DCIT 8(2), MUMBAI V. MONSANTO INDIA LTD, MUMBAI

ITA 3743/MUM/2012

• Counselvise Citation: [2015] 134 COUNSELVISE.COM (IT) 2584 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 5 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-10-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 16-04-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 25-05-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: S J SINGH SHRI A K NAYAK
• Keywords: Capital asset; Business income; Depreciation; Cost of acquisition; Capital receipt
• Section: 43B; 143(3); 14A; 37(1); 32

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH B, MUMBAI BEORE SHRI G.S.PANNU, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER ITA NO. 3171/MUM/2012 (ASSESSMENT YEAR : 2007-08) MONSANTO INDIA LIMITED, AHURA CENTRE, 5 TH FLOOR, 96, MAHAKALI CAVES ROAD, ANDHERI (EAST), MUMBAI 400093 PAN: AAACM 2875L ... APPELLANT VS. THE DCIT, RANGE 8(2), AAYKAR BHAVAN, MK RAOD, MUMBAI 400 020 .... RESPONDENT ITA NO. 3743/MUM/2012 (ASSESSMENT YEAR : 2007-08) THE DCIT, RANGE 8(2), AAYKAR BHAVAN, MK RAOD, MUMBAI 400 020 .... APPELLANT VS. MONSANTO INDIA LIMITED, AHURA CENTRE, 5 TH FLOOR, 96, MAHAKALI CAVES ROAD, ANDHERI (EAST), MUMBAI 400093 PAN: AAACM 2875L .... RESPONDENT APPELLANT BY : SHRI RAJAN VORA RESPONDENT BY : SHRI S.J.SINGH& SHRI A.K.NAYAK 2 ITA NO. 3171&3743/MUM/2012 (ASSESSMENT YEAR : 2007-08) DATE OF HEARING : 11/09/2015 DATE OF PRONOUNCEMENT : 30/10/2015 ORDER PER G.S. PANNU,AM: THE CAPTIONED ARE CROSS- APPEALS FILED BY THE AS SESSEE AND THE REVENUE, DIRECTED AGAINST THE ORDER OF THE CIT(A)- 17, MUMBAI DATED 06/03/2012, PERTAINING TO THE ASSESSMENT YEAR 2007 -08, WHICH IN TURN HAS ARISEN FROM AN ORDER PASSED BY THE ASSESSIN G OFFICER DATED 16/12/2012 UNDER SECTION 143(3) OF THE INCOME TA X ACT 1961 ( IN SHORT THE ACT). 2. THE MAIN GROUNDS OF APPEAL RAISED BY THE ASSESSE E AND REVENUE READ AS UNDER: GROUNDS OF ASSESSEES APPEAL:- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE COMMISSIONER OF INCOME-TAX (APPEALS) ERRED IN H OLDING THAT NON- COMPETE FEES RECEIVED BY THE APPELLANT ON DIVESTURE OF 'LEADER' BUSINESS IS TAXABLE AS 'SHORT TERM CAPITAL GAINS' INSTEAD OF 'L ONG TERM CAPITAL GAINS' AS CONSIDERED BY THE APPELLANT IN TH E RETURN OF INCOME. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE COMMISSIONER OF INCOME-TAX (APPEALS) ERRED IN H OLDING THAT THE DISALLOWANCE UNDER SECTION 14A OF THE ACT BE MADE A T THE RATE OF 2% OF THE DIVIDEND INCOME EARNED OVER AND ABOVE THE AM OUNT OF RS 20,39,893 DISALLOWED SUO MOTO BY THE APPELLANT IN T HE RETURN OF INCOME. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE COMMISSIONER OF INCOME-TAX (APPEALS) ERRED IN D IRECTING THE ASSESSING OFFICER TO RE-COMPUTE THE VALUE OF CLOSIN G INVENTORY IN ACCORDANCE WITH THE PROVISIONS OF SECTION 145A OF T HE ACT. 3 ITA NO. 3171&3743/MUM/2012 (ASSESSMENT YEAR : 2007-08) GROUNDS OF REVENUES APPEAL:- 1. 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN RESTRICTING THE DISALLOWANC E OF RSJ,00,44,000/- MADE U/S.14A OF THE ACT R.W. RULE 8 D TO RS.18,58,789/- WITHOUT APPRECIATING THAT IN THE CAS E OF M/S. GODREJ AND BOYCE MANUFACTURING CO. LTD. VS DCIT (32 8 ITR 81)(SUPRA), THEIR LORDSHIPS HAD UPHELD THE CONTENTI ONS OF THE UNION OF INDIA THAT RULE 8D IS REASONABLE IN ITS NA TURE.' 2. 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN RESTRICTING THE DISALLOWANC E OF RS.1,00,44,000/- MADE U/S.14A OF THE ACT R.W. RULE 8D TO RS.18,58,789/-, IN THE LIGHT OF THE JUDGMENT OF JUR ISDICTIONAL HIGH COURT IN THE CASE OF M/S. GODREJ AND BOYCE MANUFACT URING CO. LTD. VS DCIT (328 ITR 81) WHICH HAS NOT BEEN ACCEPTED BY REVENUE.' 3. 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) WAS NOT JUSTIFIED IN HOLDING THAT INCOME OF RS.45,05,07,984/- DERIVED BY THE ASSESSEE FROM GROW ING AND SALE OF HYBRID SEEDS IS TO BE TREATED AS AGRICULTURAL IN COME FALLING U/S.2(1)(A) AND DIRECTING THE AO TO ALLOW DEDUCTION U/S.10(1) OF THE I.T.ACT, 1961 IGNORING THE HON. KARNATAKA HI GH COURT'S DECISION IN THE CASE OF CIT VS NAMDHARI SEEDS (P) L TD. (2011) 203 TAXMAN 565 (KAR), IN WHICH ON THE SAME FACTS AND CI RCUMSTANCES, THE REVENUE'S VIEW AND ACTION HAVE BEEN UPHELD. 4. ''ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN TREATING THE NON-COMPETE FEES OF RS .2 CRORES RECEIVED BY THE ASSESSEE IS NOT TAXABLE AS BUSINESS INCOME IN TERMS OF SEC. 28(VA) OF THE I.T, ACT.' 5. 'ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN TREATING GAINS OF RS.7,61,20,585/- ARISING FROM THE TRANSFER OF ASSETS SUCH AS DISTRIBUTION NETWORK , REGISTRATION & LICENSES, COPY RIGHTS & GOODWILL ON SALE OF LEADE R BUSINESS ARE NOT SHORT TERM CAPITAL GAINS AS PER PROVISIONS OF S EC.50 OF I.T.ACT.' 6. 