Appeal Details
Counselvise Citation
[2013] 140 COUNSELVISE.COM (IT) 66972 (ITAT-PUNE)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
3 year(s) 3 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
06-05-2013
Appeal Filed By
Assessee
Order Result
Partly Allowed
Bench Allotted
Not Allotted
Next Hearing Date
27-11-2012
Assessment Year
2003-2004
Appeal Filed On
03-05-2010
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE BEFORE SHRI SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER AND SHRI R.K. PANDA, ACCOUNTANT MEMBER ITA NO. 879/PN/2010 (ASSESSMENT YEAR 2003-04) ACIT, CIRCLE-9, PUNE. .. APPELLANT VS. GKN SINTER METAL PVT. LTD., S.NO.146 OF MUMBAI-PUNE ROAD, PIMPRI, PUNE 411 018. PAN NO. AAACM 4432H. .. RESPONDENT ITA NO. 3465/M/2010 (ASSESSMENT YEAR 2003-04) GKN SINTER METAL PVT. LTD., S.NO.146 OF MUMBAI-PUNE ROAD, PIMPRI, PUNE 411 018. PAN NO. AAACM 4432H. .. APPELLANT VS. ACIT (OSD) 2(1), AAYAKAR BHAVAN, M.K. ROAD, MUMBAI 400 020. .. RESPONDENT ASSESSEE BY : SRI FARUKH IRANI RESPONDENT BY : SRI MUKESH VERMA DATE OF HEARING : 07-03-2013 DATE OF PRONOUNCEMENT : 06-05-2013 ORDER PER R.K. PANDA, AM : THE ABOVE CROSS APPEALS FILED BY THE REVENUE AND T HE ASSESSEE RESPECTIVELY ARE DIRECTED AGAINST THE ORDER DATED 0 2-03-2010 OF THE CIT(A)- 4, MUMBAI RELATING TO A.Y. 2003-04. FOR THE SAKE O F CONVENIENCE THESE WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY TH IS COMMON ORDER. ITA NO. 879/PN/2010 (BY REVENUE) : 2. THE ONLY EFFECTIVE GROUND RAISED BY THE REVENUE READS AS UNDER : WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) WAS JUSTIFIED IN DIRECTING THE ASSESSING OFF ICER NOT TO REDUCE 90% OF MISCELLANEOUS INCOME FROM THE ELIGIBLE BUSINESS PROFITS FOR THE PURPOSE 2 OF COMPUTATION OF DEDUCTION U/S.80HHC WHEN THE SAME WAS RIGHTLY HELD BY THE ASSESSING OFFICER AS NON-OPERATIONAL BUSINESS I NCOME. 3. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESS ING OFFICER DURING THE COURSE OF ASSESSMENT PROCEEDINGS NOTED THAT THE ASSESSEE HAS CLAIMED DEDUCTION U/S.80HHC AMOUNTING TO ` 42,40,416. HE OBSERVED FROM THE P&L ACCOUNT OF THE ASSESSEE COMPANY THAT THE ASSESS EE HAS SHOWN AN AMOUNT OF ` 63,91,400 AS MISCELLANEOUS INCOME UNDER THE HEAD O THER INCOME. WHILE COMPUTING THE DEDUCTION CLAIMED U/S .80HHC THE ASSESSEE HAS REDUCED 90% OF GROSS INTEREST RECEIVED BUT HAS NOT REDUCED 90% OF THE MISCELLANEOUS INCOME TO ARRIVE AT THE ADJUSTED PROF IT ELIGIBLE FOR DEDUCTION U/S.80HHC. HE REFERRED TO THE ORDER FOR A.Y. 1998 -99 IN CASE OF THE ASSESSEE WHEREIN THE ISSUE HAS BEEN DISCUSSED ELABO RATELY AND THE CLAIM FOR THE ASSESSEE THAT THE MISCELLANEOUS INCOME CONSISTS MAINLY OF SCRAP SALE AND EXCHANGE GAIN AND HENCE FORMS A PART OF ELIGIBL E BUSINESS PROFIT WAS NOT ACCEPTED FOR THE REASONS MENTIONED THEREIN. SI NCE THE ISSUE IN THE INSTANT YEAR IS IDENTICAL TO THAT OF ASSESSMENT YEA R 1998-99 THE ASSESSING OFFICER RELYING ON THE OBSERVATION MADE IN THE A.Y. 1998-99 RECOMPUTED THE DEDUCTION U/S.80HHC BY REDUCING 90% OF THE MISC ELLANEOUS INCOME OF ` 63,91,400 IN ADDITION TO 90% OF INTEREST INCOME. 4. IN APPEAL THE LEARNED CIT(A) ALLOWED THE CLAIM O F THE ASSESSEE BY FOLLOWING THE DECISION OF THE TRIBUNAL IN ASSESSEE S OWN CASE FOR EARLIER YEARS. AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE REVENUE IS IN APPEAL BEFORE US. 3 5. THE LEARNED COUNSEL FOR THE ASSESSEE AT THE OUTS ET FILED COPIES OF THE ORDERS OF THE TRIBUNAL IN ASSESSEES OWN CASE F OR A.Y. 1998-99, 2000- 01, 2001-02 AND 2002-03 AND SUBMITTED THAT UNDER ID ENTICAL FACTS AND CIRCUMSTANCES THE TRIBUNAL HAS ALLOWED THE CLAIM OF THE ASSESSEE AND THE APPEAL FILED BY THE REVENUE IN A.YS. 2000-01, & 200 2-03 HAS BEEN DISMISSED AND IN OTHER YEARS THE APPEAL FILED BY TH E ASSESSEE HAS BEEN ALLOWED. 6. THE LEARNED DEPARTMENTAL REPRESENTATIVE FAIRLY C ONCEDED THAT THE ISSUE HAS BEEN DECIDED AGAINST THE REVENUE BY THE D ECISIONS OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE PRECEDING ASSESSMENT YEARS. 7. AFTER HEARING BOTH THE SIDES WE FIND THE ASSESSE E HAS CLAIMED THE FOLLOWING ITEMS AS MISCELLANEOUS INCOME, THE DETAIL S OF WHICH ARE MENTIONED AT PARA 21 OF THE ORDER OF THE CIT(A) : ACCOUNT HEAD AMOUNT RS. PARTICULARS SALES TAX REFUND 9,95,864 THIS REPRESENTS THE SALE TAX REFUND RECEIVED ON COMPLETION OF THE SALES TAX ASSESSMENT MISC. INCOME 15,198 THIS REPRESENTS SUNDRY INCOME OF THE COMPANY SALE OF SCRAP 33,02,043 THIS REPRESENTS THE RECOVERY MADE BY THE COMPANY IN RESPECT OF SCRAP GENERATED DURING PRODUCTION AND IS NOTHING BUT A REDUCTION/RECOVERY OF THE COST S INCURRED AND IS INTRICATELY LINKED TO THE OPERATING AND MANUFACTURING ACTIVITIES OF THE COMPANY DISCOUNT 9,495 THIS REPRESENTS DISCOUNTS RECEIVED FROM VENDORS SALE OF GARBAGE 1.06.024 THIS REPRESENTS THE SALE OF WASTE AT THE FACTORY GAIN ON EXCHANGE 19,62,776 THIS REPRESENTS THE EXCHANGE GAIN ACCRUING TO THE COMPANY AS PART OF ITS OPERATIONAL ACTIVITIES TOTAL 63,91,400 8. WE FIND THE TRIBUNAL IN ASSESSEES OWN CASE VIDE ITA NO.5155/M/2007 ORDER DATED 27-08-2008 FOR A.Y. 2002 -03 HAS DISMISSED THE APPEAL FILED BY THE REVENUE BY HOLDING AS UNDER : 4 4. DURING THE COURSE OF HEARING BOTH THE PARTIES FA IRLY CONCEDED THAT THESE ISSUES ARE COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE ITAT A BENCH MUMBAI IN ITA NO. 3588/M/2004 IN ASSESSEES O WN CASE FOR A.Y. 2000-01 AND ALSO IN ITA NO.6427/M/2003 IN ASSESSEES OWN CA SE FOR 1998-9. IN THE LATER REFERRED CASE, IN PARA 15 OF THE ORDER IT WAS HELD AS UNDER : 13. VARIOUS DECISIONS OF THE BOMBAY HIGH COURT AND THE TRIBUNALS HAVE CONSISTENTLY HELD THAT SALES-TAX REFUND GOES T O REDUCE THE COST OF PRODUCTION. FOREIGN EXCHANGE GAINS FORM PART OF ELI GIBLE TURNOVER AND INCOME FROM SCRAP SALES PERTAIN THE CHARACTER OF BU SINESS INCOME. USEFUL REFERENCE MAY BE MADE TO THE DECISIONS OF THE BOMBA Y HIGH COURT IN THE CASE OF CIT VS. BANGALORE CLOTHING CO. [260 ITR 371 ] AND ALFA LAVAL INDIA LTD. DCIT [266 ITR 418]. THE MUMBAI TRIBUNAL IN THE CASE OF RENAISSANCE JEWELLERY P. LTD. VS. ITO [101 ITD 380] HAS FOLLOWE D THE SAME RULE. IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2000-01 , THE TRIBUNAL HAS HELD IN ITA NO.3588/MUM/2004, THAT SUCH ITEMS ARE FORMIN G PART OF THE BUSINESS PROFITS FOR THE PURPOSE OF SEC. 80HHC. THEREFORE, THIS GROUND IS ALSO LIABLE TO BE DISMISSED. 5. IT IS ALSO NOTICED FROM THE ORDER OF THE CIT(A) THAT MISCELLANEOUS INCOME CONSIST MAINLY OF SCRAP SALES, SALES TAX REFUND AND DISCOUNT. NOWHERE IT IS MENTIONED THAT EXCHANGE GAIN IS ALSO INCLUDED. BE THAT AS IT MAY, IF THERE IS ANY EXCHANGE GAIN INVOLVED THE ASSESSEE IS ENTITLED FOR DEDUCTION UNDER SECTION 80HHC ON THE ABOVE AMOUNT. RESPECTFULLY FOLLOWING THE ABOVE DECISION THE GROUNDS OF THE REVENUE ARE REJECTED. 9. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBU NAL IN ASSESSEES OWN CASE AND IN ABSENCE OF ANY CONTRARY MATERIAL BR OUGHT TO OUR NOTICE WE FIND NO INFIRMITY IN THE ORDER OF THE CIT(A) DIRECT ING THE ASSESSING OFFICER NOT TO REDUCE 90% OF MISCELLANEOUS INCOME FROM THE ELIGIBLE BUSINESS PROFITS FOR THE PURPOSE OF COMPUTATION OF DEDUCTION U/S.80HHC. THE GROUND RAISED BY THE REVENUE IS ACCORDINGLY DISMISS ED. ITA NO. 3465/M/2010 (BY ASSESSEE) : 10. GROUNDS OF APPEAL NO. 1 AND 2 BY THE ASSESSEE R EAD AS UNDER : 1. THE LD. CIT(A) ERRED IN CONFIRMING THE ACTION O F THE ASSESSING OFFICER IN DISALLOWING THE AMOUNT OF `1,34,99,999 BEING THE LO SS ON ASSIGNMENT OF A DEBT, BY HOLDING THAT THE SAME WAS NOT ALLOWABLE U/S.37(1 ) OF THE ACT. 2. WITHOUT PREJUDICE TO GROUND NO.1 ABOVE, THE LD. CIT(A) ERRED IN HOLDING THAT THE AMOUNT OF `1,34,99,999 COULD NOT BE ALLOWE D AS A BAD DEBT U/S.36(1)(VII) R.W.S.36(2) OF THE ACT AS THE CONDITIONS PRESCRIBED WERE NOT SATISFIED. 5 11. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSES SEE COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURE AND SALE OF SINTERED BEARINGS AND PARTS, SINTERED AUTOMOTIVE COMPONENTS, SINTERED FILTERS AN D METAL POWDERS. THE COMPANY ALSO MANUFACTURES TOOLS. DURING THE COURS E OF ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER NOTED THAT THE AS SESSEE HAS DEBITED AN AMOUNT OF ` 2,09,99,999 TO THE PROFIT AND LOSS ACCOUNT WHILE AR RIVING AT THE PROFIT FIGURE OF RS.13,04,53,776/- AS EXTRAORDINARY ITEMS OF EXPENDITURE. THE DETAILS IN RESPECT OF THESE EXTRAORDINARY ITEMS OF EXPENDITURE SPECIFIED IN NOTE 3(A) & (B) OF SCHEDULE-XV OF THE AUDITED AC COUNTS WHICH IS REPRODUCED BY THE ASSESSING OFFICER IN THE ASSESSME NT ORDER READ AS UNDER : 'A. THE COMPANY MAHINDRA & MAHINDRA LTD. (M&M) AND GKN SINTER METALS HOLDINGS LTD. (GKN) ENTERED INTO A SHARE SALE & PUR CHASE AGREEMENT ON 28 TH MARCH, 2002, IN TERMS OF WHICH M&M SOLD 11,50,508 E QUITY SHARES IN THE COMPANY TO GKN. PURSUANT TO THIS, GKN TOGETHER WITH ITS NOMINEES, HOLDS THE ENTIRE EQUITY SHARES OF THE COMPANY. PURSUANT TO TH E CHANGE IN SHAREHOLDING, THE NAME OF THE COMPANY HAS BEEN CHANGED TO GKN SINTER METALS LTD., EFFECTIVE FROM 2 ND AUGUST, 2002. B. EXTRAORDINARY ITEMS: PURSUANT TO THE SHARE SALE & PURCHASE AGREEMENT RE FERRED ABOVE, (I) THE COMPANY HAS ASSIGNED DEBTS AGGREGATI NG TO RS.1,35,00,000/- RS.1,35,00, 000/- TO M&M FOR A CONSIDERATION OF RE. 1. ACCORDINGLY, THE LOSS ON ASSIGNM ENT HAS BEEN WRITTEN OFF IN THE BOOKS OF ACCOUN T RS. 1,34,99,999. (II) THE COMPANY HAS ENTERED INTO A NAME LICE NSE AGREEMENT WITH M&M FOR USE OF TRADEMARKS FOR A ONE TIME FEE RS. 75, 00,000/- ---------------------- TOTAL RS.2,09,99,999/- ----------------------- 12. ON BEING QUESTIONED BY THE ASSESSING OFFICER TO JUSTIFY THE CLAIM OF THE EXTRAORDINARY ITEMS OF EXPENDITURE AMOUNTING TO RS.1,35,00,000/- AS A REVENUE EXPENDITURE THE ASSESSEE REPLIED AS UNDER : 6 '1) ENCLOSED PLEASE FIND COPY OF THE AGREEMENT DAT ED 18.07.2002 BETWEEN OUR COMPANY, MAHINDRA & MAHINDRA AND GKN SINTER METALS HOLDINGS LTD., U.K. FOR SHARE SALE AND PURCHASE. 2) THE COMPANY HAD DEB TS DUE FROM VARIOUS CUSTOMERS ON ACCOUNT OF SALES MADE TO THEM IN THE N ORMAL COURSE OF BUSINESS. NEEDLESS TO SAY, THE CORRESPONDING AMOUNTS HAD BEEN OFFERED FOR TAX FROM TIME TO TIME. IN ORDINARY COURSE THEREFORE IF ANY PORTION O F THESE DEBTS HAD WHOLLY OR PARTIALLY BAD OR IRRECOVERABLE, THE SHORTFALL WOULD HAVE BEEN ALLOWABLE AS A DEDUCTION, AS A BAD DEBT U/S.36(1)(VII). 2) THE COMPANY ASSIGNED THESE DEBTS TO MAHINDRA & MAHINDRA IN TERMS OF AN AGREEMENT DATED 27 TH SEPTEMBER, 2002 (COPY ENCLOSED). ON THE BASIS OF A FAIR ESTIMATE OF THE CHANCES OF RECOVERY OF THESE DEBTS, IT WAS FELT THAT ONLY MARGINAL AMOUNTS COULD BE RECOVERED AGAINST BOOK VALUE OF RS . 1,35,00,000. IT THEREFORE' MADE NO SENSE IN CONTINUING TO CARRY THESE DEBTS IN THE BOOKS AT THEIR BOOK VALUE OF RS.1. THE AMOUNTS TREATED AS BAD DEBTS HAVE BEEN FACTUALLY WRITTEN OFF IN THE BOOKS BY CREDITING THE ACCOUNTS OF THE RESPECTIVE P ARTIES AND HAVE CLAIMED AS BAD DEBTS U/S.36(1)(VII). NEEDLESS TO SAY, MAHINDRA & MAHINDRA LIMITED HAS OF FERED TO TAX THE AMOUNT RECOVERED FROM THE ASSIGNED DEBTS IN SUBSEQUENT YEA R IN THEIR ASSESSMENT. A LETTER WRITTEN BY THEM TO THIS EFFECT IS ENCLOSED. 13. HOWEVER, THE ASSESSING OFFICER WAS NOT CONVINCE D WITH THE ABOVE EXPLANATION GIVEN BY THE ASSESSEE AND ASKED T HE ASSESSEE TO FILE COPY OF CERTIFICATE FROM AUDITORS IN RESPECT OF ITS CLAI M FOR WRITING OFF BAD DEBTS ASSIGNED TO MAHINDRA AND MAHINDRA AND ALSO TO FILE THE COPIES OF ACCOUNTS OF DEBTS WRITTEN OFF. IN RESPONSE TO THE SAME THE ASSESSEE REPLIED AS UNDER: '2) THE RELEVANT PORTION OF REPORT GIVEN BY ERNST & YOUNG ON RECEIVABLES, WHICH HAD MENTIONED ABOUT BALANCES OVER ONE HUNDRED AND EIGHTY DAYS AND WERE, OUTSTANDING ON ACCOUNT OF AMOUNTS DISPUTED BY THE CUSTOMERS DUE TO REJECTIONS, RATE DIFFERENCES AND ALSO CERTAIN FREIG HT AMOUNTS AND OVERDUE INTERESTS AMOUNTS NOT ACCEPTED BY CUSTOMERS, WHICH WERE OUTSTANDING IN OUR BOOKS AND WHICH, WE WERE NOT HOPEFUL OF RECOVERING. 3) WE HAD ACTUALLY WRITTEN OFF BALANCES OF CUSTOMER S AS BAD DEBTS WHICH WERE CONSIDERED AS\DOUBTFUL BY ERNST & YOUNG, WHICH WERE OVER SIX MONTHS AND WERE DISPUTED BY THE CUSTOMERS. COPIES OF THE S OME STATEMENT OF ACCOUNTS SHOWING THE WRITE OFFS IN THE BOOKS ARE EN CLOSED.' 14. IN ORDER TO VERIFY THE CONTENTS OF THE SHARE SA LE AND PURCHASE AGREEMENT DATED 18-07-2002 THE AO OBTAINED A COPY O F THE SAME FROM MAHINDRA AND MAHINDRA LTD. AND NOTED THAT THE SHARE SALE AND PURCHASE 7 TRANSACTION AGREEMENT DATED 28-03-2002 WAS ENTERED INTO BETWEEN FOLLOWING PARTIES : (I) MAHINDRA &-MAHINDRA LTD. (SELLER) (II) GKN SINTER METALS HOLDING LTD. (PURCHA SER) (III) MAHINDRA SINTERED PRODUCTS LTD. (COMPAN Y). THE ASSESSEE COMPANY WAS FORMERLY KNOWN AS MAHINDRA SINTERED PRODUCTS LTD., WHEREIN M/S. MAHINDRA & MAHINDRA LTD. (SELLER) HELD 51% SHARES AND M/S. GKN SINTER METALS HOLDINGS LTD. (PURCHASER) HELD 49 %. BY VIRTUE OF THE AGREEMENT DATED 28.03.2002, THE PU RCHASER ACQUIRED THE SHARE HOLDING OF THE SELLER FOR A CONSIDERATION OF RS.65 CRORES. A SUPPLEMENTARY AGREEMENT DATED 18.07.2002 WAS MADE TO THE ORIGINAL AGREEMENT DATED 28.03.2002, BETWEEN THE SAME 3 PARTIES MENTIO NED (SUPRA). BY VIRTUE OF THE SUPPLEMENTARY AGREEMENT DATED 18-0 7-2002, THE ASSESSEE COMPANY ASSIGNED BOOK DEBTS OF RS.1,35,00,000/- FOR A CONSI DERATION OF RS.1 TO THE SELLER. 15. AFTER ANALYZING THE VARIOUS CLAUSES AND SCHEDUL E ATTACHED TO THE PRINCIPAL AGREEMENT THE AO CONFRONTED THE ASSESSEE WITH THE FOLLOWING FACTS: 4(E) IN THIS REGARD, VIDE THIS OFFICE LETTER DATED 10-02-2006, THE ASSESSEE WAS INFORMED AS UNDER : 1. IN THIS REGARD THE UNDERSIGNED OBTAINED A COPY O F THE SHARE SALE AND PURCHASE AGREEMENT DATED 20-03-2002, BETWEEN MAHIND RA & MAHINDRA LTD. (SELLER) AND G.K.N. SINTER METALS HOLDINGS LTD. (BU YER). 2. AS PER CLAUSE 2 OF THE SAID AGREEMENT, CERTAIN CONDITIONS PRECEDENT TO THE CLOSING OF THE SHARE SALE AND PURCHASE TRANSACTION WAS LAID DOWN. YOUR ATTENTION IS DRAWN MORE SPECIFICALLY TO CLAUSE 2.1.9 OF THE SAME AGREEMENT, WHICH STATED THAT 'THE COMPANY SHALL HAVE COMPLETED THE WRITING OF ASSETS SET OUT IN SCHEDULE '8' OF THIS AGREEMENT AS SPECIFICALLY I DENTIFIED BY THE PARTIES, IN ITS BOOKS OF ACCOUNTS AFTER 31.03.2002, BUT PRIOR TO TH E CLOSING. 3. BY VIRTUE OF SUPPLEMENTARY AGREEMENT DATED 18.0 7.2002 TO THE ORIGINAL SHARE SALE PURCHASE AGREEMENT, CLAUSE 2.1.9 AND SCH EDULE 8 OF THE PRINCIPAL AGREEMENT WAS DELETED AND CLAUSE 5.3 & 5.4 WAS INSE RTED IN THE PRINCIPAL AGREEMENT. BY VIRTUE OF THIS NEW CLAUSE 5.3, YOU HA VE ASSIGNED BOOK DEBTORS OF RS.1.35 CRORES FOR A CONSIDERATION OF RE.1. FURTHER MORE, NOTWITHSTANDING THE ASSIGNMENT OF THESE DEBTORS TO THE COMPANY SHALL CO LLECT DEBTS FOR AND ON BEHALF OF THE SELLER AND SHALL REMIT TO THE SELLER ANY AMO UNT SO COLLECTED ON A MONTHLY BASIS. 4. FROM THE ABOVE FACTS AND CIRCUMSTANCES, IT CAN BE SEEN THAT THE ASSIGNMENT OF BOOK DEBTORS OF RS.1.35 CRORES FOR A VALUE OF RE .1, IS A PART OF THE CONSIDERATION PAID/PAYABLE TO MAHINDRA & MAHINDRA F OR THEIR SHARE HOLDING IN THE COMPANY. HENCE, THE EXPENSES OF RS. 1,34,99,999 /- CLAIMED BY YOU AS LOSS ON ASSIGNMENT OF DEBTORS TO MAHINDRA & MAHINDRA IS NOT A REVENUE EXPENSE BUT A CAPITAL EXPENSE AND HENCE NOT ALLOWABLE. 8 16. IN RESPONSE TO THE SAME THE ASSESSEE REPL IED AS UNDER : AS MENTIONED IN OUR LETTER DATED JANUARY 30 TH , 2006 ALONG WITH WHICH WE HAD ENCLOSED THE REPORT OF ERNST & YOUNG WHICH CLEARLY STATED THAT THE RECEIVABLES WERE DOUBTFUL, HENCE IT WAS DECIDED TO WRITE IT OFF IN THE BOOKS AND ASSIGNING THE SAME TO MAHINDRA & MAHINDRA LIMITED @ RE.1 VALUE. A S THE RECEIPT OF MONEY FROM THE DEBTORS BY US WAS MORE CONVENIENT, IT WAS DECID ED THAT WHATEVER WAS RECEIVED FROM DEBTORS AGAINST ASSIGNED DEBTS SHALL BE REMITT ED TO MAHINDRA & MAHINDRA LIMITED ON MONTHLY BASIS. WE HAD IN FACT WRITTEN OF F THESE ASSIGNED DEBTS AS BAD DEBTS IN OUR BOOKS ON ASSIGNMENT AND GIVEN YOU THE STATEM ENT OF DEBTORS. HENCE, WE RESPECTFULLY SUBMIT, THAT THESE SHOULD BE CONSIDERE D AS REVENUE EXPENDITURE FOR THE PURPOSE OF DETERMINATION OF INCOME. INCIDENTALLY, THIS WAS PUT IN SHARE SALE PURCHASE AGREEMENT, BY VIRTUE OF THE DUE DILIGENCE REPORT OF ERNST & YOUNG COPY OF WHICH IS ALREADY GIVEN TO YOU. AS ALREADY A DVISED BY MAHINDRA & MAHINDRA LIMITED THE AMOUNT RECEIVED BY THEM, HAVE BEEN OFFERED TO TAX.' 17. HOWEVER, THE AO WAS NOT CONVINCED WITH THE EXPLANATION GIVEN BY THE ASSESSEE AND DISALLOWED THE ASSESSEES CLAIM OF EXPENDITURE AMOUNTING TO ` 1,34,99,999 HOLDING THE SAME TO BE CAPITAL EXPENDIT URE IN NATURE FOR THE FOLLOWING REASONS : 4(G) THE ASSESSEE'S VARIOUS SUBMISSIONS HAVE BEEN CONSIDERED IN DEPTH, HOWEVER, THE SAME IS NOT ACCEPTED FOR THE FOLLOWING REASONS : (I) THE ASSESSEES CONTENTION THAT THE AMOUNT OF BO OK DEBTS ASSIGNED TO MAHINDRA & MAHINDRA WOULD BE ALLOWABLE AS A DEDUCTI ON AS A BAD DEBTS U/S.36(1)(VII) IS BELIED BY THE FACT THAT THE ASSES SEE IS RECOVERING THESE DEBTS ON BEHALF OF MAHINDRA & MAHINDRA AND REMITTING THE AMO UNT COLLECTED TO MAHINDRA & MAHINDRA. HENCE, IT IS NOT CLEAR HOW THESE DEBT S CAN BE CONSIDERED TO BE BAD IN THE HANDS OF THE ASSESSEE COMPANY. (II) FROM THE COPIES OF ACCOUNTS FILED BY THE ASSE SSEE IN RESPECT OF FEW PARTIES IN RESPECT OF DEBTS ASSIGNED, SUCH AS : 1. HINDUSTAN MOTORS LTD. 2. RICO AUTO INDUSTRIES LTD. 3. LOHIA MACHINES LTD. MUNJAL SHOW LTD. 4. HERO HONDA MOTORS LTD. 5. ESCORTS LTD. IT IS SEEN THAT THE ASSESSEE HAS REGULAR TRANSACTIO NS THROUGHOUT THE YEAR AND IS ALSO RECEIVING