Tecumesh India Pvt. Ltd., V. ACIT Cir-16(1),

ITA 3759/DEL/2003

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 3420 (ITAT-DELHI)
• Duration Of Justice: 7 year(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-07-2010
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 19-05-2009
• Assessment Year: 1995-1996
• Appeal Filed On: 22-07-2003
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: V S RASTOGI
• Keywords: Sale consideration of property below Jantri Value; Capital asset; Depreciation; Business expenditure; Source of fund; Cost of acquisition; Wholly owned subsidiary; Commercial expediency; Revenue expenditure; Capital expenditure
• Section: 37; 6

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH : SPECIAL BENCH : NEW DELHI BEFORE SHRI G.E. VEERABHADRAPPA, HONBLE VICE PRESI DENT, SHRI I.P. BANSAL, JUDICIAL MEMBER AND SHRI R.C. SHARMA, ACCOUNTANT MEMBER ITA NO.3759/DEL/2003 ASSESSMENT YEAR : 1998-99 TECUMSEH INDIA PRIVATE LIMITED, 56, WHS AREA, FURNITURE BLOCK, KIRTHI NAGAR, NEW DELHI. PAN : AAA-CT-4183-E VS. ADDL. COMMISSIONER OF INCOME-TAX, SPECIAL RANGE-5, PRESENT JURISDICTION ACIT, CIRCLE 16 (1), NEW DELHI. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI V.S. RASTOGI, ADVOCATE & SHRI TARANDEEP SINGH, CA REVENUE BY : SMT. SURUCHI AGGARWAL, SR. STANDING COUNSEL, SHRI MANISH GUPTA, SR. DR & SHRI D.N. KAR, CIT, DR M/S HINDUSTAN COCA-COLA BEVERAGES PVT. LTD. - INTE RVENER INTERVENER BY : SHRI AJAY VOHRA, ADVOCATE & SHRI S ACHIT JOLLY, ADVOCATE M/S REED ELSEVIER INDIA (P) LTD. - INTERVENER INTERVENER BY : SHRI S.D. KAPILA, ADVOCATE ORDER PER I.P. BANSAL, JUDICIAL MEMBER THIS SPL. BENCH IS CONSTITUTED BY THE ORDER OF HO NBLE PRESIDENT DATED 2 ND SEPTEMBER, 2008 TO DECIDE THE FOLLOWING QUESTIONS: - 1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE CIT(A)-IXI, NEW DELHI [HEREINAFTER REFERRED TO AS CIT(A)] ERRED IN UPHOLDING DISALLOWANCE OF RS. 2,65,00,000/-BEING TH E NON-COMPETE FEE PAID TO M/S WHIRLPOOL OF INDIA LTD., ITA NO.3759/DEL/2003 2 1.2 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW IN UPHOLDING DISALLOWANCE OF RS. 2,65,00,000/- PAID TO M/S WHIRLPOOL OF INDIA LTD., CIT(A) ERRED IN HOLDING TH AT BY ENTERING INTO NON-COMPETITION AGREEMENT APPELLANT ACQUIRED BENEFI T OF ENDURING NATURE AND, AS SUCH, THE EXPENDITURE WAS CAPITAL EX PENDITURE. 2. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) ERRED IN UPHOLDING THE ADDITION OF RS. 39,90 ,120/- BEING THE FEE PAID TO REGISTRAR OF COMPANIES. 3. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE IN LAW, THE CIT(A) ERRED IN UPHOLDING DISALLOWANCE OF RS. 20,00 ,000/- BEING PROFESSIONAL FEE PAID TO THE ARCHITECT. 3.1 THAT WITHOUT PREJUDICE AND IN ALTERNATIVE, CIT( A) ERRED IN NOT ALLOWING BENEFIT OF DEPRECIATION THOUGH THE FEE PAI D TO ARCHITECT WAS IN CONNECTION WITH ACQUISITION OF CAPITAL ASSET. 2. ACCORDINGLY THE PRESENT APPEAL WAS FIXED FOR HEA RING BEFORE SPL. BENCH. M/S HIND COCA COLA BEVERAGES P. LTD., GURGAON THROU GH ITA NO. 1890/D/07 AND M/S REED ELSEVIER THROUGH ITA NO. 4297/D/07 HA VE JOINED AS INTERVENERS AS IN THESE APPEALS THE QUESTION REGARDING NON-COMPETE FEES IS INVOLVED. 3. FACTS IN THE CASE OF TECUMSEH INDIA P. LTD. (ITA NO. 3759/D/03) : - THESE FACTS AS EMERGED FROM THE ASSESSMENT ORDER, O RDER OF CIT (A) AND FROM THE DOCUMENTS ENCLOSED IN THE PAPER BOOKS ARE THAT THE ASSESSEE IS WHOLLY OWNED SUBSIDY OF TECUMSEH PRODUCT COMPANY MICHIGAN, USA (FOR SHORT TECUMSEH-USA). TECUMSEH-USA BEING A GLOBAL COMPR ESSOR MANUFACTURER WAS INTERESTED IN ENTERING THE INDIAN COMPRESSOR MA RKET. IN THE PROCESS, TECUMSEH-USA ENTERED INTO AN AGREEMENT CALLED MEMOR ANDUM OF UNDERSTANDING (MOU) WITH WHIRLPOOL OF INDIA LTD., A PUBLIC LIMITED COMPANY INCORPORATED UNDER THE LAWS OF INDIA AT NEW DELHI, (FOR SHORT CALLED WHIRLPOOL- INDIA) AND WHIRLPOOL CORPORATION, A PUBLIC COMPANY INCORPORATED UNDER THE LAWS OF STATE OF DELAWARE WITH ITS OFFICE AT MISSIGAN US A, (FOR SHORT CALLED WHIRLPOOL- USA). THROUGH THE MOU WHIRLPOOL-INDIA HAD DECIDED TO SELL THE COMPRESSOR AND RELATED OPERATIONS OWNED BY IT IN FARIDABAD AND BALLABGARH. WHIRLPOOL-INDIA IS STATED TO BE ONE OF INDIAS LEADING REFRIGERATOR MANUFACTURER AND IT IS MENTIONED IN THE MOU THAT TECUMSEH-USA BEING A LEAD ING GLOBAL COMPRESSOR ITA NO.3759/DEL/2003 3 MANUFACTURER IS INTERESTED IN PURCHASING SUCH COMPR ESSOR AND RELATED OPERATION AND ENTERING THE INDIAN COMPRESSOR MARKET AND BOTH THE PARTIES HAVE COME TO AN UNDERSTANDING THAT BOTH OF THEM WILL ENTER INTO AN ASSET PURCHASE AGREEMENT, WHEREBY TECUMSEH-USA THROUGH ITS TO BE AN ESTABLISHED LOCAL INDIAN ENTITY SHALL PURCHASE ALL COMPRESSOR MACHIN ERY, EQUIPMENT AND TOOLING LOCATED AT WHIRLPOOL-INDIAS FARIDABAD FACILITY AS WELL AS RELATED COMPRESSOR COMPONENT ASSETS LOCATED AT WHIRLPOOL-INDIAS BALLA BGARH FACILITY (INCLUDING LAMINATIONS, VIA DRAWINGS, CENTRALIZED TOOL ROOM, O VERLOAD PROTECTORS AND RELAYS). 4. IT WAS ALSO AGREED IN THE MOU THAT TECUMSEH SHAL L ALSO PURCHASE ALL RAW AND WORK IN PROGRESS INVENTORY FOR THE COMPRESSOR D IVISION AND COMPONENT OPERATION. IT WAS AGREED THAT ALL ASSETS AND MACHI NERY CURRENTLY USED IN THE COMPRESSOR REPAIR BUSINESS SHALL ALSO BE INCLUDED I N THE ASSET PURCHASE AGREEMENT. SIMILARLY, IT WAS AGREED THAT SUBJECT M ATTER OF ASSET PURCHASE AGREEMENT WILL COVER ALL THE RELATED DRAWINGS, ROUT INGS, BILL OF MATERIAL, KNOW-HOW, TRADE SECRETS, PATENTS, COPY RIGHTS AND OTHER TECHN ICAL INFORMATION AND INTELLECTUAL PROPERTY, ALL LEASES, CONTRACTS, PURCHASE ORDERS AN D OTHER AGREEMENTS RELATING TO COMPRESSOR DIVISION. 5. THE MOU ALSO STATES ABOUT THE LAND OWNED BY WHIR LPOOL INDIA SITUATED AT BALLABGARH ALONG WITH BUILDING STRUCTURE ON IT WHIC H WAS STATED TO BE APPROXIMATELY 26 ACRES AND IT WAS STATED THEREIN TH AT OUT OF THAT LAND SOME AREA APPROXIMATELY 5 ACRES WAS SUBJECT TO ACQUISITION PR OCEEDINGS AND PURCHASE OF THE SAME WILL BE SUBJECT TO THOSE ACQUISITION PROCE EDINGS AND THEN IN CLAUSE 3 IT IS STATED ABOUT THE AMOUNT TO BE PAID AS PURCHASE PRICE AND THE TOTAL CONSIDERATION HAS BEEN REFERRED TO AS THE PURCHASE PRICE OF THE COMPRESSOR DIVISION ASSETS WHICH WERE DESCRIBED IN ARTICLE 1 A ND THE BALLABGARH LAND AND BUILDING REFERRED TO IN ARTICLE 1 AND 2 FOR A TOTAL SUM OF RS. 52.5 CRORES. 6. ACCORDING TO RIDER PROVIDED IN CLAUSE 3.5 OF THE MOU, IT IS MENTIONED THAT TECUMSEH PURCHASE OF RAW MATERIALS AND WORK IN PROG RESS PURSUANT TO CLAUSE. 1.2 (THE CONDITION FOR PURCHASING ALL RAW AND WORK IN PROGRESS INVENTORY OF THE ITA NO.3759/DEL/2003 4 COMPRESSOR DIVISION AND COMPONENT OPERATION), THE A GREED BASE LYING FOR SUCH PURCHASE WILL BE RS. 5.25 CRORES AND ANY ADJUSTMENT TO THAT AMOUNT (UP OR DOWN) SHALL BE BASED UPON A PHYSICAL INVENTORY AT CLOSING DATE AND WILL BE REIMBURSED LOCALLY BY THE APPROPRIATE PARTY. 7. IN THE SAID MOU, IT IS ALSO AGREED THAT TECUMSEH WILL ASSUME 600 WHIRLPOOL EMPLOYEES CURRENTLY ENGAGED IN THE COMPRE SSOR DIVISION OPERATIONS AT FARIDABAD OR COMPONENT OPERATIONS AT BALLABGARH AND LIST OF SUCH EMPLOYEES WAS TO BE PROVIDED BY WHIRLPOOL INDIA TO TECUMSEH. IN THE SAID MOU A MENTION IS MADE OF MANUFACTURING AND PRODUCTION PLAN BY THE TECUMSEH ON ACQUISITION OF SUCH ASSETS AND IT IS ALSO MENTIONED THAT TECUMSEH SHALL SUPPLY TO WHIRLPOOL CERTAIN QUANTITY OF COMPRESSORS FROM YEAR 1997 TO 2 001 AND PRICES OF THOSE COMPRESSORS IS ALSO STATED THEREIN. CLAUSE 12.1 OF THE MOU STATES ABOUT NON- COMPETE AGREEMENT WHICH READS AS UNDER: - NON-COMPETE AGREEMENT 12.1 WHIRLPOOL AND WHIRLPOOL CORPORATION (INCLUDIN G ITS WHOLLY OWNED SUBSIDIARIES) AGREE NOT TO MANUFACTURE OR REP AIR COMPRESSORS DURING THE TERM OF THE GLOBAL SOURCING AGREEMENT WITH TECUMSEH. HOWEVER, WHIRLPOOL SHALL BE FREE TO SELL REFRIGERATOR COMPRESSORS TO SERVICE PARTNERS (PURCH ASED FROM TECUMSEH SUBJECT TO THE PROVISIONS OF SEC. 6.1. 8. TO IMPLEMENT THE MOU, TECUMSEH-USA, INCORPORATED TECUMSEH-INDIA PVT. LTD. (FOR SHORT TECUMSEH INDIA) WHICH ENTERED INTO AN AGREEMENT ON 2 ND JULY, 1997 WITH WHIRLPOOL- INDIA. COPY OF SUCH AGREEMENT IS PLACED AT PAGES 1 TO 27 OF THE PAPER BOOK. 9. THE TOTAL LAND OWNED BY WHIRLPOOL-INDIA MEASUR ING 105983 SQ. METRES, WAS SUBJECT TO TRANSFER TO TECUMSEH-INDIA AND IT WA S DISTRIBUTED INTO THREE PARCELS. MAIN PARCEL WAS FREE FROM ACQUISITION PRO CEEDINGS AND OTHER TWO PARCELS, NAMELY, SEVEN ACRE PARCEL AND FIVE ACRE PARCEL WERE SUBJECT TO ACQUISITION PROCEEDINGS. ALL THE THREE PARCELS WER E AGREED TO BE TRANSFERRED ON DIFFERENT AGREED PRICES. AN AGGREGATE AMOUNT OF RS .49.85 CRORES WAS MENTIONED ITA NO.3759/DEL/2003 5 TO BE PAID WITH RESPECT TO VARIOUS ASSETS. THE DETA IL OF WHICH DESCRIBED IN THE AGREEMENT IS AS FOLLOWS:- SL.NO. DESCRIPTION CLAUSE OF THE AGREEMENT AMOUNT 1. THE PRICE PAYABLE FOR THE SALE AND PURCHASE OF COMPRESSOR DIVISION AND RELATED OPERATIONS AND FACILITIES EXECUTING THE RAW MATERIALS, WORK IN PROGRESS AND THE LAND AND BUILDING AT BALLABGARH WAS AGREED. SEC. 2 19.50 CRORE 2. PURCHASE PRICE FOR INVENTORY I.E. RAW MATERIAL AND WORK IN PROGRESS. SEC. 5 5.25 CRORES 3. MAIN PARCEL OF LAND AT BALLABGARH WHICH INCLUDES BUILDINGS AND IMPROVEMENT LOCATED THEREIN SEC. 6 15.61 CRORE 4. 7 ACRE PARCEL SEC. 6 6.48 CRORE 5. 5 ACRE PARCEL SEC. 6 3.01 CRORE TOTAL 49.85 CRORE 10. IT MAY BE MENTIONED HERE THAT CLAUSE 9 WHICH IS HEADED AS TRANSFER ON CLOSING, UNDER CLAUSE (J) THE FOLLOWING STIPULATIO N IS LAID DOWN: - J. WHIRLPOOL SHALL SIGN AND DELIVER TO TECUMSEH I NDIA, AGAINST THE RECEIPT OF FULL CONSIDERATION SPECIFIED THEREIN, A NON-COMPETE AGREEMENT IN THE FORM AS CONTAINED IN APPENDIX M UNDERTAKING NOT TO COMPETE WITH TECUMSEH INDIA IN THE MANUFACTURE, SALE OR REPAIR OF COMPRESSORS IN INDIA, EXCEPT THAT WHIRLPOOL SHALL B E ENTITLED TO SELL AND INSTALL COMPRESSORS PURCHASED FROM TECUMSEH IND IA TO PERSONS UNDER ITS SERVICE ARRANGEMENTS, SUBJECT TO THE PROV ISIONS OF THE SUPPLY AGREEMENTS. 11. BEFORE AO COPY OF ANNEXURE M, AS MENTIONED IN SECTION 9(J), IS NOT FILED. HOWEVER, A COPY OF NON-COMPETENCE AGREEMENT WAS FIL ED WHICH IS DATED 10 TH JULY, 1997. COPY OF ANNEXURE M IS ALSO NOT FILED BEFORE US. THEREFORE, THE NON- COMPETE AGREEMENT ENTERED INTO BY THE ASSESSEE WITH TECUMSEH-INDIA CAN BE CONSIDERED TO BE THE SAME AS APPENDIX M ATTACHED TO THE AGREEMENT. THE AMOUNT MENTIONED IN NON-COMPETE AGREEMENT IS RS.2.6 5 CRORES. IF THE SAME IS ITA NO.3759/DEL/2003 6 ADDED TO THE AFORESAID AGGREGATE SUM OF RS. 49.85 C RORE THEN THE TOTAL AMOUNT PAID BY THE ASSESSEE TO WHIRLPOOL INDIA WILL BE AN AMOUNT OF RS. 52.50 CRORE WHICH IS THE TOTAL SUM AGREED TO BE PAID BY THE ASS ESSEE FOR WHOLE OF THE TRANSACTION AS PER MOU. 12. IT IS THAT AMOUNT OF RS. 2,65,00,000/- WHICH HA S BEEN CLAIMED BY THE ASSESSEE TO BE PAID AS NON-COMPETE FEES BEING REVEN UE EXPENDITURE BY SEPARATING THE SAID AMOUNT FROM THE MAIN AGREEMENT. 13. THE MAIN ISSUE INVOLVED IN THE PRESENT APPEAL I S REGARDING THE ALLOWABILITY OR OTHERWISE OF THE AFOREMENTIONED SUM OF RS. 2.65 CRORE BEING NON-COMPETE FEES. THE ISSUE WAS ARGUED AT LENGTH BY BOTH THE P ARTIES. ON THE BASIS OF ARGUMENTS ADVANCED DURING THE COURSE OF HEARING, BO TH THE PARTIES HAVE SUBMITTED WRITTEN SYNOPSIS. ARGUMENTS OF SHRI V.S. RASTOGI, ADVOCATE 14. ACCORDING TO LD. COUNSEL OF THE ASSESSEE, THE A DMITTED FACTS AS PER RECORD ARE: - (I) THAT TECUMSEH INDIA WAS INCORPORATED ON 30.01.1 997 AND IT IS FULLY OWNED SUBSIDIARY OF TECUMSEH USA. (II) AS PER AGREEMENT DATED 2 ND JULY, 1997 BETWEEN TECUMSEH INDIA AND WHIRLPOOL INDIA, TECUMSEH INDIA HAD PURCHASED UNDER TAKING OF WHIRLPOOL INDIAS COMPRESSOR DIVISION AND RELATE D OPERATIONS AS A RUNNING BUSINESS. THE COPIY OF THE AGREEMENT IS FI LED AT PAGES 1 TO 27 OF PAPER BOOK II. (III) ON 2 ND JULY, 1997 TECUMSEH INDIA ENTERED INTO AN AGREEMEN T STYLED AS COMPRESSOR SUPPLY AGREEMENT WITH WHIRLPOOL INDIA EFFECTIVE FOR 5 YEARS FROM 14 TH JULY, 1997 UNDER WHICH WHIRLPOOL INDIA WILL MAKE A LONG TERM COMMITMENT TO PURCHASE OPERATION OF ITS REQUIR EMENT OF CERTAIN COMPRESSORS FROM TECUMSEH INDIA AND THE VOLUME FORE CAST WAS MENTIONED IN PARA 2.4 OF THE AGREEMENT. HE SUBMITT ED THAT PARA 9 OF THE SAID AGREEMENT GAVE AN OPTION TO BOTH THE PARTI ES TO TERMINATE THE ITA NO.3759/DEL/2003 7 AGREEMENT AT ANY TIME BY MUTUAL AGREEMENT AND IF PA RTIES FAILS TO AGREE THEN THE AGREEMENT COULD BE TERMINATED UPON W RITTEN NOTICE OF TERMINATION PROVIDING AT LEASE 120 DAYS IN ADVANCE OF THE EFFECTIVE DATE OF SUCH TERMINATION UNLESS SHORTER PERIOD IS A GREED TO BY THE PARTIES (COPY OF PARA 2.4 IS FILED AT PAGE 23 OF PA PER BOOK I AND FULL AGREEMENT WAS FILED DURING THE COURSE OF HEARING). (IV) A NON-COMPETE AGREEMENT STYLED AS NON-COMPETI TION AGREEMENT WAS EXECUTED ON 10 TH JULY, 1997 BY THE WHIRLPOOL USA AND WHIRLPOOL INDI A BOTH CONSTITUTING PARTIES OF ONE PART IN FAVOUR OF TECUMSEH INDIA AND COPY OF SUCH NON-COMPETITION AGREEMENT IS FILED AT PAGES 17 TO 22 OF THE PAPER BOOK NO. 1. (V) MOU HAD EARLIER BEEN ENTERED INTO ON 4.11.1996 BETWEEN WHIRLPOOL INDIA AND WHIRLPOOL USA BEING PARTIES OF THE ONE PA RT AND TECUMSEH USA BEING PARTY OF THE OTHER PART. IT WAS CONTENDE D BY LD. COUNSEL THAT INCIDENTALLY TECUMSEH INDIA HAD NOT EVEN BEEN INCORPORATED AS THE SAME WAS INCORPORATED ON 30.01.1997 (REFERENCE IN THIS REGARD WAS MADE TO MOU COPY OF WHICH IS PLACED AT PAGES 28 TO 36 OF PAPER BOOK NO. III. 15. LD. AR SUBMITTED THAT THE AO AND LD. CIT (A) BO TH HAVE ACCEPTED THE FACT THAT THE NON-COMPETE AGREEMENT DATED 10 TH JULY, 1997 WAS A STAND-ALONE AGREEMENT AND THUS, THE PAYMENTS OF RS. 2.65 CRORE WAS TREATED AS NON- COMPETE FEES SIMPLICITOR AND FROM THAT STAND POINT IT HAS TO BE SEEN THAT WHETHER THE EXPENDITURE IS CAPITAL OR REVENUE IN NATURE. 16. IT WAS PLEADED THAT THE THREE AGREEMENTS ENVISA GED THREE DIFFERENT SUBJECT MATTERS AND WERE EXECUTED ON AND WERE TO BE EFFECTI VE FROM DIFFERENT DATES; THEY ARE ALSO NOT WITH THE SAME PARTIES. TO DESCRIBE MO RE PARTICULARLY IT WAS SUBMITTED AS UNDER: A) THE PURCHASE AGREEMENT WAS EXECUTED ON 2.7.97 BE TWEEN TECUMSEH INDIA AND WHIRLPOOL AND CONTAINED THE TERM S OF PURCHASE OF THE COMPRESSOR DIVISION AND RELATED OPERATIONS OF W HIRLPOOL. ITA NO.3759/DEL/2003 8 B) THE NON-COMPETE AGREEMENT WAS BETWEEN WHIRLPOOL CORPORATION USA AND WHIRLPOOL OF INDIA LTD., NEW DELHI AS PROMI SSORS AND TECUMSEH INDIA AND WAS EXECUTED ON 10.07.97 AFTER THE PURCHA SE WAS EFFECTED ON 2.7.97. (ACCORDING TO LD. AR DEPARTMENTS ALLEGATI ONS FAIL HERE ITSELF, BECAUSE NO BUSINESS OF WHIRLPOOL USA WAS ACQUIRED B Y THE ASSESSEE THIS FACT ITSELF NEGATES INITIAL OUTLAY THEORY). C) THE COMPRESSOR SUPPLY AGREEMENT THOUGH EXECUTE D ON 2.7.97 WAS TO BE EFFECTIVE FROM 14.7.97 THE AGREEMENT BE ING BETWEEN TECUMSEH INDIA AND WHIRLPOOL. 17. IT WAS SUBMITTED THAT NON-COMPETE AGREEMENT CAN NOT BE CONSIDERED TO BE THE PART OF EARLIER AGREEMENTS AND THE SAME HAS TO BE CONSIDERED ON STAND ALONE BASIS FOR THE FOLLOWING REASONS:- 1) BOTH THE AO & CIT(A) HAVE ACCEPTED THE FACTUAL S UB-STRATUM THAT THE PAYMENT OF RS. 2.65 CRORE WAS TOWARDS NON-COMPETE F EE AND THEY HAVE CONSIDERED THE ALLOWABILITY OR OTHERWISE OF THE SAI D EXPENDITURE ON THAT STAND POINT. THE CASES RELIED UPON BY THE AO AND CIT(A) ALSO RELATED TO THE QUESTION WHETHER NON-COMPETE FEE IS AN EXPENDITURE BY WAY OF CAPITAL OR REVENUE AND THERE IS NO WHISPER IN THE ORDER OF AO AND CIT(A) THAT THERE WAS ANY DOUBT THAT AMOUNT WAS NOT SPENT FOR NON-COMPETE FEE BUT TOWARDS COST OF ACQUISITION. IN FACT THE AO HAS WRITTEN IN HIS ORD ER THAT THE EXPENDITURE WAS SHOWN AS DEFERRED REVENUE EXPENDITURE IN THE BOOKS OF ACCOUNT. 2) THAT COMPRESSOR DIVISION AND RELATED OPERATIO NS WERE ACQUIRED BY THE ASSESSEE AS RUNNING BUSINESS VIDE AGREEMENT DATED 2 ND JULY, 1997. THEREFORE, IT HAS TO BE APPRECIATED THAT AT THE TIM E OF TAKING OVER A BUSINESS, THE QUESTION OF ENTERING INTO A NON-COMPETE AGREEME NT CANNOT ARISE. THE PERSON WHO IS ACQUIRING THE BUSINESS CAN ENTER INTO A NON-COMPETING FEE ONLY AFTER THE SAME HAS ACTUALLY BEEN ACQUIRED. THE ENT ERING INTO A NON-COMPETE AGREEMENT HAS NECESSARILY TO BE A SUBSEQUENT EVENT AND NOT COTERMINOUS ITA NO.3759/DEL/2003 9 WITH THE PROCESS OF ACQUIRING THE BUSINESS. WHAT H AD ACTUALLY HAPPENED WAS THAT THE BUSINESS WAS ACQUIRED ON 2 ND JULY, 1997 AND NON-COMPETE AGREEMENT WAS SIGNED AND MADE EFFECTIVE FROM 10 TH JULY, 1997. 3) IT IS TRUE THAT IN THE PREAMBLE OF PURCHASE AGRE EMENT DATED 2 ND JULY, 1997, ACCORDING TO CLAUSE E(III) IT IS STATED THAT A NON- COMPETE AGREEMENT AS PER CLAUSE 9(J)WOULD BE ENTERED. HOWEVER, CLAUSE 9(J) SPECIFICALLY STATES THAT WHIRLPOOL INDIA SHALL SIGN AND DELIVER TO TECUMSEH INDIA AGAINST THE RECEIPT OF FULL CONSIDERATION SPECIFIED THEREIN A NON-COMPET E AGREEMENT. READING OF THE PREAMBLE AND SUCH CLAUSE SHOWS THAT IT SPEAKS O F AN EVENT YET TO TAKE PLACE AFTER THE ACQUISITION OF UNDERTAKING BY THE A SSESSEE. NON-COMPETE AGREEMENT IS SPECIFYING THE APPLICATION OF THE WHIR LPOOL INDIA, THE PERIOD, THE CONSIDERATION AND THE RELEVANT CLAUSES WHICH ARE YE T TO BE DONE SUBSEQUENTLY AFTER THE BUSINESS WAS TAKEN OVER ON 2 ND JULY, 1997. 3.1 IN SIMILAR MANNER, THE PREAMBLE E(IV) SPEA KS OF SUPPLY AGREEMENT WHICH DOES NOT GIVE DETAILS OF THE SAID AGREEMENT A ND WHICH ALSO HAS YET TO SEE THE LIGHT OF THE DAY SUBSEQUENTLY AFTER THE PUR CHASE WHICH WAS MADE EFFECTIVE FROM 14 TH JULY, 1997 3.2 THUS, IT WILL BE INCORRECT TO PLEAD THAT THER E WAS ONLY ONE AGREEMENT AND SUBSEQUENT AGREEMENTS DATED 10 TH JULY, 1997 WAS NOT A NON-COMPETE AGREEMENT BUT WAS TO BE DOVETAILED INTO A PURCHASE AGREEMENT BY CONSTRUING THE PAYMENT OF RS. 2.65 CRORE TOWARDS THE INITIAL C OST OF ACQUISITION OF THE BUSINESS. 18. IT WAS FURTHER PLEADED THAT LAW IN RESPECT OF I NTERPRETATION OF AGREEMENTS IS STATED IN THE PROVISIONS OF LAW AND IN JUDICIAL PRO NOUNCEMENTS AS UNDER:- SECTION 91 OF THE EVIDENCE ACT, 1872 EXPRESSLY LAYS DOWN THAT WHEN THE TERMS OF A CONTRACT, OR OF A GRANT, OR OF ANY OTHER DISPOSITION OF PROPERTY, HAVE BEEN REDUCED TO THE FORM OF A DOCUME NT, AND IN ALL CASES IN WHICH ANY MATTER IS REQUIRED BY LAW TO BE REDUCED T O THE FORM OF A DOCUMENT, NO EVIDENCE SHALL BE GIVEN IN PROOF OF TH E TERMS OF SUCH ITA NO.3759/DEL/2003 10 CONTRACT, GRANT OR OTHER DISPOSITION OF PROPERTY, O R OF SUCH MATTER, EXCEPT THE DOCUMENT ITSELF, OR SECONDARY EVIDENCE OF ITS C ONTENTS IN CASES IN WHICH SECONDARY EVIDENCE IS ADMISSIBLE UNDER THE PR OVISIONS HEREINBEFORE CONTAINED. IN CIT VS. MOTORS AND GENERAL STORES (P) LTD. 66 IT R 692 (SC) IT WAS HELD THAT IN THE ABSENCE OF ANY SUGGESTION OF B AD FAITH OR FRAUD THE TRUE PRINCIPLE IS THAT A TAXING STATUTE HAS TO BE A PPLIED IN ACCORDANCE WITH THE LEGAL RIGHTS OF THE PARTIES TO THE TRANSACTION. WHEN THE TRANSACTION IS EMBODIED IN A DOCUMENT THE LIABILITY TO TAX DEPENDS UPON THE MEANING AND CONTENT OF THE LANGUAGE USED IN ACCORDANCE WITH THE ORDINARY RULES OF CONSTRUCTION. IN D.S. BIST & SONS VS. CIT 149 ITR 276 (DELHI) IT WAS HELD BY THE HONBLE JURISDICTIONAL HIGH COURT THAT THE I.T. ACT DOES NOT CLOTHE THE TAXING AUTHORITY WITH ANY POWER OR JURISDICTION TO REWRITE THE TERM OF AN AGREEMENT ENTERED INTO UNDER, THE TAXING SYSTEM IT IS UP TO THE ASSESSEE TO CONDUCT HIS BUSINESS IN HIS WISDOM. TH E ASSESSEE MAY ENTER INTO COMMERCIAL TRANSACTIONS WITH ANOTHER PARTY WHO IS AD IDEM WITH THE ASSESSEE AS TO THE TERMS AND CONDITIONS. IN STATE BANK OF INDIA AND ANOTHER VS. MULA SAHAKAR I SARKAR KARKHANA LTD. [2006] COMP. CASES 565 (SC) IT WAS HELD: A DOCUMENT, AS IS WELL KNOWN, MUST PRIMARILY BE CO NSTRUED ON THE BASIS OF THE TERMS AND CONDITIONS CONTAINED THEREIN. IT IS ALSO TRITE THAT WHILE CONSTRUING A DOCUMENT T HE COURT SHALL NOT SUPPLY AND WORDS WHICH THE AUTHOR THEREOF DID NOT USE. SURROUNDING CIRCUMSTANCES ARE RELEVANT FOR CONSTRUCTION OF A DOCUMENT ONLY IF ANY AMBIGUITY EX ISTS THEREIN AND NOT OTHERWISE. IT IS ONE THING TO SAY THAT THE NATURE OF A TRANSACTION WOULD BE JUDGED BY THE TERM S AND CONDITIONS TOGETHER WITH THE SURROUNDING AND/OR ATT ENDING CIRCUMSTANCES IN A CASE WHERE THE DOCUMENT SUFFERS FROM SOME AMBIGUITIES BUT IT IS ANOTHER THING TO SAY THA T THE COURT WILL HAVE RECOURSE TO SUCH A COURSE, ALTHOUGH NO SU CH AMBIGUITY EXISTS. (COPY ENCLOSED) APEX COURT IN DDA VS. DURGA CHAND AIR 1973, 2609 HAS HELD: ITA NO.3759/DEL/2003 11 IN CONSTRUING DOCUMENT ONE MUST HAVE REGARD, NOT T O THE PRESUMED INTENTION OF THE PARTIES BUT TO THE MEANIN G OF THE WORDS THEY HAVE USED. IF TWO INTERPRETATIONS OF TH E DOCUMENT ARE POSSIBLE, THE ONE WHICH WOULD GIVE EFF ECT AND MEANING TO ALL ITS PARTS SHOULD BE ADOPTED AND FOR THE PURPOSE, THE WORDS CREATING UNCERTAINTY IN THE DOCU MENT CAN BE IGNORED (PAGE 2609). IN DELTA INTERNATIONAL LTD. VS. SHYAM SUNDER GANER IWALA (1999) 4 SCC 345 IT WAS HELD: I. WHERE TERMS OF THE AGREEMENT ARE VAGUE OR HAVING DOUBLE MEANING ONE WHICH IS LAWFUL SHOULD BE PREFER RED. (PAGE 545) II. WHERE THE PARTIES WERE CAPABLE OF UNDERSTANDING THE IR RIGHTS FULLY, EXPRESSLY AGREED THAT THE DOCUMENT SH OULD BE CONSTRUED ONE WAY, NO INTERFERENCE SHOULD BE DRAWN SO AS TO CONSTRUE IT IN A DIFFERENT WAY. (PAGE 545). 