'WITHOUT PREJUDICE TO THE ABOVE, THE CIT (A) HAS ER RED IN HOLDING THAT GAINS OF THE APPELLANT ON TRANSFER OF DISTRIBU TION NETWORK, REGISTRATION & LICENSES, COPY RIGHTS & GOODWILL ON SALE OF LEADER BUSINESS ARE NOT BUSINESS INCOME, WITHOUT APPRECIATING THE FACT THAT ENTIRE EXPENDITURE INCUR RED FOR GENERATING THESE ASSETS AS DEDUCTION U/S. 37(1) OF THE I.T. ACT IN EARLIER YEARS.'7 4 ITA NO. 3171&3743/MUM/2012 (ASSESSMENT YEAR : 2007-08) 3. THE ASSESSEE BEFORE US IS A COMPANY INCORPORATED UNDER THE PROVISIONS OF THE COMPANIES ACT, 1956 IN THE YEAR 1949, AND IS INTER- ALIA ENGAGED IN THE GROWING AND SELLING OF HYBRID S EEDS, BESIDES BEING ENGAGED IN THE BUSINESS OF MANUFACTURING AND SELLIN G OF AGRO-CHEMICAL BASED PRODUCTS. FOR THE ASSESSMENT YEAR UNDER CONS IDERATION, IT FILED A RETURN OF INCOME DECLARING TOTAL INCOME OF RS.20,1 9,03,596/-, WHICH WAS SUBJECT TO SCRUTINY ASSESSMENT, WHEREBY TOTAL I NCOME WAS ASSESSED AT RS.66,58,34,410/- AFTER MAKING CERTAIN ADDITIO NS/ DISALLOWANCES. THE CIT(A) HAS ALLOWED CERTAIN RELIEFS TO THE ASSES SEE COMPANY, AND ACCORDINGLY THE REVENUE AS WELL AS THE ASSESSEE COM PANY ARE IN APPEAL BEFORE US. 4. THE FIRST SUBSTANTIVE DISPUTE IN THE CROSS-APPEA LS RELATES TO THE TAXABILITY OF PROFIT EARNED BY THE ASSESSEE COMPANY ON THE SALE OF ITS BUSINESS OF TRADING AND MANUFACTURE OF SELECTIVE WH EAT HERBICIDE CONTAINING THE ACTIVE INGREDIENT KNOWN AS SULFOSULF URON UNDER THE TRADEMARK LEADER (HEREINAFTER REFERRED TO US LEAD ER BUSINESS TO SUMITOMO CHEMICAL INDIA PRIVATE LIMITED (HEREINAFTE R REFERRED TO AS SUMITOMO) VIDE A BUSINESS TRANSFER AGREEMENT DATE D 31/08/2006 FOR A TOTAL CONSIDERATION OF RS.30,13,65,096/-. THE BU SINESS TRANSFER AGREEMENT ENVISAGED ITEMISED BREAK-UP OF THE CAPITA L ASSETS TRANSFERRED, AND IN THE RETURN OF INCOME FILED, ASS ESSEE TREATED THE GAIN ON SALE OF LEADER BUSINESS AS UNDER:- PARTICULARS COST OF ACQUISITION (RS.) SALE CONSIDERATION (RS.) PROFIT (RS.) (I) NON - COMPETE FEES - 2,00,00,000 2,00,00,000 (II) TECHNICAL KNOW - 1,06,07,280 4,27,30,755 3,21,23,475 5 ITA NO. 3171&3743/MUM/2012 (ASSESSMENT YEAR : 2007-08) HOW (III) TRADE MARK AND GOODWILL 1,06,07,280 4,27,30,755 3,21,23,475 (IV) DISTRIBUTION NETWORK - 3,01,66,336 3,01,66,336 (V) REGISTRATION AND LICENSES - 3,49,07,433 3,49,07,433 (VI) COPYRIGHTS - 78,97,585 78,97,585 (VII) GOODWILL - 31,49,231 31,49,231 (VIII) PLANT AND MACHINERY - 48,97,905 48,97,905 (IX) INVENTORY 11,53,90,709 11,48,85,095 - 5,05,614 TOTAL 13,66,05,269 30,13,65,095 16,47,59,826 4.1 IN SO FAR AS THE PROFIT IN SALE PROCEEDS RECE IVED ON ACCOUNT OF NON-COMPETE FEES, DISTRIBUTION NETWORK, REGISTRATIO N AND LICENSES, COPY- RIGHTS, AND GOODWILL IS CONCERNED, IT WAS TRE ATED AS LONG TERM CAPITAL GAIN; THE PROFIT IN RELATION TO TECHNICAL KNOW-HOW AND TRADEMARK WAS DECLARED AS SHORT TERM CAPITAL GAI N; THE SALE CONSIDERATION RECEIVED IN RELATION TO PLANT & MACH INERY WAS REDUCED FROM THE BLOCK OF ASSETS; AND, THE LOSS INCURRED ON TRANSFER OF INVENTORY WAS CHARGED TO THE PROFIT & LOSS ACCOUNT. THE ASSESSING OFFICER DISAGREED WITH THE ASSESSEE-COMPANY WITH RESPECT TO THE TREATMENT OF- (A) NON-COMPETE FEES, WHICH WAS HELD TO BE TAXABLE AS BUSINESS INCOME UNDER SECTION 28(VA) OF THE ACT; (B) GAIN ON TRANSFER OF DISTRIBUTION NETWORK, REGISTRATION AND LICENSES, CO PYRIGHT, AND GOODWILL, WHICH WAS HELD TO BE A SHORT TERM CAPITAL GAIN INSTEAD OF LONG TERM CAPITAL GAIN TREATED BY THE ASSESSEE. 6 ITA NO. 3171&3743/MUM/2012 (ASSESSMENT YEAR : 2007-08) 5. ON AN APPEAL BY THE ASSESSEE, THE CIT(A) ACCEPTE D THE CLAIM OF THE ASSESSEE COMPANY THAT THE GAIN ON TRANSFER OF DISTRIBUTION NETWORK, REGISTRATION AND LICENSES, COPYRIGHTS AND GOODWILL WAS A LONG TERM CAPITAL GAIN. THIS DECISION OF THE CIT(A ) IS IN CHALLENGE BY REVENUE BEFORE US BY WAY OF GROUND OF APPEAL NO.5. 5.1 FURTHER, THE CIT(A) HELD THAT THE NON-COMPETE F EE RECEIVED WAS TAXABLE AS A SHORT-TERM CAPITAL GAIN. THIS STAND O F THE CIT(A) IS IN CHALLENGE BEFORE US, IN AS MUCH AS THE ASSESSEE CO MPANY CONTENDS THAT THE NON-COMPETE FEE RECEIVED IS TAXABLE AS LONG TE RM CAPITAL GAIN (GROUND OF APPEAL NO.1 IN ASSESSEES APPEAL), WHERE AS THE REVENUE CONTENDS THAT SUCH RECEIPT IS TAXABLE AS BUSINESS INCOME UNDER SECTION 28(VA) OF THE ACT(GROUND OF APPEAL NO.4 IN REVENUE S APPEAL). 6. IN THE ABOVE BACKGROUND, WE HAVE HEARD THE RIVAL COUNSELS. THE LD. COUNSEL FOR THE ASSESSEE DEFENDED THE TREATMENT MADE BY THE ASSESSEE IN THE RETURN OF INCOME WITH RESPECT TO TH E GAIN ON TRANSFER OF LEADER BUSINESS. IT WAS POINTED OUT THAT THE NO N-COMPETE FEE WAS RECEIVED FOR AGREEING NOT TO ENGAGE IN OR CARRY ON ANY BUSINESS WHICH COULD COMPETE DIRECTLY OR INDIRECTLY WITH THE HER BICIDE BUSINESS CARRIED ON BY THE BUYER, AND SINCE SUCH RESTRICTIONS WAS FO R A PERIOD OF TEN YEARS, THE CONSIDERATION WAS RIGHTLY OFFERED TO TAX UNDER THE HEAD CAPITAL GAINS AS A LONG TERM CAPITAL GAIN. IN SUPP ORT, RELIANCE WAS PLACED ON THE FOLLOWING DECISIONS:- (I) LYKA LABS LTD., 116 ITD 457 (MUM). (II) ACIT VS. DR. B.V.RAJU (2012), 14 ITR (TRIB) 38 7 (HYD) (III) ACIT VS. M/S. TRACK CHEMICALS PVT. LTD.,ITA N O.4131/MUM/2008& OTHERS ORDER DATED 30/12/2011. 