ACIT CIR. 7 (1), MUMBAI V. M/s. NOVARTIS INDIA LTD., MUMBAI

ITA 3554/MUM/2005

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 71340 (ITAT-MUMBAI)
• Duration Of Justice: 8 year(s) 4 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-09-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I
• Next Hearing Date: 13-05-2013
• Assessment Year: 1995-1996
• Appeal Filed On: 12-05-2005
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: S D SRIVASTAVA
• Keywords: Capital asset; Depreciation; Opportunity of being heard; Cost of acquisition; Fair market value; Difference of opinion; Valuation report; Capital receipt; Change of opinion; Revenue expenditure; Capital expenditure
• Section: 80HHC; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL I BENCH, M UMBAI ! ! ! ! !' !'!' !' . . $%& $%& $%& $%& , ' ' ' ' ( ( ( ( BEFORE SHRI VIJAY PAL RAO, JM, AND SHRI N. K. BILLA IYA, AM /. I.T.A. NO.498 /MUM/2003, C.O. 183/MUM/2003 ( ' ) ' ) ' ) ' ) *) *) *) *) / ASSESSMENT YEAR: 1995-96) M/S. NOVARTIS INDIA LIMITED SANDOZ HOUSE, SHIVSAR STATE, SANDOZ HOUSE, DR. ANNIE BESANT ROAD, MUMBAI- 400 018. ' ' ' ' / VS. DY. COMMISSIONER OF INCOME TAX, CIRCLE-7(1) MUMBAI 400 020. + ' /. , /. PAN/GIR NO. : 34-002-CZ-6281 ( +- /APPELLANT ) : ( ./+- / RESPONDENT ) /. I.T.A. NO.1749 /MUM/2003 ( ' ) ' ) ' ) ' ) *) *) *) *) / ASSESSMENT YEAR: 1995-96) AND /. I.T.A. NO.3554 /MUM/2005, C.O.361/MUM/2005 ( ' ) ' ) ' ) ' ) *) *) *) *) / ASSESSMENT YEAR: 1995-96) DY. COMMISSIONER OF INCOME TAX, CIRCLE-7(1) MUMBAI 400 020. ' ' ' ' / VS. M/S. NOVARTIS INDIA LIMITED SANDOZ HOUSE, SHIVSAR STATE, SANDOZ HOUSE, DR. ANNIE BESANT ROAD, MUMBAI- 400 018. + ' /. , /. PAN/GIR NO . : 34-002-CZ-6281 ( +- /APPELLANT ) : ( ./+- / RESPONDENT ) ' 0 1' / DATE OF HEARING : 27.08. 2013 23* 0 1' /DATE OF PRONOUNCEMENT : 25.09. 2013 04 / REVENUE BY : SHR I S.D.SRIVASTAVA +-04 5 APPELLANT BY : SHRI J.D.MISTRY/SHRI MADHUR AGARWAL 2 ITA NO.498/MUM/03, 1749/MUM/ 2003 ITA NO.3554/MUM/2005, CO-185 & CO-361 M/S. NOVARTIS INDIA LIMITED 6 6 6 6 / O R D E R PER : N.K. BILLAIYA (AM) THESE ARE APPEALS BY THE ASSESSEE AND ITA 1749/MUM/ 2003 IS CROSS APPEAL BY THE REVENUE FOR THE ASSESSMENT YEAR 1995- 1996. AS THESE APPEALS WERE HEARD TOGETHER AND INVOLVE COMMON ISSUES THERE FORE, THEY ARE DISPOSED OF BY THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE AN D BREVITY. 2. WITH THIS APPEAL THE ASSESSEE HAS RAISED TEN SUB STANTIVE GROUNDS OF APPEAL. GROUND -1 WITH ALL ITS SUB-GROUNDS RELATE T O THE SALE OF ORAL HYGIENE BUSINESS (OHB). IT IS THE CONTENTION OF THE ASSESSE E THAT THE SALE OF OHB IS A SLUMP SALE AND THEREFORE, NOT LIABLE TO ANY CAPITAL GAINS TAX. WHEREAS THE REVENUES CONTENTION IS THAT THE CAPITAL GAINS TAX LIABILITY ARISES AND THEREFORE, ASSESSEE IS LIABLE FOR CAPITAL GAINS TAX. 3. THE ASSESSEE IS ENGAGED IN MANUFACTURE OF DYESTU FFS AND CHEMICALS, PHARMACEUTICALS AND PESTICIDES, AND ALSO MANUFACTUR E OF ADDITIVES, POLYMERS, PIGMENTS AND COMPOSITES. DURING THE COURSE OF THE SCRUTINY ASSESSMENT PROCEEDINGS, THE AO OBSERVED THAT THE ASSESSEE HAS DECLARED CAPITAL GAINS ON SALE OF ORAL HYGIENE BUSINESS (OHB) AND ON SALE OF BHANDUP LAND AMOUNTING TO RS.52,37,28,011/- AND RS.8,32,06,680/- RESPECTIVELY . THE AO FURTHER OBSERVED THAT FOR COMPUTING THE LONG TERM CAPITAL GAIN ON SA LE OF OHB THE ASSESSEE HAS TAKEN GROSS CONSIDERATION FOR SALE AT RS.99,54,00, 000/- FROM WHICH IT DEDUCTED EXPENSES IN CONNECTION WITH SALE AT RS.22,98,0389/- . THE ASSESSEE FURTHER DEDUCTED THE COST OF ACQUISITION BY TAKING FAIR MAR KET VALUE AS ON 1.4. 1981 AT RS.17,32,40,000/- AND APPLYING INDEXED COST VALUE D EDUCTED THE INDEXED COST OF ACQUISITION AT RS.44,86,91,600/-, DETERMINED BY APP LYING THE UNIVERSALLY ACCEPTED METHOD OF VALUATIONS WHICH IS DISCOUNTED C ASH FLOW(DCF) METHOD WHICH IS BASED ON THE VALUATION ADVISORY REPORT BY M/S ARTHUR ANDERSON. THE AO WAS OF THE FIRM BELIEF THAT THE METHOD OF THE VA LUATION ON THE BASIS OF DISCOUNTED CASH FLOW(DCF) WAS OPEN TO QUESTION. THE AO SOUGHT CLARIFICATION FROM THE ASSESSEE, THE ASSESSEE FILED A DETAILED RE PLY IN SUPPORT OF THE ADOPTION 3 ITA NO.498/MUM/03, 1749/MUM/ 2003 ITA NO.3554/MUM/2005, CO-185 & CO-361 M/S. NOVARTIS INDIA LIMITED OF DCF METHOD FOR DETERMINING THE FMV AS ON 1.4.198 1. THE AO DISCARDED THE VALUE ADOPTED BY THE ASSESSEE AND WENT ON TO DETERM INE THE FAIR MARKET VALUE AS ON 1.4.1981. ON THE BASIS OF SHARE PRICE OF THE ASSESSEE COMPANY QUOTED ON THE STOCK EXCHANGE. THE AO DETERMINED THE COSTS OF ASSETS BY TAKING THE CONTRIBUTION OF OHB IN THE TOTAL MARKET RATE OF THE ASSESSEE AND THEN APPLYING THE RATIO SO DETERMINED ON THE EQUITY SHARES EMPLOY ED IN THE BUSINESS OF OHB AS PROPORTION TO SHARE OF OHB TOTAL BUSINESS. THUS , ACCORDING TO AO , OUT OF TOTAL NO. OF EQUITY SHARES OF 13,89,375 SALE OF OH B IS TAKEN AT1,64,573 SHARES AND COMPUTED THE INDEXED COST AT RS. 7.276 CRORES A ND COMPUTED THE LONG TERM CAPITAL GAINS AT RS. 89.966 CRORES AS AGAINST RS.52 ,37,28,011/- RETURNED BY THE ASSESSEE. THE ASSESSEE CARRIED THIS MATTER BEFORE T HE CIT(A). 4. BEFORE THE CIT(A), THE ASSESSEE TOOK AN ADDITION AL PLEA THAT THE SALE SHOULD BE TREATED AS A SLUMP SALE NOT LIABLE FOR AN Y CAPITAL GAINS TAX. 5. AFTER CONSIDERING THE FACTS AND SUBMISSIONS MADE BY THE ASSESSEE THE CIT(A) WAS CONVINCED THAT THE AO RIGHTLY REJECTED D CF METHOD WHILE CONSIDERING THE FAIR MARKET VALUE (FMV) ON ORAL HYGIENE BUSINES S (OHB) AS ON 1.4. 1981. HOWEVER, AT THE SAME TIME THE CIT(A) WAS OF THE OPI NION THAT THE MARKET CAPITALIZATION METHOD FOR DETERMINING THE COSTS OF ACQUISITION OF SHARES RELATING TO OHB AS ADOPTED BY THE AO IS ALSO NOT CORRECT. 6. AFTER HAVING FORMED OPINION REGARDING INCORRECTN ESS OF BOTH THE METHODS , ONE ADOPTED BY THE ASSESSEE AND THE OTHER ADOPTED B Y THE AO, THE CIT(A) INVOKED ENHANCEMENT POWERS AND ISSUED A NOTICE OF E NHANCEMENT U/S 251 OF THE ACT AND PROPOSED TO RE-WORKING THE TAXABLE PROF ITS AND CAPITAL GAINS BASED ON HIS OBSERVATIONS ON THE ENTRIES RECORDED BY THE PURCHASER M/S. COLGATE PALMOLIVE (I) LTD., WHEREIN AN ITEMIZED ENTRIES HAV E BEEN MADE IN RESPECT OF THE PURCHASE OF OHB FROM THE ASSESSEE. THIS ITEMIZE DET AILS TAKEN BY THE CIT(A) FROM THE RECORDS OF COLGATE PALMOLIVE (I) LTD. READ AS UNDER. (I) GOODWILL RS. 270.76 MILLION (II) TECHNICAL KNOWHOW RS.498.70 MILLION 4 ITA NO.498/MUM/03, 1749/MUM/ 2003 ITA NO.3554/MUM/2005, CO-185 & CO-361 M/S. NOVARTIS INDIA LIMITED (III) COPYRIGHTS & DESIGNS RS.131.29 MILLION (IV) TRADEMARK RS. 2.22 MILLION (V) PLANT AND MACHINERY RS. 90.36 MILLION (VI) INVENTORIES OF STOCK IN TRADE RS. 84.33 MILLION IN RESPONSE TO THIS THE ASSESSEE FILED ADDITIONAL G ROUND BY WHICH IT CLAIMED THAT THE ENTIRE SALE IS A SLUMP SALE AND TH E RESULTANT PROFIT IS NOT TAXABLE. THE CIT(A) ADMITTED THE ADDITIONAL GROUND. THE ASSESSEE FURTHER OBJECTED TO ENHANCEMENT NOTICE STATING THAT IT WOUL D AMOUNT TO CHANGE OF OPINION AND SUCH CHANGE OF OPINION CANNOT BE CONSID ERED IN THE APPELLATE PROCEEDINGS AND THEREFORE, IT IS WITHOUT JURISDICTI ON. THE CIT(A) OUTRIGHTLY REJECTED THIS CONTENTION OF THE ASSESSEE. 