19. IT WAS SUBMITTED BY LD. AR THAT NON-COMPETE FEE S IS NOT IN THE NATURE OF CAPITAL AND RELIANCE WAS PLACED ON THE FOLLOWING DE CISIONS:- 7. (I) ASSAM BENGAL CEMENT CO. LTD. VS. CIT 21 ITR 34 (SC) [PAGES 1 TO 15 PB NO. VI]. IN THIS DECISION, THE H ONBLE COURT AT PAGE 9 HAS OBSERVED AS UNDER:- THE DISTINCTION WAS THUS MADE BETWEEN ACQUISITION OF AN INCOME EARNING ASSET AND THE PROCESS OF THE EARNING OF THE INCOME. EXPENDITURE IN THE ACQUISITION OF THAT ASSET WAS CA PITAL EXPENDITURE AND EXPENDITURE IN THE PROCESS OF THE E ARNING OF THE INCOME WAS REVENUE EXPENDITURE. AT PAGE 11 THEIR LORDSHIPS FORMULATED ONE OF THE PR INCIPLES AS UNDER: IF WHAT IS GOT RID OF BY A LUMPSUM PAYMENT IS AN A NNUAL BUSINESS EXPENSES CHARGEABLE AGAINST REVENUE, THE LUMP SUM P AYMENT SHOULD EQUALLY BE REGARDED AS A BUSINESS EXPENSE, B UT IF THE LUMP SUM PAYMENT BRINGS IN A CAPITAL ASSET, THEN TH AT PUTS THE BUSINESS ON ANOTHER FOOTING ALTOGETHER. THIS PROPOSITION WAS ENDORSED BY THE SUPREME COURT IN SUBSEQUENT JUDGMENT OF CIT VS. COAL SHIPMENTS P. LT D. 82 ITR 902 (SC) [PAGES 16 TO 27 OF THE PB NO. 6] AT PAGE 9 09 AS UNDER: ITA NO.3759/DEL/2003 12 THE CHARACTER OF THE PAYMENT CAN BE DETERMINED, IT WAS ADDED (IN CASE OF ASSAM BENGAL CEMENT CO. LTD.), BY TAKIN G AT WHAT IS THE TRUE NATURE OF THE ASSET WHICH HAS BEEN ACQUIRE D.. IN ASSAM BENGAL CEMENT CO.S CASE ASSESSEE HAD ACQU IRED FROM GOVT. OF ASSAM, LEASE OF LIMESTONE QUARRIES FO R THE PURPOSE OF CARRYING ON THE MANUFACTURE OF CEMENT. IN ADDITION OF RENT AND ROYALTIES, TOW SUMS WERE PAID AS PROTECTION FEES BY WHICH LESSOR AGREED NOT TO GRANT ANY LEASE, PERMIT OR PROSPECTIN G LICENCE TO ANY OTHER PARTY WITHOUT A CONDITION THAT NO LIMESTONE S HOULD BE USED FOR THE MANUFACTURE OF CEMENT. ON THESE FACTS THE COURT HELD THUS AT PAGE 47 (P.B. PAGE 14): THE ASSET WHICH THE COMPANY HAD ACQUIRED IN CONSID ERATION OF THIS RECURRING PAYMENT WAS IN THE NATURE OF A CAPIT AL ASSET, THE RIGHT TO CARRY ON ITS BUSINESS UNFETTERED BY ANY CO MPETITION FROM OUTSIDERS WITHIN THE AREA. IT WAS A PROTECTION ACQ UIRED BY THE COMPANY FOR ITS BUSINESS AS A WHOLE. IT WAS NOT A PART OF THE WORKING OF THE BUSINESS BUT WENT TO APPRECIATE THE WHOLE OF THE CAPITAL ASSET AND MAKING IT MORE PROFIT YIELDING. THE EXPENDITURE MADE BY THE COMPANY IN ACQUIRING THIS ADVANTAGE WHI CH WAS CERTAINLY AN ENDURING ADVANTAGE WAS THUS OF THE NAT URE OF CAPITAL EXPENDITURE AND WAS NOT AN ALLOWABLE DEDUCTION U/S 10(2)(XV) OF THE INCOME TAX ACT. THE RATIONALE OF THE JUDGMENT WAS THAT THE PAYMENT WENT ON TO APPRECIATE THE CAPITAL ASSET AND WAS NOT TOWARDS TH E PROCESS OF THE EARNING OF THE INCOME. THE PAYMENT DIRECTLY RELATE D TO THE ACQUISITION OF ASSET I.E., THE RIGHT TO CARRY ON TH E BUSINESS. II . CIT VS. COAL SHIPMENT P. LTD. 82 ITR 902 (SC) (PA GE 16 OF PB PART VI) THE AGREEMENT IN THAT CASE WAS BETWEEN THE ASSESSEE AND M/S H.V. LOW AND CO. LTD. WHICH WAS AN ORAL AGREEME NT WHICH DID NOT PROVIDE FOR A CERTAINTY OF DURATION AND THE AGR EEMENT COULD BE TERMINATED OR REVOKED AT ANY TIME. THOUGH THE ARRA NGEMENT RAN FOR ITA NO.3759/DEL/2003 13 5 YEARS IT AUTOMATICALLY CAME TO AN END WHEN GOVT. OF BURMA MADE SOME OTHER ARRANGEMENT FOR ITS COAL REQUIREMENT. AT PAGE 909 THE FOLLOWING OBSERVATIONS FROM THE JU DGMENT OF ASSAM BENGAL CEMENT CO. LTD. VS. CIT 27 ITR 34 (SC) WERE QUOTED: THE CHARACTER OF PAYMENT CAN BE DETERMINED BY LOO KING AT WHAT IS THE TRUE NATURE OF ASSETS WHICH HAS BEEN AC QUIRED.. THE JUDGMENT IN THIS CASE MAY BE TAKEN TO HAVE BEEN DECIDED ON TWO SPECIFIC ASPECTS PROPOUNDED BY MR. P ALKIWALA BASED ON THE FACTS OF THE CASE, TO WHICH THE COURT AGREED A. THERE WAS NO CERTAINTY OF THE DURATION OF THE AR RANGEMENT, THE SAME CAN BE REVOKED AT ANY TIME AND, THEREFORE, THE ADVANTAGE CANNOT BE SAID TO BE OF THE ENDURING CHAR ACTER AND EXPENDITURE CANNOT BE HELD TO BE OF CAPITAL NAT URE; AND B. THE PAYMENT WAS RELATED TO QUANTUM OF COAL SHIPP ED IN THE COURSE OF TRADING ACTIVITY AND NOT CONNECTED WITH T HE CAPITAL VALUE OF THE ASSETS. THE JUDGMENT MAY BE TAKEN TO HAVE BEEN DECIDED ON T HE FACTS OF THE CASE. NEVERTHELESS, THE COURT MADE FOLLOWING O BSERVATIONS AT PAGE 910. ALTHOUGH WE AGREE THAT PAYMENT MADE TO WARD OF COM PETITION IN BUSINESS TO A RIVAL DEALER WOULD CONSTITUTE CAPITAL EXPENDITURE IF THE OBJECT OF MAKING THAT PAYMENT IS TO DERIVE AN A DVANTAGE BY ELIMINATING THE COMPETITION OVER SOME LENGTH OF TIM E, THE SAME RESULT WOULD NOT FOLLOW IF THERE IS NO CERTAINTY OF THE DURATION OF THE ADVANTAGE AND THE SAME CAN BE PUT TO AN END AT ANY TIME. HOW LONG THE PERIOD OF CONTEMPLATED ADVANTAGE SHOULD BE IN ORDER TO CONSTITUTE ENDURING BENEFIT WOULD DEPEND UPON THE C IRCUMSTANCES AND THE FACTS OF EACH INDIVIDUAL CASE. FOR THE CASES WHERE THE PERIOD WAS MENTIONED, THE C OURT LEFT THE MATTER OPEN, AS THE LAST LINE REPRODUCED ABOVE WOUL D SHOW. III. EMPIRE JUTE CO. LTD. VS. CIT 124 ITR 1 (SC) DA TED 9.5.80 [PAGES 25 TO 42 OF PB VI] ITA NO.3759/DEL/2003 14 WHEREFROM THE CASE OF COAL SHIPMENT (SUPRA) WAS LEF T IT WAS TAKEN FORWARD IN THIS CASE. THE QUESTION OF ADVANTAGE OF ENDURING NATURE WAS CONSIDERED IN DETAIL. AT PAGE 10 THE COURT STATED THUS: THERE MAY BE CASES WHERE EXPENDITURE, EVEN IF INCU RRED FOR OBTAINING ADVANTAGE OF ENDURING BENEFIT, MAY, NONE THE LESS, BE ON REVENUE ACCOUNT AND THE TEST OF ENDURING BENEFIT MAY BREAK DOWN. IT IS NOT EVERY ADVANTAGE OF ENDURING NATURE ACQUIRED BY AN ASSESSEE THAT BRING THE CASE WITHIN THE PRINCIPL E LAID DOWN IN THIS TEST. WHAT IS MATERIAL TO CONSIDER IS THE NAT URE OF THE ADVANTAGE IN A COMMERCIAL SENSE AND IT IS ONLY WHER E THE ADVANTAGE IS IN THE CAPITAL FIELD THAT THE EXPENDIT URE WOULD BE DISALLOWABLE ON AN APPLICATION OF THIS TEST. IF TH E ADVANTAGE CONSISTS MERELY IN FACILITATING THE ASSESSEES TRAD ING OPERATIONS OR ENABLING THE MANAGEMENT AND CONDUCT OF THE ASSESSEE S BUSINESS TO BE CARRIED ON MORE EFFICIENTLY OR MORE PROFITABLY WHILE LEAVING THE FIXED CAPITAL UNTOUCHED, THE EXPENDITUR E WOULD BE ON REVENUE ACCOUNT, EVEN THOUGH THE ADVANTAGE MAY ENDU RE FOR AN INDEFINITE FUTURE. THE TEST OF ENDURING BENEFIT IS , THEREFORE, NOT A CERTAIN OR CONCLUSIVE TEST AND IT CANNOT BE APPLIED BLINDLY AND MECHANICALLY WITHOUT REGARD TO THE PARTICULAR FACTS AND CIRCUMSTANCES OF A GIVEN CASE. BUT EVEN IF THIS TE ST WERE APPLIED IN THE PRESENT CASE, IT DOES NOT YIELD A CONCLUSION IN FAVOUR OF THE REVENUE. HERE, BY PURCHASE OF LOOM HOURS NO NEW AS SET HAS BEEN CREATED. THERE IS NO ADDITION TO OR EXPANSION OF THE PROFIT MAKING APPARATUS OF THE ASSESSEE. THE INCOME-EARNI NG MACHINE REMAINS WHAT WAS PRIOR TO THE PURCHASE OF LOOM HOUR S. THE ASSESSEE IS MERELY ENABLED TO OPERATE THE PROFIT MA KING STRUCTURE FOR A LONGER NUMBER OF HOURS. AND THIS ADVANTAGE I S CLEARLY NOT OF AN ENDURING NATURE. IT IS IMPORTANT TO NOTE THE FOLLOWING RULES LAID DO WN BY THE COURT: A. IT IS NOT EVERY ADVANTAGE OF ENDURING NATURE ACQ UIRED BY AN ASSESSEE THAT BRINGS THE CASE WITHIN THE PRINCIPLE LAID DOWN IN THE TEST; B. IT IS ONLY WHERE THE ADVANTAGE IS IN THE CAPITAL FIELD THAT THE EXPENDITURE WOULD BE DISALLOWABLE ON AN APPLICATION OF THE TEST OF ENDURING NATURE; ITA NO.3759/DEL/2003 15 C. IF THE ADVANTAGE CONSISTS MERELY IN FACILITATING THE ASSESSEES TRADING OPERATIONS OF ENABLING THE MANAGEMENT AND C ONDUCT OF THE ASSESSEES BUSINESS TO BE CARRIED ON MORE EFFIC IENTLY OR MORE PROFITABLY THE EXPENDITURE WOULD BE REVENUE EV EN THOUGH THE ADVANTAGE MAY ENDURE FOR AN INDEFINITE FUTURE. D. BY PURCHASE OF LOOM HOURS NO NEW ASSET HAS BEEN CRE ATED. THERE IS NO ADDITION TO OR EXPANSION OF THE PROFIT MAKING APPARATUS OF THE ASSESSEE . IV. CIT VS. ASSOCIATED CEMENT COMPANIES LTD. 172 IT R 257 (SC) DATED 4.5.1988 (PAGES 43-49 OF P.B. VI) IN THIS CASE THE ARGUMENT OF THE REVENUE WAS THAT A DVANTAGE OF NOT BEING LIABLE TO PAY MUNICIPAL RATES, TAXES E TC. WHICH THE ASSESSEE COMPANY SECURED BY REASON OF MAKING THE EX PENDITURE IN QUESTION WAS FOR A PERIOD OF 15 YEARS AND WAS AN AD VANTAGE OF AN ENDURING NATURE AND ACCORDINGLY SHOULD BE REGARDED AS CAPITAL EXPENDITURE. AT PAGE 262 ONWARDS THE COURT APPLIED THE JUDGMENT IN EMPIRE JUTE COMPANY LTD. (SUPRA). QUOTING EXTEN SIVELY FROM THAT JUDGMENT IT WAS HELD THAT THE ADVANTAGE SECURE D WAS IN THE FILED OF REVENUE. THERE WAS NO ADDITION TO THE CAP ITAL ASSETS OF THE COMPANY AND CHANGE IN ITS CAPITAL STRUCTURE. THE P IPELINES ETC. WHICH CAME INTO EXISTENCE AS A RESULT OF THE EXPEND ITURE DID NOT BELONG TO THE ASSESSEE BUT TO THE MUNICIPALITY. V. ALEMBIC CHEMICAL WORKS LTD. VS. CIT 177 ITR 377 (SC) DATED 31.3.1989. BOTH THE JUDGMENTS IN THE CASE OF EMPIRE JUTE CO. LTD. (SUPRA) [PAGES 50 TO 65 OF PB VI] AND ASSOCIATED CEMENT COMPANIES LTD. (SUPRA) WERE APPLI ED. VI. CIT VS. MADRAS AUTO SERVICE (P) LTD., 223 ITR 4 68 (SC) DATED 12.08.98 (PAGES 73 TO 79 OF PB VI). ANOTHER CONTOUR OF THE TERM BENEFIT OF ENDURING NAT URE WAS DEALT WITH BY THE APEX COURT IN THIS CASE. ONE TEST WHIC H WAS ITA NO.3759/DEL/2003 16 PROPOUNDED BY THE SUPREME COURT IN ASSAM BENGAL CEM ENT CO. LTD. VS. CIT 27 ITR 34 (SC) WAS REFERRED TO AS UNDE R: EXPENDITURE MAY BE TREATED AS PROPERLY ATTRIBUTABL E TO CAPITAL WHEN IT IS MADE NOT ONLY ONCE AND FOR ALL, BUT WITH A VIEW TO BRINGING INTO EXISTENCE AN ASSET OR AN ADVA NTAGE FOR THE ENDURING BENEFIT OF A TRADE. IF WHAT IS GO T RID OF BY A LUMP SUM PAYMENT IS AN ANNUAL BUSINESS EXPENSE CHARGEABLE AGAINST REVENUE, THE LUMP SUM PAYMENT SH OULD EQUALLY BE REGARDED AS A BUSINESS EXPENSE, BUT IF T HE LUMP SUM PAYMENT BRINGS IN A CAPITAL ASSET, THEN THAT PU TS THE BUSINESS ON ANOTHER FOOTING ALTOGETHER. THE IMPORTANCE OF THIS TEST IS THAT FOR ADJUDGING T HE QUESTION WHETHER THE EXPENDITURE IS CAPITAL ON THE GROUND TH AT IT BRINGS ADVANTAGE OF ENDURING NATURE ONE ASPECT TO BE SEEN IS WHETHER IT BRINGS IN A CAPITAL ASSET. TAKING THE TEST FRAMED THE COURT IN THE CASE OF MADRAS AUTO HELD THAT THE BENEFIT DID ARISE TO THE ASSESSEE FOR 39 YEARS BUT THE EXPENDITURE CANNOT BE HELD AS CAPITAL BECAUSE THE EXPENDITURE, THOUGH DID RESULT IN CREATION OF A N ASSET, BUT IT DID NOT BELONG TO THE ASSESSEE. FOUR EARLIER JUDGMENTS OF THE SUPREME COURT WERE CITED AT PAGES 474 & 475. IT WAS HELD THAT THE DECISIVE FACTOR WAS NOT THE PE RIOD OF ADVANTAGE BUT WHETHER EXPENDITURE RESULTED IN CREATION OF A C APITAL ASSET IN THE HANDS OF THE ASSESSEE. VII. CIT VS. EICHER LTD., 302 ITR 249 (DEL.) [PAGES 66 TO 72 OF PB VI] HELPFULLY, WE HAVE THE BENEFIT OF THE JUDGMENT OF E ICHERS CASE (SUPRA) ON TWO COUNTS VIZ.- (I) THAT THIS IS A JUDGMENT OF THE JURISDICTIONAL H IGH COURT, (II) THAT IT HAS DEALT WITH THE FOLLOWING FOUR CASE S OF THE APEX COURT: (A) ASSAM BENGAL CEMENT CO. LTD. VS. CIT (SUPRA) (B) CIT VS. COAL SHIPMENTS P. LTD. (SUPRA) (C) ALEMBIC CHEMICAL WORKS LTD. VS. CIT (SUPRA) ITA NO.3759/DEL/2003 17 (D) CIT VS. MADRAS AUTO SERVICE P. LTD. (SUPRA) THE HONBLE COURT AGREED WITH THE FOLLOWING SUBMISS IONS MADE BEFORE THE CIT(A) AND ITAT (PARA 7 PAGE 252 OF ITR) : THE PAYMENT OF RS. 4 CRORES WAS MADE TO PROTECT THE ASSESSEES BUSINESS INTERESTS, ITS MARKET POSITION AND PROFITABLY. NO NEW ASSET IS CREATED BY SPENDING RS. 4 CRORES. PROFIT MAKING APPARATUS WAS NOT EXPANDED OR INCREAS ED THERE WAS NO LOSS OR DIMINUTION OR EROSION IN THE C APITAL ASSET OF THE ASSESSEE. AFTER REFERRING TO THE JUDGMENT IN CIT VS. COAL SHI PMENTS P. LTD. (SUPRA) THE RELEVANT PORTIONS OF WHICH WERE REPRODU CED, THE HONBLE COURT MADE FOLLOWING OBSERVATIONS THE LENGTH OF TIME FOR WHICH THE COMPETITION WAS EL IMINATED WAS IMPORTANT BUT THAT IS NOT ALWAYS SO (PARA 10, PAGE 52 OF ITR) WHAT IS MORE NECESSARY TO APPRECIATE IS THE PURPOSE OF THE PAYMENTS AND ITS INTENDED OBJECT AND EFFECT (PARA 1 0 AND PAGE 252 OF THE ITR) HOWEVER, IT IS NECESSARY TO KNOW WHETHER THE ADVANT AGE DERIVED BY THE PRAYER IS OF AN ENDURING NATURE, AND FOR THIS ONE OF THE CONSIDERATIONS IS THE LENGTH OF TIME FOR WHICH NON-COMPLETE AGREEMENT WOULD OPERATE ALTHOUGH THAT IS NOT DECISI VE. (PARA 10 PAGE 253 OF THE ITR). AFTER CITING THE JUDGMENTS IN THE CASES OF ALEMBIC CHEMICAL WORKS LTD. (SUPRA) AND MADRAS AUTO SERVICE P. LTD. (SUPRA) THE HONBLE BENCH CONCLUDED BY HOLDING THUS, (PARA 17, PAGE 255): THE ASSESSEE DID NOT ACQUIRE ANY CAPITAL ASSET BY M AKING THE PAYMENT OF NON-COMPETE FEE THERE IS NOTHING TO SHOW THAT THE AMOUNT OF RS. 4 C RORES WAS DRAWN OUT OF THE CAPITAL OF THE ASSESSEE. WHILE THE PERIOD DURING WHICH THE RESTRICTIVE CONVE NANT WAS TO LAST WAS NOT CLEAR FROM THE RECORD, YET HIS LORD SHIPS HELD THAT THE ITA NO.3759/DEL/2003 18 COMPETITION IN THE TWO WHEELER BUSINESS WAS ELIMINA TED FOR A WHILE, HOLDING THAT IT WAS NEITHER PERMANENT NOR EPHEMERAL . THIS OBSERVATION GOES TO SHOW THAT THE PERIOD OF RESTRIC TIVE CONVENANT WAS NOT HELD DECISIVE, BECAUSE AS ALREADY HELD AT P AGE 252 IN PARA 10, TO QUOTE AT THE COST OF REPETITION, WHAT IS MO RE NECESSARY TO APPRECIATE IS THE PURPOSE OF THE PAYMENT AND ITS IN TENDED OBJECT AND EFFECT. INDUBITABLY, IN THIS REGARD THE COURT HAD EARLIER CONCURRED WITH THE ARGUMENTS RAISED BEFORE THE LOWE R AUTHORITIES VIZ., TO QUOTE AGAIN AT THE COST OF REPETITION THE PAYMENT IS TO PROJECT THE ASSESSEES BUSINESS INTERESTS, ITS MARK ET POSITION AND PROFITABLY. 8. FINALLY IT WAS SUBMITTED THAT IF THE AFORESAID PROPOSITION OF LAW IS CONSIDERED AND APPLIED TO THE FACTS OF THE PRESENT CASE, THE POSITION WILL BE AS UNDER- (I) THE PAYMENT OF RS. 2.65 CRORES WAS MADE BY WAY OF NON- COMPETE FEES AS PER A SPECIFIC AGREEMENT EXECUTED O N 10.7.97. NO NEW ASSET WAS CREATED THEREBY NOR ASSESSEES PRO FIT MAKING APPARATUS WAS EXPANDED OR INCREASED. THE ASSESSEE DID NOT ACQUIRE ANY CAPITAL ASSET BY MAKING THE PAYMENT OF NON-COMPETE FEE. THE ASSESSEE DID NOT SUFFER ANY LOSS OR DIMIN UTION OR EROSION IN CAPITAL ASSETS. THE EXPENDITURE WAS RECORDED IN THE BOOKS OF ACCOUNT AS DEFERRED REVENUE EXPENDITURE. [REFERENCE EICHER LTD. (SUPRA)]. (II) ASSESSEE HAVING NOT ACQUIRED ANY CAPITAL ASSET IN VIEW OF ABOVE, THE EXPENDITURE INCURRED COULD NOT BE TREATE D AS CAPIAL EXPENDITURE [REFERENCE ASSAM BENGAL CEMENT CO. (SUP RA) AS APPLIED BY MADRAS AUTO SERVICE P. LTD.] (III) PAYMENT TOWARDS NON-COMPETE FEE WAS TO PROJE CT THE ASSESSEES BUSINESS INTERESTS, ITS MARKET POSITION AND PROFITABILITY [REFERENCE EICHER LTD. (SUPRA)]. THE EXPENDITURE I NCURRED WAS MERELY FOR FACILITATING ASSESSEES TRADING OPERATIO NS AND TO CONDUCT ITA NO.3759/DEL/2003 19 THE BUSINESS MORE PROFITABLY LEAVING FIXED CAPITAL UNTOUCHED [REFERENCE EMPIRE JUTE CO. LTD. (SUPRA)]. (IV) THE DURATION OF NON-COMPETE AGREEMENT WAS 5 YE ARS. THE AGREEMENT ITSELF WAS DEPENDENT UPON THE SUBSISTENCE OF THE SUPPLY AGREEMENT (KINDLY SEE CLAUSE 1A(I) OF NON-CO MPETE AGREEMENT (PAGE 18 OF PB NO. 1). THE SUPPLY AGREEM ENT ALSO, THOUGH HAVING A TERM OF 5 YEARS, COULD BE TERMINATE D AT ANY TIME BY MUTUAL AGREEMENT (KINDLY SEE PARA 9 OF THE AGREEMEN T REPRODUCED ABOVE). IN THE EVENTUALITY OF THE SUPPLY AGREEMENT BEING TERMINATED THE NON-COMPETE AGREEMENT WOULD ALSO FAL L IN VIEW OF SECOND PART OF CLAUSE 1A(I) (PAGE 18 OF PB NO. 1) O F THE NON- COMPETE AGREEMENT. THE PERIOD OF 5 YEARS AS PER TH E NON- COMPETE AGREEMENT THUS, WAS NOT SACROSANCT, FIXED U NCHANGEABLE OR PERMANENT. (V) AFTER REFERRING TO THE CASE OF COAL SHIPMENTS I T WAS HELD IN EICHERS CASE THAT THE LENGTH OF TIME FOR WHICH THE COMPETITION WAS ELIMINATED WAS IMPORTANT BUT THAT IS NOT ALWAYS SO. WHAT IS MORE NECESSARY TO APPRECIATE IS THE PURPOSE OF THE INTEN DED OBJECT AND EFFECT. IN THE PRESENT CASE WHIRLPOOL WAS NOT ELIM INATED. IN FACT AS PER SUPPLY AGREEMENT WHIRLPOOL BECAME A STRATEGIC A ND KEY BUYER OF THE COMPRESSORS MANUFACTURED. THE PURPOSE AND O BJECT OF THE NON-COMPETE AGREEMENT WAS TWOFOLD. FIRSTLY, BY NOT COMPETING WITH THE MANUFACTURING ACTIVITY, THE ASSESSEES PRO DUCTION INCREASED AND BY APPOINTING WHIRLPOOL AS STRATEGIC PURCHASER OF COMPRESSORS THE SALES INCREASED. BOTH THESE ADVANT AGES WERE ADVANTAGES IN COMMERCIAL SENSE AND NOT IN CAPITA L FIELD AS THESE TERMS ARE SUED IN THE JUDGMENT OF EMPIRE JUTE CO. L TD. (VI) THE JUDGMENT OF ASSAM BENGAL CEMENT CO. LTD. IN FAC T HELPS THE ASSESSEE. IN THAT CASE PAYMENT OF PROTEC TION FEE ENSURED THAT THE VERY PROFIT MAKING APPARATUS, I.E. , RIGHT TO CARRY ON ITS BUSINESS CONTINUED TO OPERATE UNFETTERED. UNDE R THESE ITA NO.3759/DEL/2003 20 CIRCUMSTANCES THE PAYMENT WAS RELATED TO THE PROFIT EARNING APPARATUS AND WAS THUS, HELD IN CAPITAL FILED. IN THE CASE OF THE ASSESSEE, RIGHT TO CARRY ON THE BUSINESS OF MANUFAC TURE AND SALE OF COMPRESSORS WAS ALREADY ACQUIRED BY PURCHASING THE UNDERTAKING ON 2.7.97. LATER, WHEN A NON-COMPETE AGREEMENT WAS EXECUTED ON 10.7.97 IT WAS FOR THE PURPOSE OF CARRYING ON TH E BUSINESS MORE PROFITABLY AND NOT FOR ENABLING THE ASSESSEE TO CAR RYING ON THE BUSINESS. ARGUMENTS OF SHRI AJAY VOHRA IN THE CASE OF HINDUST AN COCA COLA BEVERAGES PVT. LTD. (INTERVENER). 20. SHRI VOHRA SUBMITTED THAT FACTS OF HIS CASE ARE AS UNDER:- 1. THE APPELLANT IS A PRIVATE LIMITED COMPANY ENGA GED IN THE MANUFACTURE AND SALE OF AERATED SOFT DRINKS. 2. THE APPELLANT HAD ACQUIRED RUNNING BUSINESS OF V ARIOUS BOTTLERS AND HAD MADE CERTAIN PAYMENTS REFERRED TO AS NON- COMPETE FEES TO THE ACQUIRED BOTTLING COMPANIES OVE R AND ABOVE THE CONSIDERATION FOR PURCHASE OF BUSINESS OF THE B OTTLERS. 3. THE NON-COMPETE FEES WAS PAID TO THE SHAREHOLDER S/PROPRIETORS, ETC. OF COMPANIES/FIRMS WHOSE BUSINESS WAS TAKEN OV ER BY THE APPELLANT TO PREVENT THE SAID PERSONS FROM USING OR SHARING KNOW- HOW IN RESPECT OF THE BUSINESS (A) WITHIN A SPECIFI C TERRITORY, AND (B) FOR A MAXIMUM PERIOD OF 5/10 YEARS, AS SPECIFIED IN THE AGREEMENTS EXECUTED IN CONNECTION THEREWITH. CLAUSE 1 (A) OF THE AGREEMENT. 4. KNOW-HOW HAS BEEN DEFINED TO MEAN ALL INFORMATI ON (INCLUDING THAT COMPRISED IN OR DERIVED FROM MANUALS, INSTRUCT IONS, CATALOGUES, BOOKLETS, DATA DISKS, TAPES, SOURCE CODES, FORMULA CARDS AND FLOWCHARTS) RELATING TO THE ACQUIRED BUSINESS AND T HE SERVICES PROVIDED OR PRODUCTS MANUFACTURED BY THE ACQUIRED B USINESS. CLAUSE (1) (C) OF THE AGREEMENT. 5. THE AGREEMENT COULD BE TERMINATED AT THE INSTANC E OF EITHER OF THE PARTIES DURING THE TERM OF THE AGREEMENT. CLAU SE 10 OF THE AGREEMENT. 21. HE SUBMITTED THAT ACCORDING TO GENERAL PRINCIPL E WHAT CAN BE RECOGNIZED AS REVENUE EXPENDITURE IS STATED IN SECTION 37 WHIC H READ AS UNDER:- ITA NO.3759/DEL/2003 21 37. GENERAL (1) ANY EXPENDITURE (NOT BEING EXPENDITURE OF THE NATURE DESCRIBED IN SECTIONS 30 TO 36 AND NOT BEING IN THE NATURE OF CAPITAL EXPENDITURE OR PERSONAL EXPENSES OF THE ASSESSEE), LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF BUSINESS OR PROFESSION SHALL BE ALLOWED IN COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PR OFESSION. 22. IT WAS SUBMITTED THAT IN TERMS OF AFOREMENTIONE D SECTION, EXPENDITURE WHICH IS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PU RPOSE OF BUSINESS IS ALLOWED AS DEDUCTION IN COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS. THE EXCEPTIONS OF SUCH RULE ARE THAT THOSE EXPENDITURE SHOULD NOT BE IN THE NATURE OF: (A) PERSONAL EXPENSES; (B) EXP ENSES DEFINED U/S 30 TO 36 OF THE ACT; AND (C) CAPITAL EXPENDITURE. HE SUBMITTE D THAT IN DETERMINING WHETHER THE EXPENDITURE IS ON REVENUE ACCOUNT OR ON CAPITAL ACCOUNT, THE FOLLOWING TESTS HAVE BEEN LAID DOWN BY THE COURTS:- (A) ONCE AND FOR ALL/ENDURING BENEFIT : THE HOUSE OF LORDS IN ATHERTON V. INSULATED AND HELSBY CABLES (1925) : 10 TC 155 HAS HELD THAT WHERE THE EXPENDITURE IS MADE ONCE AND FOR ALL AND THAT SUCH EXPENDITURE BRINGS INTO EXISTENCE AN ASSET OR ADVANTAGE FOR THE ENDURING BENEFIT OF TRADE, SUCH EXPENDITURE WOULD BE OF CAPITAL NATURE AND NOT ALLOWABLE AS DEDUCTION (B) FIXED CAPITAL VS. CIRCULATING CAPITAL: THE HOU SE OF LORDS IN JOHNS SMITH & SONS V. MOORE (1921) : 12 TC 266 HAS HELD T HAT IF THE EXPENDITURE IS INCURRED OUT OF FIXED CAPITAL, THEN, SUCH EXPENDITURE WOULD BE IN THE NATURE OF CAPITAL EXPENDITURE. CON VERSELY, IF THE EXPENDITURE IS INCURRED OUT OF CIRCULATING CAPITAL, THEN, SUCH EXPENDITURE WOULD BE ADMISSIBLE REVENUE DEDUCTION. 23. IT WAS SUBMITTED THAT SINCE THEN THERE HAS BEEN SUBSTANTIAL CHANGE IN THE JUDICIAL THINKING AS HONBLE SUPREME COURT IN THE C ASE OF EMPIRE JUTE & CO. LTD. VS. CIT, 124 ITR 1 AFTER CONSIDERING THE AFORESAID JUDGEMENTS OF THE HOUSE OF LORDS AND THE VARIOUS TESTS DISCUSSED THEREIN HAS H ELD THAT IN CERTAIN SITUATIONS ITA NO.3759/DEL/2003 22 OR CIRCUMSTANCES THE TEST OF ENDURING BENEFIT MAY F AIL AND MAY NOT BE APPLICABLE UNIVERSALLY. THUS, IT WAS SUBMITTED THAT ENDURING BENEFIT ALONE CANNOT BE A CRITERIA TO HOLD THAT WHETHER EXPENDITURE IS IN THE NATURE OF CAPITAL OR REVENUE. IT WAS SUBMITTED THAT IF THE BENEFIT MERELY FACILITATE S IN CARRYING ON THE BUSINESS MORE PROFITABLY AND EFFICIENTLY, THEN, IT CAN BE IN THE NATURE OF REVENUE. REFERENCE WAS MADE TO THE FOLLOWING OBSERVATIONS:- THE DECIDED CASES HAVE, FROM TIME TO TIME, EVOLVED VARIOUS TESTS FOR DISTINGUISHING BETWEEN CAPITAL AND REVENUE EXPE NDITURE BUT NO TEST IS PARAMOUNT OR CONCLUSIVE. THERE IS NOT ALL EMBRACING FORMULA WHICH CAN PROVIDE A READY SOLUTION TO THE PROBLEM; NO TOUCHSTONE HAS BEEN DEVISED. EVERY CASE HAS TO BE DECIDED ON ITS OWN FACTS, KEEPING IN MIND THE BROAD PICTURE OF THE WHOLE OPER ATION IN RESPECT OF WHICH THE EXPENDITURE HAS BEEN INCURRED. BUT A FEW TESTS FORMULATED BY THE COURTS MAY BE REFERRED TO AS THEY MIGHT HELP TO ARRIVE AT A CORRECT DECISION OF THE CONTROVERSY BET WEEN THE PARTIES. ONE CELEBRATED TEST IS THAT LAID DOWN BY LORD CAVE L.C. IN ATHERTON V. BRITISH INSULATED AND HELSBY CABLES LTD. [1925] 10 TC 155, 192 (HL), WHERE THE LEARNED LAW LORD STATED: . WHEN AN EXPENDITURE IS MADE, NOT ONLY ONCE AND FOR ALL, BUT WITH A VIEW TO BRINGING INTO EXIST ENCE AN ASSET OR AN ADVANTAGE FOR THE ENDURING BENEFIT O F A TRADE, I THINK THAT THERE IS EVERY GOOD REASON (IN THE ABSENCE OF SPECIAL CIRCUMSTANCES LEADING TO AN OPPOSITE CONCLUSION) FOR TREATING SUCH AN EXPENDITU RE AS PROPERLY ATTRIBUTABLE NOT TO REVENUE BUT TO CAPI TAL. THIS TEST, AS THE PARENTHETICAL CLAUSE SHOWS, MUST YIELD WHERE THERE ARE SPECIAL CIRCUMSTANCES LEADING TO A CONTRARY CON CLUSION AND, AS POINTED OUT BY LORD RADCLIFFE IN COMMISSIONER OF TA XES V. NCHANGA CONSOLIDATED COPPER MINES LTD. [1965] 58 ITR 241 (P C), IT WOULD BE MISLEADING TO SUPPOSE THAT IN ALL CASES, SECURIN G A BENEFIT FOR THE BUSINESS WOULD BE, PRIMA FACIE, CAPITAL EXPENDI TURE SO LONG AS THE BENEFIT IS NOT SO TRANSITORY AS TO HAVE NO ENDU RANCE AT ALL. THERE MAY BE CASES WHERE EXPENDITURE, EVEN IF INCUR RED FOR OBTAINING ADVANTAGE OF ENDURING BENEFIT, MAY, NONE THE LESS, BE ON REVENUE ACCOUNT AND THE TEST OF ENDURING BENEFIT MA Y BREAK DOWN. IT IS NOT EVERY ADVANTAGE OF ENDURING NATURE ACQUIR ED BY AN ASSESSEE THAT BRINGS THE CASE WITHIN THE PRINCIPLE LAID DOWN IN THIS TEST. WHAT IS MATERIAL TO CONSIDER IS THE NATURE O F THE ADVANTAGE IN A COMMERCIAL SENSE AND IT IS ONLY WHERE THE ADVANT AGE IS IN THE CAPITAL FIELD THAT THE EXPENDITURE WOULD BE DISALLO WABLE ON AN APPLICATION OF THIS TEST. IF THE ADVANTAGE CONSIST S MERELY IN ITA NO.3759/DEL/2003 23 FACILITATING THE ASSESSEES TRADING OPERATIONS OR E NABLING THE MANAGEMENT AND CONDUCT OF THE ASSESSEES BUSINESS TO BE CARRIED ON MORE EFFICIENTLY OR MORE PROFITABLY WHILE LEAVIN G THE FIXED CAPITAL UNTOUCHED, THE EXPENDITURE WOULD BE ON REVENUE ACCO UNT EVEN THOUGH THE ADVANTAGE MAY ENDURE FOR AN INDEFINITE F UTURE. THE TEST OF ENDURING BENEFIT IS, THEREFORE, NOT A CERTAIN O R CONCLUSIVE TEST AND IT CANNOT BE APPLIED BLINDLY AND MECHANICALLY W ITHOUT REGARD TO THE PARTICULAR FACTS AND CIRCUMSTANCES OF A GIVEN C ASE. BUT EVEN IF THIS TEST WERE APPLIED IN THE PRESENT CASE, IT DOES NOT YIELD A CONCLUSION IN FAVOUR OF THE REVENUE. HERE BY PURCH ASE OF LOOM HOURS NO NEW ASSET HAS BEEN CREATED. THERE IS NO ADDITION TO OR EXPANSION OF THE PROFIT-MAKING APPARATUS OF THE ASS ESSEE. THE INCOME-EARNING MACHINE REMAINS WHAT IT WAS PRIOR TO THE PURCHASE OF LOOM HOURS. THE ASSESSEE IS MERELY ENABLED TO O PERATE THE PROFIT MAKING STRUCTURE FOR A LONGER NUMBER OF HOUR S. AND THIS ADVANTAGE IS CLEARLY NOT OF AN ENDURING NATURE. IT IS LIMITED IN ITS DURATION TO SIX MONTHS AND, MOREOVER, THE ADDITIONA L WORKING HOURS PER WEEK TRANSFERRED TO THE ASSESSEE HAVE TO BE UTI LIZED DURING THE WEEK AND CANNOT BE CARRIED FORWARD TO THE NEXT WEEK . IT IS, THEREFORE, NOT POSSIBLE TO SAY THAT ANY ADVANTAGE O F ENDURING BENEFIT IN THE CAPITAL FIELD WAS ACQUIRED BY THE AS SESSEE IN PURCHASING LOOM HOURS AND THE TEST OF ENDURING BENE FIT CANNOT HELP THE REVENUE. [EMPHASIS SUPPLIED] 24. IT WAS SUBMITTED THAT AFOREMENTIONED TEST WAS R EITERATED BY THE APEX COURT IN ALEMBIC CHEMICAL WORKS CO. LTD. VS. CIT 17 7 ITR 377 WHEREIN IT WAS HELD THAT THE IDEA OF ONCE FOR ALL PAYMENT AND E NDURING BENEFIT ARE NOT TO BE TREATED AS SOMETHING AKIN TO STATUTORY CONDITIONS; NOR ARE THE NOTIONS OF CAPITAL OR REVENUE A JUDICIAL FETISH. THEY SHOULD BE FLE XIBLE SO AS TO RESPOND TO THE CHANGING ECONOMIC REALITIES OF THE BUSINESS. THE EXPRESSION ASSET OR ADVANTAGE OF ENDURING BENEFIT WAS EVOLVED TO EMPH ASIZE THE ELEMENT OF SUFFICIENT DEGREE OF DURABILITY APPROPRIATE TO THE CONTEXT. 25. IT WAS SUBMITTED THAT NON-COMPETE PAYMENT IS MA DE BY ONE PARTY TO ANOTHER TO RESTRAIN THE SECOND PARTY FROM COMPETING WITH THE FIRST PARTY (THE PAYER) IN A SPECIFIED TERRITORY FOR A SPECIFIED PER IOD. THE SECOND PARTY ACCEPTS THE NEGATIVE COVENANT OF NOT CARRYING ON COMPETING BUSINESS FOR A SPECIFIED NUMBER OF YEARS IN THE SPECIFIED TERRITORY. THE PU RPOSE OF NON-COMPETE PAYMENT IS TO MAINTAIN/PROTECT THE PROFITABILITY OF THE BUS INESS OF THE PAYER BY INSULATING ITA NO.3759/DEL/2003 24 THE SAME FROM THE RISK OF COMPETITION, IF SIMILAR C OMPETING BUSINESS WAS TO BE CARRIED ON BY THE SECOND PARTY. 26. HE SUBMITTED THAT APPLYING THE TEST LAID DOWN B Y HONBLE SUPREME COURT IN THE CASE OF EMPIRE JUTE & CO. (SUPRA) IT IS TO B E APPRECIATED THAT PAYMENT OF NON-COMPETE FEE ONLY FACILITATES THE CARRYING ON OF THE BUSINESS MORE EFFICIENTLY AND PROFITABLY AND SUCH PAYMENT DOES NOT RESULT IN CREATION OF ANY NEW ASSET AND IT DOES NOT RESULT IN ANY ADDITION TO THE PROFIT EA RNING APPARATUS. HE SUBMITTED THAT THE ENDURING BENEFIT, IF ANY, BY RESTRICTING A POTENTIAL RIVAL IN THE BUSINESS IS NOT IN THE CAPITAL FIELD. THEREFORE, EVEN IF THE P AYMENT RESULTS IN AN ENDURING ADVANTAGE, IT SHOULD BE TREATED AS DEDUCTIBLE REVEN UE EXPENDITURE. 27. IT WAS SUBMITTED THAT LENGTH OF TIME CANNOT BE DETERMINATIVE OF THE NATURE OF EXPENDITURE AS LONG AS ENDURING ADVANTAGE IS NOT IN THE CAPITAL FIELD. WHERE THE ADVANTAGE MERELY FACILITATES IN CARRYING ON THE BUSINESS MORE EFFICIENTLY AND PROFITABLY, LEAVING THE FIXED ASSETS UNTOUCHED, THE PAYMENT MADE TO SECURE SUCH ADVANTAGE WOULD BE ALLOWABLE BUSINESS EXPENDITURE I RRESPECTIVE OF THE PERIOD FOR WHICH THE ADVANTAGE MAY ACCRUE TO THE ASSESSEE BY I NCURRING SUCH EXPENDITURE. 