PAYMENTS FROM THESE PARTIES REGULARLY AND PERIODICALLY. HENCE, THE ASSESSEE'S CLAIM THAT CERTAIN AMOUNTS DUE FROM THES E PARTIES ARE NOT RECOVERABLE AND HENCE BAD DEBTS CANNOT BE ACCEPTED. THE ASSESSE E HAS NOT GIVEN ANY EVIDENCE TO SUPPORT ITS CLAIM THAT THESE AMOUNTS WE RE DISPUTED BY THE CUSTOMERS FOR VARIOUS REASONS. (III) AS MENTIONED IN MY LETTER DATED 10.02.2006 TO THE ASSESSEE, FORM A PLAIN READING OF, THE TERMS OF THE SHARE SALE & PURCHASE AGREEMENT IT CAN BE SEEN 9 THAT THE ASSIGNMENT OF BOOK DEBTS OF RS. 1.35 CRORE S FOR A VALUE OF RE.1, IS A INTRINSIC PART OF THE CONSIDERATION PAYABLE TO MAHI NDRA & MAHINDRA FOR RELINQUISHING ITS SHAREHOLDING IN THE ASSESSEE COMP ANY. (IV) MAHINDRA & MAHINDRA LTD., VIDE THEIR LETTER DA TED 07.02.2006 HAVE CONFIRMED THAT OUT OF TOTAL DEBTS OF RS. 1,35,00,00 0/- TAKEN BY THEM AT A VALUE OF RE.1, THEY HAVE RECOVERED DEBTS AMOUNTING TO RS.79, 51,040/- AS UNDER : (A) A.Y. 2003-04 RS.72,09,104/- (B) A.Y. 2004-05 RS. 7,41,936/- ------------------ TOTAL RS.79,51,040/- ---------------- THUS, FURTHER FORTIFIES MY CONTENTION THAT THE DEBT S ASSIGNED TO MAHINDRA & MAHINDRA, WERE IN NO WAY BAD, AS MAHINDRA & MAHINDR A HAS RECOVERED 53.40% OF THE SAID DEBTS IN THE SAME FINANCIAL YEAR . (V) THE ASSIGNMENT OF BOOK DEBTS OF RS.1,35,00,000/ - AT A VALUE OF RE.1 AND CLAIMING THE DIFFERENCE AS A REVENUE EXPENSE IS NOT HING BUT A COLOURABLE DEVICE ADOPTED BY THE ASSESSEE COMPANY FOR COMPENSA TING MAHINDRA & MAHINDRA FOR THE SURRENDER OF THEIR SHAREHOLDING (5 1%) IN THE ASSESSEE COMPANY. RELYING UPON THE DECISION OF MC DOWELL & C O. LTD. VS. CTO (1985) 154 ITR 148 (SC), I DISALLOW THE ASSESSEE'S CLAIM O F EXPENSE AMOUNTING TO RS. 1,34,99,999/-, HOLDING THE SAME TO BE EXPENSE O F CAPITAL NATURE. 18. BEFORE THE CIT(A) THE ASSESSEE FILED ELABORATE WRITTEN SUBMISSIONS WHEREIN THE DISALLOWANCE MADE BY THE AO WAS CHALLENGED. IT WAS SUBMITTED THAT THE ASSESSEE HAS FULFILLED ALL THE CONDITIONS PRESCRIBED FOR CLAIMING THE BAD DEBT SIN CE : (I) THE COMPANY HAS NOT ARBITRARILY OR IRRATIONALLY WRITTEN OFF ANY BAD DEBT. (II) COMPLETE DETAILS OF EACH AND EVERY BAD DEBT WA S FURNISHED BY THE AO. (III) BAD DEBTS WERE ON ACCOUNT OF SUPPLIES MADE/SE RVICES RENDERED TO CUSTOMERS. (IV) IN MOST CASES THE AMOUNT IS VERY PETTY SO THAT ANY LEGAL PROCEEDINGS WOULD AMOUNT TO WASTING GOOD MONEY OR BAD MONEY. (V) BAD DEBT IS MERE 1.32% OF THE TOTAL SALES. (VI) NONE OF THE PARTIES ARE GOVERNMENT PARTIES. 18.1 THE ASSESSEE ALSO RELIED ON VARIOUS DECISIONS. IT WAS SUBMITTED THAT IF THE BAD DEBT IS NOT ALLOWABLE AS BAD DEBT THEN THE LOSS SUFFERED ON ACCOUNT OF ASSIGNING SUCH DEBT HAS TO BE ALLOWED AS 10 BUSINESS LOSS U/S.37. IT WAS SUBMITTED THAT MAHIND RA & MAHINDRA LTD. HAVE CONFIRMED THAT THEY HAVE SUBSEQUENTLY RECOVERE D DEBTS AMOUNTING TO ` 79.5 LAKHS ONLY WHICH PROVES THAT THE DEBT ASSIGNED TO MAHINDRA & MAHINDRA LTD. WAS IN NO WAY GOOD DEBT. IT WAS ALSO CONFIRMED BY MAHINDRA & MAHINDRA LTD. THAT THE BAD DEBT SO RECOVERED HAS BEEN OFFERED TO TAX. THE OBSERVATION S OF THE AO THAT THE ASSIGNMENT OF BOOK DEBTS IS NOTHING BUT A COLOU RABLE DEVICE WAS CHALLENGED. IT WAS SUBMITTED THAT FOR THE PURPOSE OF SHARE SALE ONE OF THE COMMERCIAL TERMS OF THE TRANSACTIONS WAS THAT A NY DEBT WHICH WERE DOUBTFUL FOR RECOVERY AND OUTSTANDING FOR MORE THAN 180 DAYS IS TO BE WRITTEN OFF BY THE ASSESSEE COMPANY. A DUE D ILIGENCE REPORT WAS OBTAINED FROM ERNST &YOUNG COMPANY ON BEHALF OF THE PURCHASER BEFORE THE SHARE SALE. THEREFORE, THE LOSS CLAIMED BY THE ASSESSEE IS ALLOWABLE AS REVENUE LOSS. 19. HOWEVER, THE LEARNED CIT(A) ALSO WAS NOT CONVIN CED WITH THE ARGUMENTS ADVANCED BY THE ASSESSEE AND UPHELD T HE ACTION OF THE AO BY HOLDING AS UNDER : 6. I HAVE DULY CONSIDERED THE SUBMISSION OF THE AUTHORIZED REPRESENTATIVE AND I FIND THAT THE ASSES SEE HAS WRITTEN OFF AN AMOUNT OF RS.1,34,99,999/- IN ACCORD ANCE WITH AN AGREEMENT WITH THE PURCHASER OF SHARES. IN THE FACT S AND CIRCUMSTANCES OF THE CASE IT CANNOT BE SAID THAT TH E LOSS IS A BAD DEBT AS THE ASSESSEE IS NOT IN THE BUSINESS OF MONE Y LENDING. THE ASSESSEE HAS ALSO NOT SHOWN ANY EVIDENCE TO SHOW TH AT ANY OF THE DEBT HAS BECOME BAD OR THE PARTY HAS EXPRESSED ITS INABILITY TO PAY ANY AMOUNT DUE TO ANY DIFFERENCES. HENCE THE CL AIM MADE BY THE APPELLANT CANNOT BE CATEGORISED AS BAD DEBT AS CONDITIONS PRESCRIBED IN SECTION 36(1)(VII) & 36(2) REQUIRES T HE ASSESSEE TO WRITE OFF ONLY BAD DEBT AND NOT ANY OTHER DEBT. VAR IOUS CASE LAWS CITED BY THE APPELLANT ALSO EMPHASIS THE NEED TO TA KE HONEST DECISION REGARDING WRITING OFF THE DEBT. IN THIS CA SE THE ASSESSEE HAS NOT WRITTEN OFF THE DEBT AS THEY ARE NOT RECOVE RABLE BUT DUE TO AN AGREEMENT ENTERED INTO WITH THE PURCHASER OF SHA RES. HENCE THE CLAIM IS NOT ALLOWABLE AS BAD DEBT. 11 7. AS REGARDS THE CLAIM OF THE APPELLANT THAT T HE LOSS SHOULD BE ALLOWED AS BUSINESS LOSS IS ALSO NOT TENABLE AS THE LOSS WAS N OT INCURRED BY THE ASSESSEE FOR THE PURPOSE OF BUSINESS. IT IS EVIDENT FROM THE FAC TS OF THIS CASE THAT AN AGREEMENT WAS ENTERED BETWEEN THE APPELLANT AND PUR CHASER OF SHARES THAT DEBTS WHICH ARE OUTSTANDING FOR MORE THAN 180 DAYS SHOULD BE WRITTEN OFF. ACCORDINGLY, THE ASSESSEE HAS WRITTEN OFF THESE DEB TS. RATHER THE ASSESSEE HAS ASSIGNED THESE DEBTS TO MAHINDRA & MAHINDRA FOR RE. 1. THE QUESTION IS WHETHER THIS LOSS IS FOR THE BUSINESS OF THE ASSESSEE? IS I T POSSIBLE BY ANY APPELLANT TO ENTER INTO AN AGREEMENT WITH A THIRD PARTY AND WRIT E OFF CERTAIN AMOUNT AND CLAIM THE SAME AS BAD DEBT? IN MY CONSIDERED OPINIO N THE LOSS CLAIMED BY THE APPELLANT IS NOT FOR THE BUSINESS OF THE ASSESSEE. NO AGREEMENT CAN BE ENTERED INTO BY ANY PERSON AGAINST THE LAW. IN THIS CASE IT IS EVIDENT THAT THE PURCHASER OF SHARES AND THE APPELLANT HAS ENTERED INTO AN AGREEM ENT TO WRITE OFF ALL DEBTS WHICH ARE MORE THAN 180 DAYS AND ACCORDINGLY THE AS SESSEE HAS WRITTEN OFF THESE DEBTS NOT BECAUSE THEY WERE BAD BUT BECAUSE THERE W AS AN AGREEMENT WITH THE PURCHASER OF SHARES. SUCH CLAIM OF LOSS CREATED BY THE ASSESSEE CANNOT BE REGARDED AS GENUINE LOSS AND HENCE THEY ARE NOT ALL OWABLE AS BUSINESS LOSS UNDER SECTION 37(1) OF THE I.T. ACT. THE A.O. HAS P ROVED THAT THESE DEBTS ARE NOT BAD IN THE SENSE THAT MAHINDRA & MAHINDRA TO WHOM T HESE DEBTS WERE ASSIGNED HAS RECOVERED THE DEBTS TO THE EXTENT OF RS. 79.51 LACS. HENCE THE LOSS CLAIMED BY THE APPELLANT CANNOT BE ALLOWED. IN THE RESULT, TH IS GROUND OF APPEAL IS DISMISSED. 8. THE AUTHORIZED REPRESENTATIVE FILED ADDITIONAL GROUND OF APPEAL DURING THE COURSE OF APPELLATE PROCEEDING S. IN THE ADDITIONAL GROSUND OF APPEAL THE APPELLANT HAS CLAI MED THAT THE A.O. HAS DISALLOWED THE BAD DEBT WHICH IS NOT JUSTIFIED. 9. I FIND THAT THE ASSESSEE HAS CLAIMED EXPENDITUR E/LOSS IN THE FIRST GROUND OF APPEAL. HOWEVER, DURING THE APPELLATE PROCEEDINGS ALL SUBMISSIONS WERE MADE CLAIMING THE LOSS AS BAD DEBT. AS SUCH THE ADDITIO NAL GROUND OF APPEAL WAS FILED CLAIMING THE LOSS AS BAD DEBT. SINCE THE CLAIM OF BAD DEBT IS BEING DISALLOWED FOR REASONS STATED ABOVE THIS ADDITIONAL GROUND OF APPEAL IS NOT REQUIRED TO BE ADJUDICATED SEPARATELY. 19.1 AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE AS SESSEE IS IN APPEAL BEFORE US. 20. THE LD. COUNSEL FOR THE ASSESSEE REITERATED THE SAME ARGUMENTS AS MADE BEFORE THE AO AND THE CIT(A). HE SUBMITTED THAT THE LD. CIT(A) IS NOT JUSTIFIED IN DISALLOWING THE CLAIM OF BAD DEBT AS CLAIMED BY THE ASSESSEE. HE SUBMITTED THAT ACCORDI NG TO THE LD. CIT(A) IF THE COMPANY WOULD HAVE WRITTEN OFF IT WOU LD HAVE GOT THE DEDUCTION. REFERRING TO PAGE 2 OF THE ASSESSMENT O RDER HE SUBMITTED THAT THE AMOUNT OF RS.1.35 CRORES WAS TAKEN INTO AC COUNT WHILE COMPUTING THE INCOME OF EARLIER YEARS. REFERRING T O PAGE 3 AND 5 OF 12 THE ASSESSMENT ORDER HE SUBMITTED THAT THE DEBTS WE RE ACTUALLY WRITTEN OFF IN THE BOOKS. HE SUBMITTED THAT THE RATIO OF D ECISION OF HONBLE SUPREME COURT IN THE CASE OF TRF LTD. VS. CIT REPOR TED IN 323 ITR 397 IS SQUARELY APPLICABLE TO THE FACTS OF THE PRES ENT CASE AND IT IS NOT NECESSARY TO PROVE THAT THE AMOUNT WRITTEN OFF HAD BECOME BAD. REFERRING TO THE COPY OF THE SHARE SALE AGREEMENT D ATED 28-03-2002, (COPY OF WHICH IS PLACED AT PAGES 1 TO 58 OF THE PA PER BOOK) THE LD. COUNSEL FOR THE ASSESSEE DREW THE ATTENTION OF THE BENCH TO CLAUSE 2 AT PAGE 9 WHICH SPEAKS OF CONDITIONS PRECEDING TO C LOSING. HE SUBMITTED THAT MAHINDRA & MAHINDRA HAS ALREADY PAID THE TAX ON ACCOUNT OF COLLECTION OUT OF BAD DEBTS AND THEREFOR E TAXING THE SAME IN THE HANDS OF THE ASSESSEE COMPANY BY DISALLOWING TH E CLAIM OF BAD DEBT WILL AMOUNT TO DOUBLE TAXATION. HE SUBMITTED THAT SINCE THE ASSESSEE HAS WRITTEN OFF THE BAD DEBT OF RS.1,35,00 ,000/- BY ASSIGNING THE SAME FOR RS.1/-, THEREFORE, THE BALANCE AMOUNT OF RS.1,34,99,999/- HAS TO BE ALLOWED AS BAD DEBT IN VIEW OF THE RATIO OF DECISION OF HONBLE SUPREME COURT IN THE CASE OF TRF LTD. CITED ABOVE. WITHOUT PREJUDICE TO THE ABOVE HE SUBMITTED THAT SINCE THE ASSESSEE HAS ASSIGNED THE DEBTORS OF RS.1.35 CRORES FOR RS.1/-, THEREFORE, THE BALANCE AMOUNT IS CLEARLY ALLOWABLE AS BUSINESS LOS S. HE ACCORDINGLY SUBMITTED THAT EITHER THE AMOUNT HAS TO BE ALLOWED AS BAD DEBT OR THE SAME HAS TO BE ALLOWED AS BUSINESS LOSS. 20.1 THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTH ER HAND HEAVILY RELIED ON THE ORDER OF THE AO AND THE CIT(A ). HE SUBMITTED THAT SO FAR AS THE CLAIM OF THE ASSESSEE REGARDING ALLOWABILITY OF THE SAME AS BAD DEBT, THE SAME CAN BE ALLOWABLE ONLY IF THE SAME IS 13 WRITTEN OFF IN CONFORMITY WITH THE PROVISIONS OF TH E I.T. ACT. FURTHER ANY RECOVERY SUBSEQUENT TO WRITE OFF IS TAXABLE UND ER THE PROVISIONS OF SECTION 41(4) OF THE I.T. ACT AND THE ASSESSEE DOES NOT LOSE THE OWNERSHIP OVER THE DEBT SINCE THE OWNERSHIP REMAINS WITH THE ASSESSEE WHEN THE DEBT IS WRITTEN OFF. HOWEVER, IN THE INSTANT CASE THE OWNERSHIP HAS BEEN TRANSFERRED BY ASSIGNMENT. 