ACIT 1(1), MUMBAI V. CLARIANT CHEMICALS (I) LTD, MUMBAI

ITA 7428/MUM/2011

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 84165 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-11-2014
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 11-11-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 04-11-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: A C TEJPAL
• Assessee Lawyers: FAROOKH IRANI
• Keywords: Capital asset; Depreciation; Business expenditure; Earning of tax free income; Revenue expenditure; Capital expenditure
• Section: 14A

Judgement Text

C IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, MUMBAI BEFORE SHRI SANJAY ARORA, ACCOUNTANT MEMBER & SHRI AMIT SHUKLA, JUDICIAL MEMBER ./ I.T.A. NO.7428/MUM/2011 ( / ASSESSMENT YEAR : 2007-2008 ACIT 1(1), ROOM NO. 579, AAYAKAR BHAVAN, MUMBAI 20. / VS. M/S CLARIANT CHEMICALS (I) LTD., RAVINDRA ANNEXE, 194, CHURCHGATE RECLAMATION, D V ROAD, MUMBAI 400 020. ./ PAN : AAACC5602P ( / APPELLANT ) .. ( ! / RESPONDENT ) ./ I.T.A. NO.8079/MUM/2011 ( / ASSESSMENT YEAR : 2007-2008 M/S CLARIANT CHEMICALS (I) LTD., (FORMERLY KNOWN AS COLOUR-CHEM LIMITED) RAVINDRA ANNEXE, 194, CHURCHGATE RECLAMATION, D V ROAD, MUMBAI 400 020. / VS. ADDL. COMMISSIONER OF INCOME TAX - 1(1), AAYAKAR BHAVAN, M.K. ROAD, MUMBAI 20. ./ PAN : AAACC5602P ( / APPELLANT ) .. ( ! / RESPONDENT ) 2 ITA 7428/M/11 & 8 079/M/11 ASSESSEE BY SHRI FAROOKH IRANI REVENUE BY SHRI A.C. TEJPAL & SHRI PREMANAND ' # $ / DATE OF HEARING : 11-11-2014 %& ' # $ / DATE OF PRONOUNCEMENT : 19-11-2014 () / O R D E R PER AMIT SHUKLA, J.M. THESE ARE CROSS APPEALS FILED BY THE ASSESSEE AS WE LL AS THE DEPARTMENT AGAINST THE ORDER OF LD. CIT(A) -1, MUMB AI DATED 24-08- 2011, FOR THE QUANTUM OF ASSESSMENT PASSED U/S 143( 3) OF THE INCOME TAX ACT, 1961 FOR THE A.Y. 2007-08. 2. THE SOLE ISSUE RAISED BY THE ASSESSEE IN ITS APP EAL RELATES TO THE DISALLOWANCE U/S 14 A OF THE INCOME TAX ACT, 19 61 AFTER APPLYING RULE 8-D (2)(II) OF THE INCOME TAX RULES, 1962, BY TAKING 0.5% OF THE AVERAGE INVESTMENTS. IN REVENUES APPE AL ALSO, GROUND NO.1 RELATES TO THE DISALLOWANCE U/S 14A OF THE AC T MADE ON ACCOUNT OF INTEREST EXPENDITURE WHICH HAS BEEN DELE TED BY THE LD. CIT(A) ON THE GROUND THAT ASSESSEE HAS SURPLUS FUND S OF ITS OWN, FOR MAKING THE INVESTMENT. 3. THE BRIEF FACTS QUA THE ISSUE OF DISALLOWANCE U/ S 14A OF THE ACT IS THAT, THE ASSESSEE HAS RECEIVED DIVIDEND INC OME OF RS. 97,26,000/- WHICH WAS CLAIMED AS EXEMPT. HOWEVER, THE ASSESSEE 3 ITA 7428/M/11 & 8 079/M/11 DID NOT OFFER ANY DISALLOWANCE U/S 14A IN THE COMPU TATION OF INCOME. THE A.O. NOTED THAT THE ASSESSEE HAS DEBIT ED INTEREST EXPENDITURE OF RS. 260.75 LAKHS IN THE P&L ACCOUNT AND HAS NOT ATTRIBUTED ANY INDIRECT EXPENDITURE FOR EARNING OF THE EXEMPT INCOME. AFTER RELYING ON THE DECISION OF SPECIAL B ENCH OF ITAT IN THE CASE OF I.T.O. VS. DAGA CAPITAL MANAGEMENT (P) LTD . (2009) 117 ITD 169 (MUM)[SB] AND THE DECISION OF HONBLE BOMBAY HI GH COURT IN THE CASE OF GODREJ AND BOYCE MFG. CO. LTD. VS. DCIT (2010) 328 ITR 81 (BOM.), THE AO HELD THAT THOUGH RULE 8-D IS APPL ICABLE FROM A.Y. 2008-09, HOWEVER, AS PER THE FORMULA GIVEN IN RULE 8-D, A REASONABLE BASIS IS TO BE ADOPTED FOR WORKING OUT THE DISALLOWANCE. ACCORDINGLY HE WORKED OUT THE DISALLOWANCE AGGREGAT ING TO RS. 47,97,915/- NOT ONLY UNDER THE HEAD INTEREST EXPEND ITURE BUT ALSO FOR CERTAIN INDIRECT EXPENSES. THE WORKING OF THE A.O. HAS BEEN GIVEN IN PARA 4.3 OF THE ASSESSMENT ORDER. 