Thermax Ltd., Pune V. JTCIT SPECIAL RG. 3, Pune

ITA 970/PUN/2001

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 84889 (ITAT-PUNE)
• Duration Of Justice: 13 year(s) 2 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-09-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 1997-1998
• Appeal Filed On: 18-06-2001
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: VERMA
• Assessee Lawyers: H P MAHAJANI; R D ONKAR
• Keywords: Capital asset; Gift; Business income; Business expenditure; Salary income; Opportunity of being heard; Rule of consistency; Cost of acquisition; Bad and doubtful debts; Capital receipt; Commercial expediency; Revenue expenditure
• Section: 43B; 143(3); 2(14); 80HHC; 234B; 37(1); 145; 37; 56; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE BEFORE SHRI SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER AND SHRI G S PANNU, ACCOUNTANT MEMBER ITA NO.970/PN/2001 (A.Y: 1997-98) THERMAX LIMITED 4 BOMBAY PUNE ROAD SHIVAJINAGAR, PUNE 411 005 APPELLANT VS. JT.CIT, SPL. RANGE-3, PUNE RESPONDENT ITA NO.947/PN/2001 (A.Y: 1997-98) JT.CIT, SPL. RANGE-3, PUNE APPELLANT VS. THERMAX LIMITED 4 BOMBAY PUNE ROAD SHIVAJINAGAR, PUNE 411 005 RESPONDENT ITA NO.946/PN/2001 (A.Y: 1997-98) JT.CIT, SPL. RANGE-3, PUNE APPELLANT VS. MRS ARNAVAZ R AGA, 12 BOAT CLUB ROAD, PUNE 411 001 RESPONDENT ASSESSEE BY : S/SHRI H.P. MAHAJANI AND R.D. ONKAR DEPARTMENT BY : SMT. M.S. VERMA, CIT ORDER PER SHAILENDRA KUMAR YADAV, JM : THE CAPTIONED TWO CROSS-APPEALS AND ONE BY THE ASSE SSEE INVOLVE COMMON ISSUES AND WERE HEARD TOGETHER AND A RE BEING DISPOSED OF BY WAY OF A CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE AND BREVITY. 2. WE SHALL FIRST TAKE UP ASSESSEES APPEAL IN ITA NO 970/PN/01 PERTAINING TO THE ASSESSMENT YEAR 1997-98 , WHICH IS DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF I NCOME-TAX (APPEALS)-I, PUNE DATED 13.03.2001, WHICH IN TURN, HAS ARISEN FROM AN ORDER UNDER SECTION 143(3) PASSED BY THE AS SESSING OFFICER PERTAINING TO THE ASSESSMENT YEAR 1997-98. THE ASSESSEE HAS FILED THE APPEAL ON THE FOLLOWING GROUNDS. 1. THE LEARNED CIT (APPEALS) ERRED IN NOT ACCEPTING T HE CONTENTION OF THE APPELLANT THAT INDIVIDUAL INSTANC ES OF EXPENDITURE ON ENTERTAINMENT IN EXCESS OF RS.10,000 /- ALONE FELL WITHIN THE AMBIT OF SECTION 37(2) OF THE I.T. ACT, 1961. THE LEARNED CIT (APPEALS) ACCORDINGLY OU GHT TO HAVE DIRECTED INCLUSION OF ONLY SUCH INDIVIDUAL INSTANCES OF EXPENSES ON ENTERTAINMENT, AS WERE IN EXCESS OF RS.10,000/- FOR THE PURPOSES OF COMPUTING DISALLOWANCE U/S 37(2). WITHOUT PREJUDICE TO THE ABOVE, THE LEARNED CIT (APPEALS) ERRED IN NOT ACCEPTING THE CONTENTION OF THE APPELLANT THAT AT LEAST 60% OF THE TOTAL EXPENDITUR E ON ENTERTAINMENT RELATED TO EMPLOYEES PARTICIPATING IN THE EXTENSION OF HOSPITALITY AND INSTEAD CONFIRMING EXCLUSION OF ONLY 15% THEREOF WHILE COMPUTING DISALLOWANCE U/S 37(2). 2. THE LEARNED CIT (APPEALS) FURTHER ERRED IN CONFIRM ING REJECTION OF THE APPELLANTS CLAIM FOR DEDUCTION OF PROPORTIONATE PREMIUM ON LEASEHOLD LAND AMORTISED AND CHARGED TO THE PROFIT & LOSS ACCOUNT OF THE YEA R IN QUESTION. 3. THE LEARNED CIT (APPEALS) FURTHER ERRED IN CONFIRM ING REJECTION OF THE APPELLANTS CLAIM FOR DEDUCTION F OR THE FULL AMOUNT OF RS.3,63,92,163/- CLAIMED BY THE APPELLANT, BEING PROCESS KNOW-HOW FEES. THE LEARNED CIT (APPEALS) OUGHT TO HAVE HELD THAT T HE AMOUNT IN QUESTION WAS `NOT COVERED BY THE PROVISIO NS OF SECTION 35AB OF THE INCOME-TAX ACT 1961 AND, BEI NG OF REVENUE NATURE, THE WHOLE OF IT WAS ALLOWABLE UN DER SEC.37. 4. THE LEARNED CIT(A) FURTHER ERRED IN CONFIRMING DISALLOWANCE OF A SUM OF RS.1,10,959/- UNDER RULE 6 B OF THE I.T. RULES, 1962. THE LEARNED CIT(A) OUGHT TO HAVE HELD THAT THE PROVISIONS OF THE SAID RULE WERE NOT APPLICABLE TO THE EXPENDITURE IN QUESTION AND THAT THE APPELLANT HAD NOT FAILED TO DISCHARGE THE ONUS CAST UPON IT, TO PROVE THAT THE EXPENDITURE IN QUESTION HAD NO ADVERTISEMENT VALUE AND THAT THE EXPENDITURE IN QUESTION WAS IN F ACT INCURRED FOR BUSINESS PURPOSES. 5. THE LEARNED CIT (APPEALS) FURTHER ERRED IN CONF IRMING DISALLOWANCE PROVISION OF RS.2,13,34,281/- MADE BY THE APPELLANT IN RESPECT OF WARRANTY OBLIGATIONS. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN VIEW OF THE METHOD OF ACCOUNTING CONSISTENTLY FOLLOWED BY THE APPELLANT AND ACCEPTED BY THE DEPARTMENT IN THE PAST, THE LEARNED CIT (APPEALS) OUGHT NOT TO HAVE HELD THAT THE LIABILITY IN QUESTI ON WAS OF A CONTINGENT NATURE WHICH DID NOT ACCRUE AT THE TIME WHEN THE APPELLANT MADE A PROVISION FOR IT. THE LEARNED CIT (APPEALS) FURTHER ERRED IN CONFIRMI NG THE VIEW TAKEN BY THE ASSESSING OFFICER THAT THE LIABILITY ON ACCOUNT OF WARRANTY OBLIGATION ACCRUED ONLY WHEN A CLAIM IS MADE BY THE CUSTOMER AND ACCEPTED BY THE APPELLANT. 6. THE LEARNED CIT(A) ERRED IN CONFIRMING DISALLOW ANCE OF PROVISION FOR LEAVE ENCASHMENT OF RS.23,42,,000/- REJECTING THE CONTENTION OF THE APPELLANT THAT SUCH ACTUARIALLY DETERMINED LIABILITY WAS A CRYSTALLIZED LIABILITY WHICH WAS ALLOWABLE IN THE YEAR UNDER APP EAL IN ANY EVENT, THE DISTINCTION DRAWN THE LD CIT(A) O N THE FACTS OF THE APPELLANTS CASE FROM THOSE OF THE SC DECISION IN THE CASE OF BHARAT EARTH MOVERS LTD (11 2 TAXMANN PG.61) IS NOT APT AND DETERMINATIVE OF THE ISSUE OF ALLOWABILITY OF THE EXPENDITURE IN QUESTIO N. 7. THE LD. CIT(A) ERRED IN HOLDING THAT ONLY A SUM OF RS 884.86 LACS WAS NOT TO BE INCLUDED IN THE APPELLANT S INCOME, REJECTING THE APPELLANTS CONTENTION THAT T HE ENTIRE AMOUNT OF RS 1230.11 LACS REPRESENTING PROVISIONS MADE BY IT IN ACCORDANCE WITH REQUIREMEN TS OF ACCOUNTING STANDARDS 7, ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA, WAS ON FACTS AND IN LAW PROPERLY ALLOWABLE IN COMPUTING HE APPELLANTS BUSINESS INCOME AND/OR WAS NOT INCLUDIBLE IN THE APPELLANTS BUSINESS INCOME. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW AND IN VIEW OF THE METHOD OF ACCOUNTING REGULARLY FOLLOWED BY THE APPELLANT AND ACCEPTED BY THE DEPARTMENT IN THE PAST, THE LD CIT(A) OUGHT TO HAVE ACCEPTED THE AFORESAID CONTENTION OF THE APPELLANT THAT THE WHOLE OF THE SAID SUM OF RS 1230.11 LACS DEDUCTIBLE AS CLAIMED BY THE APPELLANT. 8. IN THE MATTER OF APPELLANTS CLAIM FOR DEDUCTIO N UNDER SEC.80-I/80-IA, THE LEARNED CIT (A) FURTHER ERRED IN CONFIRMING THAT THE FOLLOWING ITEMS OF INCOME WERE NOT IN THE NATURE OF INCOME DERIVED FROM CONCERNED INDUSTRIAL UNDERTAKINGS SO AS TO BE ELIGIBLE FOR DEDUCTION UNDER SEC.80-I/80-IA: NAME OF THE UNDERTAKING AMOUNT TOTAL AMOUN T PARTICULARS DISALLOWED DISALLOWED 1. WOOD-PACK A) OTHER INCOME 1.91 LACS 1.91 LACS 2. CHILLER/HEAT PUMP A) FLUCTUATION IN RATE OF EXCHANGE 7.79 LACS B) PREMIUM ON FORWARD CONTRACTS 8.35 LACS C) SERVICE CHARGES 3.92 LACS 20.06 LACS 3) PROCESS INTEGRATED BOILER A) FLUCTUATION IN RATE OF EXCHANGE 1.05 LACS 1.05 LACS 4) FIRESIDE CHEMICALS A) INTEREST ON INVESTMENT 0.11 LACS B) INTEREST OTHERS 1.59 LACS 1.70 LACS 5) KHOPOLI PLANT A) FLUCTUATION IN RATE OF EXCHANGE 106.81 LACS B) PREMIUM ON FORWARD CONTRACTS 43.12 LACS C) INTEREST ON INVESTMENT 0.11 LACS INTEREST OTHERS 1.59 LACS 151.63 LACS 9. THE LEARNED CIT(A) FURTHER ERRED IN NOT ACCEPTIN G THE APPELLANTS CONTENTION THAT RETENTION MONEY FORMI NG PART OF SALES, OUGHT TO BE EXCLUDED WHILE COMPUTING THE APPELLANTS BUSINESS INCOME FOR THE YEAR UNDER APPEAL INASMUCH AS, TO THAT EXTENT, INCOME HAD NOT ACCRUED TO THE APPELLANT. THE APPELLANTS BUSINESS INCOME BE, ACCORDINGLY REDUCED BY THE AMOUNT OF RETENTION MONEY INCLUDED IN SALES. 10. IN THE MATTER OF DEDUCTION UNDER SEC.80-HHC, T HE CIT (APPEALS) ERRED IN CONFIRMING I) REDUCTION FROM PROFITS DERIVED FROM EXPORT OF MANUFACTURED GOODS THE LOSS SUFFERED FROM EXPORT OF TRADING GOODS. THE LEARNED CIT (APPEALS) OUGHT TO HAVE ACCEPTED THE CONTENTION OF THE APPELLANT THAT SUCH LOSS FROM EXPORT OF TRADING GOODS HAD TO BE IGNORED FOR THE PURPOSE OF SEC.80-HHC AND DEDUCTION THERE UNDER OUGHT TO HAVE BEEN ALLOWED ONLY WITH REFERENCE TO THE PROFITS DERIVED FROM EXPORT OF MANUFACTURED GOODS. II) TREATMENT OF THE FOLLOWING ITEMS AS FORMING PA RT OF TOTAL TURNOVER - RS. A)EXCISE DUTY COLLECTED 21,34,01,875 B)SALES - TAX COLLECTED 28,80,03,563 C)INSURANCE CLAIM 16,55,961 D)BAD DEBTS RECOVERED 50,76,710 E)AMOUNT WRITTEN BACK 74,40,301 F)CLAIM & REFUND CUSTOM 3,12,299 G)SALES TAX REFUND 34,84,282 H)FLUCTUATION IN RATE OF EXCHANGE 1,60,75,960 I)CREDIT BALANCE APP. 46,46,943 J)SALE OF SCRAP 2,67,38,194 THE LEARNED CIT (APPEALS) OUGHT TO HAVE ACCEPTED THE CONTENTION OF THE APPELLANT THAT NONE OF THE AFORESAID ITEMS HAD THE CHARACTER OF TURNOVER IN THE CONTEXT OF SECTION 80-HHC. III) EXCLUSION OF 90% OF THE FOLLOWING ITEMS FOR THE PURPOSES OF COMPUTING PROFITS OF THE BUSINESS IN TERMS OF SECTION 80HHC: DISCOUNT RECEIVED RS 2,21,238 LEASE RENTAL RECEIPT RS 1,15,51,947 WAREHOUSING CHARGES RECOVERED RS 6,750 MISC. INCOME/RECEIPTS RS 61,54,612 PREMIUM ON FORWARD CONTRACTS RS 42,74,160 ------------------- RS 2,22,08,707 ============= IV) IN ANY EVENT THE LD CIT(A) OUGHT TO HAVE DIRECTED THAT THE PROFITS OF THE BUSINESS SHOULD BE INCREASED BY 10% OF ALL INCOME ASSESSED UNDER THE HEAD OTHER SOURCES INASMUCH AS TO THAT EXTENT, EXPENDITURE MUST BE DEEMED TO HAVE BEEN INCURRED FOR EARNING SUCH INCOME, RESULTING IN A PRO TANTO REDUCTION IN EXPENDITURE ATTRIBUTABLE TO PROFIT & GAINS OF BUSINESS. V) THAT RS1,54,01,000/- AND RS 9,85,390 WERE NOT ELIGIBLE FOR INCLUSION IN PROFITS OF BUSINESS FOR THE PURPOSES OF SECTION 80-HHC. VI) NOT ACCEPTING THE CONTENTION OF THE APPELLANT THAT ONLY 90% OF THE NET INCOME, OF THE NATURE OF ITEMS SPECIFIED IN (III) ABOVE AS WELL AS INTEREST INCOME , I.E. INCOME LESS EXPENSES SHOULD BE REDUCED WHILE ARRIVING AT THE FIGURE OF PROFIT OF BUSINESS. 11. THE LD CIT(A) FURTHER ERRED IN CONFIRMING REJEC TION OF THE APPELLANTS CLAIM FOR DEDUCTION OF A SUM OF RS 2 CRORES PAID BY THE APPELLANT AS A TESTIMONIAL TO MR S A.R. AGA. WITHOUT PREJUDICE TO THE GENERALITY OF THE ABOVE GROUND, THE LD CIT(A) ERRED IN TAKING A VIEW THAT T HE SAID EXPENDITURE WAS IN THE NATURE OF EX-GRATIA AND WAS THEREFORE, NOT ALLOWABLE EITHER U/S 37(1) OR AN Y OTHER PROVISION OF THE ACT. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE LD CIT(A) OUGHT TO HAVE HELD THE SAID EXPENDITURE WAS INCURRED WHOLLY OR EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS AND WAS ALLOWABLE AS SUCH. 12. THE LD CIT(A) ERRED IN HOLDING THAT THE AMOUNT OF RS 3 CRORES ACCRUED BY THE APPELLANT UNDER NON-COMPETE COVENANT WAS ASSESSABLE AS INCOME OF THE APPELLANT ALONGWITH A FURTHER SUM OF RS 3 CRORES RECEIVED TOWARDS TRANSFER OF BUSINESS OF THE COMPANY. THE LD CIT(A) OUGHT TO HAVE ACCEPTED THE CONTENTION OF THE APPELLANT THAT BOTH THE AMOUNTS IN QUESTION WER E IN THE NATURE OF CAPITAL RECEIPTS NOT EXIGIBLE TO T AX. THE LD CIT(A) ERRED IN CLUBBING THE RECEIPT OF RS 3 CRORES UNDER NON-COMPETE AGREEMENT WITH RS 3 CRORES RECEIVED UNDER AGREEMENT FOR TRANSFER OF BUSINESS. THE LD CIT(A) ALSO ERRED IN HOLDING THAT THE APPELL ANT HAD NOT TRANSFERRED A SOURCE OF INCOME AS CONTENDED BY IT AND FOR THAT REASON THE SAID AMOUNTS WERE NOT IN THE NATURE OF CAPITAL RECEIPTS. IN THE ALTERNATIVE THE LD. CIT(A) ERRED IN HOLDING THAT EVEN IF IN THE NATURE OF CAPITAL RECEIPT, THE PROVI SIONS OF SECTION 50 WERE APPLICABLE THERETO. THE LD. CIT(A) OUGHT TO HAVE ATLEAST ACCEPTED THE ALTERNATE CONTENTION OF THE APPELLANT THAT THE AMOU NTS WERE ASSESSABLE AT THE RATE APPLICABLE TO LONG TERM CAPITAL GAINS. THE LD.CIT(A) OUGHT TO HAVE ACCEPTED THE VARIOUS FA CETS OF THE GROUNDS TAKEN BEFORE HIM AND THE ARGUMENTS ADVANCED BEFORE HIM AND HELD THAT THE AMOUNTS WERE NOT IN ANY CIRCUMSTANCES TAXABLE AS INCOME OF THE APPELLANT. 13. THE LEARNED CIT(A) ERRED IN HOLDING THAT A SUM OF RS.9,15,250/- WAS ATTRIBUTABLE TO DIVIDEND INCOME WHILE COMPUTING DEDUCTION U/S 80M 14. THE LEARNED CIT(A) ERRED IN TAKING THE VIEW THA T THE MATTER IN CONNECTION WITH LEVY OF INTEREST U/S 234B IS NOT APPEALABLE. YOUR APPELLANT RESERVES THE RIGHT TO ADD TO, ALTER OR AMEND ANY OF THE ABOVE GROUNDS OF APPEAL, IF NECESSARY. 3. GROUND NO. 1 (PARA 1) OF THE APPEAL RAISED BY THE ASSESSEE READS AS FOLLOWS: THE LEARNED CIT (APPEALS) ERRED IN NOT ACCEPTING T HE CONTENTION OF THE APPELLANT THAT INDIVIDUAL INSTANC ES OF EXPENDITURE ON ENTERTAINMENT IN EXCESS OF RS.10,000 /- ALONE FELL WITHIN THE AMBIT OF SECTION 37(2) OF THE I.T. ACT, 1961. THE LEARNED CIT (APPEALS) ACCORDINGLY OUGHT T O HAVE DIRECTED INCLUSION OF ONLY SUCH INDIVIDUAL INSTANCE S OF EXPENSES ON ENTERTAINMENT, AS WERE IN EXCESS OF RS.10,000/- FOR THE PURPOSES OF COMPUTING DISALLOWA NCE U/S 37(2). 3.1 AT THE TIME OF HEARING, THE LEARNED COUNSEL FOR THE ASSESSEE DID NOT PRESS THE ABOVE GROUND, AND, THEREFORE, THE SAID GROUND STANDS DISMISSED. 3.2 GROUND NO. 1 (PARA 2) RAISED BY THE ASSESSEE IS AS FOLLOWS: WITHOUT PREJUDICE TO THE ABOVE, THE LEARNED CIT (A PPEALS) ERRED IN NOT ACCEPTING THE CONTENTION OF THE APPELL ANT THAT AT LEAST 60% OF THE TOTAL EXPENDITURE ON ENTERTAINM ENT RELATED TO EMPLOYEES PARTICIPATING IN THE EXTENSION OF HOSPITALITY AND INSTEAD CONFIRMING EXCLUSION OF ONL Y 15% THEREOF WHILE COMPUTING DISALLOWANCE U/S 37(2). 3.2.1 AT THE TIME OF HEARING, IT WAS A COMMON GROU ND BETWEEN THE PARTIES THAT SIMILAR ISSUE HAD COME UP FOR CONSIDERATION BEFORE OUR CO-ORDINATE BENCH IN THE A SSESSEES OWN CASE FOR THE ASSESSMENT YEARS 1994-95 AND 1995-96 A ND THE TRIBUNAL VIDE ORDER DATED 29.1.2009 IN ITA NO 855/P N/2000 FOR ASSESSMENT YEAR 1994-95 AND IN ITA NO 252/PN/01 DAT ED 30.6.2011 FOR ASSESSMENT YEAR 1995-96 HAS CONFIRMED THE ORDERS OF THE LOWER AUTHORITIES IN THIS REGARD. SINCE THE ACTION OF THE LOWER AUTHORITIES IS IN CONFORMITY WITH THE PRECEDE NT IN THE ASSESSEES OWN CASE, THEREFORE, WE DISMISS THE GROU ND OF APPEAL RAISED BY THE ASSESSEE. 4. GROUND NO 2 RAISED BY THE ASSESSEE READS AS UN DER: THE LEARNED CIT (APPEALS) FURTHER ERRED IN CONFIRM ING REJECTION OF THE APPELLANTS CLAIM FOR DEDUCTION OF PROPORTIONATE PREMIUM ON LEASEHOLD LAND AMORTISED A ND CHARGED TO THE PROFIT & LOSS ACCOUNT OF THE YEAR IN QUESTION. 