20.2 SO FAR AS THE LOSS ON ACCOUNT OF ASSIGNMENT OF THE DEBT IS CONCERNED HE SUBMITTED THAT IN SUCH A CASE THE ASSI GNOR ASSIGNS THE DEBTS TO THE ASSIGNEE FOR THE COLLECTION OF THE SAM E. THE ASSIGNEE ACTING AS THE AGENT OF THE ASSIGNOR RECOVERS THE DE BTS FROM THE DEBTORS AND REMIT TO THE ASSIGNOR OR PRINCIPAL. THE ASSIGN OR PAYS THE ASSIGNEE SOME COMMISSION AS PER AGREEMENT TOWARDS THE SERVIC ES. THEREFORE, IN CASE OF ASSIGNMENT OF DEBT THE ASSIGNEE ACTS AS COLLECTOR OF DEBT AND AFTER COLLECTING THE MONEY HAND IT OVER TO THE ASSI GNOR. RELATING TO THE FACTS OF THE CASE HE SUBMITTED THAT HERE THE ASSESS EE HAS COLLECTED THE DEBT AND HAS SENT THE AMOUNT COLLECTED TO MAHINDRA & MAHINDRA LTD. HE SUBMITTED THAT THE ASSESSEE, I.E. GKN SINTER MET AL LTD. HAS TRANSFERRED THE DEBT OF RS.1.35 CR. FOR RS.1/- TO M AHINDRA & MAHINDRA LTD. UNDER SHARE SALE AND PURCHASE AGREEMENT DATED 28-03-2002. UNDER THIS AGREEMENT THE 51% SHARE HOLDING OF MAHIN DRA & MAHINDRA LTD. HAS BEEN PURCHASED BY THE ASSESSEE COMPANY. T HE LD. DEPARTMENTAL REPRESENTATIVE DREW THE ATTENTION OF T HE BENCH TO CLAUSE 2.1.9 OF THE AGREEMENT WHICH READS AS UNDER : THE COMPANY SHALL HAVE COMPLETED THE WRITING OFF O F ASSETS SET OUT IN SCHEDULE 8 TO THIS AGREEMENT, AS SPECIFICALLY IDE NTIFIED BY THE PARTIES, IN ITS BOOKS OF ACCOUNTS AFTER MARCH 31, 2 002, BUT PRIOR TO CLOSING. 14 HE SUBMITTED THAT UNDER THIS CLAUSE THE COMPANY WAS HAVING INTENTION TO WRITE OFF ASSETS AS PER SCHEDULE 8 OF THE ABOV E AGREEMENT. THE SCHEDULE 8 INCLUDED THE DEBTS OVERDUE BY MORE THA N 180 DAYS WHICH WORKED OUT AT RS.1.35 CR. HOWEVER, THE COMPANY CHA NGED ITS INTENTION OF WRITING OFF BY ENTERING INTO THE SUPPL EMENTARY AGREEMENT DATED 18-07-2002. AS PER PARA 2 OF THIS AGREEMENT THE CLAUSE 2.1.9 AND SCHEDULE 8 OF THE PRINCIPAL AGREEMENT WERE DE LETED. THUS, THE COMPANY ITSELF DECIDED NOT TO WRITE OFF THE DEBTS B Y ENTERING INTO THE SUPPLEMENTARY AGREEMENT. THEREFORE, THE CLAIM OF T HE ASSESSEE OF WRITING OFF OF BAD DEBT U/S.36(I)(VII) OF THE ACT H AS GOT NO MERIT. HE SUBMITTED THAT THE ASSESSEE IN THE YEAR OF CLAIM IT SELF HAD RECOVERED AN AMOUNT OF RS.72,09,104/- BUT NO INCOME ON ACCOUNT O F RECOVERY OF SUCH DEBTS WAS SHOWN BY THE ASSESSEE. THIS ALSO PR OVED THAT THE CLAIM IS NOT IN CONFORMITY WITH THE PROVISIONS OF T HE I.T. ACT. HE ACCORDINGLY SUBMITTED THAT THE ASSESSEE IS NEITHER ENTITLED TO CLAIM OF BAD DEBT NOR ON ACCOUNT OF BUSINESS LOSS. HE SUBMI TTED THAT THE FACTS OF THE CASE HAS TO BE SEEN IN BROADER PROSPECT AS P ART OF SHARE PURCHASE AND SALE AGREEMENT. SINCE THE ASSESSEE COMPANY HAS PAID THE CONSIDERATION FOR PURCHASE OF SHARES IN THE FORM OF CASH AND TRANSFERRING OF DEBTS, THEREFORE, THIS TRANSFER OF DEBTS IS BASICALLY PART OF THE SALE CONSIDERATION FOR PURCHASE OF SHARES. THEREFORE, NO DEDUCTION IS AVAILABLE EITHER U/S.36(I)(VII) OR U/S .37(1). 20.3 SO FAR AS THE ARGUMENT OF THE LD. COUNSEL FOR THE ASSESSEE THAT RECOVERY OF DEBT HAS BEEN OFFERED TO TAX BY MA HINDRA & MAHINDRA LTD. HE SUBMITTED THAT THE SAME IS NOT RELEVANT HER E SINCE THE ISSUE OF 15 TAXATION OF RECOVERY OF BAD DEBT IS NOT THE ISSUE B EFORE THE TRIBUNAL. HE ACCORDINGLY SUBMITTED THAT THE ORDER OF THE LD. CIT(A) BE UPHELD. 20.4 WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE AO AND CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONS IDERED THE VARIOUS DECISIONS CITED BEFORE US. THE ONLY QUESTION TO BE DECIDED HERE IS AS TO WHETHER THE AMOUNT OF RS.1,34,99,999/- IS ALLOWABLE AS BAD DEBT OR BUSINESS LOSS AS CLAIMED BY THE ASSESSEE OR THE SAM E IS NOT ALLOWABLE U/S.36(I)(VII) R.W.S. 36(2) OR U/S.37(1) AS HELD BY THE AO AND UPHELD BY THE CIT(A). FROM THE VARIOUS DETAILS FURNISHED BY THE ASSESSEE WE FIND THE ASSESSEE HAS ASSIGNED THE DEBTS TO MAHINDR A & MAHINDRA LTD. FOR RS.1/-. THE COPY OF THE ASSIGNMENT OF DEBT FIL ED IN PAPER BOOK AT PAGES 63 & 64 IS UNDATED. WE FIND THE FIRST SENTEN CE OF THE AGREEMENT READS AS UNDER : THIS DEED OF ASSIGNMENT IS MADE AT MUMBAI ON THIS ________DAY OF SEPTEMBER 2002. 20.5 THE FIRST PROPOSITION MADE BY THE LD. COUNSEL FOR THE ASSESSEE IS THAT THE SAME SHOULD BE ALLOWED AS BAD DEBT IN VIEW OF THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF TR F LTD. HOWEVER, WE FIND NO FORCE IN THE ABOVE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE SINCE THE ASSESSEE HAS NOT WRITTEN OFF THE AMOUNT AS BAD DEBT BUT HAS CLAIMED LOSS ON ASSIGNMENT DUE TO TRANSFER OF THE DEBTORS BY A DEED OF ASSIGNMENT FOR A CONSIDERATION OF RS.1/-. IN OUR OPINION, FOR CLAIMING THE BAD DEBT AS ALLOWABLE UNDER THE PROVIS IONS OF THE INCOME TAX ACT THE SAME MUST BE WRITTEN OFF IN CONFORMITY WITH THE 16 PROVISIONS OF THE INCOME TAX ACT. BY TRANSFERRING THE DEBT OF RS.1.35 CRORES TO MAHINDRA & MAHINDRA LTD. FOR RS.1/-, THE ASSESSEE HAS LOST THE OWNERSHIP OVER THE DEBTS. THEREFORE, BY DOING THIS THE ASSESSEE HAS MADE THE PROVISIONS OF SECTION 41(4) REDUNDANT. AS PER THE SAID PROVISIONS IF ANY AMOUNT IS RECOVERED IN FUTURE ON ACCOUNT DEDUCTION ALLOWED IN RESPECT OF BAD DEBTS OR PART THEREOF THE N THE SAME SHALL BE DEEMED TO BE THE PROFITS AND GAINS OF BUSINESS OR P ROFESSION IN THAT YEAR AND ACCORDINGLY CHARGEABLE TO TAX. HOWEVER, IN THE INSTANT CASE THE ASSESSEE HAS NOT SHOWN ANY INCOME ON ACCOUNT OF REC OVERY OF PART OF SUCH DEBT SINCE THE ASSESSEE HAS ASSIGNED THE DEBTS TO MAHINDRA & MAHINDRA AND AS PER SUBMISSION OF THE LD. COUNSEL F OR THE ASSESSEE MAHINDRA & MAHINDRA HAS OFFERED THE SAME TO TAX. T HEREFORE, THE FIRST PROPOSITION ARGUED BY THE LD. COUNSEL FOR THE ASSES SEE BEING WITHOUT ANY MERIT IS DISMISSED. 20.6 NOW COMING TO THE SECOND PROPOSITION OF THE LD . COUNSEL FOR THE ASSESSEE THAT THE SAME SHOULD BE ALLOWED AS BUSINESS LOSS SINCE THE ASSESSEE HAS SOLD THE DEBTS OF RS.1.35 CRORES F OR RS.1/- WE FIND THE SAME IS ALSO WITHOUT ANY MERIT. FIRST OF ALL IT IS NOT THE BUSINESS OF THE ASSESSEE TO ASSIGN DEBTS. FURTHER, THE ASSESSEE IN THE INSTANT CASE HAS ASSIGNED THE DEBTS TO M/S. MAHINDRA & MAHINDRA LTD. THEREFORE, THE ASSESSEE BECOMES THE ASSIGNOR AND M/S. MAHINDRA & M AHINDRA LTD. BECOMES THE ASSIGNEE. IN A CASE LIKE THIS THE ASSIG NEE IS SUPPOSED TO COLLECT ON BEHALF OF THE ASSIGNOR FOR WHICH THE ASS IGNOR SHALL GIVE SOME COMMISSION TO THE ASSIGNEE. HOWEVER, IN THE INSTANT CASE THE ASSESSEE, I.E. THE ASSIGNOR HAS UNDERTAKEN TO COLLECT THE DEB TS ON BEHALF OF THE ASSIGNEE AND HAS REMITTED THE SAME PERIODICALLY. TH E SUBMISSION OF 17 THE LD. COUNSEL FOR THE ASSESSEE THAT M/S. MAHINDRA & MAHINDRA LTD. HAS PAID TAX ON THE DEBTS SO RECOVERED AND THEREFOR E TAXING THE SAME IN THE HANDS OF THE ASSESSEE AMOUNT TO DOUBLE TAXAT ION IN OUR OPINION IS OF NO MERIT. WE, THEREFORE, FIND NO MERIT IN TH E ARGUMENTS ADVANCED BY THE LD. COUNSEL FOR THE ASSESSEE THAT A MOUNT OF RS.1,34,99,999/- SHOULD BE ALLOWED EITHER AS A BAD DEBT OR A BUSINESS LOSS. RATHER, WE FIND FORCE IN THE ARGUMENT OF THE LD. DEPARTMENTAL REPRESENTATIVE THAT THE ASSESSEE HAS ADOPTED A COLO URABLE DEVICE TO COMPENSATE MAHINDRA & MAHINDRA FOR THE SURRENDER OF THEIR 51% SHAREHOLDING AND THEREFORE THIS IS A CAPITAL EXPEND ITURE. WE ACCORDINGLY DISMISS THE GROUND RAISED BY THE ASSESS EE. 21. GROUNDS OF APPEAL 3, 4 AND 5 BY THE ASSESSEE RE AD AS UNDER : 3. THE LD. CIT(APPEALS) ERRED IN HOLDING THAT THE AMOUNT OF RS.75,00,000/- PAID FOR USE OF TRADE NAME FOR A PERIOD OF TWO YEAR S CONSTITUTES CAPITAL EXPENDITURE. 