Appeal details
Counselvise Citation
[2011] 134 COUNSELVISE.COM (IT) 4275 (ITAT-DELHI)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
7 month(s) 1 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
08-04-2011
Appeal Filed By
Department
Order Result
Dismissed
Bench Allotted
G
Next Hearing Date
08-03-2011
Assessment Year
2005-2006
Appeal Filed On
06-09-2010
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH G DELHI BEFORE SHRI C.L. SETHI AND SHRI K.G. BANSAL I.T.A. NO. 4008(DEL)/2010 ASSESSMENT YEAR: 2005-06 & I.T.A. NO. 4994(DEL)/2010 ASSESSMENT YEAR: 2006-07 SONY INDIA PVT. LTD., ADDITIONAL COMMISSIONER OF A-31, MOHAN COOPERATIVE VS. INCOME-T AX, RANGE 9, INDL. ESTATE, NEW DELHI. N EW DELHI. I.T.A. NO. 4114(DEL)/2010 ASSESSMENT YEAR: 2005-06 ADDITIONAL COMMISSIONER OF SONY INDIA PVT. LTD., INCOME-TAX, RANGE 9, VS. A- 31, MOHAN COOPERATIVE NEW DELHI. INDL. ESTATE, NEW DELHI. (APPELLANT) (RESPONDENT) ASSESSEE BY : S/SHRI N. VENKAT RAMAN, AD V., A.RIJIT CHAKRA, MS. ASHIMA GUPTA, C.A., VANKY & MANONEET DALAL, ADV./ DEPARTMENT BY : S/SHRI GA JANAND MEENA, CIT, DR, N.K. CHAND, DR A.D. MEHROTRA, CIT, DR & KISHORE B., DR ORDER PER K.G. BANSAL : AM THESE CROSS APPEALS FOR ASSESSMENT YEAR 2005- 06 AND THE APPEAL OF THE ASSESSEE FOR ASSESSMENT YEAR 2006-07 WER E ARGUED IN A ITA NOS. 4008, 4114 & 4994(DEL)/2010 2 CONSOLIDATED MANNER BY THE LD. COUNSEL FOR THE A SSESSEE AND THE LD. CIT, DR. THEREFORE, A CONSOLIDATED ORDER IS PASSED. ITA NO. 4008(DEL)/2010-A.Y. 2005-06- APPEAL OF THE ASSESSEE 2. GROUND NOS. 1 AND 2 ARE GENERAL IN NATURE TO THE EFFECT THAT THE ORDERS PASSED BY THE ASSESSING OFFICER (AO), TRAN SFER PRICING OFFICER (TPO) AND THE COMMISSIONER OF INCOME-TAX (APPEALS) [CIT(A)] ARE BAD IN LAW. THE ORDER PASSED BY THE LD. CIT(A) IS BAD IN LAW TO THE EXTENT THAT THE DECISION OF THE TRIBUNAL IN THE ASSESSEES O WN CASE FOR EARLIER YEARS WAS NOT FOLLOWED. THESE GROUNDS WILL GET D ECIDED AUTOMATICALLY WHEN OTHER GROUNDS TAKEN UP BY THE ASSESSEE ARE DE CIDED HEREUNDER. 3. GROUND NO. 3 CHALLENGES THE ADDITION OF RS. 38,98,79,056/- MADE TO THE TOTAL INCOME ON ACCOUNT OF DETERMINATION OF ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTIONS FOR IMPORT OF FINISHE D GOODS. FOLLOWING POINTS HAVE BEEN MENTIONED IN THIS REGARD: (I) REIMBURSEMENT OF ADVERTISEMENT EXPENSES AMOUNTIN G TO RS. 20,72,60,600/-, RECEIVED FROM ASSOCIATED ENTER PRISES (AES), HAS BEEN EXCLUDED FOR COMPUTING OPERATING-MARGIN (OP) OF THE ASSESSEE IN CONSUMER ELECTRONIC DIVISION; (II) NOTICE-PAY AND PENALTY RECEIVED FROM STAFF ME MBERS HAVE BEEN EXCLUDED FROM THE OP; ITA NOS. 4008, 4114 & 4994(DEL)/2010 3 (III) ADJUSTMENT HAS NOT BEEN ALLOWED ON ACCOUNT OF DI FFERENCE IN FUNCTIONS PERFORMED, RISKS UNDERTAKEN AND ASS ETS EMPLOYED BY THE ASSESSEE AND IN THE COMPARABLE CASES; (IV) ADJUSTMENT OF 5% HAS NOT BEEN ALLOWED FROM THE M EAN VALUE OF THE COMPARABLES; AND (V) THE TPO HAS NOT MENTIONED THE SUB-CLAUSE OF SECTI ON 92C(3), WHICH HAS BEEN INVOKED FOR DETERMINING ARMS LEN GTH PRICE. 3.1 IN THE CHART FURNISHED BY THE ASSESSEE, IT IS SUBMITTED THAT THE QUESTION WHETHER REIMBURSEMENT OF ADVERTISEMENT EXPENSES BY AES CONSTITUTED OPERATING OR NON-OPERATING INCOME W AS DETERMINED BY THE TRIBUNAL IN ITS OWN CASE, IN THE CONSOLIDATED OR DER FOR ASSESSMENT YEARS 2002-03, 2003-04 AND 2004-05, IN FAVOUR OF THE ASSESSEE, HOLDING THAT IT WAS THE OP. HOWEVER, THE LD. CIT(APPEALS) DID NOT FOLLOW THESE ORDERS. IN PARAGRAPH NO. 11 ON PAGE NO. 21 OF THE IMPUGNE D ORDER, IT IS MENTIONED THAT THE FINDING OF THE TRIBUNAL HAS BEEN MADE O N THE BASIS THAT THERE IS NO GOOD GROUND FOR NOT ACCEPTING THE REIMBURSEM ENT OF EXPENSES AS A PART OF NORMAL OP. THE TPO HAS RAISED SUBSTAN TIAL ARGUMENTS IN THIS BEHALF AND SUBSTANTIATED HIS CASE. THEREFORE, I T HAS BEEN HELD THAT THE TPO RIGHTLY EXCLUDED SUCH REIMBURSEMENTS FROM THE OP. RESPECTFULLY DISAGREEING WITH THE FINDINGS OF THE TRIBUNAL, TH E ORDERS OF THE TPO AND THE AO HAVE BEEN ACCEPTED IN THIS MATTER. THE CASE OF THE LD. COUNSEL IS THAT THE MATTER STANDS SQUARELY COVERED BY THE O RDER OF THE TRIBUNAL IN ITA NOS. 4008, 4114 & 4994(DEL)/2010 4 THREE YEARS PRECEDING YEARS. THE ISSUE STANDS COVERED IN PARAGRAPH NO. 104, IN WHICH IT HAS BEEN HELD THAT THERE IS NO GO OD GROUND FOR NOT ACCEPTING THE REIMBURSEMENT AS NORMAL OPERATING PROFIT AND BUT FOR THE REIMBURSEMENT, THE ASSESSEE WOULD NOT HAVE INCUR RED SUCH HUGE EXPENDITURE ON ADVERTISEMENT. FOR THE SAKE OF R EADY REFERENCE, THIS PARAGRAPH IS REPRODUCED BELOW:- 104. THE LD. CIT(APPEALS), HOWEVER, ERRONEOUSLY CALLED REIMBURSEMENT AN AD-HOC RECEIPT. THIS FINDING, WI TH RESPECT, IS WITHOUT ANY BASIS AND IS FOUND TO BE CONTRARY TO MATERIAL AVAILABLE ON RECORD INCLUDING AGREEMENT BETWEEN THE TAXPAYER AND ITS AE. THE LD. CIT(A) IS ALSO NOT CORRECT IN OBSERVING THAT TAXPAYER WOULD HAVE INCURRED THE SE EXPENSES EVEN IF THERE WAS NO SUCH REIMBURSEMENT. THIS IS CONTRARY TO WHAT HAS ALREADY BEEN ACCEPTED BY THE TPO. IN OUR VIEW, THE LEARNED CIT(APPEALS) SHOULD HAVE SEEN THAT BECAUSE OF REIMBURSEMENT, EXPENDITURE OF THE TAXPAYER ON ADVERTISEMENT WERE AS HIGH AS 9.06 PER CENT A GAINST 3 PER CENT TO 4 PER CENT SPENT BY OTHER SIMILARLY SIT UATED COMPANIES. IT IS SPECIFICALLY PROVIDED THAT SON Y PACIFIC WOULD PAY 50 PER CENT OF COST AND EXPENSES INCU RRED BY THE TAXPAYER. IT IS A MATTER OF COMMON KNOWLEDGE T HAT ADVERTISEMENT CARRIED ON TV AND OTHER MEDIA HAVE WORLDWIDE EFFECT AND MULTINATIONAL COMPANIES ENTER INTO SUCH CROSS BORDER ARRANGEMENTS. SUCH SPECIAL CIRCUMSTANCES, AS WOULD ENTITLE THE REVENUE TO DISREGARD AND TREAT THE REIMBURSEMENT AS INCONSISTENT WITH ECONOMIC REALITIES OF TRANS ACTION, HAVE NOT BEEN BROUGHT ON RECORD. IT IS NOT MATERIAL THAT OTHER COMPARABLES HAVE NOT ENTERED INTO SIMILAR ARRAN GEMENTS. BUSINESS NECESSITY OF ENTERING INTO THE AGREEM ENT BY THE TAXPAYER HAS BEEN FULLY EXPLAINED. ON FACTS, W E ARE UNABLE TO DISREGARD THE ASSERTION OF THE TAXPAYER THAT IT WOULD NOT HAVE INCURRED SUCH HUGE EXPENSES ON ADVERTISEM ENT BUT FOR AGREEMENT OF REIMBURSEMENT. WE DO NOT SEE ANY GOO D GROUND FOR NOT ACCEPTING THIS REIMBURSEMENT AS PART OF NORMAL ITA NOS. 4008, 4114 & 4994(DEL)/2010 5 OPERATING PROFIT OF THE TAXPAYER. ACCORDINGLY, T HE REVENUE AUTHORITIES ARE DIRECTED TO INCLUDE REIMBURSEMEN T AS PART OF OPERATING INCOME OF THE TAXPAYER. WE ALLOW THIS GROUND OF APPEAL. 3.2 THE CASE OF THE LD. DR IS THAT THE ASSESSE E INCURRED THE EXPENDITURE ON ADVERTISEMENT IN THE COURSE OF ITS OWN BUSINE SS. THE AMOUNT REIMBURSED BY THE AES WAS GRATIS PAYMENT NOTWIT HSTANDING THE FACT THAT AN AGREEMENT EXISTED IN RESPECT OF THE REIMB URSEMENT. THEREFORE, WHILE THE EXPENDITURE INCURRED WAS TO BE DEDUCTE D IN COMPUTING OP, THE GRATIS RECEIPT HAD NO NEXUS WITH THE BUSINESS O F THE ASSESSEE. THE ASSESSEE HAS DEBITED THE NET AMOUNT TO THE PROFIT AND LOSS ACCOUNT. LOOKING TO THE AFORESAID FACTS, SUCH NETTING WAS NOT PROPER IN SO FAR AS TRANSFER PRICING ADJUSTMENT IS CONCERNED. 3.3 WE HAVE CONSIDERED THE FACTS OF THE CASE A ND SUBMISSIONS MADE BEFORE US. WE FIND THAT THERE IS NO CHANGE IN THE FACTS ALTHOUGH THE FINDING OF THE LD. CIT(A) IS THAT THE ORDER OF THE TRIBUNAL, REFERRED TO ABOVE, DID NOT EXACTLY DECIDE THE CONTROVERSY AT HA ND AND, THEREFORE, THE ISSUE WAS APPRECIATED FURTHER BY THE TPO IN THIS YEAR. WE FURTHER FIND THAT THE TRIBUNAL REITERATED THE SAME ORDER IN ASSESSMENT YEARS 2003-04 AND 2004- 05. THE ORDER, REPRODUCED ABOVE, DEALS WITH THE CONTROVERSY AT LENGTH. ITA NOS. 4008, 4114 & 4994(DEL)/2010 6 THESE PRECEDING ORDERS ARE IN THE NATURE OF BINDI NG PRECEDENT FOR US AND EVEN FOR THE LD. CIT(A). IN VIEW THEREOF, RES PECTFULLY FOLLOWING THESE DECISIONS, IT IS HELD THAT REIMBURSEMENT OF ADVERTI SEMENT EXPENSES BY THE AES CONSTITUTES THE OP TO BE INCLUDED FOR THE PU RPOSE OF DETERMINING OPERATING MARGIN. 3.4 THE EXCLUSION OF NOTICE PAY AND PENALTY RECEI VED FROM STAFF MEMBERS HAS ADMITTEDLY BEEN DECIDED AGAINST TH E ASSESSEE BY THE TRIBUNAL AND IT HAS BEEN HELD THAT SUCH AMOUNTS C ANNOT BE INCLUDED IN THE INCOME FOR DETERMINING OPERATING MARGINS. IN V IEW OF DISCUSSION IN THE PRECEDING PARAGRAPH THAT THE ORDER IS A BINDING PRECEDENT, THE MATTER IS DECIDED AGAINST THE ASSESSEE AND IN FAVOUR OF THE REVENUE. 3.5 THEN THERE IS THE QUESTION OF MAKING ADJUST MENT TO THE ARMS LENGTH PRICE IN RESPECT OF DIFFERENCE IN FUNCTIO NS PERFORMED, RISKS UNDERTAKEN AND THE ASSETS EMPLOYED. THE CASE O F THE LD. COUNSEL IS THAT FACTS IN THIS MATTER ARE ALSO SIMILAR TO THE FA CTS CONSIDERED BY THE TRIBUNAL IN ASSESSMENT YEARS 2002-03, 2003-04 AND 2004-05. THE TRIBUNAL ALLOWED THE DEDUCTION AT 20% FOR VARIOUS DIFFERE NCES ON ACCOUNT OF INTANGIBLES, RESEARCH AND DEVELOPMENT, RISK FACT ORS, WORKING CAPITAL ETC. ITA NOS. 4008, 4114 & 4994(DEL)/2010 7 AGAINST 10% ALLOWED BY THE LD. CIT(APPEALS), AND THE GROUND WAS DISPOSED OFF ACCORDINGLY. ALTHOUGH A NUMBER OF ARGUMENTS HAVE BEEN MADE FROM BOTH THE SIDES, AS MENTIONED EARLIER, THE ORDER OF THE TRIBUNAL IN THE CASE OF THE ASSESSEE IS A BINDING PRECEDENC E AS FAR AS WE ARE CONCERNED. NO DISTINGUISHING FEATURE HAS BEEN POIN TED OUT IN THIS YEAR. FURTHER, THE LD. DR IS OF THE VIEW THAT ONLY REAS ONABLY ACCURATE ADJUSTMENT CAN BE MADE IN RESPECT OF THE AFORESAID ITEMS AND, THUS, THERE IS NO SCOPE FOR AD-HOC ADJUSTMENT. AS AGAINST THE AFORES AID, THE CASE OF THE LD. COUNSEL IS THAT ACCURATE ADJUSTMENT IS NOT FEASIB LE IN SUCH MATTERS AND WHAT IS REQUIRED BY LAW IS REASONABLY ACCURATE AD JUSTMENT, WHICH FACTS AND CIRCUMSTANCES PERMIT. IN PAST, THE TRIBUNAL HAS COME TO THE CONCLUSION THAT DEDUCTION BY 20% IS A REASONABLY ACCURATE ADJUSTMENT. WE TEND TO AGREE WITH THIS VIEW. THEREFORE, RELYING ON THE ORDER OF THE TRIBUNAL, THIS MATTER IS ALSO DECIDED IN FAVOUR OF THE ASSESSEE. 