7. THE ASSESSEE STRONGLY SUBMITTED BEFORE THE CIT(A ) THAT THE RATIO LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF B.C. SRINIVASA SETTY (128 ITR 294) SQUARELY APPLY ON THE FACTS OF THE CASE AND THEREFO RE, NO PROFIT HAS RESULTED WHICH CAN BE SUBJECT TO TAX. THE CIT(A) RE JECTED THIS PLEA OF THE ASSESSEE CONSIDERING THE DECISION OF THE HONBLE SU PREME COURT IN THE CASE OF SUN ENGINEERING (198 ITR 297 AT PAGE 320) . THE CIT(A) FURTHER DISMISSED THE ADDITIONAL PLEA TAKEN BY THE ASSESSEE TO CONSIDER T HE ENTIRE TRANSACTION AS A SLUMP SALE HOLDING IT TO BE A CHANGE OF OPINION AND AFTERTHOUGHT , TAKING A LEAF OUT OF THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. ARTEX MANUFACTURING COMPANY (227 ITR 260). 8. THE CIT(A) WAS OF THE FIRM BELIEF THAT IF A PART ICULAR PRICE IS ATTRIBUTABLE TO A PARTICULAR ITEM THEN THE ENTIRE AMOUNT WOULD BE C HARGEABLE TO TAX. THE CIT(A) WAS OF THE FIRM BELIEF THAT THE DECISION OF THE HON BLE SUPREME COURT IN THE CASE OF ARTEX MANUFACTURING COMPANY (SUPRA) IS CLEARLY A PPLICABLE TO THE FACTS OF THE PRESENT APPEAL. 5 ITA NO.498/MUM/03, 1749/MUM/ 2003 ITA NO.3554/MUM/2005, CO-185 & CO-361 M/S. NOVARTIS INDIA LIMITED 9. THE CIT(A) OBSERVED THAT THOUGH THE AGREEMENT FO R SALE DOES NOT INDICATE THE INDIVIDUAL COMPONENTS SALE PRICE. BUT THERE IS OVERWHELMING EVIDENCE AVAILABLE ON RECORD TO SHOW THAT THE SALE PRICE REC EIVED WAS ATTRIBUTABLE TO DIFFERENT COMPONENTS OF THE SO CALLED SLUMP SALE. 10. THE CIT(A) REJECTED THE CLAIM OF SLUMP SALE BY HOLDING THAT THE ASSESSEE HAS SOLD LAND AND BHANDUP UNIT SEPARATELY AND HAS OFFERED CAPITAL GAINS SEPARATELY. THE CIT(A) FURTHER DREW SUPPORT FROM TH E DECISION OF THE TRIBUNAL IN THE CASE OF M/S. PREMIER AUTOMOBILES LTD. IN ITA 35 80/MUM/1999. 11. THE CIT(A) CONCLUDED THAT BY APPLYING THE DECIS ION OF THE TRIBUNAL (SUPRA) TO THE FACTS OF THE PRESENT APPEAL, THE CLAIM OF SL UMP SALE IS A BOGUS AND FALLACIOUS CLAIM BASED ON ATTEMPTED OBFUSCATION WIT H A VIEW TO MISLEAD THE REVENUE AND EVADE PAYMENT OF TAX ON THE SALE CONSID ERATION OF OHB WHICH IS OTHERWISE CHARGEABLE TO TAX. 12. AFTER REJECTING ALL THE CONTENTIONS OF THE ASSE SSEE THE CIT(A) WENT ON TO COMPUTE THE CAPITAL GAINS AS EXHIBITED ON PAGE 21 O F HIS ORDER AND ENHANCED THE TOTAL GAINS LONG TERM AND SHORT TERM TO RS. 98.01 C RORES AS AGAINST RS.89.96 CRORES COMPUTED BY THE AO. 13. THE ASSESSEE IS BEFORE US, AGGRIEVED BY THIS FI NDINGS OF THE CIT(A). 14. LEARNED COUNSEL FOR THE ASSESSEE EXPLAINED THE TRANSACTION OF THE SALE OF OHB AND SUBMITTED THAT IT IS NOTHING BUT A SLUMP SA LE AND THEREFORE, NOT LIABLE TO TAX. THE LEARNED COUNSEL STRONGLY CONTENDED THA T ONCE THE CIT(A) HAVING ADMITTED THE ADDITIONAL GROUND HE SHOULD HAVE TREAT ED THE SALE AS A SLUMP SALE. THE COUNSEL FURTHER SUBMITTED THAT THE CIT(A) GROSS LY ERRED IN TAKING ITEMIZED VALUE OF ITEMS BASED ON THE ENTRIES RECORDED IN THE BOOKS OF THE PURCHASER M/S COLGATE PALMOLIVE (I) LTD. IT IS THE SAY OF THE COU NSEL THAT NO ITEMIZED BILLING HAS BEEN TAKEN IN THE SALE TRANSACTION OF OHB, WHICH IS VERY MUCH EVIDENT FROM THE 6 ITA NO.498/MUM/03, 1749/MUM/ 2003 ITA NO.3554/MUM/2005, CO-185 & CO-361 M/S. NOVARTIS INDIA LIMITED SALE AGREEMENT TO SUBSTANTIATE HIS CLAIM THAT ON SL UMP SALE THERE IS NO LIABILITY FOR TAX , THE COUNSEL RELIED UPON THE DECISION OF T HE HONBLE SUPREME COURT IN THE CASE OF PNB FINANCE LIMITED, 307 ITR 75(SC), HONBLE JURISDICTIONAL HIGH COURT OF MUMBAI IN THE CASE OF POLYCHEM LIMITED 343 ITR 115 (BOM). 15. PER CONTRA THE LEARNED DR STRONGLY OBJECTED TO THE ADDITIONAL PLEA OF THE ASSESSEE. IT IS THE SAY OF THE DR THAT THE ASSESSEE ITSELF HAS SHOWN CAPITAL GAINS ARISING FROM THE TRANSFER OF OHB, THEREFORE, AT THI S STAGE, THE ASSESSEE CANNOT RETRACT FROM WHAT HAS BEEN RETURNED BY IT IN ITS RE TURN OF INCOME. IT IS THE SAY OF THE DR THAT THE ASSESSEE IS TAKING SHELTER BEHIND T HE SUBSEQUENT RULINGS OF THE HIGH COURT THOUGH. AT THE TIME OF THE FILING OF THE RETURN THE INTENTION OF THE ASSESSEE WAS ABSOLUTELY CLEAR TO OFFER CAPITAL GAIN S ARISING OUT OF THE RESULTANT TRANSFER OF OHB . THE DR CONTENDED THAT THE CIT(A) HAS RIGHTLY COMPUTED THE CAPITAL GAINS TAX LIABILITY BY ADOPTING THE ITEMIZE D VALUE OF EACH ITEM. THE DR STRONGLY SUBMITTED THAT THE CIT(A) HAS BASED HIS FI NDING ON THE MANNER IN WHICH THE ENTRIES HAVE BEEN ACCOUNTED FOR IN THE BOOKS OF COLGATE AND PALMOLIVE AND PLEADED THAT THE FINDING OF THE CIT(A) DESERVES TO BE CONFIRMED. 16. WE HAVE HEARD THE RIVAL SUBMISSIONS AT LENGTH, CAREFULLY PERUSED THE ORDERS OF THE LOWER AUTHORITIES AND THE RELEVANT EV IDENCES BROUGHT ON RECORD IN THE FORM OF PAPER BOOK. WE HAVE ALSO CONSIDERED THE DECISIONS RELIED UPON BY BOTH SIDES. IT IS AN UNDISPUTED FACT THAT WITH EFFE CT FROM 1.10.1994 ASSESSEE SOLD ITS OHB TO COLGATE PALMOLIVE (I) LTD. IN TERMS OF A GREEMENT DATED 16.08.1994. IT IS ALSO NOT IN DISPUTE THAT THE ENTIRE OHB CONSTITU TED CAPITAL ASSETS BY ITSELF. THE ONLY POINT OF DISPUTE IS TO DECIDE WHETHER IT I S A SLUMP SALE AS CONTENDED BY THE ASSESSEE OR AN ITEMIZED SALE AS CONTENDED BY TH E REVENUE. A PERUSAL OF THE SALE AGREEMENT SHOWS THAT THE BUSINESS SOLD INCLUDE D: (A) GOODWILL (B) ALL TANGIBLE ASSETS INCLUDING THE ENHANCE PACKING , M ACHINERY AND EQUIPMENTS (C) ALL RIGHTS, TITLE , INTEREST , BENEFIT AND ADVANTAG ES IN UNDER ALL AGREEMENTS OR ARRANGEMENTS PERTAINING AND RELATING TO OR CONCLUDE D WITH THE BUSINESS, AUTHORIZED DEALERS, MANUFACTURERS (D) DISTRIBUTORS AND CUSTOMERS (E) ALL RIGHTS , 7 ITA NO.498/MUM/03, 1749/MUM/ 2003 ITA NO.3554/MUM/2005, CO-185 & CO-361 M/S. NOVARTIS INDIA LIMITED TITLE, INTEREST AND BENEFITS IN RELATION TO COPY RI GHTS, TRADES, DESIGN AND TRADE MARKS CONNECTED WITH THE BUSINESS (F) ALL RIGHTS , TITLE , INTEREST AND BENEFITS IN RESPECT OF PROCESS KNOW HOW TECHNOLOGY (H) ALL OTHE R IMMOVABLES , INCLUDING TANGIBLE AND INTANGIBLE ASSETS RIGHT AND INTEREST O F ANY NATURE. THE SALE AGREEMENT FURTHER STATED THAT IN CONSIDERATION OF T HE SALE OF OHB TO COLGATE PALMOLIVE (I) LIMITED INDIA AS GOING CONCERN , CPL SHALL PAY TO ASSESSEE A SUM OF RS. 99.54 CRORES. 17. A PERUSAL OF SALE AGREEMENT AT PAGE 1 TO 82 OF THE PAPER BOOK SHOWS THAT THE SALE CONSIDERATION IS NOT ITEMIZED WHICH MEANS THAT IT IS NOT A CASE OF ITEMIZED SALE. IF IT IS THE CASE OF NO SALE OF IT EMIZED ASSETS, WE HAVE TO HOLD THAT THE TRANSACTION AMOUNTS TO SLUMP SALE AS HELD BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF PREMIER AUTOMOBILES LTD.[SUPRA]. HERE WE WOULD LIKE TO STATE THAT THE CIT[A] HAS BASED HIS FINDINGS ON THE DECISION OF THE TRIBUNAL IN THE CASE OF PREMIER AUTOMOBILES LTD. HOWEVER, THE SAID DECISION OF THE TRIBUNAL HAS BEEN REVERSED BY THE JURISDICTIONAL HIGH COURT IN 264 ITR 193 WHEREIN HONBLE JURISDICTION HIGH COURT HAS HELD IF A PERUSAL OF THE DOCUMENTS CONNECTED WITH THE TR ANSACTION SHOWED THAT THE INTENTION OF THE PARTIES IN THE COMMERCIAL SENS E WAS TO TRANSFER THE BUSINESS AS A WHOLE FOR A LUMP SUM CONSIDERATION TH AT THE PARTIES DID NOT INTEND TO MAKE SALE OF ITEMIZED ASSETS THE TRANSACT ION WAS A SLUMP SALE . THUS, THE VERY DECISION ON WHICH THE CIT(A) HAS BA SED HIS FINDING AS GONE IN FAVOUR OF THE ASSESSEE AND THE JURISDICTIONAL HIGH COURT WHILE DECIDING THE ISSUE HAS ALSO CONSIDERED THE DECISION OF THE HONB LE SUPREME COURT IN THE CASE OF CIT VS. ARTEX MANUFACTURING COMPANY (227 ITR 260) , WHICH IS ANOTHER DECISION ON WHICH THE CIT(A) HAS BASED HIS FINDING . WITH THIS DECISION OF THE JURISDICTIONAL HIGH COURT GOING IN FAVOUR OF THE AS SESSEE, THE TRANSACTION HAS TO BE TAKEN A SLUMP SALE AND THE CAPITAL GAINS HAVE TO BE COMPUTED ACCORDINGLY AS PER THE PROVISIONS OF SECTION 45 TO 50. THE CHARGEA BILITY HAS TO