7 ITA NO. 3171&3743/MUM/2012 (ASSESSMENT YEAR : 2007-08) (IV) DELHI BENCH DECISION IN THE CASE OF MEDIWORLD PUBLICATIONS P. LTD., ITA NO.4086/DEL/09 DATED 2/07/2010. 7. ON THE OTHERHAND, THE LD. DEPARTMENTAL REPRESEN TATIVE HAS DEFENDED THE ACTION OF THE ASSESSING OFFICER IN TRE ATING THE NON- COMPETE FEE AS BUSINESS INCOME ON ACCOUNT OF APPLI CATION OF SECTION 28(VA) OF THE ACT. 8. ON THE ASPECT OF TAXABILITY OF NON-COMPETE FEE, WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. AS PER THE BUSIN ESS TRANSFER AGREEMENT WITH SUMITOMO, THE ENTIRE LEADER BUSI NESS HAS BEEN TRANSFERRED LOCK, STOCK AND BARREL, WHICH INTER-AL IA, CONTAINED A COVENANT TO THE EFFECT THAT ASSESSEE-COMPANY WOULD NOT ENGAGE IN OR CARRYON ANY BUSINESS FOR A PERIOD OF 10 YEARS, WHIC H COMPETES DIRECTLY OR INDIRECTLY WITH WHOLE OR PART OF THE HERBICIDE BUSINESS CARRIED ON BY THE BUYER. CLAUSE -13 OF THE BUSINESS TRANSFER AGR EEMENT, PLACED IN THE PAPER BOOK, IS RELEVANT, WHICH READS AS UNDER:- 13. NON COMPETITION AND NON SOLICITATION. 13.1 MONSANTO INDIA SHALL NOT, AND SHALL ENSURE THA T ITS AFFILIATES DO NOT, FOR A PERIOD OF TEN(10) YEARS FROM THE CLOSING DATE, DI RECTLY OR INDIRECTLY WHETHER THROUGH PARTNERSHIP OR A DISTRIBUTOR OR AS A SHAREH OLDER, JOINT VENTURE PARTNER, COLLABORATOR, EMPLOYEE, CONSULTANT OR AGEN T OR IN ANY OTHER MANNER WHATSOEVER, WHETHER FOR PROFIT OR OTHERWISE: 13.1.1 ENGAGE IN OR CARRY ON ANY BUSINESS WHICH COM PETES DIRECTLY OR INDIRECTLY WITH THE WHOLE OR ANY PART OF THE HERBIC IDE BUSINESS CARRIED ON BY SUMITOMO IN THE TERRITORY. 8.1 ON THE BASIS OF THE AFORESAID, ASSERTION OF THE ASSESSEE-COMPANY IS THAT IT HAD DISCONTINUED THE WHEAT HERBICIDE MAN UFACTURING ACTIVITY BEING CARRIED ON BY IT, AND THE NON-COMPETE FEE H AS BEEN RECEIVED FOR 8 ITA NO. 3171&3743/MUM/2012 (ASSESSMENT YEAR : 2007-08) GIVING UP THE RIGHT TO CARRY ON SUCH BUSINESS, WHI CH GIVES RISE TO CAPITAL GAIN AND NOT BUSINESS INCOME AS PER SECTION 28(VA) OF THE ACT IN TERMS OF THE PROVISO (I) THEREOF. THE REVENUE, ON THE OT HER HAND, STRONGLY CONTENDED THAT SUCH RECEIPT IS TREATED AS BUSINESS INCOME BY APPLICATION OF SECTION 28(VA) OF THE ACT. RELEVANT PORTION OF SECTION 28(VA) ALONGWITH THE PROVISO READS AS UNDER:- 28 THE FOLLOWING INCOME SHALL BE CHARGEABLE TO INC OME-TAX UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION: VA) ANY SUM, WHETHER RECEIVED OR RECEIVABLE, IN CAS H OR KIND, UNDER AN AGREEMENT FOR- (A) NOT CARRYING OUT ANY ACTIVITY IN RELATION TO AN Y BUSINESS; OR (B)........................ (I) ANY SUM, WHETHER RECEIVED OR RECEIVABLE, IN CAS H OR KIND, ON ACCOUNT OF TRANSFER OF THE RIGHT TO MANUFACTURE, PRODUCE OR PROCESS ANY AR TICLE OR THING OR RIGHT TO CARRY ON ANY BUSINESS, WHICH IS CHARGEABLE UNDER THE HEAD C APITAL GAINS; SECTION 28(VA) OF THE ACT HAS BEEN INSERTED BY THE FINANCE ACT, 2002 W.E.F. 1.4.2003, AND SEEKS TO PROVIDE THAT ANY SUM RECEIVED UNDER AN AGREEMENT FOR NOT CARRYING OUT ANY ACTIVITY IN RELATION TO ANY B USINESS INCOME . PERTINENTLY, ALL AND ANY KIND OF NON-COMPETE FEE IS NOT TO BE TREATED AS BUSINESS INCOME BY APPLICATION OF SECTIO N 28(VA) OF THE ACT, BECAUSE PROVISO (I) PRESCRIBES AN EXCEPTION TO CASE S WHERE SUM IS RECEIVED ON ACCOUNT OF TRANSFER OF THE RIGHT TO MANUFACTURE ,.......... OR RIGHT TO CARRY ON ANY BUSINESS....., WHICH IS TAXA BLE UNDER THE HEAD CAPITAL GAINS. IN THE CONTEXT OF THE CONTROVERSY B EFORE US, IT HAS TO BE UNDERSTOOD THAT, GIVEN THE PHRASEOLOGY OF SECTION 28(VA) READ WITH PROVISO (I) THEREOF, NON-COMPETE FEE PAID TO THE TR ANSFEROR FOR GIVING UP 9 ITA NO. 3171&3743/MUM/2012 (ASSESSMENT YEAR : 2007-08) THE RIGHT TO CARRY ON BUSINESS IS TO BE REGARDED AS CAPITAL GAIN, IN CONTRAST TO A SITUATION WHERE IT IS PAID FOR NOT C ARRYING OUT ANY ACTIVITY IN RELATION TO BUSINESS, THEN IT IS TO BE TAXED AS BUSINESS INCOME. THE SUBTLE DIFFERENCE HAS ALSO BEEN EXPLAINED BY THE SP ECIAL BENCH OF THE TRIBUNAL IN THE CASE OF LATE DR.B.V. RAJU (SUPRA), WHEREIN THE RELEVANT DISCUSSIONS IS AS UNDER:- IF A PAYMENT IS IN THE NATURE OF NON-COMPETE FEE R ECEIVED BY THE TRANSFEROR WHEN HE SELLS HIS BUSINESS AND AGREES NOT TO CARRY ON THE BUSINESS WHICH HE TRANSFERS THEN THAT WOULD FALL FOR CONSIDERATION UN DER (CATEGORY (B) REFERRED TO EARLIER) SECTION 55(2)(A) RIGHT TO CARRY ON BUS INESS IF THE NON-COMPETE FEE IS