3.6 THEN, THERE IS THE QUESTION OF ALLOWING 5% DE DUCTION FROM THE ARITHMETIC MEAN OF THE COMPARABLE CASES. THE CASE OF THE LD. COUNSEL IS THAT EVEN IF THE ASSESSEE WINS IN RESPECT OF REIMBURSEMENT OF ADVERTISEMENT EXPENSES, THIS ISSUE WILL BECOME O F NO CONSEQUENCE. WE HAVE ALREADY HELD THAT REIMBURSEMENT OF ADVERTISE MENT EXPENSES IS OP ITA NOS. 4008, 4114 & 4994(DEL)/2010 8 AND, THUS, DECIDED THE MATTER IN FAVOUR OF THE ASSESSEE. IN VIEW THEREOF, THIS ISSUE DOES NOT REQUIRE ANY DECISION FROM US . 3.7 THE RESULT OF THE AFORESAID DISCUSSION IS THAT GROUND NOS. 3 TO 6 OF THE APPEAL ARE ALLOWED, AS INDICATED ABOVE. 4. GROUND NOS. 7, 8 AND 9 ARE IN RESPECT OF EXP ENDITURE INCURRED BY THE ASSESSEE UNDER THE VOLUNTARY RETIREMENT SCHEME (THE VRS). IT IS MENTIONED THAT THE CIT(A) ERRED IN DISALLOWING RS. 6,70,4 9,994/- ON ACCOUNT OF AMORTIZATION OF EXPENDITURE INCURRED ON THE VRS. HE FURTHER ERRED IN HOLDING THAT IN ORDER TO CLAIM DEDUCTION U/S 35 DDA, THE VRS SHOULD COMPLY WITH THE CONDITIONS LAID DOWN IN SECTION 10(10C) OF THE ACT AND RULE 2BA OF THE INCOME-TAX RULES, 1962 (THE RULE S). HE ALSO ERRED IN HOLDING THAT THE EXPENDITURE RESULTED IN A BENE FIT OF ENDURING NATURE TO THE ASSESSEE AND, THEREFORE, IT WAS CAPITAL IN NATURE. 4.1 THE FACTS MENTIONED IN THE ASSESSMENT ORDER ARE THAT THE NOTE NO. 4 TO THE ACCOUNTS MENTIONS THAT THE ASSESSEE HAS C LAIMED THE DEDUCTION OF 1/5 TH OF THE EXPENDITURE U/S 35DDA. HOWEVER, IT APPEA RED TO THE AO THAT THE RESTRUCTURING EXPENSES ARE OF CAPITAL NAT URE. THEREFORE, THE ASSESSEE ITA NOS. 4008, 4114 & 4994(DEL)/2010 9 WAS REQUESTED TO EXPLAIN THE NATURE OF THE EXP ENSES AND THE DEDUCTIBILITY IN COMPUTING THE INCOME. IT WAS SUBMITTED THAT THE ASSESSEE HAS TREATED THE EXPENSES AS UNDER:- (I) 1/5 TH OF THE EXPENSES INCURRED IN RESPECT THE VRS HAVE BEEN CLAIMED U/S 35DDA; (II) THE LOSS ON SALE OF FIXED ASSETS HAS BEEN DISAL LOWED IN COMPUTING THE TOTAL INCOME BUT DJUSTMENT HAS BEEN MADE IN THE WRITTEN DOWN VALUE OF THE RESPECTIVE BLOCK OF A SSETS, THEREBY CLAIMING THE DEDUCTION OF DEPRECIATION ON THE RED UCED VALUE; AND (III) OTHER RESTRUCTURING EXPENSES SUCH AS LOSS ON DIS POSAL OF RAW- MATERIAL, LEGAL EXPENSES ETC. HAVE BEEN CLAIME D IN FULL U/S 37(1). 4.2 IT WAS FURTHER SUBMITTED THAT THE LOSS INC URRED ON SALE OF RAW- MATERIALS ETC. WERE FOR THE USE IN THE PROCESS OF MANUFACTURE AND THE LOSS CANNOT BE TAKEN BY ANY MEANS TO BE A CAPITAL LO SS. THE LEGAL EXPENSES WERE INCURRED FOR SEEKING LEGAL ADVISE FOR EFFE CTING THE RESTRUCTURING IN ITA NOS. 4008, 4114 & 4994(DEL)/2010 10 MATTERS LIKE LABOUR LAWS, SETTLEMENT OF DUE OF RETIRING EMPLOYEES ETC. THEREFORE, THE EXPENDITURE HAS BEEN CLAIMED IN FULL. IT WAS ALSO SUBMITTED THAT THE PROCESS OF RESTRUCTURING WAS UNDERTAKEN WITH A VIEW TO ENHANCE PROFITABILITY OF THE OPERATIONS OF THE ASSESSEE. THE ASSESSEE HAS NOT DISCONTINUED THE BUSINESS, BUT OPERATIONS A T ONE LOCATION ONLY HAVE BEEN DISCONTINUED. THEREFORE, EXPENSES OTHER THAN THE EXPENDITURE RELATING TO THE VRS ARE DEDUCTIBLE U/S 37. THE AO CONSI DERED THE FACTS OF THE CASE AND SUBMISSIONS OF THE ASSESSEE. IT IS M ENTIONED THAT THE ASSESSEE FLOATED A SCHEME EMPLOYEES VOLUNTARY RETIREMENT SCHEME-2004, UNDER WHICH THE AFORESAID EXPENDITURE HAS BEEN INCURRE D. THE MAIN FEATURES OF THE SCHEME ARE (I) IT IS APPLICABLE TO THE EMPL OYEES OF THE UNIT AT DHARUHERA, INDUSTRIAL PLOT NO. 1, URBAN ESTATE, D HARUHERA, HARYANA; (II) ALL THE EMPLOYEES OF THE FACTORY AT DHARUHERA ARE ELIGIBLE TO APPLY UNDER THE SCHEME; AND (III) THE EMPLOYEES WHO OPT FOR T HE VRS ARE NOT ELIGIBLE FOR RETRENCHMENT COMPENSATION. THE PROVISION CON TAINED IN SECTION 35DDA(1) REGARDING AMORTIZATION OF EXPENSES INC URRED UNDER VOLUNTARY RETIREMENT SCHEME ARE -WHERE AN ASSESSEE INCURS ANY EXPENDITURE IN ANY PREVIOUS YEAR BY WAY OF PAYMENT OF ANY SUM TO AN EMPLOYEE IN CONNECTION WITH HIS VOLUNTARY RETIREMENT, IN ACC ORDANCE WITH ANY SCHEME OR SCHEMES OF VOLUNTARY RETIREMENT, ONE-FIFTH OF THE AMOUNT SO PAID SHALL ITA NOS. 4008, 4114 & 4994(DEL)/2010 11 BE DEDUCTED IN COMPUTING THE PROFITS AND GAINS OF THE BUSINESS FOR THAT PREVIOUS YEAR, AND THE BALANCE SHALL BE DEDUCTE D IN EQUAL INSTALMENTS FOR EACH OF THE FOUR IMMEDIATELY SUCCEEDING PREVIOUS YEARS. THE PROVISION HAS BEEN INTRODUCED IN THE ACT BY THE FINANCE AC T, 2001, WITH EFFECT FROM 01.04.2001. IN THE EXPLANATORY NOTES, IT HAS B EEN MENTIONED THAT THESE PAYMENTS ARE CLEARLY IN THE NATURE OF EX-GRATIA PAY MENTS AND ARE MADE OVER AND ABOVE THE REGULAR TERMINAL BENEFITS LIKE PEN SION, GRATUITY, LEAVE ENCASHMENT ETC. IN RESPECT OF WHICH NORMAL PROVIS IONS OF THE ACT WILL APPLY. THE PROVISION DOES NOT BY ITSELF PROVI DE FOR THE CONTENTS OF THE VRS. THE SAME ARE PROVIDED IN RULE 2BA. THESE RULES HAVE BEEN FRAMED U/S 10(10CA). HOWEVER, IT IS AN ACCEPTE D PRINCIPLE OF CONSTRUCTION OF THE STATUTE THAT IF A TERM IS NOT DEFINED IN THE SECTION, ITS MEANING WILL TAKE COLOUR FROM THE DEFINITION PROV IDED IN SOME OTHER RELATED SECTION. THEREFORE, IT IS NECESSARY TO MA KE A REFERENCE TO RULE 2BA. ON DOING SO, IT WILL BECOME NECESSARY FOR GETTI NG DEDUCTION UNDER THIS SECTION THAT THE PROVISIONS CONTAINED IN RULE 2BA ARE SATISFIED. ON COMPARISON OF THE SCHEME WITH THE CONTENTS OF RUL E 2BA, IT IS SEEN THAT (I) THE SCHEME IS NOT OPEN TO ALL EMPLOYEES OF THE ASSESSEE-COMPANY AS IT IS LIMITED ONLY TO EMPLOYEES OF DHARUHERA UNIT; (II) NO AGE BAR HAS BEEN PLACED ON THE EMPLOYEES WORKING IN THIS UNIT; (I II) THERE IS NO BAR ON THE ITA NOS. 4008, 4114 & 4994(DEL)/2010 12 MINIMUM NUMBER OF YEARS OF SERVICE OF THE EMPLO YEE FOR MAKING HIM ELIGIBLE TO OPT FOR RETIREMENT UNDER THE VRS; (I V) THERE IS NO UPPER LIMIT PLACED ON THE COMPENSATION; AND (V) THE PAYMENT IN CLUDES WITHIN ITS AMBIT EARNED LEAVE, MEDICAL LEAVE, CASUAL LEAVE, PENSION, GRATUITY ETC. THEREFORE, THE SCHEME HAS NOT BEEN FRAMED IN ACCORDANCE WITH RULE 2BA. ACCORDINGLY, IT HAS BEEN HELD THAT THE SCHEME IS N OT A VRS AND IT IS IN SUBSTITUTION OF RETRENCHMENT COMPENSATION PAYABL E TO THE EMPLOYEES. THUS, THE PROVISIONS CONTAINED IN SECTION 35DDA ARE NOT APPLICABLE. 4.3 COMING TO THE DEDUCTIBILITY OF THE EXPENDITUR E U/S 37(1), IT IS MENTIONED THAT THE PAYMENT HAS BEEN MADE IN THE P ROCESS OF CLOSURE OF THE BUSINESS OF THE DHARUHERA UNIT. THE COMPENSATION PAID IN SUCH A CASE HAS TO BE CONSIDERED U/S 25F AND SECTION 25FF OF THE INDUSTRIAL DISPUTES ACT, 1947. THESE PROVISIONS HAVE BEEN NARRATED IN TH E ASSESSMENT ORDER. IT IS FURTHER MENTIONED THAT THE PROVISION CONTAINED IN SECTION 25FF COMES INTO OPERATION ON TRANSFER OF OWNERSHIP OR MANAGEM ENT. IN SUCH A CASE, THERE IS NO RIGHT TO RECEIVE RETRENCHMENT COMP ENSATION SUBJECT TO SOME EXCEPTIONS. THESE EXCEPTIONS ARE NOT APPLICABLE TO THE FACTS OF THE CASE. FURTHER, THE COMPENSATION PAID U/S 25FF IS NOT DEDUCTIBLE IN COMPUTING THE INCOME. THE PROVISIONS OF SECTION 25F ARE A LSO NOT SATISFIED IN THIS ITA NOS. 4008, 4114 & 4994(DEL)/2010 13 CASE. EVEN UNDER SECTION 37 OF THE ACT, ONLY THAT EXPENDITURE CAN BE ALLOWED WHICH IS INCURRED FOR THE PURPOSE OF BU SINESS, WHICH PRE- SUPPOSES THAT THE BUSINESS CONTINUES TO BE CARR IED ON BY THE ASSESSEE. THEREFORE, EXPENDITURE INCURRED IN THE COURSE OF T HE CLOSURE OF BUSINESS OR TRANSFER OF BUSINESS IS NOT DEDUCTIBLE U/S 37. A CCORDINGLY, THE CLAIM OF ONE-FIFTH OF THE EXPENDITURE MADE BY THE ASSESSE E HAS BEEN DISALLOWED. 4.4 IN THE FIRST APPEAL, IT WAS SUBMITTED BEFO RE THE LD. CIT(A) THAT ALL THE BUSINESSES OF THE ASSESSEE INCLUDING THE BUS INESS CONDUCTED AT DHARUHERA UNIT CONSTITUTED ONLY ONE COMPOSITE B USINESS. THERE WAS A COMMON CONTROL AND MANAGEMENT WHICH SHOWS THAT THERE WAS UNITY OF CONTROL. THE DIRECTOR OF DHARUHERA UNIT USED T O REPORT TO MANAGING DIRECTOR OF THE ASSESSEE-COMPANY. THE ASSESSEE HAS COMMON FUNDS FOR THIS UNIT ALONG WITH OTHER TRADING UNITS. IT H AD SAME SHAREHOLDERS AND THE SHARE CAPITAL. THE FUNDS WERE CENTRALLY MONITOR ED AND THE MANAGING DIRECTOR AS WELL AS OTHER DIRECTORS IN THE COMP ANY WERE AUTHORIZED TO SIGN AND HONOUR CHEQUES/DRAFTS ETC. DRAWN EVEN ON THE FACTORY BANK ACCOUNT. THE ANNUAL ACCOUNTS WERE COMMON. THE ASSESSEE HAS CLASSIFIED MANUFACTURING AND TRADING OPERATIONS AS ONE BUSI NESS. THE TPO HAS ALSO CONSIDERED THE RESULTS OF MANUFACTURING UNIT A ND TRADING UNITS IN A ITA NOS. 4008, 4114 & 4994(DEL)/2010 14 CONSOLIDATED MANNER. THEREFORE, IT WAS ARGUED THAT THE AO ERRED IN NOT DEDUCTING ONE-FIFTH OF THE EXPENDITURE IN COMPUTIN G THE INCOME. THE OTHER ARGUMENTS IN RESPECT OF PURPOSE OF INCURRING EXPE NDITURE AND THE VRS WERE THE SAME AS BEFORE THE AO. 4.5 THE LD. CIT(A) CAME TO THE CONCLUSION THAT TH E EXPENDITURE IS NOT IN RESPECT OF RETRENCHMENT OF EMPLOYEES OF DHARUHERA U NIT BUT THE EXPENDITURE INCURRED IN TERMS OF THE VRS. HOWE VER, THE VRS IS NOT IN ACCORDANCE WITH RULE 2BA FRAMED UNDER SECTION 1 0(10C). THEREFORE, IT HAS BEEN HELD THAT THE EXPENDITURE HAS BEEN INCUR RED TO SUSTAIN THE BUSINESS FOR A LONGER PERIOD OF TIME RESULTIN G IN A BENEFIT OF ENDURING NATURE AND, THUS, CAPITAL IN NATURE. ACCORDINGLY, THE APPEAL OF THE ASSESSEE HAS BEEN DISMISSED ON THIS GROUND. 