4. BEFORE THE LD. CIT(A), THE ASSESSEE HAD GIVEN DETAIL SUBMISSION WITH REGARD TO THE AVAILABILITY OF THE S URPLUS FUNDS FOR MAKING THE INVESTMENTS AND ALSO ABOUT THE INDIRECT EXPENSES WHICH CAN BE SAID TO BE ATTRIBUTABLE TO EARNING OF EXEMPT INCOME. THE LD. CIT(A) DELETED THE DISALLOWANCE OF INTEREST EXPENDI TURE ON THE GROUND THAT THE ASSESSEE HAS MADE INVESTMENTS OUT O F ITS OWN SURPLUS FUNDS, THEREFORE, THERE IS NO DIRECT EXPEND ITURE IN RESPECT OF INTEREST EXPENDITURE WHICH CAN BE SAID TO HAVE BEEN INCURRED BY THE ASSESSEE FOR THE PURPOSE OF THE INVESTMENTS. HOWEV ER, WITH REGARD TO THE INDIRECT EXPENDITURE, HE HELD THAT RULE 8-D SHOULD BE APPLIED 4 ITA 7428/M/11 & 8 079/M/11 TO WORK OUT THE REASONABLE BASIS, THAT IS, BY APPLY ING 0.5% OF THE AVERAGE INVESTMENT. 5. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE, SHR I FAROOQ IRANI, SUBMITTED THAT THE DISALLOWANCE IS BEING MADE FOR T HE A.Y. 2007-08, IN WHICH YEAR ADMITTEDLY RULE 8-D CANNOT BE HELD TO BE APPLICABLE. IN ASSESSMENT YEARS 2001-02, 2004-05 AND 2006-07 TH E ISSUE OF DISALLOWANCE OF SECTION 14A HAD COME UP FOR CONSIDE RATION BEFORE THE TRIBUNAL, WHEREIN THIS ISSUE HAS BEEN SET ASIDE TO THE FILE OF THE A.O. TO WORK OUT SOME REASONABLE BASIS FOR DISALLO WANCE, THEREFORE, IN THIS YEAR ALSO THE MATTER SHOULD BE RESTORED BAC K TO THE FILE OF THE A.O. TO WORK OUT THE SAME ON REASONABLE BASIS, WITH OUT RESORTING TO RULE 8-D. 6. ON THE OTHER HAND, THE LD. D.R. SUBMITTED THAT T HE A.O. HAS GIVEN A REASONABLE BASIS WHILE CALCULATING THE DISA LLOWANCE, THEREFORE, NO INTERFERENCE SHOULD BE MADE. THUS HE STRONGLY RELIED UPON THE ORDER OF THE A.O. 7. AFTER CAREFULLY CONSIDERING THE RIVAL SUBMISSION S AND ALSO ON PERUSAL OF THE IMPUGNED ORDERS AND ORDERS OF THE TR IBUNAL FOR THE EARLIER YEARS, WE FIND THAT THE ISSUE OF DISALLOWAN CE U/S 14-A HAS COME UP FOR CONSIDERATION BEFORE THE TRIBUNAL, WHER EIN THIS MATTER HAS BEEN RESTORED BACK TO THE FILE OF THE A.O. FOR FRESH ADJUDICATION TO WORK OUT THE SOME REASONABLE BASIS FOR DISALLOW ANCE. ADMITTEDLY IN THIS YEAR, RULE 8-D IS NOT APPLICABLE AND THEREF ORE SOME REASONABLE BASIS HAS TO BE ADOPTED, IN VIEW OF THE DECISION OF 5 ITA 7428/M/11 & 8 079/M/11 HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF GO DREJ & BOYCE MANUFACTURING (SUPRA). IN A.Y. 2006-07, THE TRIBUNA L WHILE DISPOSING OF THE MATTER TO THE FILE OF THE A.O., OB SERVED AND HELD AS UNDER:- AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE FIND T HAT THE TRIBUNAL HAS SET ASIDE THIS ISSUE TO THE FILE OF TH E ASSESSING OFFICER FOR FRESH ADJUDICATION. IN THIS YEAR, THE LEARNED COMMISSIONER (APPEALS) HAS ALREADY GIVEN DIRECTION TO THE ASSESSING OFFICER TO WORK OUT THE DISALLOWANCE ON S OME REASONABLE BASIS. THUS, WE DO NOT WISH TO INTERFER E IN SUCH A FINDING OF THE LEARNED COMMISSIONER (APPEALS) AND T HE PLEA OF DISALLOWANCE BEING RESTRICTED TO 2% OF THE DIVIDEND INCOME CAN BE TAKEN BEFORE THE ASSESSING OFFICER FOLLOWING THE EARLIER YEARS PRECEDENCE. ACCORDINGLY, GROUND NO. 2, AS RA ISED BY THE DEPARTMENT STANDS DISMISSED AS THE LEARNED COMMISSI ONER (APPEALS) HAS ALREADY GIVEN DIRECTION TO THE ASSESS ING OFFICER TO WORK OUT THE DISALLOWANCE ON SOME REASONABLE BAS IS. 8. THUS, CONSISTENCE WITH PRECEDENCE OF THE EARLIER YEARS, THE ENTIRE ISSUE OF DISALLOWANCE U/S 14-A IS SET ASIDE TO THE FILE OF THE AO, TO EXAMINE AND WORK OUT SOME REASONABLE BASIS F OR DISALLOWANCE HAVING REGARD TO THE FACTS OF THE CASE , DEHORS RULE 8D AND AFTER GIVING PROPER OPPORTUNITY TO THE ASSESSEE . ACCORDINGLY, THE GROUND RAISED BY THE ASSESSEE AS WELL AS BY THE DEPARTMENT IS TREATED AS ALLOWED FOR STATISTICAL PURPOSE. 