4.1 AT THE TIME OF HEARING, IT WAS COMMON GROUND BE TWEEN THE PARTIES THAT THIS GROUND IS COVERED AGAINST THE ASS ESSEE IN VIEW OF THE DECISION OF THE SPECIAL BENCH IN THE CASE OF MUKUND LIMITED 106 ITD 231(BOM) (SB). IT WAS ALSO NOTICED THAT SIMILAR GROUND HAS BEEN DECIDED AGAINST THE ASSESSEE BY THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 199 4-95 AND 1995-96, VIDE ORDERS DATED 29.1.2009 AND 30.6.2011( SUPRA). IN VIEW OF THE ABOVE ADMITTED POSITION, THE CIT(A) WAS JUSTIFIED IN CONFIRMING REJECTION OF ASSESSEES CLAIM FOR DEDUCT ION OF PROPORTIONATE ON LEASEHOLD LAND AMORTIZED AND CHARG ED TO PROFIT & LOSS ACCOUNT OF THE YEAR IN QUESTION. ACCORDINGL Y, THIS GROUND OF APPEAL IS DECIDED AGAINST THE ASSESSEE. 5. GROUND NO 3 RAISED BY THE ASSESSEE READS AS UNDER: THE LEARNED CIT (APPEALS) FURTHER ERRED IN CONFIRM ING REJECTION OF THE APPELLANTS CLAIM FOR DEDUCTION F OR THE FULL AMOUNT OF RS.3,63,92,163/- CLAIMED BY THE APPELLANT , BEING PROCESS KNOW-HOW FEES. THE LEARNED CIT (APPEALS) OUGHT TO HAVE HELD THAT T HE AMOUNT IN QUESTION WAS `NOT COVERED BY THE PROVISIO NS OF SECTION 35AB OF THE INCOME-TAX ACT 1961 AND, BEING OF REVENUE NATURE, THE WHOLE OF IT WAS ALLOWABLE UNDER SEC.37. 5.1 THE FACTS, IN BRIEF, ARE THAT AS PER THE COMPUT ATION OF THE INCOME, THE ASSESSEE CLAIMED DEDUCTION OF RS.3,63,9 2,163/- BEING FEES TOWARDS PROCESS KNOW-HOW, THOUGH IN THE BOOKS OF ACCOUNT, SUCH COST WAS TREATED AS DEFERRED REVENUE EXPENDITURE AND AMORTIZED IN EQUAL INSTALLMENTS OVER A PERIOD O F SIX YEARS. AS PER THE ASSESSEE, THE ENTIRE EXPENDITURE OF RS. 3,6 3,92,163/- WAS REVENUE IN NATURE SINCE IT HAD ONLY OBTAINED USE OF PROCESS KNOW-HOW AND THE EXPENDITURE WAS THEREFORE NOT GOVE RNED BY THE PROVISIONS OF SECTION 35AB OF THE ACT, BUT WAS ALLO WABLE U/S 37(1) OF THE ACT. HOWEVER, THE ASSESSING OFFICER AS WELL AS THE COMMISSIONER OF INCOME-TAX (APPEALS) BY FOLLOWING T HEIR STAND IN THE EARLIER ASSESSMENT YEARS, HELD THAT THE ASSESSE E COMPANY WAS ENTITLED FOR 1/6 TH DEDUCTION AS ENUMERATED IN SECTION 35AB OF THE ACT. 5.2 BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE DREW OUR ATTENTION TO CO-OPERATION AGREEMENT ENTERED INTO WI TH OSCHATZ GMBH, GERMANY PLACED AT PAGES 79 TO 84 OF THE PAPER BOOK AND CONTENDED THAT THE SAID AGREEMENT IS PROJECT SPECIF IC AND THE CLAIM OF THE ASSESSEE BE ALLOWED UNDER SECTION 37(1 ) OF THE ACT BEING DIRECT COST OF THE CONCERNED PROJECT. THE LEA RNED DEPARTMENTAL REPRESENTATIVE, ON THE OTHER HAND, SUP PORTED THE ORDERS OF THE AUTHORITIES BELOW. 5.3 WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS. WE FIND THAT IDENTICAL ISSUE HAD COME UP FOR CONSIDERATION BEFORE OUR CO- ORDINATE BENCH IN ASSESSEES CASE FOR ASSESSMENT YE AR 1995-96 AND THE TRIBUNAL VIDE ORDER DATED 30.6.2011 HAS DEA LT WITH THIS ISSUE IN DETAIL AND ULTIMATELY RESTORED THE ISSUE T O THE FILE OF THE ASSESSING OFFICER WITH CERTAIN DIRECTIONS. FOR THE SAKE OF BREVITY, WE EXTRACT BELOW THE RELEVANT OBSERVATIONS OF THE T RIBUNAL: 16. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISS IONS. BEFORE ADJUDICATING ON THE DISPUTE RAISED BY THE AS SESSEE, A BRIEF REFERENCE TO THE BACKGROUND IS NECESSARY. IN THE IMPUGNED ASSESSMENT YEAR, THE ASSESSING OFFICER NOT ICED THAT IN THE COMPUTATION OF INCOME ANNEXED TO THE RE TURN OF INCOME, THE ASSESSEE HAD CLAIMED A DEDUCTION OF RS 1,84,28,945/- ON ACCOUNT OF FEES PAID TOWARDS PROCE SS KNOW-HOW. HOWEVER, IN THE BOOKS OF ACCOUNT SUCH EXPENDITURE INCURRED ON IMPORTED TECHNICAL KNOW-HOW (INCLUDING PROCESS KNOW-HOW) WAS TREATED AS A DEFER RED REVENUE EXPENDITURE AND AMORTIZED IN EQUATED INSTAL MENTS OVER A PERIOD OF SIX YEARS. ACCORDINGLY, IN THE BOO KS OF ACCOUNT AN AMOUNT OF RS 62,31,302/- WAS WRITTEN OFF , WHILE IN THE COMPUTATION OF INCOME SUCH AMOUNT WAS ADDED BACK AND THE FULL PAYMENT MADE DURING THIS YEAR ON THIS COUNT AMOUNTING TO RS 1,84,28,945/- WAS CLAIMED AS A DEDUCTION. THE ASSESSING OFFICER SHOW-CAUSED THE AS SESSEE TO EXPLAIN AS TO HOW FULL AMOUNT OF RS 1,84,28,945/ - WAS ALLOWABLE AS DEDUCTION WHEN THERE IS A SPECIFIC PRO VISION CONTAINED IN SECTION 35AB TO THE EFFECT THAT ONLY 1 /6 TH OF THE TECHNICAL KNOW-HOW EXPENDITURE WAS ALLOWABLE. THE C LAIM OF THE ASSESSEE BEFORE THE ASSESSING OFFICER WAS TH AT PAYMENT IS MADE FOR MERE ACQUISITION OF USE OF PROC ESS KNOW-HOW AND THE SAME WAS DEDUCTIBLE UNDER SECTION 37(1) OF THE ACT AND TO SUCH EXTENT SECTION 35AB OF THE ACT WAS NOT APPLICABLE. IN SUPPORT, THE ASSESSEE ALSO RELIE D UPON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F CIT V CIBA OF INDIA LTD. 69 ITR 692 (SC). THE ASSESSING O FFICER DID NOT AGREE WITH THE ASSESSEE AND, ACCORDING TO HIM, HAVING REGARD TO THE INSERTION OF SECTION 35AB WITH EFFECT FROM THE ASSESSMENT YEAR 1985-86, THERE WAS NO SCOPE FOR INTERPRETATION THAT A PARTICULAR PAYMENT WAS CAPITA L OR REVENUE IN NATURE AND AS LONG AS THE PAYMENT WAS TO WARDS TECHNICAL KNOW-HOW, IT WOULD FALL UNDER SECTION 35A B OF THE ACT, IRRESPECTIVE AS TO WHETHER IT IS CAPITAL IN NA TURE OR REVENUE IN NATURE. THE ASSESSING OFFICER ALSO NOTIC ED THAT THE ASSESSEE HAS ON ITS OWN CONDUCT, TREATED THE AM OUNT AS A DEFERRED REVENUE EXPENDITURE, THUS THE PROVISIONS OF SECTION 35AB WERE APPLICABLE. THE ASSESSING OFFICER ALSO NOTICED THAT IDENTICAL DISPUTE WAS INVOLVED IN THE ASSESSMENT YEARS 1993-94 AND 1994-95 AND FOLLOWING THE STAND OF THE REVENUE IN THE SAID YEARS, HE ULTIMATE LY HELD THAT THE CLAIM OF THE ASSESSEE WAS MAINTAINABLE ONL Y IN TERMS OF SECTION 35AB OF THE ACT, I.E. 1/6 TH OF CURRENT YEARS PAYMENT AS WELL AS EARLIER YEARS PAYMENT WAS TO BE ALLOWED AS A DEDUCTION AND NOT THE ENTIRE AMOUNT OF RS 1,84,28,945/- PAID DURING THE YEAR ON PROCESS KNOW- HOW FEE. 17. BEFORE US, IT IS NOT IN DISPUTE THAT THE TRIBU NAL IN THE RESPECTIVE ORDERS DATED 23.6.2006 (SUPRA) AND 29.1. 2009 (SUPRA) FOR THE ASSESSMENT YEARS 1993-94 AND 1994-9 5 HAS UPHELD THE STAND OF THE ASSESSING OFFICER THAT THE CLAIM OF THE ASSESSEE WAS TO BE GOVERNED BY SECTION 35AB OF THE ACT. THE LEARNED COUNSEL FOR THE ASSESSEE DOES NOT DISPU TE THIS POSITION, BUT IT IS SUBMITTED THAT THE SAID PRECEDE NT IS APPLICABLE TO SUCH PAYMENTS WHICH HAVE BEEN MADE IN TERMS OF PROCESS KNOW-HOW AGREEMENTS EXAMINED AND CONSIDERED IN THE COURSE OF THE PROCEEDINGS FOR THE ASSESSMENT YEARS 1993-94 AND 1994-95. IT IS SOUGHT TO BE MADE OUT THAT IN SO FAR AS THE EXPENDITURE INCURRED IN TERMS OF THE AGREEMENTS ENTERED DURING THE YEAR UND ER CONSIDERATION, THE CLAIM BE REVISITED IN TERMS OF T HE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF SWARAJ ENGINES LTD. (SUPRA). 18. IN THIS CONTEXT, WE HAVE CAREFULLY EXAMINED THE RIVAL STANDS. IN THE CASE BEFORE THE HONBLE SUPREME COUR T, THE ASSESSEE SWARAJ ENGINES LTD. HAD ENTERED INTO AN AGREEMENT OF TRANSFER OF TECHNOLOGY KNOW-HOW AND TR ADE MARK IN TERMS OF WHICH ROYALTY WAS PAYABLE BY IT AS A PERCENTAGE OF NET SELLING PRICE OF THE LICENSED PRO DUCTS. THE SAID EXPENDITURE WAS CLAIMED AS A REVENUE EXPENDITU RE BY THE ASSESSEE. A QUESTION ALSO AROSE AS TO WHETHER S UCH EXPENDITURE WAS LIABLE TO BE CONSIDERED IN TERMS OF SECTION 35AB OF THE ACT OR NOT? AS PER THE HONBLE SUPREME COURT BEFORE DECIDING THE APPLICABILITY OF SECTION 35AB O F THE ACT, IT WAS TO BE DECIDED WHETHER THE EXPENDITURE INCURR ED IS REVENUE OR CAPITAL IN NATURE AND DEPENDING ON THE A NSWER TO THAT QUESTION, APPLICABILITY OF SECTION 35AB OF THE ACT WAS REQUIRED TO BE ADDRESSED. IN THE PRESENT CASE, WE F IND THAT THE CLAIM OF THE ASSESSEE BEFORE THE LOWER AUTHORIT IES HAS ALL ALONG BEEN THAT THE IMPUGNED EXPENDITURE IS REVENUE IN NATURE. IN THE INSTANT ASSESSMENT YEAR AS WELL AS I N THE PAST, THE CLAIM OF THE DEPARTMENT HAS BEEN THAT SUC H DEDUCTION IS GOVERNED BY SECTION 35AB OF THE ACT IRRESPECTIVE OF THE FACT WHETHER THE EXPENDITURE WA S REVENUE OR CAPITAL IN NATURE. QUITE CLEARLY, THE SAID APPRO ACH IS CONTRARY TO WHAT HAS BEEN ELUCIDATED BY THE HONBLE SUPREME COURT IN THE CASE OF SWARAJ ENGINES LTD. (S UPRA) WHEREIN IT HAS BEEN HELD THAT IN ORDER TO DECIDE TH E APPLICABILITY OF SECTION 35AB OF THE ACT, IT HAS TO BE DECIDED WHETHER THE EXPENDITURE IS REVENUE OR CAPITAL IN NA TURE AND DEPENDING ON THE ANSWER TO THAT QUESTION, THE ISSUE OF SECTION 35AB IS LIABLE TO BE ADDRESSED. IN THIS CON TEXT, WE FIND AMPLE FORCE IN THE PLEA NOW SET UP BY THE ASSE SSEE THAT BEFORE PROCEEDING TO APPLY SECTION 35AB OF THE ACT, THE NATURE OF THE EXPENDITURE, I.E. WHETHER IT IS CAPIT AL OR REVENUE IN NATURE HAS TO BE DECIDED. AT THIS POINT, WE ARE QUITE CONSCIOUS OF THE PRINCIPLE OF CONSISTENCY WHI CH MANDATES THAT THE DECISION IN THE ASSESSEES OWN CA SE RENDERED BY OUR CO-ORDINATE BENCH IN THE EARLIER YE ARS IS REQUIRED TO BE FOLLOWED AND WE HAVE NO REASON TO DI STRACT FROM THE SAID PRINCIPLE. THEREFORE, IN SO FAR AS TH E PAYMENTS MADE IN TERMS OF PROCESS KNOW-HOW AGREEMENTS ENTERE D IN THE EARLIER YEARS IS CONCERNED, CLAIMS THEREON WOUL D CONTINUE TO BE GOVERNED BY THE DECISION OF THE TRIB UNAL IN THE PAST YEARS AND TO THAT EXTENT, ASSESSEE HAS TO FAIL. EVEN IN THE ASSESSMENT YEAR 1994-95, THE TRIBUNAL CLEARL Y OBSERVED THAT THE NATURE OF EXPENDITURE HAS BEEN CONSIDERED IN THE PAST AND THE CLAUSES OF THE AGREE MENTS CANNOT BE RE-READ IN THE CONTEXT OF THE NEW PLEA BE ING SET- UP BY THE ASSESSEE. THEREFORE, IN SO FAR AS THE KNO W-HOW AGREEMENTS WHICH HAVE BEEN THE SUBJECT-MATTER OF CONSIDERATION IN THE PAST, THE SAME CANNOT BE REVIS ITED AT THIS STAGE. SO HOWEVER, IN SO FAR AS THE NEW PROCES S KNOW- HOW AGREEMENTS ARE CONCERNED, I.E. AGREEMENTS WHICH HAVE BEEN ENTERED DURING THE YEAR, THE LAW AS ENUMERATED BY THE HONBLE SUPREME COURT IN THE CASE OF SWARAJ ENGINES LTD. (SUPRA) SHALL GOVERN THE EFFICACY OF ASSESSEES CLA IM FOR DEDUCTION AND IT SHALL HAVE TO BE DECIDED, HAVING R EGARD TO ITS TERMS AND CONDITIONS WHETHER THE SAME ARE DIFF ERENT THAN THE EARLIER AGREEMENTS AND AS TO WHETHER THE EXPENDITURE IS REVENUE OR CAPITAL IN NATURE, AND DE PENDING ON THE ANSWER TO THE SAID QUESTION, THE APPLICABILI TY OF SECTION 35AB OF THE ACT SHALL BE DECIDED. IN NUTSHE LL IN SO FAR AS PROCESS KNOW-HOW FEE PAID IN TERMS OF THE AG REEMENT ENTERED INTO EARLIER YEARS, THE DEDUCTION THEREON S HALL BE GOVERNED BY THE PROVISIONS OF SECTION 35AB, AS HELD BY THE TRIBUNAL IN ASSESSMENT YEARS 1993-94 AND 1994-95 (S UPRA). IN SO FAR AS THE FEES PAID UNDER THE PROCESS KNOW-H OW AGREEMENTS ENTERED DURING THE YEAR UNDER CONSIDERAT ION IS CONCERNED, IN ORDER TO TEST THE EFFICACY OF SECTION 35AB ON SUCH CLAIM, IT WOULD BE IMPERATIVE TO EXAMINE AS TO WHETHER THE EXPENDITURE IS REVENUE OR CAPITAL IN NATURE AND DEPENDING ON THAT ANSWER, THE ASSESSING OFFICER SHA LL DECIDE THE APPLICABILITY OF SECTION 35AB OF THE ACT . ON THIS LIMITED ASPECT, WE DEEM IT FIT AND PROPER TO RESTOR E THE MATTER BACK TO THE FILE OF THE ASSESSING OFFICER TO BE ADJUDICATED AFRESH, OF-COURSE AFTER ALLOWING ASSESS EE REASONABLE OPPORTUNITY OF BEING HEARD. IN THIS MANN ER, ON THIS GROUND ASSESSEE PARTLY SUCCEEDS. 5.4 NOTHING CONTRARY HAS BEEN BROUGHT TO OUR KNOWLE DGE ON BEHALF OF THE REVENUE. FACTS BEING SIMILAR, SO FOL LOWING THE SAME REASONING, WE RESTORE THIS ISSUE TO THE ASSESSING O FFICER WITH SIMILAR DIRECTION AS DONE BY OUR COORDINATE BENCH I N A.Y. 1995- 96. 6. THE GROUND NO.4 READS AS UNDER: THE LEARNED CIT(A) FURTHER ERRED IN CONFIRMING DISA LLOWANCE OF A SUM OF RS.1,10,959/- UNDER RULE 6B OF THE I.T. RULES, 1962. THE LEARNED CIT(A) OUGHT TO HAVE HELD THAT THE PROV ISIONS OF THE SAID RULE WERE NOT APPLICABLE TO THE EXPENDITUR E IN QUESTION AND THAT THE APPELLANT HAD NOT FAILED TO D ISCHARGE THE ONUS CAST UPON IT, TO PROVE THAT THE EXPENDITUR E IN QUESTION HAD NO ADVERTISEMENT VALUE AND THAT THE EXPENDITURE IN QUESTION WAS IN FACT INCURRED FOR BU SINESS PURPOSES. 6.1 THIS ISSUE IS WITH REGARD TO DISALLOWANCE OF 1,10,959/- UNDER RULE 6B OF I.T. RULES, 1962. THIS EXPENDITUR E CAN ONLY BE ALLOWED U/S.37(1) PROVIDED IT IS ESTABLISHED THAT E XPENSES HAVE BEEN INCURRED FOR THE PURPOSE OF BUSINESS. AS NAME OF PERSONS TO WHOM THESE GIFTS HAVE BEEN GIVEN WERE NOT AVAILA BLE WITH THE ASSESSEE, IT WAS DIFFICULT TO HOLD THAT SUCH PERSON S WERE BUSINESS ASSOCIATES OR HAVING BUSINESS DEALINGS WITH THE ASS ESSEES COMPANY. UNDER THESE CIRCUMSTANCES, AUTHORITIES BE LOW WERE JUSTIFIED TO HOLD THAT SUCH EXPENDITURE INCURRED CO ULD NOT BE TREATED FOR BUSINESS PURPOSE. WE UPHOLD THE SAME. 7. THE GROUND NO.5 READS AS UNDER: THE LEARNED CIT (APPEALS) FURTHER ERRED IN CONFIRM ING DISALLOWANCE PROVISION OF RS.2,13,34,281/- MADE BY THE APPELLANT IN RESPECT OF WARRANTY OBLIGATIONS. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN VIEW OF THE METHOD OF ACCOUNTING CONSISTENTLY FOLLO WED BY THE APPELLANT AND ACCEPTED BY THE DEPARTMENT IN THE PAST, THE LEARNED CIT (APPEALS) OUGHT NOT TO HAVE HELD TH AT THE LIABILITY IN QUESTION WAS OF A CONTINGENT NATURE WH ICH DID NOT ACCRUE AT THE TIME WHEN THE APPELLANT MADE A PR OVISION FOR IT. THE LEARNED CIT (APPEALS) FURTHER ERRED IN CONFIRMI NG THE VIEW TAKEN BY THE ASSESSING OFFICER THAT THE LIABIL ITY ON ACCOUNT OF WARRANTY OBLIGATION ACCRUED ONLY WHEN A CLAIM IS MADE BY THE CUSTOMER AND ACCEPTED BY THE APPELLANT. 7.1. THE ASSESSEE HAD MADE A PROVISION OF AN AMOU NT OF RS.2,13,34,281/- TOWARDS WARRANTY OBLIGATIONS IN RE SPECT OF PRODUCTS/PROJECTS SOLD/EXECUTED BY IT, WHICH FORMED PART OF RS.2,61,82,607/- DEBITED IN THE PROFIT & LOSS ACCOU NT TOWARDS FOC EXPENSES. BOTH THE ASSESSING OFFICER AS WELL AS THE COMMISSIONER OF INCOME-TAX (APPEALS), FOLLOWING THE IR ORDERS FOR ASSESSMENT YEARS 1993-94 AND 1994-95, DECIDED THE I SSUE AGAINST THE ASSESSEE HOLDING THE SAID PROVISION TO BE CONTINGENT IN NATURE. 7.2 IT WAS A COMMON GROUND BETWEEN THE PARTIES TH AT THE TRIBUNAL IN THE IMMEDIATELY PRECEDING ASSESSMENT YE AR OF 1995- 96 FOLLOWED ITS OWN ORDER FOR THE ASSESSMENT YEAR 1 994-95 ON THIS ISSUE AND IN PRINCIPLE DECIDED THE ISSUE IN FA VOUR OF THE ASSESSEE. AFTER CONSIDERING THE SUBMISSIONS OF BOT H THE PARTIES, WE FIND THAT THE PRECEDENT IN THE ASSESSEES OWN CA SE FULLY COVERS THE CONTROVERSY AND ACCORDINGLY THE ASSESSING OFFIC ER IS DIRECTED TO GIVE EFFECT TO THE ABOVE PRECEDENT AS PER DIRECT IONS GIVEN IN ASSESSMENT YEARS 1994-95 AND 1995-96. ACCORDINGLY, THE ASSESSEE SUCCEEDS ON THIS GROUND AS ABOVE. 