PAID TO PERSONS ASSOCIATED WITH THE TRANSFEROR T HEN THE SAME WOULD FALL FOR CONSIDERATION ONLY UNDER SECTION 28(VA)(A) OF THE A CT ARE NOT CARRYING OUT ANY ACTIVITY IN RELATION TO ANY BUSINESS, PROVISO (I) TO SECTION 28(VA)(A) PROVIDES FOR EXCEPTION TO CASES WHERE SUCH RECEIPTS ARE TAXABLE AS CAPITAL GAIN, VIZ., WHERE ANY SUM IS RECEIVED FOR TRANSFER OF A RIGHT TO CARRY ON ANY BUSINESS WHICH IS CHARGEABLE TO TAX AS CAPITAL GAIN . WHEN THE TRANSFEROR IS ALREADY CARRYING ON BUSINESS AND AGREES NOT TO CARR Y ON BUSINESS TRANSFERRED, THEN THE SAME WOULD FALL FOR CONSIDERATION ONLY UND ER SECTION 55(2)(A) OF THE ACT. WITH THE CHANGE IN LAW RECEIPTS ON ACCOUNT OF GIVIN G UP RIGHT TO CARRY ON BUSINESS EVEN IF IT IS CAPITAL RECEIPT WOULD NOW BE CHARGEABLE TO TAX AS INCOME FROM BUSINESS. THE DIFFERENCE WOULD BE THAT IF IT IS PAID TO THE TRANSFEROR FOR GIVING UP RIGHT TO CARRY ON BUSINESS , IT WOULD BE REGARDED AS CAPITAL GAIN, THE COST OF ACQUISITION OF RIGHT TO C ARRY ON BUSINESS BEING DETERMINED IN ACCORDANCE WITH THE PROVISIONS OF SEC TION 55(2)(A) OF THE ACT. IF IT IS COMPENSATION PAID FOR NOT CARRYING OUT AN Y ACTIVITY IN RELATION TO ANY BUSINESS, WHICH THE TRANSFEROR IS NOT CARRYING ON, THE SAME WOULD BE CHARGEABLE UNDER SECTION 28(VA)(A) OF THE ACT. IF A RECEIPT IS CONSIDERED AS PAYMENT FOR NOT CARRYING ON BUSINESS WHICH THE TRAN SFEROR IS ALREADY CARRYING ON THEN IT WOULD BE REGARDED AS CAPITAL GAIN, BEING TRANSFER OF A CAPITAL ASSET, VIZ, RIGHT TO CARRY ON BUSINESS. THUS FOR T HE PROVISIONS OF SECTION 55(2)(A) OF THE ACT TO APPLY THE TRANSFEROR MUST BE CARRYING ON A BUSINESS WHICH HE AGREES NOT TO CARRY ON. IF THE TRANSFEROR IS NOT ALREADY CARRYING ON BUSINESS THEN HE RECEIVES CONSIDERATION ONLY FOR N OT CARRYING OUT ANY ACTIVITY IN RELATION TO ANY BUSINESS. IN THAT CAS E THE PROVISIONS OF SECTION 28(VA)(A) OF THE ACT WOULD APPLY AND NOT THE PROVIS O THERETO. 8.2 FACTUALLY SPEAKING, IN THE PRESENT CASE, WE ARE DEALING WITH A SITUATION WHERE THE NON-COMPETE FEE HAS BEEN RECEIV ED BY THE ASSESSEE-COMPANY FOR NOT CARRYING ON THE BUSINESS O F WHAT HERBICIDE 10 ITA NO. 3171&3743/MUM/2012 (ASSESSMENT YEAR : 2007-08) MANUFACTURING (I.E. LEADER BUSINESS), WHICH IT W AS HITHERTO CARRYING ON. THUS, WHAT IS TRANSFERRED IS RIGHT TO CARRY ON BUSINESS, WHICH IS A CAPITAL ASSET. THUS, SUCH SUM IS TO BE REGARDED AS CAPITAL GAIN, THE COST OF ACQUISITION BEING DETERMINED IN ACCORDANCE WITH SECTION 55(2)(A) OF THE ACT. ACCORDINGLY, WE ARE UNABLE TO UPHOLD THE STAND OF THE ASSESSING OFFICER THAT NON-COMPETE FEE IS TAXABLE A S BUSINESS INCOME ON ACCOUNT OF SECTION 28(VA) OF THE ACT. 9. THE NEXT ASPECT OF THE DISPUTE IS AS TO WHETHER SUCH CAPITAL GAIN IS A LONG TERM CAPITAL GAIN OR SHORT TERM CAPITAL G AIN. AS PER SECTION 2(29A) OF THE ACT, LONG TERM CAPITAL ASSET MEANS A CAPITAL ASSET WHICH IS NOT A SHORT TERM CAPITAL ASSET. SECTION 2(42A) OF THE ACT FURTHER DEFINES SHORT TERM CAPITAL ASSET AS A CAPITAL ASSET HELD F OR NOT MORE THAN 36 MONTHS IMMEDIATELY PRECEDING THE DATE OF TRANSFER. THEREFORE, THE INCIDENCE OF TAX ON TRANSFER OF A CAPITAL ASSET DEP ENDS ON THE PERIOD FOR WHICH THE CAPITAL ASSET WAS HELD PRIOR TO ITS TRANS FER. WHILE HOLDING THAT NON-COMPETE FEE WAS TAXABLE AS CAPITAL GAIN, THE CI T(A) FURTHER HELD THAT THE RIGHT OF NON-COMPETE CAME INTO EXISTENCE AT THE TIME OF DIVESTURE OF THE LEADER BUSINESS AND THEREFORE, THE PERIOD OF HOLDING BEING LESS THAN 36 MONTHS, THE CONSIDERATION RECEIV ED WOULD BE TAXABLE AS SHORT TERM CAPITAL GAINS. THE CONTENTION OF THE ASSESSEE BEFORE US IS THAT SINCE THE CONSIDERATION HAS BEEN RECEIVED FOR TRANSFER OF BUSINESS ALONGWITH RIGHT TO NOT CARRY ON BUSINESS FOR A PERI OD OF 10 YEARS, BEING A FAIRLY LONG PERIOD, THE CONSIDERATION FOR NON-COMPE TE FEES IS LIABLE TO BE TREATED AS LONG TERM CAPITAL GAIN. THE LD. DEPARTM ENTAL REPRESENTATIVE HAS REITERATED THE STAND OF THE CIT(A) ON THIS ASPE CT. 11 ITA NO. 3171&3743/MUM/2012 (ASSESSMENT YEAR : 2007-08) 10. HAVING CONSIDERED THE RIVAL STANDS ON THIS ASPE CT, IN OUR VIEW, THE CIT(A) HAS ERRED IN TREATING THE NON-COMPETE FEE AS A SHORT TERM CAPITAL GAIN. IN OUR CONSIDERED OPINION, THE CIT(A) MISDIR ECTED HIMSELF IN CONSIDERING AS TO WHEN THE . RIGHT OF NOT TO COMPETE CAME INTO EXISTENCE. ; AND, NOT TAKING INTO CONSIDERATION THE FACT THAT THE COVENANT OF NOT TO CARRY ON BUSINESS WAS (I) ATTAC HED ALONGWITH THE TRANSFER OF LEADER BUSINESS, WHICH WAS BEING CARRIE D ON BY THE ASSESSEE SINCE 1997; AND, (II) FOR A PERIOD OF 10 YEARS, WHI CH IS A FAIRLY LONG PERIOD. UNDER THESE CIRCUMSTANCES, THE NON-COMPETE FEE IS TO BE ASSESSED AS LONG TERM CAPITAL GAIN. THUS, ON THIS ASPECT, ASSESSEE SUCCEEDS, AND GROUND NO.1 IS ASSESSEES APPEAL IS A LLOWED. 