9. NOW COMING TO THE OTHER GROUNDS RAISED IN DEPAR TMENTS APPEAL. IN GROUND NO. 2, THE DEPARTMENT HAS CHALLEN GED THE DELETION OF ADDITION MADE ON ACCOUNT OF SOFTWARE AC QUISITION CHARGES WHICH WAS TREATED BY THE A.O. AS CAPITAL EX PENDITURE. 6 ITA 7428/M/11 & 8 079/M/11 10. BEFORE US, IT HAS BEEN ADMITTED BY BOTH THE PAR TIES THAT SIMILAR ISSUE HAD COME UP FOR CONSIDERATION BEFORE THE TRIBUNAL IN THE EARLIER YEARS, WHEREIN EXACT NATURE OF SOFTWARE EXPENSES WERE INCURRED AND THE TRIBUNAL HAS DELETED THE SAID ADDI TION BY TREATING IT AS REVENUE EXPENDITURE. 11. AFTER CONSIDERING THE MATERIAL PLACED ON RECORD , IT IS SEEN THAT THE ASSESSEE HAS DEBITED A SUM OF RS. 4,98,85,521/- , BEING PAYMENT MADE TO CLARIANT INTERNATIONAL LTD. FOR SOF TWARE DEVELOPMENT AND CONSULTING CHARGES. THE A.O. HAD D ISALLOWED THE SAID CLAIM ON THE GROUND THAT THESE EXPENSES HAVE B EEN INCURRED FOR ACQUIRING CAPITAL ASSET AND HENCE IT IS A CAPIT AL EXPENDITURE. THE A.O. NOTED THAT THOUGH, THIS ADDITION HAS BEEN DELETED BY THE LD. CIT(A) IN A.Y. 2003-04, HOWEVER, THE DEPARTMENT HAS PREFERRED AN APPEAL BEFORE THE TRIBUNAL. THE LD. CIT(A) FOLLO WING THE EARLIER YEAR ORDER OF THE CIT(A) HAS DELETED THE SAID ADDIT ION. AFTER GOING THROUGH THE EARLIER ORDERS OF THE TRIBUNAL, WE FIND THAT THE THIS ISSUE HAS BEEN DECIDED BY THE TRIBUNAL AFTER DISCUS SING THE FACTS IN A.Y. 2001-02, 2004-05 AND 2006-07. IN A.Y. 2006-07 , THIS ISSUE HAS BEEN DECIDED AFTER OBSERVING AND HOLDING AS UND ER:- 15. AFTER CONSIDERING THE FINDINGS OF THE ASSESSING OFFICER AND THE LEARNED COMMISSIONER (APPEALS) AND ALSO THE EAR LIER YEAR ORDERS OF THE TRIBUNAL, WE FIND THAT THE TRIBUNAL HAS RELIED UPON VARIOUS DECISIONS OF THE HIGH COURT, INCLUDING THAT OF THE DECISION OF THE HON'BLE JURISDICTIONAL HIGH COURT IN CIT V/S RA YCHEN RPG LTD., [2012] 346 ITR 183 (BORN.) FOR COMING TO THE CONCLU SION THAT THE EXPENDITURE INCURRED BY THE ASSESSEE ON THE SOFTWAR E WAS IN THE NATURE 7 ITA 7428/M/11 & 8 079/M/11 OF THE REVENUE EXPENDITURE. THE RELEVANT OBSERVATIO N AND THE FINDINGS OF THE TRIBUNAL ARE AS UNDER: 13. APROPOS GROUND N65; THIS ISSUE IS DISCUSSED BY A.O IN PARA3 AT PAGES 9 & 10 OF ASSESSMENT ORDER. A SUM OF RS.23 ,30,9261WAS CLAIMED BY THE ASSESSEE AS SOFTWARE EXPENSES. THIS AMOUNT REPRESENT PAYMENT MADE TO CLARIANT INTERNATIONAL LT D. TOWARDS ACQUISITION OF RIGHT TO USE THE SOFTWARE 'LOTUS NOT ES' DEVELOPED BY CLARIANT INTERNATIONAL LTD WHICH ACCORDING TO ASSES SEE IS POWERFUL, MULTIFACETED SOFTWARE THAT HELP TO WO EFFECTIVELY. IT EXTENDS THE POWER OF MESSAGING AND DATA EXCHANGE TO BRING ALL I NFORMATION WHETHER FROM NOTES OR FROM INTERNET AND OFFERS VERY USEFUL TOOLS LIKE E-MAIL, CALENDAR, TO-DO LISTS ETC. ALL CLARIAN T GROUP COMPANIES ARE INTER CONNECTED WITH 'LOTUS NOTE' AND CONNECTIVITY IS EFFECTED, ADMINISTERED. THE AO REJECTED THE CLAIM O F THE ASSESSEE OF THE EXPENDITURE BEING IN THE NATURE OF REVENUE A ND HELD THAT AS IT HAD PROVIDED ENDURING BENEFIT AND THE EX PENDITURE BEING ON ACCOUNT OF CAPITAL, THE ASSESSEE WAS ENTIT LED TO CLAIM DEPRECIATION ONLY. HE PROVIDED DEPRECIATION @ 25% A ND THE BALANCE AMOUNT OF RS.17,48,1951- WAS ADDED TO THE I NCOME OF THE ASSESSEE. THE LD. CIT(A) HAS SUSTAINED THE - AC TION OF A.0. THE ASSESSEE IS AGGRIEVED, HENCE, HAS FILED AFOREMENTIO NED GROUNDS. 