8. GROUND NO. 6 RAISED BY THE ASSESSEE IS AS UNDER: THE LEARNED CIT(A) ERRED IN CONFIRMING DISALLOWANC E OF PROVISION FOR LEAVE ENCASHMENT OF RS.23,42,,000/- R EJECTING THE CONTENTION OF THE APPELLANT THAT SUCH ACTUARIAL LY DETERMINED LIABILITY WAS A CRYSTALLIZED LIABILITY W HICH WAS ALLOWABLE IN THE YEAR UNDER APPEAL IN ANY EVENT, THE DISTINCTION DRAWN THE LD CIT(A) O N THE FACTS OF THE APPELLANTS CASE FROM THOSE OF THE SC DECISION IN THE CASE OF BHARAT EARTH MOVERS LTD (112 TAXMANN PG .61) IS NOT APT AND DETERMINATIVE OF THE ISSUE OF ALLOWA BILITY OF THE EXPENDITURE IN QUESTION. 8.1 BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE SUB MITTED THAT THE LOWER AUTHORITIES HAVE ERRED IN NOT ALLOWI NG THE CLAIM OF THE ASSESSEE IN VIEW OF THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF BHARAT EARTH MOVERS LTD. 245 ITR 428 (SC). IN ANY CASE, IT IS POINTED OUT THAT THE LIABILITY F OR THE CURRENT YEAR BE ALLOWED. ON THE OTHER HAND, THE LEARNED DEPARTME NTAL REPRESENTATIVE HAS RELIED UPON THE ORDERS OF THE AU THORITIES BELOW. 8.2. WE HAVE CAREFULLY CONSIDERED THE RIVAL S UBMISSIONS. WE FIND THAT SIMILAR ISSUE WAS A SUBJECT-MATTER OF CON SIDERATION BEFORE OUR COORDINATE BENCH IN ASSESSEES CASE FOR ASSESSMENT YEAR AND THE TRIBUNAL VIDE ORDER DATED 30.6.2011 IN ITA NO 508/PN/01 HAS DECIDED THE ISSUE AGAINST THE ASSESSE E IN THE ABSENCE OF ANY SPECIFIC REASONING ADVANCED TO NEGAT E THE FINDINGS OF THE COMMISSIONER OF INCOME-TAX (APPEALS). ON THE PARITY OF REASONING THEREFORE, WE DECIDE THIS ISSUE AGAINST T HE ASSESSEE FOR THE DETAILED REASONS GIVEN IN THE AFORESAID ORDER O F THE TRIBUNAL FOR THE ASSESSMENT YEAR 1995-96. ACCORDINGLY, THIS GROUND OF APPEAL OF THE ASSESSEE IS DISMISSED. 9. GROUND NO. 7 READS AS FOLLOWS: THE LD. CIT(A) ERRED IN HOLDING THAT ONLY A SUM OF RS 884.86 LACS WAS NOT TO BE INCLUDED IN THE APPELLANT S INCOME, REJECTING THE APPELLANTS CONTENTION THAT T HE ENTIRE AMOUNT OF RS 1230.11 LACS REPRESENTING PROVISIONS M ADE BY IT IN ACCORDANCE WITH REQUIREMENTS OF ACCOUNTING ST ANDARDS 7, ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA, WAS ON FACTS AND IN LAW PROPERLY ALLOWABLE IN COMPU TING HE APPELLANTS BUSINESS INCOME AND/OR WAS NOT INCLUDIB LE IN THE APPELLANTS BUSINESS INCOME. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW AND IN VIEW OF THE METHOD OF ACCOUNTING REGULAR LY FOLLOWED BY THE APPELLANT AND ACCEPTED BY THE DEPAR TMENT IN THE PAST, THE LD CIT(A) OUGHT TO HAVE ACCEPTED T HE AFORESAID CONTENTION OF THE APPELLANT THAT THE WHOL E OF THE SAID SUM OF RS 1230.11 LACS DEDUCTIBLE AS CLAIMED B Y THE APPELLANT. 9.1 THE FACTS, IN BRIEF IN THIS REGARD, ARE THAT T HE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF DRAWING, DESI GNING, ENGINEERING, FABRICATION, ERECTION, INSTALLATION, A ND COMMISSIONING OF VARIOUS EQUIPMENTS. THE PRODUCTS MANUFACTURED BY THE APPELLANT ARE COMPLEX PIECES OF EQUIPMENT (BOILERS ETC.) THAT ARE DESIGNED AND FABRICATED SPE CIALLY ACCORDING TO THE REQUIREMENTS OF THE CUSTOMER. THESE ARE USUA LLY NON- STANDARD. THE DESIGNS ARE EVOLVED DEPENDING UPON TH E TOTAL PROFILE OF THE CUSTOMERS PROJECT OF WHICH THE EQUI PMENT MANUFACTURED BY THE ASSESSEE FORMS A PART. ALL THE CONTRACTS ENTERED INTO BY THE AASEESSEE ARE FIXED PRICE CONTR ACTS. THE DIFFERENCE BETWEEN THE ORDER VALUE AND THE ESTIMATE D TOTAL COST IS THE BUDGETED CONTRIBUTION FROM THAT ORDER. DURING T HE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTED THAT FOR THE YEAR ENDED 31 ST MARCH 1997 THE COMPANY HAS PROVIDED A SUM OF RS.1230.11 LACS BY WAY OF PROFIT EQUALIZATION. THE ASSESSING OFFICER REQUIRED THE ASSESSEE TO GIVE THE PARTICULA RS OF THE METHOD FOLLOWED FOR RECOGNITION OF REVENUE IN RESPE CT OF LONG TERM CONTRACT. THE ASSESSEE EXPLAINED IN DETAIL AS FOLLOWS. IT WAS EXPLAINED BY THE ASSESSEE THAT RECOGNITION OF REVENUE FROM SUCH LONG-TERM CONTRACTS IS GOVERNED B Y ACCOUNTING STANDARD 7 ISSUED BY THE INSTITUTE OF CH ARTERED ACCOUNTANTS OF INDIA. TWO METHODS PRESCRIBED, AT TH E RELEVANT TIME, WERE THE PERCENTAGE COMPLETION METHO D AND THE COMPLETED CONTRACT METHOD. UNDER THE COMPLETED CONTRACT METHOD, PROFIT IS RECOGNIZED ONLY WHEN THE CONTRACT IS COMPLETED OR SUBSTANTIALLY COMPLETED. UNDER THE PERCENTAGE OF COMPLETION METHOD PROFITS IS RECOGNIZ ED BASED ON THE STAGE OF COMPLETION OF EACH CONTRACT. PERCEN TAGE COMPLETION METHOD IS MORE BENEFICIAL TO REVENUE IN THAT PROFITS ARE RECOGNIZED AT AN EARLIER POINT OF TIME THAN UNDER THE COMPLETED CONTRACT METHOD. THE ASSESEEE HAS CONSISTENTLY RECOGNIZED REVENUE BY THE PERCENTAGE COMPLETION METHOD WHICH HAS BEEN ACCEPTED IN THE PA ST. EXPLAINING FURTHER, IT WAS SUBMITTED THAT THE STAGE OF COMPLETION OF A CONTRACT IS DETERMINED BY COMPARING THE COST OF MATERIAL DISPATCHED TO THE UPDATED COST OF THE WHOLE PROJECT. USUALLY, THE TOTAL ORDER VALUE OF A CONTRA CT IS DENOTED BY A LUMP SUM CONSIDERATION THAT COVERS, DE SIGN, ENGINEERING, FABRICATION, ERECTION AND COMMISSIONIN G OF THE BOILER ON A TURNKEY BASIS. A BOILER OR ANY OTHER CO MPLEX OF EQUIPMENT USUALLY COMPRISES OF NUMEROUS LARGE AND S MALL COMPONENTS WHICH WHEN FABRICATED AND ASSEMBLED RESU LT IN THE FINAL PRODUCT. THE CUSTOMER IS INTERESTED ONLY IN THE FULLY OPERATIONAL BOILER THAT DELIVERS THE OUTPUT A ND GUARANTEED PERFORMANCE WITHIN THE DESIRED PARAMETER S. HE IS NOT CONCERNED WITH THE FLOW WITH WHICH INDIVIDUA L COMPONENTS ARE DELIVERED AT HIS SITE. FOR THE CONVE NIENCE SAKE AND MAINLY WITH A VIEW TO ENSURE CASH FLOWS HO WEVER, A BILLING SCHEDULE IS MUTUALLY AGREED UPON BETWEEN THE APPELLANT AND ITS CUSTOMER. IN THIS THE TOTAL ORDER VALUE IS BROKEN DOWN INTO INDIVIDUAL COMPONENTS OR GROUPS OF COMPONENTS. WHILE DRAWING UP THIS BILLING SCHEDULE , VALUES ARE NOTIONALLY ASSIGNED TO INDIVIDUAL COMPONENTS OR GROUPS OF COMPONENTS. IN AN INDIVISIBLE TURNKEY CONTRACT P ROFIT EMERGES ONLY AFTER THE SATISFACTORY EXECUTION OF TH E CONTRACT AS A WHOLE AND ON ACHIEVING GUARANTEED PERFORMANCE. THE TRUE PROGRESS OF ANY LONG TERM CONTRACT IS NOT MEAS URED IN TERMS OF BILLING MADE OR MONEY RECEIVED. THE TRUE M EASURE OF THE ACTIVITY UNDERTAKEN IN A GIVEN ACCOUNTING PE RIOD IS THE PROPORTION THAT COSTS INCURRED TO DATE BEARS TO THE ESTIMATED TOTAL COST OF THE CONTRACT. ACCOUNTING PO LICY OF THE COMPANY IS DESIGNED TO DISTRIBUTE THE CONTRIBUTION UNIFORMLY AND EQUITABLY OVER EACH STAGE OF THE EXEC UTION OF THE CONTRACT WHEN THE EXECUTION PERIOD SPREADS TWO OR MORE ACCOUNTING YEARS. THIS OBJECTIVE IS ACHIEVED BY YEA RLY PROVISIONING IN THE ACCOUNTS SO AS TO ENSURE THAT T HE YEARLY CONTRIBUTION FOR A GIVEN STAGE IS IN LINE WITH THE ESTIMATED CONTRACT CONTRIBUTION SPREAD OVER ALL THE BILLABLE/ UNBILLED COMPONENTS OF THE EQUIPMENT, TILL SUCH TIME AS THE CONTRACT IS COMPLETED, WHEN TRUE PROFITS WILL EMERGE FOR THE FIRST TIME WHILE ORDINARILY SALES MINUS COST BOOKED WOULD REFL ECT PROFITS, IN THE CASE OF LONG TERM CONTRACTS, IN ORD ER TO ENSURE THAT THERE IS EQUALIZATION OF CONTRIBUTION OVER T HE WHOLE OF THE PROGRESS OF THE CONTRACT; AN ADJUSTMENT IS MADE BASED ON STAGE OF COMPLETION. THUS, IF THE CONTRACT IS FI NALLY EXPECTED TO RESULT IN A PROFIT OF RS 80 BUT INVOICI NG AND COSTS BOOKED AT AN INTERIM STAGE OF COMPLETION, SAY 50%, REFLECT PROFIT OF RS 35 OR 45, AS AGAINST RS 40 (50 % OF RS 80) ADJUSTMENT OF RS 5 TO THE PROFITS AS PER THE BOOKS OF ACCOUNT IS CALLED FOR IN TERMS OF AS 7. FURTHER, NO RMALLY, AT AN EARLY STAGE OF A PROJECT, THERE IS LESS CERTAINT Y ABOUT THE ESTIMATED PROFIT FROM A CONTRACT WHICH UNCERTAINTY DIMINISHES GRADUALLY AS THE PROJECT NEARS COMPLETIO N. BASED ON PAST EXPERIENCE THE COMPANY DID NOT RECOGNIZE AN Y PROFIT TILL THE CONTRACT REACHED 33.33% COMPLETION. AT THE RELEVANT TIME REVENUE WAS RECOGNIZED IN FOLLOWING PROPORTION DEPENDING ON THE STAGE OF COMPLETION: PROJECT COMPLETION STAGE % OF REVENUE 33.33 % TO 50.00 % 75.0 % 50.00 % TO 75.00 % 85.0 % ABOVE 75.00 % 95.0 % IT WAS FURTHER EXPLAINED THAT PROVISION FOR CONTRI BUTION EQUALIZATION ACCOUNT IS GROUPED UNDER THE SUNDRY D EBTORS IN THE BALANCE SHEET. EVERY YEAR THE PROVISION OF T HE EARLIER YEAR IS REVERSED AND A NEW PROVISION IS MADE IN THE ACCOUNTS. THE ISSUE IS ONE OF TIMING DIFFERENCE ONL Y. THIS IS NOT A CASE OF PROVISION MADE FOR ANY EXPENSES. IT I S A CASE OF EQUALIZATION OF THE PROFIT AS REQUIRED BY ACCOUNTIN G STANDARD 7, SO AS TO ENSURE THAT THE PROFITS ARE RE CORDED AND OFFERED FOR TAX IN A SCIENTIFIC MANNER OVER THE TOTAL PERIOD OF THE CONTRACT. THE ASSESSING OFFICER WAS N OT SATISFIED WITH THE EXPLANATION OF THE ASSESSEE AND HE DISALLOWED THE SAME FOR THE FOLLOWING REASONS, NAME LY, THAT AS 7 IS NOT RELEVANT FOR COMPUTING TAXABLE INCOME B UT ONLY FOR COMPUTING COMMERCIAL PROFITS; THAT MONIES HAVE BEEN RECEIVED AS PER BILLING SCHEDULE AND WHATEVER IS RE CEIVED IN ADVANCE IS SHOWN AS SUCH; THAT ASSESSEE IS UNDER NO OBLIGATION TO RETURN ANY PART OF THE RECEIPTS; THAT RECEIPT IS NOT CONTINGENT IN NATURE; THAT SIMILAR ISSUE WAS DE CIDED IN FAVOUR OF THE DEPARTMENT BY THE CIT(A) IN THE CASE OF THERMAX BABCOCK & WILCOX LTD FOR THE ASSESSMENT YEA R 1990-91 . AGGRIEVED, THE ASSESSEE PREFERRED APPEAL BEFORE THE CIT(A). 9.2 IN APPEAL, THE CIT (A) ALLOWED RELIEF TO TH E EXTENT OF RS 884.86 LACS AND CONFIRMED ADDITION TO THE EXTENT OF RS. 345.21 LACS. THE MAIN REASON ADDUCED BY THE CIT(A) FOR ALL OWING RELIEF WAS THAT SOME AMOUNT OF INTERIM INVOICES HAVE NOT B EEN RECEIVED AND, THEREFORE, CANNOT BE SAID TO HAVE ACCRUED AND BE CHARGED TO TAX IN THE YEAR UNDER APPEAL. AGAINST THE ADDITION SUSTAINED BY THE CIT(A), ASSESSEE IS IN APPEAL, WHEREAS AGAINST THE RELIEF GRANTED, REVENUE IS IN APPEAL BEFORE US. 9.3 BEFORE US, THE LEARNED COUNSEL FOR THE ASSES SEE SUBMITTED THAT THE CIT (A) HAS FAILED TO APPRECIATE THE REAL CONTROVERSY WHICH NOW STANDS COVERED IN FAVOUR OF THE ASSESSEE BY THE AFORESAID ORDERS OF THE TRIBUNAL IN THE CASE OF THE RMAX BABCOCK & WILCOX LTD. V. DCIT VIDE ITA NOS 157 & 158/PN/95 DATED 11.5.2001 FOR ASSESSMENT YEARS 1990-91 & 1991-92. I N PARTICULAR, OUR ATTENTION WAS DRAWN TO THE FOLLOWIN G OBSERVATIONS OF THE TRIBUNAL IN PARAS 1-19: THE FIRST GRIEVANCE OF THE ASSESSEE RELATES TO ADD ITION OF RS. 60,30,000 ON ACCOUNT OF PROVISIONING MADE ON ACCOUN T OF REVENUE RECOGNITION ON PERCENTAGE OF COMPLETION MET HOD. THE YEAR UNDER CONSIDERATION IS THE FIRST YEAR OF A SSESSEE'S BUSINESS AND FOR ARRIVING AT THE PORTION OF THE PRO FIT OF THE LONG-TERM CONTRACTS, WHOSE EXECUTION IS SPREAD OVER MORE THAN ONE ACCOUNTING PERIOD, THE COMPANY MAINTAINED ACCOUNTS ON THE PERCENTAGE OF COMPLETION METHOD, NO W FORMALLY RECOGNISED AS ACCOUNTING STANDARDS 7(AS-7) OF THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA. THE ASSESSEE CONTENDED BEFORE THE ASSESSING OFFICE R THAT THE PROVISION OF RS. 60,36,000 WAS LIABLE TO BE ALL OWED AS THE COMPANY REGULARLY FOLLOWED PERCENTAGE OF COMPLE TION METHOD AND AMOUNT OF REVENUE RECOGNIZED IS DETERMIN ED BY REFERENCE TO STAGE OF COMPLETION AT THE END OF THE ACCOUNTING PERIOD. IT WAS FURTHER STATED THAT FOR CONVENIENCE OF EXECUTION OF JOB AND SUPPLIES OF VARIOUS COMPONENTS REQUIRED FOR ASSEMBLY OF BOILER AT SITE, A PRICE BR EAK UP IS PREFERRED AND APPROVED BY THE CLIENT BEFORE COMMENC EMENT OF THE SUPPLY. MATERIAL COSTS WERE BOOKED AGAINST T HE JOB AND SAME WERE ALSO RECOGNIZED AT JOB LEVEL. IT WAS ALSO STATED THAT PROVISIONS WERE MADE FOR ALL THE JOBS I N PROGRESS WHERE THE CONSUMPTION WAS SHORT OF THE EXPECTED COS T OF THE JOB AS WELL AS BOOKED. THE ASSESSING OFFICER NO TED THAT THE ASSESSEE WAS ACCOUNTING FOR ITS SALES ON THE BA SIS OF SALES BILLS PREPARED UP TO COMPLETION OF WORK. AS F AR AS EXPENSES WERE CONCERNED, THEY WERE ACCOUNTED FOR AS AND WHEN INCURRED THOUGH SOMETIMES THE ASSESSEE HAD INC URRED LESS EXPENSES IN COMPARISON WITH THE ESTIMATED COST . IN SUCH CASES, THE PROVISION WAS MADE FOR EXPENSES WHI CH WERE CLAIMED AS DEDUCTION. THE ASSESSING OFFICER DI SALLOWED THE CLAIM OF THE ASSESSEE HOLDING THAT THE PROVISIO NING IS NOT AS EXPENDITURE. HE FURTHER STATES THAT SALE BIL L AMOUNTS ARE CREDITED TO THE PROFIT AND LOSS ACCOUNT AND EXP ENSES INCURRED ON EACH PRODUCT IS ALSO ACCOUNTED FOR. ACC ORDINGLY, HE HELD THAT 'THIS PROVISION APPEARS TO BE IMAGINAR Y AND MADE IN ORDER TO INCREASE THE COST WITHOUT INCURRIN G IT ACTUALLY. THIS HAS ALSO RESULTED IN REDUCTION OF PR OFIT'. ACCORDING TO THE LEARNED COMMISSIONER OF INCOME-TA X (APPEALS), THE ASSESSEE-COMPANY HAD CREATED THE PRO VISION OF RS. 60.36 LAKHS FOR JOB COST ON ESTIMATED MATERI AL COST AND PERCENTAGE OF COMPLETION BASIS AND THUS, PROVIS ION WAS MADE BASICALLY IN RESPECT OF THE LIKELY MATERIAL CO ST AND NOT FOR THE ACTUAL MATERIAL COST. IN THE VIEW OF THE LE ARNED COMMISSIONER OF INCOME-TAX (APPEALS) PROVISIONING T HE AMOUNT PER SE CANNOT BE ALLOWED UNLESS IT WAS CREAT ED FOR AN ASCERTAINED AND ACCRUED LIABILITY AND THAT ASSES SEE CANNOT CREATE A NOTIONAL LIABILITY BY WAY OF EQUALI ZATION CHARGE AND CLAIM DEDUCTION FOR THE SAME. THEREAFTER, THE LEARNED COUNSEL FOR THE ASSESSEE DR EW OUR ATTENTION TO THE FOLLOWING OBSERVATIONS OF THE TRIB UNAL ALLOWING THE CLAIM OF THE ASSESSEE: WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUS ED THE FACTS ON RECORD. IT IS WELL ACCEPTED THAT IT IS OPE N TO AN ASSESSEE TO DECIDE/ADOPT A REGULAR METHOD OF ACCOUN TING. IF SUCH A METHOD IS AN ACCEPTABLE METHOD OF ACCOUNTING , IT WILL FOLLOW THAT THE PROFITS CAN BE PROPERLY ASCERT AINED THERE FROM. IN THE CASE BEFORE US, THE ASSESSEE HAS FOLLO WED CONSTANTLY FOR THIS YEAR (WHICH IS FIRST YEAR OF OP ERATION) AND FOR THE SUBSEQUENT YEARS A METHOD WHICH IS ONE OF T HE ACCEPTED ACCOUNTING PRINCIPLES AND PRACTICES SANCTI FIED BY USAGE AND IN LINE WITH INSTITUTE'S RECOMMENDED STAN DARD WHICH IS KNOWN AS AS-7. NO DOUBT, AS-7 WAS ISSUED I N THE YEAR 1983, BUT AS-7 IS MERELY A CODIFICATION OF EXI STING ACCOUNTING PRACTICES FOR