11. NEXT, WE MAY TAKE-UP GROUND NO.5 IN REVENUES A PPEAL, WHICH SEEKS TO CHALLENGE THE ACTION OF THE CIT(A) IN ACCE PTING THE GAIN ON TRANSFER OF DISTRIBUTION NETWORK, REGISTRATION AND LICENSES, COPYRIGHTS AND GOODWILL AS LONG TERM CAPITAL GAIN, INSTEAD OF SHORT-TERM CAPITAL GAIN HELD BY THE ASSESSING OFFICER. NOTABLY, THE B USINESS TRANSFER AGREEMENT ENTAILED TRANSFER OF LEADER BUSINESS TO S UMITOMO LOCK, STOCK AND BARREL, WHICH INTER-ALIA, ALSO INCLUDED THE TRA NSFER OF DISTRIBUTION NETWORK, REGISTRATION AND LICENSES, COPYRIGHTS AND GOODWILL AS PER THE TABULATION IN PARA -4 OF THIS ORDER. THE ASSESSEE COMPANY SUBMITTED THAT THE GAIN ON TRANSFER OF THE AFORESAID CAPITAL ASSETS WAS LONG TERM CAPITAL GAIN BECAUSE IT HAS BEEN CARRYING ON THE LE ADER BUSINESS FOR A PERIOD EXCEEDING THREE YEARS, AND THUS GAIN WAS ON ACCOUNT OF TRANSFER OF LONG TERM CAPITAL ASSETS. THE ASSESSING OFFICER TREATED SUCH GAIN AS SHORT TERM CAPITAL GAIN BY APPLYING THE PROVISIONS OF SECTION 50 OF THE ACT. AS PER THE ASSESSING OFFICER, THE AFORESAID A SSETS FORMED A PART OF THE BLOCK OF INTANGIBLE ASSETS, AND THUS GAIN ARISI NG ON THE TRANSFER OF 12 ITA NO. 3171&3743/MUM/2012 (ASSESSMENT YEAR : 2007-08) THE AFORESAID ASSETS SHOULD BE TAXED AS DEEMED SHOR T TERM CAPITAL GAIN. THE ASSESSING OFFICER FURTHER HELD THAT THE FACT T HAT DEPRECIATION WAS NOT CLAIMED ON THESE ASSETS WOULD NOT COME IN THE W AY OF APPLYING SECTION 50 OF THE ACT BECAUSE OF THE PROVISIONS OF EXPLANATION-5 TO SECTION 32 OF THE ACT, WHEREBY DEPRECIATION IS DEEM ED TO BE ALLOWED TO THE ASSESSEE IRRESPECTIVE OF THE FACT WHETHER IT HA D CLAIMED DEPRECIATION OR NOT. THIRDLY, AS PER THE ASSESSING OFFICER, SINCE THE ASSESSEE COMPANY HAD TREATED THE GAIN ON SALE OF TW O INTANGIBLE ASSETS, NAMELY, TECHNICAL KNOW-HOW AND TRADEMARKS AS SHORT TERM CAPITAL GAIN, THEN THE GAIN ON TRANSFER OF THE IMPUGNED INTANGIB LE ASSETS SHOULD ALSO BE TAXED AS SHORT TERM CAPITAL GAIN. 11.1 THE CIT(A) HAS CONSIDERED EACH OF THE OBJECTIO NS RAISED BY THE ASSESSING OFFICER AND UPHELD THE STAND OF THE ASSES SEE COMPANY THAT THE GAIN ON THE SALE OF THE AFORESAID ASSETS IS TO BE TAXED AS LONG TERM CAPITAL GAINS. ON THE ISSUE OF THE APPLICABILITY O F SECTION 50 OF THE ACT, THE CONCLUSION OF THE CIT(A) IS AS UNDER:- THE CRUCIAL WORDS IN THE SAID SECTION ARE THAT DEP RECIATION SHOULD HAVE BEEN ALLOWED UNDER THE PROVISIONS OF THE ACT IN ORDER TH AT SECTION 50 COMES INTO PLAY. NOW, THE AO IS OF THE VIEW THAT BY VIRTUE OF EXPLANATION -5, TO SECTION 32, EVEN IF THE APPELLANT HAS NOT CLAIMED DEPRECIAT ION THE SAME IS DEEMED TO HAVE BEEN ALLOWED . THE ARGUMENT OF THE AO SUFFERS FROM THE FOLLOWING ANOMALIES. FIRST, EXPLANATION -5 IS A LEGAL FICTIO N INCORPORATED IN THE COMPUTATION OF BUSINESS INCOME AND SECTION 50 IS A LEGAL FICTION FOR THE PURPOSE OF COMPUTING CAPITAL GAINS. IT IS TRITE LA W THAT A LEGAL FICTION CANNOT BE EXTRAPOLATED TO A SUBJECT OTHER THAN FOR WHICH IT HAS BEEN LEGISLATED. IN OTHER WORDS, A LEGAL FICTION MEANT FOR THE PURPOSE S OF COMPUTING BUSINESS INCOME CANNOT BE EXTRAPOLATED FOR THE PURPOSE OF CO MPUTING CAPITAL GAINS AND VICE VERSA. SECOND, IN THE CASE OF GOODWILL, DISTRIBUTION NETWORK, REGISTRATION AND PERMITS AND COPYRIGHT, THE COST OF ACQUISITION OF THESE ASSETS HAS BEEN TAKEN TO BE NIL BY VIRTUE OF SECTION 55(2) (A). THE QUESTION OF ALLOWING DEPRECIATION UNDER EXPLANATION 5, TO SECTI ON 32, THEREFORE, DOES NOT ARISE. 13 ITA NO. 3171&3743/MUM/2012 (ASSESSMENT YEAR : 2007-08) 11.2 IN THE BACKGROUND OF THE AFORESAID FINDINGS OF THE CIT(A), THE LD. DEPARTMENTAL REPRESENTATIVE HAS NOT MADE ANY CREDI BLE ARGUMENT EXCEPT REITERATING THE STAND OF THE ASSESSING OFFI CER . IN OUR CONSIDERED OPINION, THE AFORESAID ASSETS ARE INTANGIBLE ASSETS , BEING DISTRIBUTION NETWORK, REGISTRATION AND PERMITS, COPYRIGHTS, CONS TITUTE BUSINESS RIGHT/INFORMATION AND PARTAKE THE CHARACTER OF ASSE T DEFINED IN SECTION 55(2)(A) FOR WHICH ALSO THE COST OF ACQUISITION IS REQUIRED TO BE CONSIDERED AS NIL. ACCORDINGLY, THE ENTIRE CONSI DERATION RECEIVED ON TRANSFER OF DISTRIBUTION NETWORK, REGISTRATION AND LICENSES, COPYRIGHTS AND GOODWILL WAS RIGHTLY OFFERED TO TAX AS LONG TER M CAPITAL GAINS. 