BE DECIDED IN THE LIGHT OF THE RATIO LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF PNB FINANCE LIMITED (SUPRA) WHEREIN IT HAS BEEN HELD: 8 ITA NO.498/MUM/03, 1749/MUM/ 2003 ITA NO.3554/MUM/2005, CO-185 & CO-361 M/S. NOVARTIS INDIA LIMITED AS REGARDS APPLICABILITY OF SECTION 45 IS CONCERNED , THREE TESTS ARE REQUIRED TO BE APPLIED. IN THIS CASE, SECTION 45 AP PLIES. THERE IS NO DISPUTE ON THAT POINT. THE FIRST TEST IS THAT THE CHARGING SECTION AND THE COMPUTATION PROVISIONS ARE INEXTRICABLY LINKED. THE CHARGING SECTION AND THE COMPUTATION PROVISIONS TOGETHER CON STITUTED AN INTEGRATED CODE. THEREFORE, WHERE THE COMPUTATION PROVISIONS CANNOT APPLY, IT IS EVIDENT THAT SUCH A CASE WAS NOT INTE NDED TO FALL WITHIN THE CHARGING SECTION, WHICH, IN THE PRESENT CASE, IS SECTION 45. THAT SECTION CONTEMPLATES THAT ANY SURPLUS ACCRUING ON TRANSFER OF CAPITAL ASSETS IS CHARGEABLE TO TAX IN THE PREVIOUS YEAR I N WHICH TRANSFER TOOK PLACE. IN THIS CASE, TRANSFER TOOK PLACE ON JU LY 18, 1969. THE SECOND TEST WHICH NEEDS TO BE APPLIED IS THE TEST O F ALLOCATION/ATTRIBUTION. THIS TEST IS SPELT OUT IN T HE JUDGMENT OF THIS COURT IN MUGNEERAM BANGUR AND CO. (LAND DEPARTMENT ) [1965] 57 ITR 299. THIS TEST APPLIES TO A SLUMP TRANSACTION. THE OBJECT BEHIND THIS TEST IS TO FIND OUT WHETHER THE SLUMP PRICE W AS CAPABLE OF BEING ATTRIBUTABLE TO INDIVIDUAL ASSETS, WHICH IS ALSO K NOWN AS ITEM-WISE EARMARKING. THE THIRD TEST IS THAT THERE IS A CONC EPTUAL DIFFERENCE BETWEEN AN UNDERTAKING AND ITS COMPONENTS. PLANT, M ACHINERY AND DEAD STOCK ARE INDIVIDUAL ITEMS OF AN UNDERTAKING. A BUSINESS UNDERTAKING CAN CONSIST OF NOT ONLY TANGIBLE ITEMS BUT ALSO INTANGIBLE ITEMS LIKE, GOODWILL, MAN POWER, TENANCY RIGHTS AND VALUE OF BANKING LICENCE. HOWEVER, THE COST OF SUCH ITEMS (INTANGIBL ES) IS NOT DETERMINABLE. IN THE CASE OF CIT V. B. C. SRINIVASA SETTY REPORTED IN [1981] 128 ITR 294, THIS COURT HELD THAT SECTION 4 5 CHARGES THE PROFITS OR GAINS ARISING FROM THE TRANSFER OF A CAPITAL ASS ET TO INCOME-TAX. IN OTHER WORDS, IT CHARGES SURPLUS WHICH ARISES ON TH E TRANSFER OF A CAPITAL ASSET IN TERMS OF APPRECIATION OF CAPITAL VALUE OF THAT ASSET. IN THE SAID JUDGMENT, THIS COURT HELD THAT THE ASSET MUST BE ONE WHICH FALLS WITHIN THE CONTEMPLATION OF SECTION 45. IT I S FURTHER HELD THAT, THE CHARGING SECTION AND THE COMPUTATION PROVISIONS TO GETHER CONSTITUTE 9 ITA NO.498/MUM/03, 1749/MUM/ 2003 ITA NO.3554/MUM/2005, CO-185 & CO-361 M/S. NOVARTIS INDIA LIMITED AN INTEGRATED CODE AND WHEN IN A CASE THE COMPUTAT ION PROVISIONS CANNOT APPLY, SUCH A CASE WOULD NOT FALL WITHIN SE CTION 45. IN THE PRESENT CASE, THE BANKING UNDERTAKING, INTER ALIA, INCLUDED INTANGIBLE ASSETS LIKE, GOODWILL, TENANCY RIGHTS, MAN POWER AN D VALUE OF BANKING LICENCE. ON THE FACTS, WE FIND THAT ITEM-WI SE EARMARKING WAS NOT POSSIBLE. ON THE FACTS, WE FIND THAT THE COMPEN SATION (SALE CONSIDERATION) OF RS. 10.20 CRORES WAS NOT ALLOCABL E ITEM-WISE AS WAS THE CASE IN ARTEX MANUFACTURING CO. [1997] 227 ITR 260. FOR THE AFORESTATED REASONS, WE HOLD THAT ON THE FA CTS AND CIRCUMSTANCES OF THIS CASE, WHICH CONCERNS THE ASSESSMENT YEAR 1970-71, I T WAS NOT POSSIBLE TO COMPUTE CAPITAL GAINS AND, THEREFORE, THE SAID AMOU NT OF RS. 10.20 CRORES WAS NOT TAXABLE UNDER SECTION 45 OF THE 1961 ACT. ACCOR DINGLY, THE IMPUGNED JUDGMENT IS SET ASIDE. 18. TO SUM UP CONSIDERING THE FACTS OF THE CASE IN TOTALITY IN LINE WITH THE SALE AGREEMENT AND IN THE LIGHT OF THE DECISIONS DISCUSS ED HEREIN ABOVE. WE HAVE NO HESITATION TO HOLD THAT THE TRANSACTION OF THE SALE OF OHB IS A SLUMP SALE AND THAT BEING SO IN OUR HUMBLE OPINION THERE CANNOT BE ANY CAPITAL GAIN TAX LIABILITY IN THE LIGHT OF THE RATIO LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF PNB FINANCE LIMITED (SUPRA). GROUND NO. 1 WITH ALL ITS SUB-GROUND IS ALLOWED. THIS WILL ALSO DECIDE THE ADDITIONAL GROUNDS AND TH E CROSS OBJECTIONS OF THE ASSESSEE. 19. GROUND 2 RELATES TO NON COMPETE FEES OF RS.31.4 5 CRORES TREATED AS REVENUE RECEIPT AS AGAINST THE CLAIM OF THE ASSESSE E IT BEING CAPITAL RECEIPT AND THEREFORE NOT SUBJECT TO TAX. 20. WHILE SCRUTINIZING THE RETURN OF INCOME, THE AO OBSERVED THAT AN AMOUNT OF RS.31.45 CRORES WAS TAKEN AS EXEMPT WHICH WAS TH E CONSIDERATION RECEIVED ON ACCOUNT OF NON-COMPETE FEES FROM COLGATE PALMOLI VE(INDIA) LTD (CPL). WHEN QUESTIONED BY THE AO REGARDING THE NATURE OF THIS T RANSACTION, THE ASSESSEE INFORMED THAT IN TERMS OF NON COMPETE AGREEMENT MAD E ON 01.10.1994 WITH 10 ITA NO.498/MUM/03, 1749/MUM/ 2003 ITA NO.3554/MUM/2005, CO-185 & CO-361 M/S. NOVARTIS INDIA LIMITED CPL, THE IMPUGNED AMOUNT OF RS.31.45 CRORES WAS PAY ABLE BY CPL TO THE ASSESSEE AND THE SAME HAS BEEN TAKEN AS EXEMPT IN V IEW OF THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF BEST AND CO. ( PVT.) LTD. 60 ITR 11. IT WAS FURTHER EXPLAINED BY THE ASSESSEE THAT IN TERMS OF THE AGREEMENT DATED 16.08.1994, THE ASSESSEE AGREED TO SELL M/S CPL THE BUSINESS OF MANUFACTURE, DISTRIBUTION, AND SALE OF ORAL HYGIENE PRODUCTS AS A GOING CONCERN. FOLLOWING THIS SALE, CPL REQUIRED THE ASSESSEE TO REFRAIN FRO M COMPETING WITH IT IN THE SAID BUSINESS FOR A PERIOD OF 5 YEARS, TO WHICH THE COM PANY HAS AGREED TO ON CERTAIN TERMS AND CONDITIONS AND FOR THE CONSIDERATION AS S ET OUT IN THE NON- COMPETITION AGREEMENT. THE ASSESSEE AGREED THAT DU RING THE TERM OF AGREEMENT, IT WILL NOT DIRECTLY OR INDIRECTLY CARRY ON IN INDI A THE BUSINESS OF ORAL HYGIENE. IN LIEU OF THIS NON COMPETE AGREEMENT, CPL PAID RS.31. 45 CRORES AS A COMPENSATION FOR CURTAILING A SOURCE OF INCOME OF T HE ASSESSEE AND HENCE THE COMPENSATION RECEIVED AS SUCH WAS TREATED AS A CAPI TAL RECEIPT BY THE ASSESSEE . 21. THE ABOVE SUBMISSION DID NOT FIND ANY FAVOUR FR OM THE AO. THE AO HAS FORMED A BELIEF THAT NON COMPETITION AGREEMENT ON T HE FACTS OF THE CASE IS A COLOURABLE TAX DEVICE AND NOT PART OF LEGAL TAX PL ANNING. IN TERMS OF THE RULING OF MCDOWELL AND CO. LTD. 154 ITR 148 (SC). ACCORDI NG TO THE AO, SINCE THERE IS NEITHER ANY LOGIC NOR PRUDENCE TO BREAK UP THE MARK ET CAPITALIZED VALUE INTO SOME PARTS EXCEPT EVASION OF TAX, THIS NON COMPETE AGREEMENT IS BROUGHT TO TAX AS INCOME FROM BUSINESS U/S 28 OF THE ACT. 22. ASSESSEE STRONGLY AGITATED THIS ISSUE BEFORE TH E CIT(A) BUT WITHOUT ANY SUCCESS. IT WAS STRONGLY CONTENDED BEFORE THE CIT(A ) THAT THE NON COMPETE FEES HAVE BEEN SUBJECTED TO TAX ONLY W.E.F. 01.04.2003 B Y AN AMENDMENT TO CLAUSE (VA) SECTION 28 OF THE ACT THROUGH AN AMENDMENT BRO UGHT ABOUT BY THE FINANCE ACT IN 2002. 23. THE CIT(A) WAS OF THE OPINION THAT THE NON COMP ETE AGREEMENT IS ONLY FOR A PERIOD OF 5 YEARS AND NOT A PERMANENT BAN. IN SUC H CIRCUMSTANCES, IT CAN NOT BE CALLED AS CAPITAL RECEIPT ESPECIALLY WHEN THE SO CALLED COMPENSATION HAS BEEN CALCULATED ON THE BASIS OF FUTURE REVENUE EARNINGS. ACCORDING TO THE CIT(A) IN 11 ITA NO.498/MUM/03, 1749/MUM/ 2003 ITA NO.3554/MUM/2005, CO-185 & CO-361 M/S. NOVARTIS INDIA LIMITED THE NORMAL COURSE OF BUSINESS, SUCH EARNINGS ARE RE VENUE IN NATURE. THE CIT(A) FURTHER OBSERVED THAT THE AMENDED PROVISIONS IN THI S REGARD HAVE TO BE TREATED AS A RULE OF EVIDENCE AND AS DECLARATORY IN NATURE . ACCORDING TO THE CIT(A), THESE PROVISIONS CAN ALWAYS BE TREATED TO HAVE EXIS TED EVEN DURING THE PERIOD PRIOR TO 01.04.2003 ON THE BASIS OF THE FACT THAT T HESE PROVISIONS MERELY DECLARE THE LAW MORE ELABORATELY. THE CIT(A) DREW SUPPORT FROM THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF M/S PODDAR CHE MICALS LTD. 226 ITR 625 AND ACCORDINGLY THE ADDITION OF RS. 31.45 CRORES ON ACCOUNT OF NON COMPETE CONSIDERATION WAS CONFIRMED. 