28. SHRI VOHRA REFERRED TO THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CIT V. MADRAS AUTO SERVICES 233 ITR 468 WHERE TH E ASSESSEE TENANT HAD INCURRED EXPENDITURE ON DEMOLITION AND CONSTRUCTION OF A NEW BUILDING WHICH WAS TO VEST IN THE LANDLORD AND THE ASSESSEE TENANT WAS ENTITLED TO USE THE PREMISES FOR 39 YEARS AT REDUCED RENT. THE COST WAS CLAIMED AS REVENUE EXPENDITURE AND THE TRIBUNAL AND HIGH COURT ACCEPTED THE CONTENTION OF THE ASSESSEE AND ON FURTHER APPEAL HONBLE SUPREME COURT OBSERVED THAT THE NATURE OF EXPENDITURE HAS TO BE LOOKED INTO FROM A COMMERCIAL POINT OF VI EW. THE ASSESSEE DID NOT GET ANY ADVANTAGE IN CONSTRUCTING A BUILDING WHICH BELO NGED TO SOMEBODY ELSE. THE ASSESSEE ONLY GOT A LONG LEASE OF THE BUILDING CONS TRUCTED WHICH WAS SUITABLE TO THE BUSINESS OF THE ASSESSEE AT A CONCESSIONAL RATE . THE EXPENDITURE WAS MADE IN ORDER TO SECURE A LONG LEASE, A NEW AND MORE SUI TABLE BUSINESS PREMISES AT A LOWER RENT. THE ASSESSEE COULD NOT CLAIM DEPRECIAT ION. THE EXPENDITURE WAS IN ITA NO.3759/DEL/2003 25 THE NATURE OF REVENUE. LD. COUNSEL INVITED OUR ATT ENTION TOWARDS THE FOLLOWING OBSERVATIONS OF THE HONBLE SUPREME COURT FROM THE SAID DECISION:- ALL THESE CASES HAVE LOOKED UPON EXPENDITURE WHICH DID BRING ABOUT SOME KIND OF AN ENDURING BENEFIT TO THE COMPA NY AS A REVENUE EXPENDITURE WHEN THE EXPENDITURE DID NOT BR ING INTO EXISTENCE ANY CAPITAL ASSET FOR THE COMPANY. THE A SSET WHICH WAS CREATED BELONGED TO SOMEBODY ELSE AND THE COMPANY D ERIVED AN ENDURING BUSINESS ADVANTAGE BY EXPENDING THE AMOUNT . IN ALL THESE CASES, THE EXPENSES HAVE BEEN LOOKED UPON AS HAVING BEEN MADE FOR THE PURPOSE OF CONDUCTING THE BUSINESS OF THE ASSESSEE MORE PROFITABLY OR MORE SUCCESSFULLY. IN THE PRESE NT CASE ALSO, SINCE THE ASSET CREATED BY SPENDING THE SAID AMOUNT S DID NOT BELONG TO THE ASSESSEE BUT THE ASSESSEE GOT THE BUS INESS ADVANTAGE OF USING MODERN PREMISES AT A LOW RENT, THUS SAVING CONSIDERABLE REVENUE EXPENDITURE FOR THE NEXT 39 Y EARS, BOTH THE TRIBUNAL AS WELL AS THE HIGH COURT HAVE RIGHTLY COM E TO THE CONCLUSION THAT THE EXPENDITURE SHOULD BE LOOKED UP ON AS REVENUE EXPENDITURE. 29. HE SUBMITTED THAT THE AFORESAID PROPOSITION ALS O CAN BE FOUND IN THE DECISION OF KARNATAKA HIGH COURT IN THE CASE OF CIT VS. HMT LTD. 203 ITR 820. 30. SHRI VOHRA FURTHER SUBMITTED THAT IN FOLLOWING CASES, APPLYING THE AFOREMENTIONED PRINCIPLES, THE COURTS HAVE HELD THA T PAYMENT MADE BY THE ASSESSEE TO THE STATE ELECTRICITY BOARD FOR LAYING OF ELECTRICITY LINES UPTO THE ASSESSEES FACTORY, WHICH WAS PROPERTY OF ELECTRICI TY BOARD, WAS DEDUCTIBLE BUSINESS EXPENDITURE, EVEN THOUGH BY INCURRING SUCH EXPENDITURE, THE ASSESSEE HAD INDEFINITELY SECURED UNINTERRUPTED POWER SUPPLY TO ITS FACTORY:- I) CIT VS. EXCEL INDUSTRIES LIMITED 122 ITR 995 (BO M) II) HINDUSTAN TIMES LTD. VS. CIT [1980] 122 ITR 977 III) SARABHAI M. CHEMICALS PVT. LTD. VS. CIT 127 I TR 74 (GUJ) IV) CIT VS. PANBARI TEA COMPANY LIMITED 151 ITR 726 (P&H) V) CIT VS.KARAM CHAND PREM CHAND (P) LTD. 200 ITR 2 81 (GUJ) VI) CIT VS. SAW PIPES LIMITED 208 CTR 476 (DEL) ITA NO.3759/DEL/2003 26 31. REFERRING TO THESE ARGUMENTS IT WAS SUBMITTED T HAT MERE EXISTENCE OF AN ADVANTAGE OF ENDURING BENEFIT IN ITSELF DOES NOT FU LFILL THE CRITERIA TO MAKE THE EXPENDITURE ON CAPITAL ACCOUNT AND WHAT IS MATERIAL TO CONSIDER IS WHETHER THE ENDURING BENEFIT IS IN THE CAPITAL FIELD OR REVENUE FIELD. HE SUBMITTED THAT CONSIDERING THE FACTS OF THE CASE OF THE ASSESSEE A NY EXPENDITURE TO AVOID COMPETITION OR FOR THE PURPOSE OF PROTECTING THE BU SINESS ALREADY ACQUIRED BY THE ASSESSEE CAN ONLY BE CLASSIFIED AS REVENUE EXPENDIT URE SINCE THE NON- COMPETITION FEES DOES NOT BRING INTO EXISTENCE ANY NEW ASSET/ENDURING ADVANTAGE IN THE CAPITAL FIELD, BUT ONLY SEEKS TO P ROTECT THE ALREADY EXISTING ASSET/ADVANTAGE. 32. SHRI VOHRA FURTHER REFERRED TO THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CIT VS. COAL SHIPMENT LTD. (SUPRA) WHEREIN THE APEX COURT HAS HELD THAT IF THE PAYMENT IS MADE TO WARD OFF COMPETITION IN B USINESS WITH AN OBJECT OF DERIVING ADVANTAGE BY ELIMINATING COMPETITION OVER SOME LENGTH OF TIME, THE SAID EXPENDITURE WOULD BE IN THE NATURE OF CAPITAL EXPEN DITURE AND IT WAS ALSO HELD THAT HOW LONG THE PERIOD OF CONTEMPLATED ADVANTAGE SHOULD BE IN ORDER TO CONSTITUTE ENDURING BENEFIT WOULD DEPEND UPON THE F ACTS AND CIRCUMSTANCES OF EACH CASE. THEREFORE, LD. COUNSEL ARGUED THAT THE DECISION IN THE CASE OF COAL SHIPMENT LTD. DOES NOT LAY DOWN ANY RIGID RULE THAT ALL EXPENDITURE RELATING TO WARDING OFF COMPETITION WOULD CONSTITUTE CAPITAL EX PENDITURE. IT IS ONLY WHEN THE EXPENDITURE BRINGS INTO EXISTENCE A BENEFIT OF ENDU RING NATURE WOULD SUCH PAYMENT OF NON-COMPETE FEES BE TREATED AS CAPITAL E XPENDITURE AND NOT OTHERWISE. 33. HE SUBMITTED THAT ON READING OF THE DECISION IN THE CASE OF COAL SHIPMENT LTD. (SUPRA) IN JUXTAPOSITION WITH THE LATER DECISI ON OF THE HONBLE SUPREME COURT IN EMPIRE JUTE MILLS (SUPRA), IT CAN BE GATHERED TH AT ONLY WHEN THE EXPENDITURE INCURRED BY THE ASSESSEE BRINGS INTO EXISTENCE BENE FIT OF ENDURING NATURE IN THE CAPITAL FIELD, WOULD SUCH PAYMENT OF NON-COMPETE FE ES BE TREATED AS CAPITAL EXPENDITURE AND NOT OTHERWISE. ITA NO.3759/DEL/2003 27 34. LD. COUNSEL REFERRED TO THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. EICHER LTD. (SUPRA) WHEREIN NON-COM PETE FEES WAS HELD TO BE ALLOWABLE BUSINESS DEDUCTION AND HE SUBMITTED THAT HONBLE DELHI HIGH COURT HAS HELD THAT BY MAKING PAYMENT OF NON-COMPETITION FEES, THE ASSESSEE DID NOT ACQUIRE ANY CAPITAL ASSET AND, THEREFORE, SUCH EXPE NDITURE COULD NOT BE TREATED AS CAPITAL EXPENDITURE. HE SUBMITTED THAT SLP FILE D BY THE REVENUE AGAINST THE SAID DECISION HAS BEEN DISMISSED BY HONBLE SUPREME COURT VIDE ORDER DATED 20 TH JANUARY, 2009. 35. SHRI VOHRA REFERRED TO THE DECISION OF PRIVY CO UNCIL IN NCHANGA CONSOLIDATED COPPER MINES LTD. 58 ITR 241 (PC) WHER EIN IT WAS HELD BY THE PRIVY COUNCIL THAT THE PAYMENT MADE BY NCHANGA TO B ANCROFT WAS NOT FOR INITIAL OUTLAY, BUT ONLY TO CARRY ON AND EARN PROFIT OUT OF ASSETS ALREADY IN EXISTENCE AND, THEREFORE, IN THE NATURE OF REVENUE EXPENDITURE 36. SHRI VOHRA REFERRED TO THE DECISION OF HONBLE MADRAS HIGH COURT IN THE CASE OF CIT VS. LATE G.D. NAIDU AND ORS 165 ITR 63 (MAD) WHERE PAYMENTS MADE BY THE FIRM TO THE ASSESSEE FOR NOT CARRYING O N AND/OR FOR NOT COMPETING WITH THE FIRM IN THE BUSINESS OF PLYING BUSES FOR F IVE YEARS WAS HELD TO BE IN THE NATURE OF REVENUE EXPENDITURE AND IT WAS HELD BY TH E COURT THAT THERE WAS NO ACQUISITION OF ANY BUSINESS BY PAYMENT OF AMOUNT RE FERABLE TO THE RESTRICTIVE COVENANT AND THAT NO BENEFIT OF ENDURING NATURE WAS ACQUIRED BY THE FIRM BY MAKING SUCH A PAYMENT. TO THE SAME EFFECT REFERENC E WAS MADE TO THE DECISION OF HONBLE KARNATAKA HIGH COURT IN THE CASE OF DCIT VS. MCDOWELL & CO. LTD. 291 ITR 107 (KAR). 37. SHRI VOHRA ALSO REFERRED TO THE FOLLOWING DECIS IONS:- I) HONBLE CALCUTTA HIGH COURT DECISION IN THE CASE CIT VS. LAHOTY BROS 19 ITR 425 (CAL) TO CONTEND THAT FOR ALLOWABIL ITY OF AN EXPENDITURE AS REVENUE EXPENDITURE IT MUST BE AN EX PENDITURE INCURRED IN THE ACCOUNTING YEAR, THE EXPENDITURE MU ST BE IN RESPECT OF A BUSINESS WHICH WAS CARRIED ON BY THE ASSESSEE IN THE ITA NO.3759/DEL/2003 28 ACCOUNTING YEAR AND THE PROFIT OF WHICH ARE TO BE C OMPUTED AND ASSESSED, IT SHOULD NOT BE IN THE NATURE OF PERSONA L EXPENSES OF THE ASSESSEE, IT SHOULD NOT BE IN THE NATURE OF CAPITAL EXPENDITURE AND IT MUST HAVE BEEN LAID OUT OR EXPENDED WHOLLY AND EXCL USIVELY FOR THE PURPOSE OF SUCH BUSINESS. II) HONBLE BOMBAY HIGH COURT DECISION IN THE CASE OF CHAMPION ENGINEERING WORKS LTD. VS. CIT 81 ITR 273 (BOM) WHE REIN RS.50,000/- PAID BY THE ASSESSEE TO ONE SHRI P.V. S HAH FOR RESTRAINING HIM FROM TAKING UP PRIVATE PRACTICE WAS HELD TO BE IN THE NATURE OF REVENUE EXPENDITURE AS THE ASSESSEE DID N OT ACQUIRE ANY ASSET OR ADVANTAGE OF ENDURING NATURE BY MAKING SU CH PAYMENT. III) HONBLE AP HIGH COURT DECISION IN THE CASE OF CIT VS. BOWRISANKARA STEAM FERRY CO. (1973) 87 ITR 650 (AP) WHERE A SUM OF RS.21,600/- PAID BY THE ASSESSEE TO 16 INDIV IDUALS WHO WERE PROSPECTIVE BIDDERS AT AN AUCTION TO PREVENT T HEM FROM COMPETING WAS HELD TO BE IN THE NATURE OF REVENUE A S THE AMOUNT PAID TO THE PROSPECTIVE BIDDERS HAD REDUCED THE LEA SE AMOUNT WHICH WAS TO BE PAID BY THE ASSESSEE TO RUN ITS FER RIES. IV) THE FOLLOWING DECISIONS OF TRIBUNAL: (A) PADHARE DHRU AND CO. VS. ACIT (1995) 54 ITD 746 (MUM) WHEREIN THE PAYMENT MADE TO RETIRING PARTNER OF A L AW FIRM TO RESTRAIN HIM FROM STARTING HIS INDIVIDUAL PRACTICE FOR 2 YEARS WAS HELD TO BE REVENUE EXPENDITURE. (B) MODIPON LTD. VS. INSPECTING ASSTT. COMMISSIONER 52 TTJ (DEL) 477 WHEREIN LUMPSUM PAYMENT TO RETIRING EMPLO YEE TO RESTRAIN HIM FROM ENTERING INTO ANY INDEPENDENT BUS INESS WHICH COULD BE DETRIMENTAL TO ASSESSEE WAS HELD TO BE REV ENUE IN NATURE. ITA NO.3759/DEL/2003 29 (C) SMARTCHEM TECHNOLOGIES LTD. VS. ITO (2005) 97 T TJ (AHD) 818 WHEREIN PAYMENT AS NON-COMPETE FEES WAS CLAIMED U/S 37 OF THE ACT. IN THE SAID CASE THE ASSESSEE HAD PURCHAS ED VBCS PLANT FOR MANUFACTURING NITRIC ACID AND AMMONIUM NITRATE AND PAID RS.6 CRORE AS NON-COMPETE FEES THE DEDUCTION OF WHICH WA S CLAIMED U/S 37 OF THE ACT. THE ASSESSING OFFICER TREATED THE S AID EXPENDITURE AS CAPITAL. THE TRIBUNAL HELD THAT THE EXPENDITURE SATISFIED BOTH ASSESSEES NECESSITY AND COMMERCIAL EXPEDIENCY. TH E BENEFIT PROCURED BY THE ASSESSEE WAS FOR A PERIOD OF FIVE Y EARS, HENCE, COULD NOT BE SAID TO BE OF ENDURING NATURE. (D) USV LTD. VS. JCIT (2007) 106 TTJ (MUM) 535 WHER EIN SIMILAR PAYMENT MADE TO RESTRICT THE OTHER PARTY FO R NOT SUPPLYING DATA, DETAILS AND SCIENTIFIC AND MARKETING KNOW HOW RELATING TO FORMULATION MADE FROM BULK DRUG NITROGLYCERINE TO A NY THIRD PARTY FOR A PERIOD OF AT LEAST THREE YEARS FROM THE DATE OF A GREEMENT WAS HELD TO BE MADE FOR FACILITATION OF PROFIT EARNING PROCESS AND, THUS, WAS HELD TO BE REVENUE IN NATURE. (E) ADSTEAM AGENCY (INDIA) LTD. VS. DCIT 16 SOT 44. IN THE SAID CASE, THE ASSESSEE WHO HAD PURCHASED SHIPPING BUSINESSS CLAIMED THAT AMOUNT PAID AGAINST NON-COMPETITION FE ES SHOULD BE ALLOWED AS REVENUE EXPENDITURE IN THE YEAR OF PAYME NT AND, IN THE ALTERNATIVE, THE SAME MAY BE SPREAD OVER FOR A PERI OD OF FIVE YEARS FOR WHICH THE NON-COMPETITION COVENANT WAS THERE AN D IT WAS HELD BY THE TRIBUNAL THAT IT WAS A TEMPORARY ARRANGEMENT MADE WITH THE VENDOR IN ORDER TO SETTLE DOWN NEW BUSINESS OF SHIP PING AND TO DERIVE BENEFIT OUT OF IT TO ENHANCE ITS PROFITABILI TY ONLY. THE COVENANT WAS EXECUTED FOR A PERIOD OF FIVE YEARS AN D THAT TOO ONLY FOR INDIAN TERRITORY, THEREFORE, THE ASSESSEE SHOUL D DERIVE BENEFIT FOR LIMITED PERIOD OF FIVE YEARS ONLY AND SUCH EXPENDIT URE WAS TO BE ITA NO.3759/DEL/2003 30 SPREAD OVER A PERIOD OF FIVE YEARS AND CORRESPONDIN G EXPENDITURE IN EVERY YEAR WAS HELD TO BE ALLOWED. 38. HE FURTHER SUBMITTED THAT THE DECISIONS RELIED UPON BY DEPARTMENT ARE DISTINGUISHABLE BOTH ON FACTS AND IN LAW. 38.1 HIS SUBMISSIONS IN THAT REGARD ARE DESCRIBE D AS BELOW: REFERRING TO THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF ASSAM BENGAL CEMENT LTD. VS. CIT (SUPRA) ON WHICH RELIANC E WAS PLACED BY SR. STANDING COUNSEL THAT IN THAT CASE THE ISSUE WAS WH ETHER THE PAYMENT MADE BY THE ASSESSEE TO THE GOVERNMENT OF ASSAM FOR ENSURIN G THAT NOBODY ELSE GET THE RIGHTS OF MINING IN THE QUARRIES SITUATED IN KHASHI AND JAYANTI HILLS WOULD BE IN THE NATURE OF REVENUE OR CAPITAL EXPENDITURE AND HO NBLE SUPREME COURT IN THAT CASE HAS RIGHTLY HELD THAT SUCH EXPENDITURE ELIMINA TED ANY KIND OF COMPETITION AND ENSURED MONOPOLY RIGHTS OF THE ASSESSEE IN THAT AREA. THEREFORE, SUCH EXPENDITURE WAS CAPITAL IN NATURE. AS AGAINST THAT IN THE PRESENT CASE BY MAKING NON-COMPETE PAYMENTS, THE ASSESSEE DID NOT ACQUIRE ANY MONOPOLY RIGHTS IN ORDER TO ELIMINATE ANY COMPETITOR. THE PAYMENT WAS MADE TO PROTECT AN ALREADY ACQUIRED BUSINESS. THEREFORE, THE DECISION IN ASSA M BENGAL CEMENT LTD. IS NOT APPLICABLE TO THE FACTS OF THE ASSESSEES CASE. 38.2 REFERRING TO THE DECISION IN THE CASE OF CIT V S. COAL SHIPMENT PVT. LTD. (SUPRA), IT WAS SUBMITTED THAT NOWHERE IN THE SAID DECISION IT IS DESCRIBED THAT ENDURING BENEFIT REFERS TO A FIXED TENURE. IT WAS SUBMITTED THAT ON THE CONTRARY IT HAS BEEN HELD THAT WHAT WOULD CONSTITUTE ENDURING B ENEFIT WOULD DEPEND UPON FACTS AND CIRCUMSTANCES OF EACH CASE AND IT WAS HEL D THAT WHERE THE AGREEMENT COULD BE TERMINATED AT THE VOLITION OF THE PARTIES, AS IN THE PRESENT CASE, THE PAYMENT WOULD BE ON REVENUE ACCOUNT. THUS, IT WAS SUBMITTED THAT RATHER THE SAID CASE ADVANCES THE PROPOSITION CANVASSED BY THE ASSESSEE. 38.3. IT WAS SUBMITTED THAT IN THE CASE OF EMPIRE J UTE MILLS (SUPRA) IT HAS BEEN HELD THAT MERELY BECAUSE AN EXPENDITURE RESULTS IN A BENEFIT OF ENDURING NATURE ITA NO.3759/DEL/2003 31 WOULD NOT, BY ITSELF, LEAD TO THE CONCLUSION THAT T HE EXPENDITURE WAS CAPITAL IN NATURE, UNLESS IT IS PROVED THAT THE ENDURING BENEF IT WAS ON CAPITAL ACCOUNT. 38.4 THE DECISION OF HP HIGH COURT IN THE CASE OF M OHAN MEAKIN BREWERIES LTD. VS. CIT 227 ITR 879 (HP) CANNOT BE APPLIED TO THE FACTS OF THE INTERVENORS CASE AS THE QUESTION BEFORE THE HIGH COURT WAS WHET HER ONE TIME LICENCE FEE PAID TO THE GOVERNMENT TO ENSURE MONOPOLY AND EXCLU SIVE RIGHT WOULD BE ALLOWABLE REVENUE DEDUCTION OR WOULD CONSTITUTE CAP ITAL EXPENDITURE AND ON THOSE FACTS IT WAS HELD THAT LICENCE FEE PAID BY TH E ASSESSEE WAS IN THE NATURE OF CAPITAL EXPENDITURE. THE SAID CASE COULD NOT ALSO BE APPLIED TO THE FACTS OF THE ASSESSEES CASE AS THE PAYMENT DID NOT CREATE ANY M ONOPOLY. 38.5 THE DECISION OF MADRAS HIGH COURT IN THE CASE OF SREE MEENAKSHI MILLS LTD. VS. CIT (SUPRA) ALSO CANNOT BE APPLIED TO THE FACTS OF THE PRESENT CASE AS IN THAT CASE THE ISSUE WAS WHETHER EXPENDITURE INCURRE D BY THE ASSESSEE ON LITIGATION BEFORE THE COURTS AND COSTS PAID TO THE GOVERNMENT FOR VIOLATION OF THE TERMS OF THE AGREEMENT WERE IN THE NATURE OF COMMER CIAL LOSS AND UNDER THOSE FACTS IT WAS HELD THAT THE EXPENDITURE WAS DUE TO W ILLFUL ACTION OF THE ASSESSEE IN ENGAGING IN FRIVOLOUS LITIGATION FOR WHICH IT HAD T O PAY COSTS TO THE GOVERNMENT AND, THUS, NOT ALLOWABLE AS REVENUE EXPENDITURE. 38.6 THE DECISION IN THE CASE OF ARVIND MILLS VS. C IT (SUPRA) WAS ALSO SUBMITTED TO BE NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE SINCE THE APEX COURT WAS REQUIRED TO DECIDE WHETHER EXPENDITURE IN CURRED BY THE ASSESSEE FOR BETTERMENT OF TITLE IN A PIECE OF LAND OWNED BY THE ASSESSEE WOULD BE IN THE NATURE OF CAPITAL OR REVENUE EXPENDITURE. AS AGAIN ST THAT NON-COMPETE FEES IN THE PRESENT CASE IS PAID ONLY TO PROTECT THE PROFIT ABILITY OF THE BUSINESS ALREADY IN EXISTENCE. 38.7 THE DECISION IN THE CASE CIT V. HINDUSTAN PILK INGTON GLASS WORKS (SUPRA) SUPPORTS THE CASE OF THE ASSESSEE RATHER THAN SUPPO RTING THE CASE OF THE REVENUE. IT WAS SUBMITTED THAT IN THAT CASE THE IS SUE WAS WHETHER THE EXPENDITURE INCURRED BY THE ASSESSEE TO PREVENT TOT AL ANNIHILATION OF ITS BUSINESS ITA NO.3759/DEL/2003 32 WOULD BE CAPITAL OR REVENUE EXPENDITURE AND HONBLE CALCUTTA HIGH COURT CONCURRED WITH ITS EARLIER DECISION IN THE CASE OF ASSAM BENGAL CEMENT LTD. IT WAS SUBMITTED THAT IN THE PRESENT CASE BY MAKING NO N-COMPETE PAYMENT THE ASSESSEE HAS NOT ELIMINATED ANY COMPETITOR AND THE CLAIM OF THE ASSESSEE FALLS WITHIN THE CATEGORY FOR WHICH THE PAYMENT WAS HELD TO BE ALLOWABLE BY THE CALCUTTA HIGH COURT. 39. THE DECISION OF ALLAHABAD HIGH COURT IN THE CAS E OF NEEL KAMAL TALKIES VS. CIT (SUPRA) ALSO COULD NOT BE APPLIED TO THE CA SE OF HIS CLIENT AS IN THAT CASE BY INCURRING THE EXPENDITURE THE ASSESSEE HAD ENSUR ED COMPLETE MONOPOLY OVER THE BUSINESS OF EXHIBITING FILMS IN BIJNORE. AS AG AINST THAT, IN THE PRESENT CASE, THERE IS NO QUESTION OF ANY MONOPOLY BEING CREATED BY THE ASSESSEE. HE PLEADED THAT LD. DR HAS PLACED LOT OF EMPHASIS ON T HE DECISIONS OF THE MADRAS HIGH COURT IN CHELPARK V. CIT, 199 ITR 249, DECISIO N OF THE MADHYA PRADESH HIGH COURT IN GROVER SOAPS PVT. LTD., 220 ITR 299 A ND THAT OF THE MADRAS HIGH COURT IN TAMIL NADU DAIRY DEVELOPMENT CORPN., 239 I TR 142. IN THIS REGARD IT IS SUBMITTED THAT ALL THE THREE DECISIONS RELIED UPON BY THE LD. SR. DR PROCEEDED ON A FINDING BY THE TRIBUNAL THAT BY INCURRING THE EXP ENDITURE IN DISPUTE, THE ASSESSEE HAD ACQUIRED BENEFIT OF ENDURING NATURE. HOWEVER, IN THE PRESENT CASE IT IS FOR THIS SPECIAL BENCH TO FIRST ADJUDICATE WH ETHER PAYMENT OF NON-COMPETITION FEE BROUGHT INTO EXISTENCE AN ASSET/ADVANTAGE OF EN DURING BENEFIT. THE NEXT QUESTION WHICH WOULD HAVE TO BE CONSIDERED IS THAT WHETHER THE BENEFIT, SO ACQUIRED BY THE ASSESSEE, IS ON CAPITAL ACCOUNT OR REVENUE ACCOUNT? IT IS ONLY AFTER SUCH FINDING IS RECORDED, WOULD THE RATIO OF THE DECISIONS QUOTED BY THE LD. SR. DR BE OF ANY RELEVANCE. 40. CONCLUDING HIS ARGUMENTS, LD. COUNSEL SUBMITTED AS FOLLOWS:- IF THE EXPENDITURE IS FOR THE INITIAL OUTLAY OR FOR ACQUIRING OR BRINGING INTO EXISTENCE AN ASSET OR ADVANTAGE OF AN ENDURING BENE FIT IN THE CAPITAL FIELD TO THE BUSINESS THAT IS BEING CARRIED ON, OR FOR EX TENSION OF THE BUSINESS THAT IS GOING ON, OR FOR A SUBSTANTIAL REPLACEMENT OF EXISTING BUSINESS ASSETS, IT WOULD BE CAPITAL EXPENDITURE. ITA NO.3759/DEL/2003 33 IF, ON THE OTHER HAND, THE EXPENDITURE, ALTHOUGH FO R THE PURPOSE OF ACQUIRING AN ADVANTAGE OF ENDURING NATURE, IS FOR R UNNING OF THE BUSINESS WITH A VIEW TO PRODUCE PROFIT, OR INCREASE EFFICIEN CY, OR INCREASE PROFITABILITY, IT WOULD BE REVENUE EXPENDITURE. IN OTHER WORDS, AN EXPENDITURE WHICH BRINGS INTO EXISTENCE AN ADVANTAG E OF ENDURING BENEFIT MAY STILL BE REVENUE EXPENDITURE IF THE ADVANTAGE, SO OBTAINED, IS IN THE REVENUE FIELD. [REFER EMPIRE JUTE MILLS (SUPRA)] THE MOST IMPORTANT DISTINGUISHING FEATURE IN THE DE CIDING WHETHER AN EXPENDITURE IS CAPITAL OR REVENUE IS THE PURPOSE AN D INTENDED OBJECT OF INCURRING SUCH EXPENDITURE. IT IS THE INTENTION AND OBJECT WITH WHICH THE ASSET IS ACQUIRED, THAT DETERMINES THE NATURE OF THE EXPENDITURE INCURRED O VER IT, AND NOT THE METHOD OR THE MANNER IN WHICH THE PAYMENT IS MADE, OR THE SOURCE OF SUCH PAYMENT. THE LENGTH OF TIME OVER WHICH THE COMPETITION IS EL IMINATED/BENEFIT ACCRUES IS NOT THE DECISIVE FACTOR IN DETERMINING W HETHER AN EXPENDITURE IS ON CAPITAL OR REVENUE ACCOUNT. [REFER MADRAS AUTO ( SUPRA) AND EICHER LTD. (SUPRA). IN THE PRESENT CASE THE APPELLANT HAD PAID NON-COM PETE FEES TO THE COVENANTER FOR NOT SHARING THEIR KNOWLEDGE/KNOW-HO W FOR A PERIOD OF 5 YEARS. IT DID NOT BRING INTO EXISTENCE ANY ASSET OR BENEFIT OF ENDURING NATURE, IN THE CAPITAL FIELD BUT MERELY FACILITATED THE CARRYING ON OF BUSINESS MORE EFFICIENTLY AND PROFITABLY. THE PAYMENT FOR ACQUISITION OF ASSET/BUSINESS WAS D IFFERENT FROM PAYMENT OF NON-COMPETE/NON-DIVULGENCE OF INFORMATION. THE AGREEMENT WAS NOT INDEFINITE AND COULD BE TERMI NATED BY EITHER OF THE PARTIES. THE GESTATION PERIOD OF 5 YEARS WAS NECESSARY SINCE THE APPELLANT HAD RETURNED TO THE INDIAN MARKETS AFTER APPROX 20 YEAR S. THE BOTTLERS WERE FREE TO CARRY ON OTHER BUSINESSES AND, IN FACT, DID CARRY ON SUCH BUSINESS. NO NEW PROFIT EARNING APPARATUS WAS ACQUIRED BY THE APPELLANT. ITA NO.3759/DEL/2003 34 ARGUMENTS OF SHRI S.D. KAPILA 41. IT WAS SUBMITTED BY LD. COUNSEL THAT A PARTICUL AR EXPENSE WHETHER IT IS CAPITAL OR REVENUE HAS TO BE EXAMINED ON THE BASIS OF FACTS OF EACH CASE AND THOSE FACTS ARE TO BE SEEN FROM THE VIEW POINT OF T HE PAYER AND NOT FROM THE VIEW POINT OF PAYEE. HE SUBMITTED THAT IT IS NOT NECESS ARY THAT THE EXPENDITURE IS PAID BY SEPARATE AGREEMENT WHICH CAN BE DEFINED IN ONE A GREEMENT AND PAID BY ANOTHER AGREEMENT. HE SUBMITTED THAT DURATION OF R ESTRICTION IS NOT MATERIAL AND PURPOSE AND OBJECT OF IT WILL BE MATERIAL. 42. HE CONTENDED THAT HOW IT CAN BE DETERMINED HAS BEEN ENUNCIATED IN TWO EXAMPLES WHICH ARE EXTREME ON BOTH SIDES. HE REFER RED TO THE DECISION OF HONBLE ALLAHABAD HIGH COURT IN THE CASE OF NEEL KA MAL TALKIES V CIT(1973) 87 ITR 691(ALL) WHERE THE ASSESSEE BEING THE OWNER OF CINEMA HOUSE AT BIJNORE HAD ENTERED INTO AN AGREEMENT WITH ANOTHER CINEMA OWNER WHEREBY A SUM OF RS.600/- PER MONTH WAS PAID FOR FIVE YEARS FOR NON- EXHIBITION OF ANY FILM IN THE OTHER CINEMA. EXHIBITION MONOPOLY WAS CREATED AND COMPETITION WAS COMPLETELY ELIMINATED AND, THUS, IT WAS HELD THAT THE PAYMENT WAS OF A CAPITAL NATURE. 43. THEN, HE REFERRED TO ANOTHER SITUATION WHERE ON E AGREEMENT OF ACQUISITION IS EXECUTED AND ANOTHER AGREEMENT IS MADE IN RESPEC T OF NON-COMPETITION. THE AMOUNT FOR NON-COMPETITION IS NOT DRAWN FROM CAPITA L AND THE PAYMENT IS MADE ON THE BASIS OF PROFIT/TURNOVER AND IN THAT CASE TH ERE WILL BE NO NEXUS BETWEEN THE CAPITAL/ACQUISITION, THEN, IT WILL BE THE EXPENDITU RE ON REVENUE ACCOUNT. 44. HE SUBMITTED THAT IN A CASE WHERE THE ASSESSEE PURCHASE BUSINESS ASSETS AND THEN ENTER INTO A COVENANT WITH AN ENTIT Y AND ITS EMPLOYEES TO PRESERVE THE PURCHASED BUSINESS AND THAT WILL BE A CASE WHERE BUSINESS PURCHASED IS PRESERVED AND PROTECTED. FOR THIS PRO POSITION HE REFERRED TO THE DECISION OF CALCUTTA HIGH COURT IN THE CASE OF CIT VS. PIGGOT CHAPMAN & CO. 17 ITR 317 (CAL) WHERE THE ASSESSEE FIRM, WHICH WAS EN GAGED IN THE ACTIVITY OF EXCHANGE BROKERS, ENTERED INTO AN AGREEMENT WITH ON E MWHO WAS ALSO ENGAGED IN THE SIMILAR ACTIVITY FOR TRANSFER OF FOUR SEATS IN CALCUTTA STOCK EXCHANGE ITA NO.3759/DEL/2003 35 BROKERS ASSOCIATION AND ALSO ENTERED INTO AN AGREEM ENT FOR NON-COMPETITION WHERE SUCH AMOUNT WAS HELD TO BE ALLOWABLE AS REVEN UE EXPENDITURE AS THE EXPENDITURE RELATED TO PRESERVATION AND PROTECTION OF BUSINESS. 45. THEN, HE REFERRED TO THE DECISION OF HONBLE SU PREME COURT IN THE CASE OF CIT VS. COAL SHIPMENTS PVT. LTD. (SUPRA) AND CONTEN DED THAT ELIMINATION OF COMPETITION MEANS COMPLETE ELIMINATION. 46. CONCLUDING HIS ARGUMENTS HE SUBMITTED THAT IN T HE FIRST CASE THE EXPENDITURE WILL BE CAPITAL AND IN THE SECOND CASE IT WILL DEPEND UPON THE OBJECT OF THE PAYMENT AND IN THE THIRD CASE WHERE IT IS CO NTINGENT ON PROFIT, IT IS REVENUE. ARGUMENTS ADVANCED BY MRS. SURUCHI AGGARWAL, SR. ST ANDING COUNSEL FOR REVENUE : - 47. IT WAS SUBMITTED BY LD. STANDING COUNSEL THAT T HE ARGUMENTS OF REVENUE ARE TWO FOLD NAMELY: (I) THE ENTIRE TRANSACTION/CONTRACT RESULTING INTO PAYMENT OF RS. 2.65 CRORES AS NON-COMPETE FEE MUST BE READ AS A WHOLE. THE PA YMENT OF RS. 2.65 CRORE CANNOT BE TREATED IN ISOLATION. ALL THE AGREEMENTS/CONTRACTS EXECUTED BETWEEN ASSESSEE AND ITS PARENT COMPANY BE ING ON ONE PART AND M/S WHIRLPOOL INDIA AND ITS PARENT COMPANY ON T HE OTHER PART HAVE TO BE READ AS PART OF THE SAME TRANSACTION. SHE CO NTENDED THAT FROM READING OF ALL THESE AGREEMENTS/CONTRACTS THE PAYME NT OF RS. 2.65 CRORES IS ALSO A PART OF THE PAYMENT MADE TOWARDS I NITIAL OUTLAY AND WOULD CONSTITUTE CAPITAL EXPENDITURE. (II) THE ANALYSIS OF SEVERAL TESTS LAID DOWN IN THE JUDGMENTS OF HONBLE SUPREME COURT AS WELL AS SEVERAL HIGH COURTS FOR DE TERMINATION AS TO WHETHER THE PAYMENT IS FOR CAPITAL OR REVENUE WILL REVEAL THAT TEST HAS TO BE APPLIED TO THE PARTICULAR FACTS AND CIRCUMSTA NCES OF EACH CASE ITA NO.3759/DEL/2003 36 AND IT HAS TO BE DETERMINED WHETHER THE EXPENDITURE /PAYMENT IS PART OF THE COMPANYS WORKING EXPENSES OR IT IS AN EXPENDIT URE LAID DOWN AS A PART OF PROCESS OF PROFIT EARNING OR ON THE OTHER H AND, IT IS A CAPITAL LAY OUT, BEING AN EXPENDITURE NECESSARY FOR ACQUISITION OF PROPERTY OR OF RIGHT OF A PERMANENT CHARACTER THE POSSESSION OF WH ICH IS A CONDITION OF CARRYING ON ITS TRADE AT ALL? 48. REFERRING TO AFORESAID TEST MRS. AGGARWAL REFER RED TO THE DECISION OF HONBLE SUPREME COURT IN THE CASES OF ASSAM BENGAL CEMENT CO. VS. CIT 27 ITR 34 (SC) & CIT VS. COAL SHIPMENT P. LTD. 82 ITR 902. SHE CONTENDED THAT THE PAYMENT OF RS. 2.65 CRORE IS A PART OF HUGE PAY MENT TO THE EXTENT OF 45CRORE MADE BY THE ASSESSEE TO M/S WHIRLPOOL FOR THE ACQUI SITION OF THE COMPLETE COMPRESSOR DIVISION OF WHIRLPOOL, SANS THE LAND, FA CTORY BUILDING, PLANT & MACHINERY, TRANSFER OF WORK FORCE/EMPLOYEES, CONTRA CTS AND OTHER ASSETS AND HENCE COMPRISES INITIAL OUTLAY. SUCH PAYMENT WAS N ECESSARY FOR THE ACQUISITION OF RIGHTS OF A PERMANENT CHARACTER AND IS NOT A PAR T OF THE COMPANYS WORKING EXPENSES. THE SAID PAYMENT HAS ONLY BEEN GIVEN A C OLOUR OF REVENUE EXPENDITURE BUT ACTUALLY IT IS A CAPITAL EXPENDITUR E. 49. LD. COUNSEL ARGUED THAT ALL AGREEMENTS EXECUTED BETWEEN THE ASSESSEE AND ITS PARENT COMPANY ON THE ONE PART AND WHIRLPOO L AND ITS PARENT COMPANY ON THE OTHER PART SHOULD BE READ AS COMPOSITE WHOLE. 