11.3 ANOTHER OBJECTION OF THE ASSESSING OFFICER WAS THAT ASSESSEE COMPANY HAD GIVEN A DIFFERENT TREATMENT TO THE SAM E CLASS OF ASSETS, IN AS MUCH AS THE INTANGIBLE ASSETS, BEING TECHNICAL KNOW-HOW AND TRADEMARKS HAVE BEEN TREATED AS SHORT-TERM CAPITAL GAINS. IN THIS CONTEXT, THE LD. REPRESENTATIVE FOR THE ASSESSEE HA D POINTED OUT THAT THE TECHNICAL KNOW-HOW AND TRADEMARK OF THE LEADER BUSINESS WAS OWNED BY THE PARENT COMPANY AND THE ASSESSEE COMPAN Y ACQUIRED THEM DURING THE YEAR UNDER CONSIDERATION AND WERE CAPITALIZED IN THE BOOKS OF ACCOUNT AT THEIR RESPECTIVE COSTS OF ACQUI SITION. NOTABLY, THE AFORESAID FACTUAL MATRIX HAS BEEN AFFIRMED BY THE C IT(A) IN PARA 7.3 OF HIS ORDER AND BEFORE US THE SAME HAS NOT BEEN CONTR OVERTED BY THE LD. DR ALSO. 11.4 IN THE CASE OF THE IMPUGNED ASSETS, THE SAME W ERE CLAIMED TO BE SELF-GENERATED IN THE ORDINARY COURSE OF BUSINESS A ND THERE WAS NO ACTUAL OUTFLOW OF RESOURCES FOR THE PURPOSE OF THEI R ACQUISITION. BEFORE US ALSO, IT HAS BEEN CONTENDED BY THE ASSESSEE THAT IT WAS NOT REQUIRED 14 ITA NO. 3171&3743/MUM/2012 (ASSESSMENT YEAR : 2007-08) TO INCUR ANY COST FOR DEVELOPMENT OF DISTRIBUTION N ETWORK, REGISTRATION & LICENSES, COPYRIGHTS, GOODWILL ETC. ONLY IN RESPE CT OF REGISTRATION AND PERMITS, THE ASSESSEE COMPANY HAD SUBMITTED THAT T HE COST INCURRED FOR OBTAINING REGISTRATION AND PERMITS WERE CLAIMED U/S 37(1) OF THE ACT, SINCE THE EXPENSES WERE NOT INCURRED FOR THE PURPOS E OF APPRECIATING HE CAPITAL ASSETS BUT WERE INCURRED FOR THE PURPOSE OF PRODUCING PROFIT IN THE CONDUCT OF BUSINESS AND WERE ATTRIBUTABLE TO B USINESS OPERATIONS. THE EXPENDITURE INCURRED BY THE ASSESSEE-COMPANY O N A YEAR TO YEAR BASIS WAS ONLY FOR RENEWAL OF REGISTRATIONS AND PER MITS. SINCE THESE ASSETS WERE NOT ACQUIRED FOR ANY CONSIDERATION, BUT WERE SELF-GENERATED HAVING NIL COST, THE QUESTION OF CLAIMING DEPRECIAT ION UNDER SECTION 32 AND APPLYING EXPLANATION 5 TO SECTION 32 OF THE ACT AND OFFERING RESULTANT GAIN AS TAXABLE UNDER SECTION 50 WOULD NO T ARISE. 11.5 ON EACH OF THE AFORESAID ASSETS, IT HAS BEEN S OUGHT TO BE JUSTIFIED THAT THE GAIN WAS A LONG TERM CAPITAL GAIN, ON FACT S ALSO. REGARDING DISTRIBUTION NETWORK IT HAS BEEN EXPLAINED THAT THE SALES OF LEADER PRODUCTS WERE BEING MADE BY THE ASSESSEE-COMPANY T HROUGH A DEALER DISTRIBUTION NETWORK. THE ASSESSEE COMPANY HAD ENTE RED INTO CONTRACTS/ ARRANGEMENTS WITH SEVERAL DISTRIBUTORS F OR SALE AND DISTRIBUTION OF THEIR PRODUCTS COVERED UNDER LEADER BUSINESS. ON TRANSFER OF LEADER BUSINESS TO SUMITUMO, ALL THE R IGHTS OF THE ASSESSEE COMPANY UNDER SUCH CONTRACTS/BUSINESSES ARRANGEMEN TS IN RELATION TO LEADER BUSINESS WERE TRANSMITTED IN FAVOUR OF SUMI TOMO AS PER THE BUSINESS TRANSFER AGREEMENT. SINCE THE DISTRIBUTION NETWORK WAS IN THE NATURE OF BUSINESS RIGHT EXISTING FOR MORE THAN THR EE YEARS, IN OUR VIEW, THE SAME HAS BEEN RIGHTLY HELD BY THE CIT(A) TO BE TAXABLE AS LONG TERM CAPITAL GAIN. 15 ITA NO. 3171&3743/MUM/2012 (ASSESSMENT YEAR : 2007-08) 11.6 REGARDING GOODWILL, IT WAS QUITE CLEAR THAT THE SAME IS INSEPARABLE FROM BUSINESS, WHICH WAS IN EXISTENCE FOR MORE THAN THREE YEARS, AND IT GETS AUTOMATICALLY TRANSFERRED ALON GWITH THE BUSINESS. THUS, THE GAIN ON TRANSFER OF GOODWILL HAS TO BE AS SESSED AS LONG TERM CAPITAL GAIN. THE STAND OF THE CIT(A) IS AFFIRMED O N THIS ASPECT ALSO. SIMILARLY, IN RELATION TO THE GAIN ON TRANSFER OF R EGISTRATION AND LICENSES AND COPYRIGHTS ARE CONCERNED, THE SAME HAVE ALSO BE EN RIGHTLY TREATED BY THE CITA) AS LONG TERM CAPITAL GAINS. 11.7 IN VIEW OF THE AFORESAID DISCUSSION, WE FIND N O MERIT IN GROUND NO.5 IN THE APPEAL OF REVENUE, WHICH IS HEREBY DISM ISSED. 12. GROUND NO.6 IN APPEAL OF THE REVENUE SEEKS TO C ANVASS THAT THE GAIN ON TRANSFER OF DISTRIBUTION NETWORK, REGISTRAT ION AND LICENSES, COPYRIGHTS AND GOODWILL IS TAXABLE AS BUSINESS INCO ME. THE AFORESAID GROUND IS MISCONCEIVED BECAUSE THE SAME DOES NOT A RISE FROM THE ORDERS OF THE AUTHORITIES BELOW BECAUSE, EVEN THE A SSESSING OFFICER HAD AT NO STAGE TREATED SUCH GAIN AS BUSINESS INCOME. ACCORDINGLY, GROUND OF APPEAL NO.6 IS DISMISSED. 13. THE NEXT ISSUE IN THE CROSS-APPEALS IS IN RELA TION TO DISALLOWANCE U/S. 14A OF THE ACT. IN THIS CONTEXT, BRIEF FACTS ARE THAT THE ASSESSEE- COMPANY HAD EARNED DIVIDEND INCOME OF RS. 9,29,39,4 66/-, WHICH WAS CLAIMED EXEMPT U/S. 10(35) OF THE ACT. BY APPLICAT ION OF SEC. 14A OF THE ACT, ASSESSEE-COMPANY HAD SUO-MOTO DISALLOWED A SUM OF RS. 20,39,893/- IN THE RETURN OF INCOME. THE ASSESSING OFFICER HOWEVER MADE A DISALLOWANCE OF RS. 1,00,44,000/-(INTEREST E XPENDITURE-RS. 9,36,000/- PLUS ADMINISTRATIVE EXPENSES RS. 91,08,0 00/-). ON APPEAL, THE CIT(A) HAS DELETED THE DISALLOWANCE OF RS. 9,36 ,000/- PERTAINING TO 16 ITA NO. 3171&3743/MUM/2012 (ASSESSMENT YEAR : 2007-08) INTEREST EXPENDITURE, AND THE DISALLOWANCE OUT OF A DMINISTRATIVE EXPENSES HAS BEEN RESTRICTED TO 2% OF DIVIDEND INCO ME OVER AND ABOVE THE AMOUNT OF RS.20,39,893/- SUO-MOTTO DISALLOWED B Y THE ASSESSEE- COMPANY. THE REVENUE HAS CHALLENGED THE PART-RELIE F ALLOWED BY THE CIT(A), WHEREAS ASSESSEE-COMPANY HAS CHALLENGED THE SUSTENANCE OF DISALLOWANCE OVER AND ABOVE THE AMOUNT SUO-MOTTO DI SALLOWED. 