THE ACIT RG-3(2), V. M/S. LML LTD,

ITA 3668/MUM/2004

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 3049 (ITAT-MUMBAI)
• Duration Of Justice: 12 year(s) 1 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-06-2016
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: L
• Next Hearing Date: 17-03-2016
• Assessment Year: 2000-2001
• Appeal Filed On: 10-05-2004
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: JASBIR CHOUHAN
• Assessee Lawyers: H G BUCH MISS MONICA AGARWAL
• Keywords: Capital asset; Gift; Business income; Business expenditure; Double taxation relief; Services rendered outside India; Retrospective amendment; Cost of acquisition; Wholly owned subsidiary; Bad and doubtful debts; Valuation report; Notional interest; Capital receipt; Commercial expediency; Revenue expenditure; Capital expenditure
• Section: 143(3); 14A; 37(1); 28; 11

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH L , MUMBAI . . , , BEFORE SHRI G S PANNU , ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA , JUDICIAL MEMBER ITA NO. : 3668 /MUM/20 04 (ASSESSMENT YEAR: 200 0 - 0 1 ) ASST. COMMISSIONER OF INCOME TAX, RANGE - 3(2), MUMBAI VS M/S LML LTD , 714, RAHEJA CHAMBERS, 213, NARIMAN POINT, MUMBAI - 400 021 (APPELLANT) (RESPONDENT) ITA NO. : 3540 /MUM/20 04 (ASSESSMENT YEAR: 200 0 - 0 1 ) M/S LML LTD , 714, RAHEJA CHAMBERS, 213, NARIMAN POINT, MUMBAI - 400 021 . PAN : AACCB L 0141 N VS ASST. COMMISSIONER OF INCOME TAX, RANGE - 3(2), MUMBAI (APPELLANT) (RESPONDENT) ITA NO. : 3666/MUM/2011 (ASSESSMENT YEAR:2006 - 07) DY. COMMISSIONER OF INCOME TAX, RANGE - 3(2), ROOM NO.608, 6 TH FLOOR, AAYAKAR BHAVAN, MUMBAI - 400 020 VS M/S LML LTD , 714, RAHEJA CHAMBERS, 213, NARIMAN POINT, MUMBAI - 400 021 (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI H G BUCH MISS MONICA AGARWAL REVENUE BY : SHRI JASBIR CHOUHAN /DATE OF HEARING : 23 - 0 3 - 201 6 / DATE OF PRONOUNCEMENT : 21 - 0 6 - 2016 ORDER 2 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 , : PER AMIT SHUKLA , J M: THE FIRST TWO APPEALS HAVE BEEN FILED BY THE REVENUE AS WELL AS BY THE ASSESSEE AGAINST THE IMPUGNED ORDER DATED 6 TH FEBRUARY, 2004 , PASSED BY LD. CIT(A PPEALS ) - 3, MUMBAI FOR THE QUANTUM OF ASSESSMENT PASSED UNDER SECTION 143(3) FOR THE ASSESSMENT YEAR 2000 - 01. WE WILL FIRST TAKE - UP REVENUES APPEAL BEING ITA 3668/MUM/2004, VIDE WHICH FOLLOWING GROUNDS HAVE BEEN RAISED: - 1(A) ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LEARNED CIT(A) ERRED IN OFFERING A TREATMENT OF CAPITAL RECEIPT TO THE COMPENSATION RECEIVED BY THE ASSESSEE ON TERMINATION OF JOINT VENTURE AGREEMENT WITH M/S PIAGGIO. 1(B) ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LEARNED CIT(A) ERRED IN NOT HOLDING THE COMPENSATION RECEIVED ON TERMINATION OF JOINT VENTURE AGREEMENT WITH M/S PIAGGIO AS REVENUE RECEIPTS, AS T HE AGREEMENT WAS ENTERED INTO IN THE ORDINARY COURSE OF BUSINESS AND THE LINE OF BUSINESS OF THE ASSESSEE CONTINUED EVEN AFTER TERMINATION OF THE JOINT VENTURE. 1(C) ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LEARNED CIT(A) ERRED IN NOT BRINING TO TAX THE COMPENSATION RECEIVED AMOUNTING TO RS.23,88,65,000/ - RECEIVED ON TERMINATION OF JOINT VENTURE AGREEMENT WHICH IS A BENEFIT DIRECTLY SPRINGING FROM REGULAR BUSINESS ACTIVITIES OF THE ASSESSEE. 3 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 2(A) ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LEARNE D CIT(A) ERRED IN HOLDING THE FORFEITURE OF ADVANCE SHARE APPLICATION MONEY RECEIVED FROM M/S PIAGGIO C SPA, AMOUNTING TO RS.8,80,00,000, AS A CAPITAL RECEIPT AND THEREBY DELETING THE ADDITION MADE ON THAT ACCOUNT. 2(B) ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LEARNED CIT(A) ERRED IN NOT APPRECIATING THAT ON THE CESSATION OF LIABILITY ON TERMINATION OF JOINT VENTURE AGREEMENT WITH M/S PIAGGO CSPA THE ADVANCE SHARE APPLICATION MONEY TAKES THE CHARACTER OF REVENUE RECEIPT RECEIVED IN THE NORMAL COURSE OF BUSINESS. 2(C) ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LEARNED CIT(A) ERRED IN NOT APPRECIATING THAT THE ADVANCE SHARE APPLICATION MONEY RECEIVED FROM M/S PIAGG I O CSPA HAD NOT TAKEN THE COLOUR OF SHARE CAPITAL FOR WANT OF ISSUANCE OF SHARES AGAI NST THE SERVICE OF SHARE APPLICATION MONEY BY THE ASSESSEES OWN CONDUCT AS EVIDENCED IN THE MANNER OF ACCOUNTING FOR SUCH CONTRIBUTIONS. 3(A) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND LAW, THE LEARNED CIT(A) ERRED IN DELETING THE DISALLOWANCE OF RS .574.96 L AKHS INCURRED BY THE ASSESSEE AS LEGAL EXPENSES TO DEFEND ITSELF IN LEGAL SUITS FILED BY M/S PIAGGIO. 3(B) ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LEARNED CIT(A) ERRED IN NOT APPRECIATING THE FACT THAT THE LEGAL EXPENSES HAVE NOT BEEN INCU RRED TO SAFEGUARD THE INTEREST OF THE COMPANY. 4 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 3(C) ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LEARNED CIT(A) ERRED IN NOT APPRECIATING THE FACT THAT THE LEGAL EXPENSES HAVE BEEN INCURRED TO SETTLE THE DISPUTE BETWEEN THE TWO FACTION OF PROMOTERS OF T HE COMPANY AND TO PRESERVE ONLY INTEREST AND RIGHT OF THE PROMOTERS. 4(A) ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LEARNED CIT(A) ERRED IN DELETING DISALLOWANCE OF INTEREST OF RS.2.03 CRORES ATTRIBUTABLE TO THE INTEREST FREE ADVANCE TO ASSOCIATED CO NCERN, VCCL LTD., WITHOUT APPRECIATING THAT THE ASSESSEE COMPANY HAD INCURRED HUGE INTEREST ON BORROWED FUNDS. 4(B) ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LEARNED CIT(A) ERRED IN NOT APPRECIATING THE FACT THAT THE ASSESSEE COMPANY HAD BORROWED INT EREST BEARING FUNDS TO THE EXTENT OF RS.13.55 CRORES WHICH HAVE BEEN USED FOR THE PURPOSE OTHERWISE THAN FOR ITS BUSINESS BY MAKING NON - INTEREST BEARING ADVANCE TO VCCL LTD., A COMPANY PROMOTED BY THE ASSESSEE GROUP. 4(C) ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LEARNED CIT(A) ERRED IN TAKING INTO ACCOUNT PAYMENTS RECEIVED BY THE ASSESSEE FROM VCCL LTD AFTER THE END OF THE PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR UNDER CONSIDERATION, WHICH IS OF NO SIGNIFICANCE WHILE DECIDING THE ISSUE FOR THE YEAR UNDER CONSIDERATION. 5(A) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND LAW, THE LEARNED CIT(A) ERRED IN DIRECTING THE ASSESSING OFFICER TO DELETE RS.4,05,75,000/ - THE DISALLOWANCE OF INTEREST ON ACCOUNT OF DUES FROM M/S ESSLON SYNTHETICS LTD. 5 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 5(B) ON T HE FACTS AND CIRCUMSTANCES OF THE CASE THE LEARNED CIT(A) ERRED IN NOT APPRECIATING THE FACT THAT M/S ESSLON SYNTHETICS LTD., IS AN ASSOCIATE CONCERN OF THE ASSESSEE FORM WHOM IT HAS NOT RECOVERED OUTSTANDING DUES TO THE TUNE OF RS.27.05 CRORES THOUGH THE ASSESSEE COMPANY ITSELF FACED A FINANCIAL CRUNCH AND THE COMPANY BORE LIABILITY OF INTEREST ON BORROWED FUNDS. 5(C) ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LEARNED CIT(A) ERRED IN NOT APPRECIATING THE FACT THAT THE SAME SISTER CONCERN IS BENEFICIAR Y OF ASSIGNMENT OF LOAN DEBTS OF M/S PERFECT POLYCON CO. LTD., FOR A CONSIDERATION OF RE.1 ONLY INDICATING CONTRIVED ACCOMMODATION OF GROUP CONCERNS AT THE COST OF ASSESSEE COMPANYS INTEREST BEARING BORROWED FUNDS. 6. ON THE FACTS AND CIRCUMSTANCES OF TH E CASE AND IN LAW, THE LEARNED CIT(A) ERRED IN DIRECTING THE ALLOWANCE ON ACCOUNT OF TECHNICAL KNOW - HOW FEES PAID TO M/S AVL AUSTRIA HAS NOT BE DISALLOWED U/S 40(A)(I) IN THE ASSESSMENT ORDER WITHOUT APPRECIATING THAT NO DISALLOWANCE HAS BEEN MADE BY THE A SSESSING OFFICER ON THIS ACCOUNT IN THE ASSESSMENT ORDER. 7. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) ERRED IN DELETING THE DISALLOWANCE MADE U/S 49A(9) IN RESPECT OF CONTRIBUTION TO LML EXECUTIVE CUB, LML OFFICERS CLUB, L ML LADIES CLUB AND WORKERS BENEVOLENT FUND AGGREGATING TO RS.5,81,936/ - . 8. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) ERRED IN DELETING THE DISALLOWANCE MADE BY THE ASSESSING OFFICER ON ACCOUNT OF PRE - 6 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 OPERATIVE EXPENSES AMO UNTING TO RS.3,76,81,000/ - CLAIMED AS REVENUE EXPENDITURE. 9. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) ERRED IN NOT TREATING THE EXPENDITURE INCURRED ON OBTAINING ISO 9002 CERTIFICATE AND WORLD CLASS MANUFACTURE OF RS.11,30,912/ - AND RS.6,23,380/ - RESPECTIVELY AS CAPITAL EXPENDITURE IGNORING THE FACT THAT THESE EXPENSES HAVE FETCHED THE ASSESSEE THE BENEFIT OF ENDURING NATURE. 10(A) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) ERRED IN D IRECTING THE ASSESSING OFFICER TO ALLOW THE AMOUNT OF RS.17.59 CRORES AS BAD DEBT IN LIEU OF ASSESSEES CLAIM OF LOSS UNDER THE HEAD CAPITAL GAIN IGNORING THE FACT THAT THIS WAS NOT A GENUINE COMMERCIAL TRANSACTION BUT A CONTRIVED ONE INTENDED TO MANUFACTU RE LOSS. 10(B) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) ERRED IN DIRECTING TO ALLOW BAD DEBTS OF RS.17.59 CRORES WHICH ARE NOT GENERATED OUT OF TRADING TRANSACTION, IGNORING THE FACT THAT SUCH DEBTS DO NOT FALL WITHIN THE PROVISIONS OF SECTION 36(1)(VII) OF THE I.T. ACT. 11. THE APPELLANT PRAYS THAT THE ORDER OF THE CIT(A) ON THE ABOVE GROUNDS BE SET ASIDE AND THAT OF THE ASSESSING OFFICER BE RESTORED. 12. THE APPELLANT CRAVES LEAVE TO AMEND OR ALTER ANY GROUND OR ADD A N EW GROUND WHICH MAY BE NECESSARY. 7 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 2. BRIEF FACTS QUA THE ISSUE RAISED IN GROUND NO S . 1(A) TO 1(C) , AS CULLED OUT FROM THE IMPUGNED ORDER S ARE THAT, THE ASSESSEE COMPANY (LML) WAS INCORPORATED IN THE YEAR 1972 AS A PRIVATE LIMITED COMPANY AND WAS THEN ENGAGED MAINLY INTO ENGINEERING , BUSINESS OF MANUFACTURING OF TEXTILE MACHINERY , ETC . LATER ON, IT DIVERSIF IED ITS BUSINESS ACTIVITIES IN THE YEAR 1984, WHEN IT STARTED THE MANUFACTURING OF TWO WHEELERS MAINLY SCOOTERS IN T ECHNICA L COLLABORATION AND UNDE R L ICENSE AGREEMENT WITH PIAGGO COMPANY OF ITALY WHO WERE THE INVENTORS OF THE SCOOTERS AND WERE ALSO THE LARGES T TWO WHEELER PRODUCERS IN EUROPE HAVING MORE THAN 50% OF THE EUROPEAN MARKET NOT ONLY IN TWO WHEELERS BUT ALSO IN THREE W HEELERS. PIAGGIO HAD A GLOBAL PRESENCE THROUGH VARIOUS JOINT VENTURE COLLABORATION S , FRANCHISE S AND LICENSE AGREEMENT S FOR MANUFACTURING AND DISTRIBUTION OF THE PRODUCTS IN AND AROUND 130 COUNTRIES THROUGH VARIOUS SUBSIDIARIES, LICENSEES AND DISTRIBUTOR S . THE ASSESSEE COM PANY HAD ENTERED INTO A JOINT VENTURE AGREEMENT WITH THE PIAGG I O GROUP IN THE YEAR 1990 WHICH HAS ALSO LED TO ENTERING OF VARIOUS OTHER AGREEMENTS AND ARRANGEMENTS WITH PIAGGIO INCLUDING LICENSING AGREEMENT S , EXCLUSIV ITY AGREEMENTS , ENGINEERING AGREEMENTS AND MOUS IN WHICH THERE WERE TWO OR MORE PARTIES OUT OF INDIAN PROMOTERS AND ITS AFFILIATES LML, VCCL. BESIDES THERE WERE ALSO BUSINESS DEALINGS AND TRANSACTIONS BETWEEN PIAGGIO AND LML AND VCCL INCLUDING TRANSACTIONS RELATING TO PURCHASE, SALE, SUPPLY OF COMPONENTS , ASSEMBLIES OF VEHICLES , ETC. THIS JOINT VENTURE WAS RENEWED AGAIN IN THE YEAR 1995 AND WAS VALID TILL 30 TH DECEMBER, 2005. LATER ON, SERIOUS DIFFERENCES AND DISPUTES AROSE BETWEEN PROMOTERS OF LML AND PROMOTERS OF PIAGGIO WHICH LED TO THE INITI ATION OF ARBITRATION PROCEEDINGS BY FILING 8 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 CLAIM S AND COUNTER CLAIM S AGAINST EACH OTHER AND ALSO FILING OF CIVIL SUIT BY PIAGGIO , IN WHICH ASSESSEE WAS ALSO MADE PARTY . IT WAS LATER DESIRED TO RESOLVE THROUGH OUT OF COURT SETTLEMENT ALL THEIR DISPUTES AND DIFFERENCES OUTSTANDING AMONGST THEM AND TO TERMINATE ALL PAST SUBSISTING AGREEMENTS BETWEEN VARIOUS PARTIES AND TO HAVE A CLEAN BREAK IN THE RELATIONSHIP BETWEEN THE PARTIES AND AS A PART OF SUCH SETTLEMENT CERTAIN RIGHTS AND OBLIG ATIONS OF PARTIES WERE DRAWN /IMPOSED . AS A RESULT OF SUCH AN UNDERSTANDING AND NEGOTIATIONS , ON 15 TH NOVEMBER, 1999, A S ETTLEMENT AND CLEAN B REAK A GREEMENT (SCB) WAS ENTERED BETWEEN THE INDIAN PROMOTERS; LML, VESPA CAR COMPANY LTD AND M/S PIAGGIO CS PA AN D PIAGGIO VESPA BV. THE IMPORTANT TERMS IN THE SETTLEMENT AGREEMENT WERE AS UNDER: - (1) PIAGGIO BV SHALL SELL ALL ITS SHARES IN LML TO INDIAN PROMOTERS THEIR NOMINEES @ 14.06 PER SHARE; (2) PIAGGIO & CSPA SHALL PAY TO LML LTD. FIVE MILLION, FIVE HUNDRED T HOUSAND US DOLLARS ($5,500,000 US) IN CONSIDERATION OF TERMINATION OF ALL CONTRACTS AND OF THE FINAL SETTLEMENT ARRIVED AT INCLUDING CESSATION OF NON COMPETITION OBLIGATION ASSUMED BY PIAGGIO AND RIGHTS OF LML. (3) LML SHALL BE ENTITLED TO MANUFACTURE, MAR KET, SELL, DISTRIBUTE, SERVICE, REPAIR AND MAINTAIN ONLY IN INDIA THE VEHICLES PRESENTLY KNOWN AS ET4 AND NOT EXPORT THE SAME DIRECTLY OR INDIRECTLY, AT ANY TIME BEFORE DECEMBER 31, 2007. (4) LML WILL NOT UNDERTAKE MANUFACTURE OF PIAGGIO MOTORCYCLE. (5) PI AGGIO SHALL BE ENTITLED TO UNDERTAKE MANUFACTURE IN INDIA AND/OR MARKETING OF ALL KINDS OF TWO WHEELERS 9 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 AND ANY BUSINESS ACTIVITY IN INDIA SAVE AND EXCEPT NOT BEFORE DECEMBER 31, 2007 SUBLICENSE, MANUFACTURE, MARKETING, SALE AND DISTRIBUTION OF TWO WHEELER S POWERED BY A LATERAL ENGINE AS DEFINED IN THE AGREEMENT. (6) LML AND VCCL SHALL CEASE USAGE AND SHALL CAUSE THEIR DEALERS TO UNDERTAKE TO CEASE USAGE OF ALL PIAAGIO TRADE MARKS WORLDWIDE. (7) ALL CONTRACTUAL AND BUSINESS RELATIONS SHALL BE DEEMED TERMINA TED BY MUTUAL AGREEMENT OF THE PARTIES SAVE AND EXCEPT AS OTHERWISE EXPRESSLY PROVIDED THIS AGREEMENT. (8) ALL CONTRACTS SHALL STAND TERMINATED IN ALL RESPECTS, WITHOUT ANY PARTY THERETO HAVING ANY SURVIVING RIGHTS, OBLIGATIONS OR LIABILITIES TOWARDS ANY OTHER PARTY THERETO. IN PARTICULAR AND WITHOUT LIMITATION BUT SUBJECT TO THE TERMS OF THIS SETTLEMENT AGREEMENT, ALL EXCLUSIVELY WHICH MAY HAVE BEEN GRANTED TO THE INDIAN PROMOTERS, LML AND/OR VCCL UNDER THE CONTRACT SHALL CEASE AND NON COMPETITION OBLIGAT IONS ASSUMED BY PIAGGIO SHALL ALSO CEASE. PIAGGIO MAY FREELY COMPETE IN INDIA EXCEPT IN REGARD TO LATERAL ENGINE AND PIAGGIO MOTOR CYCLE UP TO 31.3.2007 . (9) THE PAYMENT BY P TO LMLL OF 5.5 MILLION DOLLARS HAS BEEN MADE IN CONSIDERATION OF TOTAL DISCHARGE BY PIAGGIO OF ANY OBLIGATION AS A CO - PROMOTER OF VCCL/LML FOR ANY DEBTORS OF VCCL TOWARDS ANY THIRD PARTY, AS WELL AS IN CONSIDERATION OF OTHER RIGHTS AND WAIVERS AND RELEASE IN FAVOUR OF PIAGGIO IN FULL AND FINAL SETTLEMENT OF THE DISPUTE AND LITIGATIONS REFERRED TO IN THE SETTLEMENT AGREEMENT. (10) INDIAN PROMOTERS, LML AND VCCL SHALL BE DEEMED TO INDEMNIFY PROTECT AND HOLD HARMLESS, AND RELEASE AND 10 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 WAIVE IN FAVOUR OF PIAGGIO AND CSPA ITS AFFILIATE ETC. FROM OR AGAINST ANY CAUSE OF ACTION, CLAIMS, LOSSES, LIABILITIES, COSTS AND EXPENSES ARISING UNDER OR RELATING TO ANY CLAIM OF BREACH, NON PERFORMANCE, FRAUDS, LIBEL, SLANDER, DEFAMATION, CONTEMPT OF COURT OR ANY IMPROPER ACTION OR INACTION RELATING TO ANY CONTRACTS OR ARISING OUT OF OR RELATING TO BUSINESS AND AFFAIRS OF LML, VCCL ETC. OR OUT OF OR RELATING TO LICENSING OR SUPPLY OF TECHNOLOGY ASSISTANCE BY PIAGGIO ETC TO LML ETC UNDER THE CONTRACTS OR OUT OF OR RELATING TO SHARE HOLDING OF PIAGGIO BV IN LML OR VCCL INCLUDING ALL CLAIMS MADE OR WHICH COULD BE MADE IN ANY LEGAL PROCEEDINGS AND/OR ON ACCOUNT OF EXERCISE OF ANY RIGHTS UNDER POWERS OF ATTORNEY WHETHER BASED ON CONTRACT, TORT, STATUE OR OTHER THEORIES OF LAW. ML SHALL NOT GRANT ANY SUB LICENSE (FOR PRODUCTS COVERED UNDER THE CONTRACTS) TO ANY 100 % LML SUBSIDIARY FOR ANY FACILITY LOCATED IN EUROPE, INDONESIA, THAILAND, TAIWAN OR CHINA. LML AND VCCL SHALL HAVE RIGHT TO CONTINUE TO PRODUCE TWO WHEELERS INCLUDING CURRENT PRODUCTS OR OTHER PRODUCTS USING PIAGGIO TECHNOLOGY OR TECHNICAL INFORMATION. (11) LML SHALL (I) USE TECHNOLOGY RELATING TO ET4 ONLY IN INDIA AND (II) NOT EXPORT OUTSIDE INDIA UP TO 31.12.2007 AND ALSO NOT TO GRANT SUB=LICENSING RIGHTS TO THIRD PARTIES. 