5. BEFORE US, THE LD. COUNSEL SUBMITTED THAT ONE OF THE FINDINGS OF THE LD. CIT(APPEALS) IS THAT THE EXPENDITURE IS IN CONNECTION WITH THE VRS AND IT IS NOT RETRENCHMENT COMPENSATION. THIS FI NDING HAS NOT BEEN CHALLENGED BY THE REVENUE. THEREFORE, THIS FIND ING HAS BECOME FINAL. THE OBJECTION OF THE REVENUE, LEFT FOR CONSIDERATIO N, IS THAT THE SCHEME DOES NOT CONFORM TO THE PROVISIONS CONTAINED IN RULE 2BA. ACCORDING TO HIM, ITA NOS. 4008, 4114 & 4994(DEL)/2010 15 SUCH NON-CONFORMATION DOES NOT ALTER THE FACT TH AT THE EXPENDITURE HAS BEEN INCURRED UNDER THE VRS AND, THEREFORE, ONE-FI FTH THEREOF IS DEDUCTIBLE IN COMPUTING THE INCOME. 5.1 IN REPLY, THE LD. DR SUBMITTED THAT THE SCH EME IS APPLICABLE ONLY TO DHARUHERA UNIT AND NOT TO ALL EMPLOYEES OF THE ASSESSEE-COMPANY. ALTHOUGH SECTION 35DDA DOES NOT LAY DOWN ANY GU IDELINE, THE ACT CONTAINS ANOTHER PROVISION UNDER SECTION 10(10 C) REGARDING EXEMPTION OF COMPENSATION RECEIVED BY THE EMPLOYEE UNDER THE VRS. THEREFORE, USEFUL GUIDANCE CAN BE TAKEN FROM THE PROVISION CONTAINED IN THIS SECTION AND RULE 2BA FRAMED UNDER THIS PROVISION. IF WE EXAMINE THE CONTENT OF RULE 2BA, IT WILL BE SEEN THAT THE VRS DOES NOT CONFORM TO VARIOUS PROVISIONS OF THE RULE. CONSEQUENTLY IT CAN BE SAID THAT THE VRS IS NOT AS PER INTENDMENT OF SECTION 35DDA. RELIANCE H AS BEEN PLACED ON THE ORDERS OF THE AO AND THE LD. CIT(APPEALS) IN RESP ECT OF FACTS AND THE JURISPRUDENCE. 5.2 IT IS FURTHER SUBMITTED THAT THE BUSINESS OF DHARUHERA UNIT HAD BEEN A SEPARATE BUSINESS. ITS FIXED ASSETS C ONSTITUTED A SEPARATE BLOCK AND SEPARATE ACCOUNTS WERE MAINTAINED FOR THIS UNIT. DUE TO CHANGE IN ITA NOS. 4008, 4114 & 4994(DEL)/2010 16 LAW, THE BUSINESS OF MANUFACTURING BECAME UNVI ABLE AND, THEREFORE, IT WAS CLOSED DOWN. THEREFORE, THE DEDUCTIBILITY OF THE EXPENDITURE HAS TO BE EXAMINED U/S 37(1) AND NOT UNDER SECTION 35 DDA. 6. WE HAVE CONSIDERED THE FACTS OF THE CASE AND SUBMISSIONS MADE BEFORE US. ON SIFTING THE SUBMISSIONS OF THE LD. COUNSEL, THESE CAN BE SUMMARIZED AS UNDER:- (I) THE PAYMENTS HAVE BEEN MADE UNDER THE VRS AS H ELD BY THE LD. CIT(APPEALS), WHOSE FINDING HAS BECOME FINAL AS NO APPEAL HAS BEEN FILED BY THE REVENUE; (II) THE LD. CIT(APPEALS) UNJUSTIFIABLY READS THE CO NDITIONS OF RULE 2BA IN SECTION 35DDA; AND (III) ONE-FIFTH OF THE EXPENDITURE IS OTHERWISE DEDUCTI BLE IN COMPUTING THE INCOME U/S 37(1) ALSO IN VIEW OF THE EXIST ING JURISPRUDENCE IN THE MATTER. ITA NOS. 4008, 4114 & 4994(DEL)/2010 17 6.1 AS AGAINST THE AFORESAID, THE SUBMISSIONS OF THE LD. DR CAN BE SUMMARIZED AS UNDER:- (I) SECTION 35DDA AND SECTION 10(10C) DEAL WITH PAYMENT AND RECEIPT RESPECTIVELY IN THE HANDS OF THE EMPLOYER AND THE EMPLOYEE AND, THEREFORE, THE USEFUL GUIDANCE CAN BE TAKEN FR OM SECTION 10(10C) AND RULE 2BA FOR ASCERTAINING WHETHER THE VRS OF T HE ASSESSEE IS AS PER INTENDMENT OF SECTION 35DDA; AND (II) THE PAYMENT IS IN RESPECT OF CLOSURE OF THE B USINESS OF DHARUHERA UNIT, WHICH IS ALTOGETHER A SEPARATE BUSINESS A ND, THEREFORE, NO DEDUCTION CAN BE ALLOWED IN VIEW OF EXISTING JURISPRUDENCE IN THE MATTER U/S 37. 6.2 THE LD. CIT(A) HAS HELD IN PARAGRAPH NO. 17. 1 ON PAGE NO. 52 OF THE IMPUGNED ORDER THAT THE ASSESSEE RIGHTLY STATES THAT THE EXPENDITURE IS NOT IN RESPECT OF RETRENCHMENT COMPENSATION BUT IN RE SPECT OF THE VRS. THIS FINDING HAS NOT BEEN CHALLENGED BY THE REVENUE BY ANY GROUND TAKEN UP IN THE CROSS APPEAL. HOWEVER, THAT DOES NOT MEAN THA T THE REVENUE CANNOT AGITATE THE MATTER BEFORE US BY RAISING A PLEA AGAINST THE ORDER OF THE LD. CIT(APPEALS). RULE 27 OF THE APPELLATE TRIBUNAL R ULES, 1963, PROVIDES ITA NOS. 4008, 4114 & 4994(DEL)/2010 18 THAT THE RESPONDENT, THOUGH HE MAY NOT HAVE APPEA LED, MAY SUPPORT THE ORDER APPEALED AGAINST ON ANY OF THE GROUNDS DEC IDED AGAINST HIM. IT IS OBVIOUS THAT THE REVENUE IS A RESPONDENT IN THIS APPEAL. THE REVENUES CASE THAT THE EXPENDITURE IS IN ESSENCE THE RETR ENCHMENT COMPENSATION AND NOT UNDER THE VRS HAS BEEN DECIDED AGAINST THE REVENUE BUT NO SPECIFIC GROUND HAS BEEN TAKEN IN THE CROSS APP EAL IN THIS MATTER. HOWEVER, UNDER THIS RULE, THE REVENUE MAY SUPPOR T THE ORDER APPEALED AGAINST ON ANY OF THE GROUND DECIDED AGAINST IT. THEREFORE, REVENUE CAN LEGITIMATELY SUPPORT THE ACT OF DISALLOWANCE O F THE LD. CIT(A) ON ANY GROUND INCLUDING THE GROUND THAT THE EXPENDITURE I S RETRENCHMENT COMPENSATION, AS ALL THE FACTS ARE ON RECORD. ACCORDINGLY, WE ARE UNABLE TO UPHOLD THE ARGUMENT OF THE LD. COUNSEL IN THIS BEHALF. 6.3 IT HAS BEEN ARGUED THAT THE LD. CIT(A) UNJUST IFIABLY READS THE CONDTIONALITIES OF RULE 2BA IN SECTION 35DDA. A S MENTIONED EARLIER, THE CASE OF THE LD. DR IS THAT SECTION 10(10C) AND SE CTION 35DDA ARE TWO SIDES OF THE COIN SAME DEALING WITH EXEMPTION IN CASE OF EMPLOYEES AND DEDUCTION IN CASE OF THE EMPLOYER. THE CONTOURS O F THE SCHEME HAVE NOT BEEN DELINEATED IN SECTION 35DDA. THEREFORE, IN ORDER TO HAVE PROPER APPRECIATION OF THE INTENDMENT OF SECTION 35DDA, THE RULES OF ITA NOS. 4008, 4114 & 4994(DEL)/2010 19 CONSTRUCTION OF THE STATUTES REQUIRE THAT RECOU RSE MAY BE TAKEN TO THE PRE-EXISTING PROVISIONS CONTAINED IN SECTION 10( 10C) REGARDING THE EXEMPTION IN THE HANDS OF THE EMPLOYEE. IF THAT I S DONE, IT IS SEEN THAT THE VRS IS NOT IN CONFORMITY WITH RULE 2BA. NO ARGUM ENT HAS BEEN RAISED BY THE LD. COUNSEL TO THE EFFECT THAT THE SCHEME IS I N ACCORDANCE WITH RULE 2BA. HOWEVER, IT IS SUBMITTED THAT IN THE BIL L, LEADING TO ENACTMENT OF SECTION 35DDA, PROVISION WAS MADE REGARDING THE APPLICATION OF RULE 2BA. THIS PORTION WAS DELETED WHEN THE BILL W AS PASSED AND, THUS, THE CONDITIONALITIES OF THIS RULE HAVE NOT BEEN INCORP ORATED INTENTIONALLY IN THE SECTION. ACCORDING TO US, THE DELETION OF CONDIT IONALITIES ORIGINALLY INCORPORATED IN THE BILL SHOWS THAT LEGISLATIVE INTENDMENT WAS NOT TO INCORPORATE ALL THE CONDITIONS OF SECTION 10(1 0C) IN SECTION 35DDA. FINALLY, THE LEGISLATURE LEFT THE SCHEME OF V OLUNTARY RETIREMENT OPEN- ENDED AND DID NOT PLACE ANY RESTRICTION ON THE SCHEME. THUS, PLAIN LANGUAGE OF THE PROVISION SUPPORTS THE CASE OF THE ASSESSEE. FURTHER, IT IS NOT A CASE OF TAKING GUIDANCE FROM A DEFI NITION SECTION. FOR SUSTAINING THE ARGUMENTS OF THE LD. DR, THE PR OVISION CONTAINED IN SECTION 35DDA WILL HAVE TO BE MODIFIED BY INCOR PORATING A PART OF SECTION 10(10C) IN IT. IN OUR VIEW, SUCH AN IN CORPORATION DOES NOT FIND SUPPORT FROM ANY RULE OF CONSTRUCTION STATED BE FORE US. THUS, THERE IS NO ITA NOS. 4008, 4114 & 4994(DEL)/2010 20 COMPELLING REASON TO READ SECTION 35DDA AS SU GGESTED BY THE LD. DR. THEREFORE, THE SCHEME OF THE ASSESSEE IS HELD T O BE A VRS, TO WHICH THE AFORESAID PROVISION IS APPLICABLE. 6.4 THIS BRINGS US TO THE FURTHER QUESTION-WHETHE R, THE DEDUCTION CAN BE ALLOWED U/S 37(1) OF THE ACT? IN THIS REGARD, T HE CASE OF THE LD. COUNSEL IS BASED UPON DECISION OF HONBLE KERALA HIGH COURT IN THE CASE OF CIT VS. O E N INDIA LTD., (2010) 8 TAXMAN.COM 246, AND I N PARTICULAR THE OBSERVATIONS MADE IN PARAGRAPH NO. 5. IT IS MEN TIONED THAT THE TEST APPLIED TO DETERMINE WHETHER THE EXPENDITURE INCURRED BY THE ASSESSEE IS REVENUE OR CAPITAL IN NATURE DEPENDS UPON THE FINDING AS T O WHETHER THE ASSESSEE HAS CREATED ANY FIXED ASSET OR NOT. IF AN ASSET H AS BEEN CREATED, THE EXPENDITURE WILL CERTAINLY BE CAPITAL IN NATURE. WHERE THE EXPENDITURE DOES NOT LEAD TO CREATION OF A FIXED ASSET, THE E XPENDITURE IS GENERALLY REVENUE IN NATURE. HOWEVER, CREATION OF AN ASSET I S NOT A MANDATORY REQUIREMENT. THE EXPENDITURE INCURRED FOR ACHI EVING A BENEFIT OF ENDURING NATURE IS ALSO CAPITAL IN NATURE. WHEN THIS TEST IS APPLIED, IT IS FELT THAT THE PURPOSE OF INTRODUCTION OF VRS IS T O REDUCE THE STAFF STRENGTH WITH A VIEW TO ACHIEVE VIABILITY AND PROFITABILITY OF THE BUSINESS IN GENERAL AND THE RETRENCHMENT WILL GIVE LONG-TERM BENEFI T TO THE ASSESSEE. THE VRS FLOATED WITH A VIEW TO ENCOURAGE MASSIVE RETIREMENT IS PRIMARILY TO ITA NOS. 4008, 4114 & 4994(DEL)/2010 21 STREAMLINE THE BUSINESS BY RESTRUCTURING THE WOR K FORCE WITH A VIEW TO INCREASE PROFITABILITY AND TO MAKE THE BUSINESS VIABLE. THEREFORE, THE BENEFIT WILL ENDURE OVER A NUMBER OF YEARS TO CO ME. ACCORDINGLY, THE PAYMENT UNDER THE VRS FOR RETIREMENT OF A NUM BER OF EMPLOYEES IS NOTHING BUT A CAPITAL EXPENDITURE WHICH COULD B E CLAIMED AS A DEDUCTION IN A PHASED MANNER OVER SEVERAL YEARS. IT IS FOR THE ASSESSEE TO PROVIDE RATIONAL BASIS TO ASCERTAIN THE NUMBER OF YEARS OVER WHICH THE BENEFIT ENDURES AND ACCORDINGLY WRITE OFF THE AMOUNT OF EXPENDITURE BY AMORTIZING IT OVER THOSE NUMBER OF YEARS. SECTION 35DDA IS A VIRTUAL DECLARATION OF THE FACT THAT THE EXPENDITURE SHOULD NOT BE ALLOWED IN ONE YEAR AND IT HAS TO BE AMORTIZED OVER A FEW YEA RS. THEREFORE, EVEN PRIOR TO INTRODUCTION OF SECTION 35DDA, THE ASSESSE E WAS ENTITLED TO CLAIM DEDUCTION OF EXPENDITURE IN A PHASED MANNER OVER A NUMBER OF YEARS WHICH HAVE TO BE RATIONALLY FIXED BY THE ASSES SEE. HAVING STATED SO, THE COURT ABUNDANTLY MADE IT CLEAR THAT THE AFORESA ID HAS BEEN STATED ONLY WITH A VIEW TO EXPRESS THE OPINION OF THE COURT A ND IT IS NOT INTENDED TO DISTURB THE SETTLED POSITION THROUGH VARIOUS H IGH COURT DECISIONS, WHICH HAS NOT BEEN CONTESTED BEFORE THE HONBLE SUPREME COURT. FOLLOWING THE DECISIONS OF VARIOUS HIGH COURTS, THE ORDER OF THE TRIBUNAL WAS AFFIRMED, WHICH MEANS THAT THE ENTIRE AMOUNT PAID UNDER TH E VRS HAS BEEN HELD TO ITA NOS. 4008, 4114 & 4994(DEL)/2010 22 BE REVENUE IN NATURE TO BRING IN LINE ITS DECI SION WITH THE DECISIONS OF VARIOUS HIGH COURTS. 