14. WITH RESPECT TO THE INTEREST EXPENDITURE, THE E XPLANATION OF THE ASSESSEE-COMPANY HAS BEEN THAT NO BORROWINGS WERE M ADE DURING THE YEAR UNDER CONSIDERATION, AND THERE WAS NO INTEREST EXPENDITURE WHICH WAS DIRECTLY RELATABLE TO THE EARNING OF EXEMPT INC OME. IN THIS CONTEXT, THE LEARNED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE ENTIRE INTEREST EXPENDITURE OF RS. 24.22 LACS DEBITED IN T HE PROFIT & LOSS ACCOUNT WAS PAID IN RELATION TO THE SECURITY DEPOSI TS RECEIVED FROM THE DISTRIBUTORS. THE AFORESAID FACTUAL ASSERTIONS OF THE ASSESSEE-COMPANY HAVE BEEN ACCEPTED BY THE CIT(A) AND ACCORDINGLY TH E DISALLOWANCE OF RS. 9,36,000/- OUT OF INTEREST EXPENDITURE HAS BEEN DELETED. 15. BEFORE US, THE LD. DEPARTMENTAL REPRESENTATIVE HAS NOT CONTROVERTED THE FACTUAL FINDINGS OF THE CIT(A). R ATHER, WE FIND THAT THE FINDINGS OF THE CIT(A) ARE FULLY BORNE OUT OF THE M ATERIAL ON RECORD. THE BALANCE SHEET OF THE ASSESSEE- COMPANY REVEALS THA T THE AGGREGATE OF THE SHARE CAPITAL AND RESERVES & SURPLUS AT THE BEG INNING AND CLOSING OF THE INSTANT YEAR IS RS. 327.02 CRORES AND RS. 374.9 7 CRORES RESPECTIVELY, AS COMPARED TO THE TOTAL INVESTMENT OF RS. 182.16 C RORES. PRIMA-FACIE, THE ASSESSEE-COMPANY HAD SUFFICIENT OWN-FUNDS AT IT S DISPOSAL TO MAKE THE INVESTMENTS. FURTHER, THE INTEREST EXPENDITURE CLAIMED IS WITH RESPECT TO THE SECURITY DEPOSIT OBTAINED FROM THE D ISTRIBUTORS, WHICH 17 ITA NO. 3171&3743/MUM/2012 (ASSESSMENT YEAR : 2007-08) HAS A NEXUS WITH ASSESSEES NON-INVESTMENT ACTIVI TY AND THUS CANNOT BE CONSIDERED FOR DISALLOWANCE U/S. 14A OF THE ACT. CONSIDERING THE FACT-SITUATION, WE AFFIRM THE ACTION OF THE CIT(A) DELETING THE DISALLOWANCE OF RS. 9,36,000/- OUT OF INTEREST EXPE NDITURE. 16. IN SO FAR AS THE DISALLOWANCE MADE BY THE ASSES SING OFFICER OF RS.91,08,000/- OUT OF ADMINISTRATIVE EXPENSES IS CO NCERNED, THE SAME WAS MADE BY THE ASSESSING OFFICER IN THE MANNER AKI N TO THAT PROVIDED IN RULE 8D OF THE RULES. THIS ASPECT OF THE MATTER DID NOT FIND FAVOUR WITH THE CIT(A), WHO HAS INSTEAD RETAINED THE DISA LLOWANCE @2% OF THE DIVIDEND INCOME OVER AND ABOVE THE SUO-MOTO DISAL LOWANCE OF RS.20,39,893/- MADE IN THE RETURN OF INCOME. THE A SSESSMENT YEAR BEFORE US IS A.Y 2007-08 AND THE APPLICABILITY OF R ULE 8D OF THE RULES IS NOT FEASIBLE AS THE SAME IS APPLICABLE FOR ASSESSME NT YEAR 2008-09 AND ONWARDS AS LAID DOWN BY THE HONBLE BOMBAY HIGH COU RT IN THE CASE OF GODREJ & BOYCE MANUFACTURING CO. LTD. VS. DCIT, 328 ITR 81(BOM). 17. IN THE RETURN OF INCOME FILED, THE ASSESSEE SUO -MOTO DISALLOWED A SUM OF RS.20,39,893/-, THE DETAILED BREAK-UP OF WHI CH HAS BEEN PLACED IN THE PAPER BOOK AT PAGE-245. THE DETAIL REVEALS THAT A PORTION OF SALARIES AND RELATED EMPLOYEE BENEFITS HAS BEEN IDE NTIFIED. LD. REPRESENTATIVE FOR THE ASSESSEE EXPLAINED THAT T IME SPENT BY THE EMPLOYEES IN THE TREASURY DEPARTMENT TOWARDS INVEST MENT ACTIVITY WAS REFLECTED BY SUCH EXPENDITURE AND, THEREFORE, ON AN ESTIMATE BASIS A SUM OF RS.20,39,893/- WAS SUO-MOTO DISALLOWED UNDER 14A OF THE ACT. IT WAS, THEREFORE, CONTENDED THAT THERE IS NO JUSTI FICATION FOR ANY FURTHER DISALLOWANCE, AS MADE OUT BY THE CIT(A). 18 ITA NO. 3171&3743/MUM/2012 (ASSESSMENT YEAR : 2007-08) 18. ON THE OTHER HAND, THE LD. DEPARTMENTAL REPRESE NTATIVE HAS CONTENDED THAT THOUGH RULE-8D OF THE RULES IS NOT A PPLICABLE FOR THE INSTANT ASSESSMENT YEAR, YET THE DISALLOWANCE CAN B E MADE ON A REASONABLE BASIS AND THAT THE ACTION OF THE ASSESSI NG OFFICER WAS JUSTIFIABLE. 19. HAVING CONSIDERED THE RIVAL STANDS ON THIS ASPE CT, AT THE THRESHOLD WE ARE SATISFIED THAT THE ASSESSING OFFICER HAS NOT COMPLIED WITH THE JURISDICTIONAL PRESCRIPTION OF SECTION 14A(2) OF T HE ACT IN AS MUCH AS THERE IS NO OBJECTIVE SATISFACTION RECORDED BY THE ASSESSING OFFICER THAT THE CLAIM OF THE ASSESSEE MADE IN THE RETURN OF INC OME WAS INCORRECT. NOTABLY, IN THE PRESENT CASE ASSESSEE HAD SUO-MOTO DISALLOWED CERTAIN EXPENDITURE UNDER SECTION 14A OF THE ACT AND THE AS SESSING OFFICER IS EMPOWERED TO DISAGREE WITH IT ONLY AFTER HE WAS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM . MADE BY THE ASSESSEE, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE. THUS, IN THE ABSENCE OF THE RECORDING OF SUCH SATISFACTION THE DISALLOWANCE OVER AND ABOVE R S. 20,39,893/- MADE OUT OF ADMINISTRATIVE EXPENSES IS UNTENABLE AND IS HEREBY DIRECTED TO BE DELETED. APART THEREFROM WE ALSO FIND THAT EVEN O THERWISE THE DISALLOWANCE ESTIMATED BY THE ASSESSEE AT RS.20,39, 893/- IS REASONABLE CONSIDERING THAT THE SAME WAS EVEN MORE THAN THE E STIMATION OF 2% OF DIVIDEND INCOME CANVASSED BY THE CIT(A). IN THIS M ANNER, WE HEREBY SET ASIDE THE ORDER OF CIT(A) AND DIRECT THE ASSESS ING OFFICER TO RESTRICT THE DISALLOWANCE UNDER SECTION 14A OF THE ACT TO RS .20,39,893/- MADE IN THE RETURN OF INCOME. THUS, GROUND OF APPEAL NO .2 OF THE ASSESSEE IS ALLOWED AND GROUND OF APPEAL NO.1 & 2 IN THE DEPART MENTAL APPEAL ARE DISMISSED. 