4. WITHOUT PREJUDICE TO GROUND NO.3 ABOVE, THE LD. CIT(APPEALS) FURTHER ERRED IN ENHANCING THE ASSESSMENT, BY TREATING THE ENTIRE AMOUNT OF RS.75,00,000/- PAID FOR USE OF THE TRADE NAME FOR T WO YEARS AS PAYMENT FOR PURCHASE OF GOODWILL. 5. WITHOUT PREJUDICE TO GROUND NOS.3 AND 4 ABOVE, THE LD. CIT(APPEALS) FURTHER ERRED IN NOT ALLOWING DEPRECIATION ON THE SAID AMOUNT OF RS.75,00,000/. 21.1 FACTS OF THE CASE, IN BRIEF, ARE THAT THE EXTR AORDINARY ITEMS OF RS.2,09,99,999/- DEBITED TO THE PROFIT AND LOSS ACC OUNT INCLUDES AN AMOUNT OF RS.75,00,000/-. ON BEING ASKED BY THE AO TO JU STIFY THE SAME IT WAS SUBMITTED THAT THE SAME HAS BEEN PAID TO MAHINDRA & MAHINDRA, BY VIRTUE OF A NAME LICENCE AGREEMENT DATED 18-07-2002. IT WAS SUBMITTED THAT AS PER CLAUSE 6 OF THE AGREEMENT, M/S. GKN SINTER MET ALS LTD. WAS 18 ALLOWED TO USE THE TRADE MARK 'MAHINDRA' FOR TWO YE ARS. THE AO ASKED THE ASSESSEE TO JUSTIFY THE PAYMENT OF RS.75,00,00 0/- PAID FOR ACQUISITION OF TRADE MARK AND EXPLAIN AS TO WHY THE SAME SHOULD NOT BE TREATED AS CAPITAL EXPENSE. IN REPLY, THE ASSESSEE VIDE LETTE R DATED 24-01-2006 MADE FOLLOWING SUBMISSIONS : 'COPY OF THE NAME LICENCE AGREEMENT IS ENCLOSED. TH E FEE WAS FOR USE OF 'MAHINDRA' NAME AFTER OUR COMPANY CAME OUT OF MAHIN DRA GROUP ON 17 TH JULY, 2002. WE WERE ALLOWED TO USE 'MAHINDRA SINTERED PRO DUCTS LIMITED' NAME TILL 31 ST DECEMBER, 2002 AND 'FORMERLY MAHINDRA SINTERED PRO DUCTS LIMITED' FOR A PERIOD OF TWO YEARS FROM THE AGREEMENT DATE. THE NA ME LICENCE FEE WAS PAID IN THE ASSESSMENT TEAR 2003-04 AND CAN BE ALLOWED TO B E CLAIMED AS 'ROYALTY PAYMENT FOR USE OF THE NAME. SINCE THE AVAILABILITY OF THE NAME WAS FOR A VERY L IMITED PERIOD AND MOREOVER SINCE WHAT WAS AVAILABLE WAS ONLY A RIGHT TO USE TH E NAME ETC., AND THAT TOO FOR A LIMITED PERIOD, NEITHER ANY OWNERSHIP ACQUIRED NOR ANY ADVANTAGE OF AN ENDURING NATURE ACQUIRED. THE EXPENDITURE IS THEREF ORE ALLOWABLE AS A ROUTINE BUSINESS EXPENDITURE.' 21.2 HOWEVER, THE SAME WAS NOT ACCEPTED BY THE AO W HO DISALLOWED 50% OF THE SAME FOR THE FOLLOWING REASONS : ACQUISITION OF TRADE MARK IN ORDINARY CIRCUMSTANCE S IS THE ACQUISITION OF A INTANGIBLE CAPITAL ASSET AS ENVISAGED IN THE I.T. R ULES AND CONSEQUENTLY PAYMENTS FOR SAME WOULD BE CAPITAL EXPENDITURE WITH ENTITLEMENT TO DEPRECIATION THEREON @ 25%. HOWEVER, IN THE INSTANT CASE, THE PAYMENT IS NOT FO R THE PURCHASE OF THE TRADE MARK, 'MAHINDRA', BUT A LICENCE FEES PAYABLE FOR US E OF THE TRADE MARK FOR A PERIOD OF 2 YEARS FROM DATE OF AGREEMENT. THE BENEF IT OF THIS PAYMENT IS SPREAD OVER A PERIOD OF 2 YEARS. ACCORDINGLY, THE ASSESSEE IS ALLOWED 50% OF THE AMO UNT PAID IN THE YEAR UNDER CONSIDERATION AND BALANCE PORTION IS ALLOWABLE FOR REMAINING PORTION OF LICENCE TERM IN NEXT YEAR. CONSEQUENTLY, RS.37,50,000/- IS DISALLOWED AND ADDED BACK TO ASSESSEE'S TOTAL INCOME. 21.3 BEFORE THE CIT(A) IT WAS ARGUED THAT BY PAYING A SUM OF RS. 75 LACS THE ASSESSEE HAS USED THE NAME OF MAHINDRA ALONGWITH THE NAME OF THE COMPANY. THIS EX PENDITURE IS REVENUE EXPENDITURE IN VIEW OF THE FACT THAT NO NEW ASSET WAS 19 ACQUIRED BY THE ASSESSEE. THERE IS NO ENDURING BENE FIT DERIVED BY PAYING A SUM OF RS. 75 LACS FOR A LIMITED PERIOD OF TWO YEARS. HENCE THE EXPENDITURE IS REQUIRED TO BE ALLOWED IN FULL. IT WAS SUBMITTED THAT THERE IS NO CONCEPT OF DEFERRED REVENUE EXPENDITURE IN INCOME TAX. HENCE THE A.O. IS NOT JUSTIFIED IN ALLOWING ONLY 50 % OF THE EXPENDITURE IN THIS YEAR. THE FOLLOWING CASE LAWS WERE RELIED U PON : I. EMPIRE JUTE CO.LTD. VS. C.I.T. 124 ITR PG. 1 II. ALEMBIC CHEMICALS WORKS LTD. VS. CIT 177 ITR PG. 377 21.4 HOWEVER, THE CIT (A) ALSO WAS NOT CONVINCED WI TH THE EXPLANATION GIVEN BY THE ASSESSEE. HE ISSUED NOTIC E FOR ENHANCEMENT U/S. 251(1) TO SHOW CAUSE AS TO WHY THE ENTIRE EXPENDITU RE OF RS. 75 LACS SHOULD NOT BE DISALLOWED AS THE ASSESSEE HAS ACQUIRED GOOD WILL OF MAHINDRA WHICH IS A CAPITAL EXPENDITURE AND NOT ALLOWABLE AS REVEN UE EXPENDITURE. NO DEPRECIATION IS ALSO ALLOWABLE IN RESPECT OF GOODWI LL. 21.5 IT WAS REITERATED THAT THE COMPANY HAS PAID A SUM OF RS.75 LACS TO MAHINDRA & MAHINDRA FOR USE OF ITS NAME. THE TRADE MARK IS ONE OF THE MOST VALUABLE INDUSTRIAL PROPERTIES OF MAHINDRA & MAHINDRA. BY PAYING A SUM OF RS. 75 LACS THE ASSESSEE HAS BECOME ENTITLED TO USE THE TRADE NAME MAHINDRA FOR A LIMITED PERIOD OF TWO YEARS. AS NO N EW ASSET HAS COME INTO EXISTENCE THE EXPENDITURE CANNOT BE TREATED AS CAPI TAL EXPENDITURE. NO ENDURING BENEFIT HAS ALSO COME INTO THE POSSESSION OF THE COMPANY. IT WAS SUBMITTED THAT U/S. 32(L)(II) OF THE I.T.ACT DEPREC IATION IS GRANTED ON INTANGIBLE ASSETS AS WELL. IT WAS ARGUED THAT IN G ENERAL IN OTHER BUSINESS OF COMMERCIAL RIGHTS OF SIMILAR NATURE WOULD INCLUDE T HE USE OF TRADE NAME AND HENCE THE DEPRECIATION IS ALLOWABLE ON THE INTA NGIBLE ASSETS U/S. 32(L)(II). THE FOLLOWING DECISIONS WERE RELIED UPON : 20 I. CIT VS. B.C. SRINIVASA SETTY 128 ITR 294(SC) II. S.C. CAMBATTA 85 CO. P. LTD. VS. CEPT - 41 ITR 500 (SC) III. SEETHALAKSHMI AMMAL VS. CED 63ITR 317(SC) 21.6. HOWEVER, THE CIT(A) WAS NOT CONVINCED WITH TH E EXPLANATION GIVEN BY THE ASSESSEE AND UPHELD THE ACTION OF THE ASSESSING OFFICER BY HOLDING AS UNDER : I HAVE DULY CONSIDERED THE SUBMISSIONS OF THE AUTHORIZED REPRESENTATIVE AND I FIND THAT THE ASSESSEE HAS INCURRED THE EXPENDITURE OF RS. 75LACS ON ACQUIRING OF GOOD WILL FOR TWO YEARS. GOOD WILL IS AN ASSET ON WHICH NO DEPRECIATION CAN BE ALLOWED AS THE SAME IS NOT AN ITEM LISTED IN SECTION 32(1)(II). HENCE THE EXPENDITURE INCURRED FOR ACQUI RING GOOD WILL I.E. TRADE NAME OF MAHINDRA & MAHINDRA IS NOT ALLOWABLE AND NO DEPRECI ATION ALSO IS ALLOWABLE ON GOOD WILL. HENCE THE INCOME OF THE APPELLANT IS ENH ANCED BY RS.37,50,000/- AS THE A.O. HAS DISALLOWED ONLY A SUM OF RS. 37,50,000/- I N THIS YEAR I.E. 50% OF THE EXPENDITURE INCURRED BY THE ASSESSEE WHEREAS THE EN TIRE EXPENDITURE OF RS. 75 LACS IS REQUIRED TO BE DISALLOWED AS CAPITAL EXPEND ITURE ON ACCOUNT OF PURCHASE OF GOOD WILL. HENCE THE INCOME IS ENHANCED BY RS. 37,5 0,000/- AND NO DEPRECIATION IS ALLOWABLE ON THIS CAPITAL EXPENDITURE. 21.7 AGGRIEVED WITH SUCH ORDER OF CIT(A) THE ASSESS EE IS IN APPEAL BEFORE US. 21.8 WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE AO AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. THERE IS NO DISPUTE TO THE FACT THAT THE ASSESSEE HAS INCURRED EXPENDITURE OF RS.75 LAKHS BEING ONE TIME LICENCE FEE PAID TO THE OWNER FOR GRANTING TO THE USER, THE LICENCE TO CONT INUE TO USE THE TRADE MARK AS PER THE NAME LICENCE AGREEMENT DATED 18-07-2002. WE FIND THE ASSESSEE TREATED THE SAME AS REVENUE EXPENDITURE IN THE BOOK S. HOWEVER, THE AO ALLOWED ONLY 50% OF THE EXPENSES AS ALLOWABLE DURIN G THE YEAR AND THE BALANCE 50% IN SUBSEQUENT YEAR SINCE THE LICENCE WA S OBTAINED FOR A PERIOD OF 2 YEARS. WE FIND THE LD. CIT(A) ENHANCED THE AM OUNT AND DISALLOWED THE ENTIRE EXPENDITURE ON THE GROUND THAT THE SAME IS FOR ACQUIRING OF GOODWILL FOR 2 YEARS AND ON WHICH NO DEPRECIATION C AN BE ALLOWED. IT IS THE 21 SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT THE ENTIRE AMOUNT SHOULD BE ALLOWED AS REVENUE EXPENDITURE. ALTERNAT IVELY IT IS THE ARGUMENT OF THE LD. COUNSEL FOR THE ASSESSEE THAT DEPRECIATI ON SHOULD BE ALLOWED IN CASE IT IS HELD TO BE ACQUISITION OF GOODWILL IN VI EW OF DECISION OF HONBLE SUPREME COURT IN THE CASE OF SMIFS SECURITIES LTD. REPORTED IN 348 ITR 302 (SC). WE FIND THE ALTERNATE CONTENTION OF THE ASSESSEE THAT DEPRECIATION SHOULD BE ALLOWED IS ACCEPTABLE IN VIEW OF DECISION OF HONBLE SUPREME COURT IN THE CASE OF CIT VS. SMIFS SECURITIES LTD. REPORTED IN 348 ITR 302 WHEREIN IT HAS BEEN HELD THAT GOODWILL UNDER EX PLANATION 3(B) OF SECTION 31(2) OF THE ACT IS ELIGIBLE FOR DEPRECIATI ON. IN VIEW OF THE DECISION OF HONBLE SUPREME COURT CITED SUPRA WE SET-ASIDE T HE ORDER OF CIT(A) AND DIRECT THE AO TO ALLOW DEPRECIATION ON THE GOODWILL AS PER LAW. ACCORDINGLY, GROUND OF APPEAL NOS. 3 AND 4 BY THE A SSESSEE ARE DISMISSED AND GROUND OF APPEAL NO.5 IS ALLOWED. 22. GROUNDS OF APPEAL NO.6 BY THE ASSESSEE READS AS UND ER : 6. THE ASSESSING OFFICER ERRED IN HOLDING AND THE THE LD. CIT (APPEALS) ERRED IN CONFIRMING THE DISALLOWANCE OF RS.43,34,000/- BE ING PREPAYMENT CHARGES PAID IN RESPECT OF DEBENTURES ISSUED WERE NOT EXPENSES I NCURRED FOR THE PURPOSE OF CARRYING ON BUSINESS. 22.1 FACTS OF THE CASE, IN BRIEF, ARE THAT THE AO DURING THE COURSE OF ASSESSMENT PROCEEDINGS NOTED THAT THE ASSESSEE HAS CLAIMED AN EXPENDITURE OF RS.43,34,000/- TOWARDS DEBENTURE PRE PAYMENT CHA RGES. ON BEING ASKED BY THE AO TO JUSTIFY THE DEDUCTION IT WAS SUBMITTED TH AT THE COMPANY HAD ISSUED DEBENTURE FOR MEETING ITS FINANCIAL REQUIREMENTS. P ENDING UTILIZATION OF THE PROCEEDS THESE DEBENTURE FUNDS WERE KEPT IN SHORT T ERM DEPOSIT WITH STANDARD CHARTERED BANK. SUBSEQUENTLY IT WAS REALIZ ED THAT THE COMPANY IS PAYING HEAVY INTEREST ON DEBENTURE FOR A PERIOD OF 3 YEARS. THEREFORE THESE 22 DEBENTURES WERE CANCELLED AND THE MONEY WAS PAID BA CK TO DEUTSCHE BANK. BUT IN THIS PROCESS THE COMPANY HAD TO PAY PRE-PAYM ENT CHARGES OF RS.43,34,000/- . 