13.1 IT WAS SUBMITTED BY LD. AR THAT SIMILAR EXPENS ES IN RESPECT OF A. Y 2002-03 AND 2003-04 WERE HELD TO BE ALLOWABLE AS REVENUE EXPENDITURE BY LD. CIT(A). HE FURTHER SUBMI TTED THAT THE EXPENDITURE IS IN THE NATURE OF USER OF SOFTWARE WH ICH BY NO STRETCH OF IMAGINATION CAN BE SAID TO BE OF EXPENDITURE IN THE NATURE OF CAPITAL. IT DID NOT PROVIDE ANY ENDURING BENEFIT TO THE ASSESSEE AND WAS A POWERFUL TOOL TO CARRY OUT THE WORK OF THE AS SESSEE EFFECTIVELY. RELIANCE WAS PLACED ON THE FOLLOWING DECISIONS TO CONTEND THAT THE EXPENDITURE WAS IN TH E NATURE OF REVENUE. (I) CIT VS. RAYCHEM RPG LTD., 346 ITR 183 (BORN) (II) CIT VS. ASAHI INDIA SAFETY GLASS LTD. 346 ITR 329(DEL) (ILL) CUR VS.AMWAY INDIA ENTERPRISES, 346 ITR 341 (DEL) (IV) SAN GHVI SALVI STOCK BROKER LTD, ITAT MUMBAI ( UNREPORTED) 13.2 ON THE OTHER HAND, LD. DR RELIED UPON THE ORDE R PASSED BY A. 0 AND LD. CIT(A). 8 ITA 7428/M/11 & 8 079/M/11 13.3 WE HAVE HEARD BOTH THE PARTIES AND THEIR CONTE NTIONS HAVE CAREFULLY BEEN CONSIDERED. ACCORDING TO DECISION OF HON 'BLE BOMBAY HIGH COURT IN THE CASE OF RAYCHEM RPG L TD. (SUPRA), IF THE EXPENDITURE INCURRED ON SOFTWARE AR E TO FACILITATE THE ASSESSEE'S BUSINESS OR ENABLING THE MANAGEMENT TO CONDUCT THE BUSINESS MORE EFFICIENTLY OR MORE PROFITABLY THEN IT CANNOT BE SAID TO BE IN THE NATU RE OF PROFIT MAKING AND HAS TO BE TREATED AS 'REVENUE EXPENDITUR E. SIMILARLY, HON 'BLE DELHI HIGH COURT IN THE CASE OF ASAHI INDIA SAFETY GLASS LTD (SUPRA) HELD THAT SOFTWARE EXPENDI TURE WERE REVENUE IN NATURE. IN THE CASE OF CIT VS. AMWAY IND IA ENTERPRISES (SUPRA) ALSO IT WAS HELD THAT PURCHASE OF SOFTWARE IS REVENUE EXPENDITURE. THE CONTENTIONS RA ISED BY THE ASSESSEE BEFORE AO WERE THAT THIS EXPENDITURE W AS INCURRED BY THE ASSESSEE TO EFFECTIVELY CARRY ON ITS BUSINES S HAS NOT BEEN CONTROVERTED BY ANY MATERIAL BROUGHT ON RECORD. IN THIS VIEW OF THE SITUATION, WE HOLD THAT LD. CIT(A) WAS NOT R IGHT IN UPHOLDING THE ACTION OF AO. THE EXPENDITURE INCURRE D BY THE ASSESSEE ON SOFTWARE WAS IN THE NATURE OF REVENUE, HENCE, ALLOWABLE AS AN EXPENDITURE. THIS GROUND OF THE ASS ESSEE IS ALLOWED. 16. THUS, CONSISTENT WITH THE VIEW TAKEN IN THE EARLIE R YEARS BY THE TRIBUNAL, WE ALSO HOLD THAT THE EXPENDITURE INCURRED BY THE ASSESSEE ON THE SOFTWARE IS TO BE TREATED AS RE VENUE EXPENDITURE AND, ACCORDINGLY, THE ORDER OF THE LEAR NED COMMISSIONER (APPEALS) IS AFFIRMED. GROUND NO.3, RA ISED BY THE REVENUE IS DISMISSED. 12. SINCE SIMILAR FACTS ARE PERMEATING THROUGH FO R THIS YEAR ALSO, THEREFORE, CONSISTENT VIEW TAKEN IN THE EARLIER YEA RS, WHICH IS BASED ON THE DECISION OF HONBLE JURISDICTIONAL HIGH COUR T IN THE CASE OF CIT VS. RAYCHEM RPG LTD. 346 ITR 183 (BOM), WE ALSO TREAT THESE EXPENDITURE AS REVENUE EXPENDITURE. ACCORDINGLY GR OUND 2 RAISED BY THE DEPARTMENT IS DISMISSED. 13. IN GROUND NO. 3 THE DEPARTMENT HAS CHALLENGE D THE DELETION OF DISALLOWANCE OF NON-COMPETE FEE PAID TO EX-MANAG ING DIRECTOR AMOUNTING TO RS. 154.20 LAKHS. 9 ITA 7428/M/11 & 8 079/M/11 14. BRIEF FACTS AS NOTED BY THE AO ARE THAT, IN SCHEDULE 19 OF THE PROFIT & LOSS ACCOUNT, THE ASSESSEE HAS DEBITED NON -COMPETE FEE OF RS. 154.20 LAKHS PAID TO EX-MANAGING DIRECTOR. IN RESPONSE TO THE SHOW CAUSE NOTICE, THE ASSESSEE SUBMITTED THAT THE SAID PAYMENT HAS BEEN MADE TO LATE, MR. K.J. BHARUCHA AS A NON-C OMPETE FEE ON HIS RETIREMENT FROM THE SERVICES W.E.F. MARCH 31, 2 006. THIS FEE REPRESENTED COMPENSATION FOR NOT JOINING ANY COMPA NY OR SHARE ANY EXPERTISE WITH COMPANIES HAVING SAME BUSINESS F OR A PERIOD OF THREE YEARS. SINCE SUCH A PAYMENT WAS MADE TO EX-MA NAGING DIRECTOR TO RESTRICT HIM TO SHARE HIS EXPERIENCE AN D EXPERTISE FOR A PERIOD OF 3 YEARS, SO THAT THERE IS NO IMMEDIATE TH REAT TO THE INTEREST OF ASSESSEES BUSINESS, THEREFORE, THE SAM E IS BUSINESS EXPENDITURE. HOWEVER, THE A.O. HELD THAT SUCH PAYM ENT OF NON- COMPETE FEE WILL RESULT INTO ENDURING BENEFITS TO T HE ASSESSEE. ACCORDINGLY THE SAME WAS TREATED AS CAPITAL EXPENDI TURE. 15. THE LD. CIT(A) RELYING UPON THE DECISION OF H ONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. EICHER LTD. (2008 ) 302 ITR 249 (DELHI), HELD THAT SUCH A PAYMENT WAS PAID FOR A RE STRICTION OF THREE YEARS AND THEREFORE, THERE IS NO QUESTION OF ANY EN DURING BENEFIT COMING TO THE ASSESSEE. MOREOVER, THE SAID EX-MANA GING DIRECTOR EXPIRED BEFORE THE SAID PERIOD OF THREE YEARS, THUS , SUCH A PAYMENT IS NOTHING BUT REVENUE EXPENDITURE. 