Cyanamid Agro Ltd. (BASF India Ltd.), Mumbai V. DCIT Circle 6(2), Mumbai

ITA 4752/MUM/2004

• Counselvise Citation: 475219914 RSA 2004
• Duration Of Justice: 9 year(s) 6 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-01-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: E
• Next Hearing Date: 15-10-2013
• Assessment Year: 2000-2001
• Appeal Filed On: 09-06-2004
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: GIRIJA DAYAL
• Assessee Lawyers: HEENA DOSHI; P J PARDIWALLA
• Keywords: Depreciation; Business expenditure; Bad and doubtful debts; Capital receipt; Commercial expediency; Revenue expenditure; Capital expenditure
• Section: 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH E, MUMBAI BEFORE SHRI P.M. JAGTAP, ACCOUNTANT MEMBER AND DR. S.T.M. PAVALAN, JUDICIAL MEMBER ITA NO. 4752/MUM/2004 ASSESSMENT YEAR: 2000-01 M/S. CYANAMID AGRO LTD. (SINCE MERGED INTO BASF INDIA LTD.) VIBGYOR TOWERS, 1 ST FLOOR, PLOT NO. C-62, G BLOCK BANDRA KURLA COMPLEX BANDRA CEI MUMBAI- 400 051 VS. ACIT CIR. 6(2) MUMBAI. (APPELLANT) (RESPONDENT) ITA NO. 4681/MUM/2004 ASSESSMENT YEAR: 2000-01 ACIT CIR. 6(2) MUMBAI. VS. M/S. CYANAMID AGRO LTD. (SINCE MERGED INTO BASF INDIA LTD.) VIBGYOR TOWERS, 1 ST FLOOR, PLOT NO. C-62, G BLOCK BANDRA KURLA COMPLEX BANDRA CEI MUMBAI- 400 051 (APPELLANT) (RESPONDENT) PERMANENT ACCOUNT NO. :- AABCS 2092 J ASSESSEE BY : SHRI P. J. PARDIWALLA & MS. HEENA DOSHI REVENUE BY : SHRI GIRIJA DAYAL DATE OF HEARING : 15.10.2013 DATE OF PRONOUNCEMENT : 08.01.2014 ITA NO. 4752/MUM/2004 ITA NO. 4681/MUM/2004 M/S. CYANAMID AGRO LTD. ASSESSMENT YEAR: 2000-01 2 O R D E R PER DR. S.T.M. PAVALAN, JM: THESE CROSS APPEALS FILED BY THE ASSESSEE AND REVEN UE ARE DIRECTED AGAINST THE ORDER OF THE LD.CIT(A)-6, MUMBAI DATED 31.03.2004 F OR THE ASSESSMENT YEAR 2000-01. FOR THE SAKE OF CONVENIENCE, BOTH THE APPEALS ARE H EAD TOGETHER AND DISPOSED OFF BY THIS COMMON ORDER. 2. GROUND NO. 1 OF THE ASSESSEES APPEAL AND GROUND S NO. 1 & 2 OF THE REVENUES APPEAL RELATE TO THE DISALLOWANCE MADE BY THE AO IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE FOR PAYMENT TO THE EMPLOYEES RETIRING UNDER VOLUNTARY RETIREMENT SCHEME (VRS) AMOUNTING TO RS.3,61,34,164/- AND THE DECISIO N OF THE LD.CIT(A) DIRECTING THE AO TO RECOMPUTE THE CAPITAL GAIN AND ADJUSTING THE WDV FOR ALLOWING DEPRECIATION IN THE CURRENT YEAR BY BIFURCATING THE VRS PAYMENT IN THE RATIO OF 1.6 & 6.8. 2.1 THE FACTS LEADING TO THE ISSUE AS CULLED OUT FR OM THE ASSESSMENT/APPELLATE ORDERS ARE THAT THE ASSESSEE COMPANY HAD IN THE PAST BEEN RATIONALIZING ITS MANPOWER COSTS BY WAY OF VOLUNTARY RETIREMENT SCHEMES. A SCHEME OF VR S WAS ANNOUNCED BY THE COMPANY DURING FY 98/99 WHEREIN 43 EMPLOYEES OF ITS VALSAD PLANT WERE RETIRED BY MAKING PAYMENT OF RS.1.99 CRORES. THIS SCHEME WAS APPROVED BY THE CCIT IN TERMS OF SECTION 10(10C) OF THE ACT AND FULL DEDUCTION OF THE OUTGOI NG AMOUNT WAS CLAIMED IN THE RETURN OF INCOME AND WAS ALSO ALLOWED TO THE ASSESSEE IN THE ASSESSMENT PROCEEDINGS. DURING THE PERIOD UNDER CONSIDERATION ALSO THE ASSESSEE ANNOUN CED A VRS WHICH BEGAN FROM 15.06.1999. APPROVAL OF THE CCIT IN TERMS OF SECTIO N 10(10C) OF THE ACT WAS TAKEN ON 23.09.1999 MENTIONING THE ELIGIBILITY OF 328 EMPLOY EES FOR THE SCHEME. AS PART OF THE SCHEME OF