22.2 HOWEVER, THE AO WAS NOT SATISFIED WITH THE EXP LANATION GIVEN BY THE ASSESSEE. RELYING ON VARIOUS DECISIONS HE DISAL LOWED THE EXPENSES OF RS.43,34,000/- CLAIMED BY THE ASSESSEE COMPANY AS P RE-PAYMENT CHARGES OF DEBENTURE AND ADDED THE SAME TO THE TOTAL INCOME OF THE ASSESSEE FOR THE FOLLOWING REASONS: 1. FROM THE PERUSAL OF THE PRINCIPAL TERMS AND CON DITIONS OF THE PLACEMENT OF THESE UNSECURED, REDEEMABLE NON-CONVERTIBLE DEBE NTURES, IT IS CLEAR THAT THERE IS NO CONDITION FOR PAYMENT OF ANY PRE-CLOSUR E CHARGES, WHAT IS SPECIFIED IS ONLY THE TENOR/MATURITY & COUPON RATE. 2. THE DEBENTURES WERE ISSUED BY THE ASSESSEE COMP ANY TO MAHINDRA & MAHINDRA ON PRIVATE PLACEMENT BASIS. MAHINDRA & MAH INDRA IN TURN SOLD THESE DEBENTURES TO DEUTSCHE BANK, THE DEBENTURES W ERE HELD BY DEUTSCHE BANK AT THE TIME OF PRE- CLOSURE AND HENCE THE ASSE SSEE COMPANY WAS NOT UNDER CONTRACTUAL OBLIGATION TO PAY PRE-CLOSURE CHA RGES TO THE BANK. 3. THE OBJECTS OF DEBENTURE ISSUE WAS FOR GENERAL C ORPORATE PURPOSES. THE ASSESSEE COMPANY UTILIZED THE DEBENTURE PROCEED S BY PLACING THE AMOUNT RECEIVED AS FIXED DEPOSIT WITH STANDARD CHAR TERED BANK. 4. THE EXPENDITURE INCURRED FOR RAISING MONEY FOR T HE PURPOSE OF BUSINESS HAS BEEN HELD TO BE ALLOWABLE EXPENDITURE U/S. 37 I N VIEW OF VARIOUS DECISION OF THE COURTS. HOWEVER, IN PRESENT CASE, E XPENDITURE IS NOT BEING INCURRED TO RAISE THE MONEY BUT IS BEING INCURRED T O RETURN THE MONEY ALREADY RAISED. MOREOVER, THIS EXPENDITURE IS NOT CONTRACTUAL BUT P URELY VOLUNTARY IN THE SENSE THAT THERE IS NO SUCH PROVISION IN THE TERMS OF ISSUE OF THE DEBENTURE PAYMENT OF THIS PRE-CLOSURE CHARGES. THIS PAYMENT I S PURELY A DISCRETIONARY DECISION BY THE ASSESSEE COMPANY, WHO IS UNDER NO LEGAL COMPULSION TO MAKE THIS PAYMENT. 22.3 BEFORE CIT(A) THE ASSESSEE REITERATED THE SAME ARGUMENTS AS MADE BEFORE THE ASSESSING OFFICER. HOWEVER, THE CI T(A) WAS ALSO NOT CONVINCED WITH THE ARGUMENTS ADVANCED BY THE ASSESS EE AND UPHELD THE ACTION OF THE ASSESSING OFFICER BY HOLDING AS UNDER : 23 I HAVE DULY CONSIDERED THE SUBMISSION OF THE AUTHO RISED REPRESENTATIVE AND I FIND THAT THE ASSESSING OFFICER IS JUSTIFIED IN D ISALLOWING THE PREPAYMENT CHARGES OF RS.43,34,000/-, INCURRED BY THE ASSESSEE ON CANCELLATION OF DEBENTURES. I FIND THAT THERE IS NO CONDITION FOR PAYMENT OF PRE-CLOSURE CHARGES. THE DEBENTURES WERE ISSUED BY ASSESSEE CO MPANY TO MAHINDRA & MAHINDRA ON PRIVATE PLACEMENT BASIS AND MAHINDRA & MAHINDRA IN TURN SOLD THESE DEBENTURES TO DEUTSCHE BANK. THEREFORE T HE DEBENTURES HELD BY DEUTSCHE BANK AT THE TIME OF PRE-CLOSURE WERE NOT C ONTRACTUAL OBLIGATION TO PAY PRE-CLOSURE CHARGES TO THE BANK. IT IS ALSO TRU E THAT THE ASSESSEE COMPANY HAS USED THESE AMOUNT OF DEBENTURE IN PLACING SHORT TERM FIXED DEPOSIT WITH STANDARD CHARTERED BANK. THE EXPENDITURE INCURRED F OR RAISING THE MONEY IS ALLOWABLE U/S. 37. HOWEVER, IN THE PRESENT CASE THE ASSESSEE HAS NOT INCURRED THESE EXPENDITURE FOR RAISING THE MONEY BUT INCURRE D THIS EXPENDITURE TO RETURN THE MONEY ALREADY RAISED. HENCE THE A.O. IS JUSTIFIED IN DISALLOWING THE EXPENDITURE OF RS.43,34,000/- AS IT CANNOT BE SAID THAT THE ASSESSEE HAS INCURRED THE LOSS FOR THE PURPOSE OF CARRYING ON TH E BUSINESS. ISSUE OF DEBENTURE IS NOT THE BUSINESS OF THE ASSESSEE. PAYI NG PREPAYMENT CHARGES CANNOT BE REGARDED AS PAYMENT FOR THE BUSINESS OF T HE ASSESSEE. RELIANCE IS PLACED ON THE DECISION OF ASSOCIATED HOTELS OF INDI A LTD. VS. CIT 231 ITR 134(PUNJAB HIGH COURT). THIS GROUND OF APPEAL IS DI SMISSED. 22.4 AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE AS SESSEE IS IN APPEAL BEFORE US 22.5 THE LD. COUNSEL FOR THE ASSESSEE REFERRING TO THE DECISION OF DELHI BENCH OF THE TRIBUNAL IN THE CASE OF GUJARAT GUARDIAN LTD. VS. JCIT REPORTED IN 114 TTJ 565 SUBMITTED THAT ANY AMO UNT PAID AS PREPAYMENT CHARGES AS A RESULT OF RESTRUCTURING OF DEBT TO SAVE BUSINESS EXPENDITURE FOR THE YEAR OR SUBSEQUENT YEA RS WILL BE IN THE NATURE OF INTEREST COST AND IS A REVENUE EXPENDITUR E AND THEREFORE ALLOWABLE AS DEDUCTION. REFERRING TO THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. GUJARAT GUARDIAN LTD. REPORTED IN 222 CTR 516 HE SUBMITTED THAT THE DECISION OF THE T RIBUNAL HAS BEEN UPHELD BY THE HONBLE HIGH COURT WHEREIN IT HAS BEE N HELD THAT THE PREPAYMENT PREMIUM PAID TO IDBI FOR RESTRUCTURING O F ITS DEBTS WAS INTEREST PAID TO PUBLIC FINANCE INSTITUTION AND W AS DEDUCTIBLE U/S.43B(D) OF THE I.T. ACT. REFERRING TO THE DECIS ION OF THE HONBLE 24 SUPREME COURT IN THE CASE OF CIT VS. ASHOK LEYLAND LTD. REPORTED IN 86 ITR 549 HE DREW THE ATTENTION OF THE BENCH TO TH E FOLLOWING : IT IS OBVIOUS FROM THE FACTS SET OUT EARLIER THAT THE COMPENSATION PAID FOR TERMINATION OF THE SERVICES OF THE MANAGING AGENTS WAS A PAYMENT MADE WITH A VIEW TO SAVE BUSINESS EXPENDITURE IN THE RELEVANT ACCOUNTING YEAR AS WELL AS FOR A FEW MORE YEARS. IT WAS NOT MADE FOR ACQUIR ING ANY ENDURING BENEFIT OR INCOME YIELDING ASSET. WE AGREE WITH THE HIGH CO URT THAT THE TRIBUNAL WAS RIGHT IN ITS CONCLUSION THAT THE EXPENDITURE IN QUESTION WAS A REVENUE EXPENDITURE. 22.6 REFERRING TO THE DECISION OF CHENNAI BENCH OF THE TRIBUNAL IN THE CASE OF OVERSEAS SANMAR FINANCE LTD. VS. JCI T REPORTED IN 86 ITD 602 HE SUBMITTED THAT DEDUCTION CLAIMED FOR FOR ECLOSURE PREMIUM PAID ON LOAN TAKEN IN EARLIER YEAR WHICH WAS REPAID PREMATURELY IN FULL IN PREVIOUS YEAR WAS HELD TO BE REVENUE EXPENDITURE . RELYING ON VARIOUS OTHER DECISIONS HE SUBMITTED THAT SINCE THE ASSESSES INCURRED THE EXPENDITURE OF PREPAYMENT CHARGES TO RELIEVE IT FROM FUTURE FINANCIAL BURDEN, THEREFORE, THE SAME SHOULD BE ALL OWED AS A REVENUE EXPENDITURE. 22.7 THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OT HER HAND HEAVILY RELIED ON THE ORDERS OF THE AO AND THE CIT( A) 22.8 WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE AO AND CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONS IDERED THE VARIOUS DECISIONS CITED BEFORE US. THERE IS NO DISPUTE TO THE GENUINENESS OF THE EXPENDITURE OF RS.43,34,000/- TOWARDS DEBENTURE PREPAYMENT CHARGES. THE ONLY DISPUTE IS REGARDING THE ALLOWAB ILITY OF THE SAME. IT IS THE CASE OF THE REVENUE THAT THERE IS NO COND ITION FOR PAYMENT OF PRE-CLOSURE CHARGES. FURTHER, THE DEBENTURES WERE HELD BY DEUTSCHE 25 BANK AT THE TIME OF PRE-CLOSURE AND THERE WERE NO C ONTRACTUAL OBLIGATION TO PAY PRE-CLOSURE CHARGES TO THE BANK. IT IS ALSO THE CASE OF THE REVENUE THAT THE ASSESSEE IN THE INSTANT CASE H AS NOT INCURRED THIS EXPENDITURE FOR RAISING THE MONEY BUT INCURRED THE SAME TO RETURN THE MONEY ALREADY RAISED AND THAT ISSUE OF DEBENTURE IS NOT THE BUSINESS OF THE ASSESSEE. IT IS THE ARGUMENT OF THE LD. COUNSE L FOR THE ASSESSEE THAT THE ASSESSEE HAD TO INCUR THE EXPENDITURE TO R ELIEVE IT FROM FURTHER FINANCIAL BURDEN AND THIS IS A COMMERCIAL DECISION. WE FIND MERIT IN THE ABOVE ARGUMENT OF THE LD. COUNSEL FOR THE ASSES SEE. BY INCURRING SUCH EXPENDITURE THE ASSESSEE HAS TRIED TO RELIEVE ITSELF FROM FURTHER FINANCIAL BURDEN. 22.9 WE FIND THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. ASHOK LEYLAND LTD. REPORTED IN 86 ITR 549 HAS HELD AS UNDER : THERE IS NO DOUBT THAT, AS A RESULT OF THE TERMINA TION OF THE SERVICES OF THE MANAGING AGENTS, THE COMPANY GOT RID OF ITS LIABILI TY TO PAY OFFICE ALLOWANCE AS WELL AS THE COMMISSION IT WAS REQUIRED TO PAY UNDER THE MANAGING AGENCY AGREEMENT NOT ONLY DURING THE ACCOUNTING YEAR BUT A LSO FOR A FEW YEARS MORE. THE EXPENDITURE THUS SAVED UNDOUBTEDLY SWELLED THE PROFITS OF THE COMPANY. FROM THE FACTS FOUND, IT IS CLEAR THAT THE MANAGING AGENCY WAS TERMINATED ON BUSINESS CONSIDERATIONS AND AS A MATTER OF COMMERCI AL EXPEDIENCY. THERE IS NO BASIS FOR HOLDING THAT BY TERMINATING THE MANAGING AGENCY, THE COMPANY ACQUIRED ANY ENDURING BENEFIT OR ANY INCOME YIELDIN G ASSET IT IS TRUE THAT BY TERMINATING THE SERVICES OF THE MANAGING AGENTS, TH E COMPANY NOT ONLY SAVED THE EXPENSE THAT IT WOULD HAVE HAD TO INCUR IN THE RELE VANT PREVIOUS YEAR BUT ALSO FOR FEW MORE YEARS TO COME. IT WILL NOT BE CORRECT TO S AY THAT BY AVOIDING CERTAIN BUSINESS EXPENDITURE, THE COMPANY CAN BE SAID TO HA VE ACQUIRED ENDURING BENEFITS OR ACQUIRED ANY INCOME YIELDING ASSET. TO QUOTE THE ILLUSTRATION GIVEN BY ROWLATT J. IN B. W. NOBLE LTD. V. MITCHELL, IN THE ORDINARY CASE A PAYMENT TO GET RID OF A SERV ANT WHEN IT IS NOT EXPEDIENT TO KEEP HIM IN THE INTEREST OF TRADE WOULD BE A DEDUCT IBLE EXPENDITURE. A PAYMENT MADE TO REMOVE THE POSSIBILITY OF A RECURRING DISAD VANTAGE CANNOT BE CONSIDERED AS A PAYMENT MADE TO ACQUIRE AN ENDURING ADVANTAGE. IN NOBLE'S CASE, ROWLATT J. HAD TO EXAMINE THE QUE STION WHETHER THE ITEM OF EXPENDITURE CONCERNED IN THAT CASE WAS A REVENUE EX PENDITURE. BRIEFLY STATED THE FACTS OF THAT CASE WERE : UNDER ITS ARTICLES OF ASS OCIATION THE MANAGEMENT OF A COMPANY OF INSURANCE BROKERS REGISTERED IN ENGLAND WAS VESTED IN ITS BOARD OF DIRECTORS IN LONDON, WITH POWERS OF DELEGATION. ONE OF THE DIRECTORS WAS APPOINTED RESIDENT DIRECTOR IN FRANCE. HE CONDUCTED THE FRENCH BUSINESS OF THE COMPANY FROM AN OFFICE IN PARIS UNDER A POWER OF AT TORNEY FROM THE COMPANY. 