50. IT WAS SUBMITTED THAT THE ASSESSEE HAS RELIED U PON SEC. 90(1) OF INDIAN EVIDENCE ACT TO CONTEND THAT CONTRACT BETWEEN THE P ARTIES ALONE SHOULD BE REFERRED TO FOR THE TRUE IMPORT OF THE MEANING AND SUBSTANCE OF THE CLAUSE AS AGAINST SUCH CONTENTION IT WILL BE IMPORTANT TO NOT E THAT AN ENTIRE CONTRACT MUST BE VIEWED AS A WHOLE. THE CONSTRUCTION OF A CONTRACT MUST DEPEND UPON THE IMPORT OF THE WORDS USED AND NOT UPON WHAT THE PARTIES CHO OSE TO SAY AFTERWARDS. SHE SUBMITTED THAT EVEN SUBSEQUENT CONDUCT OF THE PARTI ES IN THE PERFORMANCE OF THE CONTRACT CAN AFFECT THE TRUE EFFECT OF THE CLEAR AN D UNAMBIGUOUS WORDS USED IN THE CONTRACT. THE INTENTION OF THE PARTIES MUST BE ASCERTAINED FROM THE LANGUAGE ITA NO.3759/DEL/2003 37 USED IN THE CONTRACT. THE NATURE AND PURPOSE OF TH E CONTRACT SHOULD BE THE IMPORTANT GUIDE IN ASCERTAINING THE INTENTION OF TH E PARTIES. REFERENCE WAS MADE TO THE DECISION OF HONBLE SUPREME COURT IN THE CAS E OF BANK OF INDIA VS. K. MOHANDAS, 2009(5) SCC 313, IN WHICH IT WAS OBSERVED BY THEIR LORDSHIPS AS UNDER: - IT IS ALSO A WELL-RECOGNIZED PRINCIPLE OF CONSTRUC TION OF A CONTRACT THAT IT MUST BE READ AS A WHOLE IN ORDER TO ASCERTA IN THE TRUE MEANING OF ITS SEVERAL CLAUSES AND THE WORDS OF EAC H CLAUSE SHOULD BE INTERPRETED SO AS TO BRING THEM INTO HARMONY WIT H THE OTHER PROVISIONS IF THAT INTERPRETATION DOES NO VIOLENCE TO THE MEANING OF WHICH THEY ARE NATURALLY SUSCEPTIBLE. [(THE NORTH E ASTERN RAILWAY COMPANY VS. L. HASTINGS) (1900 AC 260)]. 51. REFERRING TO THESE OBSERVATIONS IT WAS SUBMITTE D THAT WHILE DECIDING THE ISSUE THE BELOW MENTIONED THREE AGREEMENTS SHOULD B E READ TOGETHER TO ARRIVE AT THE TRUE CHARACTER AND IMPORT OF THE AGREEMENTS AND THE NATURE OF THE TRANSACTIONS AND PAYMENTS MADE PURSUANT THERETO: - A) MEMORANDUM OF UNDERSTANDING DATED 4.11.1996. B) AGREEMENT DATED 2.7.1997 BETWEEN WHIRLPOOL OF I NDIA AND TECUMSEH INDIA PVT. LTD. C) THE NON-COMPETITION AGREEMENT DATED 10.7.1997. 52. REFERRING TO EACH OF THE AGREEMENTS, LD. STANDI NG COUNSEL SUBMITTED THAT THE RELEVANT FACTS WHICH IMPORTS THE CONSIDERATION FOR A PROPER DETERMINATION OF THE NATURE OF THE PAYMENT TOWARDS NON-COMPETE FEE A RE AS UNDER: - MEMORANDUM OF UNDERSTANDING ON 4.11.1996 A) THE M/S TECUMSEH PRODUCT CO. OF MICHIGAN, A LEADIN G GLOBAL COMPRESSOR MANUFACTURER ENTERED INTO A MEMORANDUM OF UNDERSTANDING ON 4.11.1996 WITH M/S WHIRLPOOL OF INDIA LTD. AND WHIRLPOOL CORPORATION, AND EXPRESSED ITS INTEREST IN PURCHASING THE COMPRESSOR DIVISION OF M/S WHIRLPOOL OF INDIA LTD., WHEREIN TECUMSEH WA S TO BECOME A STRATEGIC AND KEY SUPPLIER TO WHIRLPOOL FO R COMPRESSORS. THE TWO COMPANIES HAD AGREED TO THE FRAMEWORK BY WHICH THE SAID TRANSACTION WAS TO BE ACCOMPLISHED. ITA NO.3759/DEL/2003 38 B) TECUMSEH AND WHIRLPOOL WERE TO ENTER INTO AN A SSET PURCHASE AGREEMENT WHEREBY TECUMSEH WAS TO PURCHASE ALL COMPRESSOR MACHINERY, EQUIPMENT AND TOOLING LOC ATED AT WHIRLPOOL FARIDABAD FACILITY AS WELL AS RELATED COM PRESSOR COMPONENT ASSETS LOCATED AT WHIRLPOOL BALLABGARH FA CILITY, C) TECUMSEH WAS ALSO TO PURCHASE ALL RAW AND WORK-I N- PROGRESS INVENTORY FOR THE COMPRESSOR DIVISION AND COMPONENT OPERATIONS, (D) ALL ASSETS AND MACHINERIES CURRENTLY USED IN T HE COMPRESSOR REPAIR BUSINESS WERE TO BE INCLUDED IN THE ASSET PU RCHASE AGREEMENT, (E) TECUMSEH WAS ENTITLED TO ALL DRAWINGS, ROUTING S, BILL OF MATERIAL, KNOWHOW TRADE SECRETS, PATENTS, COPYRIGHT S AND OTHER TECHNICAL INFORMATION AND INTELLECTUAL PROPER TY AS PART OF COMPRESSOR DIVISION ASSET PURCHASE, (F) TECUMSEH WAS TO PURCHASE LAND AND BUILDING LOC ATED AT WHIRLPOOL BALLABGARH SITE AGAINST THE PURCHASE PR ICE (G) WHIRLPOOL WAS ALSO TO TRANSFER TO TECUMSEH 160 0 WHIRLPOOL EMPLOYEES CURRENTLY ENGAGED IN THE COMPRESSOR DIVIS ION OPERATIONS AT FARIDABAD OR COMPONENT OPERATIONS AT BALLABGARH. TECUMSEH WAS TO ASSUME RESPONSIBILITY FOR MAINTAINING THE VARIOUS BENEFIT PLANS COVERING THE EMPLOYEES, (H) TECUMSEH WAS TO INITIALLY TO CONTINUE TO PRODU CE COMPRESSOR AT THE FARIDABAD FACILITY, BUT WAS LATER TO RELOCAT E ALL COMPRESSORS, MACHINERIES AND EQUIPMENT FROM FARIDAB AD TO BALLABGARH WITHIN TWO YEARS. I) THE SAID MEMORANDUM OF UNDERSTANDING ALSO ENVISA GED A COMPRESSOR SUPPLY AGREEMENT FOR A TERM OF FIVE YEAR S WHEREBY TECUMSEH WAS TO PROVIDE COMPRESSORS TO WHIRLPOOL. J) THERE WAS ALSO A PROVISION IN CLAUSE 12 IN MEMOR ANDUM OF UNDERSTANDING FOR A NON-COMPETE AGREEMENT WHEREBY WHIRLPOOL AGREED NOT TO MANUFACTURE OR REPAIR COMPR ESSORS DURING THE TERM OF THE GLOBAL SOURCING AGREEMENT WI TH TECUMSEH. A COPY OF THE MEMORANDUM OF UNDERSTANDI NG DATED 4.11.1996 IS ANNEXED HERETO AS ANNEXURE 1. ITA NO.3759/DEL/2003 39 5. AGREEMENT DATED 2.7.1997 THE SIGNIFICANT CLAUSES OF THE AGREEMENT DATED 2.7. 1997 ARE AS FOLLOWS : I) THE RECITAL OF THE SAID AGREEMENT CLEARLY STATES THAT TECUMSEH INDIA IS A WHOLLY OWNED SUBSIDIARY OF TECU MSEH PRODUCT CO. WHICH HAD ENTERED INTO MEMORANDUM OF UNDERSTANDING WITH M/S WHIRLPOOL OF INDIA LTD. FOR THE ACQUISITION OF THE COMPRESSOR DIVISION OF THE SAID COMPANY. II) THE RECITAL CLAUSE (E) THAT WHIRLPOOL AND TECUM SEH INDIA (A WHOLLY OWNED SUBSIDIARY OF TECUMSEH PRODU CT CO.) HAVE NEGOTIATED FOR THE ACQUISITION OF THE COMPRESS OR DIVISION AND RELATED OPERATIONS OF WHIRLPOOL, AND THAT TECUM SEH INDIA WOULD ENGAGE IN THE BUSINESS OF MANUFACTURE, SALE A ND REPAIR OF COMPRESSORS AND FURTHER THAT WHIRLPOOL WOULD NOT COMPETE WITH TECUMSEH INDIA IN THE MANUFACTURE, SALE AND RE PAIR OF COMPRESSORS AS PER CLAUSE 9(J) OF THE AGREEMENT. III) CLAUSE 9(J) IS EXTRACTED HEREIN BELOW : WHIRLPOOL SHALL SIGN AND DELIVER TO TECUMSEH INDIA AGAINST THE RECEIPT OF FULL CONSIDERATION SPECIFIED THEREIN : (A) NON- COMPETE AGREEMENT IN THE FORM AS CONTAINED IN APPEN DIX (M) UNDERTAKING NOT TO COMPETE WITH TECUMSEH INDIA IN T HE MANUFACTURE, SALE OR REPAIR OF COMPRESSORS IN INDIA EXCEPT THAT WHIRLPOOL SHALL BE ENTITLED TO SELL AND INSTAL L COMPRESSORS PURCHASED FROM TECUMSEH INDIA TO PERSONS UNDER ITS SERVICE ARRANGEMENT, SUBJECT TO THE PROVISIONS OF THE SUPPL Y AGREEMENT. IV) IT IS SUBMITTED THAT THE SAID AGREEMENT ALSO EN VISAGED THE PURCHASE OF THE BALLABGARH LAND MEASURING 105,9 83 SQ. MTRS. AND BUILDING AND FACILITIES SITUATED AT BALLA BGARH WHERE THE ENTIRE OPERATIONS OF THE COMPRESSOR DIVISION WE RE TO BE ESTABLISHED. TECUMSEH WAS ALSO ENJOYING THE LIBERT Y THAT, IN THE EVENT TECUMSEH INDIA CONVEYS ITS INTEREST IN TH E MAIN PARCEL OF LAND, TECUMSEH MAY TRANSFER THE LICENCE T O THE PERSON OR ENTITY TO WHOM THE MAIN PARCEL IS CONVEYE D. BESIDES THE LAND, THE ENTIRE ASSETS, EMPLOYEES AND WORKERS WERE ALSO TRANSFERRED. 6. AGREEMENT DATED 10.7.1997 THOUGH, BY VIRTUE OF THE AGREEMENT DATED 10.7.1997 WHIRLPOOL HAD AGREED NOT TO COMPETE WITH TECUMSEH INDIA IN TH E ITA NO.3759/DEL/2003 40 MANUFACTURE, SALE, REPAIR OF COMPRESSORS FOR A PERI OD OF FIVE YEARS COMMENCING FROM THE DATE OF THE AGREEMENT FOR A CONSIDERATION OF SUM OF RS.2.55 CRORES, YET, THE NO N-COMPETE AGREEMENT READ TOGETHER WITH THE OTHER AGREEMENTS I S A NON- COMPETE AGREEMENT IN PERPETUITY. I) CLAUSE 4 OF THE NON-COMPETE AGREEMENT STATES AS FOLLOWS : BENEFIT AND BINDING EFFECT : THIS AGREEMENT SHALL BE BINDING UPON THE PROMISSOR S AND THEIR RESPECTIVE SUCCESSORS AND THE ASSIGNS AND SHA LL INURE TO THE BENEFIT OF TECUMSEH INDIA AND THE RESPECTIVE SU CCESSORS AND ASSIGNS. THIS AGREEMENT HAS BEEN ENTERED INTO FOR THE BENEFIT OF AND MAY BE ENFORCED BY THE TECUMSEH INDI A AND TECUMSEH AND THEIR RESPECTIVE SUCCESSORS AND ASSIGN S ONLY AND IS NOT INTENDED TO BENEFIT, BE ENFORCEABLE BY, OR CREATE ANY REMEDY OR RIGHT OF ACTION IN FAVOUR OF ANY OTHE R PERSON. 7. BY VIRTUE OF A COMBINED READING OF THE ABOVE SAI D THREE AGREEMENTS, IT IS EVIDENT THAT THE AMOUNT OF RS.2.6 5 CRORES HAS BEEN SPENT BY M/S TECUMSEH INDIA IN PURSUANCE OF THE INT ENTION OF TECUMSEH PRODUCT CO. OF MICHIGAN TO ACQUIRE THE COM PRESSOR DIVISION OF M/S WHIRLPOOL INDIA INCLUDING LAND, FAC TORY, EMPLOYEES, TECHNICAL KNOW HOW, BUILDINGS ETC. AND THUS, FORMS PART OF EXPENDITURE MADE FOR THE INITIAL OUTLAY AND HENCE C ONSTITUTES CAPITAL EXPENDITURE. IT IS SUBMITTED THAT THE EXPENDITURE OF RS.2.65 CRO RES OSTENSIBLY MADE TOWARDS NON-COMPETE FEE AGREEMENT IS IN FACT F OR THE PURPOSE OF ACQUIRING AN APPRECIATED CAPITAL ASSET WHICH WOU LD NO DOUBT MAKE THE CAPITAL ASSET MORE PROFIT YIELDING. THE PERIOD OF FIVE YEARS AS STIPULATED IN THE NON-COMPETE AGREEMENT DOES NOT MA KE ANY DIFFERENCE TO THE NATURE OF THE ACQUISITION AS THE ACQUISITION WAS AN ADVANTAGE OF ENDURING NATURE WHICH ENDURED NOT ONLY FOR THE BENEFIT OF WHOLE BUSINESS FOR FULL PERIOD OF FIVE YEARS BUT WAS IN PERPETUITY IN VIEW OF THE ACQUISITION OF THE ENTIRE COMPRESSION D IVISION ALONG WITH THE EMPLOYEES. THE ENTIRE BUSINESS OF THE COMPRESS OR DIVISION OF WHIRLPOOL WAS ELIMINATED AS NO MANUFACTURE OF COMPR ESSORS COULD BE CARRIED OUT BY WHIRLPOOL INDIA AND THE SALE OF S UCH COMPRESSORS BY WHIRLPOOL INDIA WAS CONFINED TO THE SUPPLY OF SU CH COMPRESSORS BY M/S TECUMSEH INDIA TO WHIRLPOOL. 53. THEN LD. STANDING COUNSEL REFERRED TO THE VARIO US JUDICIAL PRONOUNCEMENTS, WHEREIN SEVERAL TESTS HAVE BEEN LAI D DOWN: - ITA NO.3759/DEL/2003 41 ANALYSIS OF THE SEVERAL TESTS LAID DOWN IN THE JUDG MENTS OF THE SUPREME COURT AS WELL AS SEVERAL HIGH COURTS (1) THE SUPREME COURT HAS IN SEVERAL DECISIONS HEL D THAT IN ORDER TO DECIDE WHETHER THE EXPENDITURE IS OF REVEN UE OR CAPITAL NATURE ONE HAS TO LOOK AT THE EXPENDITURE FROM THE COMMERCIAL POINT OF VIEW. THOUGH, THE ASSET ACQUIRED BEING OF ENDURI NG NATURE IS ONE OF THE AGE OLD TESTS, YET IN THE JUDGMENT OF THE HO NBLE SUPREME COURT IN THE CASE OF ASSAM BENGAL CEMENT CO. LTD. V S. CIT (1955) 27 ITR 34 (SC) THE RELEVANT TESTS ARE AS FOLLOWS: (A) EXPENDITURE MAY BE TREATED AS PROPERLY ATTRIBUTABLE TO CAPITAL WHEN IT IS MADE NOT ONLY ONCE AND FOR ALL BUT WITH A VIEW TO BRINGING INTO EXISTENCE AN ASSET OR ADVANTAGE FOR AN ENQUIRI NG BENEFIT OF THE TRADE. IF WHAT IS GOT RID OF BY A LUMP SUM PAYMENT IS AN ANNUAL BUSINESS EXPENSE CHARGEABLE AGAINST REVENUE, THE LU MP SUM PAYMENT SHOULD EQUALLY BE REGARDED AS A BUSINESS EX PENSE, BUT IF THE LUMP SUM PAYMENT BRINGS IN A CAPITAL ASSET, THE N, THAT PUTS THE MATTER ON ANOTHER FOOTING ALTOGETHER. (B) WHETHER FOR THE PURPOSES OF EXPENDITURE, ANY CAPITA L WAS WITHDRAWN OR IN OTHER WORDS WHETHER THE OBJECT OF I NCURRING THE EXPENDITURE WAS TO EMPLOY WHAT WAS TAKEN IN AS CAPI TAL OF BUSINESS. AGAIN, IT IS TO BE SEEN WHETHER THE EXPENDITURE INC URRED WAS PART OF THE FIXED CAPITAL OF THE BUSINESS OR PART OF ITS CI RCULATING CAPITAL. C) THE AFORESAID JUDGMENT OF ASSAM BENGAL CEMENT CO. LTD. VS. THE COMMISSIONER OF INCOME-TAX, WEST BENGAL, A PPROVES CERTAIN BROAD TESTS IN SUPPORT OF THE PROPOSITION T HAT THE EXPENDITURE IN THE ACQUISITION OF THE CONCERN WOULD BE CAPITAL EXPENDITURE, AND THE EXPENDITURE IN CARRYING ON THE CONCERN WOULD BE REVENUE EXPENDITURE. (I)ONE OF THE EARLIEST TESTS, IS INDICATED IN THE F OLLOWING OBSERVATIONS OF BOWEN L.J. IN THE COURSE OF THE ARGUMENT IN CITY OF LONDON CONTRACT CORPORATION VS. STYLES (1887) 2 TC. 239, 243 : ITA NO.3759/DEL/2003 42 YOU DO NOT USE IT FOR THE PURPOSE OF OF YOUR CON CERN, WHICH MEANS, FOR THE PURPOSE OF CARRYING ON YOUR CONCERN, BUT YO U USE IT TO ACQUIRE THE CONCERN. (II ) THE PRIVY COUNCIL IN TATA HYDRO-ELECTRIC AGENCIES LTD., BOMBAY VS. COMMISSIONER OF INCOME-TAX, BOMBAY PRESIDENCY A ND ADEN (1937) L.R. 64 I.A. 215] PRONOUNCED AT PAGE 226 : WHAT IS MONEY WHOLLY AND EXCLUSIVELY LAID OUT FO R THE PURPOSES OF TRADE IS A QUESTION WHICH MUST BE DETERMINED UPON THE PRINCIPLES OF ORDINARY COMMERCIAL TRADING. IT IS NECESSARY ACCOR DINGLY, TO ATTEND TO THE TRUE NATURE OF THE EXPENDITURE AND TO ASK ONESE LF THE QUESTION, IS IT A PART OF COMPANIES WORKING EXPENSES; IS IT EXP ENDITURE LAID OUT AS PART OF PROCESS PROFIT EARNING ? (III) DIXON, J., EXPRESSED A SIMILAR OPINION IN SUN NEWSPAPERS LIMITED AND THE ASSOCIATED NEWSPAPERS LIMITED VS. THE FEDER AL COMMISSIONER OF TAXATION (1938) 61 C.L.R. 337) AT P AGE 360: BUT IN SPITE OF THE ENTIRELY DIFFERENT FORMS, MATE RIAL AND IMMATERIAL, IN WHICH IT MAY BE EXPRESSED, SUCH SOURCES OF INCOME O R CONSIST IN WHAT HAS BEEN CALLED A 'PROFIT YIELDING SUBJECT' TH E PHRASE OF LORD BLACKBURN IN UNITED COLLIERIES LTD. V. INLAND REVEN UE COMMRS. 1930 SC 215 AT P. 220. AS GENERAL CONCEPTIONS IT MAY NOT BE DIFFICULT TO DISTINGUISH BETWEEN THE PROFIT-YIELDING SUBJECT AND THE PROCESS OF OPERATING IT. IN THE SAME WAY EXPENDITURE AND OUTLA Y UPON ESTABLISHING, REPLACING AND ENLARGING THE PROFIT YI ELDING SUBJECT MAY IN A GENERAL WAY APPEAR TO BE OF A NATURE ENTIRELY DIFFERENT FROM THE CONTINUAL FLOW OF WORKING EXPENSES WHICH ARE OR OUG HT TO BE SUPPLIED CONTINUALLY OUT OF THE RETURNS OF REVENUE. THE LATT ER CAN BE CONSIDERED, ESTIMATED AND DETERMINED ONLY IN RELATI ON TO A PERIOD OR INTERVAL OF TIME, THE FORMER AS A POINT OF TIME. FO R THE ONE CONCERNS THE INSTRUMENT OF EARNING PROFITS AND THE OTHER THE CONTINUOUS PROCESS OF ITS USE OR EMPLOYMENT FOR THAT PURPOSE'. (2) IN THE CASE OF COMMISSIONER OF INCOME-TAX VS. COA L SHIPMENT PVT. LTD. (1971) 82 ITR 902 W, THE HONB LE SUPREME COURT HAS APPROVED THE FOLLOWING : (I) IN THE CASE OF ROBERT ADDIE AND SONS' COLLIERIES LTD. V. COMMISSIONER OF INLAND REVENUE ([1924] 8 T. C. 671, 676.), LORD PRESIDENT CLYDE GAVE THE FOLLOWING TEST: ITA NO.3759/DEL/2003 43 ' IT IS NECESSARY ACCORDINGLY TO ATTEND TO THE TRUE NATURE OF THE EXPENDITURE, AND TO ASK ONE'S SELF THE QUESTION, IS IT A PART OF THE COMPANY'S WORKING EXPENSES ? IS IT EXPENDITURE LAI D OUT AS PART OF THE PROCESS OF PROFIT EARNING ?-OR, ON THE OTHER HA ND, IS IT A CAPITAL OUTLAY ?-IS IT EXPENDITURE NECESSARY FOR THE ACQUIS ITION OF PROPERTY OR OF RIGHTS OF A PERMANENT CHARACTER, THE POSSESSION OF WHICH IS A CONDITION OF CARRYING ON ITS TRADE AT ALL ? ' II ) FURTHER THE JUDGES APPROVED THE DICTUM: THE EXPRESSION ' ONCE AND FOR ALL ' USED IN THE DI CTUM LAID DOWN IN ATHERTON'S CASE (1) WAS REFERRED TO BY BHAGWATI J., SPEAKING FOR THIS COURT IN THE CASE OF ASSAM BENGAL CEMENT CO. LTD. V . COMMISSIONER OF INCOME-TAX (2), AND IT WAS OBSERVED THAT THE EXP RESSION WAS USED TO DENOTE AN EXPENDITURE WHICH IS MADE ONCE AND FOR ALL FOR PROCURING AN ENDURING BENEFIT TO THE BUSINESS AS DI STINGUISHED FROM A RECURRING EXPENDITURE IN THE NATURE OF OPERATIONAL EXPENSES. THE CHARACTER OF THE PAYMENT CAN BE DETERMINED, IT WAS ADDED, BY LOOKING AT WHAT IS THE TRUE NATURE OF THE ASSET WHI CH HAS BEEN ACQUIRED AND NOT BY THE FACT WHETHER IT IS A PAYMEN T IN A LUMP SUM OR BY INSTALMENTS. IT IS ALSO AN ACCEPTED PROPOSITION THAT THE WORDS 'PERMANENT' AND 'ENDURING' ARE ONLY RELATIVE TERMS AND NOT SYNONYMOUS WITH PERPETUAL OR EVERLASTING. III) THE HONBLE SUPREME COURT HAS HELD THAT ALTHOUGH A N ENDURING BENEFIT NEED NOT BE OF AN EVER-LASTING CHARACTER, I T SHOULD NOT, AT THE SAME TIME, BE SO TRANSITORY AND EPHEMERAL THAT IT C AN BE TERMINATED AT ANY TIME AT THE VOLITION OF ANY OF THE PARTIES. ANY OTHER VIEW WOULD HAVE THE EFFECT OF RENDERING THE WORD 'ENDURING' TO BE MEANINGLESS. ALTHOUGH IT IS TRUE THAT PAYMENT MADE TO WARD OFF COMPETITION IN BUSINESS TO A RIVAL DEALER WOULD CONSTITUTE CAPI TAL EXPENDITURE IF THE OBJECT OF MAKING THAT PAYMENT IS TO DERIVE AN A DVANTAGE BY ELIMINATING THE COMPETITION OVER SOME LENGTH OF TIM E, THE SAME RESULT WOULD NOT FOLLOW IF THERE IS NO CERTAINTY OF THE DU RATION OF THE ADVANTAGE AND THE SAME CAN BE PUT TO AN END AT ANY TIME. HOW LONG THE PERIOD OF CONTEMPLATED ADVANTAGE SHOULD BE IN O RDER TO CONSTITUTE ENDURING BENEFIT WOULD DEPEND UPON THE C IRCUMSTANCES AND FACTS OF EACH INDIVIDUAL CASE. (C) THE FACTS OF THE SAID CASE ARE HOWEVER DISTINGU ISHABLE FROM THE FACTS OF THE PRESENT CASE. ITA NO.3759/DEL/2003 44 IN THE SAID CASE OF COAL SHIPMENT, AS PAYMENTS M ADE TO M/S. H. V.LOW & CO. LTD. WERE RELATED TO THE ACTUAL SHIPMEN T OF COAL IN THE COURSE OF THE TRADING ACTIVITIES OF THE RESPONDENT AND HAD NO RELATION TO THE CAPITAL VALUE OF THE ASSETS AND THE PAYMENTS WERE NOT RELATED TO OR TIED UP IN ANY WAY TO ANY FIXED SUM AGREED TO BETWEEN THE PARTIES AND HENCE WERE HELD TO BE REVENUE IN NATURE . 54. CONCLUDING HER ARGUMENTS IT WAS SUBMITTED THAT CAPITAL ASSET OF THE BUSINESS IS EITHER ACQUIRED OR EXTENDED OR SUBSTANT IALLY REPLACED AND THAT OUTLAY WHATEVER BE ITS SOURCE, WHETHER IT IS DRAWN FROM TH E CAPITAL OR THE INCOME OF THE CONCERN IS CERTAINLY IN THE NATURE OF THE CAPITAL E XPENDITURE. THE ASSET WHICH THE COMPANY HAD ACQUIRED IRRESPECTIVE OF THE FACT WHETH ER THE CONSIDERATION PAID WAS A RECURRING PAYMENT OR WAS IN LUMPSUM WOULD BE IN THE NATURE OF CAPITAL ASSET. SHE SUBMITTED THAT BY MAKING PAYMENT OF SO CALLED NON-COMPETE FEE THE ASSESSEE HAD ACQUIRED PROTECTION FOR ITS BUSINESS A S A WHOLE AS IT TOOK OVER THE ENTIRE COMPRESSOR DIVISION OF WHIRLPOOL. IT WAS NO T A PART OF THE WORKING OF THE BUSINESS BUT WENT TO APPRECIATE THE WHOLE OF THE CA PITAL ASSET AND IT WAS PART OF INITIAL OUTLAY AND TO MAKE IT MORE PROFIT YIELDING. THE ADVANTAGE DERIVED BY THE ASSESSEE WAS CERTAINLY AN ENDURING ADVANTAGE AND TH US, WAS OF THE NATURE IN CAPITAL EXPENDITURE AND WAS NOT ALLOWABLE U/S 37 OF THE ACT. 55. THE OBLIGATION TO MAKE PAYMENT WAS UNDERTAKEN B Y THE ASSESSEE IN CONSIDERATION OF THEIR ACQUISITION OF THE RIGHT AND OPPORTUNITY TO EARN PROFIT, I.E. OF THE RIGHT TO CONDUCT THE BUSINESS AND NOT FOR THE P URPOSE OF PRODUCING PROFIT IN THE CONDUCT OF THE BUSINESS. THE DISTINCTION HAS T O BE MADE BETWEEN THE EXPENDITURE INCURRED FOR ACQUISITION OF AN INCOME E ARNING ASSET AND THE EXPENDITURE INCURRED IN THE PROCESS OF THE EARNING OF THE INCOME. THE EXPENDITURE IN THE ACQUISITION OF THAT ASSET IS CAP ITAL EXPENDITURE AND EXPENDITURE IN THE PROCESS OF EARNING OF PROFIT WAS REVENUE EXP ENDITURE. SHE CONTENDED THAT SUCH TEST REALLY IS AKIN TO ONE LAID DOWN BY BOWEN LD. JUDGE CITY OF LONDON CONTRACT CORPORATION LTD. V. STYLES [(1887) 27 C.23 9]. ITA NO.3759/DEL/2003 45 ARGUMENT BY SHRI MANISH GUPTA, SR. DR : - 56. IT WAS SUBMITTED BY SH. GUPTA THAT ACCORDING TO CLAUSE 12 OF MOU DATED 4.11.1996 THE WHIRLPOOL AND ITS PARENT COMPANY AGRE ED THAT THEY WILL NOT MANUFACTURE OR REPAIR COMPRESSOR DURING THE TERM OF GLOBAL SOURCING AGREEMENT SUBJECT TO THE CONDITION THAT WHIRLPOOL SHALL BE FR EE TO SELL REFRIGERATOR, COMPRESSOR TO SERVICE PARTNERS. HE SUBMITTED THAT PURSUANT TO THE MOU PARENT COMPANY OF TECUMSEH FLOATED ONE FULLY OWNED SUBSIDI ARY NAMELY, THE ASSESSEE, ON 30.1.1997 WHICH COMPANY ENTERED INTO AN AGREEMEN T WITH WHIRLPOOL INDIA LTD. IN CONNECTION WITH THE TRANSFER OF COMPRESSOR DIVISION AND RELATED OPERATION ALONG WITH NON-COMPETE AGREEMENT AS STATED IN MOU. HE REFERRED TO THE AGREEMENT DATED 30.1.1997, WHEREIN AS PER CLAUSE (E ) WHIRLPOOL AND ASSESSEE WERE STATED TO HAVE NEGOTIATED AN ARRANGEMENT BROAD LY STATED AS UNDER: - (I) WHIRLPOOL WILL SELL ITS UNDERTAKING THE COMPRESSO R DIVISIONS AND RELATED OPERATIONS TO TECUMSEH INDIA. (II) TECUMSEH INDIA WILL ENGAGE IN THE BUSINESS OF MANUF ACTURE, SALE AND REPAIR OF COMPRESSORS, CFC AND NON-CFC: (III) WHIRLPOOL WILL NOT COMPETE WITH TECUMSEH INDIA IN T HE MANUFACTURE, SALE OR REPAIR OF COMPRESSORS AS PROVI DED IN CLAUSE 9(J) HEREIN 57. SHRI GUPTA SUBMITTED THAT AS PER AGREEMENT THE PURCHASE PRICE OF VARIOUS ITEMS WERE STATED AS UNDER WHICH WAS CAPITALIZED IN THE BOOKS OF ACCOUNT OF THE ASSESSEE COMPANY: - (I) EQUIPMENT: 19.50 CR. (II) INVENTORY: 5.25 CR. (III)REAL ESTATE: 25.10 CR. ____________ TOTAL 49.85 CR. 58. THEN SH. GUPTA REFERRED TO CLAUSE 9(J) OF THE A GREEMENT DATED 2 ND JULY, 1997 WHICH READ AS UNDER:- WHIRLPOOL SHALL SIGN AND DELIVER TO TECUMSEH INDIA , AGAINST THE RECEIPT OF FULL CONSIDERATION SPECIFIED THEREIN A N ON-COMPETE AGREEMENT IN THE FORM AS CONTAINED IN APPENDIX M UNDERTAKING NOT TO COMPETE WITH TECUMSEH INDIA IN THE MANUFACT URE, SALE OR REPAIR OF COMPRESSORS IN INDIA, EXCEPT THAT WHIRLPO OL SHALL BE ITA NO.3759/DEL/2003 46 ENTITLED TO SELL AND INSTALL COMPRESSORS PURCHASED FROM TECUMSEH INDIA TO PERSONS UNDER ITS SERVICE ARRANGEMENTS, SU BJECT TO THE PROVISIONS OF THE SUPPLY AGREEMENTS. 59. IT WAS SUBMITTED THAT THIS CLAUSE PROVIDES FOR NON-COMPETE AGREEMENT AND NO TIME LIMIT HAS BEEN PROVIDED FOR AND THERE IS NO STIPULATION REGARDING REVOCATION OF THE SAME. THUS, IT WAS SUBMITTED THA T THE NATURE OF NON-COMPETE AGREEMENT IS A PERPETUAL ALONG WITH PURCHASE OF FAC TORY, LAND, MACHINE, BUILDINGS, EMPLOYEES, KNOW-HOW, ETC. AND NO SCOPE W HATSOEVER HAS BEEN LEFT FOR FUTURE BUSINESS TO WHIRLPOOL INDIA LTD. 60. LD. DR SUBMITTED THAT NON-COMPETE AGREEMENT DAT ED 10 TH JULY, 1997 IS THE FALL OUT OF EARLIER AGREEMENTS IN THE SHAPE OF MOU DATED 4 TH NOVEMBER, 1996 AND AGREEMENT DATED 2 ND JULY, 1997. IT WAS SUBMITTED THAT IN CLAUSES C AN D D OF NON-COMPETE AGREEMENT IT WAS PROVIDED AS UNDER:- C. IN TERMS OF THE PURCHASE AGREEMENT, THE PROMISO RS HAVE AGREED NOT TO COMPETE WITH TECUMSEH INDIA IN THE MA NUFACTURE, SALE AND REPAIR OF COMPRESSORS AS A CONDITION OF TH E SALE AND PURCHASE OF THE COMPRESSOR DIVISION AND RELATED OPE RATIONS, SUBJECT TO PAYMENT OF COMPENSATION FOR THE SAME. D. THE EXECUTION AND DELIVERY OF THIS AGREEMENT IS A CONDITION PRECEDENT TO TECUMSEH INDIAS OBLIGATION TO CONSUMM ATE THE TRANSACTIONS DESCRIBED IN THE PURCHASE AGREEMENT. 61. THEN, LD. DR REFERRED TO CLAUSE (A) OF THE NON- COMPETE AND NON- DISCLOSURE AGREEMENT WHICH READ AS UNDER:- THE PROMISORS HEREBY ACKNOWLEDGE AND RECOGNIZE THE HIGHLY COMPETITIVE NATURE OF THE BUSINESS IN WHICH TECUMSE H INDIA PROPOSES TO ENGAGE. ACCORDINGLY THE PROMISORS HERE BY AGREE THAT DURING FOR THE PERIOD COMMENCING WITH THE DATE OF T HIS AGREEMENT ENDING ON THE DATE THAT IS FIVE (5) YEARS AFTER THE DATE OF THIS AGREEMENT, THE PROMISORS WILL NOT, DIRECTLY OR INDI RECTLY. HE SUBMITTED THAT CLAUSE (B) READ AS UNDER:- THE PROMISORS HEREBY ACKNOWLEDGE THAT THE TRADE SE CRETS, PRIVATE OR SECRET PROCESSES OF TECUMSEH INDIA AND INFORMATI ON CONCERNING PRODUCTS, DEVELOPMENT, TECHNICAL INFORMATION, PROCU REMENT AND SALES ACTIVITIES AND PROCEDURES, PROMOTION AND PRI CING TECHNIQUES AND CREDIT AND FINANCIAL DATA CONCERNING CUSTOMERS OF TECUMSEH INDIA ARE VALUABLE, SPECIAL AND UNIQUE ASSETS. IN LIGHT OF THE HIGHLY ITA NO.3759/DEL/2003 47 COMPETITIVE NATURE OF THE INDUSTRIES IN WHICH TECUM SEH INDIA CONDUCTS BUSINESSES, THE PROMISORS FURTHER AGREE TH AT ALL KNOWLEDGE AND INFORMATION DESCRIBED IN THE PRECEDIN G SENTENCE SHALL BE CONSIDERED CONFIDENTIAL INFORMATION. IN R ECOGNITION OF THIS FACT, THE PROMISORS WILL NOT DISCLOSE ANY OF SUCH S ECRETS, PROCESSES OR INFORMATION TO ANY PERSON, FIRM, CORPORATION, AS SOCIATION OR OTHER ENTITY FOR ANY REASON OR PURPOSES WHATSOEVER AND T HE PROMISORS WILL NOT MAKE USE OF ANY SUCH SECRETS, PROCESSES OR INFORMATION FOR THEIR OWN BENEFIT OR THE BENEFIT OF ANY OTHER PERSO N OR OTHER ENTITY UNDER ANY CIRCUMSTANCES. 62. REFERRING TO THESE CLAUSES IT WAS SUBMITTED THA T WHILE CLAUSE E (A) (PG.18) OF NON-COMPETITION AGREEMENT, THE ERSTWHILE OWNERS AGREED NOT TO COMPETE FOR A PERIOD OF 5 YEARS WITH THE ASSESSEE, UNDER CL. (B ) (PG. 19)THEY AGREED NOT TO DISCLOSE TRADE SECRETS, PROCESSES, AND INFORMATION TO ANY PARTY NOR TO USE SUCH TRADE SECRETS, PROCESSES OR INFORMATION FOR THEIR O WN BENEFIT UNDER ANY CIRCUMSTANCES WITHOUT ANY TIME LIMIT. THIS WAY A GAIN THE NON-COMPETE AGREEMENT VIRTUALLY BECAME A PERPETUAL NON-COMPETE AGREEMENT, NOTWITHSTANDING TIME LIMIT OF 5 YEARS PROVIDED IN C L.(A). 63. IT WAS FURTHER SUBMITTED THAT AS PER SETTLED LA W, THE TERMS OF AGREEMENT SHOULD BE READ AS A WHOLE IN ORDER TO CONSTRUE ITS PROPER MEANING. REFERENCE WAS MADE TO EXPLANATION TO SECTION 91 OF THE INDIAN EVIDENCE ACT, 1872 TO CONTEND THAT WHEN THE CONTRACTS, ETC. ARE CONTAINED IN MORE THAN ONE DOCUMENT, ALL THE DOCUMENTS CONTAINING THE CONTRACT SHOULD BE PROPERLY GONE THROUGH. IT WAS SUBMITTED THAT SECTION 91 OF INDIAN EVIDENCE AC T PROVIDE AS UNDER:- 91. EVIDENCE OF TERMS OF CONTRACTS, GRANTS AND OTH ER DISPOSITIONS OF PROPERTY REDUCED TO FORM OF DOCUMENTS.- WHEN THE TERMS OF A CONTRACT, OR OF A GRANT, OR OF ANY OTHER DISPOSITION OF PROPERTY , HAVE BEEN REDUCED TO THE FORM OF A DOCUMENT, AND IN ALL CASES IN WHICH A NY MATTER IS REQUIRED BY LAW TO BE REDUCED TO THE FORM OF A DOCUMENT, NO EVI DENCE SHALL BE GIVEN IN PROOF OF THE TERMS OF SUCH CONTRACT, GRANT OR OTHER DISPOSITION OF PROPERTY, OR SUCH MATTER, EXCEPT THE DOCUMENT ITSELF, OR SECO NDARY EVIDENCE OF ITS CONTENT IN CASES IN WHICH SECONDARY EVIDENCE IS ADM ISSIBLE UNDER THE PROVISIONS HEREINBEFORE CONTAINED. EXPLANATION 1 THIS SECTION APPLIES EQUALLY TO CASES IN WHICH TH E CONTRACTS GRANTS OR DISPOSITIONS OF PROPERTY REFERR ED TO ARE CONTAINED IN ITA NO.3759/DEL/2003 48 ONE DOCUMENT, AND TO CASES IN WHICH THEY ARE CONTAI NED IN MORE DOCUMENTS THAN ONE. 64. REFERENCE WAS MADE TO SECTION 6 OF INDIAN EVIDE NCE ACT TO CONTEND THAT COURT MUST TAKE NOTICE OF THE FACTS WHICH FORMED PA RT OF THE SAME TRANSACTION ALTHOUGH THEY OCCURRED AT DIFFERENT TIMES AND PLACE . SECTION 6 OF THE EVIDENCE ACT READ AS UNDER:- 6. RELEVANCY OF FACTS FORMING PART OF SAME TRANSAC TION. FACTS WHICH, THOUGH NOT ISSUE, ARE SO CONNECTED WITH A FACT IN I SSUE AS TO FORM PART OF THE SAME TRANSACTION, ARE RELEVANT, WHETHER THEY OC CURRED AT THE SAME TIME AND PLACE OR AT DIFFERENT TIMES AND PLACES. 