16. BEFORE US, THE LD. D.R. STRONGLY RELIED UP ON THE ORDER OF THE A.O. AND SUBMITTED THAT THE PAYMENT OF NON-COMPETE FEE IS ONLY 10 ITA 7428/M/11 & 8 079/M/11 FOR ENDURING BENEFIT TO THE ASSESSEE AND THEREFORE SHOULD BE HELD AS CAPITAL EXPENDITURE. IN SUPPORT OF HIS CONTENTI ON, HE RELIED UPON THE DECISION OF HONBLE GUJARAT HIGH COURT IN THE CASE OF SHREE DIGVIJAY WOOLEN MILLS LTD. VS. CIT (1993) 204 ITR 398 (GUJ.) AND HONBLE HIGH COURT OF PUNJAB IN THE CASE OF UTT AR BHARAT EXCHANGE LTD. VS. CIT, (1965) 55 ITR 550 (PUNJ). 17. ON THE OTHER HAND, THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THIS ISSUE IS SQUARELY COVERED BY TH E DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. EIC HER LTD. (SUPRA) AND ALSO SERIES OF TRIBUNAL DECISIONS, A COMPILATIO N OF SUCH DECISIONS WERE ALSO FILED BEFORE US. HE SUBMITTED THAT THE DECISIONS RELIED UPON BY THE LD. D.R. PERTAINED TO PAYMENT FOR CERTAIN CAPITAL ASSETS WHICH ADMITTEDLY WERE IN THE NATURE OF CAPITAL EXPENDITURE. NONE OF THE CASE LAWS WERE ON CON-COMPETE FEE, THAT TO BE PAID FOR A PERIOD OF THREE YEARS. 18. AFTER CONSIDERING THE RIVAL SUBMISSIONS AN D ON PERUSAL OF FACTS AS RECORDED BY THE A.O. AND LD. CIT(A), WE FI ND THAT THE ASSESSEE HAD PAID NON-COMPETE FEE TO ITS EX-MANAGIN G DIRECTOR FOR RESTRICTING HIM TO SHARE HIS EXPERTISE OR TO JOIN A NY OTHER COMPANY IN A SIMILAR LINE OF BUSINESS OF CHEMICALS FOR A PE RIOD OF THREE YEARS ON A CONSIDERATION OF RS. 154.20 LAKHS. SINCE THE AGREEMENT FOR RESTRICTIVE COVENANT WAS ONLY FOR THE PERIOD OF THR EE YEARS TO WARD- OFF A POTENTIAL THREAT OR COMPLETION, WE ARE OF THE OPINION THAT, THERE CAN NO QUESTION OF ENDURING BENEFIT FOR A LON G PERIOD. THOUGH 11 ITA 7428/M/11 & 8 079/M/11 THE HONBLE SUPREME COURT IN CIT VS. COAL SHIPMENTS PVT. LTD. (1971) 82 ITR 902(SC), HELD THAT THE PERIOD FOR WHI CH THE RESTRICTIVE COVENANT SHOULD BE IN OPERATION TO MAKE IT REVENUE EXPENDITURE IS A MATTER OF JUDGMENT AND SUCH A JUDGMENT SHOULD BE EXERCISED HAVING REGARD TO THE FACTS AND CIRCUMSTANCES OF THE CASE. IF THE RESTRICTIVE COVENANT IS FOR A INDEFINITE PERIOD OR FOR A VERY LARGE PERIOD, THEN TECHNICALLY IT CAN BE SAID THAT THE AD VANTAGE IS FOR ENDURING CHARACTER AND HENCE, CAN BE TERMED AS CA PITAL EXPENDITURE. RELYING ON THE SAME JUDGMENT, THE HON BLE MADRAS HIGH COURT IN CIT VS. LATE G.NAIDU & OTHERS, 165 IT R 63 (MAD), HELD THAT IF THE RESTRICTIVE COVENANT GIVEN IN THE NON-COMPETE AGREEMENT IS FOR A PERIOD OF 5 YEARS, THEN IT IS ON REVENUE ACCOUNT. THIS PROPOSITION HAS BEEN RETREATED BY THE SAME HIG H COURT IN CARBORANDUM UNIVERSAL LTD. VS. JCIT, TAX APPEAL NO. 244 0F 2006, ORDER DATED 10.09.2012 IN DETAIL AFTER ANALYZING TH E AFORESAID SUPREME COURT JUDGMENT AND OTHER SEVERAL JUDGMENTS. THE RELEVANT OBSERVATION AND FINDINGS ARE AS UNDER:- 'AS FAR AS THE QUESTION AS TO WHETHER AN EXPENDITURE COULD BE A CAPITAL EXPENDITURE OR REVENUE EXPENDITURE IS CONCERNED, THE CONCEPT THAT THE EXPENDITURE YIELDING AN ADVANTAGE OF AN ENDURING NATURE WOULD BE ONLY A CAPIT AL EXPENDITURE, HAS BEEN FINE-TUNED, THAT EVEN WHEN EXPE NDITURE WAS INCURRED FOR OBTAINING ADVANTAGE OF ENDURING BENEF IT, NONETHELESS, THE SAME CAN BE TAKEN AS ONE OF REVENU E ACCOUNT. J