26 THE COMPANY CLAIMED AS A DEDUCTION FROM ITS PROFITS FOR INCOME TAX PURPOSES A SUM OF POUND 19,200 PAYABLE (BY INSTALMENTS) TO A R ETIRING DIRECTOR IN THE FOLLOWING CIRCUMSTANCES: 'THE ORIGINAL DIRECTORS WE RE APPOINTED FOR LIFE SO LONG AS THEY HELD A QUALIFYING NUMBER OF SHARES, SUBJECT TO DISMISSAL FORTHWITH FOR NEGLECT OR MISCONDUCT TOWARDS THE COMPANY. A DIRECT OR SO DISMISSED WAS ONLY ENTITLED TO RECEIVE HIS SALARY THEN DUE AND COULD B E REQUIRED TO SELL HIS SHARES TO THE OTHER DIRECTORS AT PAR. HE WOULD ALSO HAVE TO S URRENDER FOR CANCELLATION CERTAIN NOTES ISSUED BY THE COMPANY ENTITLING HIM T O PARTICIPATE IN SURPLUS PROFITS. CIRCUMSTANCES AROSE IN 1920 AND 1921 IN WH ICH THE COMPANY MIGHT POSSIBLY HAVE BEEN JUSTIFIED IN DISMISSING ONE OF T HE DIRECTORS, BUT TO AVOID PUBLICITY INJURIOUS TO THE COMPANY'S REPUTATION, IT ENTERED INTO NEGOTIATION WITH THE DIRECTOR FOR HIS RETIREMENT. HE CLAIMED POUND 5 0,000 AS COMPENSATION ; BUT A COMPROMISE WAS ARRIVED AT AND EMBODIED IN AN AGRE EMENT DATED THE 30TH DECEMBER, 1921, BY WHICH HE AGREED TO RETIRE FROM T HE COMPANY, TO TRANSFER HIS 300 POUND 1 SHARES TO THE OTHER DIRECTORS AT PAR VA LUE (THEY WERE THEN WORTH CONSIDERABLY MORE) AND TO SURRENDER HIS PARTICIPATI NG NOTES. THE COMPANY AGREED TO PAY HIM POUND 19,200 AND THE DIRECTORS TO PAY HIM POUND 300 (AS CONSIDERATION FOR HIS SHARES) MAKING TOGETHER POUND 19,500 (PAYABLE IN FIVE ANNUAL INSTALMENTS) WHICH HE AGREED TO ACCEPT IN FU LL SATISFACTION OF ALL CLAIMS AGAINST THE COMPANY OR THE DIRECTORS. THE QUESTION WAS WHETHER THE PAYMENT OF POUND 19,200 WAS A DEDUCTIBLE EXPENDITURE. THE SPEC IAL COMMISSIONERS DECIDED AGAINST THE COMPANY BUT THE KING'S BENCH DIVISION A S WELL AS THE COURT OF APPEAL ACCEPTED THE COMPANY'S CONTENTION AND HELD T HAT THE PAYMENT OF POUND 19,200 MADE WAS AN ADMISSIBLE DEDUCTION IN ARRIVING AT ITS PROFITS FOR INCOME TAX PURPOSES. IN THE COURSE OF HIS JUDGMENT ROWLATT J., SITTING ON THE KING'S BENCH DIVISION, RELIED ON THE OBSERVATIONS OF THE L ORD CHANCELLOR IN ATHERTON V. BRITISH INSULATED AND HELSBY CABLES LTD. TO THE EFF ECT : ' 'A SUM OF MONEY EXPENDED, NOT OF NECESSITY AND W ITH A VIEW TO A DIRECT AND IMMEDIATE BENEFIT TO THE TRADE, BUT VOLUNTARILY AND ON THE GROUNDS OF COMMERCIAL EXPEDIENCY, AND IN ORDER INDIRECTLY TO F ACILITATE THE CARRYING ON OF THE BUSINESS, MAY YET BE EXPENDED WHOLLY AND EXC LUSIVELY FOR THE PURPOSES OF THE TRADE. ' ' THESE OBSERVATIONS OF THE LORD CHANCELLOR WERE AGA IN QUOTED WITH APPROVAL BY LORD HANWORTH M. R. WHEN THE MATTER WAS TAKEN IN APPEAL TO THE COURT OF APPEAL. THE NEXT CASE WHICH MAY BE USEFULLY REFERRED TO IS THE DECISION IN ANGLO PERSIAN OIL CO. LTD. V. DALE. THEREIN THE ASSESSEE COMPANY BY AGREEMENT MADE IN 1910 AND 1914 HAD APPOINTED ANOTHER LIMITED COMP ANY AS ITS AGENTS IN PERSIA AND THE EAST FOR A PERIOD OF YEARS, UPON THE TERMS THAT THE AGENTS SHOULD BE REMUNERATED BY COMMISSION AT SPECIFIED RATES. WITH THE PASSAGE OF TIME THE AMOUNTS PAYABLE TO THE AGENTS BY WAY OF COMMISSION INCREASED FAR BEYOND THE AMOUNTS ORIGINALLY CONTEMPLATED BY THE COMPANY, AND , AFTER NEGOTIATIONS BETWEEN THE PARTIES, THE AGREEMENTS WERE CANCELLED IN 1922, THE AGENT COMPANY AGREEING TO GO INTO VOLUNTARY LIQUIDATION AND THE C OMPANY AGREEING TO PAY TO THE AGENTS POUND 300,000 IN CASH. THIS SUM WAS IN FACT PAID AND THE COMPANY CONTENDED BEFORE THE SPECIAL COMMISSIONERS THAT IT WAS AN ADMISSIBLE DEDUCTION IN COMPUTING THE COMPANY'S PROFITS FOR PURPOSES OF INCOME TAX AND CORPORATION PROFITS TAX. THE SPECIAL COMMISSIONERS REJECTED THI S CONTENTION AND THE COMPANY APPEALED. ROWLATT J., SITTING IN THE KING'S BENCH D IVISION, ALLOWED THE APPEAL AND HELD THAT THE PAYMENT TO THE AGENTS WAS AN ADMI SSIBLE DEDUCTION FOR THE PURPOSE OF INCOME TAX AND CORPORATION PROFITS TAX. HIS DECISION WAS AFFIRMED BY THE COURT OF APPEAL. IN THE COURSE OF HIS JUDGMENT ROWLATT J. OBSERVED : 27 'NOW I WANT TO SEE HOW THE COMMISSIONERS HAVE DEAL T WITH IT, AND WHAT THEY SAY IS THAT THIS WAS EXPENDITURE OF A CAPITAL NATUR E TO SECURE AN ENDURING BENEFIT FOR THE COMPANY'S TRADE BY GETTING RID OF AN ONEROU S CONTRACT IN MY JUDGMENT THAT IS A FINDING WHICH IS PERFECTLY INCONCLUSIVE. IT DOES NOT DEAL WITH THE QUESTION. THE QUESTION IS NOT MERELY GETTING RID OF AN ONEROUS CONTRACT, BUT AN ONEROUS CONTRACT FOR WHAT ? IF IT IS AN ONEROUS CON TRACT FOR THE PAYMENT OF WAGES OR COMMISSION WHICH ARE CHARGEABLE TO REVENUE ACCOU NT IN THE PLAINEST POSSIBLE WAY, AND IF THAT IS THE ONEROUS CONTRACT THAT YOU A RE GETTING RID OF, IT IS IMPOSSIBLE TO SUGGEST THAT THAT IS A REASON FOR SAY ING THAT THIS IS A CAPITAL EXPENDITURE UNLESS YOU GET RID OF THAT ONEROUS CONT RACT (AS I POINTED OUT JUST NOW) BY ERECTING IN ITS PLACE A CAPITAL ASSET IN TH E NATURE OF COURSE I AM ONLY USING THIS AS AN ILLUSTRATIVE EXAMPLE A LABOUR SAV ING MACHINE WHICH GIVES YOU AN ASSET AND SO DISPENSES WITH THE EXPENSES OF LABO UR. BUT, TO SAY THAT IT IS A CAPITAL EXPENDITURE BECAUSE IT SECURED AN ENDURING BENEFIT BY GETTING RID OF AN ONEROUS CONTRACT IS NOT TO STATE THE MATERIAL THING , AND IT IS COMPLETELY INCONCLUSIVE' IN G. SCAMMELL & NEPHEW LTD. V. ROWLES, THE COURT OF APPEAL HELD THAT THE EXPENDITURE INCURRED FOR THE TERMINATION OF A TRADI NG RELATIONSHIP IN ORDER TO AVOID LOSSES OCCURRING IN THE FUTURE THROUGH THAT R ELATIONSHIP, WHETHER PECUNIARY LOSSES OR COMMERCIAL INCONVENIENCES, IS JUST AS MUC H FOR THE PURPOSES OF THE TRADE AS THE MAKING OR THE CARRYING INTO EFFECT OF A TRADING AGREEMENT. THE CASE WHICH CAN BE SAID TO BE THE NEAREST TO TH E FACTS OF THE PRESENT CASE DECIDED BY ANY INDIAN COURT IS THAT DECIDED BY THE CALCUTTA HIGH COURT IN ANGLO PERSIAN OIL CO. (INDIA) LTD. V. COMMISSIONER OF INC OME TAX THEREIN, MONEY WAS PAID BY AN OIL COMPANY IN A LUMP SUM AS COMPENSATIO N FOR LOSS OF AGENCY WHEREBY THE COMPANY RELIEVED ITSELF OF FUTURE ANNUA L PAYMENTS OF COMMISSION CHARGEABLE TO REVENUE ACCOUNT. THE QUESTION WAS WHE THER THE MONEY PAID AS COMPENSATION WAS ALLOWABLE AS PROPER DEDUCTION FROM THE BUSINESS PROFITS OF THE COMPANY. THE COURT UPHELD THE CONTENTION OF THE COM PANY THAT IT WAS A REVENUE EXPENDITURE. FURTHER, THE COURT OBSERVED THAT THE P RINCIPLE THAT CAPITAL RECEIPT SPELLS CAPITAL EXPENDITURE OR VICE VERSA IS SIMPLE BUT IT IS NOT NECESSARILY SOUND. WHETHER A SUM IS RECEIVED ON CAPITAL OR REVENUE ACC OUNT DEPENDS OR MAY DEPEND UPON THE CHARACTER OF THE BUSINESS OF THE RECIPIENT . WHETHER A PAYMENT IS OR IS NOT IN THE NATURE OF CAPITAL EXPENDITURE DEPENDS OR MAY DEPEND UPON THE CHARACTER OF THE BUSINESS OF THE PAYER AND UPON OTH ER FACTORS RELATED THERETO. IT IS OBVIOUS FROM THE FACTS SET OUT EARLIER THAT THE COMPENSATION PAID FOR TERMINATION OF THE SERVICES OF THE MANAGING AGENTS WAS A PAYMENT MADE WITH A VIEW TO SAVE BUSINESS EXPENDITURE IN THE RELEVANT A CCOUNTING YEAR AS WELL AS FOR A FEW MORE YEARS. IT WAS NOT MADE FOR ACQUIRING ANY ENDURING BENEFIT OR INCOME YIELDING ASSET. WE AGREE WITH THE HIGH COURT THAT T HE TRIBUNAL WAS RIGHT IN ITS CONCLUSION THAT THE EXPENDITURE IN QUESTION WAS A R EVENUE EXPENDITURE. 22.10 WE FIND THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS . GUJARAT GUARDIAN LTD. REPORTED IN 222 CTR 516 HAS H ELD AS UNDER : 14. BRIEFLY, THE ASSESSEE IN ITS PROFIT AND LOSS ACCOUNT HAS DEBITED A SUM OF RS 8 CRORES AS PRE-PAYMENT PREMIUM WHICH IS CLASSIFIED A S AN EXTRAORDINARY ITEM. THE ASSESSING OFFICER SOUGHT JUSTIFICATION FROM THE ASSESSEE FOR CLAIMING THE ENTIRE AMOUNT AS DEDUCTION IN THE PREVIOUS YEAR REL EVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION IN VIEW OF THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF 28 MADRAS INDUSTRIAL INVESTMENT CORPORATION LTD VS CIT ; (1997) 225 ITR 802. THE ASSESSEE RESPONDED TO THE QUERY OF THE ASSESSING OF FICER BY SUBMITTING THAT IT HAD MADE A PROPOSAL TO IDBI FOR RESTRUCTURING ITS D EBT WITH RESPECT TO RUPEE TERM LOAN AGGREGATING TO RS 170.76 CRORES. THE IDBI VIDE LETTER DATED 19.03.1995 AGREED TO THE PROPOSAL AND INTER ALIA RE DUCED THE RATE OF INTEREST ON THE RUPEE TERM LOAN TO 15% P.A. EFFECTIVE FROM 01.0 4.1995 UPON THE ASSESSEE PAYING IDBI A LUMP SUM PRE-PAYMENT PREMIUM OF RS 8 CRORES. 