65. REFERRING TO THESE PROVISIONS OF LAW IT WAS SUB MITTED THAT THE ORIGINAL MOU DATED 4.11.96, THE PURCHASE AGREEMENT DATED 2 ND JULY, 1997 AND NON-COMPETE AGREEMENT DATED 10 TH JULY, 1997 ARE FORMING PART OF THE SAME TRANSACTIO N. TO LOOK AT THAT AS DIFFERENT AGREEMENT WILL BE TO IGNO RE THE OBVIOUS. THE MOU AS WELL AS PURCHASE AGREEMENT BOTH CONTAINED THE CLAUS ES TO THE EFFECT THAT A NON- COMPETE AGREEMENT WOULD BE SEPARATELY ENTERED INTO. 66. IT WAS SUBMITTED THAT THE FIRST OBJECTION OF TH E LD. AR IS TO TREAT THE NON- COMPETE TRANSACTION AS SEPARATE TRANSACTION. IT WA S SUBMITTED THAT THE SAID CONTENTION IS FAR FROM TRUTH. IT WAS SUBMITTED THA T THE ASSESSING OFFICER HAS DISCUSSED THE ENTIRE ISSUE BEGINNING WITH THE SIGNI NG OF MOU ON 04.11.96 IN THE ASSESSMENT ORDER AND HE HAS ALSO DISCUSSED THE FACT UM OF RS.46.25 CRORE AS HAVING BEEN PAID TOWARDS THE PURCHASE CONSIDERATION OF THE COMPRESSOR DIVISION AND RELATED OPERATIONS. THE ASSESSEE HAS ALSO CAPI TALIZED THE SAID EXPENSES OF RS.46.25 CRORES IN ITS BOOKS AND, THUS, APPLYING TH E SAME LOGIC THE NON-COMPETE FEES ALSO SHALL HAVE THE CHARACTER OF INITIAL OUTL AY OF THE NEW UNDERTAKING AND, THEREFORE, SHOULD BE CAPITALIZED. 67. HE SUBMITTED THAT EVEN IF IT IS ASSUMED THAT TH E ASSESSING OFFICER HAS NOT TREATED THE PAYMENT OF NON-COMPETE FEE AS PART OF THE SAME TRANSACTION OF INITIAL OUTLAY, THE ITAT BEING HIGHEST FACT FINDING AUTHORITY IS NOT DEBARRED FROM GOING INTO THE FACTUAL ASPECTS OF THE MATTER BROUGH T BEFORE IT AND IT WILL NOT BE ITA NO.3759/DEL/2003 49 PROPER TO OVERLOOK THE FACTS WHICH ARE CLEAR FROM T HE RECORD. TO CONTEND THAT ITAT HAS SUCH POWER, LD. DR HAS RELIED UPON THE FOL LOWING DECISIONS:- (I) KAPUR CHAND SHRIMAL VS. CIT 131 ITR 451 (SC) : IT IS WELL KNOWN THAT AN APPELLATE AUTHORITY HAS THE JURISDICTION TO CORRECT ALL ERRORS IN THE PROCEEDINGS UNDER APPEAL AND ISSUE, IF NECESSARY, APPROPRIATE DIRECTIONS TO THE AUTHORITY AGAINST WHOSE DECISION THE APPEAL IS PREFERRED TO DISPOSE OF THE WHOLE OR ANY PART OF THE MATTER AFRESH, UNLESS FORBIDDEN FROM DOING S O BY ANY STATUTE. (II) CIT VS. MANOHAR GLASS WORKS 232 ITR 302 (ALL) : THE APPELLATE TRIBUNAL, BEING THE LAST FACT FINDIN G BODY, IS UNDER A LEGAL OBLIGATION TO RECORD A CORRECT FINDING OF FAC T AND AS AND WHEN IT FINDS SOME DIFFICULTY IN RECORDING A CORRECT FINDIN G OF FACT ON ACCOUNT OF CONTRADICTIONS IN THE FACTUAL POSITION, IT MAY R EMAND THE MATTER BACK TO THE A.O TO THE LOWER AUTHORITY TO STATE COR RECT FACTS. A-13 68. REPLYING TO THE ARGUMENTS OF LD. AR, THAT VARIO US AGREEMENTS ARE EXECUTED BETWEEN DIFFERENT PARTIES, LD. DR SUBMITTE D THAT INITIAL MOU COULD NOT HAVE BEEN SIGNED BY THE ASSESSEE, SINCE IT CAME INT O EXISTENCE AS A SUBSIDIARY OF THE FOREIGN PARENT COMPANY, WHICH WAS A SIGNATOR Y TO THE MOU. A COMMON THREAD WAS RUNNING BETWEEN THESE AGREEMENTS/CONTRAC TS WHICH COULD NOT BE IGNORED. 69. IT WAS SUBMITTED THAT AS PER THE CLAIM OF THE A SSESSEE NON-COMPETE AGREEMENT WAS EXECUTED AFTER 8 DAYS OF THE PURCHASE AGREEMENT, THEREFORE, THESE TWO TRANSACTIONS SHOULD BE CONSIDERED TO BE S EPARATE TRANSACTIONS. HE SUBMITTED THAT THE ASSESSEE IS CONVENIENTLY IGNORIN G THE CLAUSE E(III) AND CLAUSE 9(J) OF THE PURCHASE AGREEMENT DATED 2 ND JULY, 1997 SPECIFICALLY PROVIDED FOR NON- COMPETITION BY THE ERSTWHILE OWNERS IN FAVOUR OF TH E ASSESSEE. THUS, IT WAS SUBMITTED BY LD. DR THAT ACCORDING TO EXPLANATION 1 TO SECTION 91 AND THE PRINCIPLE OF RES GAESTE (SAME TRANSACTION) IN SECTION 6 OF THE INDIAN EVID ENCE ACT SHALL COME INTO PLAY. 70. IT WAS SUBMITTED THAT AS PER SETTLED PRINCIPLES OF LAW THE SUM AND SUBSTANCE OF AN AGREEMENT SHOULD BE GATHERED BY CON STRUING ALL THE RELEVANT PROVISIONS OF THE AGREEMENT AND IT IS THE SUBSTANC E RATHER THAN FORM THAT ITA NO.3759/DEL/2003 50 SHOULD GUIDE THE COURT. IT WAS SUBMITTED THAT IF E XAMINED FROM SUCH ANGLE, THE NON-COMPETE AGREEMENT SIGNED IN THE PRESENT CASE IS IN FACT A PERPETUAL ONE. THUS, IT WAS SUBMITTED BY LD. DR THAT THE ENTIRE IS SUE IS REQUIRED TO BE CONSIDERED IN ITS PROPER PERSPECTIVE AND HAS TO BE TREATED AS ONE COMMON TRANSACTION ENTERED THROUGH TWO SEPARATE AGREEMENTS , BUT THE COMMON PRINCIPLE UNDERLYING IS THAT IT IS A SLUMP SALE OF THE ENTIRE COMPRESSOR UNIT ALONG WITH NON- COMPETE COMMITMENT FROM THE ERSTWHILE OWNERS AND, I N THIS MANNER, THE EXPENDITURE OF RS.2.65 CRORE SHOULD BE TREATED AS P ART AND PARCEL OF THE INITIAL COST OF ACQUISITION OF THE UNDERTAKING AND SHOULD B E DISALLOWED AS CAPITAL EXPENDITURE. 71. IN THE ALTERNATIVE, IT WAS SUBMITTED THAT THE E XPENDITURE OTHERWISE IS CAPITAL AS THE ASSESSEE ITSELF HAD TREATED THE SAID EXPENDI TURE AS DEFERRED REVENUE EXPENDITURE IN ITS BOOKS OF ACCOUNT AND THE EXPENDI TURE HAS BEEN SPREAD OVER FIVE YEARS AND 1/5 TH OF THE EXPENDITURE IS DEBITED TO THE PROFIT & LOSS ACCOUNT IN THE YEAR UNDER CONSIDERATION. 72. REFERENCE WAS MADE TO THE FOLLOWING TWO DECISIO NS OF THE HONBLE SUPREME COURT:- (I) ASSAM BENGAL CEMENT CO. LTD V CIT:27ITR 34(S C) A DECISION RENDERED BY 4-JUDGE BENCH. (II) CIT VS COAL SHIPMENT PVT LTD: 82 ITR 902(SC) - A DECISION RENDERED BY 3-JUDGE BENCH. 73. IT WAS SUBMITTED THAT IN ASSAM-BENGAL CEMENT CO MPANYS CASE THE ASSESSEE HAD ACQUIRED FROM GOVERNMENT OF ASSAM LEAS E RIGHT OF LIME STONE QUARRY FOR THE PURPOSE OF CARRYING ON MANUFACTURE O F CEMENT. IN ADDITION TO RENT AND ROYALTIES TWO SUMS WERE PAID AS PROTECTION FEES BY THE LESSOR, AGREED NOT TO GRANT ANY LEASE, PERMIT OR PROSPECTING LICENCE TO A NY OTHER PARTY WITHOUT A CONDITION THAT NO LIME STONE SHOULD BE USED FOR THE MANUFACTURE OF CEMENT AND ON THESE FACTS THE OBSERVATIONS OF HONBLE COURT WE RE AS UNDER:- THE ASSET WHICH THE COMPANY HAD ACQUIRED IN CONSIDE RATION OF THIS RECURRING PAYMENT WAS IN THE NATURE OF A CAPITAL AS SET, THE RIGHT TO ITA NO.3759/DEL/2003 51 CARRY ON ITS BUSINESS UNFETTERED BY ANY COMPETITION FROM OUTSIDERS WITHIN THE AREA. IT WAS A PROTECTION ACQUIRED BY TH E COMPANY FOR ITS BUSINESS AS WHOLE. IT WAS NOT A PART OF THE WORKING OF THE BUSINESS BUT WENT TO APPRECIATE THE WHOLE OF THE CAPITAL ASS ET AND MAKING IT MORE PROFIT YIELDING. THE EXPENDITURE MADE BY THE C OMPANY IN ACQUIRING THIS ADVANTAGE WHICH WAS CERTAINLY AN END URING ADVANTAGE WAS THUS OF THE NATURE OF CAPITAL EXPENDI TURE AND WAS NOT AN ALLOWABLE DEDUCTION UNDER SECTION 10(2)(XV) OF THE INCOME TAX ACT. 74. IN THE CASE OF CIT VS. COAL SHIPMENT PVT. LTD. (SUPRA) THE OBSERVATIONS OF THE HONBLE SUPREME COURT WERE AS UNDER:- ALTHOUGH WE AGREE THAT PAYMENT TO WARD OF COMPETITI ON IN BUSINESS TO A RIVAL DEALER WOULD CONSTITUTE CAPITAL EXPENDITURE IF THE OBJECT OF MAKING THAT PAYMENT IS TO DERIVE AN ADVAN TAGE BY ELIMINATING THE COMPETITION OVER SOME LENGTH OF TIM E, THE SAME RESULT WOULD NOT FOLLOW IF THERE IS NO CERTAINTY OF THE DURATION OF THE ADVANTAGE AND THE SAME CAN BE PUT TO AN END AT ANY TIME. HOW LONG THE PERIOD OF CONTEMPLATED ADVANTAGE SHOULD BE IN ORDER TO CONSTITUTE ENDURING BENEFIT WOULD DEPEND UPON THE C IRCUMSTANCES AND THE FACTS OF EACH INDIVIDUAL CASE. 75. REFERRING TO THESE TWO DECISIONS IT WAS SUBMITT ED THAT APEX COURT HAS UNEQUIVOCALLY MADE IT CLEAR THAT THE PAYMENT MADE T O AVOID COMPETITION BY OBTAINING A COMMITMENT FROM A RIVAL DEALER NOT TO P URSUE THE SAME LINE OF BUSINESS OVER SOME LENGTH OF TIME, WOULD CONSTITUTE CAPITAL EXPENDITURE. IT WAS SUBMITTED THAT TILL DATE THERE IS NO OTHER DECISION OF HONBLE SUPREME COURT DIRECTLY TOUCHING THE ISSUE AND THAT BEING SO THE A TTEMPT HAS BEEN MADE BY THE ASSESSEE TO GATHER INDIRECT SUPPORT FROM OTHER CASE S SUCH AS EMPIRE JUTE & CO. LTD. VS. CIT, 124 ITR 1, CIT VS. ASSOCIATED CEMENT COMPANIES LTD., 172 ITR 257 (SC), ALEMBIC CHEMICAL WORKS CO. LTD. VS. CIT 1 77 ITR 377, CIT VS. MADRAS AUTO SERVICES, 233 ITR 468 (SC). 76. IT WAS SUBMITTED THAT THESE DECISIONS CANNOT OB LITERATE THE EFFECT OF THE DIRECT DECISION ON THE SUBJECT. 77. DISTINGUISHING THE DECISION OF HONBLE JURISDIC TIONAL HIGH COURT IN THE CASE OF CIT VS. EICHER LTD. (SUPRA), IT WAS SUBMITTED BY LD. DR AS UNDER:- ITA NO.3759/DEL/2003 52 FACTS IN EICHER CASE : PAYMENT OF RS.4 CRORES WAS MADE BY THE ASSESSEE TO A RETIRING EMPLOYEE AND THE COMPANY WHICH HE WANTED T O HELP SET UP A RIVAL BUSINESS. IT WAS AN EXISTING BUSINESS AND THE NON-COMPETE AGR EEMENT DID NOT SPECIFY THE TIME PERIOD OVER WHICH THE PAYE E WOULD NOT ENGAGE IN THE ASSEESEES LINE OF BUSINESS. DECISION OF THE HIGH COURT ACCORDING TO HIGH COURT , THE PAYMENT IS MADE TOWAR DS PROTECTING THE ASSESSEES BUSINESS INTERESTS, ITS M ARKET POSITION & PROFITABILITY. THE ASSESSEE DID NOT ACQUIRE ANY CAPITAL ASSET BY M AKING THE PAYMENT OF NON-COMPETE FEE. FROM THE RECORD, IT IS NOT KNOWN HOW LONG THE NON-C OMPETE AGREEMENT WAS TO LAST, HENCE THE ADVANTAGE IS NOT E NDURING IN NATURE. THERE WAS NOTHING TO SHOW THAT IT WAS DRAWN OUT OF THE CAPITAL OF THE ASSESSEE. AFORESAID PROPOSITIONS AS APPLIED TO THE FACTS OF THE PRESENT CASE AND WHY THE S AME WOULD NOT BE APPLICABLE: A. PAYMENT OF RS. 2.65 CRORE WAS MADE BY WAY OF NON - COMPETE FEES AS PER MOU AND SUBSEQUENT AGREEMENTS. THE TIME LIMIT PRESCRIBED AS PER THE AGREEMENT WAS FOR A MAX IMUM PERIOD OF PERPETUITY AND A MINIMUM PERIOD OF 5 YEARS AS NO TED IN THE AGREEMENTS. B. IT IS NOT THE CASE OF THE REVENUE THAT THE ASSES SEE ACQUIRED ANY CAPITAL ASSET. RATHER ACCORDING TO THE REVENUE , WHAT THE ASSESSEE HAS ACQUIRED WAS AN ENDURING ADVANTAGE , AS HELD IN THE CASES OF ASSAM BENGAL CEMENT CO. LTD V CIT:27ITR 34 (SC) & CIT VS. COAL SHIPMENT PVT. LTD. 82 ITR 902(SC). C. ENDURING ADVANTAGE DOES NOT MEAN THAT AN ADVAN TAGE SHOULD LAST FOREVER. APPARENTLY THE ASSESSEES ARGU MENT APPEARS TO ITA NO.3759/DEL/2003 53 BE THAT AN ENDURING BENEFIT SHOULD BE SYNONYMOUS WITH PERPETUAL AND EVERLASTING. THE REVENUE HAS ALRE ADY SHOWN THAT ON A CORRECT INTERPRETATION OF THE TERMS OF BOTH TH E AGREEMENTS, IT IS SEEN THAT IT IS A PERPETUAL AGREEMENT WITHOUT ANY T IME LIMIT AND EVEN IF 5 YEARS TIME FRAME IS TAKEN AS THE OUTER LI MIT OF THE NON- COMPETE AGREEMENT, IT STILL BECOMES AN ENDURING BE NEFIT. WHILE CLARIFYING THE MEANING OF ENDURING BENEFIT, THE SUP REME COURT IN THE CASE OF ASSAM BENGAL CEMENT CO. LTD V CIT:27ITR 34(SC) AT PG 44 HAS HELD : THE EXPRESSIONS ENDURING BENEFIT OR OF A PERMANENT CHARACTER WERE INTRODUCED TO MAKE IT CLE AR THAT THE ASSET OR THE RIGHT ACQUIRED MUST HAVE ENOU GH DURABILITY TO JUSTIFY ITS BEING TREATED AS A CAPITA L ASSET. SIMILARLY, THE SUPREME COURT ALSO QUOTED WITH APPRO VAL AT PG 47 THE OBSERVATIONS MADE IN SUN NEWSPAPERS LTD.. V FEDERAL COMMISSIONER OF TAXATION, AN ENGLISH CASE.: WHEN THE WORDS PERMANENT OR ENDURING ARE USED IN THIS CONNECTIONS IT IS NOT MEANT THAT THE ADVANTAGE WHICH WILL BE OBTAINED WILL LAST FOR EVER . THE DISTINCTION WHICH IS DRAWN IS THAT BETWEEN MORE OR LESS RECURRENT EXPENSES INVOLVED IN RUNNING A BUSINESS AND AN EXPENDITURE FOR THE BENEFIT OF THE BUSINESS AS WHOLE..........EG...... ......- ENLARGEMENT OF THE GOODWILL COMPANY-PERMANENT IMPROVEMENT IN THE MATERIAL OR IMMATERIAL ASSETS OF THE CONCERN. THUS, SUPREME COURT HAS HELD THAT THE WORD ENDURI NG DOES NOT MEAN PERMANENT OR EVERLASTING. IN THE LIGHT OF THE ABOVE, IT IS THUS EVIDENT THAT THE ABOVE ADVANTAGE OF NON-COMPET ITION IS AN ENDURING ONE FOR THE APPELLANT AND HENCE SHOULD B E HELD AS A CAPITAL EXPENDITURE. 78. IT WAS SUBMITTED THAT THERE ARE SEVERAL OTHER D ECISIONS OF HONBLE HIGH COURTS WHICH HAVE HELD THAT NON-COMPETE FEES TO RES TRAIN COMPETITION FOR FIVE YEARS AND MORE WOULD BE HELD TO BE GIVING AN ENDUR ING ADVANTAGE AND, THUS, CAPITAL EXPENDITURE AND REFERENCE WAS MADE TO THE F OLLOWING DECISIONS:- (I) NEEL KAMAL TALKIES V CIT(1973) 87 ITR 691(ALL) (PG 8 OF DEPARTMENTAL PAPER BOOK) ITA NO.3759/DEL/2003 54 (II) CIT V HINDUSTAN PILKINGTON GLASS WORKS (1983) 139 ITR 581(CAL) (PG 11 OF DEPARTMENTAL PAPER BOOK) (III) GROVER SOAP PVT. LTD. VS. CIT (1996) 221 ITR 299 (MP) (PG 23 OF DEPARTMENTAL PAPER BOOK) (IV) CHELPARK CO. LTD. VS. CIT (1991) 191 ITR 249 ( MAD.) (PG 43 OF DEPARTMENTAL PAPER BOOK) (V) TAMILNADU DIARY DEVELOPMENT CORPN. LTD. VS. CIT (1996) 239 ITR 142.(MAD) (PG 26 OF DEPARTMENTAL PAPER BOOK) 79. IT WAS SUBMITTED THAT THE DECISION OF HONBLE D ELHI HIGH COURT IN THE CASE OF CIT VS. EICHER LTD. (SUPRA) SHALL NOT BE APPLICA BLE TO THE ASSESSEES CASE SINCE IN THAT CASE THE PERIOD OF VALIDITY OF THE RESTRICT IVE COVENANT WAS NOT SPECIFIED WHEREAS IN THE PRESENT CASE AGREEMENT SHOWS IT IS E ITHER PERPETUAL OR EFFECTIVE AT LEAST FOR FIVE YEARS. 80. IT WAS SUBMITTED THAT ASSESSMENT YEAR UNDER CON SIDERATION IS ASSESSMENT YEAR 1998-99 AND THE ASSESSEE COMPANY HAS NOT BEEN ABLE TO SHOW ANY PROOF THAT THE AGREEMENT HAS NOT LASTED ITS FULL TERM OF FIVE YEARS I.E., UPTO 2004. MERE CLAIM THAT AGREEMENT COULD BE TERMINATED AT WILL I S IN SHARP CONTRAST TO CLAUSE 4 OF NON-COMPETE AGREEMENT WHICH MENTIONS THE BENEFI T AND BINDING EFFECT AS UNDER:- THIS AGREEMENT SHALL BE BINDING UPON THE PROMISSOR S AND THEIR RESPECTIVE SUCCESSORS AND THE ASSIGNS AND SHALL INU RE TO THE BENEFIT OF TECUMSEH INDIA AND THE RESPECTIVE SUCCESSORS AND ASSIGNS. THIS AGREEMENT HAS BEEN ENTERED INTO FOR THE BENEFI T OF AND MAY BE ENFORCED BY THE TECUMSEH INDIA AND TECUMSEH AND THE IR RESPECTIVE SUCCESSORS AND ASSIGNS ONLY AND IS NOT I NTENDED TO BENEFIT, BE ENFORCEABLE BY, OR CREATE ANY REMEDY OR RIGHT OF ACTION IN FAVOUR OF ANY OTHER PERSON. 81. IT WAS SUBMITTED THAT THE READING OF ABOVE CLAU SE WOULD SHOW THAT THERE IS NO PROVISION FOR TERMINATION OF NON-COMPETE AGREEME NT, HENCE, THE FACTS OF THE PRESENT CASE ARE DIFFERENT FROM THE FACTS IN THE CA SE OF CIT VS. EICHER LTD. (SUPRA). ITA NO.3759/DEL/2003 55 82. IT WAS SUBMITTED THAT AS PER SETTLED LAW THE DE CISION OF HONBLE SUPREME COURT IS THE LAW OF LAND UNDER ARTICLE 141 OF THE C ONSTITUTION AND IF PRIMA FACIE, THERE APPEARS TO BE SOME DICHOTOMY BETWEEN THE DEC ISION OF SUPREME COURT AND HIGH COURT, IT IS THE DECISION OF THE SUPREME COURT WHICH WOULD HAVE PRECEDENT AND BINDING EFFECT OVER ALL HIGH COURTS, TRIBUNALS WITHIN THE TERRITORY OF INDIA. TO RAISE SUCH CONTENTION LD. DR REFERRED TO THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF SUGANTHI SURESH KUMAR VS. JAGDEESHAN AIR 2002 (SC) 681 WHEREIN THEIR LORDSHIPS OBSERVED AS UNDER: - IT IS IMPERMISSIBLE FOR THE HIGH COURT TO OVERRULE THE DECISION OF THE APEX COURT ON THE GROUND THAT SUPREME COURT LAID DO WN THE LEGAL POSITION WITHOUT CONSIDERING ANY OTHER POINT. IT I S NOT ONLY A MATTER OF DISCIPLINE FOR THE HIGH COURTS IN INDIA, IT IS T HE MANDATE OF THE CONSTITUTION AS PROVIDED IN ARTICLE 141 THAT THE LA W DECLARED BY THE SUPREME COURT SHALL BE BINDING OF ALL COURTS WITHIN THE TERRITORY OF INDIA. IT WAS POINTED OUT BY THIS COURT IN ANIL KU MAR NEIOTIA VS. UNION OF INDIA (AIR 1988 SC 1353) THAT THE HIGH COU RT CANNOT QUESTION THE CORRECTNESS OF THE DECISION OF THE SUP REME COURT EVEN THOUGH THE POINT SOUGHT BEFORE THE HIGH COURT WAS N OT CONSIDERED BY THE SUPREME COURT. 83. LD. DR REFERRED TO THE DECISION OF HONBLE GUJA RAT HIGH COURT IN CIT VS. VALLABHDAS VITHALDAS (2002) 253 ITR 543 (GUJ) IN WH ICH IT HAS BEEN HELD AS UNDER:- ONCE THERE IS A PRONOUNCEMENT OF THE HIGHEST COURT OF THE LAND, THE SAME IS BINDING ON ALL COURTS, TRIBUNALS AND A LL AUTHORITIES IN VIEW OF ARTICLE 141 OF THE CONSTITUTION AND IT IS N OT OPEN TO DISTINGUISH THE SAME BY REFERRING TO CERTAIN WORDS OF THOSE PROVISIONS WHICH WERE VERY MUCH BEFORE THE SUPREME COURT MERELY ON THE GROUND THAT SOME OTHER ARGUMENTS COULD HAVE BEEN URGED WHICH WERE NOT CONSIDERED BY THE SUPREME COURT. 84. HE ALSO REFERRED TO THE DECISION OF HONBLE SUP REME COURT IN THE CASE OF VIRTUAL SOFTWARE SYSTEMS LTD. VS. CIT (2007) 287 IT R 83 (SC) IN WHICH HONBLE SUPREME COURT HAS LAID DOWN A GENERAL PROPOSITION O N PRECEDENT, HOLDING THAT WHERE THE PREDOMINANT MAJORITY OF THE HIGH COURTS H AVE TAKEN A CERTAIN VIEW OF THE INTERPRETATION OF A CERTAIN PROVISION, THE SUPR EME COURT WOULD LEAN IN FAVOUR OF THE PREDOMINANT VIEW. THE SAME VIEW SHOULD BE A PPLIED IN THIS CASE AS WELL ITA NO.3759/DEL/2003 56 SINCE MAJORITY OF HIGH COURTS HAVE HELD NON-COMPETE FEE TO BE CAPITAL IN NATURE. 85. IT WAS SUBMITTED THAT BENEFIT DERIVED BY THE AS SESSEE IS IN THE CAPITAL FIELD, SINCE THIS AMOUNT IS PAID FROM THE SAME CA PITAL OUT OF WHICH THE PAYMENT FOR LAND, BUILDING, MACHINERY, ETC. OF THE COMPRES SOR DIVISION AND ITS RELATED OPERATIONS AMOUNTING TO RS.46.25 CRORE WAS PAID FOR AND DULY CAPITALIZED IN ITS BOOKS. 86. IN REBUTTAL OF THE ARGUMENT OF SHRI AJAY VOHRA, LD. DR SUBMITTED AS FOLLOWS:- 1. SHRI AJAY VOHRA, THE LD. COUNSEL FOR THE INTE RVENERS, HINDUSTAN COCA COLA BEVERAGES PVT. LTD., HAS EMPHASISED A LOT IN HIS ARGUMENTS THAT THERE HAS BEEN SUBSTANTIAL CHANGE IN THE JUDICIAL THINKING EVER SINCE THE DAYS OF (1) ASSAM BENGAL CEMENT LTD. VS. CIT 27 ITR 34 (SC)AND (2) CIT VS. COAL SHIPMENT PVT . LTD. 82 ITR 902 (SC). IN THIS CONNECTION, HE CITED THE RATIO OF CASES O F EMPIRE JUTE & CO., LTD., VS. CIT 124 ITR 1 AND ALEMBIC CHEMICAL WORKS CO. LTD. VS. CIT 177 ITR 377(SC). THERE IS NO TRUTH IN SUCH CLAIM FOR THE FOLLOWING REASONS : (A) THE DECISION OF THE ASSAM BENGAL CEMENT LTD. VS. CIT 27 ITR 34 (SC) WAS RENDERED BY A BENCH OF 4 JUDGES. SIMILARLY DECISION IN THE CASE OF CIT VS. COAL SHIPMENT PVT. LTD. 82 ITR 902 (SC) WAS RENDERED BY A BENCH OF 3 JUDGES WHEREAS EMPIRE JUTE & CO., LTD., VS. CIT : 124 ITR 1(SC) AND ALEMBIC CHEMICAL WORKS CO. LTD. VS. CIT 177 ITR 377(SC) CASE WAS RENDERED BY THREE & TWO JUDGES BENCHES RESPECTIVELY. LOOKING AT THE BE NCH-STRENGTH, IT CANNOT BE SAID THAT THE DECISION OF THE HONBLE SUP REME COURT RENDERED IN THE CASES OF ASSAM BENGAL CEMENT LTD. VS. CIT 27 ITR 34 (SC) OR CIT VS. COAL SHIPMENT PVT. LTD. 82 I TR 902 (SC) HAVE EITHER BEEN OVERRIDDEN OR REVERSED SUBSEQUENT LY. THESE DECISIONS STILL HOLD THE FIELD. (B) SUBSEQUENT TO THE DECISION OF EMPIRE JUTE & CO., LTD., VS. CIT 124 ITR 1 AND ALEMBIC CHEMICAL WORKS CO. LT D. VS. CIT 177 ITR 377(SC), THE SUPREME COURT HAS PASSED ANOTHER ORDER IN THE CASE OF ARVIND MILLS PVT. LTD. VS. CIT 197 ITR 422 (SC) , IN WHICH IT WAS HELD THAT THE IMPROVEMENT EFFECTED ON THE LAND ACQUIRED BY THE ASSESSEE COMPANY UNDER THE TOWN PLANNING SCH EME OF BOMBAY MUNICIPALITY IS A CAPITAL EXPENDITURE EVEN THOUGH SUCH EXPENDITURE RESULTED IN PROVIDING BETTER FACILITIES FOR CARRYING ON THE ITA NO.3759/DEL/2003 57 BUSINESS OF THE ASSESSEE. THE HONBLE SUPREME COUR T FURTHER LAID DOWN THE FOLLOWING RATIO: IN OUR VIEW, LEARNED COUNSEL FOR THE RESPONDENT IS JUSTIFIED IN SUBMITTING THAT THE CAPITAL EXPENDITUR E INCURRED IN CONNECTION WITH THE BUSINESS ACTIVITIES ULTIMATE LY RESULTS IN EFFICIENTLY CARRYING ON THE BUSINESS AND , BY THAT PROCESS GIVES AID IN THE RUNNING OF THE DAY-TO-DAY BUSINESS MORE EFFICIENTLY BUT SIMPLY ON THAT SCORE, A CAPITAL EXPENDITURE DOES NOT BECOME A REVENUE EXPENDITURE. (C) IF THE ARGUMENT OF THE COUNSEL OF THE INTERVE NER WERE TO BE ACCEPTED, NO EXPENDITURE COULD EVER BE TERMED AS C APITAL SINCE ALL EXPENSES ARE ULTIMATELY INCURRED FOR FACILITATING T HE CARRYING ON OF THE BUSINESS MORE PROFITABLY AND EFFICIENTLY. IN THAT CASE ONE LIMB OF THE SEC. 37 THAT NO EXPENDITURE OF CAPITAL NATURE SHO ULD BE ALLOWED IN COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD PRO FITS & GAINS OF BUSINESS OR PROFESSION, WOULD BECOME OTIOSE. IT I S AGAIN A SETTLED LAW THAT ANY INTERPRETATION WHICH MAKES A SECTION O F STATUTE OTIOSE SHOULD BE AVOIDED. 2 THE COUNSEL OF THE INTERVENER ALSO RELIED ON T HE DECISION OF THE SUPREME COURT IN CIT V. MADRAS AUTO SERVICE : 233 ITR 468 (SC) TO ARGUE THAT IN THE CURRENT JUDICIAL THINKING, TH E LENGTH OF TIME OVER WHICH THE ENDURING ADVANTAGE MAY ENURE, IS NOT DETE RMINATIVE OF THE NATURE OF THE EXPENSE AS LONG AS THE ADVANTAGE IS NOT IN THE CAPITAL FIELD. IN THIS CONNECTION, IT IS BROUGHT TO THE NOTICE OF THE HONBLE BENCH THAT THE DECISION IN THE ABOVE CASE RELATED TO THE EXPENDITURE INCURRED BY THE ASSESSEE ON A TENANTED BUILDING WHI CH WAS TO GO BACK TO THE LANDLORD AT THE END OF THE PERIOD OF T ENANCY AND THE LANDLORD ALLOWED THE BENEFIT OF REDUCED RENT TO THE ASSESSEE. IN THOSE PECULIAR CIRCUMSTANCES, THE EXPENSE WAS HELD TO BE REVENUE IN NATURE. HENCE THE RATIO OF THE SAID CASE IS NOT APPLICABLE TO THE PRESENT ONE. 3. SHRI VOHRA ALSO RELIED ON THE DECISION OF CIT VS. LATE G.D. NAIDU (1987) 165 ITR 63(MAD.) BUT THE SAID DECISION HAS BEEN IMPLIEDLY OVER RULED BY THE LATER DECISION OF THE S AME HIGH COURT IN CHELPARK CO. V. CIT(1991) 191 ITR 249 (MAD.). 4 HE ALSO SOUGHT STRENGTH FROM THE FACT THAT T HE DEPARTMENTS SLP IN SUPREME COURT AGAINST DELHI HIGH COURTS ORD ER IN THE CASE OF CIT VS. EICHER LTD : 302 ITR 249 (DEL) HAS BEEN DISMISSED, AND THEREFORE, DELHI HIGH COURTS VIEW NOW HAS BECOME F INAL. ITA NO.3759/DEL/2003 58 THE ABOVE ASSERTION IS NOT CORRECT. FIRST OF ALL, T HE FACTS OF THE PRESENT CASE RELATES TO AN UNDERSTANDING TAKEN OVER NEWLY WHEREAS IN CIT VS. EICHER LTD : 302 ITR 249 (DEL) CASE, NON-COMPETE FEE WAS PAID IN AN EXISTING BUSINESS. SECONDLY, WHEN AN SLP IS DISMISSED BY SUPREME COURT WITHOUT ENTERING INTO TH E MERITS OF THE CASE, IT DOES NOT CREATE A BINDING PRECEDENT. THE HONBLE CALCUTTA HIGH COURT HAS REFERRED TO 3 SUCH DECISIONS OF SUPR EME COURT ON THIS MATTER IN CIT VS. RUBY TRADERS & EXPORTERS LTD. (2003) 263 ITR 300 (CAL). THE RELEVANT PORTION IS REPRODUCED HERE UNDER: HAVING REGARD TO THE ORDER DISMISSING THE SLP, WE FIND THAT IT WAS PURELY ON A QUESTION OF FACT THE SUPREM E COURT DID NOT INTERFERE. THAT SUCH A DECISION HAS NO BINDING EFFECT UNDER ARTICLE 141 OF THE CONSTITUTIO N WOULD BE APPARENT FROM THE DECISIONS IN MUNICIPAL CORPORATION OF DELHI VS. GURNAM KAUR, AIR 1989 SC 38 (PARA 11); GANGADHARAN VS. JANARDHANA MALLAN, AIR 1996 SC 2127 (PARA 9); DIRECTOR OF SETTLEMENT V S. M.R. APPARAO (2002) 4 SCC 638, 650, (PARA . 7) RELIED UPON BY MR. DEB. IN THESE DECISIONS, IT WAS HELD T HAT THE DECISIONS BY THE APEX COURT DISMISSING THE SLP WITH OUT ENTERING INTO THE MERITS OF THE CASE WOULD NOT BE B INDING UNDER ARTICLE 141. IF THE SLP IS DISMISSED BY A N ON- SPEAKING ORDER, IT DOES NOT LAY DOWN ANY LAW. ARTI CLE 141 IS NOT APPLICABLE ON A STATEMENT OF FACT AND MATTER S OTHER THAN LAW. 5. IN VIEW OF THE ABOVE, IT IS EARNESTLY URGED THAT THE DISMISSAL OF SLP IN CIT VS. EICHER LTD : 302 ITR 249 (DEL) DOES NOT TIE THE HANDS OF THIS HONBLE TRIBUNAL SINCE IF AN SLP IS D ISMISSED BY A NON- SPEAKING ORDER, IT DOES NOT LAY DOWN A LAW. 6 . THE COUNSEL OF THE INTERVENER IN THE CASE OF REID ELSIEVER LTD. VS. DCIT. SHRI S.D. KAPILA CONTENDED THAT ALLAHABAD HIGH COUR TS DECISION IN THE CASE OF NEEL KAMAL TALKIES VS. CIT (1973) 87 ITR 691 (ALL) WAS CORRECT SINCE THE ASSESSEE, A CINEMA HALL OWNE R, COULD ENSURE COMPLETE MONOPOLY STATUS IN BIJNORE TOWN BY MAKING PAYMENT TO THE OTHER THEATRE OWNER. THIS ARGUMENT IS WHOLLY FALLACIOUS SINCE THE ASSESSEE COULD NOT HAVE STOPPE D ANY OTHER NEW CINEMA-HALL TO COME UP IN THAT TOWN THROUGH SUCH NO N-COMPETE AGREEMENT. FREEDOM TO PROFESS A BUSINESS OR PROFES SION IS A FUNDAMENTAL RIGHT AND ANY NUMBER OF NEW THEATRES CA N COME UP IN ANY TOWN. THUS WHAT THE ASSESSEE GOT IS REPRIEVE F ROM COMPETITION BY AN EXISTING COMPETITOR, NOT COMPLETE MONOPOLY ST ATUS. THEREFORE, HIS ARGUMENT THAT ONLY IN A CASE WHERE A MONOPOLY I S CREATED, SUCH ITA NO.3759/DEL/2003 59 EXPENSE SHOULD BE TREATED AS CAPITAL EXPENDITURE & OTHERWISE NOT, FALLS FLAT. DECISION 87. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS IN THE LIGHT OF THE MATERIAL PLACED BEFORE US. THE FIRST CONTENTION OF LD. COUNSEL OF THE ASSESSEE IS THAT NON-COMPETE AGREEMENT, FOR THE PURPOSE OF ALLO WABILITY OR OTHERWISE OF THE NON-COMPETE AMOUNT, SHOULD BE CONSIDERED SEPARATELY FROM WHAT WAS PAID BY THE ASSESSEE TO ACQUIRE THE BUSINESS ACTIVITY OF TR ANSFORMERS AND ITS RELATED FACILITIES FROM WHIRLPOOL INDIA LTD. FOR CONTENDIN G SO, THE RELIANCE HAS BEEN PLACED ON THE FACT THAT THE ASSESSING OFFICER AND C IT (A) BOTH HAVE CONSIDERED THE SAID AGREEMENT ON STAND ALONE POINT. IN OTHER WORDS, THE CONTENTION OF LD. COUNSEL IS THAT THE PAYMENT MADE WITH REGARD TO NON -COMPETE AGREEMENT SHOULD BE CONSIDERED SEPARATELY FROM THE OTHER PAYMENTS MA DE BY THE ASSESSEE WITH REGARD TO ACQUISITION OF ASSETS RELATING TO ACTIVIT Y OF MANUFACTURING AND TRADE OF COMPRESSORS. 