VOLUNTARY SEPARATION, THE ASSESSEE RETIRE D 71 EMPLOYEES OF THE VALSAD PLANT WHO OPTED FOR THE SCHEME AND THE TOTAL OUTGO ON THI S ACCOUNT WAS RS.3,61,34,164/- INCLUDING PAYMENT ON ACCOUNT OF EX GRATIA OF RS.34, 08,539/-. IN VIEW OF THE PAST ACCOUNTING POLICY AS WELL AS THE TREATMENT IN THE A SSESSMENT PROCEEDINGS THE ASSESSEE DEBITED THE ENTIRE EXPENSE OF RS.3.61 CRORES TO THE P/L ACCOUNT AS REVENUE EXPENDITURE FOR THE YEAR. 2.1.1 ACCORDING TO THE AO, THE FACTS OF THE CASE IN THE YEAR UNDER CONSIDERATION ARE HOWEVER ON A VERY DIFFERENT FOOTING. THE VRS ANNOUNCED DURING THE F.Y. 1999-2000 WAS ITA NO. 4752/MUM/2004 ITA NO. 4681/MUM/2004 M/S. CYANAMID AGRO LTD. ASSESSMENT YEAR: 2000-01 3 NOT REALLY A PART OF THE RATIONALIZATION OF MANPOWE R COSTS. THE PLANT AT VALSAD WAS IN FACT ON THE SELLING BLOC AND THE PROCEDURE FOR SALE STAR TED ON 1 ST JAN, 2000. THE NEGOTIATIONS OF SALE WERE NOT BY WAY OF A TENDER AND WERE IN FACT A CLOSED TRANSACTION, WHICH WAS NEGOTIATED ON ONE TO ONE BASIS BY THE ASSESSEE WITH THE PURCHASER M/S. AGRIMORE INDUSTRIES LTD. (A SUBSIDIARY OF M/S. ATUL LTD.) TH E DATE OF PROMULGATION OF THE VRS IS SO CLOSE TO THE DATE OF EVENTUAL SALE OF THE PLANT THA T IT WOULD BE NATIVE TO CONCLUDE THAT THE ASSESSEE WAS TRIMMING THE MANPOWER TO RUN THE BUSIN ESS WITH A LEAN MANPOWER COMPLEMENT. IT IS CLEAR THAT THE VRS WAS PART OF AN D PERHAPS AN UNDOCUMENTED PRECONDITION OF THE SALE. THE ASSESSEE WAS AWARE OF THE FACT THAT IT WAS GETTING RID OF THE PLANT AS A GOING CONCERN. IT WAS ALSO AWARE THAT TH E PLANT SHALL NOT BE DISMANTLED BY THE PURCHASER WHO SHALL CONTINUE TO MANUFACTURE THE SAM E PRODUCTS USING THE SAME MACHINERY AND MANPOWER. THAT IS THE REASON IT ENTER ED INTO THE NON COMPETE AGREEMENT WITH THE PURCHASER. THE PURCHASER M/S. AGRIMORE DID IN FACT TAKE OVER THE VALSAD PLANT ALONG WITH 200 ODD EMPLOYEES WHO CHOSE NOT TO USE T HE VRS OF THE ASSESSEE. IT WOULD BE INCORRECT TO ALLOW THE PAYMENTS MADE TO THE OUTGOIN G EMPLOYEES AS REVENUE EXPENDITURE AS THE BUSINESS OF THE ASSESSEE AS FAR AS THE VALSA D PLANT WAS CONCERNED CAME TO AN END. IN FACT THE ASSESSEE ENTIRELY WITHDREW FROM THE BUS INESS OF MANUFACTURING AFTER THIS SALE. THE VRS INSTRUMENT TO THE TASK OF SALE OF THE PLANT AND PERHAPS EVEN A PRECONDITION. BE THAT AS IT MAY, THE BENEFIT DERIVED BY THE VRS WAS DEFINITELY NOT REVENUE IN NATURE AS NO FUTURE REVENUE PAYMENTS WERE AVOIDED BY THIS ONE TI ME PAYMENT. THE SHORT QUESTION WHILE DELIBERATING THE ALLOWABILITY OF VRS PAYMENTS AS REVENUE EXPENDITURE IS WHETHER THE ASSESSEE HAS MANAGED TO AVOID OR REDUCE ITS FUTURE REVENUE PAYMENTS. IN THE CASE OF THE ASSESSEE, THE ASSESSEE WAS NOT TO HAVE ANY FUTURE R EVENUE LIABILITY IN RELATION TO THE EMPLOYEES WORKING AT THE VALSAD PLANT WHICH WAS ANY WAY ON THE SELLING BLOC. THE ASSESSEE WAS AWARE OF THIS AND IT CAN NOT BE SAID T HAT THE EVENTS OF JANUARY 2000 CAME AS A SURPRISE TO THE ASSESSEE WHO IN JUNE, 1999 RET IRED PART OF ITS MAN FORCE IN AN INNOCENT ATTEMPT TO REDUCE ITS FUTURE WAGE BILL. IN VIEW OF THE ABOVE STATED REASONS AS RECORDED IN THE ASSESSMENT ORDER, THE AO HELD THAT IT WAS CLEAR THAT THE PAYMENTS MADE AS PART OF THE VRS WERE NOT ALLOWABLE AS REVENUE EX PENDITURE AND SHOULD BE CAPITALISED. 2.1.2 ON APPEAL, THE LD.CIT(A) WHILE HOLDING THE PA YMENT OF VRS TO THE EMPLOYEES IN THE CURRENT YEAR HAD ONLY BEEN MADE IN ORDER TO OBT AIN MAXIMUM CAPITAL RECEIPT FOR THE ITA NO. 4752/MUM/2004 ITA NO. 4681/MUM/2004 M/S. CYANAMID AGRO LTD. ASSESSMENT YEAR: 2000-01 4 SALE OF THE PLANT AND THIS OUT GOING IS REQUIRED TO BE CONSIDERED FOR WORKING OUT THE CAPITAL GAIN AS WELL AS REDUCTION IN WDV FROM THE B LOCK OF ASSETS CONSEQUENT TO THE SALE OF PLANT. ACCORDING TO THE LD.CIT(A), AS THE IMPUGN ED EXPENDITURE HAD BEEN INCURRED TO MAKE THE VALSAD PLANT MORE MARKETABLE, IT WOULD BE IN THE FITNESS OF THING IF THE SAID VRS PAYMENT IS BIFURCATED IN THE RATIO OF 1.6 & 6.8 AND NECESSARY RE-COMPUTATION OF CAPITAL GAIN AND ADJUSTMENT OF THE WDV IS MADE AFTER REDUCI NG THE RESULTANT SUM FROM THE CONSIDERATION RECEIPT. IN THE RESULT, THE LD.CIT(A) DIRECTED THE AO TO REDUCE THE CONSIDERATION RECEIPT ON ACCOUNT OF SALE OF PLANT I N THE SAID RATIO AND RE-COMPUTE THE CAPITAL AGAIN AND THE WDV FOR ALLOWING THE DEPRECIA TION IN THE CURRENT YEAR IN RESPECT OF PLANT AND MACHINERY. AGGRIEVED BY THE IMPUGNED DECI SION, THE ASSESSEE AND THE REVENUE HAVE RAISED THESE GROUNDS IN THEIR RESPECTIVE APPEA LS BEFORE US. 2.3 HAVING HEARD BOTH THE SIDES AND PERUSED THE MAT ERIAL ON RECORD, THE FIRST ISSUE TO BE DECIDED ON THE RESPECTIVE GROUNDS RAISED BY THE ASSESSEE AND REVENUE IS WHETHER THE EXPENDITURE BY WAY OF PAYMENTS MADE UNDER THE VRS F OR RETIREMENT OF EMPLOYEES IS REVENUE EXPENDITURE OR A CAPITAL EXPENDITURE. IT IS PERTINENT TO MENTION THAT BEFORE THE INTRODUCTION OF SECTION 35DDA, THE LEGAL DICTUM IS VERY CLEAR THAT THE ASSESSEE CAN CLAIM THE EXPENDITURE INCURRED ON ACCOUNT PAYMENT MADE FO R THE VRS WHICH ARE IN THE NATURE OF BUSINESS EXPENDITURE AND ARE DEDUCTIBLE U/S.37. THEREFORE, TILL THE INTRODUCTION OF NEW PROVISIONS UNDER SECTION 35 DDA, THE ASSESSEE CAN C LAIM SUCH EXPENDITURE AS REVENUE EXPENDITURE. THIS PROPOSITION IS SUPPORTED BY VARIO US DECISIONS OF THE TRIBUNAL AND HIGH COURTS. IT IS PERTINENT TO MENTION THAT THE DECISIO N OF THE TRIBUNAL IN THE CASE OF G.E.MEDICAL SYSTEMS INDIA (P) LTD (ITA NO 1073/PN/2 003) IS DIRECTLY APPLICABLE TO THE FACTS OF THE ASSESSEE IN THE CONTEXT OF SIMILAR FAC TS INVOLVED IN BOTH THE CASES WHEREIN THE TRIBUNAL HAS ALLOWED THE CLAIM OF THE ASSESSEE THAT THE IMPUGNED EXPENDITURE IS FOR THE PURPOSE OF THE BUSINESS AND DEDUCTIBLE U/S.37 OF TH E ACT. THE TRIBUNAL, IN THE SAID CASE HAS TAKEN NOTE OF THE DECISIONS OF THE BOMBAY HIGH COURT IN THE CASE OF CIT VS. BHOR INDUSTRIES LTD (2003) 264 ITR 180 AND MADRAS HIGH COURT IN THE CA SE OF MADURA COATS VS DCIT 273 ITR 32. MOREOVER, THE REASONS OF THE LOWER AU THORITIES THAT THE ASSESSEE WAS NOT TO HAVE ANY FUTURE REVENUE LIABILITY IN RELATIO N TO THE EMPLOYEES WORKING AT THE VALSAD PLANT WHICH HAS BEEN ANYWAY ON THE SELLING BLOC, IN OUR VIEW IS A WAGERING FUTURE EVENT DURING THE PERIOD WHEN THE PAYMENT FOR VRS HAS BEEN INCURRED BY THE ASSESSEE AND THE ITA NO. 4752/MUM/2004 ITA NO. 4681/MUM/2004 M/S. CYANAMID AGRO LTD. ASSESSMENT YEAR: 2000-01 5 SAME CANNOT BE A FACTOR WHICH WILL CHANGE THE NATUR E OF THE PAYMENT FROM REVENUE TO CAPITAL. IN VIEW OF THE AFOREMENTIONED DISCUSSION, THE ENTIRE EXPENSE OF RS.3.61 CRORES IS ALLOWED AS REVENUE EXPENDITURE ELIGIBLE FOR DEDUCTI ON U/S 37(1) OF THE ACT AS CLAIMED BY THE ASSESSEE. WE ORDER AND DIRECT ACCORDINGLY. RESU LTANTLY, GROUND NO 1 OF THE ASSESSEE IS ALLOWED AND GROUNDS NO 1 & 2 OF THE REV ENUE ARE DISMISSED. 