6.5 WE MAY ALSO DISCUSS THE DECISIONS RELIED UP ON BY THE LD. DR. IN THE CASE OF L.M. CHHABRA & SONS VS. CIT, 65 ITR 637 (SC), THE FACTS ARE THAT THE ASSESSEE HAD TAKEN PRAKASH TALKIES ON LEASE FOR THE PURPOSE OF CARRYING ON THE BUSINESS OF EXHIBITING CINEMA TOGRAPHIC FILMS. AFTER THE EXPIRY OF THE LEASE, THE LANDLORD FILED A SUIT F OR EVICTION AND OBTAINED A DECREE FOR POSSESSION OF THE THEATRE AND FOR PAY MENT OF MESNE PROFIT. THE ASSESSEE CLAIMED RS. 92,240/- OUT OF MESNE PROFI T AS DEDUCTION IN THE PROCEEDINGS OF ASSESSMENT YEAR 1955-56. THE ITO DISALLOWED THE CLAIM ON THE GROUND THAT THE ASSESSEE DID NOT CARRY ON THE BUSINESS IN THE RELEVANT PREVIOUS YEAR. THE AAC CONFIRMED THE ORDER OF THE ITO ON THE GROUND THAT MESNE PROFIT PAID WAS ON ACCOUNT OF WRONGFUL USE OF THE PREMISES AND, THEREFORE, THE PAYMENT IS EX-GRATIA OR CAPITAL PAYMENT. THE TRIBUNAL HELD THAT THE ASSESSEE DID NOT PROVE IN ANY MANNER THAT IT WAS CARRYING ON AN INTEGRATED CINEMATOGRAPHIC BUSINESS AND, THEREFORE, OUTGOING IN RESPECT OF THE CLOSED BUSINESS WAS NOT ADMISSIBLE. IT WAS OBSERVED THAT THE ASSESSEE WAS ACQUIRING VARIO US THEATRES FROM TIME TO TIME ON LEASE OR OTHERWISE AND RUNNING THEM INDE PENDENTLY WITH SEPARATE ITA NOS. 4008, 4114 & 4994(DEL)/2010 23 AND IDENTIFIABLE BOOKS OF ACCOUNT. THE HIGH COUR T HELD THAT IF AN ASSESSEE CARRIES ON SEVERAL DISTINCT AND INDEPENDENT BUSINE SSES, ONE OF WHICH IS CLOSED BEFORE THE PREVIOUS YEAR, HE CANNOT CLAIM DEDUCTION U/S 10 IN RESPECT OF OUTGOING ATTRIBUTABLE TO THE CLOSED BUS INESS. THIS FINDING WAS UPHELD BY THE HONBLE SUPREME COURT IN ABSENCE OF ANY EVIDENCE ABOUT UNITY OF CONTROL AND MANAGEMENT, INTER-RELATION O F THE BUSINESSES, EMPLOYMENT OF THE SAME STAFF TO RUN THE BUSINES S OR THE POSSIBILITY OF ONE THEATRE BEING CLOSED WITHOUT AFFECTING THE RE ST OF THE BUSINESS. IN THE CASE OF CIT VS. GEMINI CASHEW SALES CORPORATION, R EPORTED IN THE SAME ITR AT PAGE NO. 643, THE FACTS ARE THAT TWO PERS ONS, WALTER AND RAMASUBRAMONY, CARRIED ON BUSINESS IN CASHEW A S PARTNERS IN THE FIRM OF M/S GEMINI CASHEW SALES CORPORATION. THE PARTNERS HIP WAS DISSOLVED ON 24.8.1957 ON THE DEATH OF RAMASUBRAMONY AND THE BU SINESS WAS CONTINUED BY WALTER ON HIS OWN ACCOUNT. THE SERVICES OF TH E EMPLOYEES WERE NOT INTERRUPTED AND THERE WAS NO ALTERATION IN TER MS OF THEIR EMPLOYMENT. THE ASSESSEE CLAIMED DEDUCTION OF RS. 1,41,506/- TAKE N INTO ACCOUNTS AS GRATUITY PAYABLE TO WORKERS IN SETTLING THE AC COUNTS OF THE FIRM TILL 24.08.1957. THE ITO AND THE AAC REJECTED THE C LAIM. THE TRIBUNAL HELD THAT THERE WAS NO INTERRUPTION IN THE EMPLOYMENT OF WORKMEN AND THEIR SERVICE CONDITIONS WERE NOT ADVERSELY ALTERED IN ANY MANNER. WALTER HAS ITA NOS. 4008, 4114 & 4994(DEL)/2010 24 NOT AGREED TO TAKE OVER THE LIABILITY FOR COMPEN SATION PAYABLE UNDER SECTION 25FF. ON DISSOLUTION AND TAKE OVER, TH E WORKMEN BECAME ENTITLED TO RETRENCHMENT COMPENSATION, WHICH TH E FIRM WAS LIABLE TO PAY. THEREFORE, THE ASSESSEE WAS ENTITLED TO DEDUCT THE AMOUNT IN COMPUTATION OF INCOME. THE HIGH COURT DECIDED THE MATTER IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE BY HOLDING THAT IN THE DETERMINATION OF TAXABLE PROFITS OF THE FIRM TILL ITS DISSOLUTION, CONSIDE RATIONS ABOUT THE LIABILITY TO PAY RETRENCHMENT COMPENSATION DEVOLVING UPON WALT ER AS ASSIGNEE OF THE BUSINESS FOR CONSIDERATION, WERE IRRELEVANT, AN D SINCE IT WAS MAINTAINING ACCOUNTS ON MERCANTILE SYSTEM, THE FIRM COULD C LAIM AS A PERMISSIBLE OUTGOING THE AMOUNT FOR WHICH LIABILITY WAS INCURR ED THOUGH NO ACTUAL PAYMENT WAS MADE. THE HONBLE SUPREME COURT REVE RSED THIS FINDING. IT WAS MENTIONED THAT FOR CLAIMING A DEDUCTION OR ALLOWANCE, THE EXPENDITURE MUST BE FOR THE PURPOSE OF CARRYING O N THE BUSINESS. EVEN IN MERCANTILE SYSTEM OF ACCOUNTING WHERE THE LIABILITY IS, DURING THE WHOLE OF THE PERIOD THAT THE BUSINESS IS CARRI ED ON, WHOLLY CONTINGENT AND DOES NOT RAISE ANY DEFINITE OBLIGATION DURING THE TIME THAT THE BUSINESS IS CARRIED ON, IT CANNOT FALL WITHIN THE EXPRESS ION EXPENDITURE LAID OUT OR EXPANDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. ITA NOS. 4008, 4114 & 4994(DEL)/2010 25 6.6 IN THE CASE OF SPV BANK LTD., VS. CIT, (1980) 126 ITR 773 (KER.), THE FACTS ARE THAT THE BANKING BUSINESS OF THE A SSESSEE WAS TAKEN OVER BY ANOTHER BANK. THE ASSESSEE WAS ENGAGED ONLY IN R EALIZING THE OUTSTANDINGS RELATING TO THE DISCONTINUED BUSINES S. THE ASSESSEE INCURRED EXPENDITURE BY WAY OF INTEREST PAYABLE TO OTHER BANKS. THE HONBLE COURT HELD THAT THE BANKING BUSINESS HAD BEEN DISCONTINUE D AND, THEREFORE, THE EXPENDITURE WAS NOT DEDUCTIBLE, WITH A VIEW TO CARRY FORWARD IT AS A LOSS. IN THE CASE OF BINANI PRINTERS PVT. LTD. VS. C IT, (1983) 143 ITR 339 (CAL.), THE FACTS ARE THAT THE BOARD OF DIRECTO RS OF THE ASSESSEE-COMPANY DECIDED TO CLOSE DOWN THE ENTIRE PRINTING ESTAB LISHMENT. CONSEQUENTLY, A NOTICE WAS PUT UP THAT THE SERVICES OF ALL THE EMPLOYEES IN THE PRINTING BUSINESS WILL STAND TERMINATED FROM 01.07.1968. THE EMPLOYEES WERE INFORMED THAT THEY WILL BE PAID NOTICE PAY AND COM PENSATION IN ACCORDANCE WITH SECTION 25FFF READ WITH SECTION 25F OF THE INDUSTRIAL DISPUTES ACT, 1947, WHICH COULD BE COLLECTED ON 01.07.1968. THE Y WERE PAID A SUM OF RS. 52,121/- AS COMPENSATION AND RS. 10,233/- A S NOTICE PAY. A SUM OF RS. 6,495/- WAS ALSO PAID IN LIEU OF UN-AVAILED LEAVE STANDING TO THEIR CREDIT. THE ASSESSEE CLAIMED DEDUCTION OF RS. 6 8,849/- IN COMPUTING THE TOTAL INCOME FOR ASSESSMENT YEAR 1969-70. THE HO NBLE COURT, RELYING ON THE DECISION IN THE CASE OF GEMINI CASHEW SALES CORPORATION, HELD THAT ITA NOS. 4008, 4114 & 4994(DEL)/2010 26 THE PAYMENT WAS MADE IN THE COURSE OF CLOSURE OF T HE BUSINESS. THEREFORE, IT WAS NOT DEDUCTIBLE IN COMPUTING THE INCOME. IN T HE CASE OF INDIA MANUFACTURERS (MADRAS) PVT. LTD. VS. CIT, (1985) 155 ITR 774 (MAD.), THE FACTS INTER-ALIA ARE THAT THE ASSESSEE WAS CARRYING ON THE BUSINESS AS DISTRIBUTORS OF THE PRODUCTS OF M/S RAYALA CORPOR ATION. IN THE PROCEEDINGS FOR ASSESSMENT YEAR 1971-72, IT CLAIMED DEDUCTI ON OF A SUM OF RS. 7,500/- AS RETRENCHMENT COMPENSATION TO THE EMPLOYEES OF THE SERVICE DEPARTMENT. THE HONBLE COURT MENTIONED THAT ALTHOUGH THE AS SESSEE HAS CARRIED ON BUSINESS VENTURES OF THE SAME CHARACTER AT DIFF ERENT PLACES, IT WAS NOT HELD AS A MATTER OF LAW THAT THE VENTURES FORME D PART OF A SINGLE BUSINESS. THE ANSWER TO THIS QUESTION DEPENDS ON THE FACTS AND CIRCUMSTANCES OF EACH CASE AND IT IS FOR THE ASSESSEE TO ESTABLISH THAT THE DIFFERENT VENTURES CONSTITUTED PARTS OF THE SAME BUSINESS (EMPHASIS SUPPLIED). IN ABSENCE THEREOF, THE QUESTION WAS DECIDED IN FAVOUR OF T HE REVENUE AND AGAINST THE ASSESSEE. IN THE CASE OF PERFECT POTTERY CO. LT D. VS. CIT, (1987) 166 ITR 197, THE FACTS ARE THAT THE ASSESSEE COMPANY WAS ENGAGED IN THE BUSINESS OF MANUFACTURE AND SALE OF SANITARY PIPE S, FIRE BRICKS ETC., AT JABALPUR. THE ASSESSEE HAD ADMITTEDLY CLOSED TH E MANUFACTURING BUSINESS AT ITS JABALPUR BRANCH IN THE YEAR 1967. THE ON LY BUSINESS CARRIED ON BY THE ASSESSEE DURING THE RELEVANT YEAR WAS SAL E OF MANUFACTURED GOODS ITA NOS. 4008, 4114 & 4994(DEL)/2010 27 WHICH HAD BEEN MANUFACTURED PRIOR TO THE CLOSURE OF THE MANUFACTURING BUSINESS. THE ASSESSEE CLAIMED DEDUCTIONS OF TW O SUMS OF RS. 16,905/- AND RS. 10,444/- ON ACCOUNT OF REPAIRS TO THE MAC HINERY AND PROVISION MADE FOR OVERTIME WAGES TO ITS WORKERS RESPECTI VELY. THE CLAIM OF THE ASSESSEE WAS THAT THE SCOPE OF SECTION 37(1) IS MUCH WIDER FOR ALLOWING ANY EXPENDITURE LAID OUT OR EXPANDED WHOLLY AN D EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OR PROFESSION. THE HONBLE CO URT POINTED OUT THAT FOR CLAIMING THE DEDUCTION IN RESPECT OF A BUSINESS U/S 37(1), IT HAS TO BE PROVED THAT THE EXPENDITURE HAD SOME NEXUS WI TH THE BUSINESS AND IT WAS CARRIED ON DURING THE RELEVANT PREVIOUS YEAR. TH E ASSESSEE CARRIED ON THE BUSINESS OF SALE OF GOODS MANUFACTURED PRIOR TO ITS CLOSING THE UNIT IN 1967. THEREFORE, THE EXPENDITURE HAD NO RELEVANT NEXUS AS CONTEMPLATED UNDER SECTION 37(1) OF THE ACT. ACCORDINGLY, THE M ATTER WAS DECIDED IN FAVOUR OF THE REVENUE AND AGAINST THE ASSESSEE. 