WHICH EVIDENCE OF COMMENTA RIES OF VARIOUS AUTHORS HAVE ALREADY BEEN REFERRED TO IN PA RAGRAPH 5 (PAGE 32). FURTHER,AS-7 HAS BEEN MADE MANDATORY F ROM APRIL 1, 1991. FROM THE CHART REPRODUCED ON PARA. 4 (PAGE 31), IT IS NOTED THAT THE BOOKS OF ACCOUNT, ESPECIA LLY TRADING ACCOUNT HAS BEEN ACCEPTED, SAVE AND EXCEPT THE ADDI TION OF PROVISIONING. AS POINTED ABOVE, THE ASSESSEE IS ENG AGED IN LONG-TERM CONTRACTS AND THE PROVISIONING WAS MADE F OR THE PURPOSES OF FINDING THE PROFITS ON THE BASIS OF PER CENTAGE OF COMPLETION METHOD AS THE PROVISIONING IS BY WAY OF DISTRIBUTION OF PROFIT FOR THE CONTRACT IN VARIOUS PREVIOUS YEARS FOR WHICH THE CONTRACT WAS IN PROGRESS. THUS, PROVISIONING IS IN THE NATURE OF PROFIT RATIONALISE R, DIVIDER AND ALLOCATOR IN ORDER TO DETERMINE PROFIT EACH YEA R DURING WHICH CONTRACT WAS IN PROGRESS. IN THE YEAR OF COMP LETION OF CONTRACT, ULTIMATELY TRUE PROFIT EMERGED AND SUCH P ROFIT WAS NOT INTERFERED WITH. IN OTHER WORDS, ULTIMATE PROFI T IN THE YEAR OF COMPLETION OF PROJECT ALSO INCLUDES STAGE B Y STAGE AS WORKED OUT BY THE ASSESSEE-COMPANY AND IN THAT SENS E, PROFIT FROM THE CONTRACT AS PER THE BOOKS OF ACCOUN T IS FULLY ACCEPTABLE. IN THE CASE OF CIT V. GUTTOFFNUNGASHUTTO STERKRADO [1992] 197 ITR 66, THE ORISSA HIGH COURT, IN EFFECT HELD T HAT INCOME DETERMINED IN RESPECT OF LONG-TERM CONTRACT AS PER ITS BOOKS OF ACCOUNT COVERING THE ENTIRE PERIOD OF CONTRACT AND THE NET INCOME SO ASCERTAINED WAS APPORTIONABLE OVER THE FOUR YEARS IN QUESTION ON THE BASIS OF YEARLY T URNOVER AGAIN HIGHLIGHTING THE PRINCIPLES OF MEASUREMENT OF YEARLY PROFIT IN THE CASE OF PERCENTAGE OF COMPLETION METH OD USED IN THE CASE OF LONG-TERM CONTRACTS. IN THE CASE OF M.N. DASTUR AND CO. LTD. V. DEPUTY CIT [1997] 61 ITD 167 , THE CALCUTTA BENCH OF THE INCOME-TAX APPELLATE TRIBUNAL , FOLLOWING THE JUDGMENT OF THE ORISSA HIGH COURT IN THE CASE OF CIT V. GUTTOFFNUNGASHUTTO STERKRADO [1992] 197 I TR 66 HELD THAT THE BASIS OF THE ACCOUNTING STANDARD ISSU ED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA I.E ., AS-7 IS A WELL RECOGNISED METHOD AND THE ASSESSEE WAS RIGHT IN FOLLOWING THE SAME. IN THE CASE OF CIT V. U.P. STATE INDUSTRIAL DEVELOP MENT CORPORATION [1997] 225 ITR 703, THE SUPREME COURT H ELD AS UNDER (HEAD NOTE) : 'IN ORDER TO DETERMINE THE QUESTION OF TAXABILITY, WELL-SETTLED LEGAL PRINCIPLES AS WELL AS PRINCIPLES OF ACCOUNTAN CY HAVE TO BE TAKEN INTO ACCOUNT. IT IS A WELL ACCEPTED PROPOS ITION THAT 'FOR THE PURPOSE OF ASCERTAINING PROFITS AND GAINS, THE ORDINARY PRINCIPLES OF COMMERCIAL ACCOUNTING SHOULD BE APPLIED, SO LONG AS THEY DO NOT CONFLICT WITH ANY E XPRESS PROVISION OF THE RELEVANT STATUTES'.' IN THE CASE OF MADRAS INDUSTRIAL INVESTMENT CORPORA TION LTD. V. CIT [1997] 225 ITR 802, THE SUPREME COURT REITERATED THE SAME PRINCIPLE AS ENUNCIATED IN THE CASE OF U.P. STATE INDUSTRIAL DEVELOPMENT CORPORATION [1997 ] 225 ITR 703 (SC). IN CALCUTTA CO. LTD. V. CIT [1959] 37 ITR 1, THE SU PREME COURT HAS HELD THAT THE LONG-TERM INDIVISIBLE CONTR ACT SPREAD OVER MORE THAN ONE ACCOUNTING PERIOD, THE PR OFIT FROM THE CONTRACT AS A WHOLE IS DETERMINED WITH REF ERENCE TO THE ENTIRE VALUE OF THE CONTRACT AGAINST THE COST A LREADY INCURRED AND THE ESTIMATED COST YET TO BE INCURRED FOR ITS COMPLETION. THIS DECISION OF THE SUPREME COURT IS O F DIRECT HELP TO THE ASSESSEE AND THIS WAS ALSO ACCEPTED BY THE DEPARTMENTAL REPRESENTATIVE, BUT HE TRIED TO DISTIN GUISH IT. ACCORDING TO THE DEPARTMENTAL REPRESENTATIVE IN THE SAID CASE, THE ASSESSEE HAD OFFERED FOR TAXATION THE TOT AL RECEIPTS AND CLAIMED FOR DEDUCTION ON ACCOUNT OF LIABILITY, WHICH THE ASSESSEE HAD TO INCUR IN SUBSEQUENT YEARS IN ORDER TO FULFIL THE CONTRACTUAL AGREEMENT. ACCORDING TO THE LEARNED DEPARTMENTAL REPRESENTATIVE UNDER THESE PARTICULAR CIRCUMSTANCES, THE SUPREME COURT ALLOWED THE DEDUCT ION ON ACCOUNT OF LIABILITIES TO BE INCURRED IN SUBSEQU ENT YEAR. HOWEVER, ACCORDING TO THE LEARNED DEPARTMENTAL REPRESENTATIVE, IN THE INSTANT CASE THE RECEIPTS HA VE BEEN RECEIVED BY THE ASSESSEE DURING THE ASSESSMENT YEAR AND THAT THESE RECEIPTS HAVE BEEN EARNED BY ASSESSEE BY PERFORMING THE OBJECT AS ENVISAGED IN THE CONTRACT. THIS DISTINCTION GIVEN BY THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS NO RELEVANCE BECAUSE THE ASSESSE E'S RELIANCE IS FOR LIMITED PURPOSE THAT A DEDUCTION IS ALLOWABLE NOT ONLY ON THE BASIS OF INCURRENCE OF A LIABILITY UNDER SECTION 37 AND THAT SECTION 28 IS THE REAL REPOSITO RY OF ALL THE DEDUCTIONS UNLESS NEGATED BY THE LEGISLATURE. F URTHER, WHILE ESTIMATING THE PROFIT FROM THE CONTRACT AS A WHOLE, AND THAT CONTRACT VALUE WAS JUXTAPOSED AGAINST THE ESTIMATED COST FOR EXECUTION OF THE WHOLE CONTRACT WITH A VIEW TO FINDING OUT GROSS PROFIT FROM THE CONTRACT AS A WHOLE WHICH WAS UNIFORMLY APPLIED BASED UPON THE WORK DON E AS MEASURED BY INVOICING MADE AS PER BILLING SCHEDULE. THUS, THE RATIO LAID DOWN BY THE SUPREME COURT IN THE AFO RESAID CASE SQUARELY APPLIES TO THE FACTS AND CIRCUMSTANCE S OF THE CASE OF THE ASSESSEE. ONE OF THE STAR ARGUMENTS OF LEARNED DEPARTMENTAL REPRESENTATIVE WAS THAT METHOD OF ACCOUNTING SHOULD NOT VIOLATE PROVISIONS OF CHARGING SECTION AND FOR THIS HE RELIED UPON THE DECISION OF THE MADRAS HIGH COURT IN THE C ASE OF CIT V. STANDARD TRIUMPH MOTOR CO. LTD. [1979] 119 I TR 573. AFTER GOING THROUGH THE DETAILS OF THE METHOD OF ACCOUNTING ADOPTED BY THE ASSESSEE, WE DO NOT FIND ANY VIOLATION OF THE PROVISIONS OF THE CHARGING SECTION . AS REGARDS THE RELIANCE PLACED BY THE LEARNED DEPARTME NTAL REPRESENTATIVE ON THE JUDGMENT OF THE MADRAS HIGH C OURT REFERRED TO (SUPRA), THE MADRAS HIGH COURT WAS CONS IDERING THE CASE OF A NON-RESIDENT ASSESSEE. THE METHOD OF ACCOUNTING APPLIED WAS SUCH THAT IN THE OPINION OF THE HIGH COURT, THE INCOME EARNED IN INDIA COULD NOT BE BROU GHT TO BE CHARGED AT ALL UNDER SECTION 5(2). IN THE CASE O F THE ASSESSEE, THE POSITION IS DIFFERENT; THE CHARGE IS NOT AT ALL DEFEATED; IT IS ONLY RATIONALISED. COMING TO THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF CIT V. BRITISH PAINTS INDIA LTD. [1991] 188 ITR 44 RELIED UPON BY THE LEARNED DEPARTMENTAL REPRESENTATIVE, WE HOLD THAT THE RATIO DOES NOT APPLY TO THE FACTS OF THE P RESENT CASE BECAUSE IN THAT CASE, THE SYSTEM OF ACCOUNTING ADOP TED WAS SUCH WHICH EXCLUDED, FOR VALUATION OF STOCKS IN TRA DE, ALL COSTS OTHER THAN THE COST OF RAW MATERIAL, FOR THE GOODS IN PROCESS, FINISHED PRODUCTS AND SAME WAS LIKELY TO R ESULT IN A DISTORTED PICTURE OF THE TRUE STATE OF BUSINESS F OR THE PURPOSE OF COMPUTING THE CHARGEABLE INCOME. IN THE PRESENT CASE, THE ASSESSEE AS POINTED ABOVE, HAS ADOPTED ON E OF THE ACCEPTABLE ACCOUNTING PRINCIPLES AND PRACTICES SANC TIFIED BY USAGE AND IN LINE WITH INSTITUTE'S RECOMMENDED STAN DARD AS-7 AND SUCH METHOD DOES NOT RESULT IN A DISTORTED PICTURE OF THE TRUE STATE OF BUSINESS FOR THE PURPOSE OF CO MPUTING THE CHARGEABLE INCOME. RELIANCE PLACED BY LEARNED DEPARTMENTAL REPRESENTAT IVE ON THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF TU TICORIN ALKALI CHEMICALS AND FERTILIZERS LTD. [1997] 227 IT R 172 IS ALSO OF NO ASSISTANCE TO THE REVENUE. THIS DECISION OF THE APEX COURT NOWHERE FALLS FOUL OF THE ACCOUNTING PRI NCIPLES WHICH HAVE FOUND ACCEPTANCE IN SEVERAL CASES. HERE, IN THIS CASE, THE BUSINESS WAS NOT STARTED, YET THE COMPANY EARNED INCOME BY WAY OF INTEREST FROM THE AVAILABLE SURPLU S FUND. ACCOUNTING PRACTICE IS SUCH THAT WHEN THE PROJECT I S IN CONSTRUCTION STAGE, INTEREST SHOULD BE SET OFF AGAI NST THE CAPITAL COST OF THE PROJECT. HOWEVER, THE INSTITUTE 'S GUIDELINES OF PRE-CONSTRUCTION ACCOUNTING CLEARLY S TATES THAT EVEN THAT INCOME EARNED DURING THE CONSTRUCTION PER IOD IS TO BE SET OFF AGAINST THE PROJECT COST YET IN THE P ROFIT AND LOSS ACCOUNT TAX PROVISION IS REQUIRED TO BE MADE. FURTHER, THERE IS A SPECIFIC PROVISION WHICH CHARGES SUCH IN COME UNDER SECTION 56. OBVIOUSLY, THEREFORE, HERE ACCOUN TING PRINCIPLES FRACTURES SPECIFIC PROVISION OF SECTION 56 AND, THEREFORE, THE COURT RULED THAT SUCH INTEREST INCOM E IS LIABLE TO BE TAXED IN THIS CONTEXT. HERE, IT IS NOTEWORTHY THAT THE SUPREME COURT REFERS TO THE OBSERVATIONS OF THEIR L ORDSHIPS IN B.S.C. FOOTWEAR LTD. V. RIDGWAY (INSPECTOR OF TA XES) [1970] 77 ITR 857 (CA) AS FOLLOWS (PAGE 181) : 'IN THE CASE OF B.S.C. FOOTWEAR LTD. V. RIDGWAY (INSPECTOR OF TAXES) [1970] 77 ITR 857, 860 (CA), RUSSELL L.J. WHILE REJECTING AN ARGUMENT BASED ON WELL-SETTLED ACCOUNTANCY PRACTICE, POINTED OUT THAT THE INCOME-TAX LAW DOES NOT MARCH STEP BY STEP IN THE DIVERGENT FOOTPRINTS OF THE ACCOUNTANCY PROFESSION. ' FURTHER, CONTRASTING THIS DECISION IS THE ONE OF TH E SUPREME COURT IN THE CASE OF CIT V. BOKARO STEEL LTD. [1999 ] 236 ITR 315. HERE THE INCOME LIKE SCRAP, ETC., DIRECTLY LIN KED WITH THE CONSTRUCTION OF THE PROJECT, WAS ALLOWED TO BE SET OFF AGAINST THE PROJECT COST. IT WAS NOT ALLOWED TO SUF FER ANY TAX THERETO BY CONSIDERING SUCH INCOME AS A SEPARATE EN TITY PARTICULARLY WHEN THERE IS NO LEGISLATIVE MANDATE O R NEGATION TO THE CONTRARY. IN THE LIGHT OF THE ABOVE DISCUSSION, WE HOLD THAT THERE IS NO JUSTIFICATION FOR THE IMPUGNED ADDITION OF RS. 60,3 0,000 ON ACCOUNT OF PROVISIONING MADE ON ACCOUNT OF REVENUE RECOGNITION OF PERCENTAGE OF COMPLETION METHOD. THE SAME IS ACCORDINGLY DELETED. THIS GROUND ACCORDINGLY SUC CEEDS. THE LEARNED COUNSEL FURTHER STATED THAT THE ARGUMEN TS TAKEN BY THE DR BEFORE THE TRIBUNAL WERE TO THE EFF ECT THAT RECEIPTS WHICH HAVE BEEN RECEIVED BY THE ASSESSEE H AVE ACCRUED TO IT. ALL THE PAYMENTS HAVE BEEN RECEIVED IN PURSUANCE OF THE CONTRACT. THEREFORE, IT CANNOT BE SAID THAT THE INCOME HAD NOT ACCRUED TO THE ASSESSEE. RELIANC E PLACED ON THE JUDGMENT IN THE CASE OF E.D. SASSOON AND CO. LTD. V. CIT [1954] 26 ITR 27)(SC). IT IS IMMATERIAL HOW THE ASSESSEE TREATS THE RECEIPTS IN ITS BOOKS OF ACCOUN T. SUPPORT WAS TAKEN FROM THE JUDGMENT IN THE CASE OF CIT V. S YNDICATE BANK [1986] 159 ITR 464 (KAR). AS PER ELEMENTARY PRINCIPLES OF ACCOUNTING, RECEIPTS MINUS EXPENSES W ILL GIVE THE PROFITS OF ASSESSEE. THEREFORE, IN THE PRESENT CASE, PROFITS HAVE ACCRUED TO THE ASSESSEE. THE PRINCIPLE OF COMMERCIAL ACCOUNTING IS THAT A NOTIONAL PROFIT OR A NOTIONAL LOSS CANNOT ENTER INTO THE COMPUTATION OF PROFITS I N A YEAR. THAT PRINCIPLE IS SUBJECT TO EXCEPTION IN REGARDS T O STOCK-IN- TRADE. ACCOUNTANCY PRINCIPLE WOULD NOT OVERRULE THE PROVISIONS OF INCOME-TAX. RELIANCE PLACED ON TUTICO RIN ALKALI CHEMICALS AND FERTILIZERS LTD. V. CIT [1997] 227 ITR 172 (SC). PROFITS CANNOT BE SHIFTED FROM ONE UNIT T O OTHER UNIT. SUPPORTED WAS DERIVED FROM CEPT V. KALYAN MAL PHOOL CHAND [1987] 166 ITR 180 (SC). THE JUDGMENT IN THE CASE OF CALCUTTA CO. LTD. V. CIT [1959] 37 ITR 1 (SC) WO ULD NOT APPLY SINCE IN THAT CASE, THE ASSESSEE HAD OFFERED FOR TAXATION THE TOTAL RECEIPTS AND CLAIMED DEDUCTIONS ON ACCOUNT OF LIABILITY, WHICH THAT ASSESSEE HAD INCUR RED IN SUBSEQUENT YEARS IN ORDER TO FULFIL THE CONTRACTUAL AGREEMENT. HOWEVER, IN THE INSTANT CASE, THE RECEIP TS HAD BEEN RECEIVED BY THE ASSESSEE DURING THE ASSESSMENT YEAR AND THAT THESE RECEIPTS HAVE BEEN EARNED BY THE ASS ESSEE BY PERFORMING THE JOB AS ENVISAGED IN THE CONTRACT. FO R EARNING THE RECEIPTS, WHATEVER EXPENSES HAVE TO BE INCURRED AS FOR THE CONTRACT, HAVE ALREADY BEEN INCURRED AS PER THE TERMS OF PAYMENT; PAYMENTS ARE TO BE MADE ONLY AFTER PRODUCT ION OF THE CERTIFICATE THAT THE RELEVANT WORK HAS BEEN DON E. FURTHER, THE JUDGMENT OF THE SUPREME COURT IN THE C ASE OF CIT V. BRITISH PAINTS INDIA LTD. [1991] 188 ITR 44 WAS APPLICABLE BECAUSE THE METHOD ADOPTED BY THE ASSESS EE IS ONE WHICH DOES NOT GIVE CORRECT POSITION OF ACCOUNT S AND THE CORRECT PROFITS CANNOT BE DEDUCED THERE FROM. THE LEARNED COUNSEL FURTHER SUBMITTED THAT THE ISSU E, WHETHER PROFITS AS ARRIVED AT IN ACCORDANCE WITH TH E MANDATE OF AS 7 WOULD CONSTITUTE THE BASE FOR COMPU TING TAXABLE INCOME IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE AFORESAID ORDER OF THE CO-ORDINATE BENCH. AC CORDING TO HIM, WHILE THERMAX BABCOCK & WILCOX LTD. (SUPRA) WAS DETERMINING STAGE OF COMPLETION IN THE PROPORTION O F SALES INVOICES/TOTAL CONTRACT VALUE, THE APPELLANT HAS BE EN DETERMINING IT IN THE PROPORTION OF COSTS INCURRED/ TOTAL ESTIMATED COSTS. AS PER THE LEARNED COUNSEL, SINCE PARA 9.2 OF ACCOUNTING STANDARD-7 ONLY PROVIDES THAT STAGE O F COMPLETION MAY BE RECOGNIZED IN AN APPROPRIATE MANN ER AND FURTHER SINCE THE SAID PARA SPECIFICALLY PROVID ES FOR COSTS INCURRED/ESTIMATED COSTS AS ONE OF THE RECOGN IZED METHODS FOR DETERMINING STAGE OF COMPLETION, NOTHIN G TURNS ON INSIGNIFICANT DIFFERENCE IN FACTS. ACCORDING TO THE AR OF THE ASSESSEE, IT IS WORTH NOTING THAT THE TRIBUNAL HAS TAKEN INTO ACCOUNT DECISIONS OF THE HONBLE SUPREME COURT IN THE CASE OF MADRAS INDUSTRIAL CORPORATION LTD. TUTICORI N ALKALIES LTD AND BRITISH PAINTS LTD WHILE RECONCILI NG THE ACCOUNTING AND TAX ASPECTS OF CONTRACT ACCOUNTING. THE DECISION OF THE BOMBAY HIGH COURT IN THE CASE OF TA PARIA TOOLS LTD 260 ITR 102 IS BASED ON THE DECISION OF T HE HONBLE SUPREME COURT IN THE CASE OF MADRAS INDUSTR IAL CORPORATION LTD. WHICH HAS BEEN APPLIED BY THE TRIB UNAL WHILE DECIDING THE ISSUE IN FAVOR OF THE ASSESSEE. THE AR SUBMITTED THAT IT IS PERTINENT TO NOTE THAT THE DEP ARTMENT HAS NOT FILED AN APPEAL TO THE HIGH COURT AGAINST T HIS ORDER. THE AR ON BEHALF OF THE ASSESSEE POINTED OUT THAT W HILE THE AFORESAID DECISION COVERED THE WHOLE EXERCISE OF AR RIVING AT PROFITS IN TERMS OF AS 7, IN ITA NO. 657/PN/2002 IN THE CASE OF TTHERMAX BABCOCK & WILCOX LTD (SUPRA) THE L IMITED ISSUE WAS WHETHER THE APPELLANT WAS RIGHT IN NOT RECOGNIZING REVENUE FROM CONTRACTS THAT HAD NOT PRO GRESSED BEYOND 25% OF THE CONTRACT VALUE, WHICH IS ANOTHER FACET OF AS 7. IN THIS CONTEXT, THE TRIBUNAL HAS DEALT WITH THIS ISSUE IN PARA 6.2 OF ITS ORDER WHICH READS AS UNDER: WE HAVE HEARD BOTH SIDES. WE HAVE DEVOTED TIME TO KNOW WHAT WAS THE REASON GIVEN BY THE A.O. TO ENHANCE THE INCOME IN THIS YEAR BY DEPARTING FROM T HE ACCEPTED PAST HISTORY OF THIS ASSESSEE. WE HAVE NO T FOUND ANY CONVINCING REASON; RATHER SUCH DEPARTURE FROM THE ACCEPTED PRINCIPLE OF LAW NEEDS TO BE DISCOURAGED./ ONCE IT IS AND ADMITTED POSITION THA T THE ASSESSEE IS FOLLOWING AS-7 AS ISSUED BY ICAI; W HICH HAS BECOME MANDATORY, THEN WHAT WAS OCCASION FOR THE A.O. TO OVERLOOK THE SAME AND ALSO TO CHANGE TH E METHOD OF ACCOUNTING REGULARLY FOLLOWED YEAR AFTER YEAR. IN SHORT, ACCORDING TO AS-7, NO REVENUE IS T O BE RECOGNIZED WHEN THE PERCENTAGE COMPLETION OF CONTRACT IS LESS THAN 25%. THIS WAS FOLLOWED, HE NCE ASSESSEE WAS NOT RECOGNIZING THE INCOME ON SUCH PROJECT WHERE PERCENTAGE COMPLETION WAS LESS THAN 25%. FURTHER, THE ACCEPTED POSITION IS THAT THE CONTRACTS ENTERED INTO BY THE ASSESSEE WERE FIXED P RICE CONTRACT. THE ENTIRE COST USED TO BE CARRIED FORWA RD AS THE CONTRACT GOT PROGRESSED AND ONCE THE THRESHOLD WAS CROSSED AT THE TIME THE ENTIRE REVENUE WAS RECOGNIZED BY OFFERING THE PROFIT FOR THE PURPOSE O F TAX. SEVERAL CALCULATIONS AND YEAR-WISE CHARTS ARE PART OF THE COMPILATION. SINCE THIS IS THE BACKGROUND OF T HE ADDITION, HENCE ACCORDING TO US THE ISSUE SEEMS TO BE MORE OR LESS COVERED BY THE DECISION OF THIRD MEMBE R IN ASSESSEES OWN CASE REPORTED IN 79 ITD 63 (T.M.) . 