88. THE FACTS HAVE ALREADY BEEN SET OUT IN THE EARL IER PART OF THIS ORDER. THE PARENT COMPANY OF THE ASSESSEE COMPANY BEING LEADIN G MANUFACTURER OF COMPRESSORS WORLDWIDE, HAD DESIRED TO ENTER THE IND IAN MARKET FOR THAT ACTIVITY AND, FOR THE PURPOSE OF EFFECTUATING SUCH DESIRE TH AT COMPANY ENTERED INTO AN AGREEMENT CALLED MOU WITH THE WHIRLPOOL INDIA LTD. AND ITS PARENT COMPANY IN WHICH IT WAS CLEARLY STATED IN CLAUSE 1.1 THAT TECU MSEH AND WHIRLPOOL SHALL ENTER INTO AN ASSET PURCHASE AGREEMENT WHEREBY TECUMSEH ( THROUGH A TO BE ESTABLISHED LOCAL INDIAN ENTITY) SHALL PURCHASE ALL COMPRESSOR, MACHINERY, EQUIPMENT AND TOOLING LOCATED AT WHIRLPOOLS FARIDA BAD FACILITY AS WELL AS RELATED COMPRESSOR COMPONENT ASSETS LOCATED AT WHIRLPOOLS BALLABHGARH FACILITY [INCLUDING LAMINATIONS, WIRE DRAWINGS, CENTRAL TOOL ROOM, OVERHEAD PROTECTORS AND RELAYS] AND ALL SUCH ASSETS WERE TO BE FULLY IDENTI FIED IN SUCH ASSET PURCHASE AGREEMENT OR OTHER APPROPRIATE LOCAL INDIAN DOCUMEN TATION REQUIRED TO DETAIL SUCH SALE AND PURCHASE. SIMILARLY, IN CLAUSE 12 AN D 12.1 THE MENTION IS MADE ITA NO.3759/DEL/2003 60 REGARDING NON-COMPETE AGREEMENT WHEREBY WHIRLPOOL I NDIA AND WHIRLPOOL USA (INCLUDING ITS WHOLLY OWNED SUBSIDIARIES) AGREED NO T TO MANUFACTURE OR REPAIR COMPRESSORS DURING THE TERM OF GLOBAL SOURCING AGRE EMENT WITH TECUMSEH. HOWEVER, WHIRLPOOL HAS BEEN GIVEN RIGHT TO SELL REF RIGERATOR COMPRESSORS TO SERVICE PARTNERS PURCHASED FROM TECUMSEH SUBJECT TO PROVISIONS OF CLAUSE 6.1 OF THE AGREEMENT. THE PURCHASE PRICE IS MENTIONED IN CLAUSE 3 AND 3.1 WHEREBY IT IS STIPULATED AS UNDER:- 3. PURCHASE PRICE. 3.1 TECUMSEH SHALL PAY TO WHIRLPOOL AS THE TOTAL PU RCHASE PRICE FOR THE COMPRESSOR DIVISION ASSETS REFERRED TO IN A RTICLE 1 AND THE BALLABHGARH LAND AND BUILDINGS REFERRED TO IN ARTIC LE 2 HEREOF, RS.525 MILLION (52.5 CRORES). 89. AS PER CLAUSE 3.4 OF MOU, IT IS STATED AS UNDER :- 3.4 PARTIES SHALL MEET TO DETERMINE THE PROPER ALL OCATION OF PURCHASE PRICE FOR VARIOUS ASSETS. 90. LOOKING INTO THE ABOVE CLAUSES OF MOU IT CAN BE OBSERVED THAT PRINCIPALLY BOTH THE PARTIES HAD AGREED TO PASS ON A TOTAL CONS IDERATION OF 52.5 CRORES AND ALLOCATION OF PURCHASE PRICE FOR VARIOUS ASSETS WAS TO BE DETERMINED AT THE FURTHER MEETING OF THE PARTIES AND ACCORDING TO CLA USE 3.5 THE BASE PRICE RETAINED FOR PURCHASE OF RAW MATERIALS AND WORK IN PROGRESS WAS KEPT AT 5.25 CRORES BEING 10% OF THE TOTAL PURCHASE PRICE AGREED. THOUGH CLA USE 3 OF THE MOU HAS REFERENCE TO ARTICLE 1 AND ARTICLE 2, BUT COPY OF T HE SAME HAS NOT BEEN FURNISHED IN THE PAPER BOOK FILED BEFORE US. 91. TO ASCERTAIN THAT FOR WHAT THE TOTAL PAYMENT OF RS.52.5 CRORES WAS MADE, ONE HAS TO LOOK INTO THE AGREEMENT DATED 2 ND JULY, 1997 WHICH WAS ENTERED INTO IN FURTHERANCE OF MOU BY THE TO BE ESTABLISHED LOC AL INDIAN ENTITY, NAMELY, TECUMSEH INDIA AND WHIRLPOOL INDIA LTD. WHEREIN A T OTAL SUM OF RS.49.85 CRORES WAS DETERMINED FOR THE VARIOUS ASSETS. MORE PARTIC ULARLY, THESE ALLOCATED PAYMENTS ARE DESCRIBED IN PARA 9 OF THIS ORDER. ITA NO.3759/DEL/2003 61 92. BROADLY STATED, THE PURCHASE PRICE PAID FOR THE SALE AND PURCHASE OF COMPRESSOR DIVISION AND RELATED OPERATION AND FACIL ITIES EXCLUDING THE RAW MATERIALS, WORK IN PROGRESS AND THE LAND AND BUILDI NG AT BALLABHGARH WAS A SUM OF RS.19.50 CRORE (CLAUSE 2 OF THE AGREEMENT) PURC HASE PRICE FOR INVENTORY I.E., RAW MATERIAL AND WORK IN PROGRESS WAS RS.5.25 CRORE S (SECTION 5 OF THE AGREEMENT), PURCHASE PRICE OF THE LAND (CALLED AS MAIN PARCEL, SEVEN ACRE PARCEL AND FIVE ACRE PARCEL) FOR AN AGGREGATE AM OUNT OF RS.25.10 CRORES WHICH MADE THE TOTAL OF THESE ASSETS AT RS.49.85 CRORE. IF A FURTHER SUM OF RS.2.65 CRORE PAID ON ACCOUNT OF NON-COMPETE FEE IS ADDED T O THE SAME, THE TOTAL WILL COME TO RS.52.50 CRORE. 93. THUS, IT WILL BE INCORRECT TO SAY THAT THE NON- COMPETE AGREEMENT SHOULD BE CONSIDERED ON STAND ALONE BASIS AS THE REFERENCE OF NON-COMPETE AGREEMENT IS NOT COMING FOR THE FIRST TIME IN THE AGREEMENT DATE D 2 ND JULY, 1997, BUT IT ORIGINATED FROM THE MOU DATED 4 TH NOVEMBER, 1996 WHEREIN AS PER CLAUSE 12 IT IS CLEARLY STATED THAT THESE PARTIES SHALL ENTER INTO NON-COMPETE AGREEMENT AND AGGREGATE AMOUNT OF TRANSFER OF ALL THESE ASSETS W AS STATED TO BE RS.52.50CRORE. ALL THE FURTHER EVENTS HAVE PROCEEDED ON THE BASIS OF MOU ONLY AS THERE IS NO SIGNIFICANT CHANGE IN WHAT WAS STATED IN MOU AS A T OTAL CONSIDERATION FOR WHOLE OF THE TRANSACTION AND WHAT WAS SUBJECT TO TRANSFER . 94. WHILE CONSIDERING THE FACTS AND ARRIVING AT A L EGAL CONCLUSION FROM THOSE FACTS, IT IS NECESSARY TO GO INTO THE ENTIRE TRANSA CTION FOR PROPER APPRECIATION OF THE FACTS AS WELL AS LAW. 95. FROM THE FACTS, IT IS CLEAR THAT FOR ENTIRE TRA NSACTION WHICH INCLUDED NON- COMPETE AGREEMENT AN AGGREGATE SUM OF RS.52.5 CRORE WAS AGREED TO BE PAID AS PER CLAUSE 3.1 OF THE MOU WHICH IS REPRODUCED IN PARA 88 OF THIS ORDER. AS PER CLAUSE 3.4 OF THE MOU PARTIES WERE TO MEET FOR DETERMINING THE PROPER ALLOCATION OF THE PURCHASE PRICE FOR VARIOUS ASSETS . THE ALLOCATION OF PRICE FOR ITA NO.3759/DEL/2003 62 VARIOUS ASSETS HAS BEEN DESCRIBED ABOVE WHICH INCLU DE A SUM OF RS.2.65 CRORE BEING CALLED AS NON-COMPETE FEE. THEREFORE, THE VERY BASIS OF PAYMENT OF SO- CALLED NON-COMPETE FEES CANNOT BE DETACHED FROM THE MEMORANDUM OF UNDERSTANDING BEING PART AND PARCEL OF THE INITIALL Y AGGREGATED AGREED PURCHASE PRICE. CLAUSE `C & `D OF NON-COMPETE AGREEMENT H AVE ALREADY BEEN REPRODUCED IN PARA 60 OF THIS ORDER. CLAUSE D CLEA RLY STATES THAT EXECUTION & DELIVERY OF NON-COMPETE AGREEMENT IS A CONDITION PR ECEDENT FOR ASSESSEES OBLIGATION TO CONSUMMATE THE TRANSACTION DESCRIBED IN THE PURCHASE AGREEMENT. THEREFORE, ALL THESE AGREEMENTS FORM ONE TRANSACTIO N WHICH ARE INTERWOVEN BY A COMMON THREAD. THESE AGREEMENTS ARE NOT MUTUALLY E XCLUSIVE SO AS TO SAY THAT ONE COULD BE FULFILLED WITHOUT FULFILLING THE OTHER . THUS, THERE IS NO FORCE IN THE CONTENTION OF THE LD. COUNSEL OF THE ASSESSEE THAT THE NON-COMPETE FEES PAYMENT SHOULD BE CONSIDERED AND VIEWED ON STAND AL ONE BASIS. THE SAME IS HEREBY REJECTED. 96. IT WILL ALSO BE INCORRECT TO SAY THAT THE ASSES SING OFFICER HAS CONSIDERED SUCH PAYMENT ON STAND ALONE BASIS AS ALL THE AGREEM ENTS NAMELY; MOU, FINAL AGREEMENT, NON-COMPETE AGREEMENT AND SUPPLY AGREEME NT WERE PRODUCED BEFORE THE ASSESSING OFFICER AND HE HAS DISCUSSED A LL THESE AGREEMENTS IN THE ASSESSMENT ORDER. IT IS MENTIONED BY THE ASSESSING OFFICER IN THE ASSESSMENT ORDER THAT THE ASSESSEE COMPANY WAS INCORPORATED ON JANUARY 30, 1997 AND IT IS A FULLY OWNED SUBSIDIARY OF A NON-RESIDENT COMPANY KNOWN AS M/S TECUMSEH PRODUCTS COMPANY, MICHIGAN, USA. THE COMPANY START ED BUSINESS OF ACQUIRING THE COMPRESSOR DIVISION OF M/S WHIRLPOOL INDIA LTD. IN THE MONTH OF JULY, 1997. FOR SUCH PURCHASE, THE ASSESSEE ENTERED INTO AN MOU ON 4 TH NOVEMBER, 1996 AND A FINAL AGREEMENT WAS EXECUTED ON 2 ND JULY, 1997 ACCORDING TO WHICH AN AMOUNT OF RS.46.25 CRORE WAS PAID TO M/S WHIRLPOOL INDIA LTD. FOR VARIOUS ITEMS LIKE INVENTORY, BUILDING, LAND AND PLANT AND MACHIN ERY. IT IS FURTHER STATED BY THE ASSESSING OFFICER THAT INCLUDED IN THAT AMOUNT WAS A SUM OF RS.2.56 (ACTUAL AMOUNT IS RS.2.65 CRORE) ACCORDING TO ITEM NO. 9(J) OF THE AGREEMENT AND M/S WHIRLPOOL WAS TO SIGN A NON-COMPETE AGREEMENT AFTER RECEIVING FULL CONSIDERATION IN THE FORM CONTAINED IN APPENDIX-M. IT IS FURTHER STATED BY THE ASSESSING OFFICER ITA NO.3759/DEL/2003 63 THAT THE ASSESSEE DID NOT FILE APPENDIX-M, BUT FILE D A NON-COMPETE AGREEMENT DATED 10 TH JULY, 1997. THEREFORE, IT CANNOT BE HELD THAT THE ASSESSING OFFICER HAS CONSIDERED THE PAYMENT OF NON-COMPETE FEE ON STAND ALONE BASIS. THE CONSIDERATION THEREOF WAS FOR THE PURPOSE OF DETERM INING THE ALLOWABILITY OR OTHERWISE THEREOF FROM INCOME-TAX POINT OF VIEW AS OTHER PAYMENTS WERE NEVER CLAIMED BY THE ASSESSEE BEING ON REVENUE ACCOUNT. BUT THAT DOES NOT MEAN THAT THE ASSESSING OFFICER HAS CONSIDERED NON-COMPETE AG REEMENT ON STAND-ALONE BASIS. 97. AS POINTED OUT EARLIER, TO ARRIVE AT A PROPER C ONCLUSION, IT IS NECESSARY TO GO INTO THE ENTIRETY OF FACTS AND EVEN IF IT IS THE CASE OF THE LD. COUNSEL THAT THE ASSESSING OFFICER AND CIT (A) BOTH HAVE CONSIDERED THE NON-COMPETE AGREEMENT ON STAND ALONE BASIS, EVEN THEN THE TRIBUNAL IS NOT PRECLUDED FROM GOING INTO THE MOU AND MAIN AGREEMENT TO DECIDE THE QUESTION RELAT ING TO ALLOWABILITY OR OTHERWISE OF SUCH CLAIM OF THE ASSESSEE. THEREFORE ALSO THE CONTENTION OF LD. COUNSEL APPEARING ON BEHALF OF THE ASSESSEE THAT NO N-COMPETE AGREEMENT SHOULD BE CONSIDERED ON STAND ALONE BASIS CANNOT BE ACCEPTED. 98. ON THE ISSUE OF ALLOWABILITY OR OTHERWISE OF A SUM OF RS.2.65 CRORE, BOTH THE PARTIES HAVE SUBMITTED ELABORATE ARGUMENT IN TH EIR FAVOUR. BOTH THE PARTIES AND THE LEARNED COUNSELS OF INTERVENERS HAVE ALSO R ELIED UPON CATENA OF JUDICIAL PRONOUNCEMENTS TO CONTEND THAT THE ISSUE LIES IN TH EIR FAVOUR. ALL THESE CASES ARE DESCRIBED IN DETAIL WHILE RECORDING THEIR ARGUM ENTS. ALL OF THEM MAY NOT BE DISCUSSED IN DETAIL WHILE RECORDING OUR CONCLUSION ON THE ISSUE BUT THAT DOES NOT MEAN THAT THESE CASES HAVE NOT BEEN TAKEN INTO CONS IDERATION OR KEPT IN MIND WHILE CONSIDERING THE ISSUE. 99. AR WHILE ARGUING THAT THE PAYMENT OF NON-COMPET E FEES IS NOT IN THE NATURE OF CAPITAL HAS FIRSTLY PLACED RELIANCE ON TH E DECISION IN THE CASE OF ASSAM BENGAL CEMENT COMPANY VS. CIT (SUPRA). IN THAT CA SE THE ASSESSEE HAD ACQUIRED FROM THE GOVERNMENT OF ASSAM A LEASE OF LI MESTONE QUARRIES FOR A PERIOD OF 20 YEARS FOR THE PURPOSE OF CARRYING ON T HE MANUFACTURE OF CEMENT IN ITA NO.3759/DEL/2003 64 CONSIDERATION OF PAYMENT OF YEARLY RENTS AND ROYALT IES. IN ADDITION, THE ASSESSEE AGREED TO PAY TWO FURTHER SUMS AS PROTECTION FEES W HICH WAS IN LIEU OF LESSOR GIVING AN UNDERTAKING NOT TO GRANT LEASE, PERMIT OR A PROSPECTING LICENCE WITH REGARD TO LIMESTONE TO ANY OTHER PARTY WITHOUT A CO NDITION THAT THE LIMESTONE GIVEN WILL NOT BE USED FOR THE PURPOSE OF MANUFACTU RING CEMENT. 99.1 THEIR LORDSHIPS, REFERRING TO VARIOUS DECISION S, HAVE COME TO THE CONCLUSION THAT UNDER CLAUSE 4, THE LESSORS UNDERTO OK NOT TO GRANT ANY LEASE PERMIT OR PROSPECTING LICENCE REGARDING LIMESTONE T O ANY OTHER PARTY IN RESPECT OF THE GROUP OF QUARRIES CALLED THE DURGASIL AREA WITH OUT A CONDITION THEREIN THAT NO LIMESTONE SHALL BE USED FOR THE MANUFACTURING OF CE MENT. THE CONSIDERATION OF RS.5000/- PER ANNUM WAS TO BE PAID BY THE ASSESSEE COMPANY TO THE LESSOR DURING THE WHOLE PERIOD OF THE LEASE AND SUCH ADVAN TAGE OR BENEFIT WAS TO INURE FOR THE WHOLE PERIOD OF LEASE. IT WAS HELD TO BE E NDURING BENEFIT OF THE WHOLE OF THE BUSINESS OF THE COMPANY AND, THUS, FALLING WITH IN THE VISCOUNT CAVES TEST THOUGH THE AMOUNT WAS NOT A LUMPSUM PAYMENT BUT WAS SPREAD OVER THE WHOLE PERIOD OF THE LEASE AND IT WAS A RECURRING PAYMENT. 99.2 IT WAS HELD THAT THE FACT THAT IT WAS A RECURR ING PAYMENT WAS IMMATERIAL BECAUSE ONE HAD TO LOOK TO THE NATURE OF PAYMENT WH ICH IN TURN WILL BE DETERMINED BY THE NATURE OF ASSETS WHICH THE COMPAN Y HAD ACQUIRED. IT WAS OBSERVED THAT THE ASSET WHICH WAS ACQUIRED BY THE C OMPANY IN CONSIDERATION OF SUCH RECURRING PAYMENT WAS IN THE NATURE OF CAPITAL ASSET I.E., THE RIGHT TO CARRY ON ITS BUSINESS UNFETTERED BY ANY COMPETITION FROM OUTSIDERS WITHIN THE AREA. IT WAS A PROTECTION ACQUIRED BY THE COMPANY FOR ITS BU SINESS AS A WHOLE. IT WAS OBSERVED TO BE NOT A PART OF THE WORKING OF THE BU SINESS, BUT IT APPRECIATED THE WHOLE OF THE CAPITAL ASSET WHICH WAS MADE MORE PROF IT YIELDING. THE EXPENDITURE WAS CONSIDERED TO BE MADE FOR ACQUIRING SUCH ADDITI ON, WHICH WAS AN ENDURING ADVANTAGE AND, THUS, WAS HELD TO BE IN THE NATURE O F CAPITAL EXPENDITURE. RECURRING PAYMENT WAS CONSIDERED AS AN APPRECIATION TO THE LEASE TO THE CONSIDERABLE EXTENT, AND IT WAS SO HELD FOR SECOND PROTECTION FEES OF RS.35,000/- ITA NO.3759/DEL/2003 65 FOR THE YEAR WHICH WAS ALSO CONSIDERED TO BE ACQUIS ITION OF AN ADVANTAGE OF ENDURING NATURE WHICH INURED FOR THE BENEFIT OF THE WHOLE OF THE BUSINESS FOR THE FULL PERIOD OF THE LEASE UNLESS TERMINATED BY THE L ESSOR BY NOTICE AS PRESCRIBED IN THE LAST PART OF THE CLAUSE. 100. HERE, IN THE PRESENT CASE, AS PER THE SUBMISSI ON OF THE ASSESSEE, THE COMPRESSOR SUPPLY AGREEMENT HAS TERMINATION CLAUSE ACCORDING TO WHICH SUPPLY AGREEMENT, WHICH WAS TO TAKE EFFECT FROM 14 TH JULY, 1997 AND WAS TO END AT THE CLOSE OF THE BUSINESS ON 31 ST DECEMBER, 2002, COULD BE TERMINATED BY THE MUTUAL WRITTEN AGREEMENT UPON WRITTEN NOTICE OF TERMINATIO N PROVIDING AT LEAST 120 DAYS IN ADVANCE OF THE EFFECTIVE DATE OF SUCH TERMINATIO N. THAT TOO UNLESS SHORTER PERIOD IS AGREED TO BY THE PARTIES. BUT THE PROVIS ION OF TERMINATION OF SUPPLY AGREEMENT HAS NOTHING TO DO WITH THE NON-COMPETE CL AUSE AS THE SO CALLED TERMINATION CLAUSE DOES NOT AFFECT THE ENTIRE TRANS ACTION IN PRINCIPLE WHICH INCLUDES NON-COMPETE AGREEMENT AS WELL. IN THE CAS E OF ASSAM BENGAL CEMENT COMPANY VS. CIT (SUPRA) ALSO THERE IS REFERENCE OF SUCH TERMINATION OF NON- PROTECTION CLAUSE IN THE LEASE AGREEMENT ITSELF, BU T EVEN THEN THE PAYMENT MADE BY THE ASSESSEE IN THAT CASE WAS HELD TO BE CAPITAL IN NATURE. 101 NOW, COMING TO THE DECISION IN THE CASE OF CO AL SHIPMENT PVT. LTD. (SUPRA). IN THAT CASE THE ASSESSEE WAS ONE OF THE COMPANIES WHICH EXPORTED COAL FROM INDIA TO BURMA BEFORE THE SECOND WORLD WA R. THE SHIPMENT OF COAL TO BURMA RAILWAYS BEFORE THE WAR WAS THE SUBJECT OF OP EN TENDER. AFTER THE CESSATION OF HOSTILITIES IN 1946, IT BECAME POSSIBL E TO RESUME THE EXPORT OF COAL TO BURMA. IN ORDER TO OVERCOME THE DIFFICULTIES IN T HE CONDUCT OF TRADE, FOLLOWING THE WAR, THE PRINCIPALS OF COAL TRADE IN BENGAL FORMED AN ASSOCIATION STYLED AS COAL EXPORTERS AND CHARTERS ASSOCIATION OF WHICH THE AS SESSEE COMPANY AS WELL AS M/S H.V. LOW & CO. LTD. WERE TWO OF THE MAJOR MEMB ERS OF THE ASSOCIATION. WHEN M/S H.V. LOW & CO. LTD. LEARNT THE RESUMPTION OF THE COAL EXPORT TO BURMA BY THE ASSESSEE COMPANY IN 1946, THEY ALSO EXPRESSE D AN INTENTION TO EXPORT COAL TO BURMA. THERE UPON THE TWO COMPANIES CAME T O AN UNDERSTANDING AND ARRIVED AT A MUTUAL ARRANGEMENT ON THE FOLLOWING LI NES:- ITA NO.3759/DEL/2003 66 (I) M/S H.V. LOW & CO. LTD. WOULD NOT EXPORT COAL T O BURMA DURING THE SUBSISTENCE OF THE AGREEMENT. (II) M/S H.V. LOW & CO. LTD. WOULD ASSIST THE RESPO NDENT IN PROCURING COAL FOR SHIPMENT TO BURMA. (III) THE RESPONDENT WOULD CARRY ON THE COAL SHIPPI NG BUSINESS AND PAY M/S H.V. LOW & CO. LTD. AT 5 AS PER THE TON (SUBSE QUENTLY RAISED TO RS.1-5-0 PER TON) OF COAL SHIPPED TO BURMA. 101.1 IN PURSUANCE OF THE ABOVE MUTUAL AGREEMENT, THE ASSESSEE MADE CERTAIN PAYMENTS TO M/S H.V. LOW & CO. OR ITS NOMINEE WHICH WERE CLAIMED TO BE REVENUE EXPENDITURE. THE ASSESSING OFFICER HELD TH AT THESE WERE PAYMENTS MADE TO SECURE MONOPOLY, THEREFORE, CANNOT BE ALLOW ED AS REVENUE EXPENDITURE. AAC UPHELD THE ORDER OF ASSESSING OFFICER. HOWEVER , THE TRIBUNAL REVERSED THE ORDER OF AAC AND HELD THAT THE PAYMENTS MADE BY THE ASSESSEE WERE REVENUE IN NATURE. THE HONBLE HIGH COURT ALSO HELD THAT THE PAYMENT MADE BY THE ASSESSEE WERE NOT SUCH AS WAS LIKELY TO HAVE AN END URING BENEFIT EFFECT. IN THE OPINION OF THE HIGH COURT, THERE WAS NO CERTAINTY O F DURATION AND THE ARRANGEMENT COULD BE TERMINATED OR REVOKED AT ANY TIME. THE CO NSIDERATION WAS NOT PAID ONCE FOR ALL, BUT WAS RELATED TO UNCERTAIN SHIPME NTS TO BE MADE. IT DID NOT CREATE ANY MONOPOLY OR BRING ABOUT ANY CAPITAL ADVA NTAGE TO THE ASSESSEE AND, THUS, ASSESSEE WAS HELD ENTITLED TO GET DEDUCTION O F EXPENDITURE U/S 10(2) (XV). 101.2. THE HONBLE APEX COURT HAS OBSERVED THAT TH E TRIBUNAL HAS RECORDED A FINDING OF FACT THAT THE PAYMENTS MADE B Y THE ASSESSEE TO M/S H.V. LOW & CO. WERE TO ASSIST THE RESPONDENT IN PROCURIN G COAL FOR SHIPMENT TO BURMA AND WERE THEMSELVES NOT TO EXPORT COAL TO BURMA DUR ING THE SUBSISTENCE OF THE AGREEMENT. IT WAS FURTHER OBSERVED THAT JUDICIAL D ECISIONS ON THE ISSUE HAVE, FROM TIME TO TIME, LAID DOWN SOME BROAD PRINCIPLES IN ORDER TO DETERMINE WHETHER AN EXPENDITURE IS OF CAPITAL NATURE OR REVENUE NATU RE. BUT DESPITE THE ENUNCIATION OF THOSE PRINCIPLES, IT IS NOT ALWAYS E ASY TO DECIDE THE QUESTION IN THE CONTEXT OF THE CIRCUMSTANCES OF AN INDIVIDUAL CASE AND CONSIDERABLE DIFFICULTY IS ITA NO.3759/DEL/2003 67 EXPERIENCED IN BORDER LINE CASES AND FOR THIS PROPO SITION THEIR LORDSHIPS HAVE REFERRED TO THE DECISION IN THE CASE OF ABDUL KAYOO M VS. CIT 44 ITR 689. 101.3. THEREAFTER, THEIR LORDSHIPS HAVE CONSIDERED BROAD TESTS FOR DETERMINATION OF THE QUESTION THAT WHETHER A PARTIC ULAR EXPENDITURE IS REVENUE OR CAPITAL. REFERENCE WAS MADE TO THE DECISION IN TH E CASE OF ATHERTON VS. BRITISH INSULATED (SUPRA) AND HELSBY CABLES LTD. (SUPRA) T O EXPLAIN ABOUT THE TEST WHERE THE EXPENDITURE IS MADE NOT ONLY ONCE AND FOR ALL, BUT WITH A VIEW TO BRINGING INTO EXISTENCE AN ASSET OR ADVANTAGE FOR THE ENDURI NG BENEFIT OF THE TRADE WHICH IN GENERAL CIRCUMSTANCES CAN BE PROPERLY ATTRIBUTAB LE NOT TO REVENUE, BUT TO CAPITAL. 101.4 IN THAT CASE THE HOUSE OF LORDS DEALT WITH A FUND WHICH WAS CREATED BY THE RESPONDENT COMPANY AS A NUCLEUS OF A PENSION FUND FOR ITS EMPLOYEES. AFTER HANDING OVER THE MONEY TO TRUSTEES FOR THE EM PLOYEES, THE COMPANY CLAIMED THAT THE MONEY SHOULD BE CHARGED TO REVENUE . SUCH CLAIM OF THE ASSESSEE WAS REJECTED ON THE GROUND THAT THE PAYMEN T OF MONEY CREATED FOR ITSELF AN ENDURING BENEFIT OR ADVANTAGE WHICH WAS O F A CAPITAL NATURE. THUS, IT WAS OBSERVED BY THEIR LORDSHIPS THAT WHILE DECIDING A QUESTION THAT WHETHER A PARTICULAR EXPENDITURE IS IN THE NATURE OF REVENUE OR CAPITAL, THE COURTS HAVE TO BEAR IN MIND THAT WHETHER IT WAS AN EXPENDITURE FOR MING PART OF THE COST OF INCOME EARNING MACHINE OR STRUCTURE AS OPPOSED TO PART OF THE COST OF PERFORMING THE INCOME-EARNING OPERATIONS. 101.5 THEN, THEIR LORDSHIPS REFERRED TO THE DECISI ON IN THE CASE OF ROBERT ADDIE AND SONS COLLIERIES LTD. V. COMMISSIONER OF INLAND REVENUE, 1924 8 TC 671 WHEREIN THE TEST OF TRUE NATURE OF EXPENDITURE WAS LAID OUT AND IT WAS OBSERVED THAT WHILE DETERMINING SUCH QUESTION ONE H AS TO ASK ONESELF THE QUESTION THAT WHETHER IT IS A PART OF THE COMPANYS WORKING EXPENSES AND IT IS AN EXPENDITURE LAID OUT AS PART OF THE PROCESS OF PROF IT EARNING OR, ON THE OTHER HAND, IT IS A CAPITAL OUTLAY. ANOTHER QUESTION IS THAT WH ETHER THAT EXPENDITURE IS ITA NO.3759/DEL/2003 68 NECESSARY FOR ACQUISITION OF PROPERTY OR OF RIGHTS OF A PERMANENT CHARACTER, THE POSSESSION OF WHICH IS A CONDITION OF CARRYING ON I TS TRADE AT ALL. 101.6 THEN, THEIR LORDSHIPS REFERRED TO THE ASSAM BENGAL COMPANY LTD.S CASE WHEREIN THE EXPRESSION ONCE AND FOR ALL WAS CONSIDERED AND IT WAS HELD THAT THE CHARACTER OF PAYMENT CAN BE DETERMINED BY LOOKING AT WHAT IS THE TRUE NATURE OF THE ASSET WHICH HAS BEEN ACQUIRED AND NOT BY THE FACT WHETHER IT IS A PAYMENT IN LUMPSUM OR BY INSTALMENTS. IT WAS OBSER VED THAT THE WORDS PERMANENT AND ENDURING ARE ONLY RELATIVE TERMS AND NOT SYNONYMOUS WITH PERPETUAL OR EVERLASTING. 101.7 THEN, THEIR LORDSHIPS REFERRED TO THE TESTS LIKE THOSE OF FIXED CAPITAL AND CIRCULATING CAPITAL FOR DETERMINING THE NATURE OF THE EXPENDITURE AND IT WAS OBSERVED THAT AN ITEM OF DISBURSEMENT CAN BE REGARDED AS CAPITAL EXPENDITURE WHEN IT IS REFERABLE TO FIXED CAPITAL A ND IT WILL BE REVENUE WHEN IT CAN BE ATTRIBUTED TO THE CIRCULATING CAPITAL. IT WAS O BSERVED THAT THE CASE SET UP BY THE REVENUE WAS THAT THE OBJECT OF MAKING THE PAYME NT WAS TO ELIMINATE COMPETITION OF A RIVAL EXPORTER, THE BENEFIT WHICH INURED TO THE RESPONDENT WAS OF AN ENDURING NATURE, HENCE, THE PAYMENT SHOULD BE TR EATED AS CAPITAL EXPENDITURE. THEIR LORDSHIPS DID NOT AGREE WITH SU CH CONTENTION OF THE REVENUE ON THE GROUND THAT THE AGREEMENT BETWEEN THE ASSESS EE AND M/S H.V. LOW & CO. WAS NOT FOR A FIXED PERIOD, BUT COULD BE TERMIN ATED AT ANY TIME AT THE VOLITION OF ANY OF THE PARTIES. THEIR LORDSHIPS OBSERVED TH AT THOUGH AN ENDURING BENEFIT NEED NOT BE OF AN EVERLASTING CHARACTER, IT SHOULD NOT, AT THE SAME TIME, BE SO TRANSITORY AND EPHEMERAL THAT IT CAN BE TERMINATED AT ANY TIME AT THE VOLITION OF ANY OF THE PARTIES AND ANY OTHER VIEW WOULD HAVE TH E EFFECT OF RENDERING THE WORD ENDURING TO BE MEANINGLESS. 101.8 THEN, THEIR LORDSHIPS REFERRED TO THE DECISI ON IN THE CASE OF COMMISSIONER OF TAXES VS. M.C. NCHANGA CONSOLIDATED COPPER MINES LTD. 58 ITR 241 WHEREIN THE ASSESSEE COMPANY TOGETHER WITH TWO OTHER COMPANIES, NAMELY BHOKANA CORPORATION LTD. AND BANCROFT MINES LTD. FORMED A GROUP FOR ITA NO.3759/DEL/2003 69 CARRYING ON BUSINESS OF COPPER MINING. DUE TO STEEP FALL IN COPPER PRICES, THEY DECIDED VOLUNTARILY TO CUT THEIR PRODUCTION BY 10%. IT WAS AGREED THAT BANCROFT MINES LTD. SHOULD CEASE PRODUCTION FOR ONE YEAR AND THE RESPONDENT COMPANY AND BANCROFT MINES LTD. SHOULD UNDERTAKE BETWEEN TH EM THE WHOLE GROUP PROGRAMME FOR THE YEAR REDUCED BY THE OVERALL CUT O F 10% AND, IN TURN, AGREED TO PAY A SUM TO BANCROFT MINES LTD. TO COMPENSATE IT F OR THE ABANDONMENT OF THE PRODUCTION FOR THE YEAR AND THE QUESTION AROSE THAT WHETHER SUCH EXPENDITURE WOULD BE CAPITAL IN NATURE. IT WAS HELD BY THE COU RT THAT THE COMPENSATION PAID WAS AN ALLOWABLE DEDUCTION. IT WAS HELD THAT THE E XPENDITURE WAS NOT FOR THE PURPOSE OF ACQUIRING A BUSINESS OR A BENEFIT OF LON G-TERM OR ENDURING CONTRACT AND THEIR LORDSHIPS OBSERVED AS FOLLOWS:- ALTHOUGH WE AGREE THAT PAYMENT MADE TO WARD OFF CO MPETITION IN BUSINESS TO A RIVAL DEALER WOULD CONSTITUTE CAPITAL EXPENDITURE IF THE OBJECT OF MAKING THAT PAYMENT IS TO DERIVE AN ADVAN TAGE BY ELIMINATING THE COMPETITION OVER SOME LENGTH OF TIM E, THE SAME RESULT WOULD NOT FOLLOW IF THERE IS NO CERTAINTY OF THE DURATION OF THE ADVANTAGE AND THE SAME CAN BE PUT TO AN END AT ANY TIME. HOW LONG THE PERIOD OF CONTEMPLATED ADVANTAGE SHOULD BE IN ORDER TO CONSTITUTE ENDURING BENEFIT WOULD DEPEND UPON THE C IRCUMSTANCES AND THE FACTS OF EACH INDIVIDUAL CASE. 102. IN THE CASE OF EMPIRE JUTE COMPANY (SUPRA), TH E ASSESSEE COMPANY WAS CARRYING ON THE BUSINESS OF MANUFACTURE OF JUTE AND WAS A MEMBER OF INDIAN JUTE MILLS ASSOCIATION. THE ASSOCIATION WAS FORMED WITH THE OBJECT OF, INTER ALIA , PROTECTING THE TRADE OF ITS MEMBERS, MAKING RESTRIC TIVE CONDITIONS ON THE CONDUCT OF THE TRADE AND ACHIEVING THE PRODUCTION OF THE MI LLS OF THESE MEMBERS. A WORKING TIME AGREEMENT WAS ENTERED INTO BETWEEN THE MEMBERS RESTRICTING THE NUMBER OF WORKING HOURS PER WEEK FOR WHICH THE MILL S WERE ENTITLED TO WORK THEIR LOOMS. ACCORDING TO CLAUSE 4 OF THE WORKING TIME A GREEMENT, NO SIGNATORY COULD WORK FOR MORE THAN 45 HOURS PER WEEK AND ACCORDING TO CLAUSE 6 (B) SIGNATORIES WERE ENTITLED TO TRANSFER, IN PART OR WHOLE, THEIR ALLOTTED HOURS OF WORK PER WEEK TO ANY ONE OR MORE OF THE OTHER SIGNATORIES. UNDER TH AT CLAUSE THE ASSESSEE PURCHASED LOOM HOURS FROM FOUR OTHER MILLS FOR AN AGGREGATE AMOUNT OF RS.2,03,255/- AND CLAIMED THOSE EXPENDITURE AS REVE NUE EXPENDITURE. THE ITA NO.3759/DEL/2003 70 TRIBUNAL HELD THAT THOSE EXPENDITURE WERE IN THE NA TURE OF REVENUE. THE HONBLE HIGH COURT REVERSED THE ORDER OF THE TRIBUNAL AND H ELD THEM AS CAPITAL EXPENDITURE. THE DECISION OF HONBLE HIGH COURT WA S REVERSED BY APEX COURT AND IT WAS OBSERVED THAT THE EXPENDITURE INCURRED B Y THE ASSESSEE WAS FOR THE PURPOSE OF REMOVING A RESTRICTION ON THE NUMBER OF WORKING HOURS FOR WHICH IT COULD OPERATE ITS LOOMS WITH A VIEW TO INCREASE ITS PROFITS AND, THUS, WAS REVENUE IN NATURE. BY PURCHASE OF LOOM HOURS NO NEW ASSET WAS CREATED AND THERE WAS NO ADDITION TO OR EXPANSION OF THE PROFIT MAKING AP PARATUS OF THE ASSESSEE. THE ACQUISITION OF ADDITIONAL LOOM HOURS DID NOT ADD TO THE FIXED CAPITAL OF THE APPELLANT; THE PERMANENT STRUCTURE OF WHICH THE INC OME WAS THE PRODUCT OR FRUIT REMAINED THE SAME. 103. IN THE CASE OF CIT VS. ASSOCIATED CEMENT COMPA NIES LTD. (SUPRA), THE ASSESSEE COMPANY BEING A MANUFACTURER OF CEMENT WAS RUNNING A CEMENT FACTORY AT SHAHABAD. THE FACTORY PREMISES OF THE A SSESSEE WAS INCLUDED IN THE LIMITS OF SHAHABAD MUNICIPALITY AND A TRIPARTITE AG REEMENT WAS ENTERED INTO BETWEEN THE GOVERNMENT OF HYDERABAD, THE MUNICIPALI TY AND THE ASSESSEE WHEREBY THE COMPANY UNDERTOOK: (I) TO SUPPLY WATER TO THE MUNICIPALITY AND PROVIDE WATER PIPELINES; (II) TO SUPPLY ELECTRICITY FOR STREET LIGHTING IN THE MUNICIPALITY AND PUT UP A TRANSMISSION LINE THEREFO RE; AND (III) TO CREATE THE MAIN ROAD FROM THE FACTORY TO THE RAILWAY STATION. IN R ETURN, THE RESPONDENT WAS NOT LIABLE TO PAY MUNICIPAL RATES AND TAXES FOR A PERIO D OF 15 YEARS. DURING THE YEAR UNDER CONSIDERATION A SUM OF RS.2,09,459/-WAS EXPEN DED TOWARDS INSTALLATION OF WATER PIPELINES AND ACCESSORIES OUTSIDE THE FACTORY PREMISES WHICH WERE TO BELONG TO AND BE MAINTAINED BY MUNICIPALITY AND WHI CH ALSO CAME UNDER THE OWNERSHIP OF MUNICIPALITY AND SUCH EXPENDITURE WAS HELD TO BE REVENUE IN NATURE. IT WAS HELD BY THE APEX COURT THAT SINCE T HE INSTALLATION AND ACCESSORIES WERE THE ASSETS OF THE MUNICIPALITY AND NOT OF THE ASSESSEE, THE EXPENDITURE DID NOT RESULT IN BRINGING INTO EXISTENCE ANY CAPITAL A SSET FOR THE COMPANY. THE ADVANTAGE SECURED BY THE ASSESSEE BY INCURRING THE EXPENDITURE WAS ABSOLUTION OR IMMUNITY FROM LIABILITY TO PAY MUNICIPAL RATES O R TAXES FOR A PERIOD OF 15 YEARS ITA NO.3759/DEL/2003 71 AND IF LIABILITIES HAD TO BE PAID THE PAYMENT WOULD HAVE BEEN ON REVENUE ACCOUNT AND, THUS, THE ADVANTAGE SECURED WAS IN THE FORM OF REVENUE AND NOT CAPITAL. 