24. AGGRIEVED BY THIS FINDING OF THE CIT(A), ASSESS EE IS BEFORE US. COUNSEL FOR THE ASSESSEE TOOK US THROUGH VARIOUS CLAUSES OF THE NON COMPETE AGREEMENT AND SUBMITTED THAT THE ASSESSEE HAS REFRAINED FROM COMP ETING SAME BUSINESS WHICH HAS BEEN SOLD TO CPL FOR WHICH IT HAS RECEIVED THIS COMPENSATION. BY DOING THIS THE ASSESSEE HAS GIVEN UP ONE OF ITS SOURCE OF INCO ME AND THEREFORE IT HAS TO BE TREATED AS A CAPITAL RECEIPT. PER CONTRA THE LD. DR STRONGLY SUPPORTED THE ORDERS OF THE LOWER AUTHORITIES. 25. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS RELEVANT MATERIAL ON RECORD. THE QUESTION ARISES IS WHETHER THE AMOUNT R ECEIVED BY THE ASSESSEE AS NON-COMPETE FEE IS A REVENUE OR CAPITAL IN NATURE F OR THE PURPOSE OF TAXABILITY. THE ASSESSING OFFICER TAXED THIS AMOUNT AS A REVENU E RECEIPT IN THE HANDS OF THE ASSESSEE ON THE GROUND THAT THIS CONSIDERATION IS R ECEIVED BY THE ASSESSEE FOR KEEPING ITSELF AWAY FROM BUSINESS ACTIVITIES IN A P ARTICULAR LINE OF BUSINESS FOR A LIMITED PERIOD AND FOR A LIMITED PURPOSE. THE AO WA S OF THE VIEW THAT THE ASSESSEES DECISION TO DIVEST ITSELF FROM ORAL HYGI ENE BUSINESS (OHB) GUIDED BY THE DYNAMICS OF COMPETITIVE BUSINESS ENVIRONMENT WH ERE THE ASSESSEE FOUND ITSELF IN NOT A GOOD POSITION TO COMPETE WITH OTHER S. THUS, THE AO HAS OBSERVED THAT THE RECEIPT OF NON-COMPETE FEE IS SOLELY TO PR OTECT THE VALUE OF THE ASSESSEE COMPANY FOR ITS OWN SHAREHOLDERS I.E. PROFITABILITY AND FUTURE INCOME FOR FIVE YEARS. THE ASSESSING OFFICER RELIED UPON THE VARIOU S DECISIONS TO SUPPORT ITS FINDING. ON APPEAL, THE CIT(A) HAS CONCURRED WITH T HE VIEW OF THE AO. THE CIT(A) 12 ITA NO.498/MUM/03, 1749/MUM/ 2003 ITA NO.3554/MUM/2005, CO-185 & CO-361 M/S. NOVARTIS INDIA LIMITED TOOK NOT OF THE FACT THAT AS PER THE ANNUAL REPORT OF THE ASSESSEE AND OBSERVED THAT THE SO-CALLED NON-COMPETE AGREEMENT DATED 1.10 .1994 CANNOT BE INTERPRETED AS AN ACT OF THE ASSESSEE TO VOLUNTARIL Y REFRAIN FROM COMPETING WITH COLGATE PALMOLIVE (I) LTD., THE ASSESSEE WAS OTHERW ISE COMPELLED BY THE MARKET FORCES TO WIND-UP ITS OHB. THOUGH THE CIT(A) HAS AL SO HELD THAT THE AMENDMENT U/S 28 REGARDING TAXABILITY OF NON-COMPETE FEE BY F INANCE ACT 2002, IS DECLARITY IN NATURE HOWEVER, IT IS SETTLED THAT THE AMENDMENT U/S 28 WITH EFFECT FROM 1.4.2003 IS PROSPECTIVE AND NOT RETROSPECTIVE. THE ISSUE WHETHER THE RECEIPT ON ACCOUNT OF NON-COMPETE FEE IS REVENUE OR CAPITAL IN NATURE HAS TO BE DECIDED ON THE BASIS OF THE FACTS AND CIRCUMSTANCES OF EACH CA SE AS PER THE PRE-AMENDMENT PROVISIONS OF THE ACT. IT IS SETTLED PROPOSITION ON THE POINT THAT IF THE COMPENSATION/RECEIPT FOR REFRAIN FROM CARRYING ON B USINESS WHICH EFFECTS THE PROFIT MAKING STRUCTURE OF THE ASSESSEE THAN SUCH R ESTRICTION WILL LEAD TO LOSS OF ENDURING TRADING ASSET BY DEPRIVING THE ASSESSEE FR OM THE FUTURE INCOME AND THE RECEIPT WOULD BE CAPITAL IN NATURE. IF THE PROFIT M AKING STRUCTURE IS NOT AFFECTED AS NO LOSS OF SOURCE OF INCOME RESULTED BY PUTTING SUCH RESTRICTIONS UNDER THE NEGATIVE COVENANT THEN THE RECEIPT FOR AGREEING SUC H RESTRICTIVE COVENANT WOULD BE REVENUE. THEREFORE, THE PRINCIPLE IS BASED ON TH E TEST WHETHER AGREEING TO THE NEGATIVE COVENANT, THE ASSESSEE IS DEPRIVED OF A SO URCE OF FUTURE EARNINGS BEING THE STRUCTURE OF THE WHOLE BUSINESS OR NOT. IN THE CASE IN HAND THE CIT(A) HAS REPRODUCED THE ITEM NO. 10 OF 46 ANNUAL REPORT OF T HE ASSESSEE COMPANY WHEREIN THE FACTS AND CIRCUMSTANCES ARE DESCRIBED U NDER WHICH THE ASSESSEE TOOK THE DECISION TO DIVEST THE ACTIVITY OF ORAL HY GIENE BUSINESS AS UNDER:- MEMBERS ARE AWARE THAT WHILE THE COMPANY HAS BEEN IN THE ORAL HYGIENE BUSINESS (VIZ. TOOTHPASTE, TOOTHBRUSH ETC.) IN INDIA FOR SEVERAL YEARS, THIS DOES NOT FORM PART OF THE CIBA-GEIGY WO RLDWIDE OPERATIONS. AS A RESULT, THE INDIAN COMPANY DOES NOT HAVE ACCES S TO NEW DEVELOPMENTS, INNOVATION IN THIS FIELD. THIS BUSINE SS WILL INCREASINGLY FACE EVEN TOUGHER COMPETITION IN THE FUTURE FROM IN TERNATIONAL BRANDS IN THE EMERGING COMPETITIVE ENVIRONMENT. EXPLORATORY D ISCUSSIONS WERE HELD WITH LEADING INTERNATIONAL COMPANIES IN THE OR AL HYGIENE SECTOR WITH A VIEW TO DIVEST THIS ACTIVITY AND USE THE RES OURCES FOR THE\CORE BUSINESS OF THE COMPANY, IN WHICH CIBA-GEIGY HAS WO RLDWIDE OPERATIONS EXPERTISE. ARISING OUT OF THESE DISCUSSI ONS AIMED AT 13 ITA NO.498/MUM/03, 1749/MUM/ 2003 ITA NO.3554/MUM/2005, CO-185 & CO-361 M/S. NOVARTIS INDIA LIMITED RESTRUCTURING THE BUSINESS OF THE COMPANY, IS THE P ROPOSAL WHICH IS THE SUBJECT MATTER OF THIS RESOLUTION. IT IS PROPOSED T O TRANSFER THE UNDERTAKING OF THE ORAL HYGIENE BUSINESS AS A GOING CONCERN TO COLGATE PALMOLIVE (1) LTD. (CPI) FOR A CONSIDERAT ION OF RS. 99.54 CRORES (RS. NINETY NINE CRORES AND FIFTY FOUR LAKHS ONLY) IN TERMS OF THE AGREEMENT DATED 16TH AUGUST, 1994 ENTERED INTO BETW EEN THE COMPANY AND CPI. ADDITIONALLY, THE COMPANY IS ENTER ING INTO A NON- COMPETE AGREEMENT FOR A PERIOD OF FIVE YEARS WITH C PI FOR A CONSIDERATION OF RS. 31.45 CRORES (RS. THIRTY ONE C RORES AND FORTY FIVE LAKHS ONLY). THE TOTAL BENEFIT THAT WILL ENURE TO T HE COMPANY WILL BE RS. 130.99 CRORES (RS. ONE HUNDRED THIRTY CRORES AN D NINETY NINE LAKHS ONLY). 26. IT IS CLEAR FROM THE CIRCUMSTANCES DISCUSSED IN THE ANNUAL REPORT THAT THE ORAL HYGIENE BUSINESS (TOOTHPASTE, TOOTHBRUSH ETC.) WAS NOT FORMING PART OF THE CORE BUSINESS ACTIVITY OF THE ASSESSEE AND ITS PARE NT COMPANY. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING DYES & CHE MICALS, PHARMACEUTICALS, PESTICIDES, POLYMERS, PIGMENTS & COMPOSITES ETC. SI NCE THE ASSESSEE DID NOT HAVE EXCESS TO NEW DEVELOPMENT AND INTERVENTION IN THE FIELD OF ORAL HYGIENE BUSINESS AS IT WAS NOT PART OF THE CORE BUSINESS AC TIVITY OF ITS PARENT COMPANYS WORLDWIDE OPERATIONS THEREFORE, THE ASSESSEE FOUND ITSELF UNDER TOUGH COMPETITION FROM INTERNATIONAL BRANDS. THE ASSESSEE DECIDED TO DIVEST A PARTICULAR BUSINESS ACTIVITY BEING NOT SUITABLE AND PROFITABLE AND TO USE THE RESOURCES FOR CORE BUSINESS OF THE ASSESSEE IN WHIC H THE PARENT COMPANY OF THE ASSESSEE HAS EXPERTISE. ACCORDINGLY, THE SALE OF OR AL HYGIENE BUSINESS WAS UNDER A SCHEME OF RESTRUCTURING THE BUSINESS OF THE ASSESSEE. FROM THE FACTS AND CIRCUMSTANCES AS EMERGED FROM RECORD, IT IS CLE AR THAT BY TRANSFERRING THE ORAL HYGIENE BUSINESS THE ASSESSEE AIMED WAS TO IMP ROVE AND CONCENTRATE ON THE CORE BUSINESS ACTIVITY BY UTILIZING THE RESOURC ES. THEREFORE, BY ENTERING INTO A NEGATIVE OR RESTRICTIVE COVENANT WOULD NOT IN ANY C ASE EFFECT THE FUTURE INCOME OR PROFITABILITY OF THE ASSESSEE BECAUSE THE ASSESSEE HAS OTHERWISE CONSCIOUSLY DECIDED NOT TO CONTINUE WITH THE ORAL HYGIENE BUSIN ESS ACTIVITY BEING NO MORE SUITABLE DUE TO TOUGH COMPETITION. THUS, THE FACTS EMERGE WHICH ARE RELEVANT FOR CONSIDERING AND DECIDING THE ISSUE ARE AS UNDER: 14 ITA NO.498/MUM/03, 1749/MUM/ 2003 ITA NO.3554/MUM/2005, CO-185 & CO-361 M/S. NOVARTIS INDIA LIMITED I) THE ASSESSEE SOLD ONLY ONE OF THE BUSINESS ACTI VITIES OF THE ASSESSEE AND NOT THE ENTIRE BUSINESS. II) THE ORAL HYGIENE BUSINESS ACTIVITY SOLD BY THE ASSESSEE WAS NOT A PART OF CORE BUSINESS OF THE ASSESSEE. III) BY AGREEING TO A RESTRICTIVE COVENANT THE ASSE SSEE WAS NOT DEPRIVED OF A SOURCE OF BUSINESS ACTIVITY RATHER THE ASSESSEE TRA NSFERRED A PARTICULAR ACTIVITY UNDER THE SCHEME OF BUSINESS RESTRUCTURING AND TO A VOID THE ADVERSE AND TOUGH SITUATION IN FUTURE. IV) THE RESTRICTION UNDER THE AGREEMENT IS ONLY FOR LIMITED PERIOD OF FIVE YEARS AND NOT PERMANENT OR INDEFINITE PERIOD. 