255 ITR 20(AT) ONLY FOR THE PROPOSITION THAT AS-7 IS AN ACCEPTED GUIDELINES SO A TAX PAYER IS RIGHT IN CONSISTENTLY FOLLOWING THE SAME. AN ANOTHER FACT H AS ALSO BEEN PLACED ON RECORD THAT IN THE PAST I.E. IN A.Y. 1995-96, THE REVENUE DEPARTMENT HAS NOT ALLOWED FOR SUCH A CHANGE IN THE METHOD OF ACCOUNTING. HENCE THE A.O. WENT WRONG IN CHANGING THE CONSISTENTLY FOLLOWED METHOD BY THE ASSESSEE FOR THIS PARTICULAR YEAR. IN THE RESULT, THIS GROUND OF THE ASSESSEE I S ALLOWED. THE LEARNED COUNSEL FURTHER STATED THAT THOUGH THE AFORESAID DECISIONS GENERALLY UPHOLD THE PROPOSITIO N THAT IN COMPUTING TAXABLE INCOME PROFITS ARRIVED AT IN TERM S OF AS7 WOULD BE THE BASIS OR STARTING POINT, HE WOULD LIKE TO BRIEFLY REFER TO THE ISSUE OF RECOGNITION OF REVENUE SLAB-W ISE BASED ON STAGE OF COMPLETION THOUGH THE AO HAS NOT MADE A NY SPECIFIC GRIEVANCE ABOUT IT IN HIS ORDER. AS ALREA DY STATED ABOVE, AS 7 PROVIDES THAT THE APPLICATION OF THE P ERCENTAGE OF COMPLETION METHOD IS SUBJECT TO A RISK OF ERROR IN MAKING THE ESTIMATES. FOR THIS REASON, PROFIT IS NOT RECO GNIZED IN THE FINANCIAL STATEMENTS UNLESS OUTCOME OF THE CONT RACT CAN BE RELIABLY ESTIMATED AND THAT WHILE RECOGNIZING T HE PROFIT AN APPROPRIATE ALLOWANCE BE MADE FOR FUTURE UNFORES EEABLE FACTORS WHICH MAY AFFECT THE ULTIMATE QUANTUM OF PR OFITS. IN THE CASE OF LONG TERM CONTRACTS THAT THE COMPANY EXECUTES, THE LENGTH OF THE TIME THAT IT TAKES FOR A PROJECT TO BE COMPLETED IS ITSELF THE BIGGEST IMPONDERABLE FAC TOR OF ALL. FURTHER, CHANGES IN DESIGNS, IN STATUTORY LEVIES, I N EXCHANGE RATES; DELAYS IN COMPLETION OF THE PROJECTS WITH TH E POSSIBILITY OF PROJECTS GOING ON HOLD ALL ADD TO TH E IMPONDERABLES THAT CANNOT BE ENVISAGED AT THE CONCEPTUALIZATION STAGE. THE SLAB-WISE SCALING DOWN OF REVENUE REFERRED TO ABOVE IS THE APPLICATION OF THE MANDATE OF THESE TWO PARA OF AS 7. RELIANCE WAS PLACED ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F HUNDAI HEAVY INDUSTRIES LTD. AND THAT OF THE GUJARA T HIGH COURT IN THE CASE OF ADVANCE CONSTRUCTION P. LTD (2 75 ITR 30)(GUJ) IN THIS REGARD. THE COUNSEL SUBMITTED THAT ACCOUNTING STANDARD 1 ISSUED BY THE CENTRAL BOARD O F DIRECT TAXES UNDER SECTION 145 OF THE ACT ALSO ENJO INS THAT PRUDENCE SHOULD BE ONE OF THE MAJOR CONSIDERATIONS GOVERNING SELECTION AND APPLICATION OF ACCOUNTING P OLICIES. THIS DEMANDS THAT PROVISION SHOULD BE MADE FOR ALL KNOWN LIABILITIES AND LOSSES, EVEN THOUGH THE AMOUNT CANN OT BE DETERMINED WITH CERTAINTY AND REPRESENTS ONLY A BES T ESTIMATE IN THE LIGHT OF THE AVAILABLE INFORMATION. FURTHER RELIANCE WAS MADE ON THE FOLLOWING JUDGMENTS DEALIN G WITH RECOGNITION AND ACCRUAL OF PROFITS: (I) GRESHAM LIFE ASSURANCE SOCIETY ( 3 TC 185)(HL)(REFERRED TO IN 57 ITR 521 AT 526); (II) POONA ELECRITY SUPPLY CO. LTD. 57 ITR 512, 526)(SC) (III) BADRIDAS DAGA 34 ITR 10,15 (SC); (IV) CALCUTTA CO. LTD. 37 ITR 1(SC); (V) H.M. KASHIPAREKH & CO 39 ITR 706 (BOM); (VI) INDO NIPPON CO. (I) LTD. 261 ITR 275 (SC); (VII) ARUNA MILLS LTD 31 ITR 153 (BOM); (VIII) CHALLAPALI SUGARS LTD 98 ITR 167 (SC); (IX) MADRAS INDUSTRIAL INVESTMENT CORPN LTD 225 ITR 802 (SC); (X) BOKARO STEEL LTD 236 ITR 311 (SC) (XI) U P INDUSTRIAL DEV. CORPN. 225 ITR 703; (XII) UNITED COMMERCIAL BANK 240 ITR 355 (SC); (XIII) OTIS ELEVATOR CO (I) LTD 99 ITD (MUM); (XIV) M N DASTUR & CO LTD 61 ITD 167 (CAL); (XV) METAL BOX CO OF INDIA LTD 73 ITR 53 (SC); (XVI) ADVANCE CONSTTRUCTION C. L LTD 275 ITR 30 (GUJ); (XVII) BILAHARI INVETMENTS (P) LTD 299 ITR 1 (SC); (XVIII) HYNDAI HEAVY INDUSTRIES LTD; (XIX) TRIVENI ENGG & INDUSTRIES LTD (DEL); (XX) JACOBS ENGG INDIA P LTD; AND, (XXI) DREDGING INTERNATIONAL N.V. 9.4 HAVING CONSIDERED THE RIVAL SUBMISSIONS AND MAT ERIAL ON RECORD, WE FIND THAT A SIMILAR ISSUE CAME BEFORE CO ORDINATE BENCH IN THE CASE OF THERMAX BABCOCK & WILCOX LTD. VS. DC IT IN ITA NOS.157, 158/PN/95 VIDE ORDER DATED 11.05.2001 FOR A.YS. 1990- 91 AND 1991-92, WHEREIN THE TRIBUNAL HAS HELD THAT THE PROVISION FOR PROFIT EQUALIZATION TO RECOGNIZE PROP ORTIONATE REVENUE ON PERCENTAGE COMPLETION BASIS IN CASE OF L ONG TERM CONTRACTS IN ACCORDANCE WITH THE WELL RECOGNIZED ME THOD OF ACCOUNTING RECOMMENDED IN ACCOUNTING STANDARD 7 ISS UED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA IS FULLY DEDUCTIBLE. NOTHING CONTRARY HAS BEEN BROUGHT TO O UR KNOWLEDGE ON BEHALF OF THE REVENUE. FOLLOWING THE SAME REASO NING, WE DECIDE THE ISSUE IN FAVOUR OF THE ASSESSEE FOR THE DETAILED REASONS GIVEN IN THE AFORESAID ORDER FOR A.YS. 1990-91 & 19 91-92. 10. GROUND NO.8 READS AS FOLLOWS: IN THE MATTER OF APPELLANTS CLAIM FOR DEDUCTION U NDER SEC.80-I/80-IA, THE LEARNED CIT (A) FURTHER ERRED IN CONFIRMING THAT THE FOLLOWING ITEMS OF INCOME WERE NOT IN THE NATURE OF INCOME DERIVED FROM CONCERNED INDUSTR IAL UNDERTAKINGS SO AS TO BE ELIGIBLE FOR DEDUCTION UND ER SEC.80-I/80-IA: NAME OF THE UNDERTAKING AMOUNT TOTAL AMOUNT PARTICULARS DISALLOWED DISALLOWED 1) WOOD-PACK A) OTHER INCOME 1.91 LACS 1.91 LACS 2) CHILLER/HEAT PUMP A) FLUCTUATION IN RATE OF EXCHANGE 7.79 LACS B) PREMIUM ON FORWARD CONTRACTS 8.35 LACS C) SERVICE CHARGES 3.92 LACS 20.06 LACS 3) PROCESS INTEGRATED BOILER A) FLUCTUATION IN RATE OF EXCHANGE 1.05 LACS 1.05 LACS 4) FIRESIDE CHEMICALS A) INTEREST ON INVESTMENT 0.11 LACS B) INTEREST OTHERS 1.59 LACS 1.70 LACS 5) KHOPOLI PLANT A) FLUCTUATION IN RATE OF EXCHANGE 106.81 LACS B) PREMIUM ON FORWARD CONTRACTS 43.12 LACS C) INTEREST ON INVESTMENT 0.11 LACS D) INTEREST OTHERS 1.59 LACS 151.63 LACS 10.1 BEFORE US, THE LEARNED COUNSEL FOR THE ASSES SEE DID NOT PRESS THE ISSUES RELATING TO OTHER INCOME; INTEREST ON INVESTMENTS; AND INTEREST OTHERS AND THEREFORE, THE SE ISSUES ARE DISMISSED AS NOT PRESSED. 10.2 FLUCTUATION IN RATE OF EXCHANGE. IN SO FAR A S THE ISSUE RELATING TO PREMIUM ON FORWARD CONTRACTS IS CONCERN ED, THE SAME IS DECIDED AGAINST THE ASSESSEE BY FOLLOWING T HE FINDINGS IN THE ORDER OF THE TRIBUNAL FOR THE ASSESSMENT YEAR 1 996-97, VIDE PARA 99 IN ITA NO 482/PN/01 (SUPRA). THUS, THE ASS ESSEE FAILS ON THIS ISSUE. 10.3 IN SO FAR AS THE ISSUE RELATING TO SERVICE CH ARGES IS CONCERNED, THE SAME IS DECIDED IN FAVOUR OF THE AS SESSEE BY FOLLOWING THE FINDINGS IN THE ORDER OF THE TRIBUNAL FOR THE ASSESSMENT YEAR 1995-96, VIDE PARA 45 IN ITA NO 252 /PN/01 (SUPRA). THUS, THE ASSESSEE SUCCEEDS ON THIS ISSUE. 10.4 IT WAS A COMMON POINT BETWEEN THE PARTIES THA T THE ISSUE RELATING TO FLUCTUATION IN EXCHANGE RATE HAD BEEN SUBJECT- MATTER OF CONSIDERATION BY THE TRIBUNAL IN ASSESSME NT YEAR 1995- 96 (SUPRA) AND THE TRIBUNAL HAS RESTORED THE MATTE RS TO THE FILE OF THE ASSESSING OFFICER TO FOLLOW THE DIRECTIONS GIVEN THEREIN. FOLLOWING THE SAME, WE HOLD SO AND RESTORE THE ISSU ES TO THE FILE OF THE ASSESSING OFFICER TO ADJUDICATE THE ISSUES A FRESH IN THE LIGHT OF PRECEDENT REFERRED TO ABOVE. 11. GROUND NO. 9 RELATING TO RETENTION MONEY WAS NOT PRESSED AT THE TIME OF HEARING AND, THEREFORE, THE SAME STANDS DISMISSED AS NOT PRESSED. 12. GROUND NO. 10 OF ASSESSEES APPEAL READS THUS : IN THE MATTER OF DEDUCTION UNDER SEC.80-HHC, THE C IT (APPEALS) ERRED IN CONFIRMING A) REDUCTION FROM PROFITS DERIVED FROM EXPORT OF MANUFACTURED GOODS THE LOSS SUFFERED FROM EXPORT OF TRADING GOODS. THE LEARNED CIT (APPEALS) OUGHT TO HAVE ACCEPTED TH E CONTENTION OF THE APPELLANT THAT SUCH LOSS FROM EXP ORT OF TRADING GOODS HAD TO BE IGNORED FOR THE PURPOSE OF SEC.80-HHC AND DEDUCTION THERE UNDER OUGHT TO HAVE BEEN ALLOWED ONLY WITH REFERENCE TO THE PROFITS DER IVED FROM EXPORT OF MANUFACTURED GOODS. B) TREATMENT OF THE FOLLOWING ITEMS AS FORMING PART O F TOTAL TURNOVER - RS. A )EXCISE DUTY COLLECTED 21,34,01,875 B )SALES - TAX COLLECTED 28,80,03,563 C )INSURANCE CLAIM 16,55,961 D) BAD DEBTS RECOVERED 50,76,710 E )AMOUNT WRITTEN BACK 74,40,301 F )CLAIM & REFUND CUSTOM 3,12,299 G )SALES TAX REFUND 34,84,282 H )FLUCTUATION IN RATE OF EXCHANGE 1,60,75,960 I)CREDIT BALANCE APP. 46,46,943 J )SALE OF SCRAP 2,67,38,194 THE LEARNED CIT (APPEALS) OUGHT TO HAVE ACCEPTED TH E CONTENTION OF THE APPELLANT THAT NONE OF THE AFO RESAID ITEMS HAD THE CHARACTER OF TURNOVER IN THE CONTEXT OF SECTION 80-HHC. VII) EXCLUSION OF 90% OF THE FOLLOWING ITEMS FOR THE PURPOSES OF COMPUTING PROFITS OF THE BUSINESS IN TERMS OF SECTION 80HHC: DISCOUNT RECEIVED RS 2,21,238 LEASE RENTAL RECEIPT RS 1,15,51,947 WAREHOUSING CHARGES RECOVERED RS 6,750 MISC. INCOME/RECEIPTS RS 61,54,612 PREMIUM ON FORWARD CONTRACTS RS 42,74,160 ------------------ RS 2,22,08,707 ============= VIII) IN ANY EVENT THE LD CIT(A) OUGHT TO HAVE DIRECTED THAT THE PROFITS OF THE BUSINESS SHOULD BE INCREASED BY 10% OF ALL INCOME ASSESSED UNDER THE HEAD OTHER SOURCES INASMUCH AS TO THAT EXTENT, EXPENDITURE MUST BE DEEMED TO HAVE BEEN INCURRED FOR EARNING SUCH INCOME, RESULTING IN A PRO TANTO REDUCTION IN EXPENDITURE ATTRIBUTABLE TO PROFIT & GAINS OF BUSINESS. IX) THAT RS1,54,01,000/- AND RS 9,85,390 WERE NOT ELIGIBLE FOR INCLUSION IN PROFITS OF BUSINESS FOR THE PURPOSES OF SECTION 80-HHC. 12.1 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CARE FULLY. SO FAR AS GROUND NO. 10 (I) IS CONCERNED, THE ISSUE IS LIABLE TO BE DECIDED AGAINST THE ASSESSEE IN VIEW OF DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF IPCA LABORATORIES LTD. (2004) 266 ITR 521 (SC). WE HOLD SO. 12.2 THE ISSUES RELATING TO EXCLUSION OF EXCISE DU TY AND SALES TAX COLLECTED FROM TOTAL TURNOVER CONTAINED I N GROUND NO. 10(II) (A) & (B) RESPECTIVELY ARE CONCERNED, THEY A RE DECIDED IN FAVOUR OF THE ASSESSEE IN VIEW OF THE DECISION OF T HE HONBLE SUPREME COURT IN THE CASE OF LAKSHMI MACHINE WORKS (2007) 290 ITR 667 (SC). 12.3 GROUND NO.10 SUB-GROUND (II) HAS BEEN RAISED BY THE ASSESSEE TO EXCLUDE THE FOLLOWING ITEMS OF INCOME F ROM THE TOTAL TURNOVER FOR THE PURPOSE OF COMPUTING DEDUCTION U/S .HHC OF THE ACT. I) INSURANCE CLAIM OF RS.16,55,961/- II) BAD DEBTS RECOVERED OF RS.50,76,710/- III) AMOUNT WRITTEN BACK RS.74,40,301/- IV) CUSTOM DUTY REFUND RS.3,12,299/- V) CREDIT BALANCE APPROPRIATED RS.46,46,943/- VI) SALE OF SCRAP RS.2,67,38,194/- WE FIND THAT THE AFORESAID ISSUE OF EXCLUSION OF T HE AFORESAID RECEIPTS FROM TOTAL TURNOVER FOR THE PURPOSE OF COM PUTING DEDUCTION U/S.80HHC OF THE ACT HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE BY THE TRIBUNAL FOR A.YS. 1995-96 AND 1996-97 BY OBSERVING AS UNDER: 49. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFULLY. SO FAR AS GROUND NO. 14 (A) IS CONCERNED , THE ISSUE IS LIABLE TO BE DECIDED AGAINST THE ASSESSEE IN VIEW OF DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F IPCA LABORATORIES LTD 266 ITR 521 (SC). WE HOLD SO. 50. THE ISSUES RELATING TO EXCLUSION OF EXCISE DUT Y AND SALES TAX COLLECTED FROM TOTAL TURNOVER CONTAIN ED IN GROUND NO. B(I) AND (II) RESPECTIVELY ARE CONCERNED , THEY ARE DECIDED IN FAVOUR OF THE ASSESSEE IN VIEW OF THE DE CISION OF THE HONBLE SUPREME COURT IN THE CASE OF LAKSHMI M ACHINE WORKS 290 ITR 667 (SC). 51. THE ISSUES RELATING TO INSURANCE CLAIM OF RS 10,34,195 (SUB-GROUND (III); BAD DEBTS RECOVERED OF RS 18,83,822/- (SUB-GROUND (IV); AMOUNT WRITTEN BACK R S 44,59,146 (SUB-GROUND (V); CLAIM FOR CUSTOM RS 10,0 8,137 (SUB-GROUND VI); CLAIMS & REFUND EXCISE RS 3,18,0 29 (SUB-GROUND VII); SALES-TAX REFUND RS 12,77,939 (SU B-GROUND (VIII); CREDIT BALANCE APPROPRIATED RS 60,82,491/- (SUB- GROUND XI); SALE OF SCRAP RS 1,38,95,629 (SUB-GROUN D XII) ARE DECIDED IN FAVOUR OF THE ASSESSEE IN VIEW OF TH E ORDER OF THE TRIBUNAL FOR THE ASSESSMENT YEAR 1994-95 (SUPRA ). 52. THE ISSUE IN SUB-GROUND (XIII) RELATING TO EXP ORT RECEIPTS OF RS 66,16,279/- ELIGIBLE FOR DEDUCTION U NDER SECTION 80-O OF THE ACT IS DISMISSED, AS THE SAME W AS NOT PRESSED BY THE LEARNED COUNSEL FOR THE ASSESSEE AT THE TIME OF HEARING. 53. AS REGARDS THE ISSUE INVOLVED IN SUB-GROUND (I X) OF ORDER CANCELLATION OF RS 2,50,000/-, THE LEARNE D COUNSEL SUBMITTED THAT THE ORDER CANCELLATION IS COMPENSATI ON RECEIVED FROM CUSTOMER FOR CANCELLATION OF AN ORDER AND CANNOT REPRESENT VALUE OF GOODS SOLD OR SERVICES RE NDERED. WE FIND MERIT IN THE PLEA SET-UP BY THE ASSESSEE, A ND ACCORDINGLY ASSESSEE SUCCEEDS. 54. AS FOR THE ISSUE AT SUB-GROUND (X) OF FLUCTUA TION IN RATE OF EXCHANGE OF RS 8,41,888/-, IT WAS SUBMIT TED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT EXCHANGE FLUCTUATION IN SO FAR AS EXPORTS ARE CONCERNED IS A LREADY INCLUDED IN VALUE OF EXPORT TURNOVER SINCE IN TERMS OF SECTION 80HHC THE SAME IS TO BE TAKEN AT FOB VALUE OF EXPORTS. IN OUR VIEW, ONLY COMPONENT OF FLUCTUATION WHICH IS ON SALES IS LIABLE TO BE INCLUDED IN TOTAL TURNOVER AND NOT THE BALANCE, IF ANY. THE ASSESSING OFFICER IS DIREC TED TO RE- COMPUTE THE DEDUCTION UNDER SECTION 80HHC OF THE AC T ACCORDINGLY. 55. IN SO FAR AS THE ISSUES INVOLVED IN GROUND NO. 14(C) ARE CONCERNED, THE SAME RELATE TO EXCLUSIONS FROM T HE PROFITS OF THE BUSINESS AS PER EXPLANATION (BAA) FOR THE PURPOSES OF SECTION 80HHC OF THE ACT. THE PLEA SET- UP BY THE ASSESSEE IS THAT THE AFORESAID ITEMS OF INCOME ARE NOT EXCLUDIBLE IN TERMS OF EXPLANATION (BAA), INASMUCH AS THE SAME ARE NOT INDEPENDENT INCOMES, BUT ARE OTHERWISE INEXTRICABLY RELATED TO THE MAIN BUSINESS OF THE AS SESSEE. QUITE FAIRLY THE LEARNED COUNSEL POINTED OUT THAT A T BEST INCOME BY WAY OF LEASE RENTAL RS 69,600/-, MESNE PROFIT RS 1,32,751/- AND FRANCHISEE FEES 1,500/- MAY CON STITUTE INDEPENDENT INCOMES EXCLUDIBLE IN TERMS OF EXPLANAT ION (BAA) OF SECTION 80HHC OF THE ACT. APART THEREFRO M, IT HAS ALSO BEEN POINTED OUT THAT THE ISSUE MAY BE DECIDED IN THE LIGHT OF THE RECENT JUDGMENT OF THE HONBLE JURISDI CTIONAL HIGH COURT IN THE CASE OF CIT V. PFIZER LTD. 233 C TR 521 (BOM). 56. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS DEFENDED THE ORDERS OF THE AUTHO RITIES BELOW. 57. HAVING CONSIDERED THE RIVAL SUBMISSIONS, WE DEE M IT FIT AND PROPER TO SET ASIDE THE ISSUE TO THE FILE OF TH E ASSESSING OFFICER TO BE ADJUDICATED IN THE LIGHT OF THE JUDGM ENT OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF PFIZER LTD ., (SUPRA) EXCEPT TO THE EXTENT OF LEASE RENTAL, MESNE PROFITS AND FRANCHISEE FEES, WHICH ARE LIABLE TO BE EXCLUDE D IN TERMS OF EXPLANATION (BAA) TO SECTION 80HHC OF THE ACT. T HE ASSESSING OFFICER SHALL RE-ADJUDICATE THE CONTROVER SY AFTER ALLOWING THE ASSESSEE AN OPPORTUNITY OF BEING HEARD IN THE MATTER. 58. THE VARIOUS ISSUES INVOLVED IN GROUND 14(D), WERE NOT PRESSED BY THE LEARNED COUNSEL FOR THE ASS ESSEE AND, THEREFORE, THEY ARE DISMISSED AS NOT PRESSED. ACCORDINGLY, GROUND NO. 14 IS PARTLY ALLOWED. FACTS BEING SIMILAR WITH REGARD TO ISSUE IN SUB-GRO UND (II) OF THE ASSESSEE, THE AFORESAID ITEMS OF THE INCOME SHO ULD BE EXCLUDED FROM THE TURNOVER FOR THE PURPOSE OF COMPU TING DEDUCTION U/S.80HHC OF THE. THE ASSESSING OFFICER IS DIRECTED ACCORDINGLY. 12.4 AS FOR THE ISSUE AT SUB-GROUND (H) OF FLUCTUA TION IN RATE OF EXCHANGE OF RS 1,60,75,960/-, IT WAS SUBMITTED B Y THE LEARNED COUNSEL FOR THE ASSESSEE THAT EXCHANGE FLUCTUATION IN SO FAR AS EXPORTS ARE CONCERNED IS ALREADY INCLUDED IN VALUE OF EXPORT TURNOVER SINCE IN TERMS OF SECTION 80HHC THE SAME I S TO BE TAKEN AT FOB VALUE OF EXPORTS. IN OUR VIEW, ONLY COMPONE NT OF FLUCTUATION WHICH IS ON SALES IS LIABLE TO BE INCLU DED IN TOTAL TURNOVER AND NOT THE BALANCE, IF ANY. THE ASSESSING OFFICER IS DIRECTED TO RE-COMPUTE THE DEDUCTION UNDER SECTION 80HHC OF THE ACT ACCORDINGLY. 12.5 IN SO FAR AS THE ISSUES INVOLVED IN GROUND NO . 10(III) ARE CONCERNED, THE SAME RELATE TO EXCLUSIONS FROM T HE PROFITS OF THE BUSINESS AS PER EXPLANATION (BAA) FOR THE PURP OSES OF SECTION 80HHC OF THE ACT. THE PLEA SET-UP BY THE AS SESSEE IS THAT THE AFORESAID ITEMS OF INCOME ARE NOT EXCLUDIBLE IN TERMS OF EXPLANATION (BAA), INASMUCH AS THE SAME ARE NOT IND EPENDENT INCOMES, BUT ARE OTHERWISE INEXTRICABLY RELATED TO THE MAIN BUSINESS OF THE ASSESSEE. QUITE FAIRLY THE LEARNED COUNSEL POINTED OUT THAT AT BEST INCOME BY WAY OF LEASE REN TAL RS 1,15,51,947/-, MAY CONSTITUTE INDEPENDENT INCOMES E XCLUDIBLE IN TERMS OF EXPLANATION (BAA) OF SECTION 80HHC OF THE ACT. APART THEREFROM, IT HAS ALSO BEEN POINTED OUT THAT THE IS SUE MAY BE DECIDED IN THE LIGHT OF THE RECENT JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT V. PFI ZER LTD. 233 CTR 521 (BOM). 12.5.1 ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS DEFENDED THE ORDERS OF THE AUTHO RITIES BELOW. 12.5.2 HAVING CONSIDERED THE RIVAL SUBMISSIONS, WE DEEM IT FIT AND PROPER TO SET ASIDE THE ISSUE TO THE FILE OF TH E ASSESSING OFFICER TO BE ADJUDICATED IN THE LIGHT OF THE JUDGM ENT OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF PFIZER LTD ., (SUPRA) EXCEPT TO THE EXTENT OF LEASE RENTAL, WHICH IS LIAB LE TO BE EXCLUDED IN TERMS OF EXPLANATION (BAA) TO SECTION 80HHC OF T HE ACT. THE ASSESSING OFFICER SHALL RE-ADJUDICATE THE CONTROVER SY AFTER ALLOWING THE ASSESSEE AN OPPORTUNITY OF BEING HEARD IN THE MATTER. 12.6 GROUND NO. 10(IV) READS AS FOLLOWS: IN ANY EVENT, THE LD CIT(A) OUGHT TO HAVE DIRECTED THAT THE PROFITS OF THE BUSINESS SHOULD BE INCREASED BY 10 % OF ALL INCOME ASSESSED UNDER THE HEAD OTHER SOURCES INAS MUCH AS TO THAT EXTENT, EXPENDITURE MUST BE DEEMED TO HA VE BEEN INCURRED FOR EARNING SUCH INCOME, RESULTING IN A PR O TANTO REDUCTION IN EXPENDITURE ATTRIBUTABLE TO PROFITS & GAIN OF BUSINESS. BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE REL IED UPON THE DECISION OF MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF SURENDRA ENGINEERING CORPORATION 78 TTJ (BOM) FOR T HE PROPOSITION THAT INDIRECT COSTS SHOULD BE REDUCED A ND HENCE, PROFITS SHOULD BE INCREASED BY 10%. FURTHER RELIANC E WAS PLACED ON THE JUDGMENT IN THE CASE OF HERO EXPORTS 295 ITR 454. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 12.6.1 AFTER CONSIDERING THE SUBMISSIONS OF BOTH SI DES, WE SET ASIDE THE ORDER OF THE COMMISSIONER OF INCOME-TAX ( APPEALS) AND RESTORE THE MATTER BACK TO THE FILE OF THE ASSESSIN G OFFICER TO BE ADJUDICATED AFRESH IN THE LIGHT OF THE AFORESAID JU DGMENTS AND ACCORDING TO LAW, AFTER AFFORDING AN OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 12.7 GROUND NO. 10(V) IS AS FOLLOWS: THAT RS 1,54,01,000/- AND R 9,85,390/- WERE NOT EL IGIBLE FOR INCLUSION IN PROFITS OF BUSINESS FOR THE PURP OSES OF SECTION 80-HHC. AT THE TIME OF HEARING BEFORE US, THE LEARNED COUNS EL FOR THE ASSESSEE DID NOT PRESS FOR THIS GROUND AND, THUS, T HE SAME IS DISMISSED AS NOT PRESSED. 12.8 GROUND NO. 10(VI) IS AS FOLLOWS: IN NOT ACCEPTING THE CONTENTION OF THE APPELLANT T HAT ONLY 90% OF THE NET INCOME, OF THE NATURE OF ITEMS SPECI FIED IN (III) ABOVE AS WELL AS INTEREST INCOME, I.E. INCOME LESS EXPENSES SHOULD BE REDUCED WHILE ARRIVING AT THE FI GURE OF BUSINESS PROFIT 12.8.1 THE ISSUE RAISED BY THE ASSESSEE ASKING FOR SUBJECTING THE ITEMS OF INCOME / RECEIPTS TO 90% REDUCTION ON NET INCOME BASIS BY INVOKING EXPLANATION (BAA) TO SECTION 80 H HC OF THE ACT AND NOT ON GROSS RECEIPTS BASIS. WE FIND THAT A SI MILAR ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE BY THE HONB LE SUPREME COURT IN THE CASE OF ACG ASSOCIATED CAPSULES P. LTD . (2012) 343 1TR 89 (SC), WHEREIN, THE HONBLE SUPREME COURT HAS UPHELD THE CONTENTION THAT SUCH RECEIPTS SHOULD BE CONSIDERED ON NET INCOME BASIS AND NOT ON GROSS RECEIPTS BASIS FOR TH E PURPOSE OF INVOKING EXPLANATION (BAA) TO SECTION 80 HHC OF THE ACT. WE DIRECT THE ASSESSING OFFICER TO DECIDE THE ISSUE IN THE LIGHT OF THE SAME. 13. GROUND NO. 11 READS AS FOLLOWS: 11. THE LD CIT(A) FURTHER ERRED IN CONFIRMING REJE CTION OF THE APPELLANTS CLAIM FOR DEDUCTION OF A SUM OF RS 2 CRORES PAID BY THE APPELLANT AS A TESTIMONIAL TO MRS A.R. AGA. WITHOUT PREJUDICE TO THE GENERALITY OF THE ABOVE GR OUND, THE LD CIT(A) ERRED IN TAKING A VIEW THAT THE SAID EXPE NDITURE WAS IN THE NATURE OF EX-GRATIA AND WAS THEREFORE, N OT ALLOWABLE EITHER U/S 37(1) OR ANY OTHER PROVISION O F THE ACT. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE LD CIT(A) OUGHT TO HAVE HELD THE SAID EXPEN DITURE WAS INCURRED WHOLLY OR EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS AND WAS ALLOWABLE AS SUCH. 13.1 THE FACTS, IN BRIEF, IN RELATION TO THIS GROU ND ARE THAT MR. R. D. AGA WAS THE MANAGING DIRECTOR OF THE COMP ANY WHEN HE DIED IN HARNESS ON FEBRUARY 16, 1996. HE WAS IN BOMBAY ON A BUSINESS TRIP WHEN HE SUFFERED A MASSIVE HEART AT TACK AND DIED SOON THEREAFTER. THE BOARD OF DIRECTORS OF THE COMP ANY AT ITS MEETING HELD ON 16/04/1996 DECIDED TO PAY HIS WIDOW MRS. ANU AGA AN AMOUNT OF RS.2,00,00,000/- BY WAY OF A TESTI MONIAL. IN THIS CONTEXT, FOLLOWING RESOLUTION WAS PASSED BY TH E BOARD OF DIRECTORS: RESOLVED THAT IN RECOGNITION OF LATE MR. R. D. AGA S PERSONAL QUALITY QUALITIES OF HEART AND HEAD AND TO HONOUR HIS MEMORY, THE COMPANY DO PAY, OUT OF THE COMPANYS FUNDS, A SUM OF RS. TWO CRORES, AS A TEST IMONIAL AND, IN HIS ABSENCE, MRS. ANU AGA BE ENTITLED TO RE CEIVE THE SAID SUM FOR HERSELF SUCH THAT SHE WILL HAVE FULL D OMAIN OVER THE SAID SUM 13.2 DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE COMPANY CLAIMED THIS AMOUNT AS BUSINESS EXPENDITURE AND THE SAME WAS ALSO CHARGED TO THE PROFIT AND LOSS ACCOUN T OF THE YEAR ENDED 31 ST MARCH, 1997. THESE ACCOUNTS WERE APPROVED BY THE SHAREHOLDERS AT THE ANNUAL GENERAL MEETING. THE ASS ESSING OFFICER REJECTED THE CLAIM OF THE ASSESSEE. IN THE VIEW OF THE ASSESSING OFFICER, THE PAYMENT WAS NOT IN THE NATUR E OF EXPENDITURE SINCE THE LATE MR. AGA DIED ON 16.2.9 6 AND THEREFORE HE COULD NOT HAVE RENDERED ANY SERVICE TO THE ASSES SEE DURING THE FINANCIAL YEAR 1996-97; THAT NO SERVICES HAVE BEEN OFFERED TO THE ASSESSEE BY ANYBODY; THAT THE PAYMENT IS VOLUNT ARY IN NATURE, THERE BEING NO CONTRACTUAL OBLIGATION TO MA KE THE PAYMENT; THAT THE PAYMENT COULD BE, ALTERNATIVELY, CALLED AS APPROPRIATION OF PROFIT; THAT IT IS A LUMP-SUM PAYM ENT AND SHOULD, THEREFORE, BE TREATED AS CAPITAL EXPENDITUR E; THAT IT SHOULD BE VIEWED AS PAYMENT ATTRIBUTABLE TO THE RIG HT ACQUIRED BY THE APPELLANT TO OBTAIN THE SERVICES OF MR. AGA FOR ITS USE. THE RECIPIENT, I.E. MRS. AGA HAS TREATED THE PAYMENT AS CAPITAL RECEIPT IN HER HANDS. 13.3 IN APPEAL BEFORE THE CIT(A), THE CIT(A) HELD THAT THE PAYMENT WAS IN THE NATU8RE OF AN EX-GRATIA AND THAT IT WAS NOT PAID FOR ANY SERVICES RENDERED BY ANYBODY. THE CIT( A) ACCORDINGLY HELD THAT NO DEDUCTION WAS ALLOWABLE UN DER SECTION 37(1) OF THE ACT. BEING AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE US. 13.4 BEFORE US, THE LEARNED COUNSEL FOR THE ASSESS EE SUBMITTED THAT THE PAYMENT WAS MADE ON ACCOUNT OF C OMMERCIAL EXPEDIENCY. ELABORATING ON THIS POINT, IT WAS SUBMI TTED THAT MR. AGA WAS A COMMERCE GRADUATE AND DID HIS ECONOMICS T RIPOS IN CAMBRIDGE. HE UNDERWENT A PROGRAMME FOR MANAGEMENT DEVELOPMENT OF HARVARD UNIVERSITY. HE WAS CHAIRMAN OF THE NATIONAL COMMITTEE ON ENERGY OF CII AND LED THE CII ENERGY MISSION TO THE USA. THE LEARNED COUNSEL POINTED OUT THAT MR. AGA TOOK OVER AS THE MANAGING DIRECTOR OF THE ERSTW HILE THERMAX IN 1974 AND OF THE PRESENT ASSESSEE IN 1981, I.E. R IGHT FROM THE TIME OF ITS INCORPORATION. HE WAS AN ICONIC FIGURE AND THE DRIVING FORCE BEHIND THERMAX. HE FURTHER EXPLAINED THE CONT RIBUTIONS MADE BY MR AGA TO THERMAX THAT IT WAS BECAUSE OF HI M THAT THERMAX ACHIEVED SUCH FAME AS AN ENGINEERING MAJOR. HE PIONEERED NEW PRODUCTS COVERING A WIDE SPECTRUM OF WATER TREATMENT EQUIPMENT, POLLUTION CONTROL EQUIPMENT, E NERGY SAVING DEVICES, CO-GENERATION SYSTEMS ETC. DURING MR AGAS TENURE (1981 TO 1995-96) THE TURNOVER OF THERMAX INCREASED MANIF OLD REFLECTING MR. AGAS CONTRIBUTION TO THE GROWTH OF THERMAX. DURING THIS PERIOD ITS PRODUCT RANGE ALSO INCREASED MANIFOLD FROM MERE BOILERS TO WATER TREATMENT, POLLUTION CON TROL, CHEMICALS, WASTE MANAGEMENT ETC. HE WAS ALSO INSTRU MENTAL IN BRINGING ABOUT A LOT OF FOREIGN PARTNERS FOR THERMA X TO TIE-UP LEADING TO DIVERSIFICATION OF ITS PRODUCT PROFILE. MR. AGA WAS A CAPTAIN PAR EXCELLENCE. NO CORPOREAL GESTURE COULD EVER REFLECT THE TRUE INTRINSIC AND INTANGIBLE WORTH OF THE MAN TO T HE COMPANY. ACCORDING TO THE LEARNED COUNSEL, THE DIRECT CONCER N AND PURPOSE OF THIS TESTIMONIAL WAS TO APPRECIATE HIS C ONTRIBUTION TO THE GROWTH OF THE COMPANY, HIS PERSONAL QUALITIES O F LEADERSHIP, ABILITY AND ENTREPRENEURSHIP WHICH NONE WAS LIKELY TO EVER EQUAL IN THERMAX; THAT THE PAYMENT RECOGNIZES AND ACKNOWL EDGES ALL THAT MR. AGA HAD DONE FOR THE COMPANY IN THE PAST W AY BEYOND HIS CALL OF DUTY. HE HAD AFTER ALL DEVOTED THE BEST YEARS OF HIS LIFE IN THE SERVICE OF THE COMPANY. IT WAS ALSO MADE BY WAY OF A TESTIMONIAL IN RECOGNITION OF HIS PERSONAL QUALITIE S OF HEART AND HEAD AND TO HONOUR HIS MEMORY. IN SUM AND SUBSTANCE , IT WAS SUBMITTED THAT THERE WAS COMMERCIAL EXPEDIENCY INVO LVED IN THE IMPUGNED PAYMENT. 13.5 THE LEARNED COUNSEL FOR THE ASSESSEE THEN PRO CEEDED TO PUT-FORTH HIS SUBMISSIONS IN REGARD TO ALLOWABIL ITY OF THE CLAIM UNDER SECTION 37(1) OF THE ACT. ACCORDING TO HIM, THE PAYMENT IN QUESTION IS AN EXPENDITURE INCURRED WHOLLY AND EXCL USIVELY FOR THE PURPOSES OF THE BUSINESS OF THE ASSESSEE AND MO TIVATED ENTIRELY ON GROUNDS OF COMMERCIAL EXPEDIENCY AND IS HENCE ALLOWABLE AS A BUSINESS EXPENDITURE UNDER SECTION 3 7(1) OF THE ACT. IT WAS INCURRED BY THE ASSESSEE IN ITS CAPACIT Y AS A TRADER AND WAS A PAYMENT WHICH WAS INCIDENTAL TO THE TRADE CARRIED BY THE COMPANY. AS PER HIM, IT IS NOT THE CASE OF THE AO THAT THE AMOUNT PAID IS EITHER EXCESSIVE OR HAS ANY PERSONAL ELEMENT IN IT. THE PAYMENT WAS NOT CHARITY BECAUSE NEITHER DID MR. AGAS WIDOW ASK FOR NOR DID SHE EVER EXPECT SUCH A TESTIM ONIAL NOR DID SHE HAVE THE NEED FOR SUCH A TESTIMONIAL. THE EXPE NDITURE INCURRED CANNOT BE SAID TO BE CAPITAL IN NATURE, I N THAT, NEITHER WAS IT COST OF ACQUIRING A CAPITAL ASSET NOR WAS IT INCURRED FOR OBTAINING AN ADVANTAGE IN THE CAPITAL FIELD. HE SUB MITTED THAT A POSTHUMOUS PAYMENT CANNOT GIVE A RIGHT TO THE ASSES SEE TO OBTAIN SERVICES OF A DECEASED PERSON AND THAT THE P AYMENT WAS FOR MUCH MORE THAN SERVICES RENDERED IN THE PAST. ON THE POINT OF APPROPRIATION OF PROFITS, IT WAS SUBMITTED THAT THE PAYMENT CANNOT ALSO BE CALLED APPROPRIATION OF PROFITS IN A S MUCH AS, UNDER THE COMPANIES ACT, APPROPRIATION OF PROFITS C AN BE ONLY BY WAY OF DIVIDEND, FOR WHICH THERE ARE SPECIFIC PROVI SIONS AND A PRESCRIBED PROCEDURE IN LAW. THE PAYMENT WAS MADE T O MR. AGA / MRS. AGA NOT IN THEIR CAPACITY AS SHAREHOLDER/S. TH E PAYMENT WAS MADE TO HER AS THE WIFE OF AN EMPLOYEE-DIRECTOR OF THE COMPANY WHO DIED WHILE ON DUTY. EXPLAINING FURTHER, HE SUBMITTED THAT THE EXPENDITURE INCURRED ON GROUNDS OF COMMERCIAL EXPEDIENCY MAY NOT BE INCURRED WITH A VI EW TO MAKING PROFITS; THAT EVERY EXPENDITURE NEED NOT BE MATCHED BY CORRESPONDING INCOME; THAT WHAT IS IMPORTANT IS THA T THE PURPOSE OR RATIONALE MUST BE A BUSINESS PURPOSE AND IT MU ST BE GERMANE TO THE BUSINESS AND MUST NOT BE DE HORS THE BUSINESS. THE LEARNED COUNSEL SUBMITTED THAT IT SHOULD REFLEC T A GENUINE TRANSACTION AND MUST NOT HAVE BEEN ENTERED INTO FOR COLLATERAL PURPOSES OR FOR INDIRECT OR IMPROPER MOTIVE OR FOR SOME CONSIDERATION NOT ALIGNED WITH THE BUSINESS NEEDS O F THE ASSESSEE. HE CONCLUDED BY SUBMITTING THAT THE MERE FACT THAT THE RECIPIENT OF THE MONEY CONTENDS THAT THE RECEIPT IS OF CAPITAL NATURE IN HER HANDS WOULD NOT BE DETERMINATIVE OF T HE CHARACTER OF THE EXPENDITURE IN THE HANDS OF THE COMPANY. IN SUPPORT OF HIS VARIED SUBMISSION, THE LEARNED COUNSEL PLACED RELIA NCE ON VARIOUS DECISIONS OF JUDICIAL FORUMS. THE LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE OTHER HAND, SUPPORTED THE OR DERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT NO INTERFERENC E IS CALLED FOR IN THE ORDER OF THE CIT(A). 