N THE DECISION REPORTED IN [1980] 124 ITR 1 (EMPIRE JUTE CO. LTD. VS. COMMISSIONER OF INCOME TAX (S.C.)), THE APEX COURT PAINTED OUT THAT THE TEST OF ENDURING BENEFIT I S NOT A CERTAIN OR CONCLUSIVE TEST AND IT CANNOT BE APPLIED B LINDLY AND MECHANICALLY WITHOUT REGARD TO THE PARTICULAR FACTS AND 12 ITA 7428/M/11 & 8 079/M/11 CIRCUMSTANCES OF A GIVEN CASE. IN A TRANSACTION OF TRANSFER OF ALLOTMENT OF LOOM HOURS, ON THE QUESTION AS TO WHET HER IT IS A REVENUE EXPENDITURE OR A CAPITAL EXPENDITURE, THE AP EX COURT POINTED OUT THAT A PAYMENT MAY BE A REVENUE PAYMENT FROM THE POINT OF VIEW OF THE PAYER AND A CAPITAL PAYMENT FROM THE POINT OF VIEW OF THE RECEIVER AND VICE VERSA. THUS W HETHER AN EXPENDITURE IS CAPITAL OR REVENUE HAS TO BE DETERMINE D WITH REGARD TO THE NATURE OF THE TRANSACTION AND OTHER RE LEVANT FACTORS. REFERRING TO THE DECISION REPORTED IN [1965] 58 ITR 241 (PC) (COMMISSIONER OF TAXES V. NCHANGA CONSOLIDATED COPPER MINES LTD.), THE APEX COURT POINTED OUT THAT 'THERE MAY BE CASES WHERE EXPENDITURE, EVEN IF INCURRED FOR OBTAINI NG ADVANTAGE OF ENDURING BENEFIT, MAY, NONETHELESS, BE ON REVENUE ACCOUNT AND THE TEST OF ENDURING BENEFIT MAY BREAK DOWN. ... WHAT IS MATERIAL TO CONSIDER IS THE NATURE OF THE ADVANTAGE IN A COMMERCIAL SENSE AND IT IS ONLY WHERE THE ADVANTAGE IS IN THE CAPITAL FIELD THAT THE EXPENDITUR E WOULD BE DISALLOWABLE ON AN APPLICATION OF THIS TEST. IF THE ADVANTAGE CONSISTS MERELY IN FACILITATING THE ASSESSEES TRADIN G OPERATIONS OR ENAULING THE MANAGEMENT AND CONDUCT OF THE ASSESSEE'S BUSINESS TO BE CARRIED ON MORE EFFICIENT LY OR MORE PROFITABLY WHILE LEAVING THE FIXED CAPITAL UNTOUCHED, THE EXPENDITURE WOULD BE ON REVENUE ACCOUNT, EVEN THOUGH THE ADVANTAGE MAY ENDURE FOR AN INDEFINITE FUTURE. ' 15. REFERRING TO THE DECISION REPORTED IN [1965] 56 ITR 52 (SC) (BOMBAY STEAM NAVIGATION CO. [1953J P. LTD. V. CIT) A S WELL AS [1924} 8 TC 671 AT 676, (ROBERT ADDIE AND SONS' COLLIE RIES LTD. V. IRC), THE APEX COURT REFERRED TO THE WORDS OF LORD SUMNER, WHICH MAY USEFULLY BE EXTRACTED HEREIN TOO: 'IF THE OUTGOING EXPENDITURE IS SO RELATED TO THE CAR RYING ON OR THE CONDUCT OF THE BUSINESS THAT IT MAY BE REGARDED AS AN INTEGRAL PART OF THE PROFIT-EARNING PROCESS AND NOT FOR ACQUISITION OF AN ASSET OR A RIGHT OF A PERMANENT C HARACTER, THE POSSESSION OF WHICH IS A CONDITION OF THE CARRYING ON OF THE BUSINESS, THE EXPENDITURE MAY BE REGARDED AS REVENUE EXPENDITURE. SEE BOMBAY STEAM NAVIGATION CO. (1953) P . LTD. V. CIT [1965J 56 ITR 52 (SC). THE SAME TEST WAS FORMU LATED BY LORD CLYDE IN ROBERT ADDIE AND SONS' COLLIERIES LTD. V. IRC 13 ITA 7428/M/11 & 8 079/M/11 [1924} 8 TC 671, 676 (C SESS) IN THESE WORDS: 'IS IT A PART OF THE COMPANY'S WORKING EXPENSES IS IT EXPENDITURE LAI D OUT AS PART OF THE PROCESS OF PROFIT EARNING?-- OR, ON THE OTHER HAND, IS IT A CAPITAL OUTLAY?-- IS IT EXPENDITURE NECESSARY F OR THE ACQUISITION OF PROPERTY OR OF RIGHTS OF A PERMANENT CHARACTER, THE POSSESSION OF WHICH IS A CONDITION OF CARRYING O N ITS TRADE AT ELL?' IT IS CLEAR FROM THE ABOVE DISCUSSION THAT THE PAYMENT MADE BY THE ASSESSEE FOR PURCHASE OF LOOM HOURS WAS EXPENDITURE LAID OUT AS PART OF THE PROCESS OF PROFIT EARNING. IT WAS, TO USE LORD SUMNER'S WORDS, AN OUTLAY OF A BUSIN ESS 'IN ORDER TO CARRY IT ON AND TO EARN A PROFIT OUT OF THIS EXPENSE AS AN EXPENSE OF CARRYING IT ON'. [JOHN SMITH AND SON V, M OORE {1921]12 TC 266, 296 (HL)]. IT WAS PART' OF THE COS T TO, OPERATING THE PROFIT-EARNING APPARATUS AND WAS CLEAR LY IN THE NATURE OF REVENUE EXPENDITURE. ' 16. THUS THE QUESTION AS TO WHETHER AN EXPENDITURE I S REVENUE