3. IN PURSUANCE OF THE SAID AGREEMENT, THE ASSESSEE RECEIVED A PAYMENT OF USD $ 5.5 MILLION WHICH IN TERMS OF INR WAS RS.2388.65 LAKHS (RS.23.89 CRORES APPROX ) TOWARDS TERMINATION OF JOINT VENTURE AGREEMENT AND CONSEQUENTIAL TERMINATION OF OTHER ENGINEERING AND LICENSE AGREEMENT AS WELL AS CESSATION OF NON - COMPETE OBLIGATION OF JOINT VENTURE PARTNER. IN THE FINA NCIA L STATEMENT FOR THE YEAR ENDING 31 ST 11 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 MARCH 2000, THE ASSESSEE PUT A NOTE NO. 13 IN NOTES ON ACCOUNT FORMING PART OF THE BALANCE SHEET STATING AS UNDER: - 13. VARIOUS DISPUTES AND DIFFERENCES HAD ARISING DURING THE PREVIOUS PERIOD AMONG PIAGGIO & CSPA, PIAGGIO VESPA BV, INDIAN PROMOTERS, THE COMPANY WHICH RESULTED IN PROCEEDINGS IN SEVERAL LEGAL FORUMS. ON 15 TH NOVEMBER, 1999, A SETTLEMENT AND CLEAR BREAK AGREEMENT WAS ENTERED INTO BETWEEN M/S PIAGGIO & CSPA, PIA GGIO VESPA BV, INDIAN PROMOTERS, THE COMPANY AND VCCL LIMITED (FORMERLY KNOWN AS VESPA CAR COMPANY LIMITED) TO EFFECT A FULL AND FINAL SETTLEMENT OF ALL THEIR DISPUTES & DIFFERENCES, TO TERMINATE ALL PAST SUBSISTING AGREEMENTS AND TO HAVE A CLEAN BREAK IN RELATIONSHIP AS PER THE TERMS CONTAINED THEREIN. IN PURSUANCE OF THE ABOVE SAID AGREEMENT: ( A ) THE COMPANY HAS RECEIVED A SUM OF US$ 55 LAKHS (EQUIVALENT TO RS.2388.65 LAKHS) FROM PIAGGIO & CSPA TOWARDS TERMINATION OF ALL AGREEMENTS AND OF FINAL SETTLEMENT TH EREIN RECORDED INCLUDING CESSATION OF NON COMPETITION OBLIGATIONS ASSUMED BY PIAGGIO AND RIGHTS OF THE COMPANY. ( B ) THE AMOUNT OF RS.880 LAKHS RECEIVED FROM P I A GGIO VESPA BV IN AN EARLIER PERIOD AS AN ADVANCE AGAINST SHARE APPLICATION MONEY, NO LONGER REFUNDAB LE, HAS BEEN FORFEITED. THE COMPANY HAS OBTAINED LEGAL ADVICE ABOUT THE ACCOUNTING AND TAX TREATMENT OF THE ABOVE AMOUNTS. ACCORDINGLY, THE COMPANY HAS TREATED THE SAID AMOUNTS AS CAPITAL RECEIPTS AND DIRECTLY CREDITED TO CAPITAL RESERVE IN RESPECT OF WHIC H NO PROVISION FOR INCOME TAX IS CONSIDERED NECESSARY. 12 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 THUS, THE AMOUNT RECEIVED FROM PIAGGIO WAS TREATED AS CAPITAL RECEIPT NOT LIABLE FOR TAXATION . 4. BEFORE THE AO, THE ASSESSEE IN RESPONSE TO THE SHOW CAUSE NOTICE AS TO WHY IT SHALL NOT BE TREATED AS REVENUE RECEIPTS, HIGHLIGHTED THE MAIN F EATURES OF SETTLEMENT AGREEMENT AND ALSO THE APPROVAL OF THE SAID AGREEMENT BY THE BOARD OF DIRECTORS ( WHICH HAS BEEN INCORPORATED BY AO IN PAGES 5 AND 6 OF THE ASSESSMENT ORDER ) AND CONTENTED THAT THE AMOUNT RECEIVED AS COMPENSATION WAS FOR LOSS ON ACCOUNT OF IMPOSITION OF SEVERAL NEGATIVE COVENANTS QUA THE ASSESSEE, HENCE IT WAS A CAPITAL RECEIPTS . THE LD. AO AFTER CONSIDERING THE ASSESSEES ARGUMENTS AND MATERIAL ON RECORD OBS ERVED THAT THE COLLABORATION WITH PIAGGIO BY THE ASSESSEE HAS IMMENSELY HELPED THE ASSESSEE IN DIVERSIFYING ITS OPERATION FROM ITS TRADITIONAL BUSINESS OF DEALING IN YARN TO HIGHLY TECHNICAL FIELD OF MANUFACTURING OF SCOOTERS AND TWO WHEELERS AND SPARE PAR TS IN INDIA. THIS AGREEMENT HAD GIVEN ASSESSEE GOOD AMOUNT OF BUSINESS IN INDIA AND ABROAD RESULTING INTO HUGE PROFITS. IN FACT, AT THE RELEVANT POINT OF TIME, THIS COLLABORATION HAS PUT THE ASSESSEE COMPANY IN NUMBER 2 POSITION OF TWO WHEELER MANUFACTURIN G IN INDIA AFTER BAJAJ AUTO LIMITED . HAD THIS COLLABORATION CONTINUED ASSESSEE WOULD HAVE REAPED HUGE DIVIDEND. HE ALSO NOTED THAT, POST SETTLEMENT AND CLEAN BREAK AGREEMENT (SCB) DATED 15.11.1999, VARIOUS RESTRICTIONS AND EMBARGOS WERE IMPOSED UPON THE AS SESSEE WHEREIN ; I) THE ASSESSEE WAS NOT ALLOWED TO USE BRAND NAMES OF PIAGGIO HENCEFORTH; II) THE UP GRADATION OF NEW TECHNOLOGY FROM PIAGGIO WAS STOPPED; 13 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 III) PIAGGIO WAS ALLOWED TO ENTER INTO COLLABORATION AGREEMENTS WITH OTHER PARTIES IN INDIA TO MANUFACTURE AND COMPETE WITH LML; IV) ALL THESE FACTORS HAD THE EFFECT OF REDUCING THE FUTURE PROFITABILITY OF LML TREMENDOUSLY; V) IN LIEU OF VARIOUS RESTRICTIVE COVENANTS HAVING EFFECT ON BUSINESS OF THE LML, PIAGGIO PAID LML A SUM OF RS.23,88,65,000/ - (EQUIVALENT TO US $ 5 . 5 MILLION) AND RS.8,80,00,000 / - . AFTER INVITING THE ASSESSEES SUBMISSION WITH REGARD TO TAXABILITY OF COMPENSATION OF RS.23,88,65,000/ - AND DESPITE HIS ABOVE OBSERVATION S , THE AO CAME TO THE CONCLUSION THAT THE SAID RECEIPT IS NOT A CAPITAL RECEIPT BUT A REVENUE RECEIPT. SUM AND SUBSTANCE OF HIS CONCLUSION AND REASONING ARE AS UNDER: - I ) THE ASSESSEE COMPANY AND ITS COLLABORATOR HAVE MUTUA LLY AGREED UPON TO PRE - MATURELY END TO THIS COLLABORATION ARRANGEMENT AND SUCH A PREMATURE ENDING OF THE AGREEMEN T RESULTED IN THE RECEIPT OF THE AMOUNT AND IF ASSESSEE WOULD HAVE CONTINUED WITH THE COLLABORATION U N TILL 30TH DECEMBER, 2005, THEN THE ASSESSEE DEFINITELY WOULD NOT HAVE ENTITLED ITSELF FOR SUCH A LUMP - SUM AMOUNT. T HE AMOUNT IS NOT ON ACCOUNT OF RELINQUISHMENT OF ANY OTHER TANGIBLE OR INTANGIBLE ASSETS OR CLOSURE OF BUSINESS . THUS, THE RECEIPT IS NEITHER FOR ANY SALE OF CAPITAL ASSET NOR FOR SALE OF ANY BUSINESS ACTIVITY; II ) THE AMOUNT RECEIVED BY THE ASSESSEE IS NOTHING BUT COMPENSA TION FOR VARIOUS BENEFITS THAT IT WOULD HAVE 14 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 DERIVED, HAD THE AGREEMENT WITH PIAGGIO WOULD HAVE REMAINED IN FORCE . W HAT THE ASSESSEE HAD LOST IS SUBSTANTIAL TECHNOLOGICAL ADVANTAGE AS WELL AS MARKET ADVANTAGES VIS - - VIS ITS COMPETITORS ON ACCOUNT OF PREMAT URE TERMINATION OF BUSINESS COLLABORATION AGREEMENT. IT WAS UNDER THESE CIRCUMSTANCES AND AS A MATTER OF BUSINESS PRUDENCE THE ASSESSEE WAS SUITABLY COMPENSATED FOR SUCH A COLOSSAL LOSS . HOWEVER, IT DOES NOT MEAN IT HA D ANY ILL - EFFECT TOWARDS TH E PRESENT A S WELL AS FUTURE PROFIT S ; III ) FROM THE PERIOD 199 0 TO 15.11.1999, THAT IS, A PERIOD DURING WHICH COLLABORATION AGREEMENT EXISTED, THE ASSESSEE HAD ALREADY STABILIZED ITS PRODUCTION AS WELL AS MARKET IN THE TWO WHEELER INDUSTRY. SEVERANCE OF THE AGREEMENT HAS NOT AFFECTED THE NORMAL DAY - TO - DAY BUSINESS ACTIVITY AND PRODUCTION ACTIVITY OF THE ASSESSEE COMPANY. BY VIRTUE OF THE TERMINATION, THE ASSESSEES MANUF ACTURING ACTIVITY HAS NOT STOPPED NOR HAS BEEN ASKED NOT TO USE THE TECHNOLOGY THAT IT ALREADY RECEIVED /ACQUIRED FROM PIAGGIO OVER THE PERIOD OF TIME . IN THIS BACKGRO UND, HE HELD THAT THE AMOUNT OF RS.23,88,65,000/ - IS A REVENUE RECEIPT WHICH HAS TO B E TAXED AS BUSINESS INCOME OF THE ASSESSEE. 5. BEFORE THE CIT(A), ASSESSEE AGAIN PLACED ALL THE RELEVANT MATERIAL FACTS TO HIGHLIGHT THE TERMS AND CONDITIONS OF THE AGREEMENT AND THE SETTLEMENT IN WHICH ASSESSEE HAD RECEIVED COMPENSATION OF RS.23.88 CRORES. THE RESTRICTIVE COVENANTS ATTACHED TO THE RECEIPTS FLOWING FROM SCB WAS HIGHLIGHTED BEFORE THE CIT(A) IN THE FOLLOWING MANNER: - 15 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 (1) THE JOINT VENTURE PREMATURE TERMINATION HAS RESULTED IN ADVERSE BUSINESS CONSEQUENCES BY FORECLOSING BUSINESS OPPORTUNITIES FOR THE FOR THE NEXT 5 YEARS (I.E. UP TO 31.12.2005 AS THE JV WAS AGREED UPON UP TO THIS DATE) (2) THE AGREEMENT CONCERNING TERMI NATION OF THE RELATIONSHIP HAS RESULTED IN THE FOLLOWING FURTHER ADVERSE EFFECTS FOR LML NAMELY: - (I) LMLS MARKET HAS STRUCK AS IT HAS BEEN RESTRICTED ONLY TO INDIA IN RESPECT OF CLAIMS LIKE ET4 AND ITS RIGHT TO EXPORT THE PRODUCT DIRECTLY OR INDIRECTLY HAS BEEN TOTALLY CURTAILED TILL 31.12.2007 LEADING TO STOPPAGE OF AN AVENUE OF INCOME. FURTHER THERE IS ALSO THE RESTRICTION THAT IN RESPECT OF ET4 LML WILL NOT GRANT SUB LICENSE TO ANY ONE; (II) RESTRICTION HAS BEEN PLACED IN THE MATTER OF MANUFACTURE O F PIAGGIO MOTOR CYCLE BY LML. THIS TOO IS IN THE NATURE OF CLOSING OF SOURCE OF BUSINESS ACTIVITY PERMANENTLY AFFECTING THE VITAL STRUCTURE CONCERNING LMLS BUSINESS; (III) AFTER 31.12.2007, P WOULD BE ENTITLED TO COMPETE WITH LML IN INDIA THROUGH MAN UFACTURE, SALE, MARKETING AND DISTRIBUTION AGREEMENTS CONCERNING THE TWO WHEELERS POWERED BY A LATERAL ENGINE. (IV) USE OF PIAGGIO NAME TRADE MARK UNDER WHICH BUSINESS WAS HITHERTO DONE HAS BEEN PROHIBITED. THIS WILL AFFECT THE OVERALL BUSINESS STRATEGY OF LML; 16 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 (V) THERE WOULD BE CEASURE OF ALL RELATIONSHIP BY TERMINATION OF ALL CONTRACTS WHICH WOULD AFFECT THE ENTIRE BUSINESS SET UP OF LML; (VI) ANY LIABILITY RELATABLE TO P IAGGIO AND ITS GROUP COMPANIES HAVING DEALING WITH LML HENCEFORTH WILL BE OF LML; (VII) P IAGGIO AND ITS ASSOCIATES WILL NO LONGER BE BOUND BY NON - COMPETE AGREEMENTS AND WOULD BE FULLY ENTITLED TO COMPETE WITH LML; (VIII) DESIGNS, TECHNOLOGY ETC. CONCERNING PIAGGIO MOTOR CYCLE WILL NOT BE DISCLOSED OR TRANSFERRED TO ANYBODY. (3) SUBSTANTIAL SUM EXPECTED TO BE RECEIVED FROM P IAGGIO AS CAPITAL CONTRIBUTION TOWARDS THE PROPOSED DIVERSIFICATION - CUM - EXPANSION PROGRAMME OF RS.204 CRORES HAS FALLEN THROUGH BECAUSE OF TERMINATION OF RELATIONSHIP AFFECTING THE FUTURE BUSINESS STRUCTURE WH ICH WOULD HAVE EARNED SUBSTANTIAL BUSINESS GAINS TO LML. 6. LD. CIT(A) AFTER CONSIDERING THE ENTIRE MATERIAL PLACED ON RECORD AND ALSO THE REASONING OF THE AO AND SUBMISSIONS MADE BY THE ASSESSEE, HELD THAT THE AMOUNT RECEIVED BY THE ASSESSEE IS TO BE TREATED AS CAPITAL RECE IPTS NOT LIABLE FOR TAX ATION EITHER AS A BUSINESS INCOME OR AS A CAPITAL GAIN. FIRST OF ALL, HE OBSERVED THAT, THE ISSUE REGARDING THE TAXATION OF AFORESAID SUM NEEDS TO BE EXAMINED FROM FOLLOWING ANGLE: - 17 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 ( I ) WHETHER RECEIPT COULD BE CONSIDERED TO BE A RECEIPT OF A CASUAL AND NON - RECURRING NATURE AND HENCE TAXABLE IN TERMS OF SECTION 10(3) OF THE I.T. ACT.? ( II ) WHETHER IT COULD BE TAXED AS COMPENSATION IN TERMS OF SECTION 28(II) OF THE ACT? ( III ) WHETHER IT COULD BE CONSIDERED INCOME APART FR OM THE TWO PROVISIONS MENTIONED AT (I) AND (II) ABOVE? AND ( IV ) WHETHER IT COULD BE CONSIDERED AS CAPITAL GAIN TAXABLE IN TERMS OF SECTION 45? ON THE FIRST PART , HE HELD THAT THE SAID RECEIPT WAS A NON - RECURRING NATURE AND IS NOT LIKELY TO RECUR AGAIN AND THEREFORE, NEITHER IT IS INCOME OF A CASUAL NATURE NOR OF A NON - RECURRING NATURE . IN SUPPORT, HE RELIED UPON A DECISION OF : - I) P H DIVECHA V CIT [1963] 48 ITR 222 (SC); AND II) CIT V M RAMA LAKSHMI REDDY [1981] 131 ITR 415(MAD); ON THE SECOND PART , WHETHER IT IS A COMPENSATION UNDER SECTION 28(II), HE HELD THAT THE SAID PAYMENT DO NOT FALL IN ANY OF THE SUB - CLAUSES OF CLAUSE (II) OF SECTION 28 , THEREFORE IT IS BEYOND AMBIT OF SECTION 28 ALSO . ON THE THIRD PART, HE HELD THAT THE SETTLEMENT AGREEMENT SPECIFICALLY STERILIZE D THE PROFIT EARNING APPARATUS OF THE ASSESSEE AND BUSINESS O F THE ASSESSEE , THEREFORE, IT IS ON CAPITAL FIELD . IN SUPPORT OF HIS CONCLUSION , HE RELIED UPON FOLLOWING DECISIONS: 18 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 S. NO CASE LAW CITATION 1 CIT V SOUTH INDIA FLOUR MILLS P LTD. [ 1970] 75 ITR 147 (MAD) 2 KETTLEWELL BULLEN & CO. LTD. V CIT [1964] 53 ITR 261 (SC) 3 GILLANDERS ARBUTHNOT & CO. (P) LTD V CIT [1964] 53 ITR 283 (SC) 4 CIT V SHESHASAYEE BROS (P) LTD. [1999] 239 ITR 471 (MAD 5 CIT V PRABHU DAYAL [1971] 82 ITR 804(SC) 6 CIT V BAAJI CHITRA MANDIR [1985] 154 ITR 777 (AP) 7 BREAK, INSPECTOR OF TAXES V ROBSON [1942] 25 TAX CASE 33(HL ) 8 CIT V BEST & CO. (P) LTD. [1966] 60 ITR 11 (SC) 9 GENBOIG UNION FIRECLAY CO LTD V COMMISSIONER OF INLAND REVENUE [1922] 12 TC 427 (HL) AFTER REFERRING TO THESE DECISIONS, THE LD. CIT(A) CAME TO THE CONCLUSION ON THE FACTS THAT IT CANNOT BE A CASE OF CONSIDERING THE SAID AMOUNT OF COMPENSATION AS BUSINESS INCOME. LASTLY, O N THE ISSUE OF CAPITAL GAIN ALSO, HE HELD THAT , SINCE THERE IS NO COST OF ACQUISITION WHICH CAN BE ATTRIBUTED TO THE RIGHTS SURRENDERED BY THE SCB CAN BE ARRIVED AT, THEREFORE, IN VIEW OF THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CIT VS B . C . SRINIVASA SHETTY, REPORTED IN [1981] 128 ITR 294, NO CAPITAL GAIN IS LIABLE TO BE TAXED. THUS, ON THESE GROUNDS, HE DELETED THE ADDITION MADE BY THE AO. 7 . BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE AFTER EXPLAINING THE ENTIRE FACTS WHICH HAS BEEN SUCCINCTLY DISCUSSED ABOVE BY US , HE SUBMI TTED THAT HERE IN THIS CASE, BY VIRTUE OF TERMINATION OF THE JV AGREEMENT THE ENTIRE BUSINESS OF THE ASSESSEE HAS BEEN IMPAIRED AND THE ADVERSE AFFECT OF SUCH TERMINATION CAN BE SEEN IN THE PROFITS OF THE LML FOR YEAR 31ST MARCH, 2000 ITSELF AND IN LATER Y EARS THE ASSESSEE RAN INTO HEAVY LOSSES . THE PRODUCTION OF THE ASSESSEE FELL DOWN ALMOST BY 45% IN THIS YEAR AS COMPARED TO THE PREVIOUS PERIOD AND ALSO THE INSTALLED CAPACITY USE D WAS ONLY 61% WHICH EARLIER WAS 110%. THIS EFFECT WAS THERE IN THE 19 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 IMMEDIATE LY FIRST YEAR OF THE DISPUTE AND LATER ON THE POSITION HAD BECOME WORST IN LATER YEARS IN AS MUCH AS LM L BECAME SICK COMPANY IN THE ASSESSMENT YEAR 2006 - 07 AND IS BEFORE THE BIFR FOR ITS REVIVAL TILL DATE . IT IS SOLELY BECAUSE OF THIS TERMINATION OF JOINT VENTURE , THE ENTIRE BRAND VALUE AND BUSINESS OF LML HAS BEEN FINISHED. THUS, THE WHOLE PROFIT MAKING APPARATUS AND BUSINESS HAS BEEN PARALYZED POST THIS TERMINATION OF AGREEMENT , THEREFORE COMPENSATION AWARDED IS TO BE TREATED A S CAPITAL RECEIPT . ON THE VARIOUS ALLEGATION OF THE AO, HE GAVE POINT - WISE REBUTTAL AND REITERATED THAT THE RESTRICTED COVENANT PUT IN SCB HAS CAUSED HUGE LOSS TO ASSESSEE FROM WHICH ASSESSEE COULD NOT REVIVE TILL DATE . HE SUBMITTED THAT, NOT ONLY THE LML WAS BARRED FROM MANUFACTURING OF PIAGGIO TWO WHEELERS BUT ALSO EXPORT WAS RESTRICTED FOR THE PERIOD OF 7 YEARS AND IT COULD NOT USE PIAGGIO TRADEMARK. NOT ONLY THAT , PIAGGIO WAS GIVEN RIGHT TO COMPETE IN INDIA , WHICH IMPAIRED ASSESSEES BUSINESS . THUS, THE WHOLE PROFIT M AKING APPARATUS WAS STERILIZE D DUE TO VARIOUS NEGATIVE COVENANTS . HE ALSO DISTINGUISHED THE DECISIONS RELIED UPON BY THE AO, THAT IS, CIT V SHAMSHER PRINTING PRESS, REPORTED IN [1960] 39 ITR 90, IN THE CASE OF BLUE STAR LTD VS CIT, REPORTED IN [1995] 217 I TR 514 ON THE GROUND THAT , IN THE FIRST DECISION THE COMPENSATION WAS PAID FOR COMPULSORY VACATION OF PREMISE AND ASSESSEE HAD SHIFTED ITS BUSINESS PLACE WITHOUT IMPAIRING THE BUSINESS AT ALL BECAUSE ASSESSEE CONTINUED ITS BUSINESS LATER ON AND THERE WAS N O LOSS OF ACTUAL PROFIT MAKING APPARATUS. IN THE SECOND DECISION, THE COMPENSATION WAS PAID FOR LOSS OF AGENCY DURING THE COURSE OF NORMAL COURSE OF BUSINESS. IT DID NOT AFFECT THE TRADING, STRUCTURE NOR DEPRIVED ASSESSEE FROM ITS SOURCE OF INCOME . HERE IN THIS CASE HE SUBMITTED THAT WHOLE PROFIT 20 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 MAKING APPARATUS GOT IMPAIRED. IN SUPPORT H E ALSO GAVE DATA FOR DOWN FALL OF THE PRODUCTION AND SALE S IN THE LATER YEARS AND ALSO HOW SCB HAD AFFECTED ITS BUSINESS. LASTLY, LD. COUNSEL RELIED ON THE FOLLOWING DECIS IONS: - I VAZIR SULTAN & SONS [1959] 36 ITR 175(SC) II PH DIVECHA [1963] 48 ITR 222(SC) III GILANDERS ARBUTHNOT & CO LTD [1964] 53 ITR 283 (SC) IV KETTLEWELL BULLLEN & CO. LTD. [1964] 53 ITR 261 (SC) V PRABHU DAYAL [1971] 82 ITR 804 (SC) VI BEST AND CO. (PRIVATE) LTD. [1966) 60 ITR 11 (SC) VII OBEROI HOTEL (P) LTD [1999] 236 ITR 902(SC) VIII AUTOMOBILE PRODUCTS OF INDIA [1981] 7 TAXMAN 327(BOM) IX SOUTH INDIA FLOUR MILLS (P) LTD [1970] 75 ITR 147 (MAD) X SESHASAYEE BROS (P) LTD [1999] 239 ITR 471 (MAD) XI GHAZIABAD ENG. CO. (P.) LTD. [1984] 7 ITD 289 (DEL) XII GUFFIC CHEM (P.) LTD. V CIT [2011] 322 ITR 602 (SC) XIII BISLERI SALES LTD . [2013] 115 TTJ 285 (MUMBAI ITAT) 8 . ON THE OTHER HAND, LD. DR STRONGLY RELIED UPON TH E ORDER OF THE AO AND SUBMITTED THAT THE ASSESSEE WAS IN THE BUSINESS PRIOR TO PIAGGIO AGREEMENT AND ALSO CONTINUED TO DO THE SAME BUSINESS POST - TERMINATION OF THE AGREEMENT. THERE IS NO LOSS ON ACCOUNT OF SOURCE OF REVENUE , WHICH CONTINUED ALBEIT ON A LESSER SCALE . THE COMPENSATION PAID WAS ON BREACH OF AN AGREEMENT DURING THE NORMAL COURSE OF THE BUSINESS, HENCE IS ON REVENUE ACCOUNT . EVEN OTHERWISE ALSO, ANY SUM RECEIVED UNDER AN AGREEMENT EITHER FOR NOT CARRYING OUT ANY ACTIVITY OR FOR NOT SHARING OF ANY TECHNICAL KNOW - HOW ETC, SUCH AN AMOUNT IS TO BE TREATED AS BUSINESS INCOME ONLY . IN SUPPORT H E STRONGLY REFERRED TO SECTION 28(V)(A) WHICH THOUGH HAS COME IN THE STATUTE W.E.F. AY 2003 - 04 HOWEVER, HE SUBMITTED THAT THE S A ME SPIRIT OF THE LAW SHOULD BE APPLIED FOR THE EARLIER YEARS ALSO . HE FURTHER SUBMITTED THAT, HERE IT IS NOT A CASE OF LOSING THE SOURCE OF INCOME BUT A TERMINATION OF AN AGREEMENT BY WHICH CERTAIN RESTRICTIONS WERE PUT TO THE ASSESSEE, THEREFORE, ANY COMPENSATION RECEIVED IN