27. SINCE THE ASSESSEE HAS SOLD ONLY A NON-CORE BUS INESS ACTIVITY WITH MOTIVE AND OBJECT TO CONCENTRATE ON THE CORE BUSINESS ACTI VITY THEREFORE, BY AGREEING TO THE RESTRICTIVE NEGATIVE COVENANT THE ASSESSEE IS N OT DEPRIVED FROM THE CARRYING ON THE BUSINESS ACTIVITY BUT THE ASSESSEE FREED ITS RESOURCES FROM A NON-CORE BUSINESS ACTIVITY TO APPLY AND USE THE SAME FOR THE CORE AND MAIN BUSINESS ACTIVITY OF THE ASSESSEE. THUS, RESTRAINING ITSELF FROM MANUFACTURING A PARTICULAR PRODUCT FOR A LIMITED PERIOD OF FIVE YEARS WOULD NO T RESULT LOSS OF INCOME EARNING STRUCTURE WHEN THE ASSESSEE ITSELF HAS DECIDED TO C ONTINUE AND CONCENTRATE ON THE CORE BUSINESS ACTIVITY. WHEN IT IS NOT A LOSS I N THE NATURE OF ENDURING ASSET THEN THE AMOUNT RECEIVED BY THE ASSESSEE UNDER THE NON-COMPETE AGREEMENT FOR NOT CARRYING OUT THE ACTIVITY FOR FIVE YEARS IS REV ENUE AND NOT CAPITAL IN NATURE. FROM THE FACTS OF THE CASE IN HAND WE FIND THAT BY AGREEING TO THE RESTRICTIVE COVENANT DOES NOT RESULT IN LOSS OF ANY ENDURING AS SET OR LOSS OF SOURCE OF INCOME TO THE ASSESSEE AS THE ASSESSEE DID NOT SEE ANY BRIGHT FUTURE IN THE SAID BUSINESS ACTIVITY. THE DECISIONS RELIED UPON BY THE ASSESSEE WOULD NOT HELP THE CASE OF THE ASSESSEE BECAUSE IN THE CASE OF GUFFIC CHEM. PVT. LTD. VS CIT 332 ITR 602 (SC) THE ASSESSEE WAS CARRYING ON THE BUSIN ESS OF MANUFACTURING, 15 ITA NO.498/MUM/03, 1749/MUM/ 2003 ITA NO.3554/MUM/2005, CO-185 & CO-361 M/S. NOVARTIS INDIA LIMITED SELLING AND DISTRIBUTION OF PHARMACEUTICALS AND MED ICAL PREPARATION. THE ASSESSEE AGREED TO TRANSFER ITS TRADE MARKS TO RANB AXY AND ALSO AGREED NOT TO CARRY ON DIRECTLY OR INDIRECTLY THE BUSINESS HITHER TO CARRY ON BY IT. THUS, IN THE SAID CASE THE ASSESSEE AGREED TO RESTRICT ITSELF FR OM CARRYING ON ITS MAIN BUSINESS ACTIVITY WHICH IS NOT IN THE CASE OF THE A SSESSEE BEFORE US. SIMILARLY, IN THE OTHER CASES THE COMPENSATION WAS RECEIVED BY TH E ASSESSEE FOR RESTRICTING ITSELF FROM CARRYING ON ITS MAIN BUSINESS ACTIVITY EITHER FOR INDEFINITE PERIOD OR FOR A VERY LONG PERIOD OF TIME. ACCORDINGLY, WE ARE OF THE VIEW THAT THE DECISIONS RELIED UPON BY THE ASSESSEE WOULD NOT APPLY IN THE FACTS OF THE CASE. HENCE WE DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDERS OF THE AUTHORITIES BELOW QUA THIS ISSUE. 28. GROUND 3 RELATES TO THE CAPITAL GAINS ON THE SA LE OF BHANDOOP LAND. THE ASSESSEE IS AGGRIEVED BY THE COMPUTATION OF CAPITAL GAINS AT RS.13,30,61,590/- AS AGAINST RS.8,32,06,680/- RETURNED BY THE ASSESSE E. THIS ISSUE FINDS PLACE AT PAGE 26 OF THE ASSESSMENT ORDER, THE AO OBSERVED TH AT THE ASSESSEE HAS SHOWN LONG TERM CAPITAL GAIN ON SALE OF BHANDOOP LAND AT RS.8,32,06,680/-. THE AO FURTHER OBSERVED THAT THE SALE CONSIDERATION HAS BE EN SHOWN AT RS.34,09,59,000/- FROM WHICH PROPORTIONATE EXPENSES AT RS.84,82,950/- HAS BEEN CONSIDERED. THE AO FURTHER OBSERVED THAT THE ASSESSEE HAS TAKEN FAIR MARKET VALUE (FMV) AS PER THE VALUATION REPORT OF T HE GOVERNMENT REGISTERED VALUER. THE FMV OF THE LAND IS TAKEN AS ON 01.04 .1981. THE INDEXED COST OF ACQUISITION HAS BEEN SHOWN AT RS.24,96,69,317/- AND ACCORDINGLY LONG TERM CAPITAL GAIN HAS BEEN COMPUTED. THE AO MADE LOCAL ENQUIRIES WHICH REVEALED THAT THE COMPARABLE SALE RATE AT NEAR ABOUT 01.04.8 1 WERE MUCH LOWER COMPARED TO THE RATE ADOPTED IN THE VALUATION REPOR T. BASED ON THIS LOCAL ENQUIRY, THE AO REFERRED THE MATTER U/S 55A OF THE ACT TO THE DVO TO DETERMINE THE FMV OF THE LAND AS ON 01.04.81. THE ASSESSEE S TRONGLY OBJECTED TO THIS REFERENCE MADE BY THE AO. ACCORDING TO THE ASSESSE E, THE AO CAN ONLY REFER WHEN HE IS OF THE OPINION THAT THE FAIR MARKET EXCE ED THE VALUE OF THE ASSET. IN THE PRESENT CASE, IT WAS CONTENDED THAT THE FAIR MA RKET VALUE AT RS.3,500/- HAS BEEN CONSIDERED BY THE AO AS HIGHER. THEREFORE, TH ERE IS NO SCOPE FOR REFERRING 16 ITA NO.498/MUM/03, 1749/MUM/ 2003 ITA NO.3554/MUM/2005, CO-185 & CO-361 M/S. NOVARTIS INDIA LIMITED THE PRESENT LAND VALUATION CASE TO THE DVO. THIS C ONTENTION OF THE ASSESSEE WAS REJECTED BY THE AO. WHO WAS OF THE OPINION THAT RE FERENCE OF THE VALUATION OFFICER CAN BE MADE U/S 55A TO ASCERTAIN FAIR MARKE T VALUE OF CAPITAL ASSET FOR DETERMINING THE CAPITAL GAINS. THE AO, THEREAFTER, WENT ON TO COMPUTE THE LONG TERM CAPITAL GAIN ON SALE OF LAND BY ADOPTING THE F MV AS PER THE PRELIMINARY REPORT OF THE VALUATION OFFICER WHO HAS TAKEN THE F MV AT RS.1400/- PER SQ. METER BASED ON 1 FSI. THE LONG TERM CAPITAL GAIN WAS COM PUTED AT RS.13,30,61,590/-. 29. AGGRIEVED BY THIS FINDING, THE ASSESSEE CARRIED THE MATTER BEFORE THE CIT(A). IT WAS EXPLAINED THAT THE DIFFERENCE IN LO NG TERM CAPITAL GAIN HAS ARISEN ON ACCOUNT OF VALUE AS ON 01.04.81, WHICH HAS BEEN CONSIDERED BY THE ASSESSEES REGISTERED VALUER AT RS.1750/- PER SQ. M ETER AS AGAINST THE SAME VALUE AT RS.1400/- PER SQ. METER BY THE DVO. IT WA S POINTED OUT THAT EVEN AS PER THE REPORT OF THE DVO THE VALUE SHOULD HAVE BEE N COMPUTED AT THE RATE OF RS.1746 PER SQ. METER. THE ASSESSEE OBJECTED TO TH E REFERENCE MADE BY THE AO. THE CIT(A) DISMISSED THIS SUBMISSION OF THE ASSESSE E HOLDING THAT THE ACTION OF THE AO IN MAKING A REFERENCE TO THE DVO IS UPHELD A S THE SAME WAS REQUIRED FOR CORRECTLY COMPUTING THE TAXABLE CAPITAL GAIN IN QUE STION. AFTER CONSIDERING THE ENTIRE FACTS AND SUBMISSIONS MADE BY THE ASSESSEE, THE CIT(A) OBSERVED THAT ONCE REFERENCE IS MADE TO THE DVO UNDER THE PROVISI ONS OF SECTION 55A OF THE ACT, THE VALUE FIXED BY THE DVO, BECOMES BINDING ON THE AO. THE CIT(A) CONCLUDED THAT THE AO WAS JUSTIFIED IN COMPUTING TH E VALUE AS PER THE VALUATION REPORT SUBMITTED BY THE DVO. 30. AGGRIEVED BY THIS FINDING OF THE CIT(A), ASSES SEE IS BEFORE US. COUNSEL FOR THE ASSESSEE REITERATED WHAT HAS BEEN SUBMITTED BEF ORE THE LOWER AUTHORITIES. THE LD. COUNSEL STRONGLY CONTENDED THAT THE REFEREN CE U/S 55A OF THE ACT IS BAD IN LAW AS THE AO CANNOT REFER THE MATTER, IF HE IS NOT OF THE OPINION THAT THE SALE CONSIDERATION IS HIGHER THAN WHAT HAS BEEN DECLARED BY THE ASSESSEE. DRAWING OUR ATTENTION TO THE RATE ADOPTED BY THE DVO, IT IS THE SAY OF THE COUNSEL THAT IF THE DVOS RATE IS ACCEPTED AS CORRECT THERE WOULD B E A LOSS OF RS.6,64,97,382/- TO SUBSTANTIATE HIS CLAIM , THE COUNSEL SUBMITTED A CHART GIVING WORKING 17 ITA NO.498/MUM/03, 1749/MUM/ 2003 ITA NO.3554/MUM/2005, CO-185 & CO-361 M/S. NOVARTIS INDIA LIMITED ANALYSIS AS PER RETURN, AS PER AO, AND IF DVO RATE IS ACCEPTED WITH CORRECT FSI OF ONE. THE LD. DR STRONGLY SUPPORTED THE FINDINGS OF THE LOWER AUTHORITIES. 31. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES. THE DVOS REPORT CANNOT BE BRUSHED AS IDE LIGHTLY. HOWEVER, ONCE THE AO HAS CALLED FOR THE REPORT IT BECOMES BINDING UPON THE AO. WE HAVE ACCORDINGLY PERUSED THE CAPITAL GAIN CALCULATION CH ART SUBMITTED BY THE COUNSEL. IN OUR HUMBLE OPINION THIS CALCULATION NEEDS TO BE VERIFIED AT THE ASSESSMENT STAGE. THEREFORE, WE RESTORE THIS ISSUE BACK TO T HE FILES OF AO. THE ASSESSEE IS DIRECTED TO SUBMIT THIS WORKING BEFORE THE AO. THE AO IS DIRECTED TO VERIFY THIS WORKING OF CAPITAL GAINS WHICH IS BASED ON DVOS RA TE AT FSI 1. THE AO IS EXPECTED TO GIVE A REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE BEFORE DECIDING THIS ISSUE AFRESH IN THE LIGHT OF THE WORK ING GIVEN BY THE ASSESSEE. 