OR NOT HAS TO BE SEEN FROM THE CONTEXT OF AN EXPENDI TURE FORMING 'PART OF THE COST OF THE INCOME EARNING MAC HINE OR STRUCTURE' AS OPPOSED TO PART OF THE COST OF PERFORM ING THE INCOME-EARNING OPERATIONS' [1971] 82 ITR 902 (CIT VS . COAL SHIPMENTS P. LTD. (S.C.) 17. THUS, THE CONSISTENT GUIDING PRINCIPLES IN MATT ERS OF UNDERSTANDING AN EXPENDITURE AS A CAPITAL OR REVENUE, AS HELD BY THE APEX COURT, IS TO FIND OUT THE AIM AND OBJECT OF THE EXPENDITURE AND THE COMMERCIAL NECESSITIES OF MAKING SUCH AN EXPENDITURE. THE QUESTION HAS TO BE CONSIDERED IN THE BACKGROUND OF THE FACTS OF EACH CASE, THAT 'THE IDEA OF 'ONCE FOR ALL' PAYMENT AND 'ENDURING BENEFIT' ARE NOT TO BE TREATED AS SOMETHING AKIN TO STATUTORY CONDITIONS; NOR ARE T HE NOTIONS OF 'CAPITAL'.OR 'REVENUE' A JUDICIAL FETISH. '_- [19 89) 177 ITR 377 (ALEMBIC CHEMICAL WORKS CO. LTD.). 18. GOING BY THE ABOVE-SAID PRINCIPLE, IF ONE LOOKS AT THE DECISION REPORTED IN [1991] 191 ITR 249' (CHELPARK COM PANY LTD. VS. COMMISSIONER OF INCOME TAX), ONE MAY FIND TH AT THE DECISION THAT THE EXPENDITURE WAS A CAPITA! EXPENDITUR E AND HENCE NOT DEDUCTIBLE, RESTED IN THE CONTEXT OF THE PEC ULIAR FACTS OF THE CASE; THE PARTNERSHIP WITH WHICH THE ASSESSE E HAD THE NON-COMPETE AGREEMENT GOT DISSOLVED IMMEDIATELY AFTE R THE 14 ITA 7428/M/11 & 8 079/M/11 PAYMENT OF THE NON- COMPETE FEE AND THE POTENTIAL C OMPETITOR HAD VANISHED, ON THESE FACTS, THIS COURT OBSERVED THAT , WHATEVER THE ASSESSEE HAD PAID FOR WAS OF PERMANENT O R ENDURING QUALITY, IN THE SENSE THAT COMPLETION HAD BE EN TOTALLY ELIMINATED AND PROTECTION HAD BEEN ACQUIRED FOR THE BUS INESS OF THE ASSESSEE AS A WHOLE. WE DO NOT FIND THAT THE O NE BASED ON THE FACTS OF THE SAID DECISION. THE QUESTION HEREI N AS TO WHETHER NON-COMPETE FEE PAID TO THE EX-MANAGING DIRE CTOR WAS A REVENUE OR A CAPITA/EXPENDITURE, HAS TO BE SEE N IN THE' CONTEXT OF THE FACTS OF THIS CASE AND THE CIRCUMSTAN CES IN WHICH THE PAYMENTS WERE MADE. 19. IT IS NOT DENIED BY THE REVENUE THAT U. MONNNRAO WAS THE CHAIRMAN AND MANAGING DIRECTOR OF SOME OF THE COMPAN IES WHICH GO T MERGED WITH THE ASSESSEE COMPANY. THE SA ID U. MOHANRAO HAD ACCESS TO ALL INFORMATION STARTING FROM MANUFACTURING PROCESS, KNOWHOW TO THE CLIENTELE AND THE PRODUCTS, INCLUDING THE PRICING OF THE PRODUCTS. BY A PROCESS OF AMALGAMATION, THE ASSESSEE HAD ACQUIRED THE BUSINESS OF THE AMALGAMATING COMPANIES. HOWEVER, FOR THE FRUITFUL E XERCISE OF ITS BUSINESS AS A BUSINESS PROPOSITION, THE ASSESSE E THOUGHT IT FIT TO ENTER INTO A NON-COMPETE AGREEMENT WITH A PE RSON WHO HAD THE KNOWLEDGE OF THE ENTIRE OPERATIONS, SO AS TO GET THE FULL YIELD OF THE AMALGAMATED COMPANY'S BUSINESS. IN THAT CONTEXT, RIGHTLY, THE ASSESSEE TOOK A COMMERCIAL DEC ISION TO PAY NON- COMPETE FEE TO U. MOHANRAO AND GOING BY THE DECISION OF THE APEX COURT, PARTICULARLY THE DECISION REPORTED IN [1971} 82 ITR 902 (CIT VS. COAL SHIPMENT, P. LTD (S. C.)), THAT THE PAYMENT WAS IN RESPECT OF THE PERFORMING O F THE BUSINESS OF THE ASSESSEE, WE HAVE NO HESITATION IN HOLDING THAT THE EXPENDITURE IS ONLY ON REVENUE ACCOUNT AND NOT ON CAPITAL ACCOUNT. IN THE CIRCUMSTANCES, WE ACCEPT TH E CASE OF THE ASSESSEE, SET ASIDE THE ORDER OF THE TRIBUNAL AND ALLOW THE TAX CASE. 20. IT MAY BE POINTED OUT THAT IN THE ASSESSEE'S OW N CASE RELATING TO THE ASSESSMENT YEARS 1998-99, 1999-2000 IN R.C.NOS.97 AND 98 OF 2008, BY ORDER DATED 06.04.2011, QUESTION NOS.2 AND 4 HEREIN WERE RAISED BEFORE THIS C OURT. THE FIRST QUESTION RELATING TO SCRAP SALES WAS CONS IDERED AND 15 ITA 7428/M/11 & 8 079/M/11 ANSWERED AGAINST THE ASSESSEE, REFERRING TO THE DECIS ION OF THE TRIBUNAL REPORTED IN 97 ITO 306 (JCIT VS. VIRUDHUNAG AR TEXTILES LIMITED). THE SECOND QUESTION ALSO WAS ANSW ERED AGAINST THE ASSESSEE, FOLLOWING THE DECISION OF THIS COURT REPORTED IN [2006J 282 ITR 389 (MAD.) (CIT VS. CHINNAP ANDI) AND THE THIRD QUESTION WAS ALSO DECIDED AGAINST THE ASS ESSEE FOLLOWING THE DECISION REPORTED IN [1993} 199 ITR 43 (E SCORTS LTD VS. UNION F INDIA). 