13.6 THE ISSUE BEFORE US IS WITH REGARD TO TAXABIL ITY OF LUMP SUM PAYMENT MADE GRATUITOUSLY TO THE WIDOW MRS. ARN AWAZ AGA. A SIMILAR ISSUE WAS RAISED IN THE REVENUES APPEAL IN ITA NO. 946/PN/2001 ALSO. IN THIS REGARD, THE LEARNED AUTH ORIZED REPRESENTATIVE FOR THE ASSESSEE HAS SUBMITTED THAT CENTRAL BOARD OF DIRECT TAXES HAS ISSUED CIRCULAR NO.573 DATED 21 .08.1990 CLARIFYING THAT ANY SUCH GRATUITOUS LUMP SUM PAYMEN T WILL NOT BE TAXABLE AS INCOME IN THE HANDS OF THE RECIPIENT WIDOW UNDER THE INCOME TAX ACT. THE LUMP SUM GRATUITOUS PAYMEN T IS A TESTIMONIAL OF THE NATURE OF A GIFT AND NOT REMUNER ATION TO THE EMPLOYEE FOR HIS SERVICES. THE PURPOSE FOR WHICH T HE AMOUNT WAS PAID WAS TO EXPRESS GRATITUDE FOR WHAT HE HAD D ONE AND IN APPRECIATION OF HIS PERSONAL QUALITIES. OBVIOUSLY THE TERMS OF THE EMPLOYMENT OF THE DECEASED DIRECTOR MR. AGA DID NOT ENTITLE HIM TO SUCH A BENEFIT. THE LUMP SUM GRATUITOUS PAYMENT MADE AFTER DEATH TO THE WIDOW THEREFORE CANNOT BE SAID TO BE W HOLLY AND EXCLUSIVELY INCURRED BY THE ASSESSEE FOR THE PURPOS E OF ITS BUSINESS. IT IS PERTINENT TO MENTION THAT IN THE L IGHT OF THE CLARIFICATION GIVEN BY THE CBDT IN CIRCULAR NO.573 THE TESTIMONIAL IN THE NATURE OF GRATUITOUS LUMP SUM PA YMENT IS NOT TAXABLE UNDER THE ACT IN THE HANDS OF THE WIDOW MRS . AGA. ONE AND THE SAME OUTGOING WOULD NOT BE ELIGIBLE FOR TAX RELIEF TWICE IN SUCH CIRCUMSTANCES. ACCORDINGLY, GROUND RAISED BY THE ASSESSEE IN THIS REGARD IS DISMISSED. 14. GROUND NO. 12 READS AS FOLLOWS: 12. THE LD CIT(A) ERRED IN HOLDING THAT THE AMOUN T OF RS 3 CRORES ACCRUED BY THE APPELLANT UNDER NON-COMPETE COVENANT WAS ASSESSABLE AS INCOME OF THE APPELLANT ALONGWITH A FURTHER SUM OF RS 3 CRORES RECEIVED TOW ARDS TRANSFER OF BUSINESS OF THE COMPANY. THE LD CIT(A) OUGHT TO HAVE ACCEPTED THE CONTENTION OF THE APPELLANT THAT BOTH THE AMOUNTS IN QUESTION WERE IN THE NATURE OF CAPITAL RECEIPTS NOT EXIGIBLE TO TAX. THE LD CIT(A) ERRED IN CLUBBING THE RECEIPT OF RS 3 CRORES UNDER NON-COMPETE AGREEMENT WITH RS 3 CRORES RECEIV ED UNDER AGREEMENT FOR TRANSFER OF BUSINESS. THE LD CIT(A) ALSO ERRED IN HOLDING THAT THE APPELL ANT HAD NOT TRANSFERRED A SOURCE OF INCOME AS CONTENDED BY IT AND FOR THAT REASON THE SAID AMOUNTS WERE NOT IN THE NA TURE OF CAPITAL RECEIPTS. IN THE ALTERNATIVE THE LD. CIT(A) ERRED IN HOLDING THAT EVEN IF IN THE NATURE OF CAPITAL RECEIPT, THE PROVISIONS OF SECTION 50 WERE APPLICABLE THERETO. THE LD. CIT(A) OUGHT TO HAVE ATLEAST ACCEPTED THE A LTERNATE CONTENTION OF THE APPELLANT THAT THE AMOUNTS WERE ASSESSABLE AT THE RATE APPLICABLE TO LONG TERM CAPI TAL GAINS. THE LD.CIT(A) OUGHT TO HAVE ACCEPTED THE VARIOUS FA CETS OF THE GROUNDS TAKEN BEFORE HIM AND THE ARGUMENTS ADVA NCED BEFORE HIM AND HELD THAT THE AMOUNTS WERE NOT IN AN Y CIRCUMSTANCES TAXABLE AS INCOME OF THE APPELLANT. THE RELEVANT FACTS, AS EXPLAINED BY THE LEARNED COU NSEL FOR THE ASSESSEE, ARE THAT THE COMPANY WAS INTER-ALIA I N THE BUSINESS OF DESIGNING, ENGINEERING, PROCUREMENT, DI STRIBUTION, MARKETING, AND SALE OF WATER TREATMENT CONDITIONING AND PURIFICATION PRODUCTS ESPECIALLY RELATED TO INDUSTR IAL APPLICATIONS. DURING THE COURSE OF THIS WATER TREATMENT BUSINESS OF TWENTY YEARS THE COMPANY HAD ACQUIRED CONSIDERABLE KNOW-HO W, TECHNOLOGIES, AND TRADEMARKS. IT HAD ALSO ACQUIRED A STRONG MARKET PRESENCE AND HAD ESTABLISHED RELATED INFRAST RUCTURE WHICH COULD CATER TO THE POTENTIAL GROWTH OF THE BU SINESS. IT TRANSFERRED, ON A GOING CONCERN BASIS, THIS BUSINES S UNDERTAKING CONSISTING OF ALL ASSETS, PRODUCTS, GOODWILL, MANPO WER, INTELLECTUAL PROPERTY, PENDING CUSTOMER ORDERS AND ALL OTHER INFORMATION, MATERIAL/RELEVANT FOR THE CONDUCT OF T HE SAID BUSINESS, AS DETAILED IN THE BUSINESS TRANSFER AGRE EMENT (BTA) ENTERED INTO WITH THERMAX CULLIGAN WATER TECHNOLOGI ES LIMITED (TCWTL) ON 29 TH MARCH, 1997 (PAPER BOOK PAGE NO 85 - 108). TCWTL WAS A 50:50 JOINT VENTURE BETWEEN THERMAX AND CULLIGAN INTERNATIONAL COMPANY, USA.IN CONSIDERATIO N OF SUCH TRANSFER THE COMPANY RECEIVED A SUM OF RS. 3 CRORES . DURING THE COURSE OF ASSESSMENT PROCEEDINGS, ITT WAS CONTENDED BEFORE THE AO THAT THIS SUM WAS A CAPITAL RECEIPT NOT EXIGIBLE TO TAX. 14.1 AS REGARDS THE NON-COMPETE AGREEMENT (NCA), I T WAS EXPLAINED THAT ON 29 TH MARCH 1997 ITSELF THE COMPANY ALSO ENTERED INTO A SEPARATE NON-COMPETITION AGREEMENT WITH TCWTL (NCA) IN TERMS OF WHICH IT AGREED TO, INTER-A LIA, GIVE UP, PART WITH AND DESIST FROM CARRYING ON THE WATER TRE ATMENT PRODUCT BUSINESS ANYWHERE IN INDIA. (PAPER BOOK PAG E NO 109 - 111) FOR A PERIOD OF 25 YEARS. IN CONSIDERATION OF SUCH RESTRICTIVE COVENANT, THE COMPANY WAS PAID A FURTHER SUM OF RS. 3 CRORES. THE COMPANY CONTENDED THAT THIS SUM WAS ALSO A CAPI TAL RECEIPT NOT EXIGIBLE TO TAX. 14.2 THE ASSESSING OFFICER, HOWEVER, BROUGHT THE S AID TWO RECEIPTS TO TAX AS BUSINESS INCOME HOLDING THAT THE ASSESSEET HAS NOT SOLD ANY UNDERTAKING AND, THEREFORE, IT CANNOT BE CALLED PRICE REALIZED ON SALE OF BUSINESS UNDERTAKING; THAT THE APPELLANT HAS NOT TRANSFERRED ANY UNDERTAKING BUT HAS TRANSFERRED ITS BUSINESS OF MANUFACTURING WATER TREATMENT PRODUCT DIVISION; THAT THE APPELLANT DID NOT HAVE WATER TREATMENT PRODUCT DIVI SION AS A SEPARATE DIVISION. IT HAD WATER TREATMENT PROJECT BUSINESS DIVISION AND OUT OF THIS DIVISION THE APPELLANT HAD CARVED THE WATER TREATMENT PRODUCT DIVISION AND CLAIMED THE SA ME TO HAVE BEEN SOLD TO TCWTL. EVEN WATER TREATMENT PRODUCT DI VISION HAS NOT BEEN SOLD AS A GOING CONCERN BECAUSE THE APPELL ANT HAD NOT TRANSFERRED ALL ASSETS AND LIABILITIES RELATING THE RETO. ACCORDING TO THE AO NO LIABILITY HAS BEEN TRANSFERRED OUT. ALL T HE EMPLOYEES HAVE NOT BEEN TRANSFERRED AS MENTIONED IN THE BUSIN ESS TRANSFER AGREEMENT. NO ENCUMBRANCES OF ANY KIND HAVE BEEN T RANSFERRED. NO WORK IN PROGRESS HAS BEEN TRANSFERRED. NO OTHER ASSETS HAVE BEEN TRANSFERRED. NO DEPRECIABLE ASSETS HAVE BEEN T RANSFERRED. EVEN GOODWILL, INTELLECTUAL PROPERTY RIGHT AND KNOW -HOW RIGHT CLAIMED TO HAVE BEEN TRANSFERRED BY THE APPELLANT H AVE NOT BEEN TRANSFERRED FULLY BECAUSE ACCORDING TO THE AO, THE ASSESSEE WILL CONTINUE TO BE IN THE BUSINESS OF WATER TREATMENT P ROJECTS BUSINESS DIVISION AND ACCORDING TO HIM TECHNICAL KN OW-HOW, GOODWILL AND INTELLECTUAL PROPERTY RIGHT ACQUIRED B Y THE ASSESSEE WOULD BE REQUIRED FOR THE PURPOSE OF EXECUTING PROJ ECTS OF ITS CONTINUING DIVISION. WHATEVER HAS BEEN RECEIVED BY THE APPELLANT CAN BE CALLED A BENEFIT DERIVED DURING THE COURSE O F BUSINESS AND, THEREFORE, TAXABLE UNDER SECTION 28(IV) OF THE ACT. 14.3 AS REGARDS THE NON-COMPETE AGREEMENT, THE ASS ESSING OFFICER HELD THAT RECEIPT OF RS.3 CRORES TOWARDS SA LE OF THE UNDERTAKING ARE NOT ON ACCOUNT OF FOREGOING ANY INC OME-EARNING SOURCE; THAT THE APPELLANT ONLY AGREED NOT TO COMPE TE WITH TCWTL IN AREAS OF WATER TREATMENT PRODUCT DIVISION; BUT IT CONTINUES TO OPERATE ITS PROJECT DIVISION. THIS NON -COMPETITION AGREEMENT IS VALID ONLY FOR 25 YEARS. THE ASSESSEE HAS ARTIFICIALLY CREATED A DIFFERENCE BETWEEN WATER TREATMENT PRODUC T DIVISION AND WATER TREATMENT PROJECT DIVISION. THE TECHNOLO GY REQUIRED FOR MANUFACTURING WATER TREATMENT PRODUCT DIVISION AND WATER TREATMENT PROJECT DIVISION IS THE SAME. THEREFORE, THE APPELLANT HAS NOT PARTED WITH ANY INCOME-EARNING SOURCE. ACCO RDING TO THE AO, FURTHER AMOUNT OF RS.3 CRORES RECEIVED BY THE A SSESSEE UNDER NCA IS NOTHING BUT CONSIDERATION FOR SALE OF PART O F BUSINESS OF WATER TREATMENT PRODUCT DIVISION AND IS REQUIRED TO BE CLUBBED WITH THE OTHER AMOUNT OF RS.3 CRORES RECEIVED BY TH E APPELLANT SEPARATELY UNDER BUSINESS TRANSFER AGREEMENT. THER EFORE, THE ENTIRE AMOUNT IS TAXABLE UNDER SECTION 28(IV) OF TH E ACT. ALTERNATIVELY, ACCORDING TO THE AO, THE ENTIRE RECE IPT OF RS. 6 CRORES IS TAXABLE AS SHORT-TERM CAPITAL GAINS IN VI EW OF THE PROVISIONS OF SECTION 50 OF THE ACT. THE ASSESSEE I TSELF HAS OFFERED THESE AMOUNTS FOR TAX IN THE COMPUTATION OF INCOME. WITHOUT PREJUDICE TO THE ABOVE, THE AO HAS TAKEN A VIEW THA T THE SALE AND TRANSFER OF THE BUSINESS UNDERTAKING HAD NOT BEEN C OMPLETED BY 31 ST MARCH 1997 AND ACCORDINGLY THE INCOME ARISING THER EFROM SHOULD BE TAXABLE IN THE HANDS OF THE APPELLANT IN ASSESSMENT YEAR 1998-99 BUT, SINCE THE APPELLANT ITSELF HAS OF FERED THESE AMOUNTS FOR TAX IN ASSESSMENT YEAR 1997-98, HE HAS BROUGHT THEM TO TAX ON PROTECTIVE BASIS. BEING AGGRIEVED, THE ASSESSEE CARRIED THE MATTER IN APPEAL TO THE CIT(A). 14.4 THE CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE HELD THAT CONSIDERATION FOR NON COMPETE CO VENANT IS NOTHING BUT A DIFFERENT EXPRESSION FOR TRANSFER OF BUSINESS ACTIVITY AND THEREFORE HE CONFIRMED THE VIEW OF THE AO THAT THE ENTIRE COMPENSATION WAS FOR TRANSFER OF BUSINESS. ACCORDIN G TO HIM ONE WITHOUT THE OTHER IS MEANINGLESS. HE FURTHER HELD T HAT WHEN THERE ARE MULTIPLE ACTIVITIES OF AN ASSESSEE AND IF ONE OF THEM IS TRANSFERRED FOR A NON COMPETE COVENANT IT CANNOT BE SAID THAT SUCH AN AGREEMENT TAKES AWAY THE SOURCE OF INCOME O F THE ASSESSEE. ACCORDING TO THE CIT(A), SINCE THE APPEL LANT CARRIED ON MANY BUSINESSES AND ONE OF THEM WAS TRANSFERRED TRA DING STRUCTURE OF THE APPELLANT CANNOT BE SAID TO HAVE B EEN AFFECTED. HE HELD THAT THERE WAS NOTHING ON RECORD TO SUGGEST THAT TRANSFER HAS AFFECTED THE TRADING STRUCTURE. ACCORDING TO TH E CIT(A) THE DECISION IN THE CASE OF BEST & CO. WAS NOT APPLICAB LE, SINCE ACCORDING TO HIM UNLIKE IN THE CASE OF BEST, RECEIP T BY WAY OF NON-COMPETE IS CONNECTED WITH THE TRANSFER OF BUSIN ESS ACTIVITIES AND NOT WHOLLY UNCONNECTED WITH SUCH TRANSFER. APPL YING THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F ARTEX MANUFACTURING CO (227 ITR 262) HE HELD THAT THE SAI D SUM WAS TAXABLE HAVING BEEN RECEIVED DURING THE CONTINUANCE OF THE BUSINESS. HE FURTHER HELD THAT EVEN IF RECEIPTS ARE CAPITAL IN NATURE PROVISIONS OF SECTION 50 OF THE ACT WOULD AP PLY. ACCORDINGLY, THE CIT(A) CONFIRMED THE ORDER OF THE AO THAT THE SAID SUMS WERE TAXABLE EITHER AS BUSINESS INCOME OR AS SHORT TERM CAPITAL GAINS U/S 50 OF THE ACT. 14.5 BEFORE US, THE LEARNED COUNSEL FOR THE ASSESS EE ASSAILED THE ORDER OF THE CIT(A) AND FILED WRITTEN SUBMISSIONS WHICH ARE EXTRACTED BELOW FOR THE SAKE OF BREVITY: SUBMISSIONS: GENERAL A. THERMAX AND CULLIGAN HAD INITIALLY ENTERED INTO A SHAREHOLDERS AGREEMENT ON 17 TH DECEMBER, 1996 WITH THE INTENTION OF FORMING A JOINT VENTURE FOR MANUFACTUR ING PRODUCTS, SYSTEMS AND SERVICES FOR WATER TREATMENT FOR COMMERCIAL, HOUSEHOLD, INDUSTRIAL AND OTHER MARKETS AND ALSO FOR MANUFACTURE ETC. OF PURIFIED AND BOTTLED D RINKING WATER. TCWTL WAS TO BE A 50:50 JOINT VENTURE.THIS AGREEMENT WAS FOLLOWED BY THE BUSINESS TRANSFER AGREEMENT (BTA) AND THE NON-COMPETITION AGREEMENT ( NCA) BETWEEN THE JV COMPANY, TCWTL AND THERMAX.UNDER TH E BTA THERMAX TRANSFERRED ON A GOING CONCERN BASIS IT S BUSINESS UNDERTAKING CONSISTING OF ALL TANGIBLE AND INTANGIBLE ASSETS, PRODUCTS, GOODWILL, MANPOWER, INTELLECTUAL PROPERTY (PROPRIETARY INFORMATION, TRA DEMARKS, COPYRIGHTS ETC) LICENSES, PERMITS, KNOW HOW ( PROC ESSES, TECHNIQUES, CONFIDENTIAL INFORMATION, TRADE SECRETS , ETC), PENDING CUSTOMER ORDERS AND ALL OTHER INFORMATION, MATERIAL/RELEVANT FOR THE CONDUCT OF THE SAID BUSIN ESS, AS DETAILED IN THE BTA. B. THE ABOVE TRANSFERS WERE EFFECTED AS PART AND PARCE L OF THE BUSINESS/BUSINESS UNDERTAKING WHICH CHANGED HANDS O N A GOING CONCERN BASIS. IT WAS THUS A CASE OF SLUMP S ALE OF THE WATER TREATMENT PRODUCT BUSINESS. IT WAS THE CONTEN TION OF THE APPELLANT THAT, IN TERMS OF THE LAW AS IT THEN STOOD, A SLUMP SALE WAS NOT EXIGIBLE TO TAX EVEN UNDER THE H EAD CAPITAL GAINS. THIS VIEW IS SUPPORTED BY A PLETHORA OF CASE LAW INCLUDING OF THE SUPREME COURT C. THE INCOME TAX ACT OF THE RELEVANT TIME DID NOT CON TAIN ANY DEFINITION OF A SLUMP SALE. FINANCE ACT, 1999 INT RODUCED SECTION 50B CONTAINING SPECIAL PROVISIONS FOR COMPU TATION OF CAPITAL GAINS IN CASE OF SLUMP SALE. THIS SUBSE QUENT AMENDMENT ITSELF IS SUPPORTIVE OF THE APPELLANTS C ONTENTION THAT, CONSIDERATION RECEIVABLE IN THE EVENT OF A SL UMP SALE IS A CAPITAL RECEIPT AND NOT A BUSINESS INCOME. THIS VIEW IS SUPPORTED BY A PLETHORA OF CASE LAW INCLUDING OF TH E SUPREME COURT. FOLLOWING THE DECISION OF THE SUPRE ME COURT IN THE CASE OF SINCE THE BUSINESS OR UNDERTA KING, WHICH WAS UNDOUBTEDLY A CAPITAL ASSET, HAS NO COST OF ACQUISITION, THE CHARGE OF TAX UNDER SECTION 45 FAI LS. D. THIS POSITION IN LAW WAS OVERCOME BY THE INTRODUCTI ON OF SECTION 50B WITH EFFECT FROM AY 2000-01 MAKING GAIN S ARISING ON SLUMP SALE EXIGIBLE TO TAX BY PROVIDING THAT THE NET WORTH OF THE TRANSFERRED UNDERTAKING WOULD BE D EEMED TO BE THE COST OF ACQUISITION THEREOF. E. SECTION 2(42C) WAS INSERTED TO DEFINE A SLUMP SALE AS TRANSFER OF ONE OR MORE UNDERTAKINGS AS A RESULT OF THE SALE FOR LUMPSUM CONSIDERATION WITHOUT VALUES BEING ASSI GNED TO THE INDIVIDUAL ASSETS AND LIABILITIES IN SUCH SALES . FOR THIS PURPOSES DEFINITION OF AN UNDERTAKING IN S 2(19)( AA) WAS ADOPTED SO AS TO INCLUDE THEREIN ANY PART OF AN UN DERTAKING OR A UNIT OR DIVISION OF AN UNDERTAKING OR A BUSIN ESS ACTIVITY TAKEN AS A WHOLE BUT DOES NOT INCLUDE INDI VIDUAL ASSETS OR LIABILITIES OR ANY COMBINATION THEREOF NO T CONSTITUTING A BUSINESS ACTIVITY. THUS, EVEN UNDER THE POST- AMENDMENT