17.1 ACCORDING TO US, AS CORRECTLY HELD BY THE TRIB UNAL, THE ASSESSEES CLAIM FOR DEDUCTION HAD TO BE ALLOWED, IN ONE LUMP SUM, KEEPI NG IN VIEW THE PROVISIONS OF SECTION 43B(D) WHICH PROVIDES THAT ANY SUM PAYABLE BY THE ASSESSEE AS INTEREST ON ANY LOAN OR BORROWING FROM ANY FINANCIAL INSTITU TION SHALL BE ALLOWED TO THE ASSESSEE IN THE YEAR IN WHICH THE SAME IS PAID IRRE SPECTIVE OF THE PROVISIONS IN WHICH THE LIABILITY TO PAY SUCH SUM IS INCURRED BY THE ASSESSEE ACCORDING TO THE METHOD OF ACCOUNTING REGULARLY APPLIED BY THE ASSES SEE. SINCE THE AUTHORITIES BELOW HAVE NOT DISPUTED THAT PRE-PAYMENT PREMIUM PA ID TO IDBI, IN THE INSTANT CASE, IS NOTHING BUT INTEREST OR THAT IT WAS PAID TO A PUBLIC FINANCIAL INSTITUTION I.E., IDBI THEN, IN TERMS OF, SECTION 43B(D) THE AS SESSEES CLAIM FOR DEDUCTION COULD ONLY HAVE BEEN ALLOWED IN THE YEAR IN WHICH T HE PAYMENT HAD ACTUALLY BEEN MADE. IT IS NOT DISPUTED THAT PAYMENT HAS BEEN MADE IN THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION I.E., ASSESSMENT YEAR 1996- 97. THEREFORE, THERE IS NO SCOPE FOR SPREADING OVER THE LIABILITY OVER A PERIOD OF 10 YEARS AS WAS SOUGHT TO BE DONE BY THE ASSESSING OFFICER WHICH WAS, ACCORDING TO US, ERRONEOUSLY SUSTAINED BY THE CIT(A ). THE RATIO OF THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF MADRAS INDUSTRI AL CORPORATION (SUPRA) IS NOT APPLICABLE TO THE PRESENT CASE. THE FACTS OF TH E INSTANT CASE ARE DIFFERENT. MADRAS INDUSTRIAL CORPORATION (SUPRA) PERTAINS TO T REATMENT OF DISCOUNT ON DEBENTURE ISSUED BY THE ASSESSEE. THE SUPREME COURT S OBSERVATIONS THAT A CLAIM FOR DEDUCTION BY AN ASSESSEE BE SPREAD OVER AS DEDU CTION IN ONE YEAR WOULD DISTORT THE PICTURE OF PROFITS, CANNOT BE APPLIED T O THE INSTANT CASE, AS THE MECHANISM FOR CLAIMING DEDUCTION ON ACCOUNT OF INT EREST PAID ON LOANS OBTAINED BY THE ASSESSEE FROM A PUBLIC FINANCIAL IN STITUTION, IS SPECIFICALLY PROVIDED FOR IN THE STATUTE UNDER SECTION 43B(D) OF THE ACT. THEREFORE, IN TERMS OF SECTION 43B(D) ONCE IT IS ASCERTAINED THAT THE PAYM ENT IS IN THE NATURE OF INTEREST IN TERMS OF SECTION 36(1)(III) READ WITH SECTION 2(28A) OF THE ACT, AND THE ASSESSEE FULFILLS THE CONDITIONS PROVIDED IN SE CTION 43B(D), THAT IS, IT IS THE INTEREST PAID IN RESPECT OF LOANS OBTAINED FROM PUB LIC INSTITUTIONS, IT FOLLOWS THAT, THE INTEREST WILL HAVE TO BE ALLOWED AS A DEDUCTION ONLY IN THE YEAR OF PAYMENT, NOTWITHSTANDING THE FACT THAT, THE LIABILITY TO PAY SUCH SUM WAS INCURRED IN AN EARLIER YEAR BASED ON THE METHOD OF ACCOUNTING REGU LARLY EMPLOYED BY THE ASSESSEE. IN THESE CIRCUMSTANCES, IN OUR OPINION TH E ASSESSING OFFICER FAILED TO APPRECIATE THE RATIO OF THE JUDGMENT OF THE SUPREME COURT IN MADRAS INDUSTRIAL CORPORATION (SUPRA), WHICH IS, REALLY AN APPLICATIO N OF THE PRINCIPLE OF ACCOUNTANCY OF MATCHING INCOME WITH EXPENDITURE, WH ERE THE ACT MAKES NO SPECIFIC PROVISION FOR CLAIM OF DEDUCTION. THE SAID PRINCIPLE ENUNCIATED BY THE SUPREME COURT WAS NOT CONTEMPLATED TO APPLY TO SITU ATIONS WHERE THE ACT MAKES A DISTINCT AND SPECIFIC PROVISION. SEE OBSERVATIONS MADE BY THE SUPREME COURT IN TUTICORIN ALKALI CHEMICALS V. CIT ; (1997) 227 ITR 172 AT PAGES 183-184. IN THE RESULT, NO FAULT CAN BE FOUND WITH THE APPROACH OF THE TRIBUNAL IN RESPECT OF THIS ISSUE. 22.11 WE FIND THE CHENNAI BENCH OF THE TRIBUNAL IN THE CASE OF OVERSEAS SANMAR FINANCE LTD. VS. JCIT REPORTED IN 8 6 ITD 601 HAS HELD AS UNDER : 29 THE RIVAL CONTENTIONS ON THIS ISSUE TOGETHER WITH THE CASE LAWS AS REFERRED TO HAVE BEEN GIVEN OUR VERY CAREFUL CONSIDERATION. THE FACT AS IS EVIDENT FROM RECORD IS THAT THE LOAN THAT WAS TAKEN IN EARLIER Y EARS WAS REPAID IN FULL IN THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR AND T HIS RESULTED IN THE PAYMENT OF CHARGES LEVIED BY THE FINANCIAL INSTITUTIONS TO THE TUNE OF RS.56,15,126. IT IS ALSO EVIDENT FROM THE RECORD THAT THE REDUCTION IN THE R ATE OF INTEREST FOR FRESH LOANS TO BE ADVANCED BY THE FINANCIAL INSTITUTIONS LED THE A SSESSEE COMPANY TO PAY OFF THE ENTIRE LOAN THAT CARRIED THE BURDEN OF HIGHER RATE OF INTEREST. THE ASSESSEE APPARENTLY CALCULATED THE AMOUNT OF INTEREST THAT I T WOULD BE PAYING OVER THE YEARS AT THE AGREED RATE OF INTEREST AND COMPARED I T WITH THE FORECLOSURE PREMIUM TOGETHER WITH THE INTEREST THAT IT WOULD PA Y ON THE REVISED RATE BASIS AND FOUND IT TO BE ADVANTAGEOUS TO THE COMPANY BY P AYING THE FORECLOSURE PREMIUM. THIS ADVANTAGE THAT THE COMPANY WANTED TO BENEFIT FROM IS CLEARLY A WELL-JUDGED BUSINESS DECISION AND THEREFORE, IT IS LAID OUT WHOLLY FOR THE PURPOSES OF ITS BUSINESS. THIS ITSELF IS SUFFICIENT FOR ALLOWING THE CLAIM IN FULL IN THE YEAR IN WHICH IT WAS INCURRED. IN MADRAS INDUSTRIAL INVESTMENT CORPN. LTD. 'S CAS E (SUPRA) THE ASSESSEE DID NOT MAKE ITS CLAIM FOR DEDUCTION OF ENTIRE AMOUNT O F DISCOUNT ALLOWED ON DEBENTURE ISSUES BUT ONLY TO THE EXTENT OF A PORTIO N THAT IT ARRIVED BY DIVIDING THE AMOUNT OF DISCOUNT BY THE NUMBER OF YEARS OF LIFE O F DEBENTURE. THUS, THE APEX COURT WAS NOT ADDRESSED ON THE ALLOWABILITY OF THE ENTIRE AMOUNT IN THE YEAR OF INCURRING AND THEREFORE, THERE WAS NO RULING ON THA T POINT. HOWEVERJ, THE DECISION SIVAKAMI MILLS LTD. S CASE (SUPRA) CLEARLY GOES TO SHOW THAT THE GUARANTEE CHARGES PAID FOR A LOAN THAT IS TO RUN FO R A FEW YEARS IS ALLOWABLE ON THE BASIS OF THE CONTRACT BEING EFFECTED IN THE YEA R. IN THE OTHER CASE, MADRAS AUTO SERVICE (P.) LTD. (SUPRA), THE LESSEE DEMOLISH ED THE ENTIRE BUILDING THAT WAS TAKEN ON A LEASE OF 39 YEARS AND CONSTRUCTED A NEW BUILDING IN ITS PLACE ON THE UNDERSTANDING THAT ON EXPIRY OF THE LEASE THE BUILD ING AS RECONSTRUCTED WOULD BE HANDED OVER TO THE LESSOR FOR WHICH CONSIDERATION A LOWER RENT WAS AGREED TO BY THE LESSOR. THE COURT RULED THAT BY CONSTRUCTING A NEW STRUCTURE IN PLACE OF THE OLD STRUCTURE THE ASSESSEE ONLY DERIVED A BUSINESS ADVANTAGE AND NO ASSET OF ENDURING NATURE WAS ACQUIRED AND HENCE, THE ENTIRE COST OF CONSTRUCTION IS ALLOWABLE AS REVENUE EXPENDITURE IN THE YEAR ITSELF . WE ARE THEREFORE OF THE OPINION THAT THE CLAIM FOR DEDUCTION FOR THE ENTIRE AMOUNT OF FORECLOSURE PREMIUM IN THE ASSESSMENT YEA R IS JUSTIFIED AND WE ACCORDINGLY UPHOLD THE CLAIM. THIS ISSUE IS DECIDED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. 22.12 SO FAR AS THE DECISION RELIED ON BY THE CIT(A ) IN THE CASE OF ASSOCIATED HOTELS INDIA LTD. VS. CIT REPORTED IN 23 ITR 134 WE FIND THE SAME WAS DECIDED BY THE HONBLE PUNJAB HIGH COURT ( CIRCUIT BENCH AT DELHI). THE FACTS IN THAT CASE WERE DISTINGUISHABL E AND NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE. IN THAT CASE DEBENTURES WERE REDEEMED BEFORE MATURITY BY PAYING BONUS AND FRESH DEBENTURES WERE ISSUED BEFORE MATURITY. HOWEVER, IN THE INSTANT CASE, IT IS NOT THE CASE OF THE REVENUE THAT THE ASSESSEE HAS ISSUED FRESH DEBENTURES AFTER PREPAYME NT OF THE DEBENTURES. 30 THEREFORE, THE ABOVE DECISION IS NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE. CONSIDERING THE TOTALITY OF THE FACTS OF THE CASE AND IN VIEW OF THE DECISIONS CITED (SUPRA) WE ARE OF THE CONSIDERED OP INION THAT THE AMOUNT OF RS.43,34,000/- INCURRED BY THE ASSESSEE BEING PREPA YMENT CHARGES PAID IN RESPECT OF DEBENTURES ISSUED ARE EXPENSES INCURRED FOR THE PURPOSE OF BUSINESS AND THE SAME IS AN ALLOWABLE EXPENDITURE. ACCORDINGLY THE ORDER OF THE CIT(A) ON THIS ISSUE IS SET-ASIDE AND GROUND OF APPEAL NO.6 BY THE ASSESSEE IS ALLOWED. 23. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED AND THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS THE 6 TH DAY OF MAY 2013. SD/- SD/- (SHAILENDRA KUMAR YADAV) (R.K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEMBER PUNE, DATED : 6 TH MAY 2013 SATISH COPY OF THE ORDER IS FORWARDED TO : 1. THE ASSESSEE 2. THE DEPARTMENT 3. THE CIT(A)-4, MUMBAI 4. D.R. A BENCH, PUNE 5. GUARD FILE BY ORDER // TRUE COPY // PRIVATE SECRETARY, INCOME TAX APPELLATE TRIBUNAL, PUNE
Other Referred Cases
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Laws Referred To
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1:1 Consultation on Startup Fundraising
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1:1 Consultation on Business Valuations
₹1
1:1 Consultation on SME Listing
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Memorandum Amendment Resolution
₹0
Non-Compete Agreement
₹0
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