LIEU OF S UCH 21 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 RESTRICTION S IS NOTHING BUT ON REVENUE ACCOUNT AND NOT ON ACCOUNT OF ANY CAPITAL FIELD . THUS, HE SUBMITTED THAT THE ENTIRE COMPENSATION RECEIVED WAS RIGHTLY TAXED AS BUSINESS INCOME BY THE AO. 9 . WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE REL EVANT FACTS AND MATERIAL DISCUSSED IN THE IMPUGNED ORDERS. IT IS A TRITE LAW THAT UNDER THE INCOME TAX ACT A LL THE RECEIPTS IN THE HAND S OF AN ASSESSEE WOULD NOT NECESSARILY BE INCOME OR DEEMED TO BE INCOME FOR THE PURPOSE OF INCOME TAX, BECAUSE IT WILL DE PEND UPON THE NATURE OF THE RECEIPT AND THE TRUE SCOPE AND EFFECT OF THE RELEVANT TAXING PROVISIONS. THE HONBLE SUPREME COURT IN KETTLEWE L L BULLEN & CO. LTD (SUPRA) HAVE LAID DOWN THAT , WHERE ON A CONSIDERATION OF THE CIRCUMSTANCES, PAYMENT IS MADE TO COM PENSATE A PERSON FOR CANCELLATION OF A CONTRACT WHICH DOES NOT AFFECT THE TRADING STRUCTURE OF HIS BUSINESS, NOR DEPRIVE HIM OF WHAT IS SUBSTANCE OF HIS SOURCE OF INCOME, TERMINATION OF THE CONTRACT BEING A NORMAL INCIDENT OF THE BUSINESS, AND SUCH CANCELL ATION LEAVES HIM FREE TO CARRY ON HIS TRADE THE RECEIPT IS REVENUE. HOWEVER, WHE RE BY THE CANCELLATIO N RESULTS INTO LOSS OF WHAT MAY BE REGARDED AS THE SOURCE OF THE ASSESSEES INCOME, THE PAYMENT MADE TO COMPENSATE FOR CANCELLATION OF THE AGENCY AGREEMENT IS NORMALLY A CAPITAL RECEIPT. T HIS FUNDAMENTAL PRINCIPLE NEEDS TO BE EXAMINED ON CASE TO CASE BASIS DEPENDING UPON THE FACTS OF EA CH CASE. A DISTINCTION HAS TO BE DRAWN, WHERE A PAYMENT IS MADE FOR A BREACH OF ANY AGREEMENT DURING THE COURSE OF A BUSINESS AND A COMPENSATION FOR TERMINATION OF INCOME PRODUCING ASSETS OR IMPAIRING THE PROFIT MAKING APPARATUS . THE FORMER MAY NOT LOSE IT S REVENUE NATURE BUT LATER BEING A PAYMENT ON ACCOUNT 22 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 OF DESTRUCTION OF A CAPITAL ASSET HAS TO BE RECKONED AS CAPITAL RECEIPT. IF WE ANALYZE THE FACTS OF THE PRESENT CASE, AS DISCUSSED ABOVE, IT IS OSTENSIBLY EVIDENT THAT THE PAYMENT WHICH HAS BEEN RECEIVE D BY THE ASSESSEE IS MAINLY ON ACCOUNT OF COMPEN SATION ATTRIBUTABLE TO NEGATIVE/ RESTRICTIVE COVENANT S IMPOSED UP ON THE ASSESSEE , ADVERSELY AFFECTING THE BUSINESS OF ASSESSEE AND PROFITABILITY . THE ASSESSEE WAS ENJOYING THE TECHNICAL KNOW - HOW AND THE BRAND NAME OF PIAGGIO IN MANUFACTURING AND SELLING ITS VARIOUS MODELS OF SCOOTERS WHICH WAS PURELY FROM THE TECHNOLOGICAL COLLABORATION AND VARIOUS KIND OF ASSISTANCE FROM PIAGGIO . THE JOINT VENTURE AGREEMENT HAS FACILITATED THE ASSESSEE TO CARRY OUT ITS BUSIN ESS IN LARGE SCALE NOT ONLY IN INDIA BUT ALSO ACROSS THE WORLD. AS ADMITTED BY THE AO ALSO, THE ASSESSEE WAS RECKONED AS NUMBER TWO IN THE COUNTRY AS FAR AS PRODUCTION AND SALE OF TWO WHEELERS ARE CONCERNED. THIS COLLABORATION HAS LED TO LARGE SALES AND RESULTANTLY HUGE PROFITABILITY TO THE ASSESSEE. NOW BY TERMINATION OF SUCH AN AGREEMENT, VARIOUS RESTRICTIVE COVENANTS WERE ATTACHED WHICH CAN BE HIGHLIGHTED AS UNDER: - (I) MANUFACTURE AND SALE OF SCOOTERS RESTRICTED TO INDIA ONLY AND ALSO NO SU B - LICENSE IN RESPECT OF THE SAME CAN BE GRANTED; (II) EXPORT RESTRICTED TILL DECEMBER 31, 2007 , WHICH IMPAIRED ASSESSEES SALE AND PROFIT ; (III) LML SHALL NOT UNDERTAKE MANUFACTURE OF PIAGGIO MOTORCYCLE; (IV) PIAGGIO WOULD BE ENTITLED TO COMPETE WITH LML IN INDIA THROUGH MANUFACTURE, SALE, MARKETING AND DISTRIBUTION AGREEMENT CONCERNING THE 2 - WHEELERS EXCEPT THOSE VEHICLES WHICH ARE POWERED BY LATERAL 23 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 ENGINE FOR WHICH THEY CAN COMPETE AFTER 31ST DECEMBER, 2007; (V) PIAGGIO CAN UNDERTAKE ANY OTHER BUSINESS ACTIVITY IN INDIA; (VI) LML SHALL CEASE THE USAGE AND DEALING WITH THE D EALERS OF ALL PIAGGIO COMPANIES HENCEFORTH THE DATE OF SCB . (VII) ANY LIABILITY RELATABLE TO PIAGGIO AND ITS GROUP COMPANIES HAVING DEAL ING WITH LML HENCEFORTH SCB, WOULD BE OF LML; (VIII) PIAGGIO AND ITS ASSOCIATES WILL NO LONGER BE BOUND BY THE NON - COMPETE AGREEMENTS AND WOULD BE FULLY ENTITLED TO COMPETE . 10 . AS A RESULT OF TH ESE RESTRICTIVE COVENANTS, AS POINTED OUT BY THE LD. COUNSEL NOT ONLY THE PRODUCTION AND SALES WENT DOWN BUT ALSO ENTIRE BUSINESS OF THE ASSESSEE GOT IMPAIRED AND LATER ON THE ASSESSEE COMPANY BECAME IN SIGNIFICANT PLAYER AND NON ENTITY IN THE FIELD OF TWO WHE ELERS AS A RESULT OF THIS SCB . IN THE FIRST YEAR ITSELF, THE PRODUCTION AS WELL AS THE SALES WENT DOWN BY HALF AND LATER ON, THE ASSESSEE GOT WIPED OUT FROM THE MARKET COMPLETELY . THUS, THE ENTIRE PROFIT MAKING APPARATUS AND BUSINESS WHICH WAS IN THE FOR M OF TECHNICAL - COLLABORATION , BRAND AND VARIOUS ARRANGEMENTS WITH PIAGGIO GOT SEVERELY PARALYZED . FROM THE TERMS OF THE SETTLEMENT AGREEMENT AND THE RESTRICTIVE COVENANTS AS HIGHLIGHTED ABOVE, IT IS SEEN THAT THE COMPENSATION WAS PURELY FOR RESTRAINING THE ASSESSEE TO CARRY OUT ITS BUSINESS WITHOUT ANY AID OF LICENSE OR BRAND FROM PIAGGIO. THE EXPORTS WERE RESTRICTED AND PIAGGIO ITSELF WAS EMPOWERED TO COMPETE WITH LML IN INDIA IN TWO WHEELERS. THUS, THE ENTIRE TRADING 24 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 STRUCTURE OF THE ASSESSEES BUSINESS W HICH WAS A POTENTIAL OF SOURCE OF INCOME TO THE ASSESSEE IN FUTURE WAS ADVERSELY AFFECTED AND, THEREFORE, WE AGREE WITH THE CONCLUSION OF THE CIT(A) THAT SUCH A COMPENSATION WILL FALL WITHIN THE REALM OF CAPI TAL RECEIPT. HERE IN THIS CASE , BY VIRTUE OF NEGATIVE COVENANTS NOT ONLY THE PROFIT MAKING APPARATUS GOT IMPAIRED BUT SLOWLY SWALLOWED THE SOURCE OF INCOME OF THE ASSESSEE WHICH PROVED TO BE F A TAL IN THE SUBSEQUENT YEARS. THE HONBLE SUPREME COURT, LATER ON IN THE CASE OF OBEROI HOTELS P VT. L TD . VS CIT (SUPRA) APPLYING THE GUIDING PRINCIPLE OF KETTLEWELL BULLEN & CO. LTD (SUPRA) AS WELL AS THE DECISION OF KARAMCHAND THAPAR, REPORTED IN [1971] 80 ITR 167 (SC) HELD THAT, IF THE E NDURING BENEFIT WAS REFLECTED ON THE C APITAL OF THE ASSESSEE A ND GIVING UP THE CONTRACTUAL RIGHT ON THE BASIS OF PRINCIPAL AGREEMENT WHICH HAD RESULTED INTO LOSS AND SOURCE OF ASSESSEES INCOME, THE RECEIPT IN HANDS OF THE ASSESSEE IS A CAPITAL RECEIPT. 1 1 . NOW COMING TO THE ARGUMENT OF LD. DR THAT PROVISION OF SECT ION 28(V)(A) WHICH HAD BEEN BROUGHT IN THE STATUTE W.E.F. 2003 - 04 SHOULD BE HELD TO BE APPLICABLE IN THE PRESENT ASSESSMENT YEAR ALSO, WE FIND THAT SUCH AN ARGUMENT CANNOT BE ACCEPTED, BECAUSE , THE PRO VISION OF SECTION 28(V)(A) WAS BROUGHT SPECIFICALLY INTO THE ACT TO TREAT THE PAYMENT RECEIVED ON NON - COMPETE FEE UNDER A NEGATIVE COVENANT TO BE TAXABLE AS BUSINESS INCOME UNDER SECTION 28 AND SUCH A PROVISION WAS BROUGHT BY THE FINANCE ACT, 2002 W.E.F. 01.04.2003 , THEREFORE IT CANNOT BE APPLIED RETROSPECT IVELY FOR THE ASSESSMENT YEAR 2000 - 01. T HIS PRECISE ISSUE HAD COME UP FOR CONSIDERATION BEFORE THE HONBLE SUPREME COURT IN THE CASE OF GUFFICHEM VS. CIT, REPORTED IN [2011] 332 ITR 602, WHEREIN, 25 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 THE HONBLE SUPREME COURT HAS ANSWERED TH E EXACT QUESTION IN THE FOLLOWING MANNER: - 5. THE POSITION IN LAW IS CLEAR AND WELL - SETTLED. THERE IS A DICHOTOMY BETWEEN RECEIPT OF COMPENSATION BY AN ASSESSEE FOR THE LOSS OF AGENCY AND RECEIPT OF COMPENSATION ATTRIBUTABLE TO THE NEGATIVE/RESTRICTIVE COVENANT. THE CO MPENSATION RECEIVED FOR THE LOSS OF AGENCY IS A REVENUE RECEIPT WHEREAS THE COMPENSATION ATTRIBUTABLE TO A NEGATIVE/RESTRICTIVE COVENANT IS A CAPITAL RECEIPT. 6. THE ABOVE DICHOTOMY IS CLEARLY SPELT OUT IN THE JUDGMENT OF THIS COURT IN GILLANDERS' CASE ( SUPRA) IN WHICH THE FACTS WERE AS FOLLOWS. THE ASSESSEE IN THAT CASE CARRIED ON BUSINESS IN DIVERSE FIELDS BESIDES ACTING AS MANAGING AGENTS, SHIPPING AGENTS, PURCHASING AGENTS AND SECRETARIES. THE ASSESSEE ALSO ACTED AS IMPORTERS AND DISTRIBUTORS ON BEHAL F OF FOREIGN PRINCIPALS AND BOUGHT AND SOLD ON ITS OWN ACCOUNT. UNDER AN AGREEMENT WHICH WAS TERMINABLE AT WILL ASSESSEE ACTED AS A SOLE AGENT OF EXPLOSIVES MANUFACTURED BY IMPERIAL CHEMICAL INDUSTRIES (EXPORT) LTD. THAT AGENCY WAS TERMINATED AND BY WAY OF COMPENSATION THE IMPERIAL CHEMICAL INDUSTRIES (EXPORT) LTD. PAID FOR FIRST THREE YEARS AFTER THE TERMINATION OF THE AGENCY TWO - FIFTHS OF THE COMMISSION ACCRUED ON ITS SALES IN THE TERRITORY OF THE AGENCY OF THE APPELLANT AND IN ADDITION IN THE THIRD YEAR FULL COMMISSION WAS PAID FOR THE SALES IN THAT YEAR. THE IMPERIAL CHEMICAL INDUSTRIES (EXPORT) LTD. TOOK A FORMAL UNDERTAKING FROM THE ASSESSEE TO REFRAIN FROM SELLING OR ACCEPTING ANY AGENCY FOR EXPLOSIVES. 7. TWO QUESTIONS AROSE FOR DETERMINATION, NAMELY, WHETHER THE AMOUNTS RECEIVED BY THE APPELLANT FOR LOSS OF AGENCY WAS IN NORMAL COURSE OF BUSINESS AND THEREFORE WHETHER THEY CONSTITUTED REVENUE RECEIPT? THE SECOND 26 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 QUESTION WHICH AROSE BEFORE THIS COURT WAS W HETHER THE AMOUNT RECEIVED BY THE ASSESSEE (COMPENSATION) ON THE CONDITION NOT TO CARRY ON A COMPETITIVE BUSINESS WAS IN THE NATURE OF CAPITAL RECEIPT ? IT WAS HELD THAT THE COMPENSATION RECEIVED BY THE ASSESSEE FOR LOSS OF AGENCY WAS A REVENUE RECEIPT WHE REAS COMPENSATION RECEIVED FOR REFRAINING FROM CARRYING ON COMPETITIVE BUSINESS WAS A CAPITAL RECEIPT. THIS DICHOTOMY HAS NOT BEEN APPRECIATED BY THE HIGH COURT IN ITS IMPUGNED JUDGMENT. THE HIGH COURT HAS MISINTERPRETED THE JUDGMENT OF THIS COURT IN GILLA NDERS' CASE (SUPRA). IN THE PRESENT CASE, THE DEPARTMENT HAS NOT IMPUGNED THE GENUINENESS OF THE TRANSACTION. IN THE PRESENT CASE, WE ARE OF THE VIEW THAT THE HIGH COURT HAS ERRED IN INTERFERING WITH THE CONCURRENT FINDINGS OF FACT RECORDED BY THE CIT(A) A ND THE TRIBUNAL. ONE MORE ASPECT NEEDS TO BE HIGHLIGHTED. PAYMENT RECEIVED AS NON - COMPETITION FEE UNDER A NEGATIVE COVENANT WAS ALWAYS TREATED AS A CAPITAL RECEIPT TILL THE ASST. YR. 2003 - 04. IT IS ONLY VIDE FINANCE ACT, 2002 W.E.F. 1ST APRIL, 2003 THAT TH E SAID CAPITAL RECEIPT IS NOW MADE TAXABLE [ SEE: S. 28(VA)]. THE FINANCE ACT, 2002 ITSELF INDICATES THAT DURING THE RELEVANT ASSESSMENT YEAR COMPENSATION RECEIVED BY THE ASSESSEE UNDER NON - COMPETITION AGREEMENT WAS A CAPITAL RECEIPT, NOT TAXABLE UNDER THE 1961 ACT. IT BECAME TAXABLE ONLY W.E.F. 1ST APRIL, 2003. IT IS WELL - SETTLED THAT A LIABILITY CANNOT BE CREATED RETROSPECTIVELY. IN THE PRESENT CASE, COMPENSATION RECEIVED UNDER NON - COMPETITION AGREEMENT BECAME TAXABLE AS A CAPITAL RECEIPT AND NOT AS A REVE NUE RECEIPT BY SPECIFIC LEGISLATIVE MANDATE VIDE S. 28(VA) AND THAT TOO W.E.F. 1ST APRIL, 2003. HENCE, THE SAID S. 28 (VA) IS AMENDATORY AND NOT CLARIFICATORY. LASTLY, IN CIT VS. RAI BAHADUR JAIRAM VALJI & ORS. (1959) 35 ITR 148 (SC) IT WAS HELD BY THIS CO URT THAT IF A CONTRACT IS ENTERED INTO IN THE ORDINARY COURSE OF BUSINESS, ANY COMPENSATION RECEIVED FOR ITS TERMINATION (LOSS OF AGENCY) 27 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 WOULD BE A REVENUE RECEIPT. IN THE PRESENT CASE, BOTH CIT(A) AS WELL AS THE TRIBUNAL, CAME TO THE CONCLUSION THAT THE AGREEMENT ENTERED INTO BY THE ASSESSEE WITH RANBAXY LED TO LOSS OF SOURCE OF BUSINESS; THAT PAYMENT WAS RECEIVED UNDER THE NEGATIVE COVENANT AND THEREFORE THE RECEIPT OF RS. 50 LAKHS BY THE ASSESSEE FROM RANBAXY WAS IN THE NATURE OF CAPITAL RECEIPT. IN FAC T, IN ORDER TO PUT AN END TO THE LITIGATION, PARLIAMENT STEPPED IN TO SPECIFICALLY TAX SUCH RECEIPTS UNDER NON - COMPETITION AGREEMENT W.E.F. 1ST APRIL, 2003 . T HE AFORESAID JUDGMENT AND RATIO OF THE HONBLE SUPREME COURT MAKES IT AMPLY CLEAR THAT , FIRSTLY, THE COMPENSATION RECEIVED BY THE ASSESSEE WHICH IS ATTRIBUTABLE TO NEGATIVE / RESTRICTIVE COVENANT IS A CAPITAL RECEIPT; AND SECONDLY, THE PROVISION OF SECTION 28(VA) BROUGHT W.E.F. 01.04.2003 IN THE ACT WILL APPLY ONLY FROM AY 2003 - 04. THUS, THE AFORESAID DECISION OF THE HONBLE APEX COURT CLEARLY CLINCHES THE ISSUE IN HAND AND RESPECTIVELY FOLLOWING THE AFORESAID PRINCIPLES , WE HOLD THAT THE AMOUNT OF RECEIPT OF COMPENSATION RECEIVED BY THE ASSESSEE ON TERMINATION OF AN AGREEMENT AND FOR CONSIDERATION ATT RIBUTABLE TO NEGATIVE AND RESTRICTIVE COVENANTS IS TO BE TREATED AS CAPITAL RECEIPT AND NOT BUSINESS INCOME OR REVENUE RECEIPT . THUS, GROUND NO.1 IS ALLOWED IN FAVOUR OF TH E ASSESSEE AND REVENUES GROUND NO. 1(A), 1(B) AND 1(C) ARE DISMISSED. 1 2 . THE ISSUE INVOLVED IN THE SECOND GROUND IS THAT, THE REVENUE HAS CHALLENGED THE DELETION OF AMOUNT OF RS.8,80,00,000/ - BY CIT(A) ON ACCOUNT OF FORFEITURE OF ADVANCE SHARE APPLICATION MONEY BY TREATING IT AS A CAPITAL RECEIPT. 28 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 1 3 . THE FACTS IN BRIEF ARE THAT, THE ASSESSEE COMPANY HAD RECEIVED A SUM OF RS.8.80 CRORES BY WAY OF ADVANCE SHARE APPLICATION MONEY FROM M/S PIAGGIO CS PA ITALY IN ACCORDANCE WITH THE APPROVAL RECEIVED FROM THE RBI IN THE YEAR 1995. THE INWARD REMITTANCE CERTIFICATE ALSO INDICATES T HAT THE SAID AMOUNT WAS RECEIVED AS A SHARE CAPITAL AMOUNT. THIS AMOUNT WAS BROUGHT AS PER CONDITIONS LAID DOWN BY THE FINANCIAL INSTITUTIONS WHO HAVE FUNDED THE EXPANSION - CUM - DIVERSIFICATION PROJECT OF THE ASSESSEE , THAT PROMOTERS HAVE TO INFUSE 20% OF TH E FUNDS . IN THE WAKE OF SETTLEMENT AND CLEAN BREAK AGREEMENT DATED 15.11.1999, THE ASSESSEE IN CONTINUATION OF THE AMOUNT RECEIVED BY WAY OF COMPENSATION OF RS.23.89 CRORES, ALSO METED OUT ITS LIABILITY OF RS.8.8 CRORES WHICH WAS RECEIVED IN THE EARLIER YEARS IN SHARE CAPITAL. IN OTHER WORDS, AFTER TERMINATION OF THE AGREEMENT, THE ASSESSEE COMPANY HAS ABSOLVED ITSELF FROM REPAYMENT OF ITS LIABILITY TO M/S PIAGGIO AND CREDITED THE AMOUNT TO CAPITAL RESERVE FUND . IN RESPO NSE TO THE SHOW CAUSE NOTICE, THE A SSESSEES SUBMISSION HAS REPRODUCED BY THE AO AT PAGE 15 WAS AS UNDER: FORFEITURE OF SHARE APPLICATION MONEY RS.880 LAKHS : IN SUPPORT OF OUR CLAIM FOR SUM OF RS.880 LAKHS RECEIVED BY US AS SHARE APPLICATION MONEY WE ENCLOSE THE COPY OF COMMUNICATION RECEIVED BY OUR MANAGING DIRECTOR, MR. D K SINGHANLA ON 1 ST DECEMBER, 1995 WITH REGARD TO A SUM OF RS.88 MILLIONS SENT TO THE COMPANY (ANNEXURE : C) FROM THE SAID COMMUNICATION IT IS ESTABLISHED THAT, THE RELEVANT AMOUNT WAS SENT TOWARDS SUBSCRIPTION MONE Y FOR EQUITY SHARES TO BE ISSUED ON A RIGHT BASIS. THE COMPANY COULD NOT MAKE EITHER RIGHT ISSUE OR PREFERENTIAL ISSUE IN RESPECT OF ITS EQUITY SHARES TO FINANCE THE DIVERSIFICATION AND EXPANSION PROGRAM UNDERTAKEN BY IT. 29 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 IN TERMS OF FINAL SETTLEMENT AND CLEAN BREAK AGREEMENT EXECUTED ON 15 TH NOVEMBER, 1999 THE COMPANY HAS FORFEITED THE RELEVANT AMOUNT OF RS.8.80 CRORES AND CREDITED THE SAME TO CAPITAL RESERVE ACCOUNT. SUBMISSIONS: THE ISSUE OF SHARES BY A LIMITED COMPANY IS NOT A TRADING TRANSACTION AT ALL. THEREFORE RECEIPT OF ADVANCE SHARE APPLICATION MONEY CANNOT BE TREATED AS TRADING TRANSACTION. THESE AMOUNTS ARE OBVIOUSLY NOT PROFITS OR GAINS OF THE TRADE, AND THEY ARE NOT LIABLE TO BE BROUGHT INTO THE ACCOUNTS FOR INCOME - TAX. THUS FROM THE AFOR ESAID TESTS, IT CAN BE CONSIDERED THAT THE AMOUNT RECEIVED FROM PIAGGIO AS SHARE APPLICATION MONEY WAS OF CAPITAL NATURE NOT A REVENUE RECEIPT. THE AO REJECTED THE ASSESSEES CONTENTION AFTER GIVING DETAIL REASONING. IN SUM AND SUBSTANCE HE HELD THAT, FIRSTLY, THE AMOUNT OF RS.8.8 CRORES WAS SHOWN UNDER THE HEAD UNSECURED LOAN IN THE BALANCE SHEET AS ON 31ST MARCH, 1999 AND 31ST MARCH, 2000 AND NOT AS SHARE CAPITAL OR SHARE APPLICATION MONEY ; SECONDLY, LML DID NOT FOLLOW TH E STIPULATED TIME FRAME FOR ALLOTTING OF SHARES AS PRESCRIBED BY SEBI AND UNDER THE PROVISIONS OF THE COMPANYS ACT , WHICH IS EVIDENT THAT MONEY WAS LYING FOR 4 YEARS ; THIRDLY, HAD THE SHARES WERE ALLOTTED PIAGGIO WOULD HAVE ENJOYED DIVIDEND AND PARTICIPAT ION IN MANAGEMENT AND OTHER BENEFITS; AND LASTLY, THE IMPUGNED SUM CAN ONLY BE INTERPRETED AS ADVANCE FROM THE PIAGGIO RECEIVED FOR THE SETTING - UP OF BUSINESS AND FOR DAY - TO - DAY BUSINESS ACTIVITIES AND FORFEITURE OF THE AMOUNT IS NOTHING BUT REVENUE RECEIP TS IN THE HANDS OF THE ASSESSEE . HE TAXED THE AMOUNT FINALLY UNDER SECTION 41(1). THE DETAIL REASONING GIVEN BY THE AO HAS BEEN INCORPORATED AT PAGES 18 TO 22 OF THE ASSESSMENT ORDER. 