3. GROUND NO. 2 RAISED BY THE ASSESSEE RELATES TO T HE DECISION OF THE LD.CIT(A) CONFIRMING THE DISALLOWANCE MADE BY THE AO ON ACCOU NT OF NON COMPETE FEES AMOUNTING TO RS.36.75 CRORES PAID TO M/S AGRIMORE LTD. 3.1 THE RELEVANT FACTS CULLED OUT FROM THE ASSESSME NT/APPELLATE ORDERS ARE THAT THE ASSESSEE COMPANY SOLD ITS INSECTICIDES PLANT AT ATU L, VALSAD TO M/S AGRIMORE LIMITED CLOSE TO DECEMBER 1999 VIDE AGREEMENT DATED 31 ST DECEMBER, 1999. THE ASSESSEE COMPANY ENTERED INTO AN AGREEMENT WITH AGRIMORE LIMITED RES TRICTING IT FROM SELLING AND DISTRIBUTION OF THE THREE FAST SELLING MAJOR PRODUC TS I.E. THIMET, MALATHION AND ABATE AND ALSO FROM PARTING WITH THE SPECIALIZED KNOWLEDG E AND EXPERTISE IN RELATION TO THESE PRODUCTS FOR SEVEN/FOURTEEN YEARS. IN CONSIDERATION THERETO THE ASSESSEE COMPANY AGREED TO PAY A LUMP SUM FEE OF RS.36.75 CRORES PAYABLE IN ACCORDANCE WITH THE AGREED SCHEDULE OF PAYMENT. FOR ITS BOOK PURPOSE, THE ASSESSEE COMP ANY HAD SHOWN THE SAID FEE OF RS.36.75 CRORES AS DEFERRED REVENUE EXPENDITURE TO BE AMORTISED OVER A PERIOD OF FIVE YEARS. ACCORDINGLY, THE ASSESSEE COMPANY DEBITED RS .1,83,75,000/- TO THE PROFIT AND LOSS ACCOUNT OF THE PREVIOUS YEAR. 3.1.1 DURING THE ASSESSMENT PROCEEDING, THE ASSESSE E COMPANY, RELYING ON THE DECISION OF SUPREME COURT IN THE CASE OF CIT VS. EMPIRE JUTE CO. LIMITED (124 ITR 1) AND THE DECISION OF THE MADRAS HIGH COURT IN THE CASE OF CI T VS. LATE G.B. NAIDU & ORS (165 ITR 63) HAD CLAIMED THE ENTIRE PAYMENT AS A BUSINESS EX PENDITURE DEDUCTIBLE UNDER SECTION 37(1) OF THE ACT DURING THE CURRENT YEAR. THIS ISSU E HAS BEEN DISCUSSED IN PARAS 11 TO 19 SPREAD OVER FROM PAGES 6 TO 10 THE ASSESSMENT ORDER . THE AO HELD THAT THE PAYMENT OF NON-COMPETE FEE WAS A COLOURABLE DEVICE DEPLOYED BY THE ASSESSEE COMPANY SINCE ACCORDING TO HIM THIS PAYMENT WAS NOT AT ALL WARRAN TED ON ACCOUNT OF COMMERCIAL EXPEDIENCY, ETC AND THEREBY DISALLOWED THE IMPUGNED EXPENDITURE TREATING THE SAME AS CAPITAL EXPENDITURE. ITA NO. 4752/MUM/2004 ITA NO. 4681/MUM/2004 M/S. CYANAMID AGRO LTD. ASSESSMENT YEAR: 2000-01 6 3.1.2 ON APPEAL THE LD.CIT(A) CONFIRMED THE ACTION OF THE AO FOR THE REASONS STATED FROM PARAS 9 TO 14 OF HIS ORDER. ACCORDING TO THE L D.CIT(A), THE PAYMENT MADE TO WARD OFF COMPETITION IN BUSINESS WOULD CONSTITUTE CAPITA L EXPENDITURE IF THE OBJECT OF MAKING THAT PAYMENT IS TO DERIVE AN ADVANTAGE BY ELIMINATI NG THE COMPETITION OVER SOME LENGTH OF TIME. FOR THE SAID PROPOSITION, THE LD.CIT(A) RE LIED ON THE DECISION OF THE HONBLE APEX COURT IN THE CASE OF CIT VS. COAL SHIPMENT PVT. LTD. REPORTED IN 82 ITR 902. AGGRIEVED BY THE IMPUGNED DECISION THE ASSESSEE HAS RAISED THIS GROUND IN THE APPEAL BEFORE US. 3.2 BEFORE US, THE LD.COUNSEL FOR THE ASSESSEE HAS VEHEMENTLY ARGUED THAT THE SAID EXPENDITURE HAS BEEN INCURRED BY THE ASSESSEE COMPA NY WITH AN INTENTION OF AVOIDING MANUFACTURE OF HAZARDOUS SUBSTANCE AND THE COMMERCI AL PRUDENCE/EXPEDIENCY OF THE ASSESSEE COULD NOT HAVE BEEN DOUBTED BY THE LOWER A UTHORITIES TO TREAT THE IMPUGNED EXPENDITURE AS CAPITAL IN NATURE. FURTHER, RELIANCE HAS BEEN PLACED ON