32. GROUND NO. 3 IS ALLOWED FOR STATISTICAL PURPOSE WITH THIS ADDITIONAL GROUND NO. 1, 2 AND CO. NUMBER 2 ARE ALSO ACCORDINGLY DECI DED. 33. GROUND NO.4 RELATES TO THE GRIEVANCE THAT THE C IT(A) ERRED IN CONFIRMING THE ACTION OF THE AO IN NOT ALLOWING DEPRECIATION O F RS.7,97,982/- WITH RESPECT TO KANDLA PLANT. THIS ISSUE HAS BEEN DISCUSSED BY THE AO AT PARA 7 ON PAGE 30 OF ITS ORDER. THE AO OBSERVED THAT THE KANDLA PLAN T WAS THROUGHOUT NON- OPERATIONAL DURING THE YEAR. THEREFORE, THE AO WAS OF THE OPINION THAT ASSESSEE IS NOT ENTITLE FOR A CLAIM OF DEPRECIATION , PLANT BEING NON-OPERATIONAL. THE ASSESSEE CARRIED THE MATTER BEFORE THE CIT(A). THE CIT(A) HAS CONSIDERED THIS GRIEVANCE OF THE ASSESSEE AT PARA 9 ON PAGE 30 OF H IS ORDER. THE CIT(A) WAS OF THE OPINION THAT THE FACTS OF THE CASE ARE IDENTICA L TO THOSE OF A.Y. 1993-94 AND 1994-95 WHERE THE SIMILAR CLAIM WAS DISALLOWED BY T HE AO AND CONFIRMED BY HIS PREDECESSORS. THE CIT(A) FOLLOWED THE FINDINGS OF HIS PREDECESSORS AND CONFIRMED THE DISALLOWANCE. BEFORE US, THE LD. COU NSEL FOR THE ASSESSEE SUBMITTED THAT IN EARLIER ORDER I.E. 1993-94 AND 19 94-95, THE TRIBUNAL HAS ALLOWED DEPRECIATION, TO SUBSTANTIATE , THE COUNSEL DREW OUR ATTENTION TO THE ORDER OF THE TRIBUNAL IN ITA NO. 334/MUM/1997 FOR A .Y. 1993-94. THE COUNSEL FOR THE ASSESSEE ALSO DREW OUR ATTENTION TO THE ORD ER OF THE TRIBUNAL IN ITA NO. 18 ITA NO.498/MUM/03, 1749/MUM/ 2003 ITA NO.3554/MUM/2005, CO-185 & CO-361 M/S. NOVARTIS INDIA LIMITED 2874/MUM/1999. THE LD. DR FAIRLY CONCEDED THAT TH E ISSUE HAS BEEN DECIDED BY THE TRIBUNAL. 34. WE HAVE CAREFULLY PERUSED THE ORDER OF THE LOWE R AUTHORITIES AND THE ORDERS OF THE TRIBUNAL. WE FIND THAT IN A.Y. 1993- 94, THE TRIBUNAL HAS DECIDED THIS ISSUE AT PARA 25 OF ITS ORDER WHEREIN THE TRIB UNAL HAS DIRECTED THE AO TO VERIFY, IF THE PLANT WAS ACTUALLY IN OPERATION AND IF SATISFIED THE DEPRECIATION MAY BE ALLOWED. FOR A.Y. 1994-95, THE TRIBUNAL AT PAR A 9 OF ITS ORDER HAS HELD THAT ONCE THE ASSET ENTERS THE RELEVANT BLOCK, IT LOSES ITS SEPARATE EXISTENCE FOR THE PURPOSE OF DEPRECIATION AND WHAT IS TO BE SEEN FOR THE PURPOSE OF ALLOWING DEPRECIATION IS THE USE OF THE RELEVANT BLOCK AS A WHOLE AND NOT THE USE OF INDIVIDUAL ASSET. ACCORDINGLY, THE TRIBUNAL DIRECT ED THE AO TO VERIFY THE CLAIM OF THE ASSESSEE AFTER VERIFYING THE FACTUAL POSITION F ROM THE RELEVANT RECORD. RESPECTFULLY FOLLOWING THE FINDINGS OF THE TRIBUNAL IN ASSESSEES OWN CASE, WE RESTORE THIS ISSUE BACK TO THE FILE OF AO TO DECIDE THE CLAIM OF DEPRECIATION IN THE LIGHT OF THE DIRECTION GIVEN BY THE TRIBUNAL FOR A. Y.1993-94 AND 1994-95. GROUND NO. 4 IS ALLOWED FOR STATISTICAL PURPOSE. 35. GROUND 5 RELATES TO THE LOSS ON EXPORT OF TRADI NG GOODS TO BE SET OFF AGAINST PROFITS OF MANUFACTURING GOODS FOR THE PURPOSE OF A LLOWING DEDUCTION U/S 80HHC. THIS ISSUE HAS BEEN TREATED BY THE AO AT PA RA 11 ON PAGE 32 OF ITS ORDER. THE AO OBSERVED THAT FOR THE YEAR UNDER CON SIDERATION, THERE IS A TRADING LOSS OF RS. 45,81,837/- WHICH EXCEEDS THE MANUFACTU RING PROFITS AND PROFIT ELIGIBLE UNDER THE PROVISO OF SECTION 80HHC CLAUSE 3. THEREFORE, THE ASSESSEE IS NOT ELIGIBLE TO ANY DEDUCTION U/S 80HHC. ASSESS EE AGITATED THIS MATTER BEFORE THE CIT(A) AND THE CIT(A) HAS CONSIDERED THIS GRIEV ANCE OF THE ASSESSEE AT PARA 12 OF PAGE 32 OF HIS ORDER, WHEREIN THE CIT(A) UPHE LD THE ACTION OF THE AO FOLLOWING THE DECISION OF THE HONBLE JURISDICTIONA L HIGH COURT IN THE CASE OF IPCA LABORATORIES 251 ITR 401. BEFORE US, THE LD. COUNSEL FAIRLY CONCEDED THAT THIS ISSUE HAS BEEN DECIDED AGAINST THE ASSESSEE B Y THE HONBLE HIGH COURT IN THE CASE OF IPCA LABORATORIES 266 ITR 521 AS THE CO UNSEL HAS HIMSELF POINTED OUT 19 ITA NO.498/MUM/03, 1749/MUM/ 2003 ITA NO.3554/MUM/2005, CO-185 & CO-361 M/S. NOVARTIS INDIA LIMITED THAT THIS ISSUE HAS BEEN DECIDED AGAINST THE ASSESS EE BY THE DECISION OF THE HONBLE HIGH COURT, GROUND NO. 5 IS ACCORDINGLY DIS MISSED. 36. GROUND NO. 6 RELATES TO THE DISALLOWANCE OF RS. 3,90,12,431/- ON ACCOUNT OF INCREMENTAL LIABILITY FOR PAYMENT OF PENSION UND ER THE VOLUNTARY RETIREMENT SCHEME (VRS) CREATED ON AN ACTUARIAL BASIS IN COMPU TING THE ASSESSEES TOTAL INCOME. THE AO HAS DISCUSSED THIS ISSUE ON PARA 12 ON PAGE 32 OF HIS ORDER, WHEREIN THE AO FOLLOWED ORDER OF 1993-94 AND 1994-9 5 FOR DISALLOWING THE INCREMENTAL LIABILITY OF RS.3.90 CRORES. WHEN THE MATTER WAS AGITATED BEFORE THE CIT(A), THE CIT(A) HAS CONSIDERED THIS ISSUE OF THE ASSESSEE AT PARA 13 OF PAGE 33 OF HIS ORDER WHEREIN THE CIT(A) HAS FOLLOWED THE DE CISION OF HIS PREDECESSORS FOR A.Y. 1993-94 AND 1994-95 AND CONFIRMED THE DISALLOW ANCE MADE BY THE AO. BEFORE US, THE COUNSEL FOR THE ASSESSEE DREW OUR AT TENTION TO PAGE 134 OF THE PAPER BOOK WHICH IS INTERNAL PAGE 15 OF ORDER OF TH E TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y. 1994-95 IN ITA NO. 2874/MUM/1999 AND ITA NO.2720/MUM/1999. IT IS A SAY OF THE COUNSEL THAT THE TRIBUNAL IN THAT ORDER HAS RESTORED THIS ISSUE BACK TO THE FILE OF AO. FO LLOWING THE FINDINGS OF THE TRIBUNAL FOR A.Y. 1993-94, THE LD. DR ALSO AGREED T O THE SUBMISSION OF THE COUNSEL, WE HAVE CAREFULLY GONE THROUGH THE ORDERS OF THE LOWER AUTHORITIES AND THE ORDER OF THE TRIBUNAL. WE FIND THAT THE TRIBUN AL IN ITS ORDER AT PARA 40 HAS FOLLOWED THE FINDINGS GIVEN BY THE TRIBUNAL IN A.Y. 1993-94 AND HAS RESTORED THIS ISSUE BACK TO THE FILE OF AO TO EXAMINE AND VERIFY THE ACTUARY VALUATION CERTIFICATE AND THE AGREEMENT WITH THE COMPANY AND THE EMPLOYEE AND IF HE FINDS THAT THE LIABILITY HAS BEEN CALCULATED ON A SCIENTI FIC BASIS, MAY ALLOW THE CLAIM OF THE ASSESSEE. FACTS AND CIRCUMSTANCES BEING IDENTI CAL, RESPECTFULLY FOLLOWING THE AFORE STATED DIRECTION OF THE TRIBUNAL IN ASSESSEE S OWN CASE FOR A.Y. 1994-95, THIS ISSUE IS RESTORED BACK TO THE FILE OF AO. TH E AO IS DIRECTED TO DECIDE IN THE LIGHT OF A.Y. 1993-94 AND 1994-95. GROUND NO. 6 IS ALLOWED FOR STATISTICAL PURPOSE. 37. GROUND NO. 7 RELATES TO DISALLOWANCE OF RS.23,1 8,653/- BEING 20% OF FOREIGN TRAVELLING EXPENSES. BOTH PARTIES AGREED T HAT IDENTICAL ISSUE HAS BEEN 20 ITA NO.498/MUM/03, 1749/MUM/ 2003 ITA NO.3554/MUM/2005, CO-185 & CO-361 M/S. NOVARTIS INDIA LIMITED DECIDED BY THE TRIBUNAL IN ASSESSEES OWN CASE IN A .Y. 1991-92, 1992-93 & 1993-94. WE HAVE CAREFULLY CONSIDERED THE ORDER OF THE TRIBUNAL FOR A.Y. 1993- 94 IN ITA NO. 334/MUM/1997. WE FIND THAT A SIMILAR ISSUE HAS BEEN DECIDED BY THE TRIBUNAL WHILE DECIDING GROUND NO. 5 OF THAT AP PEAL AT PARA 26 OF ITS ORDER. WE FIND THAT THE TRIBUNAL HAS GIVEN FINDING AT PARA 31 ON PAGE 10 OF ITS ORDER, WHEREIN IT HAS FOLLOWED THE DECISION OF THE TRIBUNA L IN ASSESSEES OWN CASE FOR A.Y. 1991-92 AND 1992-93 AND DELETED THE ADDITIONS SUSTAINED BY THE CIT(A) THE FACTS BEING IDENTICAL. WE HAVE NO HESITATION IN FO LLOWING THE FINDINGS OF THE TRIBUNAL IN ASSESSEES OWN CASE (SUPRA) DISALLOWANC E SUSTAINED BY THE CIT(A) ARE DELETED. THIS GROUND IS ACCORDINGLY ALLOWED. ALTERNATIVE PLEA RAISED BY THE ASSESSEE IS DISMISSED. 38. GROUND NO. 8 RELATES TO THE DISALLOWANCE OF EXP ENSES TREATING IN THE NATURE OF ENTERTAINMENT EXPENSES U/S 37(2) OF THE A CT. FOLLOWING AMOUNTS HAVE BEEN CONSIDERED TO BE IN THE NATURE OF ENTERTAINMEN T EXPENSES. 