30 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 14. THE LD. CIT(A) DELETED THE SAID ADDITION AFTER OBSERVING AND HOLDING AS UNDER: - 3.2 CONSIDERING THE RIVAL SUBMISSIONS ON THE SUBJECT I AM OF THE VIEW THAT, THE ALLEGATIONS MADE BY ASSESSING OFFICER ABOUT NON - COMPLIANCE OF PROVISIONS OF COMPANIES ACT REGULATORY AUTHORITIES LIKE SEBI AND STOCK EXCHANGE HAVE NOT BEEN SUPPORTED BY ANY EVIDENCE BROUGHT ON RECORD BY HIM IN SUPPORT OF HIS CLAIM, WHEREAS OTHER OBSERVATIONS ARE PURELY OUT OF SURMISE AND CONJECTURE. 3.2.1 WHEREAS THE APPELLANT HAS BROUGHT ON RECORD THE PRIMARY EVIDENCE LIKE COMMUNICATION FROM PIAGGIO TO ITS MANAGING DIRECTOR ACCOMPANIED BY INWARD REMITTANCE CERTIFICATE WHICH ESTABLISHES BEYOND DOUBT THAT, THE RELEVANT AMOUNT WAS RECEIVED AS A CONTRIBUTION T OWARDS SHARE CAPITAL, THERE IS NOTHING BROUGHT ON RECORD BY ASSESSING OFFICER WHICH SAYS OTHERWISE. 3.2.2 NOW COMING TO THE ISSUE OF FORFEITING AND TRANSFERRING THE ABOVE REFERRED AMOUNT TO A CAPITAL RESERVE, IT IS THE SUBMISSION OF THE APPELLANT THAT IT H AS RELEVANCE AS FAR AS NATURE OF RECEIPT IS CONCERNED. 3.2.3 ALTERNATIVELY IT IS CONTENDED BY THE LEARNED AR THAT, EVEN IF IT IS TREATED AS A LOAN AS HELD BY THE ASSESSING OFFICER THE SAME CANNOT BE TAXED IN VIEW OF JURISDICTIONAL HIGH COURT JUDGMENT IN CASE OF MAHINDRA & MAHINDRA VS CIT (261 ITR 501) WHEREIN IT HAS BEEN HELD THAT, THE LOAN IN RESPECT OF WHICH WAIVER HAS BEEN MADE CANNOT BE ASSESSED EITHER U/S 28(IV) OR 41(1) OF THE INCOME - TAX ACT, 1961. 3.2.4 CONSIDERING THE EVIDENCE LAID DOWN BY THE LE ARNED AR IT IS NOT IN DOUBT THAT, THE RELEVANT AMOUNT WAS RECEIVED TOWARDS CAPITAL CONTRIBUTION TO BE RAISED BY THE APPELLANT TO 31 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 FINANCE ITS DIVERSIFICATION CUM EXPANSION PROGRAMME IN 1995 AND SINCE NO SHARES HAVE BEEN ALLOTTED AGAINST THE SAID AMOUNT THE RELEVANT FORFEITURE BY THE APPELLANT WOULD NOT BE TAXABLE AS REVENUE RECEIPT. 1 5 . BEFORE US, THE LD. DR SUBMITTED THAT, FIRST OF ALL, IT CAN BE SEEN THAT, ASSESSEE IN THE BALANCE - SHEET FOR THE YEAR ENDING 31ST MARCH, 1999 AND 31ST MARCH, 2000 HAS ITSELF TREATED IT AS UNSECURED LOANS. THE AMOUNT WAS RECEIVED IN THE YEAR 1995 AND TILL 1999, THE ASSESSEES HAD NOT ALLOTTED THE SHARES AND IT WAS NEVER CAPITALIZED BY THE ASSESSEE COMPANY. HAD IT BEEN THE CAPITAL SHARE APPLICATION MONEY , TH E ASSESSEE WOULD HA VE ALLOTTED THE SHARES WITH IN THE TIMEFRAME WHICH IS THE REQUIREMENT AS PER THE SEBI AS HELD BY THE AO; S ECONDLY, THE FORFEITURE OF AN ADVANCE FROM THE FOREIGN COLLABORATOR WHICH ASSESSEE ITSELF HAS TREATED IN THE FORM OF LOANS AND ADVANCE THEREFORE, FORFEITURE OF THIS AMOUNT IS NOTHING BUT REVENUE RECEIPT. THE LD. DR ALSO RELIED UPON THE DECISION HONBLE SUP REME COURT IN THE CASE OF T . V . SUNDRAM IYENGAR & SONS LTD, REPORTED IN [1996] 88 TAXMAN 429 (SC) AND BOMBAY HIGH COURT DECISION IN THE CASE OF SOLID CONTAINERS LIMITED. VS. DEPUTY VS DCIT, REPORTED IN [2009] 308 ITR 417. 1 6 . BEFORE US, THE LD. COUNSEL SUBMITTED THAT, IT CANNOT BE DISPUTED THAT THE MONEY WAS RECEIVED AS SHARE APPLICATION MONEY TO FINANCE THE EXPANSION OF THE PROJECT. THIS IS EVIDENT FROM THE INWARD REMITTANCE CERTIFICATE BY THE BANK AND APPROVAL OF THE RBI. THE TREATMENT OF THE AMOUNT I N THE BOOKS OF ACCOUNT CANNOT BE THE DETERMINATIVE FACTOR FOR TAXABILITY UNDER THE ACT. THE AMOUNT WAS FORFEITED IN 32 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 PURSUANCE OF S CB AND WAS N EVER CLAIMED AS EXPENDITURE EITHER IN THIS YEAR OR IN THE EARLIER YEAR; THEREFORE, SAME CANNOT BE TAXED AS RELIN QUISHMENT OF BUSINESS LIAB ILITY UNDER SECTION 41(1) AS HELD BY THE AO. IN SUPPORT, HE STRONGLY RELIED UPON THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS . SHIVALI CONSTRUCTION S P LTD, REPORTED IN [2013] 355 ITR 218. HE FURTHER RELIED UPON T HE DECISION OF ITAT, MUMBAI IN THE CASE OF IMPSAT (P) LTD V ITO, REPORTED IN [2004] 91 ITD 254 WHEREIN, THE APPLICATION MONEY FOR ISSUE OF SHARE TO A FOREIGN COLLABORATOR COULD NOT BE REFUNDED DUE TO HEAVY FINANCIAL LOSSES WAS HELD TO BE IN CAPITAL FIELD. THUS, HE SUBMITTED THAT THE RECEIPT IN QUESTION WAS FOR SHARE APPLICATION MONEY AND NOT FOR ANY KIND OF ADVANCE DURING THE COURSE OF ANY TRADING OR BUSINESS. FURTHER, DISCLOSURE AS UNSECURED LOAN CANNOT BE THE DECISIVE FACTOR FOR TREATING IT AS CAPITAL OR REVENUE RECEIPT. RELYING UPON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CHOWRINGHEE SALES BUREAU P LTD V CIT, REPORTED IN [1973] 87 ITR 542, HE SUBMITTED THAT TRUE NATURE AND QUALITY OF RECEIPTS IS TO BE LOOKED INTO AND NOT UNDER WHICH HEAD IT HAS ENTERED IN THE BOOK OF ACCOUNTS . 1 7 . WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT FINDING GIVEN IN THE IMPUGNED ORDE RS. THE ASSESSEE HAD UNDERTAKEN EXPANSION - CUM - DIVERSIFICATION OF ITS SCOOTER BUSINESS AND FOR THAT PURPOSE FIN ANCIAL INSTITUTION AGREED TO GRANT L OAN ON A CONDITION THAT PROMOTERS LML AND PIAGGIO WILL CONTRIBUTE OR INFUSE 20% OF FUNDS. IN PURSUANCE THEREOF, ON 1ST DECEMBER, 1995, PIAGGIO CONFIRMED T HAT IT SHALL REMIT THE SUM OF RS.8.8 CRORES BY 7TH JANUARY, 1996 A S ADVANCED SHARE APPLICATION MONEY. ON 8TH JANUARY, 1996, LML 33 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 RECEIVED RS.8 .8 CRORES FORM PIAGGIO AS SHARE APPLICATION MONEY IN ITS BANK ACCOUNT . APPROVAL WAS SOUGHT FROM RESERVE BANK OF INDIA FOR INWARD REMITTANCE O F SHARE APPLICATION MONEY. BANK ISSUED T HE CERTIFICATE CERTIFYING THE FOREIGN INWARD REMITTANCE CERTIFYING THAT RECEIPT OF RS.8.8 CRORES IS TOWARDS SHARE CAPITAL. NOT ONLY THAT THE RBI ALSO GAVE APPROVAL ON THE ACCOUNT OF SHARE APPLICATION MONEY ONLY . IT IS ALSO AN ADMITTED FACT THAT, ASSESSEE COULD NOT BE ALLO T THE SHARES IN PERIOD OF 4 YEARS. ACCORDINGLY, WHEN THERE WAS SETTLEMENT - BREAK - AGREEME NT ON 15.11.1999, THE ASSESSEE FORFEITED THIS AMOUNT AS PER ONE OF THE TERMS AGREED BETWEEN THE PARTIES AND HAS TAKEN IT TOWARDS ITS CAPITAL RESERVE FUN D. UNDER ARTICLE 2(F) OF S CB , THERE WAS A CLEAR CUT CLAUSE THAT SUM OF RS.8.8 CRORES WHICH WAS ADVANCE AS SHARE APPLICATION MONEY ON ACCOUNT OF PROMOTERS CONTRIBUTION TOWARDS EXPANSION - CUM - DIVERSIFICATION OF PROJECT WILL REMAIN WITH THE ASSESSEE . THE AO HAS RELIED HEAVILY ON THE POINT THAT, FIRSTLY, THE ASSESSEE HAD SHOWN THE SAID AMOUNT UNDER THE HEAD UNSECURED LOANS AND SECONDLY, NON - ALLOCATION OF SHARES IS IN VIOLATION OF SEBI GUIDELINES AND UNDER THE COMPANIES ACT; AND LASTLY, THE REVENUES CASE BEF ORE US IS THAT , SAME IS TO BE TAXED UNDER SECTION 41(1). 18. FIRST OF ALL, IT IS QUITE TRITE THAT NATURE AND QUALITY OF RECEIPT IS THE SUBSTRATUM OF TAXING AN INCOME UNDER THE INCOME - TAX ACT AND NOT THE HEAD UNDER WHICH IT HAS ENTERED IN TO THE BOOKS O F ACCOUNT. ENTRY IN THE BOOKS OF ACCOUNT IS NOT A DECISIVE AND DETERMINATIVE FACTOR OF INCOME , ALBEIT THE NATURE AND SOURCE OF RECEIPTS . THIS PROPOSITION IS WELL SETTLED BY THE HONBLE APEX COURT IN SEVERAL CASES , INCLUDING AS REFERRED TO ABOVE BY THE LD. COUNSEL. AT THE TIME OF RECEIVING OF 34 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 THE RECEIPT IN THE YEAR 1996 FROM PIAGGIO , THE SAME WAS ON ACCOUNT OF CAPITAL, THAT IS, TOWARD S SHARE APPLICATION MONEY. THE RECEIPT RECEIVED AS SHARE APPLICATION TOWARDS EQUITY WHICH IS CAPITAL IN NATURE CANNOT BE TREA TED AS LOAN OR ADVANCE SIMPLY BECAUSE ONE OF THE PARTIES AGREED T HAT IT IS TO BE TREATED AS AN ADVANCE OR LOAN IN HIS BOOKS . EVEN OTHERWISE THE CAPITAL RECEIPT CANNOT BE CONVERTED INTO REVENUE RECEIPT BY EFFLUX OF TIME BECAUSE T HE QUALITY AND NATURE OF THE RECEIPT SHOULD BE ADJUDGED AT THE TIME OF ITS RECEIPT AND SUCH QUALITY CANNOT BE AFFECTED OR ALTERED SUBSEQUENTLY BY ACT OF THE PART IES , OF COURSE WHEN BOTH THE PARTIES CLEARLY MANDATE OR AGREE TO THE SAME FOR SUCH A CONVERSION . ONCE, THE MONEY WHICH HAS COME FROM FOREIGN COLLABORATOR TOWARDS SHARE APPLICATION MONEY DULY APPROVED BY R EGULATORY A UTHORITY , THEN SAME CANNOT BE TREATED AS A LOAN EVEN THOUGH IT WAS RECORDED AS LOAN BY ASSESSEE IN ITS BOOKS OF ACCOUNT OR CAN BE IN A NY MANNER RECKONED AS REVENUE RECEIPT AT THE TIME OF FORFEITURE ; S ECONDLY, THE ALLEGATION OF THE AO THAT NON - ALLOTMENT OF SHARE WAS IN VIOLATION OF SEBI GUIDELINES AND UNDER THE COMPANYS ACT, THE SAME IS NOT RELEVANT AND ALSO IT HAS NOT BEEN SHOWN TO US W HICH PROVISION HAS BEEN VIOLATED. I N OUR OPINION, WHAT IS REQUIRED TO BE LOOKED INTO I S, WHETHER UNDER THE PROVISIONS OF THE INCOME - TAX ACT, IF A RECEIPT WHICH WAS ON ACCOUNT OF A CAPITAL CAN BE TREATED AS ON REVENUE ACCOUNT OR NOT ; AND LASTLY , THE A DDITIO N HAS BEEN MADE FINALLY BY THE AO AFTER INVOKING PR OVISION OF SECTION 41(1). THE FIRST AND FOREMOST CONDITION WHICH NEEDS TO BE EXAMINED BEFORE INVOKING THE PROVISIONS OF SECTION 41(1) IS THAT, WHETHER AN ALLOWANCE OR DEDUCTION HAS BEEN MADE IN THE ASSESSM ENT FOR ANY YEAR IN RESPECT OF LOSS, EXPENDITURE OR TRADING LIABILITY INCURRED BY THE ASSESSEE OR NOT ; WHICH IS CLEARLY ABSENT IN THE 35 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 PRESENT CASE . THUS, THE SHARE APPLICATION MONEY RECEIVED BY THE ASSESSEE, IN ANY MANNER DOES NOT FALL WITHIN THE AMBIT AND SCOPE OF S ECTION 41(1). THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF T V SUNDRAM IYENGAR & SONS LTD (SUPRA) AS RELIED UPON BY THE LD. DR IS NOT APPLICABLE BECAUSE IN THAT CASE IT WAS A CASE OF A TRADE DEPOSIT RECEIVED IN THE COURSE OF CARRYING ON THE BUSINESS AND SUCH UNCLAIMED DEPOSITS WERE WRITTEN BACK BY THE ASSESSEE AND TRANSFERRED TO THE P&L ACCOUNT. IT WAS IN TH I S BACKGROUND THAT THE HONBLE APEX COURT HELD THAT IT WAS INCOME OF THE ASSESSEE. IN THE CASE OF SOLID CONTAINERS (SUPRA) THE RELEVA NT FACT WAS THAT THE MONEY WAS RECEIVED BY THE ASSESSEE IN COURSE OF CARRYING ON HIS BUSINESS. ALTHOUGH IT WAS TREATED AS DEPOSIT AND WAS OF CAPITAL NATURE AT THE POINT OF TIME IT WAS RECEIVED, HOWEVER BY EFFLUX OF TIME THE MONEY HAS BECOME THE ASSESSEE'S OWN MONEY , BECAUSE OF UNCLAIMED BY THE CUSTOMERS . WHAT REMAINS AFTER ADJUSTMENT OF THE DEPOSITS HAS NOT BEEN CLAIMED BY THE CUSTOMERS; HENCE T HE CLAIMS OF THE CUSTOMERS HAVE BECOME BARRED BY LIMITATION. THE ASSESSEE ITSELF HAS TREATED THE MONEY AS ITS OWN MONEY AND TAKEN THE AMOUNT TO ITS PROFIT AND LOSS ACCOUNT. THERE WAS NO EXPLANATION FROM THE ASSESSEE WHY THE SURPLUS MONEY WAS TAKEN TO ITS PROFIT AND LOSS ACCOUNT EVEN IF IT WAS SOMEBODY ELSE'S MONEY. IT WAS IN LIGHT OF THESE FACTS AND BACKGROUND THE HO NBLE BOMBAY HIGH COURT HELD THAT IT WAS THE INCOME OF THE ASSESSEE. HERE IN PRESENT CASE NO DEPOSITS HAVE RECEIVED FROM CUSTOMERS NOR IT IS A LOAN TAKEN FOR TRADING ACTIVITY AND NEITHER HAS IT BEEN TRANSFERRED TO P&L ACCOUNT , ALBEIT HERE THE SHARE APPLICATION MONEY HAS BEEN FORFEITED DUE TO SETTLEMENT BY THE SHARE APPLICANT AND THE ASSESSEE AND THE MONEY HAS BE E N TRANSFERRED TO CAPITAL RESERVE FUND . THUS, SUCH AN AMOUNT 36 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 CANNOT BE TAXED IN EITHER WAY UNDER SECTION 41(1). ACCORDINGLY, THE FINDING OF T HE LD. CIT(A) ON THIS SCORE IS CONFIRMED AND IMPUGNED ISSUE RAISED BY THE REVENUE IN GROUND NO. 2 IS TREATED AS DISMISSED. 1 9 . IN GROUND NO.3, THE REVENUE HAS CHALLENGED THE DELETION OF DISALLOWANCE OF RS.574.96 L AKHS INCURRED BY THE ASSESSEE AS LEGAL EXPENSES TO DEFEND ITSELF IN LEGAL SUITS FILED BY M/S PIAGGIO C S PA. 20 . THE ASSESSEE HAS DE BITED A SUM OF RS.574.96 LAKHS TOWARDS LEGAL EXPENSES T O DEFE ND ITSELF IN LEGAL SUITS AND ARBITRATIONS FILED BY M/S PIAGGIO COMPANIES . THE ASSESSEES CASE BEFORE T HE AO WAS THAT, IT WAS ONE OF THE DEFENDANTS IN THE SUITS FILED BY PIAGGIO IN INDIA AND FURTHER THE PIAGGIO COMPANY HAD APPLIED TO INTERNATIONAL CHAMBER OF COMMERCE FOR ARBITRATION WHERE THEY HAVE MADE CLAIMS AGAINST THE COMPANY FOR DAMAGES FOR ALLEGED BRE ACH OF AGREEMENTS. THEY HAD ALSO FILED A PETITION BEFORE THE COMPANY LAW BOARD UNDER SECTION 397 AND 398 OF THE COMPANIES ACT AGAINST THE ASSESSEE, ITS PROMOTERS AND ITS MANAGEMENT FOR ALLEGED OPPRESSION AND MISMANAGEMENT. THE INDIAN PROMOTERS HAVE INCURRE D SIGNIFICANT EXPENSES ON LITIGATION WHICH WAS FAR MORE THAN THE AMOUNT SPENT BY THE ASSESSEE IN SUCH DISPUTES . THE AO HELD THAT THE DISPUTE WAS BETWEEN THE TWO PROMOTERS OF THE COMPANY AND NOT WITH THE ASSESSEE COMPANY . IN SUM AND SUBSTANCE , THE AOS REASONING FOR REJECTING THE CLAIM WAS THAT: (I) FIRSTLY , T HE DISPUTE WAS BETWEEN THE TWO PROMOTERS OF THE ASSESSEE COMPANY WITH PIAGGIO AND SUIT WAS FILED FOR 37 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 OPPRESSION AND MISMANAGEMENT BY THE PROMOTERS AGAINST EACH OTHER AND NOT AGAINST THE A SSESSEE ; (II) SECONDLY , THE ASSESSEE COMPANY WAS ONLY PART Y TO THE EXTENT THAT IT WAS DEFENDING BEFORE THE COMPANY LAW BOARD AGAINST ANY PROBABLE LIQUIDATION ORDER THAT MIGHT HAVE BEEN PASSED BECAUSE OF DISPUTE BETWEEN THE PROMOTERS; (III) THIRDLY , S UCH LITIGATION AMONGST THE PROMOTERS IS NO WAY RELATED TO THE BUSINESS ACTIVITY OF THE COMPANY AND IT DOES NOT CONTRIBUTE TO THE NORMAL REVENUE GENERATION OF THE COMPANY AND HENCE IT HAS NOT BEEN INCURRED DURING THE COURSE OF CARRYING OUT BUSINESS; (IV) FOURTHLY , T HE COMPANY IS A SEPARATE ARTIFICIAL LEGAL ENTITY AND, THEREFORE, LITIGATION BETWEEN TWO GROUP OF PROMOTERS CANNOT BE THE RESPONS IBILITY OF THE COMPANY; AND ( V ) LASTLY , THE LML WAS COMPELLED TO INCUR THE EXPENDITURE TO ENABLE THE EXISTING PROMOTERS TO CONTINUE TO HOLD AND CLING UPON THE MANAGEMENT AFFAIRS OF THE LML. 21 . THE LD. CIT ( A), ALLOWED THE CLAIM ON THE GROUND THAT, THOUGH THE DISPUTE AND THE ENTIRE LITIGATION WAS BETWEEN THE PROMOTERS, HOWEVER, IT WOULD BE HAZARDOUS FOR THE CORPORATE CITIZEN NOT TO DEFEND THE SAID SUIT IN WHICH IT IS MADE PARTY AND NOT TO SPENT ANY MONEY ON SUCH KIND OF LITIGATION, ONLY BECAUSE IT DOES NOT GENERATE ANY REV ENUE. IT MAY NOT BE FOR EARNING OF INCOME BUT IT HAS CERTAINLY BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. A CORPORATE BODY HAS TO CONSIDER THE INTEREST OF THE COMPANY AS A WHOLE THAT IS , OF ITS ST AKE HOLDERS NAMELY , SHAREHOLDERS. WHE N FINANCIAL INSTITUTIONS AND BANK S WHO HAVE LENT THE MONEY TO A ASSESSEE COMPANY WILL EXPECT THAT IT WILL DEFEND ANY ACTION INITIATED AGAINST IT BY ITS SHAREHOLDERS, WHO HAVE DUAL CAPACITY AS A 38 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 SHAREHOLDERS AS WELL AS PRINCIPAL TECHNOLOGY PROVIDER OR I N - CH ARGE OF DAY - TO - DAY MANAGEMENT OF THE COMPANY AND ALSO FOR VARIOUS BUSINESS RELATIONSHIP WITH THEM OTHER THAN AS A SHAREHOLDERS. THUS, HE HELD THAT THE LEGAL EXPENSES INCURRED BY THE ASSESSEE WERE FOR ITS BUSINESS PURPOSE AND THE SAME NEEDS TO BE ALLOWED. 22 . BEFORE US, THE LD. DR STRONGLY RELIED UPON THE ORDER OF THE AO AND SUBMITTED THAT, ONCE THERE IS LITIGATION BETWEEN THE PROMOTERS AMONGST THEMSELVES , THEN COMPANY HAS NO BUSINESS TO SPEND THE AMOUNT FOR LITIGATION AND SECONDLY, THE EXPENDITURE INCURRED DOES NOT RELATE TO BUSINESS OF THE COMPANY. 2 3 . ON THE OTHER HAND, THE LD. COUNSEL SUBMITTED THAT, THE LITIGATION BETWEEN THE PROMOTERS HAD A WIDE IMPACT ON THE LML, AS THE ARBITRATION PROCEEDINGS WERE IN THE NATURE OF CLAIM FOR DAMAGES FOR BREACH OF CONTRACTS AND IF NOT DEFENDED, LML WOULD HAVE JEOPARDIZED ITS INTEREST. FURTHER, HE CLARIFIED THAT, LML HAS INCURRED EXPENDITURE ONLY ITS OWN PART OF THE LEGAL EXPENDITURE AND INDIAN PROMOTERS HAVE INCURRED THERE PART OF THE LITIGATI ON COST . THUS, IT CANNOT BE HELD THAT ENTIRE EXPENDITURE WAS INCURRED BY THE ASSESSEE ONLY. LML HAD SEVERAL STAKE SHAREHOLDERS AND INDIAN PUBLIC OWN MORE THAN 51% OF THE CAPITAL INCLUDING ITS LENDERS , BANKS AND FINANCIAL INSTITUTIONS, EMPLOYEES AND ANCILLA RIES WHOSE STAKE AND EXISTENCE IS DEPENDENT ON THE ASSESSEE. IN SUPPORT, VARIOUS DECISIONS HAVE BEEN RELIED UPON BY LD. COUNSEL WHICH FOR THE SAKE OF CONVENIENCE IS REPRODUCED HEREIN BELOW: 39 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 SR. NO. CASE LAW CITATION 1 BILASRAIJHARMAL (HUF) V CIT 9 TAXMAN179 (BOM) 2 CIT V INDO BURMAH PETROLEUM CO LTD. 142 ITR 141 (CA 3 RAMPUR DISTILLERY & CHEMICALS CO. LTD 140 ITR 725 (ALL.) 4 CIT V MUIR MILLS CO LTD 148 ITR 418 (ALL.) 5 CIT V O P N ARUNACHALLA NADAR 141 ITR 620 (MAD) 6 CIT V CARD BOARD PRODUCTS 96 TAXMAN282 (PAT) 2 4 . WE H AVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT FINDING GIVEN IN THE IMPUGNED ORDERS. THE MAIN REASON FOR NOT ALLOWING THE ASSESSEES CLAIM FOR LEGAL EXPENSES DEBITED TO THE P&L ACCOUNT BY THE AO IS THAT, FIRSTLY, THESE LEGAL EXPENSES PERTAIN TO DISPUTE BETWEEN INDIAN PROMOTERS AND FOREIGN PROMOTERS AND THE SUITS / ARBITRATION PROCEEDINGS FILED AMONGST THEM CANNOT BE SAID TO BE RELATED TO THE BUSINESS ACTIVITY OF THE LML ; SECONDLY , IT DID N OT CONTRIBUTE TO ANY REVENUE GENERATION TO THE ASSESSEE; AND LASTLY , T HE ASSESSEE WAS COMPELLED TO INCUR THE EXPENDITURE TO ENABLE THE EXISTING PROMOTERS TO CONTINUE THEIR HOLD AND CONTROL OF MANAGEMENT AFFAIRS OF THE LML SO THAT, THE MANAGEMENT DOES NOT S LIP TO PIAGGIO. IT IS AN UNDISPUTED FACT THAT, THE ASSESSEE WAS ALSO ONE OF THE DEFENDANTS IN THE SUIT AND ALSO IN THE ARBITRATION PROCEEDINGS INITIATED BY THE PIAGGIO . C ERTAIN CLAIMS FOR DAMAGES WERE ALSO MADE AGAINST THE ASSESSEE FOR ALLEGED BREACH OF AG REEMENTS. A PETITION WAS ALSO FILED AGAINST THE ASSESSEE COMPANY AND ITS PROMOTERS BEFORE COMPANY LAW BOARD FOR WINDING OFF. THUS, THE ASSESSEE COMPANY WAS DIRECTLY AFFECTED BY SUCH LEGAL PROCEEDINGS. ONCE THE JOINT VENTURE AGREEMENT (JVA) BETWEEN THE INDI AN PROMOTERS AND PIAGGIO WAS JEOPARDIZED, VARIOUS TRIGGERING EVENTS FOLLOWED WHICH LEAD TO MANY PROCEEDINGS AGAINST THE PROMOTERS INCLUDING THAT OF THE ASSESSEE COMPANY. IT IS NOT DISPUTED BY THE AO THAT, ASSESSEE WAS MADE PART Y IN SEVERAL PROCEEDINGS 40 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 AND CLAIM WAS MADE AGAINST THE ASSESSEE COMPANY. ONCE THAT IS SO, THEN, THE ASSESSEE HAD TO DEF END ITS POSITION AND STAKE AND ALSO TO SAVE ITS BUSINESS. IT HAS ALREADY BEEN BROUGHT ON RECORD BEFORE THE AO THAT AMOUNT OF MORE THAN RS.4.03 CRORES WAS SPENT BY TH E PROMOTERS SEPARATELY FOR THE LITIGATION EXPENSES AND THE AMOUNT SPENT BY THE ASSESSEE WAS SEPARATE AND WAS ONLY TO DEFEND ITSELF IN ALL THE PROCEEDINGS INITIATED BY THE PIAGGIO. THE TRUE TEST IN RESPECT OF ALLOWING THE LITIGATION / LEGAL EXPENSES IS , WHETH ER THE LITIGATION WAS INITIATED WHILE CARRYING ON THE BUSINESS OR DURING THE CONDUCT OF THE BUSINESS OR NOT. IF LITIGATION IN ANY MANNER AFFECTS THE WORKING OF THE COMPANY OR THE SOURCE OF ITS INCOME OR ITS DAY - TO - DAY RUNNING OR MANAGEMENT , THEN SUCH EXPENSES HAS TO BE RECKONED AS INCURRED OR EXPENDED FOR THE PURPOSE OF THE BUSINESS . THE TEST OF IMMEDIATE BENEFIT OR REVENUE IS NOT CRITERIA FOR ALLOWING EXPENDITURE UNDER SECTION 37(1) , ALBEIT IT HAS TO SEEN, WHETHER IT HAS BEEN INCURRED FOR T HE PURPOSES OF THE ASSESSEES BUSINESS OR NOT. THE EXPRESSION FOR THE PURPOSE OF BUSINESS HAS A VERY WIDE IMPORT AND COVERS A SITUATION WHERE IT AFFECTS THE OVERALL BUSINESS OF THE ASSESSEE AND COMMERCIAL EXPEDIENCY. IT HAS TO BE SEEN FROM THIS ANGLE ALS O , I F THE ASSESSEE WOULD NOT HAVE BEEN DRAGGED IN TO SUCH LITIGATION AND PROCEEDING S BEFORE THE COMPANY LAW BOARD, THEN THERE WOULD NOT HAVE BEEN ANY REQUIREMENT FOR THE ASSESSEE TO INCUR SUCH EXPENDITURE . ASSESSEE GOT INVOLVED ONLY BECAUSE IT WAS MADE ONE OF THE RESPONDENT AND DEFENDANT IN THE SUIT AND IN ORDER TO SAVE ITS BUSINESS FROM POSSIBLE LIQUIDATION THE ASSESSEE HAD TO INCUR THE LEGAL EXPENSES . THUS, IN OUR OPINION, SUCH EXPENDITURE ON LEGAL EXPENSES IS WHOLLY AND EXCLUSIVELY INCURRED FOR THE PURPO SE OF THE BUSINESS AND ACCORDINGLY, SAME NEEDS TO BE ALLOWED . 41 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 ACCORDINGLY, GROUND NO.3 OF THE REVENUES APPEAL STANDS DISMISSED. 2 5 . IN GROUND NO.4, REVENUE HAS CHALLENGED THE DELETION OF DISALLOWANCE OF INTEREST OF RS.2.03 CRORES ATTRIBUTABLE TO THE INTEREST FREE ADVANCE TO THE A SSOCIATED CONCERN , V CCL LTD. 2 6 . THE FACTS IN BRIEF ARE THAT THERE WERE OUTSTANDING DEBT AND ADVANCES DUE FO RM VCCL LTD . WHICH STOOD AT RS.1514.65 LAKHS AS ON 31 ST MARCH, 2000, AS AGAINST THE DUE AMOUNT OF RS.2,785.71 LAKHS AS ON 31 ST MARCH, 1999. IT WAS DECLARED IN THE NOT ES TO THE ACCOUNT IN THE FINANCIAL STATEMENT THAT NET WORTH OF VCCL LTD. IS NEGATIVE AND C OMPANYS MANUFACTURING OPERATIONS CONTINUED TO BE SUSPENDED AS IN THE PAST. THE MANAGEMENT IS PURSUING FOR RECOVERY OF ABOVE DUE AMOUNT FROM VCCL LTD BY WAY OF ACQUISITION OR DISPOSAL OF ITS ASSETS. ADJUSTMENT FOR LOSS WHICH MIGHT ARISE IN RESPECT OF THE S AID OUTSTANDING WILL BE MADE ON ITS DETERMINATION. ADMITTEDLY ON THE SAID DUES, LML DID NOT RECEIVE ANY INTEREST INCOME. THE AO NOTED THAT PURSUANT TO SCB , V CCL HAD RE C EIVED SUM OF RS.1355 LAKHS FORM PIAGGIO. THE LML COULD NOT RECOVER THE SAID AMOUNT FRO M V CCL AND IF RECOVERY FROM VCCL OF RS.1355 LAKHS WOULD HAVE BEEN MADE , THEN ASSESSEE WOULD HAVE SAVED THE INTEREST COMPONENT ON THAT AMOUNT . HE FURTHER NOTED THAT THE AMOUNT ADVANCE D TO VCCL LTD IS 14% OF THE TOTAL AMOUNT BORROWED BY THE LML , ON WHICH IT IS PAYING INTEREST . THUS, THE AO IMPUTED INTEREST RATE OF 15% OF RS.13 . 55 CRORES AND HELD THAT IT SHOULD BE DISALLOWED , WHICH WORKED OUT TO RS.2,03,25,000/ - . 2 6 . THE LD. CIT(A) DELETED THE SAID DISALLOWANCE ON THE GROUND THAT, NOW THE VCCL LTD . HAS PAI D THE AMOUNT OF 42 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 RS.1355 LAKHS TO THE LML, THEREFORE, THE ENTIRE BASIS OF MAKING DISALLOWANCE BY THE AO NO LONGER STANDS. 2 7 . AFTER HEARING THE PARTIES AND ON PERUSAL OF THE MATERIAL PL A CED ON RECORD , WE FIND THAT THE ENTIRE PREMISE OF THE AO FOR DISALLOW ING THE INTEREST IS THAT, ON ONE HAND, ASSESSEE HAD SHOWN AMOUNT DUE FROM VCCL LTD AS ON 31 ST MARCH, 2000 AT RS.1,514.65 LAKHS , WHICH IT FINDS IT DIFFICULT TO R ECOVER AND ON THE OTHER HAND WHEN THE VCCL HAD RECEIVED AN AMOUNT OF RS.1355 LAKHS FROM THE PIAG GIO UNDER THE SCB , ASSESSEE IS NOT RECOVERING THE AMOUNT FROM VCCL . IF THIS AMOUNT WOULD HAVE BEEN GIVEN TO THE LML THEN DUE AMOUNT COULD HAVE BEEN REDUCED AND ALSO THE CONSEQUENT INTEREST TO LML . ON THIS PREMISE H E HA S MADE THE DISALLOWANCE OF INTEREST ON THE AMOUNT OF RS.13 . 55 CRORES. NOW, ADMITTEDLY, IT HAS BEEN SHOWN BY THE ASSESSEE BEFORE THE CIT(A), WHICH HAS NOT BEEN DISPUTED BY THE REVENUE BEFORE US THAT, VCCL LTD HAS PAID THE AMOUNT OF RS.13 . 55 CRORES TO THE ASSESSEE FOR WHICH THE NECESSARY EVIDE NCES WERE ALSO FILED BEFORE THE CIT(A) AND XEROX COPY OF THE CHEQUE IS ALSO APPEARING IN THE PAPER BOOK. THUS, THE ENTIRE PREMISE ON WHICH THE DISALLOWANCE WA S MADE BY THE AO HAS NO LEGS TO STAND. HENCE , THE GROUND RAISED BY THE REVENUE HAS BEEN RENDERED B ASELESS AND WITHOUT ANY BASIS OR SUPPORT FROM ANY MATERIAL ON RECORD AND ACCORDINGLY, THE SAME IS DISMISSED. 2 8 . IN GROUND NO.5, THE REVENUE HAS CHALLENGED THE DELETION OF RS.4,05,75,000/ - ON ACCOUNT OF DISALLOWANCE OF INTEREST ON DUES FROM M/S ESSLON SY NTHETICS LTD . 29 . THE BRIEF FACTS ARE THAT, IN THE NOTES OF THE ACCOUNTS IN 43 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 THE BALANCE - SHEET , VIDE N OTE NO.11, THE ASSESSEE HAS REPORTED THAT, SUM OF RS.2709 LAKHS OUT OF TOTAL SUM OF RS.7103 LAKHS WAS RECOVERABLE FROM M/S ESSLON SYNTHETICS LTD (ESL) AGAINST THE SALE CONSIDERATION FOR TRANSFER OF UNDERTAKINGS AND OTHER DEBTS FOR WHICH NO PAYMENT HAS BEEN RECEIVED BY THE ASSESSEE . THIS AMOUNT REPRESENTS THE UNPAID SALE CONSIDERATION IN RESPECT OF ITS FIB RE BUSINESS TRANSFERRED TO M/S ESL IN THE YEAR 1987. IN THE YEAR 1990, THE RELEVANT APPROVAL OF FINANCIAL INSTITUTIONS/BANKS WERE RECEIVED AND THE PRICE WAS REWORKED AND IN TERMS OF THE AGREEMENT THE PURCHASE CONSIDERATION OF RS.71.03 CRORES WAS PAID BY ESL , BY TAKING OVER LIABILITY OF THE INSTIT UTIONS / BANKS TO THE EXTENT OF RS.29.99 CRORES AND DOWN PAYMENT OF RS.14 CRORES. THE AMOUNT OF RS.9.45 CRORES WAS PAYABLE ON OR BEFORE 31 ST MARCH 1992 AND A SUM OF RS.17.59 CRORES WAS PAYABLE IN 28 EQUAL INSTALLMENTS BEGINNING FROM 1 ST APRIL, 1991. IN RESPECT OF RS. 9.45 CRORES, THERE WAS NO PROVISION FOR PAYMENT OF INTEREST IN CASE OF DELAY A ND THE SAID AMOUNT WAS GUARANTEED BY SARASWAT TRADING CO. LTD WHO WAS HOLDING EQUITY SHARES OF LML LTD. TO ENFORCE THE ABOVE REFERRED PAYMENT, SUI T WAS FILED IN HONBLE DELHI HIGH COURT AND PENDING DISPOSAL , THE SAID AMOUNT OF RS.9.45 CRORES HAS BEEN SHOWN BY THE ASSESSEE AS RECOVERABLE . I N RESPECT OF SUM OF RS.17.59 CRORES WHICH WAS UNSECURED, THE PROVISION WAS MADE IN THE BOOKS OF ACCOUNT FOR THE YEAR ENDING 31 ST MARCH, 1 997. SINCE THE COMPANY WAS ORDERED TO BE WOUND UP BY HONBLE ALLAHABAD HIGH COURT AND THERE WAS NO POSSIBILITY OF REALIZING ANYTHING. HOWEVER, LATER ON THE SAID SUM WAS FINALLY ASS IGNED TO ITS SUBSIDIARY COMPANY, M/S PERFECT POLYCO NS LTD. FOR TOKEN CONSIDERATION OF RE 1/ - . SIMULTANEOUSLY, THE ASSESSEE HAS ALSO WRITTEN OFF THE BAD DEBTS IN ITS BOOKS OF ACCOUNT BY 44 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 DE B I TI NG THE PROVISION FOR DOUBTFUL DEBTS AND CREDITING TO THE PARTIES ACCOUNT . THE AO, IN HIS SHOW CAUSE NOTICE TO THE AS SESSEE REQUIRED AS TO WHY INTEREST RATE OF 18% ON THE AMOUNT OF RS.27.05 CRORES ( 1 7.59 + 9.45) SHOULD NOT BE MADE , WHICH COMES TO RS.4.87 CRORES A N D ADD THE SAME BY WAY OF I NTEREST ACCRUED ON OUTSTANDING AMOUNT. IN RESPONSE, THE ASSESSEE AFTER STATING THE ENTIRE BACKGROUND OF THE TRANSACTION STATED THAT , ESL HAS BEEN DECLARED SICK UNIT BY BIFR AND THERE WAS NO POSSIBILITY OF REALIZING ANYTHING FROM THE ASSESSEE COMPANY AND, THEREFORE, THERE IS NO SCOPE FOR ADDITION O N ACCOUNT OF NOTIONAL INTEREST. THE AO OB SERVED IN HIS ORDER THAT THE ASSESSEE WAS NOT KEEN TO RECOVER THE AMOUNT OF RS.27.04 CRORES FROM ITS SISTER CONCERN ESL AND AS PE R THE TERMS OF SALE OF BUSINESS, THE ASSESSE E WAS TO RECOVER THE TOTAL CONSIDERATION IN A PHASED MANNER O V ER A PERIOD TIME. IT COULD RECOVER ONLY A PART AMOUNT AND BALANCE AMOUNT OF RS.27.05 CRORES IS STILL OUTSTANDING. HE FURTHER OBSERVED THAT, M/S SARASWAT TRADING CO. WAS GUARANTOR FOR THESE DUES WHICH HELD THE M AJOR CHUNK OF SHARES OF LML AND, THEREFORE, ASSESSEE COULD HAVE EAS ILY RECOV ERED ITS DUES FROM THE GUARANTOR . I N S TE AD , IT HAD ASSIGN ED THE ENTIRE AMOUNT OF LOAN TO M/S PERFECT POLYCON CO. LTD. FOR A CONSIDERATION OF RE . 1/ - . T HUS , THE ENTIRE NATURE OF TRANSACTION SHOWS THAT ASSESSEE DID NOT HA D ANY INTENTION TO RECOVER IT S AMOUNT DUE INSPITE THAT AMOUNT WAS SHOWN AS RECOVERABLE . T HE ASSESSEE HAS CHOSE N TO ASSIGN THE ENTIRE AMOUNT OF LOAN FOR A CONSIDERATION OF RE 1/ - TO ANOTHER SISTER CONCERN , WHICH I S NOT JUSTIFIED UNDER NORMAL BUSINESS PRUDENCE BUT IT IS A CASE OF GENEROUS CHARITY TOWARDS I TS SISTER CONCERN. ACCORDINGLY, HE HELD THAT 15% DISALLOWANCE SHOULD BE MADE ON THE AMOUNT RECOVERABLE, THAT IS ON RS. 27.05 CRORES WHICH WORKS OUT TO 45 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 RS.4,05,75,000/ - . 30 . BEFORE THE CIT(A), THE ASSESSEE SUBMITTED THAT, OUT OF THE SAID AMOUNT OF RS.27.05 CRORES, RS.17.59 CRORES REPRESENTS THE SURPLUS OF UNDERTAKING WHICH WAS CREDITED TO THE PROFIT AND LOSS ACCOUNT AND FOR TAX PURPOSE THE SAID AMOUNT WAS PARTLY OFFERED AS LONG - TERM - CAPITAL - GAIN WHEREAS PART OF THE AMOUNT WAS CREDITED TO THE VARIOUS BLOCK OF ASSETS AND THEREBY REDUCE THE WRITTEN DOWN VALUE OF THOSE ASSETS. THUS, NO ADDITION WA S REQUIRED TO BE MADE ON SUM OF RS. 17.59 CRORES SO MUCH SO THAT THERE COULD BE ANY NOTIONAL DISALLOWANCE OF INTEREST IN RESPECT OF SUM RECEIVABLE FROM THE COMPANY. IT WAS FURTHER POINTED OUT THAT, EVEN THE RELEVANT SUM HAS BEEN WRITTEN OFF IN THE BOOKS OF ACCOUNT AND AS SUCH THERE IS NO QUESTION OF DISALLOWING ANY NOTIONAL INTEREST SINCE THERE IS NOTHING RECE IVABLE FROM THE SAID PARTY. AS REGARDS THE BALANCE SUM OF RS.9.45 CRORES, IT WAS SUBMITTED THAT THE SALE AGREEMENT DOES NOT CONTAIN ANY PROVISION WITH REGARD TO THE CHARGING OF INTEREST IN CASE OF DELAY, THEREFORE, NO INTEREST COULD BE DISALLOWED ON THIS A MOUNT ALSO. LASTLY, IT WAS SUBMITTED THAT AO HAS NOT ESTABLISHED ANY NEXUS BETWEEN THE AMOUNT RECEIVABLE AND AMOUNT BORROWED WHILE COMPUTING THE DISALLOWANCE. 3 1 . THE LD. CIT(A) AFTER APPRECIATING THE FACTS IN THE LIGHT OF THE SUBMISSIONS MADE AND MATERI ALS PLACED ON RECORD, HELD THAT, NO CASE HAS BEEN MADE OUT BY THE AO FOR DISALLOWANCE AND ACCORDINGLY HE DIRECTED THE AO TO DELETE THE SAID DISALLOWANCE. 3 2 . BEFORE US, THE LD. DR SUBMITTED THAT, AO HAD GIVEN A 46 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 DETAILED REASON AS TO WHY THE INTEREST SHOUL D BE DISALLOWED ON THE AMOUNT WHICH WAS RECOVERABLE FROM ESL. AO HAS ALSO BROUGHT OUT HOW THE SAID AMOUNT OF LOAN HAS BEEN ASSIGNED TO ANOTHER SISTER CONCERN RE 1/ - , THEREFORE, THE FINDING OF THE AO FOR MAKING THE DISALLOWANCE NEEDS TO BE UPHELD. THE LD. C IT(A) HAS NOT GIVEN ANY REASONING FOR DELETING THE SAID DISALLOWANCE. 3 3 . BEFORE US, THE LD. COUNSEL SUBMITTED THAT THE AMOUNT OUTSTANDING OF RS.27.05 CRORES WAS PART OF SALE CONSIDERATION RECEIVABLE FROM ESL FOR TRANSFER OF FABRIC BUSINESS AND WAS IN THE NATURE OF ANY SUM OR MONEY ADVANCED, THEREFORE, THERE IS NO QUESTION OF ANY INTEREST BEARING FUNDS DIVERTED FOR NON - BUSINESS PURPOSES. NO NOTIONAL DISALLOWANCE CAN BE MA DE ANY SUCH CASE, BECAUSE AO HAS NOT MADE OUT ANY CASE FOR THE INTEREST BEARING FUNDS HAVE BEEN DIVERTED FOR ADVANCING INTEREST FREE LOANS FOR NON - GENUINE OR NON - BUSINESS PURPOSE . O THERWISE ALSO, IT IS AN ADMITTED FACT THAT ESL HAS BEEN O R DE RED TO BE WOUND UP BY HONBLE ALLAHABAD HIGH COURT AND LML COULD NOT HAVE RECOVERED ANYTHING. THUS, THERE IS NO REAL INCOME WHICH CAN BE SAID TO HAVE BEEN BROUGHT TO TAX. 3 4 . WE HAVE CONSIDERED THE RELEVANT FACTS AS CULLED OUT IN THE IMPUGNED ORDER S AS WELL AS SUBMIS SIONS MADE BY THE PARTIES. AS DISCUSSED ABOVE, A SUM OF RS.27.05 CRORES WAS RECEIVABLE TO THE ASSESSEE AS PART OF SALE CONSIDERATION FROM ESL FOR TRANSFER OF FIBR E BUSINESS IN THE YEAR 1987. THE ASSESSEE WAS TO RECEIVE RS.9.45 CRORES UP TILL MARCH, 1992 AN D BALANCE AMOUNT OF RS.17.59 CRORES IN 28 EQUAL INSTALLMENTS STARTING FROM 1ST APRIL, 1991. AS BROUGHT OUT BY THE ASSESSEE BEFORE THE CIT(A), RS.17.59 CRORES REPRESENT THE 47 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 SURPLUS ON SALE OF UNDERTAKING WHICH WAS CREDITED TO THE P&L ACCOUNT AND WAS OFFERED AS LONG - TERM - CAPITAL GAIN /LOSS WHEREAS, THE PART OF THE AMOUNT WAS CREDITED TO THE VARIOUS BLOCK - OF - ASSETS AND THEREBY REDUCE THE WDV OF THOSE ASSETS. THUS, THERE WAS NO OCCASION FOR DISALLOWANCE OF ANY INTEREST ON THE AMOUNT OF RS.17.51 CRORES. FURTHER, IT IS UNDISPUTED THAT THE SUM OF RS.9.45 CRORES IS A PART OF A SALE CONSIDERATION RECEIVABLE FROM ESL FROM THE TRANSFER OF FIBER BUSINESS , THEN HOW IT CAN BE RECKONED AS MONEY ADVANCE D BY THE ASSESSEE TO ITS AE O R SISTER CONCERN OUT OF INTEREST BEARING FUNDS. A DISALLOWANCE OF INTEREST IN SUCH CASES CAN ONLY BE WHEN THE DEPARTMENT/ REVENUE MAKES OUT A CASE THAT INTEREST BEARING FUNDS HAVE BEEN DIVERTED TO THE SISTER CONCERNS WITHOUT ANY BUSINESS PURPOSE AND WITHOUT CHARGING ANY INTEREST. OSTENSIBLY IT IS NOT THE CASE HERE THAT ANY INTEREST BEARING FUNDS HAVE BEEN DIVERTED TO THE SISTER CONCERN ALBEIT CERTAIN SUM WAS TO BE RECEIVED BY THE ASSESSEE AS PART OF SALE CONSIDERATION AND IN SUCH A CASE HOW THE INTEREST COMPONENT CAN BE IMPUTED FO R MAKING ANY DISALLOWANCE IS NOT UNDERSTANDABLE . NOT ONLY THAT, IT HAS BEEN BROUGHT ON RECORD THAT ESL HAS BEEN ORDERED TO BE WOUND UP BY THE HONBLE ALLAHABAD HIGH COURT AND ONCE THE AMOUNT ITSELF IS DOUBTFUL OF RECOVERY THEN HOW ANY AMOUNT OF INTEREST AN D THAT TO BE ON THE NOTIONAL BASIS CAN BE IMPUTED FOR MAKING THE DISALLOWANCE. THE ENTIRE EXERCISE DONE BY THE AO IS VERY ARBITRARILY AND WE DO NOT FIND ANY REASON TO DEVIATE FROM THE CONCLUSION OF THE CIT(A) IN DELETING THE SAID DISALLOWANCE. ACCORDINGLY, THE GROUND NO.5 AS RAISED BY THE REVENUE IS DISMISSED. 3 5 . IN GROUND NO.6, THE REVENUE HAS CHALLENGED THE DELETION 48 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 OF DISALLOWANCE MADE BY THE AO UNDER SECTION 40(A)(I) ON ACCOUNT OF TECHNICAL KNOW - HOW FEES PAID TO M/S AVL AUSTRIA. 3 6 . THE BRIEF FACTS OF THE CASE, AS DISCUSSED IN THE IMPUGNED ORDER ARE THAT, IN THE RETURN OF INCOME, THE ASSESSEE HAS CLAIMED THE DEDUCTION OF RS.2,83,44,224/ - IN RESPECT OF TECHNICAL KNOW - HOW FEES WHICH INCLUDED AN AMOUNT OF RS.3,80,20,015/ - PAID TO M/S AVL AUSTRIA TOWARDS TECHNICAL KNOW - HOW FEES. THE AO HELD THAT, SINCE ASSESSEE HAS NOT DEDUCTED TDS IN RESPECT OF SUCH A PAYMENT, THEREFORE, THE SAME IS DISALLOWABLE UNDER SECTION 40(A)(I) AND ACCORDINGLY, HE MADE THE DISALLOWANCE. THE ASSESSEES CASE BEFORE T HE CIT(A) WAS THAT, IT RELATE TO THE PAYMENT OF SERVICES RENDERED OUTSIDE INDIA AND ACCORDING TO ARTICLE 7 OF INDIA - AUSTRIA DTAA, THE SAME CANNOT BE SUBJECT TO WITHHOLDING OF TAX IN INDIA AND IN S UPPORT , THE ASSESSEE HAD RELIED UPON THE DECISION OF ITAT CH ENNAI BENCH IN THE CASE OF TVS SUZUKI LTD. VS ITO, REPORTED IN 73 IT D 91 WHICH RENDERED ON SIMILAR KIND OF FACTS . THUS, IT WAS CONTENDED THAT I N THE TERMS OF SAID ARTICLE 7 , THE TECHNICAL KNOW - HOW FEES PAID ON TECHNICAL SERVICES RENDERED OUTSIDE INDIA AND MONEY WAS PAID IN AUSTRIA , THEN WITHHOLDING TAX IS NOT APPLICABLE. THE LD. CIT(A) FOLLOWING THE DECISION OF THE CHENNAI ITAT HELD THAT THERE CANNOT BE ANY DISALLOWANCE UNDER SECTION 40(A)(I). 3 7 . AFTER HEARING BOTH THE PARTIES AND ON PERUSAL ON RELEVANT FINDING GIVEN IN THE IMPUGNED ORDERS, WE FIND THAT, THE DISALLOWANCE HAD BEEN MADE BY THE AO ON THE GROUND AND ON THE FOOTING THAT THE PAYMENT OF TECHNICAL KNOW - HOW FEES T O AVL AUSTRIA IS TAXABLE IN INDIA EVEN IF IT HAS BEEN RENDERED OUTSIDE INDIA AND SINCE , ASSESSEE HAS NOT DEDUCTED 49 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 TDS ON SUCH PAYMENTS , THEREFORE, DISALLOWANCE UNDER SECTION 40(A)(I) SHOULD BE MADE. ADMITTEDLY, HERE IN THIS CASE, THE OLD DTAA PROVISION OF 1963 BETWEEN INDIA AND AUSTRIA WHICH EXISTED UP TIL L SEPT EMBER, 2001 WOULD BE APP LICABLE. THE OLD ARTICLE 7 READ AS UNDER: - AMOUNTS PAID BY AN ENTERPRISE OF ONE OF THE TERRITORIES FOR TECHNICAL SERVICES FURNISHED BY AN ENTERPRISE OF THE OTHER TERRITORY SHALL NOT BE SUBJECT TO TAX BY THE FIRST - MENTIONED TERRITORY EXCEPT IN SO FAR AS S UCH AMOUNTS ARE ATTRIBUTABLE TO ACTIVITIES ACTUALLY PERFORMED IN THE FIRST - MENTIONED TERRITORY. IN COMPUTING THE INCOME SO SUBJECT TO TAX, THERE SHALL BE ALLOWED AS DEDUCTIONS THE EXPENSES INCURRED IN THE FIRST - MENTIONED TERRITORY IN CONNECTION WITH THE AC TIVITIES PERFORMED IN THAT TERRITORY . FROM THE ABOVE, IT IS CLEAR THAT IF THE AMOUNT IS PAID BY AN INDIAN ENTERPRISE FOR TECHNICAL SERVICES FURNISHED BY ENTERPRISE IN AUSTRIA TH EN SAME SHALL NOT BE SUBJECT TO TAX IN INDIA EXCEPT IN SO FAR AS SUCH AMOUNT IS ATTRIBUTABLE TO THE ACTIVITIES ACTUALLY PERFORMED IN INDIA. T HIS ARTICLE IS DIFFERENT FROM TH E NEW ARTICLE 7 APPLICABLE POST SEPTEMBER 2001 AND, THEREFORE, THE BENEFIT OF OLD ART ICLE HAS TO BE GIVEN TO THE ASSESSEE IN THE AY 2000 - 01 . HERE IN THIS CASE ADMITTEDLY, THE ACTIVITY OF RENDERING OF TECHNICAL SERVICES HAS BEEN PERFORMED BY THE AUSTRIA N COMPANY IN AUSTRIA AND THE AMOUNT HAS BEEN PAID BY THE INDIAN ENTERPRISE IN AUSTRIA , TH EREFORE, BY VIRTUE OF ARTICLE 7 OF DTAA ( AS WAS PREVALENT PRIOR TO SEPTEMBER, 2 001) , THE AMOUNT WAS NOT TAXABLE IN INDIA AND CONSEQUENTLY THE ASSESSEE WAS NOT REQUIRED TO DEDUCT TDS ON PAYMENT . THUS, NO DISALLOWANCE 50 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 UNDER SECTION 40(A)(I) CAN BE MADE IN TH E PRESENT CASE . IN THE RESULT, GROUND NO.6 AS RAISED BY THE REVENUE IS DISMISSED. 3 8 . IN G ROUND NO.7, THE REVENUE HAS CHALLENGED THE DISALLOWANCE U/S 40 A(9) IN RESPECT OF FOLLOWING EXPENDITURE S : - S.NO. PARTICULARS AMOUNT 1 LML EXECUTIVE CLUB 48,000 2 LML OFFICERS CLUB 2,80,000 3 LML LADIES CLUB 2,20,000 4 EMPLOYERS CONTRIBUTION TO WORKERS BENEVOLENT FUND 33,936 TOTAL 5,81,936 39 . THE AO HAS DISALLOWED THE SAID AMOUNTS ON THE GROUND THAT, SIMILAR DISALLOWANCE WAS MADE IN THE EARLIER YEARS. THE LD. CIT(A) HAS ALSO DELETED THE SAID ADDITION AFTER FOLLOWING THE APPELLATE ORDERS FOR THE EARLIER YEARS. BEFORE US, IT HAS BEEN ADMITTED BY BOTH THE PARTIES THAT THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE AYS 1997 - 98, 1998 - 99 AND 1999 - 00 IN THE APPEAL FILED BY THE REVENUE HAS CONFIRMED THE SIMILAR DISALLOWANCE MADE UNDER SECTION 40A(9) . ACCORDINGLY, FOLLOWING THE EARLIER YEAR PRECEDENCE WHICH IS APPLICABLE IN THIS YEAR ALSO, THIS ISSUE IS DECIDED AGAINST THE ASSESSEE AND IN FAVOUR OF THE REVENUE. THUS, GROUND NO.7 RAISED BY THE DEPARTMENT IS ALLOWED. 40 . IN GROUND NO.8, THE REVENUE HAS CHALLENGED THE DELETION OF DISALLOWANCE ON ACCOUNT OF PRE - OPERATIVE EXPENSES AMOUNTING TO RS.3,76,81,000/ - CLAIMED AS REVENUE EXPENDITURE. 4 1 . THE AO NOTED THAT, ASSESSEE HAS REDUCED THE PRE - 51 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 OPERATIVE EXPENSES BY SUM OF RS.3,76,81,000/ - WHICH WAS CLAIMED AS REVENUE EXPENDITURE. HE HAD ALSO NOTE D THE FACT THAT ASSESSEE HAS REDUCED AMOUNT OF RS.376.18 LAKHS FROM TOTAL PRE - OPERATIVE EXPENDITURE OF RS.1038.20 LAKHS DEBITED IN THE PROFIT & LOSS ACCOUNT . THE ASSESSEES CASE WAS THAT, DURING THE YEAR THE INTEREST ON BORROWINGS AND OTHER INCIDENTAL EXPENSES INCURRED IN RELATION TO THE EXPAN S ION PROJECT UNDER IMPLE MENTATION HAVE BEEN CAPITALIZED AND CARR IED FORWARD AS PRE - OPERATIVE EXPENDITURE PENDING ALL OCATION UNDER THE FIXED ASSETS. THE AMOUNT OF RS.1038 .20 LAKHS WAS CAPITALIZED IN THE BOOKS, HOWEVER, IN THE RETURN OF INCOME THE NET PRE - OPERATIVE EXPENDITURE OF RS.661.39 LAKHS WAS CLAIMED AS REVENUE EXPENDITURE. THE AO HELD THAT, INTEREST INCOME OF RS.376.81 LAKHS IS TO BE TAXED AS INCOME FROM OTHER SOURC ES BASED ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF TUTICORIN ALKALI CHEMICALS & FERTILIZERS LTD. V. CIT [ 1 997] 227 ITR 172 (SC) AND ALSO THE JURISDICTIONAL HIGH COURT IN THE CASE OF RAVI RATNA EXPORTS CO. LTD., 246 ITR 443 AND HOST OF OTHER D ECISIONS. THE LD. CIT(A) REVERSED THE ACTION OF THE AO, FOLLOWING THE DECISION OF TATA CHEMICALS LTD VS DCIT, REPORTED IN 72 ITD 1 . 4 2 . BEFORE US, THE CONTENTION OF THE LD. COUNSEL HAS BEEN THAT, THESE PRE - OPERATIVE EXPENDITURE WAS PART OF ONGOING EXPANSION AND IN ANY CASE, THERE IS NO REQUIREMENT TO GO ON TO THE MERITS BECAUSE THE AMOUNT OF RS. 3 76.81 LAKHS, WHICH HAS BEEN TAXED BY THE AO AMOUNT S TO DOUBLE TAXATION, BECAUSE THE SAID AMOUNT WAS ALREADY REDUCED BY THE ASSESSEE FROM THE PROFIT AND LOSS ACCOUNT AS THE SAME WAS NETTED OFF. HE POINTED OUT THAT THE PRE - OPERATIVE EXPENDITURE WAS RS.103 8 .20 LAKHS WHICH INCLUDED THE 52 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 INTEREST AND OTHER INCOME OF RS.376.81 LAKHS W AS ALREADY REDU CED AND NET OPERATIVE EXPENDITURE WAS CLAIMED, THAT IS , RS.661.39 LAKHS. THUS, THE DISALLOWANCE MADE BY THE AO WAS AN ARITHMETICAL FALLACY. LD. DR SUBMITTED THAT AO MAY VERIFY AND GIVE CONSEQUENTIAL RELIEF. 4 3 . AFTER CONSIDERING THE AFORESAID SUBMISSION O F THE LD. COUNSEL, WE AGREE WITH HIM T HAT WE NEED NOT TO GO INTO MERITS OF THE ISSUE , BECAUSE ALREADY ASSESSEE HAD REDUCED THE SAID AMOUNT OF RS.376.18 LAKHS FROM THE PRE - OPERATIVE EXPENDITURE WHICH HAS BEEN ADDED BY THE AO SEPARATELY . THIS IS EVIDENT FROM THE FACT THAT TOTAL PRE - OPERATIVE EXPENDITURE WAS RS. 1038.20 LAKHS , OUT OF WHICH INTEREST AND OTHER INCOME OF RS.376.81 LAKHS HAS ALREADY BEEN REDUCED AND ONLY RS.661.39 LAKHS HAVE BEEN CLAIMED IN THE P&L A/C. THUS, THERE WAS NO REQU IREMENT BY THE AO TO DISALLOW ONCE AGAIN THE INTEREST AND OTHER INCOME OF RS . 376.81 LAKHS. AO IS ACCORDINGLY IS DIRECTED TO RECTIFY T HIS MISTAKE AFTER VERIF ICATION THAT I F THE ASSESSEE HAS ALREADY REDUCED THE SAID AMOUNT FROM THE TOTAL PRE - OPERATIVE EXPEND ITURE AS STATED BEFORE US , THEN NO ADDITION SHOULD BE MADE. IN THE RESULT, GROUND NO.8 IS TREATED AS ALLOWED IN THE MANNER INDICATED ABOVE. 4 4 . IN GROUND NO.9, THE REVENUE HAS CHALLENGED THE ORDER OF THE CIT(A) IN NOT TREATING THE EXPENDITURE INCURRED ON OBTAINING ISO 9002 AND WORLD CLASS MANUFACTURE CERTIFICATE OF RS.11,30,912/ - AND RS.6,23,380/ - AS CAPITAL EXPENDITURE. LML HA D OBTAINED THE C ERTIFICATE OF ISO 9002 FOR WHICH IT HAS PAID RS.11,30,912/ - AND HAS ALSO PAID RS.6,23,380/ - FOR OBTAINING CERTIFICATE FOR WORLD CLASS 53 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 MANUFACTURING FACILITY . THE SAID AMOUNT HAS BEEN CLAIMED AS REVENUE EXPENDITURE BY THE ASSESSEE WHICH HAS BEEN DISALLO WED BY THE AO AS CAPITAL EXPENDITURE ON THE GROUND THAT T HE S E A RE IN THE NATURE OF TRADEMARK EXPENDITURE AND HAD A BENEFIT OF ENDURING NATURE. THE LD. CIT(A) HAS DELETED THE SAID ADDITION S ON THE GROUND THAT THE SAID EXPENDITURE WAS INCURRED WHOLLY AND EXC LUSIVELY FOR THE PURPOSE OF BUSINESS AND NOT IN THE NATURE OF CAPITAL EXPENDITURE. 4 5 . AFTER HEARING BOTH THE PARTIES AND ON PERUSAL OF THE IMPUGNED ORDER, WE FIND THAT THE PAYMENT FOR OBTAINING CERTIFICATE OF ISO 9002 , AND WORLD CLASS MANUFACTURE FACILITY ; ONLY CON V E Y S THAT THE LML PRODUCTS WERE MANUFACTURED BY ADHERING THE INTERNATIONAL QUALITY AND BEST MANUFACTURING PRACTICES. IT DOES NOT GIVE ANY VESTED RIGHT TO THE ASSESSEE OR ASSIGN ANY SPECIAL O R EXCLUSIVE RIGHT I N THE NATURE OF TRADEMARK AS HELD BY THE AO , BECAUSE, IT ONLY GIVES RECOGNITION OF THE PRODUCT THAT IT W AS MADE OF GOOD QUALITY AND STANDARD . THERE IS NO ENDURING BENEFIT TO THE ASSESSEE GIVING ANY IMPETUS TO ITS PROFIT MAKING APPARATUS. THESE CERTIFICATES GIVE VALUE TO THE PRODUCTS AND HELP THE ASSESSEE TO FAIRLY COMPETE IN THE MARKET AND BOOST ITS SALE. THE BENEFIT IF AT ALL IS ON REVENUE ACCOUNT. THE LD. COUNSEL BEFORE US HAS RELIED UPON THE DECISION OF HONBLE P&H HIGH COURT IN THE CASE OF CIT VS UPPER INDIA STEEL MFG. AND ENGINEE RING CO LTD, REPORTED IN [2014] 50 TAXMAN.COM 345, WHEREIN THE HONBLE HIGH COURT HAS ALLOWED THE EXPENDITURE INCURRED FOR ISO 9002 CERTIFICATE AS REVENUE EXPENDITURE. THUS, WE DO NOT FIND ANY MERITS IN THE CONTENTION OF THE AO THAT PAYMENT FOR GETTING SUCH CERTIFICATE S FOR QUALITY PRODUCTS OR WORLD CLASS 54 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 MANUFACTURING FACILITY IS IN THE NATURE OF TRADEMARK AND HENCE IS CAPITAL IN NATURE. WE, THUS, CONFIRM THE ORDER OF THE CIT(A) THAT SUCH AN EXPENDITURE IS REVENUE EXPENDITURE AND IS ALLOWABLE UNDER SECT ION 37(1). ACCORDINGLY WE DISMISS THE GROUND RAISED BY THE REVENUE. 4 6 . IN GROUND NO.10, THE REVENUE HAS CHALLENGED THE ALLOWANCE OF RS.17.59 CRORES AS BAD DEBT BY LD. CIT(A) . 4 7 . THE FACTS ON THIS ISSUE HAVE ALREADY BEEN DISCUSSED WHILE ADJUDICATING GRO UND NO.5 AS ABOVE. THE LD. CIT(A) IN THE IMPUGNED ORDER HAS NOTED DOWN THE FOLLOWING FACTS: - 10.1 IN THE YEAR 1987 THE APPELLANT COMPANY HAD HIVED OFF ITS MANMADE FIBER BUSINESS TO ITS WHOLLY OWNED SUBSIDIARY, M/S LML FIBER LTD. (FORMERLY KNOWN AS KANPUR SYNTHETICS LTD) AND NOW KNOW N AS M/S ESSLON SYNTHETICS LTD. THE SAID BUSINESS WAS TRANSFERRED AT BOOK VALUE AGGREGATING TO RS.5356.39 LAKHS ON A GOING CONCERN BASIS AND THE SAID TRANSFER WAS SUBJECT TO THE APPROVAL OF FINANCIAL INSTITUTIONS/BANKS WHO WERE THE LENDER TO THE COMPANY. IN THE YEAR 1990 THE APPROVAL FROM FINANCIAL INSTITUTIONS WAS RECEIVED UNDER WHICH THE SAID SUBSIDIARY WAS TO BE DEALING FROM THE APPELLANT COMPANY AND NEW SHAREHOLDERS OR H IS NOMINEE WERE TO INJECT A FRESH CAPITAL OF RS.14 CRO RES. THE SAID FIBER BUSINESS WAS VALUED AT RS.7109 LAKHS. THE DIFFERENCE BETWEEN THE BOOK VALUE AND THE REVALUED PRICE AT WHICH THE SAID UNDERTAKING WAS TRANSFERRED WAS CREDITED TO PROFIT LOSS ACCOUNT AND AS FAR AS COMPUTATION OF TAXABLE INCOME WAS CONCER NED THE PROFIT REALIZED ON SALE OF LAND WAS OFFERED FOR TAX WHEREAS THE SURPLUS AMOUNT WAS CREDITED TO THE BLOCK OF ASSETS LIKE BUILDING, PLANT AND 55 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 MACHINERY, ELECTRICAL INSTALLATION AS REQUIRED BY THE PROVISIONS OF INCOME - TAX ACT, 1961. THE COMPANY HAD RE CEIVED UPFRONT PAYMENT OF RS.14 CRORES AGAINST THE SALE OF FIBER DIVISION AND BALANCE AMOUNT OF RS.27.04 CRORES WAS TO BE RECEIVED WITHIN STIPULATED PERIOD. THE SUM OF RS.9.45 CRORES IS GUARANTEED BY M/S SARASWATI TRADING COMPANY, VADUZ WHERE AS A SUM OF R S.17.59 CRORES WAS UNSECURED. THE SAID M/S ESSLON SYNTHETICS LTD BECAME A SICK COMPANY UNDER THE PROVISIONS OF SICA AND THEREAFTER IT WAS ORDERED TO BE WOUND UP BY ALLAHABAD HIGH COURT VIDE ITS ORDER DATED 27.03.1996 . 20.1.1 THE APPELLANT HAD MADE A PROV ISION IN ITS BOOKS OF ACCOUNT FOR A SUM OF RS.17.59 CRORES IN THE F.Y. 1997 - 98 BY WAY OF PROVISION FOR DOUBTFUL DEBTS AND THE CLAIM WAS NOT PURSUED IN VIEW OF RETROSPECTIVE AMENDMENT MADE TO THE INCOME - TAX ACT BY VIRTUE OF WHICH THE BAD DEBT WAS TO BE ALLO WED ONLY BEING WRITTEN OFF AND NOT UPON PROVISION. DURING THE YEAR THE APPELLANT ASSIGNED THE SAID DEBT FOR A CONSIDERATION OF RE.1/ - TO ITS SUBSIDIARY M/S PERFECT POLYCONS LTD AND CLAIMED A LONG TERM CAPITAL LOSS BY INDEXING THE SAID SUM OF RS.17.59 CRORE S . 4 8 . THE ASSES S EES CASE BEFORE THE CIT(A) TO REBUT THE FINDING OF THE AO WAS THAT, THE PART OF THE AMOUNT WHICH IS RECOVERABLE BY VIRTUE OF GUARANTEE BEING WRITTEN OFF HAS NO RELEVANCE TO THE ISSUE OF ALLOWABILITY OF RS. 17.59 CRORES. THE FACT THAT THE SAID AMOUNT HAS BEEN ASSIGNED FOR A PRICE OF RE.1/ - TO A SUBSIDIARY COMPANY ALSO HAS NO RELEVANCE . T HE IMPUGNED ISSUE IS TO BE EXAMINED FROM THE ANGLE, WH ETHER ANY OUTSIDER WOULD HAVE GO T MORE THAN THE SUM OF RE.1/ - ON FACTS OF THE CASE WHEN NOTHI NG WAS RECOVERABLE. T HE ASSESSEE 56 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 HAD ALSO RELIED UPON THE VALUATION REPORT FILED AT THE ASSESSMENT STAGE IN RESPECT OF SUCH DEBT AND REITERATED THAT THE SAME IS A CAPITAL ASSET. ALTERNATIVELY, IT WAS CONTENDED THAT AO HIMSELF HAS ADMITTED THAT RELEVANT AMO UNT IS NOTHING BUT A SUNDRY DEBT WHICH HAS BEEN WRITTEN OFF DURING THE YEAR , THEN SAME SHOULD BE ALLOWED AS BAD DEBT. THE LD. CIT(A) AFTER P ER U S ING THE RELEVANT MATERIAL AND FACT OBSERVED THAT, THE ASSESSEES CLAIM FOR LONG - TERM - CAPITAL - LOSS IS NOT TENABLE , HOWEVER, THE ASSESSEE I S ENTITLED TO CLAIM OF BAD DEBT AND DIRECT ED THE AO TO ALLOW THE SAME IN CASE IT HAS BEEN ACTUALLY WRITTEN OFF I N THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER APPEAL. 49 . BEFORE US, THE LD. COUNSEL SUBMITTED THAT, THIS IS SIMILAR TO GROUND NO.12 TO THE ASSESSEES APPEAL, WHEREIN, ASSESSEE HAD CONTENDED THAT, IT SHOULD BE ALLOWED AS CAPITAL - LOSS. 5 0 . AFTER CONSIDERING THE RIVAL SUBMISSIONS AND ON PERUSAL OF THE IMPUGNED ORDER, IT WOULD BE RELEVANT TO REITERATE THE FACT THAT , IN THE YEAR 1987, LML HAD TRANSFERRED ITS FIB R E BUSINESS TO ITS WHOLLY OWNED SUBSIDIARY M/S ESSLON SYNTHETICS LTD . THE BOOK VALUE OF THE ASSETS WAS RS.53.56 CRORES. THE BUSINESS WAS TRANSFERRED AS A GOING CONCERN WHICH WAS SUBJECT TO APPROV AL FROM THE LENDERS. THE APPROVAL OF LENDERS WAS OBTAINED IN AUGUST, 30 TH 1990 AND THE ASSETS OF THE FIBRE BUSINESS WERE VALUED AT RS.71.03 CRORES. A DIFFERENCE OF RS. 17.59 (71.03 53.56) WAS CREDITED TO THE PROFIT & LOSS ACCOUNT FOR THE YEAR ENDING 31 ST MARCH, 1991. THE TOTAL SALE CONSIDERATION WHICH WAS TO BE CHARGED FROM THE ESSLON WAS AS UNDER : - 57 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 TAKEOVER OF LOAN LIABILITY DUE TO LENDERS RS.2,999 LACS PAYMENT ON EXECUTION OF DEED OF CONVEYANCE RS.1,400 LACS PAYMENT BEFORE MARCH 31, 1992 (GUARANTEED BY SARASWATI TRADING CO LTD ) . RS. 945 LALCS PAYMENT IN CASH IN 28 EQUAL QUARTERLY INSTALLMENTS BEGINNING FROM APRIL 1, 1991 RS.1,759 LACS TOTAL RS.7,103 LAC S ============ THE RECEIVABLES WERE SHOWN AS LOANS AND ADVANCES. LATER ON, THE ESL BECAME A SICK COMPANY AND THEREAFTER , ORDER OF WOUND ING UP WAS PASSED BY THE HONBLE ALLAHABAD HIGH COURT. IN PURSUANCE OF SUCH AN ORDER, A PROVISION FOR BAD AND DOUBTFUL DEBT OF RS.17.59 CRORES WAS MADE IN THE BOOKS OF ACCOUNT IN THE FINANCIAL YEAR 1997 - 98. THE LML LATER ON HAS ASSIGNED THE DEBT OF RS.17.59 CRORES TO M/S PERFECT POLYCO N FOR A TOKEN CONSIDERATION OF RE.1/ - , ACCORDINGLY, THE PROVISION FOR BAD AND DOUBTFUL DEBT WAS ADJUSTED AGAINST THE PARTIES ACCOUNT. LML CLAIMED THE LOSS ON ASSIGNMENT AS LONG - TERM - CAPITAL - LOSS AFTER INDEXATION OF RS.17.59 CRORES WHICH WORKED OUT TO RS.37 CRORES (APPROX.). THE AO HAD DISALLOWED THE CLAIM ON THE GROUND THAT IT WAS SUNDRY DEBT, WHICH WAS OUTSTANDING SINCE 1987 AND THE SAME WAS NEVER TREATED AS CAPITAL ASSET BY SHOWING EITHER UNDER THE HEAD INVESTMENT OR FIXED ASSETS. THE ASSIGNMENT OF SUCH DEBT HAD RE.1/ - IS NOT GENUINE. THE LD. CIT(A) HELD THAT, IT IS NO T THE CASE OF LONG - TERM - CAPITAL - LOSS ALBEIT THE ASSESSEE IS ENTITLED FOR CLAIM OF A BAD DEBT AS ASSESSEE HAS WRITTEN OFF THE DEBTS IN THE AFORESAID MANNER . 