VARIOUS DECISIONS INCLUDING THE DECISION OF THE DELHI HIGH COURT IN T HE CASE OF CIT VS. EICHER LTD REPORTED IN 302 ITR 249 IN SUPPORT OF THE PROPOSITION THAT THE SAID EXPENDITURE IS DEDUCTIBLE U/S 37(1) OF THE ACT. ON THE OTHER HAND, THE LD.AR BY DRAWING OUR ATTENTION TO THE FACTS HAS VEHEMENTLY ARGUED THAT THE CHRONOLOGY OF EVENTS AND THE VALUATIONS ADOPTED BY THE ASSESSEE FOR THE VARIOUS COMPONENTS OF THE SALE OF THE VALSAD PLANT GIVE AWAY THE CONTUMACIOUS CONDUCT OF THE ASSESSEE. NO JUDICIAL A UTHORITY HAS EVER JUSTIFIED THE ADOPTION OF NON-COMMERCIAL, COLORABLE DEVICES WHICH ENCUMBER THE P/L ACCOUNT WITH PAYMENTS WHICH ARE SO BLATANTLY EXCESSIVE AND UN-NE CESSARY. THE ASSESSEE HAS MADE FEEBLE ATTEMPTS DURING THE ASSESSMENT/APPELLATE PRO CEEDINGS TO EXPLAIN TO THE INORDINATELY LARGE FINANCIAL OUTGO ON THE GROUNDS O F REORGANIZATION OF THE GROUP AT A GLOBAL LEVEL. THE EXPLANATIONS DO NOT ADDRESS THE OBVIOUS NON COMMERCIAL CONSIDERATIONS AT PLAY IN THE PROCESS. FURTHER, THE LD.DR HAS STATED THAT THE LD.CIT(A) CORRECTLY RELIED ON THE DECISION OF THE HONBLE APEX COURT IN THE CASE OF CIT VS. COAL SHIPMENT PVT. LTD. (SUPRA) FOR CONFIRMING THE SAID DISALLOWANCE AND THUS THE S AME IS JUSTIFIED. 3.3 WE HAVE HEARD BOTH THE SIDES AND PERUSED THE MA TERIAL ON RECORD ON THIS GROUND. IT IS PERTINENT TO MENTION THAT THE SUPPLY AGREEMEN T HAS BEEN ENTERED ON 3 RD JANUARY, 2000 WHEREIN IT IS STIPULATED THAT CYANAMID AGRO WO ULD PURCHASE ITS ACTUAL REQUIREMENTS OF THIMET, MALATHION AND ABATE. THE COMPANY WOULD G IVE FORECASTING IN RESPECT OF EVERY ITA NO. 4752/MUM/2004 ITA NO. 4681/MUM/2004 M/S. CYANAMID AGRO LTD. ASSESSMENT YEAR: 2000-01 7 QUARTER OF THE DESIRED QUANTITY MANUFACTURED AND AL L THE MATERIAL PRODUCED SUBJECT TO THERE BEING PASSING THE QUALITY CONTROL TEST WOULD BE PURCHASED BY CYANAMID AGRO LTD. IT IS ALSO MENTIONED IN THE AGREEMENT THAT CYANAMID AG RO LTD IS NOT REQUIRED TO PURCHASE ANY FIX MINIMUM QUANTITY OF ANY PRODUCT. ACCORDINGL Y, IT MAY BE NOTED THAT AGROMORE LTD HAS TO PRODUCE THE BASIC CHEMICALS AND CONCENTRATE IN THE VALSAD PLANT ON THE BASIS OF FORECAST MADE WHICH WOULD BE WHOLLY PURCHASED BY CY ANAMID AGRO LTD. FOR ABOVE PURCHASE, CYANAMID AGRO LTD WOULD GIVE SUFFICIENT A DVANCE TO THE AGRIMORE LTD IN ORDER TO BUILD UP SUFFICIENT INVENTORY OF THE PRODUCT TO ENABLE THE AGRIMORE LTD TO MAKE THE SUPPLY. THE ABOVE ADVANCE HAS TO BE ADJUSTED AGAINS T THE INVOICE TO BE RAISED. THE PRICE OF THE PRODUCT IS TO BE FIXED OVER CALENDAR YEAR BA SED ON BASE MANUFACTURING COST PLUS 7% AS MARGIN. THE ABOVE AGREEMENT IS TO BE VALID FO R FIVE YEARS ONLY AND THE SAME COULD BE EXTENDED FOR A FURTHER PERIOD OF TWO YEARS ON TH E MUTUAL CONVENIENCE AND IN ANY CASE WOULD LAPSE AFTER SEVEN YEARS. THERE IS NO RESTRICT ION ON THE AGRIMORE LTD TO PRODUCE ANY OTHER CHEMICALS THAT DO NOT COMPETE WITH THE ABOVE MENTIONED PRODUCTS AND CYANAMID AGRO LTD. HAD RIGHT OF FIRST REFUSAL IN RESPECT OF OTHER PRODUCT MANUFACTURED. THE PRICE FOR SUCH PRODUCE WOULD BE MANUFACTURED COST PLUS 15% OR THE MARKET VALUE WHICHEVER IS LESS. AFTER THE REFUSAL, AGRIMORE LTD IS FREE TO SE LL THESE PRODUCTS TO ANY OTHER PARTY. IT IS ALSO MENTIONED THAT AFTER THE TERMINATION OF THE CO NTRACT WHICH MAY BE ON ACCOUNT OF AFFLUX OF TIME OR BREACH OF TERMS