104. IN THE CASE OF ALEMBIC CHEMICAL WORKS CO. LTD. VS. CIT 177 ITR 377, THE ASSESSEE COMPANY WHICH WAS IN THE BUSINESS OF MANUF ACTURING OF PENICILLIN WITH A VIEW TO INCREASE THE YIELD ENTERED INTO AN AGREEM ENT WITH MEIJI, A REPUTED JAPANESE ENTERPRISES, AND MADE PAYMENT TO THE SAID CONCERN OF RS.2,39,625/- FOR SUPPLY OF SUB-CULTURES OF MEIJIS MOST SUITABL E PENICILLIN PRODUCING STRAINS IN A PILOT PLANT, THE TECHNICAL INFORMATION, KNOW HOW AND WRITTEN DESCRIPTION OF MEIJIS PROCESS FOR FERMENTATION OF PENICILLIN ALONG WITH A FLOW SHEET OF THE PROCESS IN THE PILOT PLANT AND THE DESIGN AND SPECIFICATIONS OF TH E MAIN EQUIPMENT IN SUCH PILOT PLANT AND TO ARRANGE FOR THE TRAINING OF THE ASSESS EES REPRESENTATIVES IN MEIJIS PLANT IN JAPAN AT THE ASSESSEES EXPENSES AND ADVIS ED THE ASSESSEE IN LARGE- SCALE MANUFACTURE OF PENICILLIN FOR A PERIOD OF TWO YEARS. THE ASSESSEE WAS TO KEEP TECHNICAL KNOW HOW CONFIDENTIAL AND SECRET AND WAS NOT TO SEEK ANY PATENT FOR THE PROCESS. SUCH PAYMENT WAS CLAIMED AS REVEN UE EXPENDITURE. UPTO THE LEVEL OF HIGH COURT, THE EXPENDITURE WAS CATEGORIZE D AS CAPITAL IN NATURE. IT WAS HELD BY THE HONBLE APEX COURT THAT: (A) IT WILL BE UNREALISTIC TO IGNORE THE RAPID ADV ANCES IN RESEARCH IN ANTIBIOTIC MEDICAL MICROBIOLOGY. THE RAPID STRIDES IN SCIENCE AND TECHNOLOGY IN THE FIELD SHOULD MAKE US A LITTLE SLO W AND CIRCUMSPECT IN TOO READILY PIGEON HOLDING AN OUTLAY, SUCH AS TH IS, AS CAPITAL. (B) IN THE INDEFINITE VARIETY OF SITUATIONAL DIVERS ITIES IN WHICH THE CONCEPT OF WHAT IS CAPITAL EXPENDITURE AND WHAT IS REVENUE ARISES, IT WILL NEIGH IMPOSSIBLE TO FORMULATE ANY GENERAL RULE, EVE N IN GENERALITY OF THE CASES, SUFFICIENTLY ACCURATE AND REASONABLY COM PREHENSIVE, TO DRAW ANY CLEAR LINE OF DEMARCATION, HOWEVER, SOME B ROAD AND GENERAL TEST HAVE BEEN SUGGESTED FROM TIME TO TIME TO ASCERTAIN ON WHICH SIDE OF THE LINE THE OUTLAY IN ANY PARTICULAR CASE MIGHT REASONABLY BE HELD TO FALL. THESE TESTS ARE GENERA LLY EFFICACIOUS ITA NO.3759/DEL/2003 72 AND SERVE AS USEFUL SERVANTS; BUT AS MASTERS THEY T END TO BE OVEREXACTING. (C) THE IDEA OF ONCE FOR ALL PAYMENT AND ENDURIN G BENEFIT ARE NOT TO BE TREATED AS SOMETHING AKIN TO THE STATUTORY CONDITIO NS; NOR ARE THE NOTIONS OF CAPITAL OR REVENUE A JUDICIAL FETISH . WHAT IS CAPITAL EXPENDITURE AND WHAT IS REVENUE ARE NOT ETERNAL VER ITIES BUT MUST NEEDS BE FLEXIBLE SO AS TO RESPOND TO THE CHANGING ECONOMIC REALITIES OF BUSINESS. THE EXPRESSION ASSET OR ADVANTAGE OF ENDURING NATURE WAS EVOLVED TO EMPHASISE THE ELEMENT OF A SUFFICIEN T DEGREE OF DURABILITY APPROPRIATE TO THE CONTEXT. (D) WHAT IS RELEVANT IS THE PURPOSE OF THE DEAL AND IT IS INTENDED TO DO AND EFFECT, CONSIDERED IN A COMMONSENSE WAY HAVING REGA RD TO THE BUSINESS REALITIES AND IN A GIVEN CASE, THE TEST OF ENDURING BENEFIT MIGHT BREAKDOWN. 105. IN THE CASE OF CIT VS. MADRAS AUTO SERVICE (P) LTD., 223 ITR 468 (SC) THE ASSESSEE HAD OBTAINED PREMISES ON LEASE FOR 39 YEAR S. UNDER THE LEASE AGREEMENT ASSESSEE DEMOLISHED EXISTING CONSTRUCTION AND CONSTRUCTED NEW BUILDING TO SUIT ITS BUSINESS AT ITS OWN EXPENSES. THE ASSESSEE IN NO CIRCUMSTANCES WAS ENTITLED FOR ANY COMPENSATION ON ACCOUNT OF PUTTING UP NEW CONSTRUCTION AND IT SHOULD BE TREATED AS TENANT SUB JECT TO PAYMENT OF RENT LOWER THAN THE RENT PREVAILING IN THE MARKET. THE EXPENS ES INCURRED ON CONSTRUCTION WERE CLAIMED AS REVENUE EXPENDITURE AND THESE WERE HELD ALLOWABLE ON THE GROUND THAT THE ASSET CREATED BY SUCH EXPENDITURE D ID NOT BELONG TO THE ASSESSEE AND WHAT THE ASSESSEE HAD GOT WAS ONLY BUS INESS ADVANTAGE OF USING MODERN PREMISES AT A LOW RENT, THUS SAVING CONSIDER ABLE REVENUE EXPENDITURE FOR THE NEXT 39 YEARS. 106. THE HONBLE DELHI HIGH COURT IN THE CASE OF CI T VS. EICHER LTD. 302 ITR 249 IN A CASE WHERE THE EX-EMPLOYEE OF THE ASSESSEE CALLED VISHWANATHAN HAD ACQUIRED DURING THE COURSE OF HIS EMPLOYMENT SPECIA L KNOWLEDGE OF TECHNOLOGY IN ITA NO.3759/DEL/2003 73 THE TWO-WHEELER INDUSTRY AS WELL AS OF MANAGING THE DEALERSHIP OF THE MARKET PLACE AND OTHER SPECIALIZED KNOWLEDGE RELATING TO T HE TWO-WHEELER BUSINESS, HAD ENTERED INTO AN AGREEMENT WITH ANOTHER COMPANY CALL ED VCPL TO THE EFFECT THAT HE WOULD PROMOTE THE OTHER COMPANY AND COLLABORATE WITH IT TO SET UP MANUFACTURING FACILITIES FOR TWO-WHEELERS UPON HIS RETIREMENT FROM THE ASSESSEE. 106.1 UPON COMING TO KNOW SUCH THINGS, THE ASSESSE E NEGOTIATED A NON- COMPETE AGREEMENT WITH VCPL AND VISHWANATHAN WHEREB Y A SUM OF RS.4 CRORE WAS PAID TO VCPL, SO THAT VCPL AND VISHWANATHAN WOU LD NOT CARRY OUT ANY BUSINESS ACTIVITY WITH REGARD TO TWO-WHEELERS AND S UCH AMOUNT PAID WAS HELD TO BE ALLOWABLE AS REVENUE EXPENDITURE AFTER CONSIDERI NG VARIOUS JUDICIAL PRONOUNCEMENTS, NAMELY, I. NEEL KAMAL TALKIES V CIT(1973) 87 ITR 691(ALL) II. CIT VS. COAL SHIPMENTS P. LTD. 82 ITR 902 (SC) III. CIT VS. LATE G.D. NAIDU AND ORS 165 ITR 63 (MA D) IV. ALEMBIC CHEMICAL WORKS LTD. VS. CIT 177 ITR 377 (SC ) V. CIT VS. MADRAS AUTO SERVICE (P) LTD., 223 ITR 468 ( SC) 106.2 AFTER REFERRING TO THE AFOREMENTIONED DECISI ONS IT WAS OBSERVED BY THE HONBLE DELHI HIGH COURT THAT APPLYING ALL THES E PRINCIPLES LAID DOWN IN THE AFOREMENTIONED JUDICIAL DECISIONS A FEW FACTS STAND OUT QUITE CLEARLY. THE ASSESSEE DID NOT ACQUIRE ANY CAPITAL ASSET BY MAKIN G THE PAYMENT OF NON- COMPETE FEE. IT MERELY ELIMINATED COMPETITION IN T HE TWO-WHEELER BUSINESS, FOR A WHILE. IT WAS OBSERVED THAT FROM THE RECORDS, IT W AS NOT CLEAR HOW LONG RESTRICTIVE COVENANT WAS TO LAST, BUT IT WAS NEITHER PERMANENT NOR EPHEMERAL. IN THAT SENSE THE ADVANTAGE WAS NOT OF AN ENDURING NATURE. IT WA S OBSERVED THAT THERE WAS NOTHING TO SHOW THAT THE AMOUNT OF RS.4 CRORE WAS D RAWN OUT OF THE CAPITAL OF THE ASSESSEE AND ON CUMULATIVE APPRECIATION OF THESE FA CTS IT WAS HELD THAT THE CIT (A) AND THE TRIBUNAL DID NOT ERR IN CONCLUDING THA T THE PAYMENT OF NON-COMPETE FEES BY THE ASSESSEE WAS A BUSINESS EXPENDITURE AND NOT A CAPITAL EXPENDITURE ITA NO.3759/DEL/2003 74 AND IN THIS VIEW OF THE SITUATION IT WAS HELD THAT NO SUBSTANTIAL QUESTION ARISES FOR CONSIDERATION. 107. IF WE PERUSE ALL THE AFOREMENTIONED DECISIONS WHICH HAVE LAID DOWN VARIOUS TESTS TO CONSIDER A QUESTION THAT WHETHER A PARTICULAR EXPENDITURE WILL BE CAPITAL OR REVENUE, ONE THING IS CLEAR THAT THE LIN E OF DEMARCATION BETWEEN THE CAPITAL EXPENDITURE AND REVENUE EXPENDITURE IS VERY THIN. THEREFORE, IT IS NOT DESIRABLE FOR ANY COURT TO DO THAT WHICH THE PARLIA MENT HAS ABSTAINED FROM DOING I.E., TO FORMULATE PRECISE RULES FOR THE GUIDANCE OR EMBARRASSMENT OF BUSINESSMEN IN THE CONDUCT OF BUSINESS AFFAIRS. JU STICE BHAGWATI WHILE DESCRIBING SUCH SITUATION IN THE DECISION OF ASSAM BENGAL CEMENT COMPANY (SUPRA) HAS REFERRED TO THE QUOTATION OF LORD MACNAGHTEN IN DOVEY V. CORY (1901) AC 477 AT P.488 . SIMILARLY, THE OBSERVATIONS OF ROWLATT, J. FROM THE DECISION IN THE CASE OF COUNTLESS WARWICK STEAMSHIP CO. LTD. VS. OGG (1924) 2 K.B. 292 AT P.298 HAVE BEEN REPRODUCED WHERE IT IS STATED THAT IT IS VERY DIFFICULT TO LAY DOWN ANY GENERAL RULE WHICH IS BOTH SUFFICIENTLY ACCURAT E AND SUFFICIENTLY EXHAUSTIVE TO COVER ALL OR EVEN A GREAT NUMBER OF POSSIBLE CASES, AND ANY ATTEMPT WAS REFUSED TO BE MADE TO LAY DOWN ANY SUCH RULE. 108. JUSTICE BHAGWATI IN THE SAID DECISION HAS THEN REFERRED TO THE BROAD TESTS, WHICH ARE LAID DOWN IN EARLIER JUDGMENTS AND THE EA RLIEST ONE WAS FOUND IN THE DECISION IN THE CASE OF CITY OF LONDON CONTRACT COR PORATION VS STYLES (1887) 2 TAX CAS. 239 AT P.243 WHEREIN THE BASIC RULE WAS LA ID DOWN AS UNDER:- YOU DO NOT USE IT FOR THE PURPOSES OF YOUR CONCERN , WHICH MEANS, FOR THE PURPOSE OF CARRYING ON YOUR CONCERN, BUT YO U USE IT TO ACQUIRE THE CONCERN. 109. IN OTHER WORDS THE ABOVE RULE STATES THAT THE EXPENDITURE IN THE ACQUISITION OF THE CONCERN WOULD BE CAPITAL EXPENDITURE; THE EX PENDITURE IN CARRYING ON THE CONCERN WOULD BE REVENUE EXPENDITURE. THEREAFTER, IN THE CASE OF VELLAMBROSA RUBBER CO. V. FARMER [1910] 5 TAX CAS. 529 LORD DUNEDIN HAS EVOLVED THE TEST OF EXPENSES INCURRED ONCE AND FOR ALL VIS--VIS INC OME EXPENDITURE I.E., GOING TO RECUR EVERY YEAR. THIS TEST WAS FURTHER ADOPTED BY ROWLATT, J. IN OUNSWORTH ITA NO.3759/DEL/2003 75 (SURVEYOR OF TAXES) V. VICKERS LIMITED [1915] 6 TAX CAS. 671 WHICH APART FROM THE TEST OF ONCE AND FOR ALL HAS SUGGESTED ANOTHE R POINT OF VIEW WHICH WAS OF ENDURING EXPENDITURE. THEREAFTER, VISCOUNT CAVE, L.C., IN ATHERTONS CASE [1925] 10 TAX CAS 155 REGARDING ENDURING BENEFIT WA S FURTHER ELABORATED THE TEST REGARDING ENDURING BENEFIT BY QUOTING LORD DUNEDI N WHO SPOKE ABOUT ENDURING EXPENDITURE. 110. THEREAFTER, IN J OHN SMITH & SON V. MOORE (INSPECTOR OF TAXES) [192 0] 12 TAX CAS. 266 AT P. 282 ANOTHER TEST WAS SUGGESTED WHICH WAS THE TEST OF FI XED OR CIRCULATING CAPITAL. IT WAS OBSERVED THAT IT WAS N OT NECESSARY TO DRAW AN EXACT LINE OF DEMARCATION BETWEEN THE FIXED AND CIRCULATI NG CAPITAL AND IT WAS STATED THAT FIXED CAPITAL CAN BE DEFINED AS WHAT THE OWNER TURNS TO PROVIDE BY KEEPING IT IN HIS OWN POSSESSION AND CIRCULATING CAPITAL AS WH AT HE MAKES PROFIT OF BY PARTING WITH IT AND LETTING IT CHANGE MASTERS. THI S TEST WAS ADOPTED BY LORD HANWORTH, M.R IN ANGLO-PERSIAN OIL CO. VS. DALE [19 32] 1 K.B. 124 AT 128. 111. LORD CAVES TEST THAT WHERE MONEY IS SPENT FOR ENDURING BENEFIT, IT IS CAPITAL, HAD LEFT SOME DOUBT AS TO WHAT IS MEANT B Y ENDURING. FOR DETERMINING THAT THE EXPRESSION ENDURING BENEFIT OR OF A PER MANENT CHARACTER THEIR LORDSHIPS OF HONBLE SUPREME COURT IN THE CASE OF A SSAM BENGAL CEMENT COMPANY LTD. (SUPRA) HAVE REFERRED TO THE FULL BENC H DECISION OF LAHORE HIGH COURT IN THE CASE OF BENARSIDAS JAGANNATH [1947] 1 5 ITR 185 WHEREIN IT WAS OBSERVED AS UNDER:- 2. EXPENDITURE MAY BE TREATED AS PROPERLY ATTRIBUT ABLE TO CAPITAL WHEN IT IS MADE NOT ONLY ONCE AND FOR ALL, BUT WITH A VIEW TO BRINGING INTO EXISTENCE AN ASSET OR AN ADVANTAGE FO R THE ENDURING BENEFIT OF A TRADE : VIDE VISCOUNT CAVE, .C., IN AT HERIO VS. BRITISH INSULATED AND HELSBY CABLES LTD. IF WHAT IS GOT R ID OF BY A LUMP SUM PAYMENT IS AN ANNUAL BUSINESS EXPENSE CHARGEAB LE AGAINST REVENUE, THE LUMP SUM PAYMENT SHOULD EQUALLY BE REG ARDED AS A BUSINESS EXPENSE, BUT IF THE LUMP SUMP PAYMENT BRIN GS IN A CAPITAL ASSET, THEN THAT PUTS THE BUSINESS ON ANOTH ER FOOTING ALTOGETHER. THUS, IF LABOUR SAVING MACHINERY WAS A CQUIRED, THE COST OF SUCH ACQUISITION CANNOT BE DEDUCTED OUT OF THE P ROFITS BY ITA NO.3759/DEL/2003 76 CLAIMING THAT IT RELIEVES THE ANNUAL LABOUR BILL, THE BUSINESS, HAS ACQUIRED A NEW ASSET, THAT IS, MACHINERY. THE EXPRESSIONS ENDURING BENEFIT OR OF A PERMANE NT CHARACTER WERE INTRODUCED TO MAKE IT CLEAR THAT TH E ASSET OR THE RIGHT ACQUIRED MUST HAVE ENOUGH DURABILITY TO JUSTI FY ITS BEING TREATED AS A CAPITAL ASSET. 112. IT IS ALSO OBSERVED THAT THE VISCOUNT CAVES T EST HAS BEEN ADOPTED ALMOST UNIVERSALLY IN INDIA VIDE FOLLOWING DECISIONS:- VISCOUNT CAVES TEST HAS ALSO BEEN ADOPTED ALMOST UNIVERSALLY IN INDIA. VIDE MUNSHI GULAB SINGH AND SONS V. COMMIS SIONER OF INCOME TAX, COMMISSIONER OF INCOME TAX, BOMBAY V. CENTURY SPINNING, WEAVING & MANUFACTURING CO. LTD., JAGAT B US SERVICE, SAHARANPUR VS. COMMISSIONER OF INCOME TAX, BOMBAY VS. FINLAY MILLS LTD. 113. THEIR LORDSHIPS AFTER ANALYZING HISTORY OF ALL THESE JUDICIAL DECISIONS FOR ADDRESSING THE QUESTION THAT WHETHER A PARTICULAR E XPENDITURE WILL BE CAPITAL OR REVENUE, HAVE REFERRED TO THE PRINCIPLES WHICH EMER GES OUT FROM THESE AUTHORITIES. 114. IT WAS OBSERVED THAT WHERE THE EXPENDITURE IS MADE FOR INITIAL OUTLAY OR FOR EXPANSION OF BUSINESS OR A SUBSTANTIAL REPLACEMENT OF EQUIPMENT, THE EXPENDITURE WILL BE CAPITAL IN NATURE. IT WAS OBSE RVED THAT A CAPITAL ASSET OF THE BUSINESS IS EITHER ACQUIRED OR EXTENDED TO BE SUBST ANTIALLY REPLACED AND THAT OUTLAY WHATEVER BE ITS SOURCE; WHETHER IT IS DRAWN FROM THE CAPITAL OR THE INCOME OF THE CONCERN IS CERTAINLY IN THE NATURE OF CAPITA L EXPENDITURE. THE QUESTION, HOWEVER, ARISES FOR CONSIDERATION WHERE EXPENDITURE IS INCURRED WHILE THE BUSINESS IS GOING ON AND IS NOT INCURRED EITHER FOR THE EXPANSION OF THE BUSINESS OR FOR THE SUBSTANTIAL REPLACEMENT OF ITS EQUIPMENT AND SUCH EXPENDITURE CAN BE LOOKED AT EITHER FROM THE POINT OF VIEW OF WHAT IS ACQUIRED OR FROM THE POINT OF VIEW OF WHAT IS THE SOURCE FROM WHICH THE EXPENDIT URE IS INCURRED. IN SUCH CIRCUMSTANCES, IF THE EXPENDITURE IS MADE FOR ACQUI RING OR BRINGING INTO EXISTENCE AN ASSET OR ADVANTAGE FOR THE ENDURING BENEFIT OF T HE BUSINESS, THEN IT WILL BE PROPERLY ATTRIBUTABLE TO CAPITAL AND, ON THE OTHER HAND, IF IT IS MADE NOT FOR THE ITA NO.3759/DEL/2003 77 PURPOSE OF BRINGING INTO EXISTENCE ANY ASSET ADVANT AGE, BUT FOR RUNNING THE BUSINESS OR WORKING IT WITH A VIEW TO PRODUCE THE P ROFIT, THEN, IT WILL BE IN THE NATURE OF REVENUE. 115. IT WAS OBSERVED THAT IF ANY SUCH ASSET OR ADVA NTAGE FOR THE ENDURING BENEFIT OF THE BUSINESS IS ACQUIRED OR BROUGHT INTO EXISTENCE, THEN IT WOULD BE IMMATERIAL WHETHER THE SOURCE OF THE PAYMENT WAS TH E CAPITAL OR THE INCOME OF THE CONCERN OR WHETHER THE PAYMENT WAS MADE ONCE A ND FOR ALL OR WAS MADE PERIODICALLY. THE AIMS AND OBJECT OF THE EXPENDITU RE WOULD DETERMINE THE CHARACTER OF THE EXPENDITURE WHETHER IT IS A CAPITA L EXPENDITURE OR A REVENUE EXPENDITURE. THE SOURCE OR THE MANNER OF THE PAYME NT WOULD THEN BE OF NO CONSEQUENCES. 116. IT WAS OBSERVED THAT IT IS ONLY IN THOSE CASES WHERE THE ABOVE TEST IS OF NO AVAIL THAT ONE MAY GO TO THE TEST OF FIXED OR CIRCU LATING CAPITAL AND CONSIDER WHETHER THE EXPENDITURE INCURRED WAS PART OF THE FI XED CAPITAL OF THE BUSINESS OR PART OF ITS CIRCULATING CAPITAL. IN THAT CIRCUMSTA NCES, IF THE EXPENDITURE WAS PART OF THE FIXED CAPITAL OF THE BUSINESS, THEN, IT WOULD B E OF A NATURE OF CAPITAL EXPENDITURE AND IF IT WAS THE PART OF THE CIRCULATI NG CAPITAL THEN IT WILL BE IN THE NATURE OF REVENUE EXPENDITURE. IT WILL BE USEFUL T O REPRODUCE THE FOLLOWING OBSERVATIONS OF THEIR LORDSHIPS FROM ASSAM BENGAL C EMENT COMPANY (SUPRA)S CASE:- THIS SYNTHESIS ATTEMPTED BY THE FULL BENCH OF THE LAHORE HIGH COURT TRULY ENUNCIATES THE PRINCIPLES WHICH EMERGE FROM THE AUTHORITIES. IN CASES WHERE THE EXPENDITURE IS MA DE FOR THE INITIAL OUTLAY OR FOR EXTENSION OF A BUSINESS OR A SUBSTANT IAL REPLACEMENT OF THE EQUIPMENT, THERE IS NO DOUBT THAT IT IS CAPITA L EXPENDITURE. A CAPITAL ASSET OF THE BUSINESS IS EITHER ACQUIRED OR EXTENDED OR SUBSTANTIALLY REPLACED AND THAT OUTLAY WHATEVER BE ITS SOURCE WHETHER IT IS DRAWN FROM THE CAPITAL OR THE INCOME OF THE CONCERN IS CERTAINLY IN THE NATURE OF CAPITAL EXPENDITURE. TH E QUESTION HOWEVER ARISES FOR CONSIDERATION WHERE EXPENDITURE IS INCURRED WHILE THE BUSINESS IS GOING ON AND IS NOT INCURRED EITHER FOR EXTENSION OF THE BUSINESS OR FOR THE SUBSTANTIAL RE PLACEMENT OF ITS EQUIPMENT. SUCH EXPENDITURE CAN BE LOOKED AT EITHER FROM THE POINT OF VIEW OF WHAT IS ACQUIRED OR FROM THE POINT OF VI EW OF WHAT IS THE ITA NO.3759/DEL/2003 78 SOURCE FROM WHICH THE EXPENDITURE IS INCURRED. IF THE EXPENDITURE IS MADE FOR ACQUIRING OR BRINGING INTO EXISTENCE AN AS SET OR ADVANTAGE FOR THE ENDURING BENEFIT OF THE BUSINESS IT IS PROP ERLY ATTRIBUTABLE TO CAPITAL AND IS OF THE NATURE OF CAPITAL EXPENDITURE . IF ON THE OTHER HAND IT IS MADE NOT FOR THE PURPOSE OF BRINGING INT O EXISTENCE ANY SUCH ASSET ADVANTAGE BUT FOR RUNNING THE BUSINESS O R WORKING IT WITH A VIEW TO PRODUCE THE PROFITS IT IS RUNNING TH E BUSINESS OR WORKING IT WITH A VIEW TO PRODUCE THE PROFITS IT I S A REVENUE EXPENDITURE. IF ANY SUCH ASSET OR ADVANTAGE FOR TH E ENDURING BENEFIT OF THE BUSINESS IS THUS ACQUIRED OR BROUGHT INTO EXISTENCE IT WOULD BE IMMATERIAL WHETHER THE SOURCE OF THE PAYME NT WAS THE CAPITAL OR THE INCOME OF THE CONCERN OR WHETHER THE PAYMENT WAS MADE ONCE AND FOR ALL OR WAS MADE PERIODICALLY. TH E AIM AND OBJECT OF THE EXPENDITURE WOULD DETERMINE THE CHARA CTER OF THE EXPENDITURE WHETHER IT IS A CAPITAL EXPENDITURE OR A REVENUE EXPENDITURE. THE SOURCE OR THE MANNER OF THE PAYM ENT WOULD THEN BE OF NO CONSEQUENCE. IT IS ONLY IN THOSE CASES WHERE THE TEST IF OF NO AVAIL THAT ONE MAY GO TO THE TEST OF FIXED O R CIRCULATING CAPITAL AND CONSIDER WHETHER THE EXPENDITURE INCURRED WAS PART OF THE FIXED CAPITAL OF THE BUSINESS OR PART OF ITS CIRCU LATING CAPITAL. IF IT WAS PART OF THE FIXED CAPITAL OF THE BUSINESS IT WO ULD BE OF THE NATURE OF CAPITAL EXPENDITURE AND IF IT WAS PART OF ITS CIRCULATING CAPITAL IT WOULD BE OF THE NATURE OF REVENUE EXPEND ITURE. 117. IT MAY BE MENTIONED HERE THAT ONE SHOULD NOT C ONFUSE HIMSELF WITH THE VARIETY OF TESTS LAID DOWN IN THE END NUMBER OF JUD ICIAL PRONOUNCEMENTS TO CONSIDER THE QUESTION OF DETERMINATION OF THE NATUR E OF EXPENDITURE THAT WHETHER IT IS `CAPITAL OF `REVENUE. THE ANSWER TO THE QU ESTION CAN WELL BE FOUND IN THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF AS SAM BENGAL (SUPRA) WHEREIN THEIR LORDSHIPS HAVE OBSERVED THAT THESE TESTS ARE MUTUALLY EXCLUSIVE AND HAVE TO BE APPLIED TO THE FACTS OF EACH PARTICULAR CASE IN THE MANNER INDICATED ABOVE. IT WAS OBSERVED THAT IN THE GREAT DIVERSITY OF HUMA N AFFAIRS AND THE COMPLICATED NATURE OF BUSINESS OPERATIONS IT IS DIFFICULT TO LA Y DOWN A TEST WHICH WOULD APPLY TO ALL SITUATIONS AND, THUS, ONE HAS TO APPLY THESE CR ITERIA ONE AFTER THE OTHER FROM THE BUSINESS POINT OF VIEW AND COME TO THE CONCLUSI ON WHETHER ON A FAIR APPRECIATION OF THE WHOLE SITUATION THE EXPENDITURE INCURRED IN A PARTICULAR CASE IS OF THE NATURE OF CAPITAL EXPENDITURE OR REVENUE EXP ENDITURE. THE QUESTION IS A QUESTION OF FACT TO BE DETERMINED BY THE IT AUTHORI TIES OF AN APPLICATION OF THE BROAD PRINCIPLES LAID DOWN ABOVE AND THE COURTS OF LAW WOULD NOT ORDINARILY ITA NO.3759/DEL/2003 79 INTERFERE WITH SUCH FINDINGS OF FACT IF THEY HAVE BEEN ARRIVED AT ON A PROPER APPRECIATION OF THOSE PRINCIPLES. REFERENCE CAN BE MADE TO THE FOLLOWING OBSERVATIONS OF THEIR LORDSHIPS FROM THE SAID DECIS ION: THESE TESTS ARE THUS MUTUALLY EXCLUSIVE AND HAVE T O BE APPLIED TO THE FACTS OF EACH PARTICULARS CASE IN THE MANNER AB OVE INDICATED. IT HAS BEEN RIGHTLY OBSERVED THAT IN THE GREAT DIVE RSITY OF HUMAN AFFAIRS AND THE COMPLICATED NATURE OF BUSINESS OPER ATIONS IT IS DIFFICULT TO LAY DOWN A TEST WHICH WOULD APPLY TO A LL SITUATIONS. ONE HAS THEREFORE GOT TO APPLY THESE CRITERIA ONE AFTER THE OTHER FROM THE BUSINESS POINT OF VIEW AND COME TO THE CONCLUSION WHETHER ON A FAIR APPRECIATION OF THE WHOLE SITUATION THE EXPEND ITURE INCURRED IN A PARTICULAR CASE IS OF THE NATURE OF CAPITAL EXPENDI TURE OR REVENUE EXPENDITURE IN WHICH LATTER EVENT ONLY IT WOULD BE A DEDUCTIBLE ALLOWANCE UNDER SECTION 10(2)(XV) OF THE INCOME T AX ACT. THE QUESTION HAS ALL ALONG BEEN CONSIDERED TO BE A QUE STION OF FACT TO BE DETERMINED BY THE INCOME TAX AUTHORITIES ON AN APPLICATION OF THE BROAD PRINCIPLES LAID DOWN ABOVE AND THE COURTS OF LAW WOULD NOT ORDINARILY INTERFERE WITH SUCH FINDINGS OF FAC T IF THEY HAVE BEEN ARRIVED AT ON A PROPER APPLICATION OF THOSE PRINCIP LES. 118. GENERAL PROPOSITION CANVASSED BY SHRI VOHRA CA NNOT BE ACCEPTED THAT IN ALL CASES OF PAYMENT OF NON-COMPETE FEE, THE PURPOS E OF MAKING SUCH PAYMENT IS TO MAINTAIN/PROTECT THE PROFITABILITY OF THE BUSINE SS BY INSULATING THE SAME FROM THE RISK OF COMPETITION, THEREFORE, IT HAS TO BE CO NSIDERED TO BE EXPENDITURE ON REVENUE ACCOUNT. SUCH ARGUMENT CANNOT BE ACCEPTED IN VIEW OF CLEAR DECISION OF HONBLE SUPREME COURT IN THE CASE OF ASSAM BENGAL ( SUPRA) WHERE THEIR LORDSHIPS HAVE CLEARLY HELD THAT PROTECTION FEES PA ID BY THE ASSESSEE WAS AN ACQUISITION OF AN ASSET OR ADVANTAGE OF AN ENDURING NATURE FOR WHOLE OF THE BUSINESS FOR THE FULL PERIOD OF LEASE UNLESS TERMIN ATED BY THE LESSOR BY NOTICE AS PRESCRIBED IN THE LAST PART OF THE CLAUSE. THIS PR OTECTION FEES PAID WAS CONSIDERED TO BE IN THE NATURE OF CAPITAL EXPENDITU RE. THE AFORESAID DECISION OF HONBLE SUPREME COURT HAS BEEN REFERRED IN ALMOST A LL THE CASES TOUCHING THIS ISSUE AND TILL DATE THE SAID DECISION HAS NOT BEEN SHOWN TO BE OVERRULED. THE CASE OF EMPIRE JUTE (SUPRA), AS ARGUED BY SHRI VOHR A, ALSO CANNOT BE APPLIED AS GENERAL PROPOSITION THAT NON-COMPETE FEE ONLY FACIL ITATE THE CARRYING ON OF THE BUSINESS AS THE FACTS IN THAT CASE WERE TOTALLY DIF FERENT AND IT WAS FOUND BY THE APEX COURT THAT THE PAYMENT MADE BY THE ASSESSEE WA S FOR GETTING MORE ITA NO.3759/DEL/2003 80 UTILIZATION OF PRODUCTION CAPACITY AS WITHOUT MAKIN G SUCH PAYMENT ASSESSEE COULD NOT WORK FOR MORE LOOM HOURS. AS AGAINST TH AT IN THE CASE OF PROTECTION FEE THE ASSESSEE HAS BEEN HELD TO HAVE ACQUIRED AN ASSET OR ADVANTAGE AS PER DECISION OF HONBLE SUPREME COURT IN THE CASE OF AS SAM BENGAL (SUPRA). 119. IT MAY BE TRUE THAT A PARTICULAR LENGTH OF TIM E MAY NOT BE DETERMINATIVE OF DECIDING WHETHER A PARTICULAR EXPENDITURE CAN BE TE RMED TO HAVE PROVIDED ENDURING BENEFIT BUT ACCORDING TO THE AFOREMENTIONE D DECISIONS IT DOES NEITHER MEAN PERMANENT NOR EPHEMERAL. BUT AT THE SAME TIME IF THE RESTRICTIVE COVENANT IS TO LAST FOR 5 YEARS THAT HAS ALSO BEEN HELD TO B E GIVING ENDURING BENEFIT IN THE CASE OF ASSAM BENGAL. 120. THE RATIO OF DECISION IN THE CASE OF MADRAS AU TO SERVICES (SUPRA) IS ALSO OF NO AVAIL IN THE CASES OF NON COMPETE PAYMENTS AS IN THAT CASE THE INCURRING OF EXPENSES DID NOT CREATE ANY ASSET AS AGAINST THAT I T HAS BEEN CLEARLY HELD BY THE HONBLE SUPREME COURT IN THE CASE OF ASSAM BENGAL ( SUPRA) THAT PROTECTION FEE PAID BY THE ASSESSEE HAD ACQUIRED AN ASSET OR ADVAN TAGE OF AN ENDURING NATURE WHICH ENURED FOR THE BENEFIT OF THE WHOLE OF THE BU SINESS. SIMILAR IS THE POSITION OF OTHER DECISIONS RELATING TO LAYING DOWN ELECTRIC ITY LINES, WHICH DID NOT BECOME THE PROPERTY/ASSET OF THE ASSESSEE AND THEREFORE, T HE EXPENDITURE WAS HELD TO BE IN THE NATURE OF REVENUE. 