5 1 . WE AGREE WITH THE FINDING OF THE CIT(A), FIRSTLY , THAT IT CANNOT BE A CAPITAL ASSET, BECAUSE IT WAS MONEY RECEIVABLE BY 58 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 THE ASSESSEE FROM ESL TOWARDS SALE CONSIDERATION. THE ASSESSEE HAD TREATED AS A BAD AND DOUBTFUL DEBT IN ITS BOOKS OF ACCOUNT IN THE EARLIER YEAR WHICH HAS BEEN WRITTEN OFF IN THIS YEA R BY WAY OF ADJUSTMENT AGAINST THE PARTIES ACCOUNT, BECAUSE IT WAS ASSIGNED TO M/S PERFECT POLYCO N WHICH HAS BEEN T AKEN ON A CONSIDERATION OF RE.1/ - . SECONDLY, T HE AO HIMSELF HAD ADMITTED THAT, IT IS A SUNDRY DEBT WHICH IS OUTSTANDING SINCE 1987. LASTLY, I T IS ALSO NOT DISPUTED THAT THE SAID AMOUNT WAS RECEIVABLE AND WAS TREATED AS LOANS AND ADVANCES IN THE BOOKS OF ACCOUNT WHICH HAS BEEN WRITTEN OFF IN THE AFORESAID MANNER. THUS, IT HAS RIGHTLY BEEN HELD THAT THE SAME WILL BE ALLOWABLE AS BAD DEBT. ONCE TH E PROVISION FOR DOUBTFUL DEBT HAS BEEN DEBITED TO THE P&L ACCOUNT AND THE CORRESPONDING PROVISION HAS BEEN REDUCED FROM THE DEBTORS ACCOUNT IN THE BALANCE - SHEET THEN THIS WOULD AMOUNT TO WRIT ING OFF THE DEBT AND THUS ALL THE CONDITIONS LAID DOWN IN SECTION 36(1)(VII) R.W.S. 36(2) CLEARLY GETS FULFILLED. THIS ISSUE HAS BEEN SETTLED BY THE HONBLE SUPREME COURT IN THE CASE OF VIJAYA BANK LTD. VS CIT, REPORTED IN [2010] 323 ITR 166 WHICH HAS BEEN FOLLOWED BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS TAINWALLA CHEMICALS AND PLASTICS LH, REPORTED IN [2013] 215 TAXMAN. 153. THUS THE SAID AMOUNT WOULD BE ALLOWED AS A BAD DEBT WRITTEN OFF BY THE ASSESSEE AND NOT AS A LONG - TERM CAPITAL LOSS. ACCORDINGLY, WE AFFIRM THE ORDER OF CIT(A) ON THIS SCORE. IN THE R ESULT GROUND NO.10 AS RAISED BY THE REVENUE IS DISMISSED. 5 2 . IN THE RESULT, APPEAL OF THE REVENUE STANDS PARTLY ALLOWED . 59 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 5 3 . NOW, WE WILL TAKE - UP ASSESSEES APPEAL IN ITA NO.3540 OF 2004 FOR AY 2009 - 10; IN VARIOUS GROUNDS OF APPEAL, THE ASSESSEE HAS RAISED FOLLOWING GROUNDS: - GROUND NO.1 : A DDITION ON ACCOUNT OF ASSESSABLE VALUE OF GOODS IMPORTED FOR JOB WORK AND RE - EXPORT ; GROUND NO.2 : A DDITION OF RS.82,88,848/ - W RITTEN OFF IN THE ACCOUNT ; GROUND NO.3 : P ROVISION FOR BAD AND DOUBTFUL DEBTS OF RS.63,96,704/ - AND PROVISION FOR DOUBTFUL ADVANCES OF RS.8,86,000/ - ON THE BASIS OF RETROSPECTIVE AMENDMENT; GROUND NO.4 : D EBIT BALANCES WRITTEN OFF AMOUNTING TO RS.27,20,800/ - ; GROUND NO.5 : D ISALLOWANCE OF PAYMENT ON ACCOUNT OF ROYALTY AND TECHNICAL KNOW - HOW FEES DISALLOWED UNDER SECTION 40(A)(I); GROUND NO.6 : D ISALLOWANCE UNDER SECTION 14A OF RS.50,000/ - ; GROUND NO.7 : DISALLOWNCE OF P AYMENT MADE TO CLUBS OF RS .60,971/ - ; GROUND NO.8 : D ISALLOWANCE OF PRIOR PERIOD EXPENSES OR RS.26.27 LACS; GROUND NO.9 : D ISALLOWANCE OF AMOUNT INCURRED OF RS.19,90,486/ - IN RESPECT OF EXPENDITURE INCURRED TOWARDS PURCHASE OF SUNDRY EQUIPMENT; GROUND NO.10 : D ISALLOWANCE OF EXPENDI TURE INCURRED TOWARDS PURCHASE OF EQUIPMENT AND TOOLS FOR TRAINING CENTRE OF RS.6,29,617/ - ; 60 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 GROUND NO.11 : A DDITION OF RS.7,46,139/ - BEING 10% OF RS.74,61,398/ - ON ACCOUNT OF GIFTS TO COMPANYS GUESTS AND EMPLOYEES ON VARIOUS OCCASIONS; AND GROUND NO.12 : L ONG TERM CAPITAL LOSS ON ASSIGNMENT OF DEBT OF RS.37,59,62,087/ - . 5 4 . AT THE OUTSET, THE LD. COUNSEL SUBMITTED THAT, GROUND NO.2 , GROUND NO.6, GROUND NO.7, GROUND NO.9 AND GROUND NO.10 ARE NOT PRESSED. ACCORDINGLY, THE SE GROUNDS ARE DISMISSED AS NOT PRESSED. 5 5 . BRIEF FACTS QUA THE GROUND NO.1 ARE THAT, THE ASSESSEE USED TO IMPORT CERTAIN COMPONENTS FREE OF COST FROM M/S PIAGGIO BV, THE COLLABORATOR FOR PERFORMING JOB WORK AND THEREAFTER SUCH COMPONENTS WER E EXPORTED. AS PER TH E ARRANGEMENT T HE ASSESSEE HAD TO PA Y THE IMPORT DUTY ON BEHALF OF THE PIAGGIO AND THEN SAME WAS DEBITED TO PIAGGIO ACCOUNT AS AND WHEN SUCH COMPONENTS WERE RE - EXPORTED AND REFUND OF CUSTOM DUTY WAS CREDITED TO THE PIAGGIO ACCOUNT. IN THE YEAR UNDER CONSIDERATION, LML HA D PAID CUSTOM DUTY OF RS.71.76 L AKHS IN RESPECT OF COMPONENTS IMPORTED FROM PIAGGIO WHICH WERE TO BE RE - EXPORTED. HOWEVER, DUE TO THE EXECUTION OF SETTLEMEN T AND CLEAN BREAK AGREEMENT , L ML WAS NOT REQUIRED TO RE - EXPO R T THESE COMPONENTS AND AS A CONSEQUENCE THE COMPONENTS BECAME THE PRO PE RTY OF LML WITHOUT ANY COST. THE CUSTOM DUTY RECOVERABLE WAS WRITTEN OFF AND WAS CLAIMED AS SUCH. THE COMPONENTS WERE USED IN THE BUSINESS OF THE LML, THAT IS, FOR MANUFACTURING OF ITS PRODUCT . 61 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 THE RELEVANT FACTS NOTED BY THE AO QUA THIS ISSUE AND HIS FINDING ARE REPRODUCED HEREUNDER: - II) THE ASSESSEE HAS PAID RS.71,76,026/ - AS CUSTOMS DUTY ON ACCOUNT OF IMPORT OF VARIOUS COMPONENTS MEANT FOR RE - EXPORT TO PIAGGIO. HOWEVER, DUE TO DISPUTE THE PRODUCTS WERE NO MORE EXPORTED AND FURTHER DUE TO SETTLEMENT AND CLEAN BREAK AGREEMENT DATED 15 TH SEPTEMBER, 1999, THE ASSESSEE WAS NEITHER REQUIRED TO SEND BACK THE COMPONENTS IN THE SHAPE OF RE - EXPORT NOT IT COULD RECOVER CUSTOMS DUTY PAID ON BEHALF OF PIAGGIO. HOWEVER, THE ASSESSEE HAS CLAIMED THAT THE COMPONENT WAS SUBSEQUENTLY CONSUMED BY IT FOR ITS OWN MANUFACTURING ACTIVITY BUT IN THIS REGARD, THE ASSESSEE DID NOT PRODUCE ANY DOCUMENTARY EVIDENCE IN SUPPORT OF ITS CONTENTION. HENCE IN ABSENCE OF ANY PROPER EVIDENCE THE AMOUNT OF CUSTOMS DUTY PAID CANNOT BE ALLOWED AS DEDUCTIBLE EXPENSE TO THE ASSESSEE. IT IS ALSO WORTH MENTIONING THAT BY IMPORTING SUCH COMPONENTS WITH THE RIDER TO RE - EXPORT THE SAME, THE ASSESSEE HAS COMMITTED AN INFRINGEMENT OF CUSTOMS LAW AS IT HAS CONSUMED THE SAME FOR DOMESTIC PRODUCTION INSTEAD OF FULFILLING ITS EXPORT OBLIGATION. HENCE SUCH A SUM OF RS.71,76,026/ - PAID BY ASSESSEE TOWARDS THE IMPORT OF COM PONENTS FROM M/S PIAGGIO BV FOR RE - EXPORT, WHICH WAS SUBSEQUENTLY CONSUMED BY THE ASSESSEE IN ITS DOMESTIC MARKET AND THIS AMOUNT WRITTEN OFF SUBSEQUENTLY FROM THE ACCOUNT OF M/S PIAGGIO BV IS NOTHING BUT A RELINQUISHMENT OF A BUSINESS OBLIGATION, IS ADDED TO THE INCOME OF THE ASSESSEE, IN THE LIGHT OF DISCUSSIONS HELD IN THE EARLIER PARAGRAPHS. IV ) IN CONTINUATION TO THE ABOVE, THE ASSESSEE WAS ASKED TO FURNISH A COPY OF BILL OF ENTRY GIVING THE VALUE OF COMPONENTS WHICH HAS BEEN IMPORTED, ON WHICH THE ABOVE REFERRED DUTY WAS PAID. THE SAME WERE FILED VIDE LETTER DTD. 4.3.2003. THE 62 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 ASSESSABLE VALUE AS DECLARED FOR CUSTOM PURPOSE WORKS OUT AS UNDER: IMPORT DEPT. SR.NO. DATE AMOUNT (ASSESSABLE VALUE OF GOODS IMPORTED) 009398 17/02/99 630,668 014332 25/02/99 203,361 007840 04/12/99 507,882 007239 13/12/96 943,956 000110 03/02/97 4,825,828 009403 15/03/97 209,193 007309 13/06/97 151,096 019109 31/03/97 619,249 019110 31/03/97 65,105 002952 27/05/97 3,936,842 12,093,180 IN THIS REGARD THIS IS FURTHER TO STATE THAT ON THESE IMPORTED COMPONENTS NO PURCHASE CONSIDERATION HAS BEEN PAID BY THE ASSESSEE TO M/S PIAGGIO AS THE SAME WERE TO BE EXPORTED BACK TO M/S PIAGGIO. THUS, IT CAN BE SEEN THAT SINCE THE AMOUNT OF CUSTOMS DUTY PAID AS DISCUSSED IN POINT NO.(II) ABOVE, COULD NOT BE RECOVERED AS THE GOODS IMPORTED WERE NEVER RE - EXPORTED. IN VIEW OF THIS IT IS NATURAL THAT THE ASSESSEE COMPANY CONSUMED IMPORTED COMPONENTS FOR ITS OWN PURPOSE AND SINCE ASSESSEE DID NOT PAY ANY AMOU NT TOWARDS PRINCIPAL COST OF COMPONENTS TO PIAGGIO AND FURTHER IN VIEW OF THE SETTLEMENT & CLEAN BREAK AGREEMENT DATED 15/11/99, THESE GOODS ARE NO MORE REQUIRED TO BE EXPORTED BACK TO M/S PIAGGIO, THE LIABILITY OF ASSESSEE TO RE - EXPORT THESE GOODS STANDS EXTINGUISHED. HENCE, THE ASSESSEE IS LIABLE TO PAY TAX ON SUCH EXTINGUISHED BUSINESS LIABILITY. HENCE, A SUM OF RS.1,20,93,180/ - BEING COST (AS ASSESSED BY THE CUSTOMS DEPARTMENT) OF GOODS IMPORTED FOR WHICH NO CONSIDERATION HAS BEEN PAID) AND MEANT FOR RE - EXPORT IS ADDED TO THE TAXABLE INCOME OF THE ASSESSEE 63 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 5 6 . LD. CIT(A) HELD THAT CUSTOM DUTY OF RS.71.76 LAKHS IS ALLOWABLE BECAUSE IT WAS IN THE COURSE OF BUSINESS AND THE SAME HAS BEEN FASTENED ON THE ASSESSEE ON ACCOUNT OF EXECUTION OF CLEAN BREAK AND FINAL SETTLEMENT AGREEMENT AND SAME IS ADMISSIBLE AS DEDUCTION. HOWEVER, ON THE TAXING OF RS.1,20,93,180/ - BEING THE BENEFIT DERIVED BY THE ASSESSEE BY VIRTUE OF THE REL INQUISHMENT OF THE LIABILITY, HE HELD THAT, THE VALUE OF THE GOODS RECEIVED FREE OF COST AND USED IN THE ASSESSEES BUSINESS HAS RIGHTLY BEEN SUBJECT TO THE TAX BY THE AO. HE REJECTED THE ASSESSEES PLEA THAT , SINCE NO LIABILITY WAS RECORDED IN THE BOOKS O F ACCOUNT AND CLAIMED AS DEDUCTION, THEREFORE, N O NOTIONAL ADDITION CAN BE MADE , BECAUSE THE SAM E IS MISCONCEIVED AND MISPLACED. I T IS AN ADMITTED FACT THAT GOODS IN QUESTION WAS USED IN ASSESSEES BUSINESS WHICH HAVE BEEN RECEIVED FREE OF COST TO THE ASSE SSEE AND AS SUCH THERE WAS NO BASIS TO RECORD ANY LIABILITY IN THE BOOKS OF ACCOUNT MUCH LESS TO CLAIM ANY DEDUCTION. 5 7 . BEFORE US, THE LD. COUNSEL SUBMITTED THAT, AS REGARDS THE ALLOWANCE OF EXCISE DUTY OF RS.71.76 LAKHS IS CONCERNED, THE REVENUE IS NOT IN APPEAL, THEREFORE, THE ACTION OF THE CIT(A) TO THIS EXTENT STANDS CONFIRMED. ON THE ISSUE OF RS.1,20,93,180/ - BEING ASSESSABLE VALUE OF COMPONENTS IMPORTED, HE SUBMITTED THAT COMPONENTS WERE IMPORTED FREE OF COST, THEREFORE, THERE WAS NO LIABILITY TOWA RDS PIAGGIO. ACCORDINGLY, THERE IS NO QUESTION OF EXTINGUISHMENT OF ANY LIABILITY. EVEN OTHERWISE ALSO, THE SAID SUM WAS NEVER CLAIMED AS DEDUCTION EITHER IN THE EARLIER YEAR OR IN THE YEAR UNDER CONSIDERATION; THEREFORE, SECTION 41(1) AS INVOKED BY THE AO CANNOT BE UPHELD. 64 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 5 8 . ON THE OTHER HAND, LD. DR STRONGLY RELIED UPON THE ORDER OF THE CIT(A) AND SUBMITTED THAT, THE ASSESSEE HAS DERIVED THE BENEFIT BY VIRTUE OF RELINQUISHMENT BY THE PIAGGIO IN WAKE OF SCB AND, THEREFORE, SAME HAS RIGHTLY BEEN TAXED. 59 . WE HAVE CONSIDERED THE RIVAL SUBMISSION S AND ALSO PERUSED THE RELEVANT FINDING GIVEN IN THE IMPUGNED ORDER. FROM THE FACTS AS DISCUSSED ABOVE, IT IS CLEAR THAT THE ASSESSEE USED TO IMPORT CERTAIN COMPONEN TS FREE - OF - COST FROM PIAGGIO BV FOR PERFORMING THE JOB WORK AND RE - EXPORT THE SAME AFTER COMPLETION OF THE JOB . AS PER THE ARRANGEMENT THE LML USED TO PA Y THE IMPORT DUTY ON BEHALF OF PIAGGIO AND WHEN SUCH COMPONENTS WERE RE - EXPORTED , THE REFUND OF CUSTOM DUTY WAS CREDITED TO THE PIAGGIO S ACCOUNT. THE ASSESSEE HAD PAID SUM OF RS.71.76 LAKHS AS A CUSTOM DUTY ON COMPONENTS IMPORTED WHICH WAS TO RE - EXPORTED TO PIAGGIO . THIS ALLOWANCE OF EXCISE DUTY HAS BEEN DELETED BY THE CIT(A) WHICH HAS NOT BEEN CHALLENGED BY THE REVENUE. IN THE WAKE OF EXECUTION OF S ETTLEMENT AND CLEAN BREAK AGREEMENT , NOW THE LML WAS NOT REQUIRED TO RE - EXPORT THE SA ID COMPONENTS AND ACCORDINGLY, THE COMPONENTS IMPORTED FROM PIAGGIO HAD BEC O ME THE PROPERTY OF THE ASSESSEE WHICH WAS USED IN THE MANUFACTURING OF THE ASSESSEE. SO FAR AS THE ASSESSEE IS CONCERNED, NO COST WAS INCURRED BY THE ASSESSEE FOR SUCH COMPONENT AND IT WAS NEVER CLAIMED AS DEDUCTION EITHER IN THIS YEAR OR IN THE EARLIER YEARS. AS ADMITTED BY THE AO, NO PURCHASE CONSIDERATION HAS BEEN PAID BY THE ASSESSEE FOR THE COMPONENTS . IF ANY COMPONENT HAS BECOME FREE OF COST WHICH HAS BEEN USED IN THE MANUFACTURING THEN IT ONLY GOES TO REDUCE THE COST OF THE PURCHASE OR MANUFACTURING COST AND ENHANCE THE PR OFIT OF THE MANUFACTURED PRODUCT ON SALE . WE 65 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 ARE UNABLE TO APPRECIATE AS TO H OW SUCH A VALUE OF COMPONENT CAN BE BROUGHT TO T AX IN THE HANDS OF THE ASSESSEE , BECAUSE TO TH E EXTENT ASSESSEE GET S THE BENEFIT O N THE COST , IT WILL BE REFLECTED IN THE PRICE OF THE MANUFACTURED PRODUCT A ND THEREBY GIVING A HIGHER PROFIT ON THE SALE OF THE SAID PRODUCT . THERE IS NO LIABILITY TOWARDS PIAGGIO AND ACCORDINGLY, IT CANNOT BE HELD THAT THERE IS ANY EXTINGUISHMENT OF ANY LIABILITY WHICH NEEDS TO BE TAXED IN THIS YEAR. TH E LD. CIT(A) HAS HELD THAT THE COMPONENTS RECEIVED WITHOUT ANY PURCHASE PRICE CONSTITUTES THE INCOME CANNOT BE UPHELD , BECAUSE THE INCOME OR PROFIT WILL RESULT ONLY IF THE SAID COMPONENT IS USED IN THE MANUFACTURING OF THE PRODUCT AND WHEN THE PRODUCT IS U LTIMATELY SOLD. THE PROFIT IMBEDDED ON ACCOUNT OF SUCH FREE COMPONENT WOULD ONLY BE DETERMINED AT THE TIME OF SALE OF THE PRODUCT AND THEN PROFIT WOULD BE TAXED AND NOT WHEN THE SAID COMPONE NT (FREE OF COST) HAS BEEN USED, THAT IS, AT THE TIME OF THE PURCH ASE ITSELF . TH U S, IN OUR OPINION, SU CH AN ADDITION IS NOT CALLED AND SAME IS DIRECTED TO BE DELETED . RESULTANTLY GROUND NO. 1 AS RAISED BY THE ASSESSEE IS TREATED AS ALLOWED. 6 0 . IN GROUND NO.3, THE ASSESSEE HAS CHALLENGED THE DISALLOWANCE OF PROVISION FOR DOUBTFUL DEBTS OF RS.63,96,704/ - AND PROVISION FOR DOUBTFUL ADVANCE OF RS.8,86,000/ - . 6 1 . THE AO HELD THAT THE PROVISIONS MADE FOR DOUBTFUL DEBT ARE NOT CRYSTALLIZED LIABILITIES. THE AMOUNT HAS NOT BEEN ACTUALLY WRITTEN OFF IN THE BOOKS OF ACCOUNTS, THEREFORE, A SSESSEE COULD NOT HAVE CLAIMED THESE EXPENSES AND IN THE COMPUTATION OF INCOME ALSO SUCH AN AMOUNT HAS NOT BEEN 66 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 ADDED BACK BY THE ASSESSEE. ACCORDINGLY, DISALLOWED AND ADDED BACK THE SAME TO THE INCOME OF THE ASSESSEE. 6 2 . THE LD. CIT(A) TOO HAS CONFIRMED THE ACTION OF THE AO ON THE GROUND THAT IN VIEW OF AMENDMENT MADE IN THE PROVISION OF THE ACT, SUCH A PROVISION FOR DOUBTFUL DOUBTS . 6 3 . LD. COUNSELS SUBMISSION BEFORE US HAS BEEN THAT, LML HAS DEBITED THE INDIVIDUAL ACCOUNT OF THE DEBTORS WITH THE PROVISION FOR DOUBTFUL DEBTS AND PROVISIONS FOR DOUBTFUL LOANS AND ADVANCES. IN SUPPORT, HE REFERRED TO THE RELEVANT PAGES IN PAPER - BOOK - II AT PAGES 449 TO 451. HE FURTHER SUBMITTED THAT, IF A PROVISION FOR DOUBTFUL DEBT IS DEBITED TO THE PROFIT AND LOSS ACCOUNT WITH SIMULTANEOUSLY RE DU CTION FROM THE DEBTORS ACCOUNT IS MADE THEN; IT WOULD BE ALLOWABLE AS DEDUCTION. IN SUPPORT, HE STRONGLY RELIED UPON THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS TAINWALLA CHEMICALS AND PLASTICS , REPORTED IN [2013] 215 TAXMAN. 153 AND CATENA OF OTHER DECISIONS INCLUDING THAT OF THE HONBLE SUPREME COURT IN THE CASE OF VIJAYA BANK ( SUPRA ) AND TRF LTD VS CIT, REPORTED IN [2010] 190 TAXMAN.391. ON THE OTHER HAND, LD. DR STRONGLY RELIED U PON THE ORDER OF THE CIT(A). 6 4 . AFTER CONSIDERING THE RELEVANT SUBMISSIONS OF THE ASSESSEE AND ON PERUSAL OF THE IMPUGNED ORDERS, WE AGREE WITH THE CONTENTION OF THE LD. COUNSEL THAT IF A PROVISION FOR DOUBTFUL DEBT IS DEBITED TO THE P&L ACCOUNT AND SIMULTANEOUS REDUCTION FROM THE DEBTORS ACCOUNT IS MADE , THEN SAME AMOUNTS TO WRITING OFF IN THE BOOKS OF ACCOUNT AND SHOULD BE ALLOWED AS DEDUCTION UNDER SECTION 36(1)(VII). THIS PRINCIPLE HAS BEEN REITERATED BY THE HONBLE BOMBAY COURT IN 67 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 THE CASE TAINWA LLA CHEMICALS AND PLASTICS ( SUPRA ) . HOWEVER NEITHER THE AO NOR THE CIT(A) HAS DISCUSSED THIS ISSUE IN DETAIL , ACCORDINGLY, WE DIRECT THE AO TO EXAMINE THE ISSUE ON MERITS AND IN THE LIGHT OF PRINCIPLE LAID DOWN BY THE HONBLE BOMBAY HIGH COURT AND HONBLE APEX COURT AND DECIDE THE SAME AFTER GIVING OPPORTUNITY TO THE ASSESSEE TO PRESENT ITS CASE . WITH THIS DIRECTION, THE ISSUE RAISED BY THE ASSESSEE IN GROUND NO.3 IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 6 5 . IN G ROUND NO.4, THE ASSESSEE HAS CHALLENGED VARIOUS BAD DEBTS WRITTEN OFF AGGREGATING TO RS.27,20,806/ - , WHICH CONSISTS OF THREE AMOUNTS, VIZ., RS. 21,37,200/ - PAID TO M/S MODERN TRADING CO.; RS. 3,48,874/ - PAID AS CUSTOM DUTY FOR IMPORT; AND RS. 2,34,732/ - CONSISTING OF VARIOUS DEBIT BAL ANCES . 