6.7 WE HAVE CONSIDERED THIS MATTER ALSO. AS WIL L BE EVIDENT FROM THE DECISION IN THE CASE OF L.M. CHHABDA & SONS (SU PRA), THE ANSWER TO THIS QUESTION DEPENDS UPON WHETHER THE MANUFACTURING U NIT AT DHARUHERA IS A SEPARATE AND INDEPENDENT BUSINESS OR IT IS A PART OF THE OVERALL BUSINESS OF THE ASSESSEE OF MANUFACTURE, SALE AND TRADING OF GOODS. THE HONBLE ITA NOS. 4008, 4114 & 4994(DEL)/2010 28 SUPREME COURT MENTIONED THAT THE RESULTS OF ACCO UNTS OF DIFFERENT VENTURES WERE ENTERED IN THE ACCOUNT MAINTAINED AT THE HEAD OFFICE, BUT FROM THIS CIRCUMSTANCE NO INFERENCE NECESSARILY ARISES TH AT THE EXHIBITION OF FILMS IN DIFFERENT THEATRES CONSTITUTED THE SAME BUS INESS. THERE IS NO EVIDENCE ABOUT UNITY OF CONTROL, MANAGEMENT, SAME STAFF TO RUN THE BUSINESS OR THE POSSIBILITY OF ONE THEATRE BEING CLOSED WITHOUT AFFECTING THE REST OF THE BUSINESS. THE ASSESSEE HAS NOT ESTABLISHED THAT CLOSURE OF THIS BUSINESS WOULD NOT MATERIALLY AFFECT THE OTHER BUSINESSES, SAME PERSONNEL WERE EMPLOYED FOR RUNNING THE BUSINESS OR EVEN UNITY O F CONTROL AND MANAGEMENT OR INTER-RELATION OF THE BUSINESS. COMING TO THE FACTS OF THIS CASE, ALTHOUGH IT IS STATED THAT THE MANUFACTURI NG AND TRADING BUSINESSES WERE PART OF THE SAME BUSINESS. ONE OF THE RE ASONS IS THAT THE DIRECTOR OF MANUFACTURING BUSINESS WAS REPORTING TO MANAGING DIRECTOR OF THE ASSESSEE-COMPANY. ACCORDING TO US, THIS BY ITSELF DOES NOT LEAD TO INFERENCE THAT VARIOUS BUSINESSES WERE THE SAM E BUSINESS. IT IS NOT SHOWN THAT THE SAME BANK ACCOUNT WAS MAINTAINED OR THE ACCOUNTS OF ALL THE BUSINESSES WERE KEPT IN THE SENSE THAT FUND S OF ONE BUSINESS WERE FREQUENTLY USED FOR OTHERS, LEADING TO INTER-LA CING OF FINANCES. IT IS ALSO NOT SHOWN WHETHER ASSETS OF ONE UNIT WERE MERGE D WITH THOSE OF OTHERS FOR THE PURPOSE OF BUSINESS SUCH AS TAKING LOANS ETC. MERE CONSOLIDATION ITA NOS. 4008, 4114 & 4994(DEL)/2010 29 OF ACCOUNTS IN THE HEAD OFFICE WILL NOT LEAD T O THE INFERENCE OF UNITY OF BUSINESSES. ON THE OTHER HAND, AN EXCLUSIVE DIRE CTOR WAS LOOKING AFTER THE MANUFACTURING BUSINESS AND EMPLOYEES OF THIS UNIT WERE USED ONLY FOR ITS BUSINESS. THE BANK ACCOUNT WAS SEPARATELY MAINTAINED. ALMOST ALL EMPLOYEES WERE RETIRED. THESE FACTORS SHOW THAT THE BUSINESS OF MANUFACTURING WAS A SEPARATE BUSINESS. THUS, THE ASSESSEE HAS NOT DISCHARGED THE BURDEN THAT ALL THE UNITS CONSTIT UTED ONLY ONE BUSINESS. IN THE CASE OF GEMINI CASHEW SALES CORPORATION, THE FACTS WERE DIFFERENT AS IT HAD TO BE DECIDED AS TO WHETHER TAKING OVER THE BUSINESS BY WALTER, LEADING TO LIABILITY OF RETRENCHMENT COMPENSATIO N, WAS CONTINGENT LIABILITY OR ASCERTAINED LIABILITY OF THE DISCONTI NUED BUSINESS. IN THE CASE OF SPV BANK LTD., THE ASSESSEE WAS MERELY REALIZING THE OUTSTANDING OF A TRANSFERRED BUSINESS. IN THESE CIRCUMSTANCES, IT WAS HELD THAT INTEREST PAID TO OTHER BANKS WAS NOT THE EXPENDITURE INCURRE D IN THE COURSE OF CARRYING ON THE BUSINESS. THEREFORE, THE FACTS ARE DIST INGUISHABLE. IN THE CASE OF BINANI PRINTERS PVT. LTD., THE COURT HAD NO OCCASI ON TO GO INTO THE QUESTION WHETHER IT WAS A PART OF OTHER BUSINESSES CARRIED ON BY THE ASSESSEE, YET IT WAS HELD THAT THE CLAIMS OF RS. 62,121/- AND RS. 10,233/- WERE NOT ALLOWABLE AS THE LIABILITIES PERTAINED T O THE CLOSED BUSINESS. IN THE CASE OF INDIA MANUFACTURERS (MADRAS) PVT. LTD., TH E ASSESSEE WAS UNABLE ITA NOS. 4008, 4114 & 4994(DEL)/2010 30 TO JUSTIFY THAT RS. 7,500/- PAID AS RETRENCHME NT COMPENSATION WERE IN RESPECT OF SERVICE DEPARTMENT. HOWEVER, THE HON BLE COURT DID MENTION THAT IT HAD NOT BEEN HELD AS A MATTER OF LAW T HAT THE VARIOUS VENTURES FORMED PART OF A SINGLE BUSINESS. IN THE CASE OF PERFECT POTTERY CO. LTD., THE EXPENDITURE IN RESPECT OF REPAIRS OF MACHI NERY ETC. WAS INCURRED ON THE ASSETS ETC. OF THE CLOSED BUSINESS AND, THEREF ORE, THE HONBLE COURT HELD THAT THE PROVISION CONTAINED IN SECTION 37(1) IS N OT SO WIDE AS TO INCLUDE WITHIN IT THE EXPENDITURE INCURRED FOR THE BUSI NESS IN RESPECT OF WHICH THE NEXUS HAS NOT BEEN PROVED. THUS, IT IS HELD THAT T HE DECISION IN THE CASE OF GEMINI CASHEW SALES CORPORATION CAN ONLY BE MAD E APPLICABLE TO THE FACTS OF THIS CASE. HOWEVER, IT HAS NOT BEEN PROV ED THAT THE CLOSED BUSINESS OF MANUFACTURING GOODS WAS A PART AND PAR CEL OF THE OVERALL BUSINESS OF THE ASSESSEE. IN ORDER TO GIVE A FIN DING, IT IS INTER-ALIA REQUIRED TO PROVE THAT-(I) THE CONTROL AND MANAGEMENT WAS THE SAME, (II) THE FINANCES WERE INTER-LINKED AND INTER-LACED, (III) EMPLOYEES WERE COMMON OR AT LEAST INTER-CHANGEABLE, AND (IV) CLOSURE OF THIS BUSINES S WOULD NOT MATERIALLY AFFECT OTHER BUSINESSES. THESE FINDINGS OF FACT S REQUIRE MATERIAL ON RECORD, SUCH AS DIRECTORS REPORT TO THE SHAREH OLDERS AT THE TIME OF STARTING AND CLOSING THE MANUFACTURING BUSINESS FOR ASCERT AINING SOURCES AND UTILIZATION OF FUNDS; PRODUCTION OF BANK ACCOUNT TO SHOW USER MONEY AS ITA NOS. 4008, 4114 & 4994(DEL)/2010 31 A COMMON KITTY FOR ALL BUSINESS; EVIDENCE OF SH IFTING OF PERSONNEL FROM ONE BUSINESS TO ANOTHER; VIABILITY OF THE TRADI NG BUSINESS IN ABSENCE OF MANUFACTURING BUSINESS ETC. AS ALL THESE FACTS ARE NOT ON RECORD, WE DO NOT FURNISH A FINDING IN RESPECT OF THIS ASPECT . 6.8 HOWEVER, AS MENTIONED EARLIER, THE ASSESSEE I S ENTITLED TO DEDUCTION OF ONE-FIFTH OF THE EXPENDITURE U/S 35DDA AS CLA IMED. THEREFORE, THESE GROUNDS ARE ALLOWED. 7. GROUND NOS. 10, 11 AND 12 ARE IN RESPECT OF DISALLOWANCE OF AN EXPENDITURE OF RS. 1,72,07,000/-, MADE BY THE AO F ROM LEGAL AND PROFESSIONAL CHARGES, AND OTHER EXPENSES FOR RE STRUCTURING THE BUSINESS OPERATIONS. IT IS MENTIONED THAT THE LD. CIT(A) ERRED IN HOLDING THAT THE EXPENDITURE RESULTED IN BENEFIT OF ENDURING NATU RE TO THE ASSESSEE AND, THUS, IT IS CAPITAL IN NATURE. IT IS ALSO MENTIO NED THAT THE LD. CIT(APPEALS) ERRED IN MENTIONING THAT THE ASSESSEE ITSELF HA S HELD THE VRS EXPENSES AS CAPITAL EXPENDITURE AND LEGAL AND PROFESSIONAL CHA RGES ARE INCURRED IN CONNECTION THEREWITH, LEADING TO THE INFERENCE O F THE EXPENDITURE BEING CAPITAL IN NATURE. ITA NOS. 4008, 4114 & 4994(DEL)/2010 32 7.1 IN THIS CONNECTION, IT IS MENTIONED IN THE A SSESSMENT ORDER THAT THE ASSESSEE INCURRED LEGAL AND PROFESSIONAL EXPENSES A ND OTHER COSTS FOR CLOSING THE MANUFACTURING BUSINESS. THE ASSESSEE HAS CLA IMED THE VRS EXPENDITURE TO BE CAPITAL IN NATURE AND AMORTIZED THE SAME U/S 35DDA. NO SUCH SPECIAL PROVISION EXISTS FOR LEGAL A ND OTHER COSTS INCURRED FOR CLOSURE OF BUSINESS. THEREFORE, ITS NATURE IS T HE SAME AS THE EXPENDITURE INCURRED FOR CLOSING THE BUSINESS. ACCORDINGLY, T HE EXPENDITURE OF RS. 1,72,07,000/- HAS BEEN DISALLOWED. 7.2 BEFORE THE LD. CIT(A), IT WAS SUBMITTED THAT THE EXPENDITURE WAS INCURRED IN THE COURSE OF THE BUSINESS FOR CLOSING DOWN ITS ONE UNIT, DHARUHERA UNIT. THE EXPENSES WERE INCURRED FOR CARRYING OUT THE RESTRUCTURING EXERCISE FOR CONDUCTING THE BUSINES S MORE EFFICIENTLY AND PROFITABLY. VARIOUS AMOUNTS WERE PAID TO THE C ONSULTANTS IN THE COURSE OF SETTLING THE CLAIMS OF THE EMPLOYEES UNDER THE VRS. THE EXPENSES HAVE ALSO BEEN INCURRED FOR PROVIDING ASSISTANCE IN HA NDLING MEDIA COVERAGE ON CLOSURE OF THE FACTORY, OBTAINING MEDI-CLAIM INSURANCE FOR RETIRED EMPLOYEES, CONTRIBUTION MADE TO SUPERANNUATION FUN D, SECURITY CHARGES FOR ADDITIONAL SECURITY GUARD HIRED DURING THE CLOSUR E PERIOD AND TRAVELING ETC. EXPENSES OF THE CONSULTANTS. THESE EXPENSES ARE NOT IN THE CAPITAL ITA NOS. 4008, 4114 & 4994(DEL)/2010 33 FIELD. THEREFORE, IT WAS AGITATED THAT THE EXP ENSES MAY BE ALLOWED IN FULL. HOWEVER, THE LD. CIT(APPEALS) MENTIONED THAT THAT THE EXPENSES WERE INCURRED FOR CLOSING THE MANUFACTURING UNIT. THESE ARE IN THE NATURE OF ONE TIME EXPENDITURE AND THE ASSESSEE HAS IT SELF TREATED THE VRS EXPENDITURE AS CAPITAL IN NATURE. THE EXPENDITUR E INURED AN ENDURING BENEFIT BY CLOSING DOWN THE UNVIABLE UNIT. THE REFORE, THE EXPENDITURE WAS HELD TO BE CAPITAL IN NATURE AND THE GROUND OF THE ASSESSEE IN THIS REGARD WAS DISMISSED. 7.3 BEFORE US, THE CASE OF THE ASSESSEE IS THAT T HIS KIND OF EXPENSES ARE REVENUE IN NATURE, DEDUCTIBLE IN FULL U/S 37(1) O F THE ACT. ON THE OTHER HAND, THE LD. DR RELIED ON THE ARGUMENTS IN RESP ECT OF GROUND NOS. 7, 8 AND 9 TO ARGUE THAT THE EXPENDITURE IS CAPITAL IN NA TURE. HE ALSO RELIED ON THE FINDINGS OF THE AO AND THE LD. CIT(A). 