1) LUNCH EXPENSES TO PERSONNEL ON DUTY RS.5,41,313/- 2) 5% OF TOTAL CANTEEN EXPENSES OF RS.2,18,004/- 3) BUSINESS MEETING EXPENSES RS.2,69,255/- 4) EXPENSES ON ANNUAL GENERAL MEETING(AGM) RS. 9,0 84/- RS.10,37,656/- 50% DISALLOWED OF RS.5,18,828 39. BOTH PARTIES AGREED THAT SIMILAR ISSUE HAS BEEN DECIDED BY THE TRIBUNAL IN ASSESSEES OWN CASE IN A.Y. 1991-92, 1992-93 AND 19 93-94. WE HAVE CAREFULLY CONSIDERED THE ORDER OF THE TRIBUNAL FOR A.Y. 1993- 94 IN ITA NO.334/MUM/1997. WE FIND THAT IDENTICAL FACTS HAVE BEEN CONSIDERED B Y THE TRIBUNAL AT PARA 48 OF ITS ORDER. WE FIND THAT THE TRIBUNAL HAS DIRECTED THE AO TO ALLOW THE BUSINESS MEETING EXPENSES AND EXPENSES OF AGM AND THE TRIBUN AL HAS CONFIRMED DISALLOWANCE OF RS. 2 LAKHS OUT OF TOTAL CANTEEN EX PENSES WHICH COME TO AROUND 40% OF THE TOTAL CANTEEN EXPENSES DISALLOWED. LUNC H EXPENSES ON EMPLOYEES DURING THE COURSE OF OUTDOOR DUTY HAS BEEN FULLY A LLOWED U/S 37(3) OF THE ACT. RESPECTFULLY FOLLOWING THE FINDINGS OF THE TRIBUNAL (SUPRA), WE DIRECT THE AO TO ALLOW THE LUNCH EXPENSES ON EMPLOYEES DURING THE OU TDOOR DUTY, BUSINESS 21 ITA NO.498/MUM/03, 1749/MUM/ 2003 ITA NO.3554/MUM/2005, CO-185 & CO-361 M/S. NOVARTIS INDIA LIMITED MEETING EXPENSES, EXPENSES ON AGM FULLY AND WE CON FIRMED DISALLOWANCE OF RS.85,000/- OUT OF THE TOTAL CANTEEN EXPENSES OF 2, 18,004/-. GROUND NO. 8 IS PARTLY ALLOWED. 40. GROUND NO. 9 RELATES TO THE DISALLOWANCE OF TOT AL AIR FARE EXPENSES INCURRED ON FOREIGN VISITORS, THIS ISSUE HAS BEEN D ISCUSSED BY THE AO AT PAGE 36 VIDE PARA 17 OF HIS ORDER. THE AO HAS FOLLOWED THE FINDINGS OF A.Y. 1994-95 AND DISALLOWED THE ENTIRE EXPENDITURE INCURRED ON FOREI GN VISITORS. WHEN THIS ADDITION WAS CHALLENGED BEFORE THE CIT(A), THE CIT( A) CONSIDERED THE GRIEVANCE OF THE ASSESSEE AT PARA 17 OF PAGE 36 OF ITS ORDER. T HE CIT(A) WAS CONVINCED WITH THE EXPENDITURE ON TRAVELLING OF FOREIGN DIRECTORS AND DIRECTED THE AO TO ALLOW THIS EXPENDITURE OF RS.5,56,647/-. HOWEVER, FOR TH E REMAINING AMOUNT, THE CIT(A) OBSERVED THAT THE ASSESSEE HAS FAILED TO EST ABLISH THE BUSINESS RELEVANCE OF THE EXPENDITURE AND CONFIRMED THE BALANCE. 41. AGGRIEVED BY THIS FINDING, ASSESSEE IS BEFORE US. COUNSEL FOR THE ASSESSEE SUBMITTED THAT IN EARLIER YEAR I.E. A.Y. 1992-93 AN D 1993-94 SIMILAR DISALLOWANCES HAVE BEEN CONSIDERED BY THE TRIBUNAL AND COUNSEL REQUESTED THAT THE FINDINGS MAY BE FOLLOWED FOR THE YEAR UNDER CON SIDERATION. THE LD. DR FAIRLY CONCEDED TO THIS SUBMISSION. WE HAVE CAREFULLY PER USED THE ORDER OF THE TRIBUNAL FOR A.Y. 1993-94 IN ITA NO.334/MUM/1997. WE FIND THAT IDENTICAL ISSUE HAS BEEN CONSIDERED BY THE TRIBUNAL AT PARA 3 8 OF PAGE 12 OF ITS ORDER. WE FIND THAT THE TRIBUNAL HAS GIVEN ITS FINDING ON PAR A 43 OF PAGE 13 OF ITS ORDER WHEREIN THE TRIBUNAL HAS FOLLOWED THE FINDINGS IN A SSESSEES OWN CASE FOR A.Y. 1992-93 AND ALLOWED THE CLAIM OF THE EXPENSES. FAC TS BEING IDENTICAL, WE HAVE NO HESITATION IN FOLLOWING THE FINDINGS OF THE TRIB UNAL IN ASSESSEES OWN CASE GIVEN IN EARLIER ORDERS. WE ACCORDINGLY DIRECT THE AO TO DELETE THE ADDITION OF RS.11,37,257/-. GROUND NO. 9 IS ALLOWED. 42. GROUND NO.10 RELATES TO THE DISALLOWANCE OF RS. 4,04,669/- U/S 37(4) OF THE ACT. THIS ISSUE HAS BEEN DISCUSSED BY THE AO AT PA RA 18 ON PAGE 36 OF ITS ORDER 22 ITA NO.498/MUM/03, 1749/MUM/ 2003 ITA NO.3554/MUM/2005, CO-185 & CO-361 M/S. NOVARTIS INDIA LIMITED AND THE CIT(A) HAS CONSIDERED THE GRIEVANCE OF THE ASSESSEE AT PARA 18 ON PAGE 37 OF ITS ORDER. BEFORE US, COUNSEL FOR THE ASSESS EE POINTED OUT THAT ON IDENTICAL FACTS SIMILAR ISSUE HAS BEEN DECIDED BY THE TRIBUNA L IN ASSESSEES OWN CASE IN A.Y. 1991-92 AND 1993-94. THE LD. DR COULD NOT BRI NG ANY DISTINGUISHING FACT BEFORE US, WE HAVE CAREFULLY PERUSED THE ORDER OF T HE TRIBUNAL FOR A.Y. 1993-94 IN ITA NO. 334/MUM/1997. WE FIND THAT A SIMILAR IS SUE HAS BEEN CONSIDERED BY THE TRIBUNAL AT PARA 44 OF ITS ORDER. THE TRIBUNAL HAS GIVEN ITS FINDING ON PARA 46, WHEREIN IT HAS FOLLOWED THE FINDINGS GIVEN BY T HE TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y. 1991-92 AND RESTORED BACK THE ISSUE T O THE FILES OF AO FOR FURTHER VERIFICATION. FACTS AND CIRCUMSTANCES ARE BEING ID ENTICAL FOLLOWING THE FINDINGS OF THE TRIBUNAL (SUPRA) WE RESTORE THIS ISSUE BACK TO THE FILES OF AO. THE AO IS DIRECTED TO CONSIDER THE DETAILS FILED BY THE ASSES SEE GIVING BREAK UP OF EXPENSES INCURRED ON GUEST HOUSE MAINTENANCE AND ALLOW THE E XPENSES INCURRED ON FOOD BEVERAGES. THIS GROUND IS ALLOWED FOR STATISTICAL P URPOSES. C.O. 183/MUM/2003 43. THE ADDITIONAL GROUND RELATES TO LEVY OF INTERE ST U/S 234(B), WE FIND THAT THIS LEVY RELATES TO THE ENHANCEMENT MADE BY THE CI T(A) DURING THE APPELLATE PROCEEDINGS, AS WE HAVE DECIDED THE GROUND ON ENHAN CEMENT IN FAVOUR OF THE ASSESSEE. THEREFORE THIS GRIEVANCE OF THE ASSESSEE BECOMES OTIOSE. 44. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. AND WITH THIS GROUND NO. 1,2 & 3 OF C.O. 183/MUM/2003 ARE ALSO D ISPOSED OF IN ACCORDANCE WITH OUR SPECIFIC DECISION ON EACH GROUND. ITA NO.1749/MUM/2003 45. GROUND 1 RELATES TO THE DELETION OF THE DISALLO WANCE OF RS.8,33,946/- ON ACCOUNT OF COMPUTER SOFTWARE PURCHASES. THIS ISSUE HAS BEEN CONSIDERED BY THE AO AT PAGE 29 ON PARA 6 OF ITS ORDER. THE AO FOUND THAT OUT OF THE TOTAL EXPENDITURE OF RS.11,56,786/-, RS.8,33,946/- HAS B EEN STATED TO BE ON ACCOUNT 23 ITA NO.498/MUM/03, 1749/MUM/ 2003 ITA NO.3554/MUM/2005, CO-185 & CO-361 M/S. NOVARTIS INDIA LIMITED OF APPLICATION SOFTWARES CLAIMED AS REVENUE EXPEND ITURE. THE AO WAS OF THE OPINION THAT THE BENEFITS OF THE SOFTWARE ARE LONG TERM OR OF ENDURING NATURE AND ACCORDINGLY TREATED THIS EXPENDITURE AS CAPITAL AND ALLOWED THE DEPRECIATION AND DISALLOWED THE REMAINDER. ASSESSEE STRONGLY AGITAT ED THIS ISSUE BEFORE CIT(A). THE CIT(A) HAS CONSIDERED THIS GRIEVANCE OF THE ASS ESSEE AT PARA 8 AND PARA 30 OF ITS ORDER. THE CIT(A) WAS CONVINCED THAT THE AP PLICATION SOFTWARE OF COMPUTERS GET OUTDATED IN NO TIME. HENCE, SUCH EXP ENDITURE CANNOT BE TREATED AS CAPITAL EXPENDITURE. THE CIT(A) FURTHER OBSERV ED THAT IN IMMEDIATELY TWO PRECEDING ASSESSMENT YEARS , HIS PREDECESSORS HAVE TREATED SIMILAR EXPENDITURE AS REVENUE EXPENDITURE, FOLLOWING THE FINDINGS OF H IS PREDECESSORS, THE CIT(A) DIRECTED THE AO TO DELETE THE ENTIRE DISALLOWANCE. HOWEVER, AT THE SAME TIME DIRECTED THE AO TO WITHDRAW THE DEPRECIATION ALLOWE D. AGGRIEVED BY THIS REVENUE IS BEFORE US. THE LD DR STRONGLY SUPPORTED THE FIN DINGS OF THE AO, COUNSEL FOR THE ASSESS STRONGLY RELIED UPON THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF ASAHI INDIA SAFETY GLASS LIMITED 245 CT R 529. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES. IT IS NOT IN DISPUTE THAT THE EXPENDITURE HAS BEEN INCURRED O N APPLICATION SOFTWARE .THE HONBLE DELHI HIGH COURT IN THE CASE OF ASAHI SAFET Y GLASS LTD.(SUPRA) HAS HELD THAT APPLICATION SOFTWARE ARE OF REVENUE IN NATURE AS THE AO HAS NOT DOUBTED THAT THE EXPENSES WERE ON APPLICATION SOFTWARE THER EFORE RESPECTFULLY FOLLOWING THE DECISION OF THE HONBLE DELHI HIGH COURT , FIN DINGS OF THE CIT(A) ARE CONFIRMED. APPEAL OF THE REVENUE IS DISMISSED. 