AND CONDITIONS OR INSOLVENCY OF ANY PARTY, CYANAMID AGRO LTD SHALL NOT BE LIABLE TO PAY ANY DAMAGES TO THE AGRIMORE LTD. ON THE OTHER HAND THE NON-COMPETE FEE AGREEMENT WHICH HAS BEEN ENTERE D ALSO ON 3 RD JANUARY, 2000 BARS THE AGRIMORE LTD FROM ENGAGING IN THE SALE AND DIST RIBUTION IN RESPECT OF THIMET, MALATHION AND PALATHION FOR SEVEN YEARS AND ABATE F OR 14 YEARS. IT IS RELEVANT TO STATE THAT THESE NAMES ARE BRAND NAMES AND THE SAME HAS NOT BE EN TRANSFERRED TO AGRIMORE LTD. DURING THE APPELLATE PROCEEDINGS BEFORE THE LD.CIT( A), IN RESPONSE TO THE QUERY TO PRODUCE THE BASIS ON WHICH THE IMPUGNED AMOUNT OF R S.36.75 CRORES HAS BEEN WORKED OUT, BASF HAS NOT BEEN IN A POSITION TO GIVE BASIS FOR ARRIVING AT A SUM OF RS.36.75 CORES EXCEPT A SKETCHY WORKING WHEREIN LOSS AND PROFIT IN CASE THE AGRIMORE LTD IS ALLOWED TO ENGAGE IN THE PRODUCTION OF THESE CHEMICAL PRODUCTS . IN THIS CONNECTION, IT IS RELEVANT TO STATE THAT IN CASE THE SUPPLY AGREEMENT IS TERMINAT ED, NO COMPENSATION WOULD BE PAYABLE BUT THE NON-COMPETE AGREEMENT WOULD CONTINUE AND AG RIMORE LTD. WOULD NOT BE IN A POSITION TO PRODUCE OR MARKET THESE CHEMICALS ALTHO UGH UNDER DIFFERENT BRAND ON ACCOUNT ITA NO. 4752/MUM/2004 ITA NO. 4681/MUM/2004 M/S. CYANAMID AGRO LTD. ASSESSMENT YEAR: 2000-01 8 OF NON-COMPETITIVE AGREEMENT. THEREFORE, WE AGREE W ITH THE OBSERVATION OF THE LD.CIT(A) THAT THE SUPPLY AGREEMENT HAS NOTHING TO DO WITH TH E COMPETITION FEES AGREEMENT AS THE SAME HAS BEEN PAID ON ACCOUNT OF AGRIMORE NOT ENGAG ING IN THE PRODUCTION OF THESE FOUR ITEMS FOR SEVEN YEARS AND FIFTEEN YEARS. IN THE CON TEXT OF THE FACTS AS AFOREMENTIONED, THE HONBLE APEX IN THE CASE OF CIT VS. COAL SHIPMENT P VT. LTD. (SUPRA), WHICH HAS BEEN RELIED BY THE LD.CIT(A), HAS HELD THAT PAYMENT MADE TO WAR D OF COMPETITION IN THE BUSINESS OF ARRIVAL WOULD CONSTITUTE CAPITAL EXPENDITURE OF THE OBJECT OF MAKING THAT PAYMENT IS TO DERIVE AN ADVANTAGE BY ELIMINATING THE COMPETITION OVER SOME LENGTH OF TIME; THE SAME RESULT WOULD NOT FOLLOW IF THERE IS NO UNCERTAINTY OF THE DURATION OF THE ADVANTAGE AND THE SAME CAN BE PUT ON AN END ANY TIME. ALTHOUGH AN END URING BENEFIT NEED NOT BE EVERLASTING CHARACTER IT SHOULD NOT BE SO TRANSITOR Y AND EPHEMERAL THAT IT CAN BE TERMINATED AT ANY TIME AT THE VOLITION OF ANY OF TH E PARTIES. IN THE PRESENT CASE, THE THREE PRODUCTS OF THE COMPANY HAS ADVANTAGE FOR SEVEN YEA RS AND THE 4 TH PRODUCT HAS ADVANTAGE FOR FOURTEEN YEARS. THE AGREEMENT HAS BEE N ENTERED IN ORDER TO HAVE THE ADVANTAGE OF ENDURING NATURE AS AFTER THESE PERIODS , THE CYANAMID AGRO LTD. ITSELF MAY STOP USING THIS CROP PROTECTION CHEMICALS AND COME OUT WITH THE NEW PRODUCT AND THERE WOULD BE NO PURPOSE IN CONTINUING WITH THE NON COMP ETITIVE AGREEMENT OF THESE FOUR PRODUCTS. AS THE LIFE OF THESE PRODUCTS ITSELF IN T HE COMPETITION AGE WOULD BE OVER BEFORE THE PERIOD OF SEVEN YEARS AND FOURTEEN YEARS IS OVE R, WE CONCUR WITH THE DECISION OF THE LD.CIT(A) THAT THIS PAYMENT IS REQUIRED TO BE CONSI DERED AS CAPITAL IN NATURE. SINCE THE LD.CIT(A) HAS REFRAINED FROM MAKING ANY COMMENT IN RESPECT OF OBSERVATION MADE BY THE AO ON THE ASPECT OF FINANCIAL IMPRUDENCE AS THE CYA NAMID AGRO LTD AND AGRIMORE LTD. IS NOT RELATED PARTY AND THE AFFAIR OF THE BUSINESS SH OULD BE LEFT IN THE HAND OF BUSINESSMAN AND THE DEPARTMENT SHOULD CONFINE ITSELF TO THE ALL OWABILITY OR OTHERWISE OF ANY EXPENDITURE INCURRED BY THE COMPANY IN COMPUTING TH E TAXABLE INCOME OF THE ASSESSEE COMPANY, THE NECESSITY OF DEALING WITH THE SAID ISS UE DOES NOT ARISE. RESULTANTLY, THE DECISION OF THE LD.CIT(A) ON THIS COUNT IS UPHELD. GROUND NO 2 OF THE ASSESSEES APPEAL IS DISMISSED. 