7.4 WE HAVE CONSIDERED THE FACTS OF THE CASE AND S UBMISSIONS MADE BEFORE US. GENERALLY, SPEAKING THE EXPENDITURE I NCURRED IN THE COURSE OF A RUNNING BUSINESS ON CONSULTANTS AND EMPLOYEES CON STITUTES REVENUE EXPENDITURE. HOWEVER, IT HAS NOT BEEN ESTABLISHE D BY THE ASSESSEE THAT THE CLOSED UNIT WAS A PART AND PARCEL OF THE OVERAL L BUSINESS OF THE ASSESSEE ITA NOS. 4008, 4114 & 4994(DEL)/2010 34 OF MANUFACTURING AND SALE OF GOODS. ACCORDINGLY, IT IS HELD THAT THE EXPENDITURE IS IN CONNECTION WITH CLOSURE OF THE MANUFACTURING BUSINESS. THEREFORE, IT CANNOT BE DENIED THAT THE EXPENDI TURE IS CAPITAL IN NATURE. FURTHER, ITS NATURE IS THE SAME AS THAT OF VRS EXPENSES. THE EXPENDITURE INCURRED ON EMPLOYEES IS HELD TO BE DEDUCTIBLE U/S 35DDA OVER A PERIOD OF FIVE YEARS STARTING FROM THE YEAR IN WHICH THE EXPENDITURE HAS BEEN INCURRED. THE LD. COUNSEL HAS STRONGLY RELIED O N THE DECISION IN THE CASE OF OEN INDIA LTD. THAT EVEN IN ABSENCE OF SECT ION 35DDA, THE EXPENDITURE ON RETIRED EMPLOYEES WHICH LEADS TO A BENEFIT OF ENDURING NATURE, WHICH OUGHT TO BE SPREAD OVER A REASONABLE PERIOD OF TIME, NOTWITHSTANDING THE FACT THAT AFTER MAKING THE O BSERVATIONS THE HONBLE COURT ALLOWED THE EXPENDITURE IN FULL BY RELYING ON THE PRE-EXISTING DECISIONS. TAKING A CUE FROM THIS PART OF THE DE CISION, WHICH HAS BEEN HEAVILY RELIED UPON BY THE LD. COUNSEL IN CONNE CTION WITH THE VRS EXPENSES, IT IS HELD THAT ALTHOUGH THE EXPENDITU RE GRANTS BENEFIT OF ENDURING NATURE BUT IT DOES NOT LEAD TO CREATIO N OF AN ASSET AND, THEREFORE, IT SHOULD BE ALLOWED IN FIVE YEARS, AS DONE IN THE CASE OF THE VRS PAYMENTS. THE AO IS DIRECTED TO ALLOW 1/5 TH OF THE EXPENSES IN THIS YEAR AND BALANCE IN NEXT FOUR YEARS IN EQUAL INSTAL LMENTS. ACCORDINGLY, THESE GROUNDS ARE PARTLY ALLOWED. ITA NOS. 4008, 4114 & 4994(DEL)/2010 35 8. GROUND NO. 13 IS IN RESPECT OF THE CLAIM OF HIGHER DEPRECIATION ON PRINTERS, UPS AND SWITCHES BY CONSIDERING THEM AS PARTS OF THE COMPUTERS. WHILE THE LD. COUNSEL RELIED ON THE D ECISION OF KOLKATA BENCH OF THE TRIBUNAL IN THE CASE OF ITO VS. SAMIRAN MAJUMDAR (2006) 98 ITD 119, THE LD. DR RELIED ON THE ORDERS OF THE LO WER AUTHORITIES. AS THE COORDINATE BENCH HAS ALREADY TAKEN A DECISION I N THE MATTER, RELYING ON THE SAME, THE MATTER IS DECIDED IN FAVOUR OF T HE ASSESSEE AND AGAINST THE REVENUE. THE AO IS DIRECTED TO ALLOW DEPRECIATIO N ON THESE ITEMS AT THE RATE OF SIXTY PER CENT. 9. GROUND NOS. 14 AND 15 ARE IN RESPECT OF DEPRE CIATION ON FACTORY ASSETS. IT IS MENTIONED THAT THE LD. CIT(A) ERRE D IN UPHOLDING THE DISALLOWANCE OF RS. 4,42,22,475/-, MADE BY THE AO BY DENYING DEPRECIATION ON BALANCE WRITTEN DOWN VALUE OF ASSETS OF THE FACTORY, WHICH WAS CLOSED DOWN DURING THE FINANCIAL YEA R 2004-05, AND WHICH WAS INCLUDED IN THE TOTAL WRITTEN DOWN VALUE O F ALL BLOCK OF ASSETS OF THE ASSESSEE-COMPANY. IT IS FURTHER MENTIONED THAT HE ERRED IN HOLDING THAT THE DEPRECIATION ON ASSETS SOLD/TRANSFERRED DURIN G THE YEAR WAS NOT ITA NOS. 4008, 4114 & 4994(DEL)/2010 36 ADMISSIBLE AS THE ASSETS WERE NO LONGER OWNED B Y THE ASSESSEE AND USED BY IT IN ITS BUSINESS DURING THE YEAR. 9.1 IN THIS CONNECTION, IT IS MENTIONED IN THE ASS ESSMENT ORDER THAT THE MANUFACTURING ACTIVITIES IN DHARUHERA UNIT WERE CLOSED DOWN IN JULY, 2004. THEREAFTER, ALL THE ASSETS EXCEPT MOTOR VEHICLES AND SOFTWARE WERE SOLD BEFORE 31.3.2005. THE ASSESSEE STI LL CLAIMED DEPRECIATION OF RS. 4,42,22,475/- IN RESPECT OF THE ASSETS EXCLU DING MOTOR VEHICLES AND SOFTWARE. IT HAS BEEN HELD THAT IT IS COMPLET ELY INCONCEIVABLE THAT THE ASSESSEE CAN BE ALLOWED DEPRECIATION IN RESPECT OF ASSETS WHICH IT NO LONGER OWNS AND WHICH IT HAS ALREADY TRANSFERRED . THE TRANSFEREE IS CLAIMING DEPRECIATION ON THESE ASSETS. THUS, THE CLAIM HAS BEEN DENIED. 9.2 THE ARGUMENTS SUBMITTED BEFORE THE LD. CIT(A) WERE THE SAME AS BEFORE THE AO. THE LD. CIT(A) CONSIDERED THE FACTS OF THE CASE AND HELD THAT BOTH OWNERSHIP AND USER OF THE ASSETS ARE ESSENTIAL INGREDIENTS FOR CLAIMING DEPRECIATION. BOTH THE INGREDIENTS AR E MISSING IN THIS CASE. THEREFORE, THE DEDUCTION HAS NOT BEEN ALLOWED TO THE ASSESSEE. ITA NOS. 4008, 4114 & 4994(DEL)/2010 37 10. BEFORE US, THE LD. COUNSEL RELIED ON THE PROV ISION CONTAINED IN SECTION 32(1)(II) TO THE EFFECT THAT IN RESPECT OF BUILDING, MACHINERY, PLANT OR FURNITURE, BEING TANGIBLE ASSETS; OWNED, WHO LLY OR PARTLY BY THE ASSESSEE AND USED FOR THE PURPOSES OF BUSINESS OR PROFESSION, THE DEDUCTION SHALL BE ALLOWED IN THE CASE OF ANY BLOCK OF ASSETS AT SUCH PERCENTAGE OF THE WRITTEN DOWN VALUE THEREOF, AS MAY BE PRESCRIBED. IT IS ARGUED THAT ON TRANSFER OF ASSETS, THE SALE VALUE REALIZED WAS DEDUCTED FROM VARIOUS BLOCKS OF ASSETS, BUT THE BLOCKS WE RE NOT EXHAUSTED. THEREFORE, THE DEPRECIATION HAS BEEN CLAIMED ON THE VALUE OBTAINED AFTER DEDUCTING SALE PRICE FROM THE WDVS OF THE BLOCK OF ASSETS. OUR ATTENTION HAS BEEN DRAWN TOWARDS THE PROVISION CONTAINED IN SECTION 2(11) WHICH DEFINES BLOCK OF ASSETS TO MEAN A GROUP OF ASSETS FALLING WITHIN A CLASS OF ASSETS IN RESPECT OF WHICH SAME PERC ENTAGE OF DEPRECIATION IS PRESCRIBED. FURTHER, OUR ATTENTION HAS BEEN DR AWN TO THE PROVISION CONTAINED IN SECTION 43(6) WHICH DEFINES THE EX PRESSION WRITTEN DOWN VALUE TO MEAN INTER-ALIA AS THE AGGREGATE OF WR ITTEN DOWN VALUES OF ASSETS FALLING WITHIN THAT BLOCK OF ASSETS AT THE BEG INNING OF THE PREVIOUS YEAR AND ADJUSTED:- (A) BY THE INCREASE BY ACTUAL COST OF ANY ASSET FALLING WITHIN THAT BLOCK, ACQUIRED DURING THE PREVIOUS YEAR; (B) BY THE REDUCTION OF THE MONIES PAYABLE IN RESPECT OF ANY ASSET F ALLING WITHIN THAT BLOCK, ITA NOS. 4008, 4114 & 4994(DEL)/2010 38 WHICH IS SOLD OR DISCARDED, DEMOLISHED OR DESTR OYED DURING THAT PREVIOUS YEAR TOGETHER WITH THE AMOUNT OF SCRAP VALUE, IF ANY, SO HOWEVER THAT THE AMOUNT OF SUCH REDUCTION DOES NOT EXCEED THE WRI TTEN DOWN VALUE AS SO INCREASED. THEREFORE, IT IS ARGUED THAT THE DEP RECIATION HAS RIGHTLY BEEN CLAIMED. 10.1 IN REPLY, THE LD. DR SUBMITTED THAT DHAR UHERA UNIT WAS A SEPARATE MANUFACTURING UNIT. THE OTHER UNITS LOCATED EL SEWHERE WERE PRODUCING SOFTWARES OR TRADING IN GOODS. THE ASSESSEE DECIDED TO CLOSE DOWN THE DHARUHERA UNIT, WITH THE RESULT THAT THE BUILDING , AND PLANT AND MACHINERY OF THIS UNIT WAS NO LONGER OWNED BY THE ASSESSEE I N THIS YEAR. THE OTHER UNITS WERE NOT MANUFACTURING UNITS AND, THER EFORE, THERE WAS NO BLOCK OF FACTORY BUILDING OR MACHINERY AND PLANT. 11. WE HAVE CONSIDERED THE FACTS OF THE CASE AND THE SUBMISSIONS MADE BEFORE US. THE FACTS OF THE CASE ARE THAT AS PER BOOKS, THE ASSESSEE HAD FREE-HOLD LAND OF THE W.D.V. OF RS. 1,13,55,0 00/- PERTAINING TO THE DHARUHERA UNIT, WHICH WAS REDUCED FROM THE BLOC K LEADING TO NIL VALUE AT THE END OF THE YEAR. NO DEPRECIATION HAS BEEN CHARGED IN THE BOOKS. FURTHER THE ASSESSEE HAD BUILDING OF THE W.D.V . OF ABOUT RS. 12.00 CRORE ITA NOS. 4008, 4114 & 4994(DEL)/2010 39 WHICH WAS ALSO REDUCED TO NIL. IN THE CASE OF MACHINERY AND PLANT, THE OPENING VALUE WAS ABOUT RS. 55.81 CRORE, TO WH ICH ADDITION OF RS. 53.70 LAKH WAS MADE, BUT ON ACCOUNT OF TRANSFER, THIS BLOCK WAS ALSO REDUCED TO NIL AT THE END OF THE YEAR. APART FROM THE AFOR ESAID, THE OTHER BLOCKS ARE IN RESPECT OF FURNITURE, FIXTURES AND OFFICE EQUI PMENTS; COMPUTERS; LEASE- HOLD IMPROVEMENTS AND VEHICLES. AS MENTIONED EA RLIER, COMPUTERS AND VEHICLES IN DHARUHERA UNIT WERE MERGED WITH TH E COMPUTERS AND VEHICLES OF OTHER UNITS, WHICH ARE STILL FUNCTIONING. H OWEVER, IN SO FAR AS THE POSITION OF THE BLOCKS OF BUILDING, AND PLANT & M ACHINERY AS PER THE I.T. RULES IS CONCERNED, IT IS SOMEWHAT DIFFERENT. IN THE CONSOLIDATED STATEMENT, THE ASSESSEE HAS SHOWN OPENING WDV OF MACHINE RY AND PLANT AT ABOUT RS. 25.33 CRORE FROM WHICH SALE PROCEEDS OF ABOU T RS. 5.05 CRORE HAVE BEEN REDUCED. AN OVERALL ADDITION OF ABOUT 1.17 CRORE HAS BEEN MADE, TAKING THE VALUE AS ON 31.3.2005 AT RS. 21. 44 CRORE. ON THIS VALUE, DEPRECIATION OF ABOUT RS. 53.22 LAKH HAS BEEN C LAIMED AND THE CLOSING WDV HAS BEEN WORKED OUT AT ABOUT RS. 1.61 CRO RE. THERE IS ALSO A BLOCK OF NON-RESIDENTIAL BUILDINGS WITH THE OPE NING WDV OF ABOUT RS. 12.46 CRORE. THIS HAS BEEN REDUCED BY SALE PRO CEEDS OF ABOUT RS. 88.08 LAKH. ADDITIONS OF ABOUT RS. 1.55 CRORE HAVE BEEN MADE TAKING THE TOTAL VALUE TO ABOUT RS. 5.20 CRORE. ON THIS VALUE DEPRECIATION HAS BEEN ITA NOS. 4008, 4114 & 4994(DEL)/2010 40 CLAIMED @ 10%. THE CASE OF THE LD. COUNSEL IS THA T NONE OF THE BLOCKS IN THE CONSOLIDATED ACCOUNTS GOT EXHAUSTED EVEN A FTER DEDUCTING SALE PROCEEDS. THEREFORE, THE ASSESSEE IS ENTITLED TO DEDUCT DEPRECIATION AS PER WORKING FURNISHED UNDER THE INCOME-TAX RULES. ON THE OTHER HAND, THE CASE OF THE LD. DR IS THAT THE BLOCKS OF MACHINERY AND PLANT, AND FACTORY BUILDING IN RESPECT OF DHARUHERA UNIT HAVE BEEN E XHAUSTED AS PER BOOKS AFTER TRANSFER OF ASSETS. THEREFORE, THE WDV IN RESPECT OF THESE ASSETS CANNOT BE MADE SUBJECT MATTER OF FURTHER DEDUCT ION OF DEPRECIATION AS THESE ASSETS NEITHER BELONG TO THE ASSESSEE NOR USED FOR ITS BUSINESS. THE ONLY CLAIM WHICH THE ASSESSEE CAN MAKE IS COMP UTATION OF LOSS ON TRANSFER OF ASSETS AS PROVIDED IN SECTION 50 O F THE ACT. 11.1 IN THE CASE OF INDUCTOTHERM (INDIA) LTD. VS. DCIT, (2008) 73 ITD 329 (AHD.), THE ASSESSEE DISCARDED A PARTICULA R ASSET DURING THE YEAR AND CONSEQUENTLY IT WAS NOT USED FOR THE PURPOSE OF BUSINESS. UNDER THE PROVISION OF SECTION 43(6)(C) OF THE ACT, THE DE PRECIATION IS TO BE ALLOWED AFTER REDUCTION OF MONIES PAYABLE IN RESPECT OF ANY ASSET FALLING IN THE BLOCK OF ASSETS, WHICH IS SOLD, DISCARDED, DEMO LISHED OR DESTROYED, DURING THE PREVIOUS YEAR TOGETHER WITH THE AMOUN T OF SCRAP VALUE, IF ANY. IT HAS BEEN HELD THAT UNLESS AND UNTIL THE SCRAP VALUE OF THE MACHINERY, ITA NOS. 4008, 4114 & 4994(DEL)/2010 41 WHICH HAS BEEN DISCARDED ETC. IS ASCERTAINED, THE SAME CANNOT BE REDUCED FOR THE PURPOSE OF COMPUTING DEPRECIATION AND, THE REFORE, NOTHING CAN BE REDUCED FROM THE WRITTEN DOWN VALUE OF THE BLOCK OF ASSETS. IN THE CASE OF NATHANI STEELS LTD. VS. DCIT, (1996) 57 ITD 584 (BOM.), THE FACTS ARE THAT THE ASSESSEE-COMPANY, ENGAGED IN THE BUS INESS OF MANUFACTURING MARINE CONTAINERS, ESTABLISHED A SECOND UNIT AND CLAIMED DEPRECIATION ON THE BUILDINGS AS WELL AS MACHINERY AND PLANT INSTALLED THEREIN. THE AO DISALLOWED THE DEPRECIATION ON THE GROUND THAT THE BUILDING, PLANT AND MACHINERY HAVE NOT BEEN USED IN THE COURSE OF AC TUAL PRODUCTION, WHICH STARTED IN NOVEMBER, 1991 ONLY. THE TRIBUNAL DID NOT ALLOW DEDUCTION OF DEPRECIATION IN RESPECT OF THE ASSETS OF THE NEW UNIT BY MENTIONING THAT THE TIME LAG BETWEEN