19 ITA NO. 3171&3743/MUM/2012 (ASSESSMENT YEAR : 2007-08) 20. THE ONLY OTHER GROUND IN THE APPEAL OF THE ASSE SSEE IS BY WAY OF GROUND OF APPEAL NO.3, WHICH RELATES TO THE RECOMP UTING VALUE OF CLOSING INVENTORY IN ACCORDANCE WITH THE PROVISION S OF SECTION 145A OF THE ACT. 21. IN THIS CONTEXT, THE BRIEF FACTS ARE THAT BEFOR E THE CIT(A), ASSESSEE SUBMITTED THAT WHILE PASSING ASSESSMENT O RDER FOR THE PRECEDING ASSESSMENT YEAR OF 2006-07, THE ASSESSIN G OFFICER MADE AN ADJUSTMENT TO THE VALUE OF CLOSING STOCK TO THE TUN E OF RS.4,13,28,639/- ON ACCOUNT OF ADJUSTMENT UNDER SECTION 145A OF THE ACT. THE ASSESSEE EXPLAINED THAT IN THE COURSE OF ASSESSMENT PROCEEDI NGS IT SUBMITTED A WORKING OF ADJUSTMENT UNDER SECTION 145A OF THE AC T BASED ON THE STAND OF THE DEPARTMENT OF THE EARLIER ASSESSMENT Y EARS, WHEREBY THE NET EFFECT OF THE ADJUSTMENT IN OPENING-STOCK AS WE LL AS CLOSING-STOCK WAS RESULTING IN REDUCTION OF PROFIT BY RS.1,57,02, 765/-. THE ASSESSEE POINTED OUT THAT SUCH RELIEF WAS NOT ALLOWED BY THE ASSESSING OFFICER. THE CIT(A) IN PRINCIPLE AGREED WITH THE ASSESSEE TH AT MERELY BECAUSE IN THE CURRENT YEAR THE EFFECT OF SECTION 145A OF THE ACT RESULTS IN REDUCTION IN PROFIT, THE ASSESSING OFFICER WOULD NO T BE JUSTIFIED NOT TO MAKE SIMILAR ADJUSTMENT. THE CIT(A) FURTHER NOTIC ED THAT IN THE EARLIER YEARS THE CIT(A) HAD UPHELD THE ADJUSTMENT UNDER SE CTION 145A OF THE ACT AND, THEREFORE, HE DIRECTED THE ASSESSING OFFIC ER TO RECOMPUTE THE DISALLOWANCE UNDER SECTION 145A OF THE ACT IN THE C URRENT YEAR BY TAKING THE FIGURE OF OPENING STOCK AS PER THE CLOSING STOC K VALUED BY HIM FOR THE PRECEDING ASSESSMENT YEAR OF 2006-07. 22. AGAINST SUCH DECISION OF THE CIT(A), THE ASSESS EE IS IN FURTHER APPEAL BEFORE US. APART FROM POINTING OUT THAT EVE N AFTER APPLYING THE 20 ITA NO. 3171&3743/MUM/2012 (ASSESSMENT YEAR : 2007-08) PROVISIONS OF SECTION 145A R.W. SECTION 43B OF THE ACT THERE WOULD BE NO EFFECT ON PROFIT, THE ASSESSEE COMPANY HAS NOT S UBSTANTIATED THE SAID PLEA. IN ANY CASE WE FIND THAT THE DIRECTION OF THE CIT(A) TO THE ASSESSING OFFICER FOR ADOPTING THE VALUE OF OPENING STOCK IN CONSONANCE WITH THE VALUE OF CLOSING STOCK ADOPTED FOR THE IMM EDIATELY PRECEDING YEAR DOES NOT REQUIRE ANY INTERFERENCE, AND IS HER EBY AFFIRMED. THUS, ON THIS ASPECT ASSESSEE HAS TO BE FAILED. 23. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. 24. IN THE APPEAL OF THE REVENUE, THE ONLY GROUND R EMAINING IS WITH REGARD TO THE ACTION OF THE CIT(A) IN HOLDING THAT INCOME OF RS.45,05,07,984/- DERIVED BY THE ASSESSEE FROM GROW ING AND SELLING OF HYBRID SEEDS IS TO BE CONSIDERED AS AGRICULTURAL IN COME SO AS TO BE ELIGIBLE FOR DEDUCTION UNDER SECTION 10(1) OF THE A CT. 25. ON THIS ASPECT, IT WAS A COMMON GROUND BETWEEN THE PARTIES THAT THE SAID DISPUTE IS NOT UNIQUE TO THE ASSESSMENT YE AR UNDER CONSIDERATION BUT HAS BEEN REGULARLY OCCURRING IN T HE PAST ASSESSMENTS ALSO. THE MUMBAI BENCH OF THE TRIBUNAL IN ASSESSEE S OWN CASE FOR ASSESSMENT YEARS 2000-01 VIDE ITA NO.286&287/BNG/03 & OTHERS DATED 26/11/2007 HAD ACCEPTED THE STAND OF THE ASSE SSEE THAT INCOME ARISING FROM SEEDS DIVISION WAS ENTITLED FOR DEDUCT ION UNDER SECTION 10(1) OF THE ACT. 26. BEFORE US THE LD. REPRESENTATIVE FOR THE ASSESS EE POINTED OUT THAT EARLIER TO THE ASSESSMENT YEAR 1993-94, THE DE PARTMENT HAD ACCEPTED SUCH CLAIM OF THE ASSESSEE AT THE ASSESSME NT STAGE ITSELF. FOR THE SUBSEQUENT ASSESSMENT YEARS ALSO THE MUMBAI BE NCH OF THE 21 ITA NO. 3171&3743/MUM/2012 (ASSESSMENT YEAR : 2007-08) TRIBUNAL HAS ACCEPTED THE STAND OF THE ASSESSEE FO LLOWING THE AFORESAID PRECEDENTS. IT HAS ALSO BEEN POINTED OUT THAT THE HONBLE BOMBAY HIGH COURT VIDE ITS ORDER DATED 5/8/2011 FOR ASSESSMENT YEAR 1993-94 TO 2004-05 (EXCEPT A.Y 2003-04) HAS UPHELD THE ASSESSE ES CLAIM FOR EXEMPTION UNDER SECTION 10(1) OF THE ACT. COPIES O F SUCH ORDERS HAVE BEEN PLACED ON RECORD. 27. FOLLOWING THE AFORESAID PRECEDENTS, WE FIND NO MERIT IN THE GROUND RAISED BY THE REVENUE AS NO FAULT CAN BE FOU ND WITH THE DECISION OF THE CIT(A), WHICH IS IN CONSONANCE WITH THE PRECEDENTS IN ASSESSEES OWN CASE. THUS, ON THIS ASPECT, REVENUE FAILS. 28. RESULTANTLY, WHEREAS THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED, THAT OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 30/ 10/2015. SD/- SD/- (AMIT SHUKLA) (G.S. PANNU) JUDICIAL MEMBER ACCOUNTANT ME MBER MUMBAI, DATED 30/10/2015 COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT , 2. THE RESPONDENT. 3. THE CIT(A)- 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE. BY ORDER, //TRUE COPY// (DY./ASSTT. REGISTRAR) ITAT, MUMBAI VM , SR. PS