121. IT MAY BE MENTIONED HERE THAT THE TEST OF ENDU RING BENEFIT HAS NOT LOST ITS IMPORTANCE EVEN IN THE CONTEXT OF THE PRESENT SITUA TION. TO CONTEND THAT THE TEST OF ENDURING BENEFIT IS NO MORE IN FORCE WILL BE CON TRARY EVEN TO THE RECENT JUDICIAL PRONOUNCEMENTS. REFERENCE IN THIS REGARD CAN BE MA DE TO THE LATER DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. J.K. SYNTHETICS LTD. 309 ITR 371 (DEL) WHICH IS A DECISION RENDERED AFTER THE DE CISION IN THE CASE OF CIT VS. EICHER LTD. (SUPRA) WHEREIN AFTER EXAMINING THE AVA ILABLE JUDICIAL PRONOUNCEMENTS IT WAS STATED THAT THE FOLLOWING BRO AD PRINCIPLES WERE FORCED OVER THE YEARS WHICH REQUIRED TO BE APPLIED TO THE FACTS OF EACH CASE. THE RELEVANT OBSERVATIONS ARE AS UNDER: ITA NO.3759/DEL/2003 81 BROAD PRINCIPLES WHICH EMERGE ON READING OF VARIOU S AUTHORITIES 55. AN OVERALL VIEW OF THE JUDGMENTS OF THE SUPREME COURT, AS WELL AS, OF THE HIGH COURTS WOULD SHOW THAT THE FOLLOWIN G BROAD PRINCIPLES HAVE BEEN FORGED OVER THE YEARS, WHICH R EQUIRE, TO BE APPLIED TO THE FACTS OF EACH CASE:- ( I ) THE EXPENDITURE INCURRED TOWARDS INITIAL OUTLAY O F BUSINESS WOULD BE IN THE NATURE OF CAPITAL EXPENDIT URE, HOWEVER, IF THE EXPENDITURE IS INCURRED WHILE THE BUSINESS IS O N GOING, IT WOULD HAVE TO BE ASCERTAINED IF THE EXPENDITURE IS MADE F OR ACQUIRING OR BRINGING INTO EXISTENCE AN ASSET OR AN ADVANTAGE OF AN ENDURING BENEFIT FOR THE BUSINESS, IF THAT BE SO, IT WILL BE IN THE NATURE OF CAPITAL EXPENDITURE. IF THE EXPENDITURE, ON THE OTH ER HAND, IS FOR RUNNING THE BUSINESS OR WORKING IT, WITH A VIEW TO PRODUCE PROFITS, IT WOULD BE IN THE NATURE OF REVENUE EXPENDITURE; ( II ) IT IS THE AIM AND OBJECT OF EXPENDITURE, WHICH WO ULD, DETERMINE ITS CHARACTER AND NOT THE SOURCE AND MANN ER OF ITS PAYMENT; ( III ) THE TEST OF ONCE AND FOR ALL PAYMENT I.E., A LUMP SUM PAYMENT MADE, IN RESPECT OF, A TRANSACTION IS AN IN CONCLUSIVE TEST. THE CHARACTER OF PAYMENT CAN BE DETERMINED BY LOOKI NG AT WHAT IS THE TRUE NATURE OF THE ASSET WHICH IS ACQUIRED AND NOT BY THE FACT WHETHER IT IS A PAYMENT IN LUMP SUM OR IN AN INST ALMENT. IN APPLYING THE TEST OF AN ADVANTAGE OF AN ENDURING NA TURE, IT WOULD NOT BE PROPER, TO LOOK AT THE ADVANTAGE OBTAINED, A S LASTING FOREVER. THE DISTINCTION WHICH IS REQUIRED TO BE DRAWN IS, W HETHER THE EXPENSE HAS BEEN INCURRED TO DO AWAY WITH, WHAT IS A RECURRING EXPENSE FOR RUNNING A BUSINESS, AS AGAINST, AN EXPE NSE UNDERTAKEN FOR THE BENEFIT OF THE BUSINESS AS A WHO LE; ( IV ) AN EXPENSE INCURRED FOR ACQUISITION OF A SOURCE O F PROFIT OR INCOME WOULD IN THE ABSENCE OF ANY CONTRA RY CIRCUMSTANCE, BE IN THE NATURE OF CAPITAL EXPENDITURE. AS AGAINST THIS, AN EXPENDITURE WHICH ENABLES THE PROFIT MAKING STRUCTU RE TO WORK MORE EFFICIENTLY LEAVING THE SOURCE OR THE PROFIT MAKING STRUCTURE UNTOUCHED, WOULD BE IN THE NATURE OF REVENUE EXPEND ITURE. IN OTHER WORDS, EXPENDITURE INCURRED TO FINE TUNE TRADING OP ERATIONS TO ENABLE THE MANAGEMENT TO RUN THE BUSINESS EFFECTIVE LY, EFFICIENTLY AND PROFITABLY LEAVING THE FIXED ASSETS UNTOUCHED W OULD BE AN EXPENDITURE OF A REVENUE NATURE EVEN THOUGH THE ADV ANTAGE OBTAINED MAY LAST FOR AN INDEFINITE PERIOD. TO THAT EXTENT, THE TEST OF ENDURING BENEFIT OR ADVANTAGE COULD BE CONSIDERED A S HAVING BROKEN DOWN; ITA NO.3759/DEL/2003 82 ( V ) EXPENDITURE INCURRED FOR GRANT OF LICENSE WHICH ACCORDS ACCESS TO TECHNICAL KNOWLEDGE, AS AGAINST , ABSOLUTE TRANSFER OF TECHNICAL KNOWLEDGE AND INFORMATION WOU LD ORDINARILY BE TREATED AS REVENUE EXPENDITURE. IN ORDER TO SIFT, I N A MANNER OF SPEAKING, THE GRAIN FROM THE CHAFF, ONE WOULD HAVE TO CLOSELY LOOK AT THE ATTENDANT CIRCUMSTANCES, SUCH AS: ( A ) THE TENURE OF THE LICENCE. ( B ) THE RIGHT, IF ANY, IN THE LICENSEE TO CREATE FURT HER RIGHTS IN FAVOUR OF THIRD PARTIES, ( C ) THE PROHIBITION, IF ANY, IN PARTING WITH A CONFID ENTIAL INFORMATION RECEIVED UNDER THE LICENSE TO THIRD PAR TIES WITHOUT THE CONSENT OF THE LICENSOR, ( D ) WHETHER THE LICENCE TRANSFERS THE FRUITS OF RESE ARCH OF THE LICENSOR, ONCE FOR ALL, ( E ) WHETHER ON EXPIRY OF THE LICENCE THE LICENSEE IS REQUIRED TO RETURN BACK THE PLANS AND DESIGNS OBTAINED UNDER TH E LICENCE TO THE LICENSOR EVEN THOUGH THE LICENSEE MAY CONTINUE TO MANUFACTURE THE PRODUCT, IN RESPECT OF, WHICH ACCESS TO KNOWL EDGE WAS OBTAINED DURING THE SUBSISTENCE OF THE LICENCE. ( F ) WHETHER ANY SECRET OR PROCESS OF MANUFACTURE WAS SOLD BY THE LICENSOR TO THE LICENSEE. EXPENDITURE ON OBTAINING ACCESS TO SUCH SECRET PROCESS WOULD ORDINARILY BE CONSTRUED AS CAP ITAL IN NATURE; ( VI ) THE FACT THAT ASSESSEE COULD USE THE TECHNICAL KNOWLEDGE OBTAINED DURING THE TENURE OF THE LICENSE FOR THE PURPOSES OF ITS BUSINESS AFTER THE AGREEMENT HAS EX PIRED, AND IN THAT SENSE, RESULTING IN AN ENDURING ADVANTAGE, HAS BEEN CATEGORICALLY REJECTED BY THE COURTS. THE COURTS HA VE HELD THAT THIS, BY ITSELF, CANNOT BE DECISIVE BECAUSE KNOWLEDGE BY ITSELF MAY LAST FOR A LONG PERIOD EVEN THOUGH DUE TO RAPID CHANGE O F TECHNOLOGY AND HUGE STRIDES MADE IN THE FIELD OF SCIENCE, THE KNOWLEDGE MAY WITH PASSAGE OF TIME BECOME OBSOLETE; ( VII ) WHILE DETERMINING THE NATURE OF EXPENDITURE, GIVE N THE DIVERSITY OF HUMAN AFFAIRS AND COMPLICATED NATURE O F BUSINESS; THE TEST ENUNCIATED BY COURTS HAVE TO BE APPLIED FROM A BUSINESS POINT OF VIEW AND ON A FAIR APPRECIATION OF THE WHOLE FAC T SITUATION BEFORE CONCLUDING WHETHER THE EXPENDITURE IS IN THE NATURE OF CAPITAL OR REVENUE. 122. IT CAN BE SEEN FROM THE ABOVE TESTS THAT BROAD LY THE BASIC TEST TO DETERMINE THE NATURE OF AN EXPENDITURE REMAIN SAME EVEN IN THE CONTEXT OF MODERN SITUATION AND THESE TESTS ARE THE TEST OF IN ITIAL OUTLAY OF THE BUSINESS, THE ITA NO.3759/DEL/2003 83 AIM AND OBJECT OF THE EXPENDITURE, ENDURING BENEFIT TEST AND THE TEST OF FIXED AND CIRCULATING CAPITAL. 123. APPLYING THE AFOREMENTIONED PRINCIPLES TO THE FACTS OF PRESENT CASE, IT MAY BE STATED THAT THE SO-CALLED `NON-COMPETE AGREEMENT IS PART & PARCEL OF THE ENTIRE TRANSACTION. THE ASSESSEE HAD ACQUIRED A BUS INESS CONCERN IN INDIA WITH ITS OUTLAY (MORE PARTICULARLY DESCRIBED ELSEWHERE I N THIS ORDER) AND THE ENTIRE TRANSACTION WAS OUTLINED IN THE MOU DATED 4 TH NOVEMBER, 1996. THE RELEVANT PORTION OF CLAUSE 3 OF MOU WHICH REGULATES THE PU RCHASE PRICE OF THE TRANSACTION HAS ALREADY BEEN REPRODUCED IN PARA 88 AND 89 OF THIS ORDER WHEREIN AGGREGATE AMOUNT OF RS.52.5 CRORE WAS DETERMINED AS THE TOTAL PURCHASE PRICE FOR THE COMPRESSOR DIVISION ASSETS REFERRED TO IN A RTICLE 1 AND THE BALLABGARH LAND AND BUILDING AS REFERRED TO IN ARTICLE 2. THE PURCHASE PRICE ITSELF STATES THAT THE AMOUNT OF RS.52.5 CRORE WAS TO BE PAID AS A TOT AL PURCHASE PRICE FOR THE COMPRESSOR DIVISION ASSETS AND BALLABHGARH LAND AND BUILDING. 124. THE MOU WAS IMPLEMENTED THROUGH AGREEMENT DATE D 2 ND JULY, 1997 WHICH ALSO STATES ABOUT EXECUTION OF NON-COMPETE AG REEMENT IN CLAUSE 9 (J) WHICH READ AS UNDER:- J. WHIRLPOOL SHALL SIGN AND DELIVER TO TECUMSEH I NDIA, AGAINST THE RECEIPT OF FULL CONSIDERATION SPECIFIED THEREIN, A NON-COMPETE AGREEMENT IN THE FORM AS CONTAINED IN APPENDIX M UNDERTAKING NOT TO COMPETE WITH TECUMSEH INDIA IN THE MANUFACTURE, SALE OR REPAIR OF COMPRESSORS IN INDIA, EXCEPT THAT WHIRLPOOL SHALL B E ENTITLED TO SELL AND INSTALL COMPRESSORS PURCHASED FROM TECUMSEH IND IA TO PERSONS UNDER ITS SERVICE ARRANGEMENTS, SUBJECT TO THE PROV ISIONS OF THE SUPPLY AGREEMENTS. 124.1 THUS, IT CAN BE SEEN THAT NON-COMPETE AGREEM ENT WAS MADE APPENDIX M TO THE AGREEMENT DATED 2 ND JULY, 1997 AND WAS, THUS, PART AND PARCEL OF THE MAIN AGREEMENT THE SIGNING AND EXECUT ION WHEREOF WAS A CONDITION PRECEDENT (CLAUSE D OF NON-COMPETE AGREEMENT REPROD UCED IN PARA 60 OF THIS ORDER) FOR THE COMPLETION OF THE TRANSACTION. ITA NO.3759/DEL/2003 84 125. IT CAN BE MENTIONED HERE THAT THE TOTAL PURCHA SE PRICE OF RS.52.5 CRORES ENVISAGED IN MOU VIDE CLAUSE 3 WAS INCLUDING A SUM OF RS.2.65 CRORE TO BE PAID FOR NON-COMPETE AGREEMENT. THE OTHER SUM OF RS.49. 85 CRORE WAS TO BE PAID IN RESPECT OF VARIOUS ASSETS AS DESCRIBED IN PARA 9 OF THIS ORDER. IF WE AGGREGATE THESE TWO SUMS THEN, THE TOTAL AMOUNT WILL COME TO RS.52.5 CRORES WHICH WAS THE AGREED PURCHASE PRICE. THE ASSESSEE COMPANY WAS IN CORPORATED FOR THE PURPOSE OF EFFECTUATING THE TRANSACTIONS AGREED IN THE MOU. THE PURPOSE OF THE ASSESSEE COMPANY FOR WHICH IT WAS INCORPORATED WAS THAT TECUMSEH USA BEING A LEADING GLOBAL COMPRESSOR MANUFACTURER WAS INTERESTED IN PURCHASING COMPRESSOR RELATED OPERATIONS OF WHIRLPOOL INDIA F OR INDIAN COMPRESSOR MARKET. THUS, THE VERY INTENTION AND PURPOSE WAS TO ESTABLI SH BUSINESS IN INDIA BY TAKING OVER THE COMPRESSOR AND RELATED OPERATIONS OF WHIRL POOL INDIA IN INDIA. THE NON- COMPETE AGREEMENT WAS PART AND PARCEL OF THE WHOLE TRANSACTION AND CANNOT BE TREATED TO BE A SEPARATE TRANSACTION. 126. THE CASE OF THE ASSESSEE WILL FALL UNDER THE F IRST TEST WHICH DESCRIBES THAT IF THE EXPENDITURE IS MADE FOR THE INITIAL OUTLAY O R FOR THE EXPANSION OF BUSINESS OR A SUBSTANTIAL REPLACEMENT OF THE EQUIPMENT, THEN, I T WILL FALL UNDER THE CAPITAL EXPENDITURE. IT WAS NOT AN EXPENDITURE INCURRED WH ILE THE BUSINESS WAS CARRYING ON. THOUGH IT HAS BEEN THE CONTENTION OF THE ASSES SEE THAT NON-COMPETE AGREEMENT WAS EXECUTED SUBSEQUENT TO THE DATE OF MA IN AGREEMENT, BUT SUCH CONTENTION OF THE ASSESSEE CANNOT BE ACCEPTED AS IN THE MAIN AGREEMENT ITSELF THE NON-COMPETE AGREEMENT WAS APPENDED AS M WITHO UT WHICH THE TRANSACTION WAS NOT COMPLETE AS BY INCLUDING THE AMOUNT PAID FO R NON-COMPETE AGREEMENT THE PURCHASE PRICE AS STATED IN MOU COULD BE ARRIVE D AT. 127. THE INCURRING OF EXPENDITURE ALSO BROUGHT AN E NDURING BENEFIT TO THE ASSESSEE IF THE SAME IS EXAMINED FROM THE PROPOSITI ON OF LAW LAID DOWN IN THE CASE OF ASSAM BENGAL CEMENT COMPANY LTD. (SUPRA) W HEREIN THEIR LORDSHIPS HAVE CONSIDERED THE PERIOD OF FIVE YEARS AS PROVIDI NG ENDURING ADVANTAGE TO THE ASSESSEE IRRESPECTIVE OF THE FACT THAT THE PAYMENT WAS TO BE MADE ANNUALLY. THEIR LORDSHIPS HAVE OBSERVED THAT THE ASSET WHICH THE COMPANY HAD ACQUIRED IN ITA NO.3759/DEL/2003 85 CONSIDERATION OF SUCH RECURRING PAYMENT WAS IN THE NATURE OF CAPITAL ASSET WHICH WAS THE RIGHT TO CARRY ON ITS BUSINESS UNFETTERED B Y ANY COMPETITION FROM OUTSIDERS WITHIN THE AREA. THE PROTECTION ACQUIRED BY THE COMPANY WAS FOR ITS BUSINESS AS A WHOLE. IT WAS NOT A PART OF THE WORK ING OF THE BUSINESS, BUT WENT TO APPRECIATE THE WHOLE OF THE CAPITAL ASSET AND MAKE IT MORE PROFIT YIELDING. THE RELEVANT OBSERVATIONS OF THEIR LORDSHIPS FROM THE S AID DECISION ARE AS UNDER:- THE ASSET WHICH THE COMPANY HAD ACQUIRED IN CONSID ERATION OF THIS RECURRING PAYMENT WAS IN THE NATURE OF A CAPIT AL ASSET, THE RIGHT TO CARRY ON ITS BUSINESS UNFETTERED BY ANY CO MPETITION FROM OUTSIDERS WITHIN THE AREA. IT WAS A PROTECTION ACQ UIRED BY THE COMPANY FOR ITS BUSINESS AS A WHOLE. IT WAS NOT A PART OF THE WORKING OF THE BUSINESS BUT WENT TO APPRECIATE THE WHOLE OF THE CAPITAL ASSET AND MAKING IT MORE PROFIT YIELDING. THE EXPENDITURE MADE BY THE COMPANY IN ACQUIRING THIS ADVANTAGE WHI CH WAS CERTAINLY AN ENDURING ADVANTAGE WAS THUS OF THE NAT URE OF CAPITAL EXPENDITURE AND WAS NOT AN ALLOWABLE DEDUCTION U/S 10(2)(XV) OF THE INCOME TAX ACT. THE FURTHER PROTECTION FEE WHICH WAS PAID BY THE CO MPANY TO THE LESSOR UNDER CLAUSE 5 OF THE DEED WAS ALSO OF A SIM ILAR NATURE. IT WAS NO DOUBT SPREAD OVER A PERIOD OF 5 YEARS, BUT T HE ADVANTAGE WHICH THE COMPANY GOT AS A RESULT OF THE PAYMENT WA S TO INURE FOR ITS BENEFIT FOR THE WHOLE OF THE PERIOD OF THE LEAS E UNLESS DETERMINED IN THE MANNER PROVIDED IN THE LAST PART OF THE CLAUSE. IT PROVIDED PROTECTION TO THE COMPANY AGAINST ALL C OMPETITORS IN THE WHOLE OF THE KHASI AND JAINTIA HILLS DISTRICT A ND THE CAPITAL ASSET WHICH THE COMPANY ACQUIRED UNDER THE LEASE WA S THEREBY APPRECIATED TO A CONSIDERABLE EXTENT. THE SUM OF RS.35,000 AGREED TO BE PAID BY THE COMPANY TO THE LESSOR FOR THE PERIOD OF 5 YEARS WAS NOT A REVENUE EXPENDITURE WHICH WAS MADE BY THE COMPANY FOR WORKING THE CAPITAL ASSET WHICH IT HAD ACQUIRED. IT WAS NO PART OF THE WORKING OR OPERATIONAL EXPENSES OF THE COMPANY. IT WAS AN EXPENDITURE MADE FOR THE PURPOS E OF ACQUIRING AN APPRECIATED CAPITAL ASSET WHICH WOULD NO DOUBT BY REASON OF THE UNDERTAKING GIVEN BY THE LESSOR MAKE THE CAPITAL ASSET MORE PROFIT YIELDING. THE PERIOD OF 5 YEARS OVER WHICH THE PAYMENTS WERE SPREAD DID NOT MAKE ANY DIFFERENCE TO THE NATURE OF THE ACQUISITION. IT WAS NONE THE LESS AN ACQUIS ITION OF AN ADVANTAGE OF AN ENDURING NATURE WHICH ENURED FOR TH E BENEFIT OF THE WHOLE OF THE BUSINESS FOR THE FULL PERIOD OF TH E LEASE UNLESS TERMINATED BY THE LESSOR BY NOTICE AS PRESCRIBED IN THE LAST PART OF THE CLAUSE. THIS AGAIN WAS THE ACQUISITION OF AN A SSET OR ADVANTAGE OF AN ENDURING NATURE FOR THE WHOLE OF T HE BUSINESS ITA NO.3759/DEL/2003 86 AND WAS OF THE NATURE OF CAPITAL EXPENDITURE AND TH US WAS NOT AN ALLOWABLE DEDUCTION UNDER SECTION 10(2) (XV) OF THE ACT. 128. LD. COUNSEL APPEARING ON BEHALF OF THE ASSESSE E HAS DISTINGUISHED THE DECISION IN THE CASE OF ASSAM BENGAL CEMENT COMPANY LTD. (SUPRA) ON THE GROUNDS THAT IN THAT CASE THE RIGHT ACQUIRED BY THE ASSESSEE WAS TO CARRY ON ITS BUSINESS UNFETTERED BY ANY COMPETITION FROM OUTSIDE R WITHIN THE AREA, BUT IN THE CASE OF THE ASSESSEE THERE WERE SEVERAL COMPETITORS AND WHAT THE ASSESSEE HAD GOT ONLY THE NON-COMPETE AGREEMENT FROM ONE PARTY, NAMELY, WHIRLPOOL INDIA FROM WHICH IT HAD PURCHASED THE MANUFACTURING RELAT ED FACILITIES. THIS PROPOSITION OF THE ASSESSEE ALSO CANNOT BE ACCEPTED AS IT IS NO T NECESSARY THAT THE ASSESSEE SHOULD ACQUIRE MONOPOLY RIGHTS WHILE WARDING OFF TH E COMPETITION. REFERENCE IN THIS REGARD CAN BE MADE TO THE FOLLOWING OBSERVATIO NS OF HONBLE SUPREME COURT FROM THE DECISION IN THE CASE CIT VS. COAL SHIPMENT PVT. LTD. (SUPRA) WHERE IT WAS OBSERVED THAT EVEN IN A CASE WHERE PAYMENT IS M ADE TO WARD OFF COMPETITION IN BUSINESS TO A RIVAL DEALER WOULD CON STITUTE CAPITAL EXPENDITURE:- ALTHOUGH WE AGREE THAT PAYMENT MADE TO WARD OFF CO MPETITION IN BUSINESS TO A RIVAL DEALER WOULD CONSTITUTE CAPITAL EXPENDITURE IF THE OBJECT OF MAKING THAT PAYMENT IS TO DERIVE AN A DVANTAGE BY ELIMINATING THE COMPETITION OVER SOME LENGTH OF TIM E, THE SAME RESULT WOULD NOT FOLLOW IF THERE IS NO CERTAINTY OF THE DURATION OF THE ADVANTAGE AND THE SAME CAN BE PUT TO AN END AT ANY TIME. HOW LONG THE PERIOD OF CONTEMPLATED ADVANTAGE SHOULD BE IN ORDER TO CONSTITUTE ENDURING BENEFIT WOULD DEPEND UPON THE C IRCUMSTANCES AND THE FACTS OF EACH INDIVIDUAL CASE. 129. ACCORDING TO ABOVE OBSERVATIONS IT CAN BE SEEN THAT WARDING OFF COMPETITION IN BUSINESS EVEN TO A RIVAL DEALER WILL CONSTITUTE CAPITAL EXPENDITURE AND TO HOLD THEM CAPITAL EXPENDITURE IT IS NOT NECE SSARY THAT NON-COMPETE FEE IS PAID TO CREATE MONOPOLY RIGHTS. 130. THE ASSESSEE ALSO CANNOT GET ANY HELP FROM THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. EICHER COMPANY LT D. (SUPRA) AS IN THAT CASE THEIR LORDSHIPS HAVE CLEARLY FOUND FROM THE RECORD THAT IT WAS NOT CLEAR THAT HOW LONG THE RESTRICTIVE COVENANT WAS TO LAST AND WHAT THE ASSESSEE HAD DONE WAS ITA NO.3759/DEL/2003 87 THAT IT ELIMINATED THE COMPETITION IN THE TWO-WHEEL ER BUSINESS FOR A WHILE. THEIR LORDSHIPS HAVE ALSO FOUND THAT THE BENEFIT RECEIVED BY THE ASSESSEE IN THAT CASE WAS NEITHER PERMANENT NOR EPHEMERAL. THEREFORE, TH E SAID DECISION IS NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE AS IN T HE CASE OF ASSESSEE THE NON- COMPETE AGREEMENT IS APPLICABLE FOR 5 YEARS, WHICH PERIOD HAS BEEN CONSIDERED TO BE SUFFICIENT TO GIVE ENDURING BENEFIT IN THE CA SE OF ASSAM BENGAL (SUPRA). 131. WITH THESE OBSERVATIONS WE HOLD THAT THE EXPEN DITURE OF RS.2.65 CRORE CLAIMED BY THE ASSESSEE IN PURSUANCE OF NON-COMPETE AGREEMENT DATED 10 TH JULY, 1997 ARE CAPITAL EXPENDITURE, THE DEDUCTION O F WHICH CANNOT BE GRANTED TO THE ASSESSEE AS REVENUE EXPENDITURE. THE MAIN ISSU E IS DECIDED AGAINST THE ASSESSEE AND IN FAVOUR OF THE REVENUE. 132. NOW, WE TAKE UP THE CASES OF INTERVENERS. ALT HOUGH IN ALL THESE CASES THE ISSUE OF NON-COMPETE FEE IS INVOLVED, BUT, AS WE UN DERSTAND FROM THE DISCUSSIONS DURING HEARING, THE ISSUE IS BASICALLY ONE PURELY B ASED ON APPRECIATION OF FACTS OF EACH CASE, AND WE COULD SEE IN OUR INITIAL IMPRESSI ON AT THE STAGE OF ARGUMENTS THAT THE FACTS OF THE CASE OF INTERVENERS ARE NOT E NTIRELY SIMILAR TO THE FACTS OF THE MAIN APPELLANT. IT IS, THEREFORE, NECESSARY FOR US TO GO INTO THE FACTS OF THOSE CASES THOROUGHLY BEFORE APPLYING THE LAW AS WE HAVE TRIED TO DETERMINE IN THE CASE OF THE ASSESSEE. WE, THEREFORE, ARE OF THE VI EW THAT THE CASES OF THE INTERVENERS SHOULD BE BETTER ALLOWED TO BE FRAMED A ND APPRECIATED BY THE DIVISION BENCH BEFORE APPLYING THE PRINCIPLE LAID D OWN HERE IN THIS CASE TO THE FACTS OF THOSE CASES (UNLESS THE FACTS FALL IN LINE ). SO, WITHOUT MAKING ANY DETAILED DISCUSSION, WE RESTORE THE CASES OF THE IN TERVENERS TO THE DIVISION BENCH TO BE DECIDED ONLY AFTER ASCERTAINING THE FACTS AS ALSO THE SIMILARITY OF THE FACTS WITH THOSE DISCUSSED IN THE CASE OF THE PRESENT ASS ESSEE. THEREFORE, THE CASES OF THE INTERVENERS BE PLACED BEFORE THE DIVISION BE NCH TO BE DECIDED IN ACCORDANCE WITH THE LAW AFTER BRINGING OUT THE FACT S ON RECORD. ITA NO.3759/DEL/2003 88 133. SO FAR AS IT RELATES TO GROUND NO.2 THE ISSUE IS DISCUSSED BY THE ASSESSING OFFICER IN PARA 3 OF THE IMPUGNED ASSESSMENT ORDER. THE ASSESSEE HAS INCREASED ITS AUTHORIZED SHARE CAPITAL AND FOR THAT PURPOSE IT HAS INCURRED AN EXPENDITURE OF RS.39,90,120/- BEING ON ACCOUNT OF F EE PAID TO REGISTRAR OF COMPANIES. THE ASSESSING OFFICER RELYING ON THE FO LLOWING DECISIONS OF HONBLE SUPREME COURT HAS DISALLOWED THIS AMOUNT:- I) PUNJAB STATE INDUSTRIAL DEVELOPMENT CORPORATION LTD. VS. CIT 225 ITR 792; II) BROOK BOND INDIA LTD. VS. CIT 225 ITR 798 (SC). 134. BEFORE LD. CIT (A) IT WAS PLEADED THAT COMPANY S INVESTMENT IN WORKING CAPITAL AS ON 31 ST MARCH, 1998 WAS RS.24,79,41,453/- AND INVESTMENT I N FIXED ASSETS AS ON 31 ST MARCH, 1998 WAS RS.44,52,68,614/- AND IT WAS SUBMI TTED THAT EVEN IF ROC FEES OF RS.39,90,120/- IS APPORTIONED I N THE RATIO OF WORKING CAPITAL TO FIXED CAPITAL, THEN, THE AMOUNT ATTRIBUTABLE TO WORKING CAPITAL WILL COME TO RS.14,54,876/- AND ATTRIBUTABLE TO FIXED ASSETS WIL L BE AN AMOUNT OF RS.25,35,244/-. THE AMOUNT ATTRIBUTABLE TO WORKING CAPITAL AT RS.14,54,876/- OUT OF RS.39,90,120/- IS EXPENDITURE ON REVENUE ACCOUNT AND QUALIFIES FOR DEDUCTION AS A REVENUE EXPENDITURE AND ANOTHER AMOUNT MAY BE TREATED AS CAPITAL EXPENDITURE. HOWEVER, THE LD. CIT (A) DID NOT ACCE PT SUCH SUBMISSION OF THE ASSESSEE, AND, REFERRING TO THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF PUNJAB STATE INDUSTRIAL DEVELOPMENT CORPORATION LTD . VS. CIT (SUPRA) HE UPHELD THE ACTION OF THE ASSESSING OFFICER. THE ASSESSEE IS AGGRIEVED, HENCE, IN APPEAL. 135. THE SUBMISSIONS MADE BEFORE THE CIT (A) WERE R EITERATED BEFORE US. THE LEARNED AR RELIED UPON THE UNREPORTED DECISION OF D ELHI ITAT IN THE CASE OF GE CAPITAL TRANSPORTATION SERVICES LTD. VS. DCIT, ORD ER DATED 4 TH MAY, 2007 IN ITA NO.2036/DEL/2002 A COPY OF WHICH IS PLACED AT PAGES 119 TO 123 AND RELIANCE WAS PLACED ON PARA 16 TO 21 OF THE ORDER, WHICH, FO R THE SAKE OF CONVENIENCE ARE REPRODUCED BELOW:- ITA NO.3759/DEL/2003 89 16. GROUNDS NO. 4 OF THE APPEAL IS DIRECTED AGAINS T DISALLOWANCE OF RS. 50,80,172/- ON ACCOUNT OF EXPENSES INCURRED IN CONNECTION WITH THE ISSUE OF EQUITY SHARES FOR AUGMENTING THE WORKING CAPITAL BY TREATING THE SAME AS CAPITAL EXPENDITURE. 17. THE BRIEF FACTS OF THE CASE ARE THAT DURING THE YEAR THE ASSESSEE INCURRED EXPENSES OF RS. 50,80,172/- IN CO NNECTION WITH FRESH ISSUE OF EQUITY SHARES. THE ASSESSING OFFICE R RELYING ON THE DECISION OF THE HONBLE SUPREME COURT IN BROOK BOND (INDIA) LTD. VS. C.I.T. [225 ITR 798 (SC)] HELD THE EXPENSES TO BE CAPITAL EXPENDITURE AND DISALLOWED THE CLAIM FOR DEDUCTION TO THE ASSESSEE. 18. THE LEARNED C.I.T.(A) OBSERVED THAT A SIMILAR I SSUE WAS IN APPEAL BEFORE THE TRIBUNAL IN THE CASE OF THE ASSES SEE FOR THE ASSESSMENT YEAR 1990-91 WHEREIN THE ISSUE WAS DECI DED AGAINST THE ASSESSEE. HENCE, HE CONFIRMED THE ORDER OF THE ASSESSING OFFICER . 19. THE LEARNED A.R. OF THE ASSESSEE HAS ARGUED TH AT THE EXPENDITURE WAS INCURRED FOR AUGMENTING OF WORKING CAPITAL. RELYING ON THE DECISION OF THE CHENNAI BENCH OF THE TRIBUNAL IN LAXMI AUTO COMPONENTS LTD. VS. DCIT [101 ITD (CHENN AI) 209 (TM) IT WAS SUBMITTED THAT THE EXPENDITURE SHOULD B E ALLOWED. 20. THE LEARNED D.R. ON THE OTHER HAND SUPPORTED TH E ORDERS OF THE LOWER AUTHORITIES. 21. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES AND THE MATERIALS AVAILA BLE ON RECORD. WE FIND THAT THE ASSESSING OFFICER HAS DISALLOWED THE DEDUCTION CLAIMED BY THE ASSESSEE OF RS. 50,80,172/- IN CONNE CTION WITH THE ISSUE OF EQUITY SHARES FOLLOWING THE DECISION OF TH E HONBLE SUPREME COURT IN BROOKE BOND (INDIA) LTD. VS. C.I.T . [225 ITR 798]. THE CONTENTION OF THE ASSESSEE IS THAT THE INCREASE IN THE SHARE CAPITAL WAS TO MEET THE NEEDS FOR WORKING CAPITAL . IT IS THE SUBMISSION OF THE ASSESSEE THAT THE TRIBUNAL IN LAX MI AUTO COMPONENTS LTD. (SUPRA) HAS OBSERVED THAT WHERE THE EXPENSES WERE INCURRED FOR INCREASING THE SHARE CAPITAL WHIC H WAS IN TO MEET THE NEED FOR WORKING CAPITAL THEN THE EXPENDITURE W AS ALLOWABLE AS REVENUE EXPENDITURE. WE FIND THAT BOTH THE LOWER AUTHORITIES HAS NOT BROUGHT ON RECORD THE ENTIRE FACTS OF THE CASE WHETHER THE INCREASE IN THE SHARE CAPITAL BY THE ASSESSEE WAS F OR WORKING CAPITAL OR FOR FIXED CAPITAL. FURTHER, WE FIND THAT THE LEARNED C.I.T.(A) HAS OBSERVED IN HIS ORDER THAT FOR THE A SSESSMENT YEAR 1990-91 A SIMILAR ISSUE HAD ARISEN AND THE CLAIM FO R DEDUCTION OF ITA NO.3759/DEL/2003 90 THE ASSESSEE WAS DISALLOWED. IN THESE FACTS AND CI RCUMSTANCES WE ARE OF THE CONSIDERED OPINION THAT THE ISSUE SHOULD BE RESTORED BACK TO THE FILE OF THE ASSESSING OFFICER FOR DECI DING THE SAME AFRESH AFTER VERIFYING THE FACTS OF THE CASE AND C ONSIDERING THE DECISION OF THE TRIBUNAL IN THE CASE OF LAXMI AUTO COMPONENTS LTD. (SUPRA). WE THEREFORE, SET ASIDE THE ORDER OF THE ASSESSING OFFICER AND THE LD. COMMISSIONER OF INCOME TAX (AP PEALS) AND REMAND THE MATTER BACK TO THE FILE OF THE ASSESSIN G OFFICER FOR DECIDING THE ISSUE AFRESH IN THE LIGHT OF THE OBSER VATIONS MADE ABOVE AND AFTER AFFORDING PROPER OPPORTUNITY OF HEA RING TO BOTH THE PARTIES. THIS GROUND OF APPEAL IS ALLOWED FOR STATI STICAL PURPOSES. 136. LD. DR, HOWEVER, RELIED UPON THE ORDER OF THE ASSESSING OFFICER AND CIT (A). 137. ON THIS ISSUE WE HAVE HEARD BOTH THE PARTIES. THE FACT IS UNDISPUTED THAT THE FEE HAS BEEN PAID BY THE ASSESSEE FOR INCREASIN G THE AUTHORIZED CAPITAL. HONBLE SUPREME COURT IN THE CASE PUNJAB STATE INDU STRIAL DEVELOPMENT CORPORATION LTD. VS. CIT (SUPRA) HAS HELD THAT THE FEE PAID TO THE REGISTRAR FOR EXPANSION OF THE CAPITAL BASE OF THE COMPANY WAS DI RECTLY RELATED TO CAPITAL EXPENDITURE INCURRED BY THE COMPANY AND ALTHOUGH IN CIDENTALLY THAT WOULD CERTAINLY HELP IN THE BUSINESS OF THE COMPANY AND M AY ALSO HELP IN PROFIT MAKING, IT STILL RETAIN THE CHARACTER OF CAPITAL EXPENDITUR E SINCE THE EXPENDITURE WAS DIRECTLY RELATED TO THE EXPANSION OF THE CAPITAL BA SE OF THE COMPANY, THUS, IT WAS NOT AN EXPENSE IN THE NATURE OF REVENUE. THE ARGUM ENT OF LD. AR OF PROPORTIONATE ALLOCATION OF THE EXPENDITURE BETWEEN WORKING CAPITAL AND FIXED ASSETS IS RIGHTLY REJECTED BY THE CIT (A) AS NO SUC H BENEFIT CAN BE AVAILED BY THE ASSESSEE IN VIEW OF AFOREMENTIONED DECISION OF HON BLE SUPREME COURT WHICH IS SQUARELY APPLICABLE TO THE FACTS OF THE PRESENT CAS E. WE DISMISS THIS GROUND. 138. APROPOS GROUND NO.3, THIS ISSUE IS DISCUSSED B Y THE ASSESSING OFFICER IN PARA 4. IT WAS OBSERVED BY THE ASSESSING OFFICER T HAT IN THE DETAILS FILED FOR LEGAL AND PROFESSIONAL CHARGES A SUM OF RS.20 LAC WAS FOU ND DEBITED AND DETAILS IN THIS REGARD HAS SHOWN THAT AMOUNT WAS PAID TO SHRI C.P. KUKREJA ASSOCIATES, ITA NO.3759/DEL/2003 91 ARCHITECTS. SINCE THAT PAYMENT WAS MADE TO AN ARCH ITECT, THE SAME WAS HELD TO BE CAPITAL EXPENDITURE AND ACCORDINGLY ADDED TO THE INCOME OF THE ASSESSEE. 139. BEFORE LD. CIT (A), LD. AR OF THE ASSESSEE DID NOT DISPUTE ABOUT THE NATURE OF THE EXPENDITURE AND THE CLAIM OF THE ASSE SSEE WAS REGARDING DEPRECIATION AND IT IS OBSERVED BY THE CIT (A) THAT IN THE ABSENCE OF DETAILS THE CLAIM OF THE ASSESSEE EVEN REGARDING DEPRECIATION C OULD NOT BE ACCEPTED. THE ASSESSEE IS AGGRIEVED, HENCE, IN APPEAL. 140. LD. AR ALSO DID NOT SUBMIT ANY DETAILS BEFORE US AS THE SAME WAS SPECIFICALLY ASKED FOR AND IN THE ABSENCE OF SUCH D ETAILS, AFTER HEARING BOTH THE PARTIES ON THIS ISSUE WE DECLINE TO INTERFERE IN TH E FINDINGS OF THE CIT (A) VIDE WHICH SUCH ADDITION HAS BEEN UPHELD AND BENEFIT OF DEPRECIATION IS DENIED. THIS GROUND OF THE ASSESSEE IS ALSO DISMISSED. 141. IN THE RESULT, THE APPEAL FILED BY THE ASSESSE E IS DISMISSED IN THE MANNER AFORESAID. . . THE ORDER PRONOUNCED IN THE OPEN COURT ON 30.07.2 010. SD/- SD/- SD/- [R.C. SHARMA] [G.E. VEERABHADRAPPA] [I.P. BANSAL] ACCOUNTANT MEMBER VICE PRESIDENT JUDICIAL MEMBER DATED, 30.07.2010. DK COPY FORWARDED TO: - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT TRUE COPY BY ORDER, DEPUTY REGISTRAR, ITAT, DELHI BENCHES