INSTALLATION AND ACTUAL P RODUCTION INDICATES THAT THE MACHINERY WAS NOT READY FOR USE. THE PLANT AND MACHINERY WAS NOT TESTED OR SUBJECTED TO TRIAL RUN WHICH FURTHER STRENGTHENS THE CONCLUSION THAT THE MACHINERY WAS NOT USED. THE ARGUMENT OF THE ASSESSEE OF PASSIVE USER BASED ON THE CONCEPT OF BLOCK OF ASSETS WAS NOT ACCEPTED IN VIEW OF SPECIFIC PROVISION OF SECTION 32(1) REGARDING T HE USE OF ASSET FOR THE PURPOSE OF BUSINESS. ITA NOS. 4008, 4114 & 4994(DEL)/2010 42 11.2 IN THE CASE OF ACIT VS. SRF LTD., (2008) 21 SOT 122 (DEL), THE FACTS ARE THAT THE ASSESSEE CLAIMED DEPRECIATI ON INTER-ALIA IN RESPECT OF ASSETS OF ITS INTERNATIONAL DIVISION. THE AO DI SALLOWED THE SAME ON THE GROUND THAT NO BUSINESS ACTIVITY TOOK PLACE IN T HIS DIVISION. THE LD. CIT(APPEALS) CAME TO THE CONCLUSION THAT THESE AS SETS HAD BEEN USED IN EARLIER YEARS AND EVEN IN SUBSEQUENT YEARS AN D, THEREFORE, THE ASSETS WERE READY FOR USE. HE ALSO HELD THAT THE CONCEPT OF DEPRECIATION ON INDIVIDUAL ASSETS HAS BEEN DONE AWAY WITH AND SUBSTITUTED WITH THE CONCEPT OF BLOCK OF ASSETS. IN SUCH A SITUATIO N, THE QUESTION OF USER WILL ONLY COME IN THE FIRST YEAR AND ONCE THE ASSET HAS ENTERED IN THE BLOCK, DEPRECIATION COULD NOT BE DETERMINED OR ALLOWED ON A PIECE-MEAL BASIS. THE TRIBUNAL UPHELD THIS FINDING AND MENTIONED THAT ONCE AN ASSET ENTERS A BLOCK IT LOOSES ITS INDIVIDUAL IDE NTITY AND DEPRECIATION HAS TO BE ALLOWED ON THE ENTIRE BLOCK OF ASSETS. SINCE INTERNATIONAL DIVISION DID NOT REPRESENT A SEPARATE BLOCK OF ASSETS BUT F ORMED PART OF OVERALL BLOCK OF ASSETS OF THE BUSINESS, THESE ASSETS COULD BE SAID TO BE READY FOR USE, ENTITLING THE ASSESSEE TO CLAIM DEPRECIATION. I N THE CASE OF YAMAHA MOTOR (INDIA) PVT. LTD. VS. ACIT, (2008) 24 SOT 76 (DEL), THE FACTS ARE THAT THE ASSESSEE CLAIMED DEPRECIATION OF AB OUT RS. 58.00 LAKH ON THE ASSETS OF ABOUT RS. 4.71 CRORE, WHICH HAD BEEN W RITTEN OFF ON THE LAST DAY ITA NOS. 4008, 4114 & 4994(DEL)/2010 43 OF THE PREVIOUS YEAR. IT WAS SUBMITTED THAT HAVI NG REGARD TO THE PROVISIONS CONTAINED IN SECTIONS 32 AND 43(6), THE CLAIM HAS BEEN RIGHTLY MADE IN RESPECT OF ASSETS WHICH HAVE BEEN WRITTEN OFF IN THE BOOKS BUT FOR WHICH NO LOSS HAS BEEN CLAIMED. THE AO AND THE LD. CIT( APPEALS) DISALLOWED THE CLAIM FOR LACK OF USE OF THE ASSETS FOR THE PURPOSE OF BUSINESS. THE TRIBUNAL MENTIONED THAT THE SCHEME OF ASSET-W ISE DEPRECIATION HAS BEEN DONE AWAY WITH EFFECT FROM 01.04.1988. THE ASSE SSEE HAD WRITTEN OFF CERTAIN ASSETS FROM THE BLOCK AND IN SUCH A SITU ATION THE ONLY THING WHICH COULD BE DONE WAS TO REDUCE THE WDV WITH THE SCR AP VALUE PAYABLE IN RESPECT OF THE ASSETS. THE AO WAS DIRECTED TO RECOMPUTE THE DEPRECIATION IN THE LIGHT OF AFORESAID OBSERV ATIONS. 11.3 IN THE CASE OF VINYL CHEMICALS (INDIA) LT D., (2008) 25 SOT 235 (MUM.), THE QUESTION WAS SOMEWHAT DIFFERENT REGA RDING DETERMINATION OF THE SCRAP VALUE IN RESPECT OF A DISCARDED ASSE T. THE TRIBUNAL WAS OF THE VIEW THAT THE MONIES PAYABLE IN RESPECT OF DISCA RDED ASSET SHOULD BE ADJUSTED IN THE YEAR OF SALE AND NOT IN THE YEAR O F DISCARDING WHEN SUCH VALUE WAS NOT ASCERTAINABLE. ITA NOS. 4008, 4114 & 4994(DEL)/2010 44 11.4 IN THE CASE OF DINESHKUMAR GULABCHAND AGGARWA L VS. UNION OF INDIA, (2004) 267 ITR 768, THE HONBLE BOMB AY HIGH COURT HAS HELD THAT AFTER AMENDMENT IN SECTION 32, DEPRECIATION IN RESPECT OF AN ASSET COULD BE ALLOWED ONLY IF IT HAS BEEN ACTUALLY U SED IN THE BUSINESS. THE SLP AGAINST THIS DECISION WAS DISMISSED BY THE H ONBLE SUPREME COURT AS MENTIONED IN (2004) 266 ITR 106 (ST.). 11.5 HAVING CONSIDERED THE FACTS AND THE JURISPR UDENCE IN THE MATTER, IT MAY BE MENTIONED THAT NEITHER THE BUILDING NOR T HE MACHINERY OR PLANT IN DHARUHERA UNIT WERE OWNED BY THE ASSESSEE OR US ED BY IT ON ACCOUNT OF CLOSURE OF THE UNIT AND TRANSFER OF THE ASSETS I N THIS YEAR. AS HELD EARLIER, IT HAS NOT BEEN ESTABLISHED BY THE ASSESSEE THAT THE BUSINESS OF MANUFACTURING AND TRADING CONSTITUTED ONE COMPOS ITE BUSINESS. THE AFORESAID TWO BLOCKS OF ASSETS IN RESPECT OF DHAR UHERA UNIT CEASED TO EXIST ON TRANSFER OF ALL THE ASSETS IN THESE BLOCKS. IT IS TRUE THAT FOR THE PURPOSE OF COMPUTING THE DEDUCTION OF DEPRECIATION, THE A SSESSEE HAD PREPARED A CONSOLIDATED STATEMENT INCLUDING ALL THE ASSETS OF ALL UNITS UNDER RESPECTIVE BLOCKS. THIS HOWEVER CANNOT BE ACCEP TED AS A BASIS THAT THE RESPECTIVE BLOCKS OF DHARUHERA UNIT, CARRYING O N MANUFACTURING BUSINESS, DID NOT STAND EXHAUSTED. THE FACTS OF THE CASE OF INDUCTOTHERM (INDIA) ITA NOS. 4008, 4114 & 4994(DEL)/2010 45 LTD. ARE DISTINGUISHABLE AS SOME ASSETS HAD BEEN DISCARDED BUT SCRAP VALUE WAS NOT ASCERTAINED. THE BLOCK OF ASSETS HAD NOT THUS COME TO AN END. THE FACTS OF NATHANI STEELS LTD ARE ALSO DISTINGUISHABLE AS IT WAS A CASE OF INSTALLATION OF A NEW UNIT WHOSE AS SETS HAD NOT BEEN USED AT ALL. IT WAS NOT A CASE OF CLOSURE OF ONE OF THE UNIT, WHERE THE ASSETS HAVE BEEN USED EARLIER TO THE CLOSURE. THE FACT S OF THE CASE OF SRF LTD. ARE ALSO DISTINGUISHABLE BECAUSE THE ASSETS CO ULD NOT BE USED IN A PARTICULAR YEAR ALTHOUGH THEY WERE USED IN PREC EDING AND SUBSEQUENT YEARS AND THE TRIBUNAL CAME TO THE CONCLUSION THAT THE PRINCIPLE OF PASSIVE USER COULD BE APPLIED. IN THE CASE OF YAMA HA MOTOR (INDIA) PVT. LTD., THE QUESTION WAS REGARDING THE YEAR IN WHICH MONI ES PAYABLE IN RESPECT OF DISCARDED ASSETS COULD BE REDUCED FROM THE BLOCK OF ASSETS AND, THUS, THE FACTS ARE DISTINGUISHABLE. POSITION IN RESPECT OF VINYL CHEMICALS (INDIA) LTD. IS ALSO SIMILAR. THE FACTS OF THE CASE OF DINESHKUMAR GULABCHAND AGGARWAL ARE ALSO DISTINGUISHABLE IN AS MUCH AS THE NEWLY ACQUIRED ASSET HAD NOT BEEN ACTUALLY USED IN THE BUSINESS . 11.5 IN THE INSTANT CASE, THE QUESTION IS NOT REG ARDING PASSIVE USER OF THE ASSETS OF THE BUSINESS OR REGARDING THE YEAR IN WHICH SALE CONSIDERATION OR THE SCRAP VALUE HAD TO BE REDUCED FROM THE WD V OF THE BLOCKS OF ITA NOS. 4008, 4114 & 4994(DEL)/2010 46 BUILDINGS AND MACHINERY AND PLANT ON DHARUHERA U NIT. THESE ASSETS WERE TRANSFERRED BY THE ASSESSEE IN THIS YEAR. THEREF ORE, THESE ASSETS NEITHER BELONGED TO THE ASSESSEE NOR USED FOR THE PURP OSE OF BUSINESS OF THE ASSESSEE OF MANUFACTURING GOODS. WE HAVE ALREAD Y MENTIONED THAT THE ASSESSEE HAS NOT ESTABLISHED THAT THIS UNIT WAS ONLY A PART OF OVERALL BUSINESS OF MANUFACTURING AND TRADING ACTIVIT IES. THEREFORE, THE PROVISIONS CONTAINED IN SECTION 32 REGARDING OWN ERSHIP AND USER COME INTO PLAY. AS THE ASSESSEE IS NEITHER THE OWNE R OF THE ASSETS NOR THE ASSETS HAVE BEEN USED IN THE BUSINESS OF THE A SSESSEE, THE ASSESSEE IS NOT ENTITLED TO DEDUCT DEPRECIATION. 11.6 SECTION 50 REGARDING SPECIAL PROVISION FOR COMPUTATION OF CAPITAL GAIN IN CASE OF DEPRECIABLE ASSETS DEALS INTE R-ALIA WITH A SITUATION WHERE ANY BLOCK OF ASSETS CEASES TO EXIST FOR THE R EASON THAT ALL THE ASSETS IN THE BLOCK HAVE BEEN TRANSFERRED DURING THE PRE VIOUS YEAR. IT IS PROVIDED THAT INCOME RECEIVED OR ACCRUING AS A RESULT OF SUCH TRANSFER SHALL BE DEEMED TO BE THE CAPITAL GAINS ARISING FROM THE TRANSFER OF SHORT-TERM CAPITAL ASSET. WE ARE OF THE VIEW THAT THE CA SE OF THE ASSESSEE FALLS WITHIN THE AMBIT OF THIS SUB-SECTION BECAUSE TH E WORD INCOME INCLUDES ITA NOS. 4008, 4114 & 4994(DEL)/2010 47 WITHIN ITS AMBIT THE LOSS ALSO. THE AO IS DI RECTED TO HEAR THE ASSESSEE IN THIS MATTER AND COMPUTE THE LOSS AS PROVIDED I N SECTION 50(2). 11.7 IN THE RESULT, THE GROUND IS TREATED AS PART LY ALLOWED AS DISCUSSED ABOVE. 12. GROUND NOS. 16, 17 AND 18 ARE IN RESPECT OF PART-DISALLOWANCE OUT OF ADVERTISEMENT AND SALES PROMOTION EXPENSES. IT IS MENTIONED THAT THE LD. CIT(APPEALS) ERRED IN DISALLOWING 10% OF SUC H EXPENSES LEADING TO ENHANCEMENT OF INCOME BY RS. 6,03,62,100/- BY HO LDING THAT THE EXPENSES RESULTED IN A BENEFIT OF ENDURING NATURE. IT IS FURTHER MENTIONED THAT SIMILAR ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE IN EARLIER YEARS. IT IS ALSO MENTIONED THAT THE LD. CIT(A) ERRE D IN NOT FOLLOWING THE DECISION OF THE TRIBUNAL IN ITS OWN CASE FOR EARL IER YEARS WHERE THE FACTS WERE SIMILAR. 12.1 IN THIS CONNECTION, IT IS INTER-ALIA MENTION ED IN THE ASSESSMENT ORDER THAT EXPENDITURE OF RS. 60,36,21,000/- WAS INCURR ED UNDER THE HEAD ADVERTISEMENT AND SELLING EXPENSES. SONY CORPOR ATION, JAPAN, THE ULTIMATE PARENT COMPANY, AND ITS SUBSIDIARIES AR E HOLDING THE WHOLE OF THE ITA NOS. 4008, 4114 & 4994(DEL)/2010 48 SHARE CAPITAL IN IT. THE HUGE EXPENDITURE ON ADVERTISEMENT AND SALES- PROMOTION WILL LEAD TO A BENEFIT TO THE PARENT COMPANY ALSO. BESIDES THIS, THE AGGRESSIVE ADVERTISEMENT AND SALES PROMOTION WILL LEAD TO A BENEFIT OF ENDURING NATURE. ON AN ESTIMATED BASI S 10% OF THE EXPENDITURE WAS ATTRIBUTED TO THE BENEFIT FLOWING TO SONY COR PORATION, JAPAN, AND 10% OF THE EXPENDITURE WAS TREATED AS CAPITAL IN NATURE. THE LD. CIT(APPEALS) UPHELD ONLY 10% DISALLOWANCE, BEING EXPENDITURE OF CAPITAL NATURE. 