4. GROUND NO. 3 OF THE ASSESSEES APPEAL AND GROUND NO. 5 OF THE REVENUES APPEAL RELATE TO THE DISALLOWANCE OF BAD DEBT WRITTEN OFF RS.54,17,792/- BY THE AO AND THE DECISION OF THE LD.CIT(A) PARTLY ALLOWING THE CLAIM TO THE EXTENT OF RS.44,09,800/-. ITA NO. 4752/MUM/2004 ITA NO. 4681/MUM/2004 M/S. CYANAMID AGRO LTD. ASSESSMENT YEAR: 2000-01 9 4.1 DURING THE YEAR UNDER CONSIDERATION, THE ASSESS EE HAD WRITTEN OFF BAD DEBTS AMOUNTING TO RS.54,17,792/-. HOWEVER, IN THE ASSESS MENT FRAMED, THE AO DISALLOWED THE SAME AS THE ASSESSEE HAD NOT CONVINCINGLY PROVED TH AT THE DEBTS WRITTEN OFF AS BAD DEBT ON COUNT OF FINANCIAL POSITION OF THE DEBTORS AND A SSESSEE HAD NOT TAKEN ANY LEGAL ACTION AGAINST THE DEFAULTING DEBTORS. ON APPEAL, THE LD.C IT(A) AFTER OBSERVING THAT THE DETAILS IN RESPECT OF BAD DEBTS PERTAINING TO SAHAKARI GANANA VIKAS SAMITIS AMOUNTING TO RS.44,09,800/- WHICH PERTAINS TO 16 SAMITIS HAD BEE N GIVEN, HOWEVER, NO EVIDENCE IN RESPECT OF BALANCE BAD DEBTS CLAIM ALONG WITH THE B ASIS ON WHICH THE DECISION WAS MADE COULD BE PRODUCED THE LD.CIT(A), CONFIRMED THE REMA INING BAD DEBT RETURN OFF CLAIMED BY THE ASSESSEE. AGGRIEVED BY THE IMPUGNED DECISION TH E ASSESSEE AND THE REVENUE HAVE RAISED THESE GROUNDS IN THEIR RESPECTIVE APPEAL BEF ORE US. 4.2 HAVING HEARD BOTH THE SIDES AND PERUSED THE MAT ERIAL ON RECORD, IT IS PERTINENT TO NOTE THAT THE HONBLE SUPREME COURT IN THE CASE OF TRF LIMITED VS. CIT [(2010) 323 ITR 397 (SC)] HAS HELD THAT AFTER 01.04.1989, IT IS NOT NECESSARY FOR THE ASSESSEE TO ESTABLISH THAT THE DEBT, IN FACT, HAS BECOME IRRECOVERABLE. I T HAS FURTHER BEEN LAID DOWN THAT IF THE BAD DEBT HAS BEEN WRITTEN OFF AS IRRECOVERABLE IN T HE ACCOUNTS OF THE ASSESSEE IT IS ENOUGH FOR CLAIMING DEDUCTION U/S.36(1)(VII). SIMILAR VIEW HAS BEEN CANVASSED BY THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. ST AR CHEMICALS (BOMBAY) PVT. LTD. [(2009) 313 ITR 126 (BOM.)]. IN THIS CASE, THE HONBLE HIGH COURT HELD THAT ONCE THE ASSESSEE HAS WRITTEN OFF DEBT AS BAD, REQUIREMENT OF SECTION 36( 1)(VII) IS SATISFIED AND THE CLAIM FOR DEDUCTION OF BAD DEBT IS ALLOWABLE. FROM THE ABOVE DISCUSSED TWO JUDGMENTS, IT BECOMES MANIFEST THAT THE DEDUCTION ON ACCOUNT BAD DEBT IS TO BE ALLOWED IN THE YEAR IN WHICH THE AMOUNT IS WRITTEN OFF IN ITS BOOKS OF ACCOUNT PROVI DED THE CONDITIONS OF SECTION 36(2) ARE FULFILLED. IN THE PRESENT CASE, IT HAS NOT BEEN ACC USED BY THE AUTHORITIES BELOW THAT THE ASSESSEE DID NOT SATISFY THE CONDITIONS OF SECTION 36(2). THUS, IN PRINCIPLE IT IS HELD THAT ONCE THE AMOUNT OF DEBT IS WRITTEN OFF IN THE BOOKS OF ACCOUNT, THE CONDITION OF SECTION 36(1)(VII) IS FULFILLED AND THE DEDUCTION HAS TO FO LLOW, OF COURSE SUBJECT TO THE SATISFACTION OF THE CONDITIONS OF SEC. 36(2). THERE IS NO REQUIR EMENT TO DISTINCTLY PROVE THAT THE DEBT HAS, IN FACT, BECOME IRRECOVERABLE AS A PRE-REQUISI TE CONDITION FOR ALLOWING OF DEDUCTION. ACCORDINGLY, WE DELETE THE ADDITION MADE/SUSTAINED BY THE AUTHORITIES BELOW ON THIS ITA NO. 4752/MUM/2004 ITA NO. 4681/MUM/2004 M/S. CYANAMID AGRO LTD. ASSESSMENT YEAR: 2000-01 10 COUNT. RESULTANTLY, GROUND NO. 3 OF THE ASSESSEES APPEAL IS ALLOWED AN D GROUND NO. 5 OF THE REVENUES APPEAL IS DISMISSED. 