6 6 . T HE FACTS IN BRIEF ARE THAT THE ASSESSEE HAS WRITTEN OFF SUM OF RS.21,32,700/ - PAID TO M/S MODERN T RADING COMPANY FOR PROCUREMENT OF LICENSE OF RS.4.11 CRORES FOR WHICH ASSESSEE COULD NOT ESTABLISHED AS TO FOR WHICH PURPOSE LICENSES WERE PURCHA SED, WHETHER FOR THE CAPITAL OR REVENUE AND WHY THE DESIRED IMPORT ON THESE LICENSES COULD NOT BE AFFECTED. FURTHER, THE ASSESSEE HAS PAID CUSTOM DUTY OF RS.3,48,874/ - FOR IMPORT OF CERTAIN SCOOTERS FOR THE PURPOSE OF EXHIBITING THE SAME IN THE INDIAN MARK ET AND THERAFTER RE - EXPORTING THE SAME. HOWEVER, IN THIS CASE, THE ASSESSEE DID NOT EXPORT THE SCOOTERS SINCE IT WAS USED IN THE INDIAN MARKET AND CUSTOM DUTY PAID COULD NOT BE RECOVERED , WHICH WAS WRITTEN OFF . REGARDING WRITE OFF OF DEBIT BALANCES AGGREG ATING TO RS.2,34,732/ - , THE AO NOTED THAT THE LML COULD NOT JUSTIFY THE REASON TO WRITE OFF NOR COULD ESTABLISH THE GENUINENESS FOR 68 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 SUCH WRITE OFF. THE LD. CIT(A) HAS CONFIRMED ALL THE DISALLOWANCE ON THE GROUND THAT NOTHING HAS BEEN BROUGHT ON RECORD WITH REGARD TO SUBSTANTIATE THE WRITE OFF OF DEBIT BALANCE S . 6 7 . BEFORE US, THE LD. COUNSEL SUBMITTED THAT, DETAILS OF PARTY - WISE WRITE OFF WERE SUBMITTED DURING THE COURSE OF ASSESSMENT PROCEEDINGS ALONG WITH THE REASONS TO WHY THESE WERE WRITTEN BACK AND UNDER WHICH CIRCUMSTANCES. OTHERWISE ALSO, HE SUBMITTED THAT THE SAME CAN BE ALLOWED AS BUSINESS LOSS. 6 8 . ON THE OTHER HAND, LD. DR STRONGLY RELIED UPON THE ORDER OF THE CIT(A) AND AO. 69 . AFTER CONSIDERING THE SUBMISSIONS OF THE PARTIES AND T HE FINDING GIVEN IN THE IMPUGNED ORDERS, W E FIND THAT, SO FAR AS SUNDRY BALANCE WRITTEN OFF FOR THE AMOUNT OF RS.21,37,200/ - RECEIVABLE FROM M/S MODERN TRADING COMPANY , IT IS NOT CLEAR FOR WHAT PURPOSE LICENSE OF RS.4.11 CRORES WAS PROCURED, WHETHER FOR TR ADING PURPOSE OR FOR ACQUISITION OF CAPITAL ASSET. T HE ASSESSEE COULD NOT ESTABLISH OR BRING ANY PROOF, UNDER WHAT CIRCUMSTANCES, THE ASSESSEE COULD NOT USE THE LICENSE AND FOR WHAT PURPOSE IT WAS PURCHASED AND WHY THE DESIRED IMPORT ON THESE LICENSES COUL D NOT BE AFFECTED. FOR A NY CLAIM OF BUSINESS EXPENDITURE OR CLAIM OF WRITE OFF OR A BUSINESS LOSS, THE ONUS IS ON THE ASSESSEE AS TO HOW IT RELATED TO HIS BUSINESS AND ALSO HAS TO GIVE GENUINE REASON S WITH EVIDENCE FOR INCURRING THE EXPENSES AND WHY IT HAS BEEN WRITTEN OFF. IN OUR OPINION, WITHOUT THERE BEING ANY MATERIAL ON RECORD AND ANY SATISFACTORY EXPLANATION, WE AGREE WITH THE FINDING OF THE 69 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 LOWER AUTHORITIES THAT TO THE EXTENT OF AMOUNT WRITTEN OFF OF RS.21,37,200/ - THERE IS NO MATERIAL TO SUBSTANTIA TE THE ASSESSEES CLAIM AND ONUS C A ST UPON THE ASSESSEE HAS NOT BE EN DISCHARGED THEREFORE, IT HAS RIGHTY BEEN DISALLOWED. 7 0 . AS REGARDS THE VARIOUS DEBIT BALANCE S TOTALING TO RS.2,34,274/ - ALSO, WE FIND THAT ASSESSEE COULD NOT ESTABLISH THE REASON FOR WRITING OFF AND COULD NOT ESTABLISH THE GENUINENESS OF THE ENTIRE TRANSACTION. THUS, ON THIS SCORE ALSO, THE ORDER OF THE CIT(A) IS CONFIRMED. 7 1 . HOWEVER, WITH RESPECT OF RS.3,48,874/ - BEING CUSTOM DUTY WRITTEN OFF ON EXPORT OF CERTAIN SCOOTERS FOR EXHIBITING THE SAME IN INDIAN MARKET, WE FIND THAT ASSESSEE COULD NOT RE - EXPORT THE SCOOTERS AS IT WAS USED IN THE INDIAN MARKET AND AS SUCH EXCISE DUTY COULD NOT BE RECOVERED. THUS, CUSTOM DUTY WHICH WAS PAID BY THE ASSESSEE IN THE COURSE OF ITS BUSINESS AND ONCE IT WAS NOT RECOVERED; THE N THE SAME H AS TO BE ALLOWED AS DEDUCTION OR LOSS WHILE COMPUTING THE INCOME FROM PROFITS AND GAINS UNDER SECTION 28. T HE ASSESSEE HAD TAKEN A BUSINESS DECISION FOR IMPORTING OF CERTAIN SCOOTERS FOR EXHIBITING THE SAME IN THE INDIAN MARKET FOR WHICH IT HAD TO PAY THE CUSTOM DUTY. THUS, THE SAID AMOUNT INCURRED WAS DURING THE COURSE OF THE BUSINESS AND WRITE OFF OF SUCH AMO UNT WHICH WAS NOT RECOVERABLE IS TO BE ALLOWED AS DEDUCTIBLE EXPENSE. THUS, THE CLAIM OF RS.3,48,874/ - IS CLEARLY ALLOWABLE AND WE ORDER ACCORDINGLY . THUS, GROUND NO.4 IS PARTLY ALLOWED. 7 2 . IN GROUND NO.5, THE ASSESSEE HAS CHALLENGED VARIOUS PAYMENT MADE TOWARDS R OYALTY AND T ECHNICAL KNOW - HOW 70 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 WHICH HAS BEEN DISALLOWED. THE DETAILS OF SUCH PAYMENT ARE AS UNDER: - S L . NO. PARTY NAME NATURE AMOUNT RS. 1 M/S DAELIM MOTORS CO. LTD., KOREA ROYALTY 5,268 2 M/S CHINA TERMINAL & ELECTRICAL CO. LTD., TAIWAN ROYALTY 2,16,546 3 M/S DAELIM MOTORS CO. LTD. S. KOREA FTS 53,41,830 4 M/S SUN ELECTRIC CO, S. KOREA FTS 9,13,995 5 M/S YOUNGSHIN INDUSTRIAL CORPORATION, S. KOREA FTS 9,89,470 6 RICARDO, UK FTS 15,09,196 T O THE EXTENT OF PAYMENT ROYALTY MADE TO M/S DAELIM MOTORS CO. LTD, KOREA AND M/S CHINA TERMINAL & ELECTRICAL CO LTD., TAIWAN, THE SAME HAS NOT BEEN PRESSED BY THE LD. COUNSEL, THE REFORE, DISALLOWAN CE OF PAYMENT MADE TO THESE TWO PARTIES IS CONFIRMED. 7 3 . AS REGARDS THE PAYMENT ON ACCOUNT OF FEE FOR TECHNICAL SERVICES PAID TO VARIOUS PARTIES, THE AO HAS DISALLOWED THE SAME ON THE GROUND THAT, ASSESSEE HAS FAILED TO DEDUCT TDS ON SUCH AMOUNT AND SAME CANNOT BE ALLOWED AS DEDUCTION. THIS HAS BEEN CONFIRMED BY THE CIT(A) ALSO. 7 4 . BEFORE US THE LD. COUNSEL SUBMITTED THAT, AS PER THE TERMS OF CERTAIN AGREEMENT WHICH HAS BEEN PLACED IN THE PAPER BOOK , ALL TH E SE SERVICES HAVE BEEN RENDERED BY NON - RESIDENTS OUTSIDE INDIA AND, THEREFORE, THE PAYMENT MADE TO THE NON - RESIDENT ENTITIES FOR SERVICES RENDERED OUTSIDE INDIA CANNOT BE HELD TO BE TAXABLE IN INDIA. IN SUPPORT, HE REFERRED TO THE DOCUMENTS PLACED IN THE PAPER - BOOK - III ON PAGES 508 TO 512. THUS, NO DIS ALLOWANCE CAN BE MADE ON GROUND THAT NO TDS HAS BEEN DEDUCTED. 71 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 7 5 . BEFORE US, LD. DR SUBMITTED THAT, NOW IN WAKE OF EXPLANATION TO SECTION 9(1)(VII) BROUGHT BY THE FINANCE ACT, 2010 WITH RETROSPECTIVE EFFECT FORM 01.06.19 7 6, EVEN IF THE NON - RESIDENT HAS PROVIDED SERVICES OUTSIDE INDIA THEN ALSO SAME SHALL BE TREATED AS TAXABLE IN INDIA AS IF THE SERVICES HAS BEEN GIVEN IN INDIA. THUS, IN VIEW OF THIS E XPLANATION, NOW IT CANNOT BE HELD THAT ASSESSEE WAS NOT LIABLE TO DEDUCT TDS BECAUSE LAW HAS BEEN AMENDED RETROSPECTIVELY. ON THE QUERY RAISED BY THE BENCH, WHETHER ANY MAKE AVAILABLE OF TECHNOLOGY OR TECHNICAL KNOW - HOW UNDER THE RESPECTIVE ARTICLES OF DTAA HAS BEEN MADE , LD. DR SUBMITTED THAT, MATTER CAN BE RESTORED BACK TO THE FILE OF THE AO TO EXAMINE THIS ASPECT. 7 6 . A FTER CONSIDERING THE RIVAL SUBMISSION S AND ON PERUSAL OF THE IMPUGNED ORDERS, WE FIND THAT, IT HAS NOT BEEN DISPUTED THAT THE PAYMENT MADE FOR FEE FOR TECHNICAL SERVICES HAS BEEN MADE ON THE SERVICES WHICH HAS BEEN PROVIDED OR RENDERED OUTSIDE INDIA. THESE ARE EVIDENT FROM THE SERVICE AGREEMENT S WHICH HAVE BEEN PLACED IN THE PAPER - BOOK. BEFORE US, LD. DR HAS HEAVILY RELIED UPON THE E XPLANATION INSERTED BY THE FINANCE ACT 2010 , W.R.E .F. 01.04.19 7 6. HOWEVER, AT THE TIME OF MAKING THE PAYMENT, THERE WAS NO SUCH PROVISION UNDER THE A CT BY WHICH A NON - RESIDENT WAS LIABLE TO BE TAXED IN INDIA EVEN WHEN THE SERVICES WERE RENDERED OUTSIDE INDIA , THEREF ORE, IT WAS IMPOSSIBLE TO HOLD THAT ASSESSEE SHOULD HAVE WITHHOLD THE TAX AT THE TIME OF MAKING THE PAYMENTS . IT IS AN ADMITTED POSITION THAT IN WAKE OF DECISION OF HONBLE SUPREME COURT, I N THE CASE OF ISHIKAWAJIMA - HARIMA HEAVY INDUSTRIES LTD. V. DIT, RE PORTED IN [2007] 288 ITR 408 THE POSITION OF LAW WAS THAT, IF THE SERVICES WHICH ARE SOURCE OF INCOME, WHICH IS 72 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 SOUGHT TO BE TAXED IN INDIA HAVE TO BE RENDERED IN INDIA AS WELL AS UTILIZED IN INDIA SO AS TO BE HELD TO BE TAXABLE IN INDIA. BOTH THE CONDITIO NS HAVE TO BE SATISFIED, THAT IS, THE SERVICES THAT THE SOURCE OF INCOME SHOULD BE IN INDIA AND SERVICES HAVE BEEN RENDERED IN INDIA. HOWEVER, IF THE SERVICES HAVE BEEN RENDERED OUTSIDE INDIA THEN SAME WAS HELD TO BE OUTSIDE THE PURVIEW OF TAXABLE IN INDIA . ONCE THIS IS THE ADMITTED POSITION, THEN IT IS VERY DIFFICULT TO HOLD THAT, ASSESSEE SHOULD HAVE DEDUCTED TDS ON SUCH A PAYMENT WHEN THERE WAS NO LAW THAT THE PAYMENT IS TAXABLE IN INDIA. HERE, THE MAXIM OF LEX NON COGIT AD IMPOSSPLIA , THAT IS, THE LAW OF THE POSSIBLY COMPELLING A PERSON TO DO SOMETHING WHICH IS IMPOSSIBLE, THAT IS, WHEN THERE IS NO PROVISION FOR TAXING AN AMOUNT IN INDIA THEN HOW IT CAN BE EXPECTED THAT A TAX SHOULD BE DEDUCTED ON SUCH A PAYMENT. THIS VIEW HAS BEEN UPHELD BY IN CATENA O F DECISIONS WHEREIN, IT HAS BEEN HELD THAT, ASSESSEE CANNOT HELD TO BE LIABLE FOR DEDUCTING TDS IN VIEW OF THE RETROSPECTIVE AMENDMENT WHICH HAS COME AT A MUCH LATER DATE. THUS, WITHOUT GOING INTO THE ASPECT OF FTS CLAUSE IN DTAAS, WE HOLD THAT, AT THE R ELEVANT TIME WHILE MAKING THE PAYMENT , ASSESSEE WAS NOT LIABLE TO DEDUCT TDS UNDER THE DOMESTIC LAW . ACCORDINGLY, DISALLOWANCE UNDER SECTION 40(A)(I) COULD NOT HAVE BEEN MADE BY THE AO. 7 7 . IN GROUND NO.8, ASSESSEE HAS CHALLENGED THE DISALLOWANCE OF PRIOR PERIOD EXPENSES OF RS.26.27 LACS. 7 8 . THE ASSESSEES CLAIM BEFORE THE AO WAS THAT, THIS INCOME HAS BEEN CRYSTALLIZED IN THE IMPUGNED YEAR; HOWEVER, THE AO DISBELIEVED THE CONTENTION OF THE ASSESSEE ON THE GROUND THAT ASSESSEE COULD NOT PROVIDE ANY D OCUMENTARY EVIDENCE S AND COULD NOT PROVIDE DETAILS OF PRIOR PERIOD EXPENSES AND BREAK - UP OF PRIOR PERIOD EXPENSES AND ALSO DID NOT ESTABLISH AS TO WHY THESE EXPENSES WERE NOT DEBITED TO 73 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 THE PROFIT AND LOSS ACCOUNT IN THE RELEVANT ASSESSMENT YEAR. THUS IN A BSENCE OF ANY DETAIL HE DISALLOWED THE CLAIM. THE LD. CIT(A) TOO HAS CONFIRMED THE ACTION OF THE AO ON THIS FOOTING ONLY . 79 . BEFORE US, THE LD. COUNSEL SUBMITTED THAT, ASSESSEE DID GAVE DETAILED JUSTIFICATION AS TO HOW THE AMOUNT OF EXPENSES G O T CRYSTALLIZED DURING THE YEAR AND IN SUPPORT OF THE SAME REFERRED TO THE RELEVANT DOCUMENTS PLACED IN THE PAPER - BOOK - II AT PAGES 453 AND 545. HE SUBMITTED THE SAID EXPENSES CRYSTALLIZED DURING THE YEAR ONLY ON THE BASIS OF THE COMMUNICATION OF THE PARTIES ; THEREFORE, QUESTION OF CLAIM IN THE EARLIER YEARS DOES NOT ARISE. NOW, IN VIEW OF THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF TAPARIA TOOLS LTD VS. JCIT, REPORTED IN [2015] 55 TAXMANN.COM 361, THE SAME NEEDS TO BE ALLOWED. IN THE SAID CASE, THE ASSESSEE ISSUED DEBENTURES AND OFFERED THE INVESTORS AN OPTION TO GET ONE TIME UPFRONT DISCOUNTED INTEREST. THE INTEREST SO PAID WAS TREATED AS DEFERRED REVENUE EXPENDITURE IN THE BOOKS OF ACCOUNT, BUT IT WAS CLAIMED FULLY FOR INCOME TAX PURPOSES. THE CLAI M OF THE ASSESSEE WAS HELD TO BE ALLOWABLE BY HO NB LE SUPREME COURT . 8 0 . AFTER CONSIDERING THE MATERIAL PLACED ON RECORD IT IS SEEN THAT T HE DETAILS OF PRIOR PERIOD EXPENSES HAVE GIVEN IN THE PAPER BOOK AT PAGE 453, ON PERUSAL OF THE SAME IT IS SEEN T HAT THE EXPENSES ARE ON ACCOUNT OF INSURANCE EXPENSES OF RS.70,389/ - ; RAW MATERIAL COMPONENTS PURCHASE OF RS.7,79,229/ - ; AMOUNT OF RS.12,86,478/ - FOR CONTRACT OF PAINT GIVEN TO THE ASIAN PAINTS LTD; AMOUNT OF RS.5,07,215/ - RELATING TO MODI RUBBER FACTORY; INTEREST TO OTHERS , ETC. THE ASSESSEE HAS GIVEN THE REASONS AS TO WHY THESE LIABILITIES HAVE 74 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 BEEN CRYSTALLIZED IN THIS YEAR. HOWEVER, NEITHER THE AO NOR THE CIT(A) HAVE DISCUSSED THIS ISSUE IN PROPER PERSPECTIVE, THEREFORE, WE ARE OF THE OPINION THAT MATTE R SHOULD BE RESTORED BACK TO THE AO TO EXAMINE THIS ISSUE AFRESH AFTER CONSIDERING ASSESSEES SUBMISSION AND ALSO IN THE LIGHT OF THE DECISION LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF TAPARIA TOOLS LTD ( SUPRA ). ACCORDINGLY, GROUND NO.8 IS ALLO WED FOR STATISTICAL PURPOSES. 8 1 . IN G ROUND NO.11, THE ASSESSEE HAS CHALLENGED THE ADDITION ON ACCOUNT OF GIFT TO VARIOUS EMPLOYEES ON VARIOUS OCCASIONS. THE AO HAS DISALLOWED 10% OF THE EXPENSES AMOUNTING TO RS.7.46 LAKHS WHICH HAS BEEN CONFIRMED BY THE AO ON AD - HOC BASIS. THE ASSESSEES SUBMISSION HAS BEEN THAT THE SAME IS BASED ON SURMISES, CONJECTURES AND NO PROPER REASONING HAS BEEN GIVEN FOR ADHOC DISALLOWANCE. 8 2 . AFTER CONSIDERING THE RIVAL SUBMISSION IT HAS BEEN SEEN THAT, THE EXPENSES OF RS.74, 61,398/ - HAVE BEEN DEBITED TO P&L ACCOUNT TOWARDS GIVING GIFTS TO COMPANYS GUESTS AND COMPANYS EMPLOYEES. THE AO HAS MADE THE ADHOC DISALLOWANCE @10% ON THE GROUND THAT THESE EXPENSES CANNOT BE HELD TO BE INCURRED WHOLLY FOR THE BUSINESS PURPOSE. SUCH AN ADDITION HAS BEEN CONFIRMED BY THE FIRST APPELLATE AUTHORITY ALSO ON ESTIMATE BASIS @ 10% OF RS.74,61,398/ - . THOUGH THERE IS SOME DEGREE OF ADHOCISM IN SUCH A DISALLOWANCE, HOWEVER, THE ONUS WAS ON THE ASSESSEE TO SHOW THAT ENTIRE EXPENDITURE DEBITED IS WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND THE RE IS NO ELEMENT OF NON - BUSINESS - PURPOSE OR FOR ANY PERSONAL NATURE EXPENDITURE . IN CASE OF THE COMPANY THOUGH THERE CANNOT BE ANY EXPENSES OF 75 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 PERSON AL NATURE, HOWEVER, IN THE PRESENT CASE ASSESSEE HAS MAINLY STATED THAT THE GIFTS HAVE BEEN GIVEN TO THE GUESTS BUT WHY SUCH A N EXPENSIVE GIFTS WERE GIVEN TO THE GUESTS HAS NOT BEEN SPECIFIED. THUS, THE ELEMENT OF NON - BUSINESS PURPOSE IS INHERENT IN SUCH AN EXPLANATION, THEREFORE, WE DO NOT FIND ANY REAS ON TO DEVIATE FROM THE DISALLOWANCE AS CONFIRMED BY THE CIT(A). ACCORDINGLY, GROUND NO.11 IS DISMISSED. 8 3 . SO FAR AS THE ISSUE RAISED IN GROUND NO.12, WE HAVE ALREADY DECIDED THIS ISSUE WHILE ADJUDICATING GROUND NO.10 OF THE REVENUES APPEAL FOR AY 2000 - 01, WHEREIN, WE HAVE ALREADY HELD THAT IT IS NOT CASE OF L ONG T ERM C APITAL LOSS ALBEIT I T IS A CASE OF BAD DEBT WRITTEN OFF WHICH HAS BEEN ALLOWED IN FAVOUR OF THE ASSESSEE. ACCORDINGLY, GROUND NO.12 IS DISMISSED. 8 4 . IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. 8 5 . NOW, WE SHALL DEAL WITH REVENUES APPEAL BEING ITA NO3666/MUM/2011 FOR AY 2006 - 07, VIDE WHICH FOLLOWING GROUNDS HAVE BEEN RAISED: - 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN DELETING DISALLOWANCE OF INTEREST OF RS.1,76,12,640/ - ATTRIBUTABLE TO THE INTEREST FREE ADVANCE TO ASSOCIATED CONCERN, VCCL LTD. AMOUNTING TO RS.1467.72 LACS WITHOUT APPRECIATING THAT THE ASSESSEE COMPANY HAD INCURRED HUGE INTEREST ON BORROWED FUNDS. 2. ON THE FAC TS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN DIRECTING THE ASSESSING OFFICER TO DELETE RS.113.4 LAKHS THE DISALLOWANCE OF INTEREST ON ACCOUNT OF DUES FROM M/S ESSION SYNTHETICS LTD. 3. ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN APPRECIATING THE FACT THAT M/S ESSION SYNTHETIC LTD IS AN ASSOCIATE CONCERN OF THE ASSESSEE 76 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 FROM WHOM IT HAS NOT RECOVERED OUTSTANDING DELETING DISALLOWANCE OF INTEREST OF RS.945 LAKHS ATTRIBUTABLE TO THE INTE REST FREE ADVANCE TO ASSOCIATED CONCERN, VCCL LTD. WITHOUT APPRECIATING THAT THE ASSESSEE COMPANY HAD INCURRED HUGE INTEREST ON BORROWED FUNDS. 8 6 . IT HAS BEEN ADMITTED BY BOTH THE PARTIES THAT, GROUND NO. 1 & 2 ARE SIMILAR TO REVENUES GROUNDS NO.4 AND 5 FOR THE ASSESSM ENT YEAR 2000 - 01. ACCORDINGLY, OUR FINDING GIVEN THEREIN WILL APPLY MUTATIS MUTANDIS ON THE IMPUGNED ISSUES AS SIMILAR FACTS ARE PERMEATING IN THIS YEAR ALSO , THEREFORE, FOLLOWING THE OUR CONCLUSION IN THE SAID APPEAL BOTH THE GROUND S RAISED BY THE REVENUE ARE TREATED AS DISMISSED. 8 7 . AS REGARDS TO GROUND NO.3, IT HAS BEEN ADMITTED BY BOTH THE PARTIES THAT THE SAME IS NOT ARISING OUT OF CIT(A)S ORDER AND, THEREFORE, SAME IS DISMISSED AS IN F R UCTUOUS . 8 8 . IN THE RESULT, APPEAL OF THE REVENUE STANDS DISMISSED. TO SUM - UP: REVENUES APPEAL AS WELL AS ASSESSEES APPEAL FOR AY 2000 - 01 STANDS PARTLY ALLOWED AND REVENUES APPEAL FOR AY 2006 - 07 STANDS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 21 ST JUNE, 2016 SD/ - SD/ - ( . . ) ( ) ( G S PANNU ) ( AMIT SHUKLA ) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATE: 21 ST JUNE, 2016 77 M/S LML LTD ITA NO. : 3668 /MUM/20 04 ITA NO. : 3540 /MUM/20 04 ITA NO. : 3666/MUM/2011 / COPY TO: - 1 ) / THE APPELLANT. 2 ) / THE RESPONDENT. 3 ) THE CIT(A) III / CONCERNED____ , MUMBAI. 4 ) THE CIT - 3 / CONCERNED____ , MUMBAI. 5 ) , , / THE D.R. L BENCH, MUMBAI. 6 ) \ COPY TO GUARD FILE. / BY ORDER / / TRUE COPY / / / , DY. / ASSTT. REGISTRAR I.T.A.T., MUMBAI * . . *CHAVAN, SR.PS