12.2 BEFORE US, THE LD. COUNSEL SUBMITTED THAT THE EXPENDITURE HAS BEEN INCURRED IN THE COURSE OF BUSINESS OF THE ASSESS EE. THEREFORE, IT IS IMMATERIAL THAT SOME BENEFIT MAY ACCRUE TO SONY CO RPORATION, JAPAN. IT IS FURTHER SUBMITTED THAT THE ADVERTISEMENT EXPENDITU RE IS REVENUE IN NATURE AND NO PART OF IT COULD BE ATTRIBUTED TO CAPITAL ACCOUNT. THE DETAILS OF THE EXPENDITURE WERE STATED TO HAVE BEEN FILED BEFORE THE LOWER AUTHORITIES AND REPRODUCED IN THE WRITTEN SUBMISSIONS FILED BEFOR E THE LD. CIT(APPEALS). IT IS SEEN THAT THE EXPENDITURE OF ABOUT RS. 25.10 CRORE HAS BEEN INCURRED ON ADVERTISEMENTS, ABOUT RS. 53.38 CRORE ON SALES PROMOTION AND ABOUT RS. 4.47 CRORE ON SALE OF PRODUCTS. IT IS CLAIMED TH AT THE WHOLE OF THE EXPENDITURE IS ALLOWABLE AS REVENUE EXPENDITURE. NO PARTICULAR ARGUMENT ITA NOS. 4008, 4114 & 4994(DEL)/2010 49 HAS BEEN FURNISHED BY THE LEARNED DR EXCEPT PLAC ING RELIANCE ON THE ORDERS OF AUTHORITIES BELOW. 12.3 WE HAVE CONSIDERED THE FACTS OF THE CASE AN D SUBMISSIONS BEFORE US. IN THE CASE OF NESTLE INDIA VS. DEPUTY CIT, (20 07) 111 TTJ (DEL) 498, IT HAS INTER-ALIA BEEN HELD THAT THE EXPENSES INC URRED BY A NON-RESIDENT COMPANY ON ADVERTISEMENT AND SALES-PROMOTION IN INDIA IN RESPECT OF PRODUCTS IT WAS DEALING IN CANNOT BE DISALLOWED A S THE EXPENSES WERE INCURRED IN THE COURSE OF BUSINESS OF THE ASSESSE E. IT HAS BEEN FURTHER HELD THAT SINCE PAYMENTS HAVE BEEN MADE TO THIRD PA RTIES, THERE IS NO QUESTION OF MAKING ADJUSTMENTS ON ACCOUNT OF TRANSFER-PRI CING. 12.4 IN THIS CASE, THERE IS NO ALLEGATION THAT AN Y PART OF THE EXPENDITURE RELATES TO PRODUCTS IN WHICH THE ASSESSEE IS NOT DEALING IN THE NORMAL COURSE OF ITS BUSINESS. THE EXPENSES BY WAY OF ADVERTISEMENT AND SALES PROMOTION ARE REVENUE IN NATURE. FURTHER, IF IN CURRING OF THE EXPENDITURE LEADS TO A BENEFIT INCIDENTALLY TO ANY OTHER PE RSON, THAT DOES NOT CONSTITUTE SUFFICIENT GROUND FOR MAKING PART-DISALLOWANCE. F URTHER, NO PART OF THE EXPENDITURE CAN BE SAID TO BE CAPITAL IN NATURE. THEREFORE, THE ADDITION PARTLY SUSTAINED BY THE LD. CIT(APPEALS) IS DEL ETED. ITA NOS. 4008, 4114 & 4994(DEL)/2010 50 12.5 IN THE RESULT, THESE GROUNDS ARE ALLOWED. 13. GROUND NO. 19 IS IN RESPECT OF CLAIM OF DEDUCT ION UNDER SECTIONS 10A AND 10B. IT IS MENTIONED THAT THE CLAIMS W ERE REDUCED BY RS. 1,68,970/- AND RS. 90,795/- RESPECTIVELY. THE LD. COUNSEL DID NOT ARGUE THIS GROUND BY MENTIONING THAT IN THE EARLIER YE ARS SIMILAR GROUND STANDS COVERED BY THE ORDER OF THE TRIBUNAL AGAINST THE ASSESSEE. ACCORDINGLY, THIS GROUND IS DISMISSED. ITA NO. 4114(DEL)/2010- A.Y. 2005-06- APPEAL OF T HE REVENUE 14. THE ONLY GROUND TAKEN IN THIS APPEAL IS THA T THE LD. CIT(APPEALS) ERRED IN DELETING THE ADDITION OF RS. 15,51,403/ -, MADE BY THE AO ON ACCOUNT OF DEPOSIT OF SALES-TAX UNDER PROTEST. 14.1 IN THIS CONNECTION, IT IS MENTIONED IN THE IMPUGNED ORDER THAT THE ASSESSEE TENDERED A FRESH CLAIM U/S 43B IN RESPE CT OF SALES-TAX OF RS. 15,51,403/-, DEPOSITED BY IT UNDER PROTEST. IT WAS SUBMITTED THAT THE DEMAND HAD BEEN RAISED BY THE SALES-TAX AUTHORI TIES BUT THE AMOUNT ITA NOS. 4008, 4114 & 4994(DEL)/2010 51 WAS NOT DEBITED TO PROFIT AND LOSS ACCOUNT A S THE DEMAND HAD BEEN CHALLENGED. DUE TO INADVERTENCE, THE CLAIM WAS A LSO NOT MADE AT THE TIME OF FILING OF THE RETURN OF INCOME. THE AMOUNT IS OTHERWISE DEDUCTIBLE IN COMPUTING THE TOTAL INCOME UNDER THE PROVISIONS OF SECTION 43B. THE LD. CIT(APPEALS) ALLOWED THE DEDUCTION BY FOLLOWING T HE DECISION OF MUMBAI TRIBUNAL IN THE CASE OF EMERSON NETWORK POWER ( INDIA) PVT. LTD. VS. ACIT, 122 TTJ 67 AND CHICAGO NEUMATIC (I) LTD., 15 SOT 252, IN WHICH IT HAS BEEN HELD THAT THE CLAIM COULD NOT BE REJEC TED ON TECHNICAL GROUNDS AND THE AO WAS OBLIGED TO GIVE RELIEF TO THE A SSESSEE AS PER LAW EVEN THOUGH THE ASSESSEE HAD NOT FILED THE REVISED R ETURN. 14.2 BEFORE US, THE LD. DR RELIED ON THE ORDER O F THE AO WHILE THE LD. COUNSEL RELIED ON THE ORDER OF THE LD. CIT(APPEA LS). 14.3 HAVING CONSIDERED THE RIVAL SUBMISSIONS. TH E FACT IS THAT THE AMOUNT HAD BEEN PAID WITHIN THE PRESCRIBED TIME. THE FACT THAT IT WAS PAID UNDER PROTEST OR THE LEVY WAS CHALLENGED MAKES NO DIFFERENCE TO THE SITUATION THAT THE TAX HAS BEEN PAID AS PER THE DEMAND OF SALES-TAX DEPARTMENT. ALTHOUGH THE ASSESSEE HAS NOT FILED A REVISED RETURN FOR MAKING THE CLAIM AND IN VIEW THEREOF THE LD. CI T(APPEALS) COULD NOT ITA NOS. 4008, 4114 & 4994(DEL)/2010 52 HAVE GRANTED RELIEF TO THE ASSESSEE AS PER THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF GOETZE (INDIA) LTD. VS. CIT, 284 ITR 323, YET THIS VERY DECISION ALSO MENTIONS THAT NO SUCH TECHNICAL CONSIDERATION PREVENTS THE TRIBUNAL FROM ENTE RTAINING AND ADJUDICATING UPON A FRESH CLAIM PROVIDED ALL THE FACTS A RE THERE ON RECORD. INVOKING THIS JURISDICTION, IT IS HELD THAT THE L D. CIT(APPEALS) WAS RIGHT IN GRANTING RELIEF TO THE ASSESSEE. ITA NO. 4994(DEL)/2010- A.Y. 2006-07- APPEAL OF THE ASSESSEE 15. GROUND NOS. 1 TO 12 ARE SIMILAR TO GROUND NO S. 1 TO 6 IN THE APPEAL OF THE ASSESSEE FOR ASSESSMENT YEAR 2005-06 (SU PRA). THE ONLY ADDITIONAL POINT IS STATED TO BE IN RESPECT OF PROVISION MA DE BY THE ASSESSEE FOR IMPORT DUTY PAYABLE BY IT. THE CASE OF THE LD. COUNSEL IS THAT THERE WAS A CONFUSION ABOUT THE RATE OF DUTY APPLICABLE ON I MPORT OF STILL CAMERA, WHETHER IT IS THE SAME AS THE DUTY ON VIDEO CAME RA OR NOT. THE BENEFIT OF LOWER DUTY WAS EXPLICITLY EXTENDED IN THE IMMEDI ATELY SUCCEEDING YEAR. HOWEVER, BY WAY OF AN ENTRY, A PROVISION WAS C REATED TAKING THE RATE TO BE HIGHER AND THIS PROVISION WAS REVERSED IN T HE IMMEDIATELY SUCCEEDING YEAR AS THE BENEFIT WAS EXTENDED IN RESPECT OF STILL CAMERAS ALSO. SINCE ITA NOS. 4008, 4114 & 4994(DEL)/2010 53 IT IS MERELY A BOOK ENTRY, IT WAS ARGUED THAT THE EXPENDITURE DEBITED TO PROFIT AND LOSS ACCOUNT BY WAY OF THE PROVISION SH OULD BE EXCLUDED WHILE WORKING OUT OPERATING RATIO IN THE CASE OF THE ASSESSEE FOR COMPARISON WITH ARMS LENGTH TRANSACTIONS. THE LD. DR F AIRLY CONCEDED THAT THIS IS MERELY A BOOK ENTRY. HAVING CONSIDERED THESE ARGUMENTS, IT IS HELD THAT THE PROVISION SHOULD BE EXCLUDED FOR WORKING OU T THE OP IN THE CASE OF THE ASSESSEE. IN RESPECT OF OTHER POINTS THE ORD ER OF LAST YEAR IS MADE APPLICABLE TO THIS YEAR ALSO. 15.1 THUS, THESE GROUNDS ARE ALLOWED. 16. GROUND NOS. 13 TO 17 ARE IN RESPECT OF AMORT IZATION OF THE EXPENSES UNDER THE VRS. IT HAS BEEN HELD BY US THAT 1/5 TH OF THE EXPENDITURE WAS DEDUCTIBLE IN ASSESSMENT YEAR 2005-06 AND, THUS, THE BALANCE AMOUNT IS DEDUCTIBLE IN FOUR EQUAL INSTALLMENTS IN THE IMM EDIATELY SUCCEEDING YEARS. RELYING ON THAT ORDER, IT IS HELD THAT THE ASS ESSEE IS ENTITLED TO DEDUCT 1/5 TH OF THE EXPENDITURE IN THIS YEAR ALSO. THUS, T HIS GROUND IS ALLOWED. 17. GROUND NO. 18 IS IN RESPECT OF RATE OF DEPRE CIATION ON UPS, SWITCHES AND PRINTERS. IT HAS BEEN HELD BY US THAT THE ASSESSEE IS ENTITLED ITA NOS. 4008, 4114 & 4994(DEL)/2010 54 TO DEDUCTION AT THE RATE OF SIXTY PER CENT ON TH ESE ITEMS ALSO, BEING PART AND PARCEL OF THE COMPUTERS. ACCORDINGLY, THIS G ROUND IS ALLOWED. 18. GROUND NOS. 19 AND 20 ARE IN RESPECT OF DEDUC TION OF DEPRECIATION ON THE DEPRECIABLE ASSETS OF DHARUHERA UNIT. IT HA S BEEN HELD THAT THE DEPRECIATION IS NOT DEDUCTIBLE AS THE BLOCKS OF ASSETS OF PLANT AND MACHINERY, AND BUILDINGS WERE NEITHER OWNED BY T HE ASSESSEE NOR USED FOR THE PURPOSE OF ITS BUSINESS. FOLLOWING THE E ARLIER DECISION, THESE GROUNDS ARE DISMISSED. 19. GROUND NOS. 21 TO 24 ARE IN RESPECT OF DIS ALLOWANCE OF RS. 8,35,46,918/-, BEING 10% ON ADVERTISEMENT AND SELLING EXPENSES, HELD TO BE THE EXPENDITURE OF CAPITAL NATURE. SIMILAR GROUNDS HAVE BEEN DECIDED IN FAVOUR OF THE ASSESSEE IN THE IMMEDIATELY PR ECEDING YEAR. THEREFORE, FOLLOWING THAT ORDER, THESE GROUNDS ARE ALLOWED. 20. GROUND NO. 25 IS IN RESPECT OF DEDUCTION UND ER SECTIONS 10A AND 10B. IT IS MENTIONED THAT THE LD. DRP ERRED I N REDUCING THE CLAIMS BY RS. 76,606/- AND RS. 13,23,733/-. THESE GROUNDS STAND DISMISSED BY FOLLOWING OUR EARLIER ORDER IN THE MATTER. ITA NOS. 4008, 4114 & 4994(DEL)/2010 55 21. GROUND NO. 26 IS AGAINST RESTRICTING DEPRE CIATION ON LICENSE FEES PAID FOR USE OF COMPUTER SOFTWARE TO 25% OF THE WDV RESULTING IN ENHANCEMENT OF INCOME BY RS. 50,78,450/-. 21.1 IN THIS CONNECTION, IT IS MENTIONED IN THE ORD ER OF THE LD. DRP THAT THE ASSESSEE CLAIMED DEDUCTION OF DEPRECIATION @ SIX TY PER CENT. LICENSE IS AN INTANGIBLE ASSET AS PER PART-B OF APPENDIX- I, IN WHICH THE RATE OF DEPRECIATION ON ALL INTANGIBLE ASSETS HAS BEEN PRESCRIBED @ 25%. THEREFORE, EXCESS CLAIM OF 35% WAS DISALLOWED. NO PARTICULAR ARGUMENT HAS BEEN MADE BY THE LD. COUNSEL. PART -B OF APPENDIX-I IN RESPECT OF INTANGIBLE ASSETS PROVIDES DEPRECIAT ION AT UNIFORM RATE OF 25% AND LICENSES HAVE BEEN INCLUDED THEREIN. ACCORDINGLY, WE DO NOT FIND ANY ERROR IN THE ORDER OF THE LD. DRP. THER EFORE, THIS GROUND IS DISMISSED. 22. NO APPEAL LIES AGAINST MERE INITIATION OF PENALTY PROCEEDINGS U/S 271(1)(C) OF THE ACT. THEREFORE, GROUND NO. 27 I N THIS BEHALF IS ALSO DISMISSED. ITA NOS. 4008, 4114 & 4994(DEL)/2010 56 23. IN THE RESULT, THE APPEALS OF THE ASSESSEE F OR BOTH THE ASSESSMENT YEARS ARE PARTLY ALLOWED AND THE APPEAL OF THE D EPARTMENT FOR ASSESSMENT YEAR 2005-06 IS DISMISSED. THIS ORDER WAS PRONOUNCED IN THE OPEN COURT ON 8 APRIL, 2011. SD/- SD/- (C.L. SETHI) (K.G.BANSAL) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 8 TH APRIL, 2011. SP SATIA COPY OF THE ORDER FORWARDED TO: SONY INDIA PVT. LTD., NEW DELHI. ADDITIONAL CIT, RANGE-9, NEW DELHI. CIT(A) CIT THE DR, ITAT, NEW DELHI. ASSISTANT REGISTRAR.