46. GROUND NO. 2 RELATES TO THE DELETION OF THE ADD ITION TO THE VALUE OF CLOSING STOCK ON ACCOUNT OF MODVAT CREDIT OF RS.3,17,85,000 /-. THIS ISSUE HAS BEEN DISCUSSED BY THE AO AT PARA 9 OF PAGE 31 OF HIS ORD ER AND THE CIT(A) HAS CONSIDERED THE GRIEVANCE OF THE ASSESSEE AT PARA 10 ON PAGE 31 OF HIS ORDER, WHEREIN THE CIT(A) HAS GIVEN A VERY CATEGORICAL FIN DINGS THAT THE FACTS OF THE CASE ARE COVERED BY THE DECISION OF THE HONBLE JURISDIC TIONAL HIGH COURT IN THE CASE OF INDO NIPPON CHEMICAL CO. LTD. 245 ITR 385. BEFO RE US, THE LD. DR COULD NOT BRING ANY DISTINGUISHING CASE, AS THE CIT(A) HAS DE LETED THE ADDITION FOLLOWING 24 ITA NO.498/MUM/03, 1749/MUM/ 2003 ITA NO.3554/MUM/2005, CO-185 & CO-361 M/S. NOVARTIS INDIA LIMITED THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COU RT. WE DO NOT FIND ANY REASON TO INTERFERE WITH THE FINDINGS OF THE CIT(A), GROU ND NO. 2 IS ACCORDINGLY DISMISSED. 47. GROUND NO. 3 RELATES TO THE DELETION OF THE ADD ITION OF RS. 94,476/- TO THE CLOSING STOCK ON ACCOUNT OF FREIGHT. THIS ISSUE HA S BEEN DISCUSSED BY THE AO AT PARA 10 ON PAGE 31 OF HIS ORDER AND THE GRIEVANCE O F THE ASSESSEE HAS BEEN CONSIDERED BY THE CIT(A) AT PARA 11 ON PAGE 31 OF I TS ORDER. THE CIT(A), WHILE DELETING THE ADDITION, OBSERVED THAT THE ADDITION I S BEING DELETED FOLOWOING THE REASONING GIVEN FOR THE DELETION OF THE ADDITION ON ACCOUNT OF MODVAT BEFORE US. THE LD. DR RELIED UP ON TO ASSESSMENT ORDER, THE CO UNSEL FOR THE ASSESSEE RELIED UPON THE ORDER OF THE CIT(A). WE HAVE CAREFULLY CO NSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF THE LOWER AUT HORITIES. WE FIND THAT THE REASONING GIVEN BY THE CIT(A) ARE IN PARITY WITH TH E REASONING GIVEN FOR DELETING THE ADDITION ON ACCOUNT OF MODVAT. WHEREIN, THE DE CISION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF INDO NIPPON CHEMICAL CO. LTD.(SUPRA) HAS BEEN FOLLOWED. FACTS BEING ON RECORD, WE DO NOT FIND AN Y REASON TO INTERFERE WITH THE FINDINGS OF THE CIT(A), GROUND NO. 3 IS ACCORDINGLY DISMISSED. 48. WITH GROUND NO. 4, THE REVENUE HAS CHALLENGED T HE CORRECTNESS THE ORDER OF THE CIT(A) STATING THAT THE CIT(A) ERRED IN DIRE CTING THE AO TO EXCLUDE THE SALES TAX AND EXCISE DUTY FROM THE TOTAL TURNOVER FROM TH E COMPUTATION OF DEDUCTION U/S 80HHC OF THE ACT. THIS ISSUE HAS BEEN DISCUSS ED AT LENGTH BY THE AO AT PARA 11 OF PAGE 32 OF ITS ORDER. WHEN THE MATTER W AS CARRIED BEFORE THE CIT(A), THE CIT(A) HAS CONSIDERED THE GRIEVANCE OF AT PARA 12 ON PAGE 32 OF HIS ORDER. AFTER CONSIDERING THE FACTS OF THE CASE, THE CIT(A) OBSERVED THAT THE ISSUE IS COVERED BY THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF M/S SUDARSHAN CHEMICAL INDUSTRIES LTD. 245 ITR 769 IN T HE FAVOUR OF THE ASSESSEE AND ACCORDINGLY DIRECTED THE AO TO RECOMPUTE THE DE DUCTION U/S 80HHC BY EXCLUDING THE AMOUNT OF SALES TAX AND EXCISE DUTY F ROM THE TOTAL TURNOVER. BEFORE US, THE LD. DR COULD NOT BRING ANY DISTINGUI SHING CASE, THEREFORE, WE DO 25 ITA NO.498/MUM/03, 1749/MUM/ 2003 ITA NO.3554/MUM/2005, CO-185 & CO-361 M/S. NOVARTIS INDIA LIMITED NOT FIND ANY REASON TO INTERFERE WITH THE FINDINGS OF THE CIT(A), WHICH IS BASED ON THE DECISION OF THE JURISDICTIONAL HIGH COURT. GRO UND NO. 4 IS ACCORDINGLY DISMISSED. 49. GROUND NO. 5 RELATES TO THE DELETION OF THE ADD ITION OF RS.30,95,523/-. THE AO HAS DISCUSSED THIS DISALLOWANCE AT PARA 14 O N PAGE 33 OF ITS ORDER. THE AO OBSERVED THAT THE ASSESSEE HAS INCURRED FOLLOWIN G EXPENDITURE:- 1) ON PRODUCTION OF ADVERTISEMENT FILMS RS. 19,33,00 1/- 2) ON PRODUCTION OF TV FILMS RS. 6,34,656/- 3) ON PRODUCTION OF CINEMA SLIDES RS. 5,27,866/- THE AO WAS OF THE OPINION THAT THESE EXPENDITURE AR E OF CAPITAL IN NATURE AND ACCORDINGLY DISALLOWED RS.30,95,523/- TREATING THE SAME AS OF CAPITAL IN NATURE. THE ASSESSEE CARRIED THE MATTER BEFORE THE CIT(A), THE CIT(A) HAS CONSIDERED THIS GRIEVANCE OF THE ASSESSEE AT PARA 14 OF PAGE 33 OF ITS ORDER. THE CIT(A) WAS CONVINCED THAT THESE EXPENDITURE ARE OF REVENUE IN NATURE FOR WHICH THE CIT(A) FOLLOWED THE DECISION OF THE TRIBUNAL IN THE METRO SHOES PVT. LTD. 258 ITR 106. AGGRIEVED BY THIS, REVENUE IS BEFORE US. THE COUNS EL FOR THE ASSESSEE STRAIGHTAWAY POINTED OUT THAT THE ISSUE NOW STANDS SETTLED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE JURISDICTIONAL HIGH COURT IN ASSESSEES OWN CASE IN ITA NO.1644/2007. THE ORDER IS EXHIBITED ON PAG E 143 OF THE PAPER-BOOK. THE LD. DR FAIRLY CONCEDED ON THIS, WE HAVE CAREFUL LY PERUSED THE ORDERS OF THE LOWER AUTHORITIES AND THE ORDER OF THE HONBLE JURI SDICTIONAL HIGH COURT IN ASSESSEES OWN CASE (SUPRA). WE AGREE WITH THE SUB MISSION OF THE LD. COUNSEL THAT THIS ISSUE HAS BEEN SETTLED IN FAVOUR OF THE A SSESSEE. ACCORDINGLY, GROUND NO. 5 IS DISMISSED. 50. THE ADDITIONAL GROUND OF THE REVENUE RELATES TO GROUND NO. 3 OF ASSESSEES APPEAL. FOR SIMILAR REASONS, THIS ADDITIONAL GROUND OF THE REVENUE IS DISPOSED OFF. 51. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS PARTLY ALLOWED AND WITH THIS GROUND NO. 4 TO 6 OF C.O. 183/MUM/2003 ARE DIS POSED OFF ON SPECIFIC DECISION ON RELATED GROUNDS OF APPEAL. 26 ITA NO.498/MUM/03, 1749/MUM/ 2003 ITA NO.3554/MUM/2005, CO-185 & CO-361 M/S. NOVARTIS INDIA LIMITED ITA NO.3554/MUM/2005 & C.O. 361/MUM/2005 52. THIS APPEAL BY THE REVENUE IS AGAINST THE ORDER OF THE LD. CIT(A) 19, DATED 22.03.2005 PERTAINING TO A.Y. 1995-96. THE REVENUE HAS RAISED FOLLOWING GROUNDS OF APPEAL:- I. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE CIT(A) ERRED IN DIRECTING THE AO TO TREAT THE CAPITAL GAINS ON S ALE OF GOODWILL INCLUDING THE DEEM4ED SHORT TERM CAPITAL GAINS OF RS.90.29 CRORES AS LONG TERM CAPITAL GAIN BY WRONGLY HOLDING THAT THE THEN CIT(A) IN TH E ENHANCEMENT NOTICE HAD NOT PROPOSED TO TREAT THE SAME AS SHORT TERM CAPITA L GAIN. II. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE CIT(A) ERRED IN DIRECTING THE AO TO TREAT THE CAPITAL GAINS ON S ALE OF GOODWILL INCLUDING THE DEEMED SHORT TERM CAPITAL GAINS OF RS.90.29 CRORES AS LONG TERM CAPITAL GAIN IGNORING THE CATEGORICAL WORDINGS OF THE CIT( A) PROPOSING TO ENHANCE THE SHORT TERM CAPITAL GAINS RS.90.29 CRORES. III. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE CIT(A) ERRED IN DIRECTING THE AO TO TREAT THE CAPITAL GAINS ON S ALE OF GOODWILL INCLUDING THE DEEMED SHORT TERM CAPITAL GAINS OF RS.90.29 CRORES AS LONG TERM CAPITAL GAIN IGNORING THE CATEGORICAL WORDINGS OF THE THEN CIT(A) THAT PROFIT ON SALE OF INVENTORIES STANDS ENHANCED TO RS.98.01 CRORES, AS AGAINST RS.89.96 CRORES, OF LONG TERMS CAPITAL GAIN ASSESSED BY THE AO. 53. THE GRIEVANCES OF THE REVENUE HAS BEEN DECIDED IN ASSESSEES APPEAL IN ITA NO. 498/MUM/2003. THIS APPEAL BY THE REVENUE B ECOMES OTIOSE .FOR SIMILAR REASONS. C.O.361/MUM/2005 BY THE ASSESSEE IS ALSO TREATED AS OTIOSE. 54. IN THE RESULT APPEAL FILED BY THE REVENUE AND T HE C.O. OF THE ASSESSEE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 25/09/2013 6023* ' 7'89 /09/2013 30: SD/- (VIJAY PAL RAO) SD/- (N.K.BILLAIYA) / JUDICIAL MEMBER ' / ACCOUNTANT MEMBER MUMBAI; 27 ITA NO.498/MUM/03, 1749/MUM/ 2003 ITA NO.3554/MUM/2005, CO-185 & CO-361 M/S. NOVARTIS INDIA LIMITED 7' /DATED : 25 TH SEPTEMBER , 2013 SHEKHAR. P.S. 60 60 60 60 .1;<*1 .1;<*1 .1;<*1 .1;<*15 COPY OF THE ORDER FORWARDED TO : 1. +- / THE APPELLANT 2. ./+- / THE RESPONDENT. 3. = > ? / THE CIT- , MUMBAI. 4. = / CIT(A)- , MUMBAI 5. @:.1' / DR, ITAT, MUMBAI 6. :A)B 5 GUARD FILE. 6' 6' 6' 6' / BY ORDER, /1.1 //TRUE COPY// C CC C5 55 5D D D D (DY./ASSTT. REGISTRAR) / ITAT, MUMBAI,