5. GROUND NO. 3 OF THE REVENUES APPEAL RELATE TO T HE DECISION OF THE LD.CIT(A) IN DELETING THE ADDITION MADE BY THE AO AMOUNTING TO R S.3,44,000/- TO THE VALUE OF CLOSING STOCK AS FREIGHT CHARGES ARE NOT INCLUDED IN THE VA LUE OF CLOSING STOCK. 5.1 HAVING HEARD BOTH THE SIDES AND PERUSED THE MAT ERIAL ON RECORD, IT IS NOTED THAT THE LD.CIT(A) FOLLOWING HIS OWN ORDER FOR THE ASSES SMENT YEAR 1997-98, HAS DELETED THE SAID ADDITION ON THE REASON THAT POST MANUFACTURING EXPENSES ARE NOT REQUIRED TO BE INCLUDED IN THE VALUATION OF THE CLOSING STOCK. IT HAS BEEN BROUGHT TO OUR NOTICE THAT THE TRIBUNAL, IN THE ASSESSEES OWN CASE FOR THE ASSESS MENT YEARS 1994-95, 1998-99 AND 1999-2000 HAS ALLOWED SIMILAR CLAIMS OF THE ASSESSE E IN RESPECT OF FREIGHT CHARGES. IN THE ABSENCE OF ANY CONTRADICTORY FACTS BROUGHT ON RECOR D BY THE REVENUE DURING THE YEAR UNDER CONSIDERATION, WE DO NOT FIND ANY JUSTIFIABLE REASON TO INTERFERE WITH THE DECISION OF THE LD.CIT(A) ON THIS COUNT AND THE SAME IS UPHELD. GROUND NO. 3 OF THE REVENUES APPEAL IS DISMISSED. 6. GROUND NO. 4 RELATES TO THE DECISION OF THE LD.C IT(A) IN DELETING THE ADDITION OF RS.2,97,992/- TO THE CLOSING STOCK IN RESPECT OF UN -UTILISED MODVAT CREDIT MADE BY THE AO. AT THE OUTSET, THE LEARNED COUNSEL FOR THE ASSESSEE HAS BROUGHT TO OUR ATTENTION TO ORDER OF THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEARS 1998-99 AND 1999- 2000 WHICH IS AVAILABLE AT PAGES 114 TO 120 OF THE COMPILATION. THE TRIBUNAL, IN THE SAID ORDER AT PARAS 15 TO 19 HAS ALLOWED A SIMILAR CLAIM OF THE ASSESSEE. IN THE ABSENCE OF ANY DISTINGUISHING FACTS BROUGHT ON RECORD BY THE REVEN UE FOR THE YEAR UNDER CONSIDERATION, WE DO NOT FIND ANY INFIRMITY IN THE DECISION OF THE LD.CIT(A) ON THIS COUNT AND THE SAME IS THUS UPHELD. GROUND NO 4 OF THE REVENUES APPEAL IS DISMISSED. 7. GROUND NO. 6 OF THE REVENUES APPEAL RELATES TO THE DECISION OF THE LD.CIT(A) IN DELETING THE DISALLOWANCE OF THE EXPENDITURE OF RS. 8,48,424/- WHICH HAVE BEEN INCURRED BY THE ASSESSEE ON PRODUCTION OF ADVERTISEMENT FILM . IT IS OBSERVED THAT THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 19 98-99 AND 1999-2000 HAS ALLOWED SIMILAR EXPENDITURE AS CLAIMED BY THE ASSESSEE. SIN CE IDENTICAL FACTS ARE INVOLVED IN THIS ITA NO. 4752/MUM/2004 ITA NO. 4681/MUM/2004 M/S. CYANAMID AGRO LTD. ASSESSMENT YEAR: 2000-01 11 YEAR ALSO, WE, BY FOLLOWING THE SAID ORDER OF THE T RIBUNAL ACCORDINGLY DECIDE THIS ISSUE AGAINST THE REVENUE AND IN FAVOUR OF THE ASSESSEE. GROUND NO 6 IS DISMISSED. 8. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED AND THAT OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 8 TH DAY OF JANUARY 2014. SD/- SD/- (P.M. JAGTAP) (DR. S.T.M. PAVALAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED: 08.01.2014. *SRIVASTAVA COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT(A) CONCERNED, MUMBAI THE DR E BENCH //TRUE COPY// BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.