21. AS FAR AS THE FIRST QUESTION IS CONCERNED, WE HA VE REFERRED TO THE DECISION OF THE APEX COURT TO GRANT RELIEF TO THE ASSESSEE. AS FAR AS THE SECOND QUESTION IS CONCERNED, AGAIN, WE HAVE REFERRED TO THE DECISION REPORTED IN [2012] 343 ITR 89 (SC) (ACG ASSOCIATED CAPSULES PVT. LTD. VS. COMMISSION ER OF INCOME- TAX (SE)) TO GRANT RELIEF TO THE ASSESSEE. I N THE CIRCUMSTANCES, WE HAVE CONSIDERED THE SAID QUESTIONS IN FAVOUR OF THE ASSESSEE AND HAD NOT FOLLOWED THE DECISIO N OF THIS COURT RENDERED IN THE ASSESSEE'S OWN CASE. AS F AR AS THE THIRD QUESTION ON THE QUESTION OF DEPRECIATION UNDER S ECTION 35AB IS CONCERNED, ON FACTS, WE HAVE HELD THAT AGAIN ST THE ASSESSEE AND THE SAME IS DIFFERENT FROM ASSESSEE'S O WN DECIDED CASE, ALTHOUGH ON A DIFFERENT GROUND. 19. HOWEVER, SUCH A PAYMENT IS ALSO TO BE SEEN FRO M THE CONTEXT OF COMMERCIAL AND BUSINESS EXPEDIENCY. IF T HE OUTGOING EXPENDITURE IS SO INEXTRICABLY LINKED OR RELATED TO CARRYING ON OR CONDUCT OF THE BUSINESS, THAT IS, IT CAN BE REGARDE D AS INTEGRAL PART OF THE PROFIT EARNING PROCESS AND NOT FOR ANY ACQUI SITION OF ASSET OR A RIGHT OF PERMANENT CHARACTER AND INCURRING OF THE EXPENDITURE IS A CONDITION FOR CARRYING ON THE BUSINESS, THEN SUCH AN EXPENDITURE MAY BE REGARDED AS REVENUE EXPENDITURE. HERE THE AG REEMENT FOR PAYMENT OF NON-COMPETE FEE WAS ONLY TO PROTECT TH E EXISTING BUSINESS FOR A TEMPORARY PERIOD TO WARD OFF COMPLET ION SO THAT ASSESSEE COMPANY CAN GET STABILIZING PERIOD WITHOUT ITS LONG 16 ITA 7428/M/11 & 8 079/M/11 SERVING MD. HERE NO NEW ASSETS OF ANY ENDURING BENE FIT HAS ARISEN TO THE ASSESSEE ON SUCH PAYMENT. IF THE ADVANTAGE I S NOT FOR LONGER PERIOD AND NOT ENDURING IN NATURE, THEN SUCH A PAYM ENT OF NON- COMPETE FEE IS NOTHING BUT BUSINESS EXPENDITURE WHI CH IS ON REVENUE ACCOUNT. ON SIMILAR FACTS AND CIRCUMSTANCE S, THE HONBLE DELHI HIGH COURT ALSO IN THE CASE OF EICHER LTD. (S UPRA), AFTER DISCUSSING VARIOUS CASE LAWS CAME TO THE CONCLUSION THAT PAYMENT OF NON-COMPETE FEE FOR ELIMINATING COMPETITION IN T HE TWO WHEELER BUSINESS CANNOT BE HELD THAT ASSESSEE HAS ACQUIRED CAPITAL ASSET OF ENDURING NATURE. THE JUDGMENTS RELIED BY THE LD. DR ARE NOT ONLY DISTINGUISHABLE ON FACTS BUT ALSO ON RATIO DECENDI , HENCE NOT APPLICABLE IN THE PRESENT CASE. THUS ON THESE FACTS , WE HOLD THAT SUCH A PAYMENT OF NON-COMPETE FEE IS ALLOWABLE AS A REVENUE EXPENDITURE AND THE ORDER OF LD. CIT(A) ON THIS SCO RE IS CONFIRMED. REVENUES GROUND IS THUS DISMISSED. 20. IN THE RESULT, APPEAL OF THE ASSESSEE IN ITA NO. 8079/MUM/2011 IS ALLOWED FOR STATISTICAL PURPOSE, WHEREAS APPEAL OF THE REVENUE IN ITA NO. 7428/MUM/2011 IS PARTLY A LLOWED FOR STATISTICAL PURPOSE. 17 ITA 7428/M/11 & 8 079/M/11 ORDER PRONOUNCED IN THE OPEN COURT ON 19 TH NOVEMBER, 2014 () ' %& *( + 19 TH NOVEMBER & ' , SD/- SD/- (SANJAY ARORA) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI; *( DATED 19.11.2014 . . ./ RK , SR. PS () ' #- .-# / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. ! / THE RESPONDENT. 3. / ( ) / THE CIT(A) 1, MUMBAI 4. / / CIT 1, MUMBAI 5. -0 , # , , / DR, ITAT, MUMBAI C BENCH 6. , 1 2 / GUARD FILE. () / BY ORDER, ! -# # //TRUE COPY// 3 / 4 5 (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI