/2013 BUSINESS IN FAVOUR OF M/S. AB VOLVO. OPERATIVE PART OF THE AGREEMENT DATED 26.05.2008 IS REPRODUCED AS UNDER FOR FACILIT Y OF REFERENCE: 'FURTHER, CLAUSE 3. I AND 3.1.1 IS REPRODUCED AS UN DER: 3.1 IN CONSIDERATION OF THIS AGREEMENT INCLUDING TH E PAYMENT OF THE CONSIDERATION FOR THE TRANSFER OF THE EXCLUSIVE RIG HT TO CARRY ON THE CV BUSINESS IN THE FAVOUR OF THE COMPANY AND EXCLU SION OF THE OTHER TRANSACTION DOCUMENTS, EML: UNDERTAKES TO VOL VO THAT IT SHALL NOT, AND SHALL CAUSE AND PROCURE THAT NONE OF ITS CONNECTED PERSONS SHALL. WITHOUT THE PRIOR WRITTEN CONSENT OF VOLVO EITHER ALONG OR JOINTLY WITH, THOUGH (WHICH INCLUDES BY WA Y OF OWNERSHIP OF AN)' SHARES OR ANY DIRECT OR INDIRECT CONTROL) O R ON BEHALF OF OR IN CONJUNCTION WITH (WHETHER AS DIRECTOR, PARTNER, CONSULTANT, MANAGER, EMPLOYEE, AGENT OR OTHERWISE) ANY PERSONS, DIRECT OR OTHERWISE) ANY PERSONS, DIRECTLY OR INDIRECTLY: 3.1.1. WITH EFFECT FROM THE DATE OF THIS AGREEMENT, UP TO THE TERMINATION DATE AND FOR A FURTHER PERIOD OF 3 (THR EE) YEARS FROM THE TERMINATION DATE. (A) CARRYON OR BE ENGAGED OR CONCERNED OR INTERESTE D IN THE DEVELOPMENT AND / OR MANUFACTURE AND / OR SALE AND / OR DISTRIBUTION OF AND / OR PROVISIONS OF AFTER SALES SERVICES OF TRUCKS AND / OR BUSSES; OR (B) INDUCE, ATTEMPT TO INDUCE, ENGAGE OR EMPLOY. OR SOLICIT OR CONTACT WITH A VIEW TO THE ENGAGEMENT OR EMPLOYMENT BY ANY PERSON, ANY EMPLOYEE, OFFICER OR MANAGER OF OR ANY PERSON WHO HAS BEEN AN EMPLOYEE, OFFICER OR MANAGER OF THE COMPANY IN EITHER CASE DURING THE TERM OF THIS AGRE EMENT; 39. CURSORY LOOK AT THE OPERATIVE CLAUSES OF THE A GREEMENT ENTERED INTO BETWEEN THE ASSESSEE AND AB VOLVO AND VECE APPARENT LY PROVED THAT THERE WAS A NEGATIVE/RESTRICTIVE COVENANT BETWEEN T HE ASSESSEE COMPANY AND M/S. AB VOLVO THAT ASSESSEE COMPANY SHALL NOT C ARRY OUT AND BE ENGAGED AND CARRY THE INTEREST IN DEVELOPMENT/.MANUFACTURE/SALE/DISTRIBUTION/PROVISIO N OF AFORESAID SERVICES AND TRACK OF THE BUSINESS OR INDUCE, ATTEM PT TO INDUCE, ENGAGE OR EMPLOY, OR SOLICIT OR CONTACT WITH A VIEW TO THE EN GAGEMENT OR 22 I.T. A.NO.2561 & 2386/DEL/2013 EMPLOYMENT BY ANY PERSON, ANY EMPLOYEE, OFFICER OR MANAGER OF, OR ANY PERSON WHO HAS BEEN AN EMPLOYEE DURING THE TERMS OF AGREEMENT. IT IS A COMPLETE EMBARGO ON THE ASSESSEE COMPANY. 40. FOLLOWING THE LAW LAID DOWN BY HON'BLE SUPREME COURT IN THE JUDGEMENT OF ONGC LTD. VSS CIT & ANOTHER, CIVIL APPEAL NO.731 OF 2007, WE ARE OF THE CONSIDERED VIEW THAT THE AMOUNT OF RS .39,35,00,000/- RECEIVED BY THE ASSESSEE COMPANY AS NON COMPETE FEE , IS A COMPONENT ATTRIBUTABLE IN A NEGATIVE / RESTRICTIVE COVENANT A ND AS SUCH, IS A CAPITAL RECEIPT AS HAS BEEN HELD BY LD. CIT(A) VIDE IMPUGNE D ORDER. SO, FINDING NO ILLEGALITY OR PERVERSITY IN THE FINDINGS OF LD. CIT(A), GROUND NO.4 IS DETERMINED AGAINST THE REVENUE. 41. IN VIEW OF THE FINDINGS ABOVE, BOTH APPEALS UN DER CONSIDERATION ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES. 42. ORDER PRONOUNCED IN THE OPEN COURT ON 04 TH JAN., 2015. SD./- SD./- ( N. K. SAINI) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MFMBFR DATE: 04 TH JAN., 2015 SP COPY FORWARDED TO:- 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT (A)-, NEW DELHI. 5. THE DR, ITAT, LOKNAYAK BHAWAN, KHAN MARKET, NEW DELHI. TRUE COPY. BY ORDER (ITA T, NEW DELHI). 23 I.T. A.NO.2561 & 2386/DEL/2013 S.NO. DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON SR. PS/PS 2 DRAFT PLACED BEFORE AUTHOR 4,7,9/12, SR. PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER AM/AM 5 APPROVED DRAFT COMES TO THE SR. PS/PS SR. PS/PS 6 KEPT FOR PRONOUNCEMENT SR. PS/PS 7 FILE SENT TO BENCH CLERK SR. PS/PS 8 DATE ON WHICH THE FILE GOES TO HEAD CLERK 9 DATE ON WHICH FILE GOES TO A.R. 10 DATE OF DISPATCH OF ORDER