STATUTE IN ORDER TO QUALIFY AS A SLUMP SA LE, EVEN A PART OF AN UNDERTAKING, UNIT OR A DIVISION OF AN UNDERTAKING OR A BUSINESS ACTIVITY CAN CONSTITUTE T HE SUBJECT MATTER OF SLUMP SALE 1. ON SOME SPECIFIC VIEWS TAKEN BY THE AO A. IN VIEW OF THE DEFINITION OF AN UNDERTAKING IN EXPLANATION TO S 2(19AA) PART OF UNDERTAKING ETC - THE CONTENTION OF THE AO THAT ONLY PRODUCT DIVISION HAS BEEN TRANSFERRED BY CULLING IT OUT FROM THE PROJECT DIVI SION IS CONTRARY TO THE SUBSEQUENT LEGISLATION. THE ACTIVI TY OF MANUFACTURING WATER TREATMENT PRODUCTS WAS ALL ALON G A DISTINCT BUSINESS ACTIVITY OF THE WATER TREATMENT DIVISION. SO WAS THE CASE WITH THE PROJECT ACTIVITY . AS A MATTER OF FACT, IN FY 1993-94 THE WATER TREATMENT BUSINESS WAS SEGREGATED INTO TWO SUBDIVISIONS NAMEL Y PROJECTS AND PRODUCTS. PROJECT DIVISION FOCUSED ON LARGE TURN-KEY PROJECTS INVOLVING SITE ERECTION AND INSTA LLATION. THE VALUE OF PROJECT DIVISION JOBS WAS ALSO COMPARA TIVELY LARGE. PRODUCT DIVISION FOCUSED ESSENTIALLY ON STAN DARD PRODUCTS ALONG WITH SMALL TO MEDIUM SIZED PLANTS WH ICH USE STANDARD PRODUCTS IN A MODULAR FORM. STANDARD PRODUCTS INCLUDE SOFTENERS, DOSERS, FILTERS, DEMINERALIZATION PLANTS, REVERSE OSMOSIS PLANTS AND COLOUR REMOVAL SYSTEMS. B. IT IS THUS NOT AS IF THE APPELLANT HAS DONE SOME NO TIONAL EXERCISE OCCASIONED BY THE BTA. C. THE FOLLOWING FIGURES OF THE PRODUCT BUSINESS MAY B E NOTED: YEAR ENDED TURNOVER RS. (CRORES) 31.3.1994 10.77 31.3.1995 15.72 31.3.1996 16.97 31.3.1997 18.18 THESE FIGURES ARE INDEPENDENTLY AVAILABLE IN THE CO MPANYS BOOKS OF ACCOUNT TO DISPROVE THE CONTENTION OF THE AO THAT THERE WAS NO INDEPENDENT PRODUCT BUSINESS. D. THE PRODUCT DIVISION ALSO HAD DEDICATED INFRASTRUCT URE AND MANPOWER. E. THE AO/CIT(A) HOWEVER CONCEDE THAT WHAT HAS BEEN TRANSFERRED IS A BUSINESS WHICH SHOULD SUFFICE T O MAKE THE SALE A SLUMP SALE AS JUDICIALLY UNDERSTOOD AN D AS SUBSEQUENTLY DEFINED IN THE ACT. F. SINCE A BUSINESS HAS BEEN TRANSFERRED, THERE IS N O BASIS FOR THE AO TO SAY THAT NO INCOME EARNING SOURCE HAS BEEN TRANSFERRED. G. IT IS NOW SETTLED LAW THAT BUSINESS AND BUSINESS UNDERTAKING CONSTITUTE A CAPITAL ASSET. THIS IS SO BECAUSE, A CAPITAL ASSET HAS BEEN DEFINED IN SECTIO N 2(14) TO MEAN PROPERTY OF ANY KIND. BUSINESS IS A SOURC E OF INCOME. THE FIGURES OF TURNOVER OF THE PRODUCT BUSI NESS AS GIVEN ABOVE ARE SUFFICIENT TO CONFIRM THIS FACTU AL POSITION. H. THE OTHER CONTENTION OF THE AO IS THAT LIABILITIES AND ENCUMBRANCES HAVE NOT BEEN TRANSFERRED. I. UNLIKE THE DEFINITION OF DE-MERGER (S 2(19AA) INTRO DUCED BY THE FINANCE ACT, 1999 WITH EFFECT FROM ASSESSMEN T YEAR 2000-01, WHICH REQUIRES THAT ALL THE PROPERTY OF THE UNDERTAKING AS WELL AS ALL THE LIABILITIES RELATING TO THE UNDERTAKING HAVE TO BE TRANSFERRED IN ORDER TO QUAL IFY AS A DE-MERGER, THERE IS NO SUCH REQUIREMENT IN THE CA SE OF A SLUMP SALE. IT IS THUS NOT A PRE-CONDITION THAT A LL OR ANY LIABILITIES OF THE UNDERTAKING SHOULD BE TRANSFERRE D IN ORDER TO QUALIFY AS A SLUMP SALE. A SLUMP SALE IS T HAT IN WHICH THE UNDERTAKING IS TRANSFERRED WITHOUT VALUE BEING ASSIGNED TO INDIVIDUAL ASSETS AND LIABILITIES. THEREFORE, THE OTHER CONTENTION OF THE AO THAT LIAB ILITIES OF THE PRODUCT DIVISION HAVE NOT BEEN TRANSFERRED IS A LSO NOT BORNE OUT BY LEGISLATIVE INTENT. IN ANY EVENT, IF LIABILI TIES HAD BEEN ALSO TRANSFERRED THE CONSIDERATION WOULD HAVE BEEN ADJUS TED PRO TANTO. J. THE AOS CHARGE THAT ALL THE EMPLOYEES OF THE WATER TREATMENT HAVE NOT BEEN TRANSFERRED HAS NO SIGNIFIC ANCE IN THAT THE LAW DOES NOT REQUIRE THAT THERE SHOULD BE A TRANSFER OF ALL OR ANY EMPLOYEES. THIS IS ESSENTIAL LY A COMMERCIAL DECISION WHICH IS BEST LEFT TO THE PARTI ES. EVEN THE PROVISIONS RELATING TO DE-MERGER WHICH STI PULATE TRANSFER OF ALL ASSETS AND ALL LIABILITIES IN THE E VENT OF DE- MERGER DO NOT LAY DOWN TRANSFER OF EMPLOYEES. IN ANY EVENT THE LIST OF 66 PERSONS SELECTED FOR TR ANSFER HAS BEEN ANNEXED TO THE BTA. K. THE OTHER CONTENTION OF THE AO IS THAT EVEN AFTER T RANSFER OF THE BUSINESS AND ATTENDANT TRANSFER OF INTANGIBL ES LIKE KNOW HOW, INTELLECTUAL PROPERTY RIGHTS AND PROPRIET ARY INFORMATION THE APPELLANT CONTINUES TO BE USED IN T HE WATER TREATMENT PROJECT BUSINESS AND HENCE THERE IS NO EFFECTIVE TRANSFER OF THESE INTANGIBLES. L. THIS IS PURE CONJECTURE. WHAT HAVE BEEN TRANSFERRED ARE INTANGIBLES RELATING TO THE PRODUCT BUSINESS. THE E NTIRE TECHNOLOGY RELATING TO THE PRODUCT BUSINESS IS NOT THE SAME AS THAT REQUIRED FOR THE PROJECT BUSINESS. EVE N IF FOR THE TIME BEING IT IS PRESUMED THAT THERE IS SOM E OVERLAPPING TECHNOLOGY, IT CANNOT BE DENIED THAT TH ERE HAS INDEED BEEN A TRANSFER AS AGREED BETWEEN THE PA RTIES. FURTHER, THIS BTA HAS TO BE READ IN THE CONTEXT OF THE NCA WHICH EFFECTIVELY PREVENTS THE APPELLANT FROM U SING THE INTANGIBLES IN MANUFACTURE OF SPECIFIED PRODUCT S. M. THE AOS ALTERNATE STAND IS THAT THE CONSIDERATION RECEIVED IS TAXABLE AS SHORT TERM CAPITAL GAINS IN VIEW OF THE PROVISIONS OF S 50. N. PROVISIONS OF S 50 APPLY TO ONLY TRANSFER OF DEPREC IABLE ASSETS. IN THE PRESENT CASE THE ENTIRE UNDERTAKING/BUSINESS, A NON-DEPRECIABLE ASSET, WAS TRANSFERRED. NO SEPARATE CONSIDERATION HAS BEEN ASS IGNED TO THE DEPRECIABLE ASSETS TRANSFERRED INCIDENTAL TO THE TRANSFER OF THE WHOLE OF THE UNDERTAKING/BUSINESS. THE PROVISIONS OF S 50 DO NOT THEREFORE APPLY TO A SLUMP SALE. IF S 50 WAS APPLICABLE EVEN IN THE CASE OF A SLUMP SALE THERE WAS NO NEED TO INTRODUCE S 50B; A SLUMP SALE COULD INVOLVE TRANSFER OF DEPRECIABLE ASSETS AS WELL AS IS CLEAR FROM EXPLANATION 2 TO S 50B EXPLAINING HOW THE NET WORTH OF THE UNDE RTAKING HAS TO BE COMPUTED. THE CONTENTION OF THE AO/CIT(A) THAT THE RECEIPT OF RS 6 CRORES WAS A SHORT TERM CAPITAL GAINS CHARGEABLE U/ S 50 IS CONTRARY TO BOTH FACTS AND THE POSITION IN LAW. O. THE AO HAS ALTERNATIVELY BROUGHT THE RECEIPT TO TAX UNDER SECTION 28(IV) OF THE ACT. SECTION 28(IV) READS AS FOLLOWS: THE VALUE OF ANY BENEFIT OR PERQUISITE, WHETHER CON VERTIBLE INTO MONEY OR NOT, ARISING FROM BUSINESS OR THE EXE RCISE OF A PROFESSION P. IT IS A SETTLED POSITION THAT RECEIPT OF MONEY CANN OT BE BROUGHT TO TAX UNDER 28(IV) AND ONLY A BENEFIT OR PERQUISITE RECEIVED IN KIND CAN BE THE SUBJECT MATT ER OF CHARGE UNDER THAT CLAUSE. SEVERAL DECISIONS, INCLUD ING THOSE OF THE SC AND THE JURISDICTIONAL HC, HAVE BE EN REFERRED TO THE TABULATION GIVEN AT THE END OF THES E SUBMISSIONS IN WHICH SUPPORT THE VIEW THAT S 28(IV) IS NOT APPLICABLE TO THE CONSIDERATION OF RS 6 CRORES IN QUESTION. Q. EVEN OTHERWISE, THE BENEFIT OR PERQUISITE HAS TO AR ISE FROM CARRYING ON OF BUSINESS. THE CONSIDERATIONS IN DISPUTE ARISE FROM SALE OF BUSINESS/SURRENDER OF A RIGHT RELATING THERETO. 2. NON COMPETE A. UNDER THE NCA THE APPELLANT AGREED TO WAS GIVE UP, PART WITH AND DESIST FROM CARRYING ON THE WATER TREATMEN T PRODUCT BUSINESS ANYWHERE IN INDIA. DURING THE VALI DITY OF THE NCA THE APPELLANT WAS PROHIBITED FROM DIRECT LY OR INDIRECTLY OWNING, MANAGING, OPERATING, ENGAGING IN PRODUCT BUSINESS TRANSFERRED UNDER THE BTA AND IN A NY WAY COMPETING WITH TCWTL. IT WAS ALSO PROHIBITED F ROM PROVIDING INFORMATION, KNOW-HOW OR ASSISTANCE TO AN Y PARTY IN RESPECT OF PRODUCT BUSINESS. B. THE VALIDITY OF THE NCA WAS TWENTY-FIVE YEARS BEGIN NING 29.03.1997. THE LONG DURATION OF THE EMBARGO IS ITS ELF SUGGESTIVE OF THE CHARACTER OF THE RECEIPT AS A CAP ITAL RECEIPT. C. SINCE THE RIGHT TO CARRY ON BUSINESS IS A VALUABLE RIGHT IT CONSTITUTES PROPERTY OF ANY KIND WITHIN THE MEANI NG OF SECTION 2(14) OF THE ACT AND IS THUS A CAPITAL ASSE T. ONCE AGAIN, SINCE THIS CAPITAL ASSET DID NOT HAVE A COST OF ACQUISITION THE RATIO OF THE DECISION OF THE SUPREM E COURT IN B.C.SRINIVASA SETTY (128 ITR 294) SQUARELY APPLI ES AND THE RECEIPT IS A CAPITAL RECEIPT NOT EXIGIBLE TO TA X. D. THE AMENDMENT TO SECTION 55(2) COVERING RIGHT TO C ARRY ON ANY BUSINESS HAS BEEN INTRODUCED ONLY WITH EFFE CT FROM AY 2003-04 AND HENCE HAS NO APPLICATION TO THE YEAR UNDER APPEAL. SIMILARLY S 28(VA) PROVIDING FOR TAXATION OF A SUM RECEIVED FOR NOT CARRYING OUT AN Y ACTIVITY IN RELATION TO ANY BUSINESS HAS ALSO BEEN INTRODUCED ONLY WITH EFFECT FROM AY 2003-04. E. REGARDING THE ALTERNATE CONTENTION OF THE AO THAT T HE RECEIPT UNDER NCA SHOULD ALSO BE RECKONED AS PART O F SALE CONSIDERATION OF THE BUSINESS IT IS RESPECTFUL LY SUBMITTED THAT SINCE BOTH ARE IN THE NATURE OF CAPI TAL RECEIPTS THE END RESULT WOULD BE SAME. F. IN ANY EVENT BOTH RECEIPTS ARISE OUT OF INDEPENDENT AGREEMENTS WHICH DEAL WITH INDEPENDENT RIGHTS AND OBLIGATIONS OF THE TRANSFEROR AND TRANSFEREE. THE T WO CONSIDERATIONS ARE INDEPENDENT OF EACH OTHER THOUGH BOTH HAVE A COMMON CAUSA CAUSANS VIZ. SALE OF THE BUSINESS. G. THE OTHER STAND OF THE AO IS THAT THE CONSIDERATION IS TAXABLE IN AY 1997-98 ONLY ON A PROTECTIVE BASIS TH OUGH IN HIS VIEW THE TRANSACTION WOULD BE TAXABLE IN AY 1998- 99 BECAUSE CERTAIN DEPRECIABLE ASSETS WERE EFFECTIV ELY TRANSFERRED AFTER 31.3.1997. H. THE BTA DEFINES EFFECTIVE DATE AS THE DATE OF CLO SURE OF BUSINESS BY THE TRANSFEROR I.E. MARCH 31, 1997 OR S UCH OTHER EFFECTIVE DATE AS MAY BE AGREED BY THE PARTIE S. CLAUSE 5 OF THE BTA DEFINES COMPLETION OF THE SALE AND TRANSFER OF THE BUSINESS UNDERTAKING SHALL TAKE PLA CE ON THE EFFECTIVE DATE. IT IS RESPECTFULLY SUBMITTED THAT M ERE FACTS THAT SOME ATTENDANT FORMALITIES ETC. ARE DELAYED BEYOND 31 ST MARCH, 1997 WOULD NOT DEFEAT THE INTENTION OF THE PARTIES PARTICULARLY WHEN THE TRANSFEREE HAS ALREADY PAID THE FULL CONSI DERATION OF RS.6 CRORES BEFORE 31 ST MARCH, 1997 ACKNOWLEDGING COMPLIANCE WITH AT LEAST THE SUBSTANTIVE PORTION OF THE BTA. I. IT IS THEREFORE RESPECTFULLY SUBMITTED THAT THE CHA RACTER OF BOTH THE RECEIPTS HAS TO BE DECIDED IN AY 1997-98 I TSELF AND NOT AY 1998-99 AS ALTERNATIVELY HELD BY THE AO. J. FINALLY THE AO HAS SAID THAT THE AMOUNT IS TAXABLE BECAUSE THE ASSESSEE ITSELF HAS OFFERED THE AMOUNT FOR TAX. IT IS RESPECTFULLY SUBMITTED THAT THE SO CALLED OF FER WAS NOT AN UNCONDITIONAL OFFER BUT WAS SUBJECT TO THE CONTE NTIONS PUT FORTH BY THE ASSESSEE WHILE THE RETURN OF INCOME. T HE AO CANNOT IGNORE THIS PART OF THE ANNEXURES TO THE RETURN. 3. SUBMISSIONS WITH REFERENCE TO ORDER OF THE CIT(A) A. FIRST OF ALL THERE IS NO BASIS FOR THE AO AND THE C IT(A) TO HOLD THAT CONSIDERATIONS UNDER TWO DISTINCT AGREEME NTS SHOULD BE CLUBBED TOGETHER AND DEALT WITH TOGETHER. B. IT IS NOT THE CASE OF EITHER THE AO OR OF THE CIT(A ) THAT THE TWO AGREEMENTS ARE SHAM OR BOGUS. C. THERE IS ALSO NO ALLEGATION THAT THE CONSIDERATION IS EXCESSIVE OR UNREASONABLE D. THERE IS AN ACCEPTANCE BY BOTH THE LOWER AUTHORITIE S THAT A BUSINESS WAS TRANSFERRED; THE DISPUTE IS ABOUT TAX TREATMENT OF THE CONSIDERATION RECEIVED FOR TRANSFE R OF THE BUSINESS AND SEPARATE CONSIDERATION FOR ENTERING IN TO A NON COMPETE AGREEMENT. E. ACCORDING TO THE LEARNED CIT(A) ONE WITHOUT THE OTH ER IS MEANINGLESS. IT IS RESPECTFULLY SUBMITTED THAT ONE CAN ENTER INTO A NON COMPETE COVENANT ONLY AFTER GIVING UP THE BUSINESS OR OTHER RIGHT AGAINST WHICH THE TRANS FEROR AGREES NOT TO COMPETE. AS A MATTER OF FACT, NON COM PETE WITHOUT GIVING UP ANY VALUABLE ASSET OR RIGHT IS MEANINGLESS. F. S 55(2) BRINGS TO CHARGE TRANSFER OF RIGHT TO CARR Y ON BUSINESS WHICH CAN HAPPEN ONLY WHEN THE TRANSFEROR GIVES UP THE BUSINESS WHICH HE HAS AGREED NOT TO COMPETE. SIMILARLY S 28(VA) WOULD APPLY WHEN THE RI GHT TO CARRY ON ANY ACTIVITY IN RELATION TO ANY BUSINESS I S GIVEN UP. G. THE ARGUMENT OF THE CIT(A) IS THEREFORE LEGALLY AND FACTUALLY UNTENABLE. THERE IS NO COMMERCIAL AND LEGAL JUSTIFICATION FOR THE STAND OF THE CIT (A)/AO H. EVEN IN THE CASES WHERE NON COMPETE COMPENSATION WA S HELD TO BE A CAPITAL RECEIPT THE NON COMPETE HAD AR ISEN OUT OF OR INCIDENTAL TO THE TRANSFER OF A BUSINESS OR OTHER SIMILAR RIGHT (PLEASE SEE TABULATION OF CASE LAW AT THE END OF THESE SUBMISSIONS). I. RELIANCE PLACED BY THE LEARNED CIT (A) ON THE DECIS ION OF THE SC IN THE CASE OF BEST & COMPANY TANTAMOUNT TO LOSING SIGHT OF THE RATIO THEREOF AND INSTEAD PICKI NG UP A SENTENCE AND APPLYING THE SAME TO CERTAIN SET OF FA CTS. THIS APPROACH OF THE LEARNED CIT(A) IS CONTRARY TO THE DECISION OF THE SC IN THE CASE OF SUN ENGINEERING W ORKS LTD (198 ITR 297) THE JUDGMENT MUST BE READ AS A WHOLE AND THE OBSERVATIONS FROM THE JUDGMENT HAVE TO BE CONSI DERED IN THE LIGHT OF THE QUESTIONS WHICH WERE BEFORE THIS COURT . A DECISION OF THIS COURT TAKES ITS COLOUR FROM THE QUESTIONS INVO LVED IN THE CASE IN WHICH IT IS RENDERED AND, WHILE APPLYING THE DEC ISION TO A LATER CASE, THE COURTS MUST CAREFULLY TRY TO ASCERTAIN TH E TRUE PRINCIPLE LAID DOWN BY THE DECISION OF THIS COURT AND NOT TO PICK OUT WORDS OR LAID DOWN BY THE DECISION OF THIS COURT AND NOT TO PICK AT WORDS OR SENTENCES FROM THE JUDGMENT, DIVORCED FROM THE CONTEXT OF THE QUESTIONS UNDER CONSIDERATION BY THIS COURT, TO SUPPORT THEIR REASONING J. IN THE CASE OF BEST AND COMPANY RELIED UPON BY THE CIT (A) COMPENSATION WAS EXPRESSLY RECEIVED FOR GIV ING UP THE MANAGING AGENCY. THE COUNSEL FOR THE ASSESSEE H AD SOUGHT TO CONTEND THAT IT WAS WHOLLY FOR THE RESTRI CTIVE COVENANT, WHICH CONTENTION WAS, ON FACTS, REJECTED BY THE SC. THE COURT NOTED THAT THE RESTRICTIVE COVENANT W AS AN INDEPENDENT OBLIGATION UNDERTAKEN FOR A SPECIFIED P ERIOD WHICH CAME INTO OPERATION ONLY AFTER THE MANAGING AGENCY WAS TERMINATED. IT WAS WHOLLY UNCONNECTED WI TH THE COMPENSATION ATTRIBUTABLE TO THE TERMINATION OF AGENCY. THE COURT HELD THAT COMPENSATION ATTRIBUTAB LE TO THE RESTRICTIVE COVENANT WAS A CAPITAL RECEIPT NOT ASSESSABLE TO TAX. IN THIS CASE THEREFORE THE ISSUE WAS OF NOTIONAL BI FURCATION OF A COMPOSITE COMPENSATION FOR GIVING UP OF THE MA NAGING AGENCY AND FOR RESTRICTIVE COVENANT. THE COURT MADE THE AFORESAID OBSERVATIONS IN THE CONTEXT OF SUPPORTING THE STAND OF THE ASSESSEE THAT THE COMPENSATION NEEDED TO BE SPL IT UP, WITH SOME PORTION BEING ATTRIBUTED TO RESTRICTIVE COVENA NT. THE COURT HELD THAT THE COMPENSATION WAS A COMBINED ONE BUT H AD TO BE BIFURCATED AND A PORTION THEREOF HAD TO BE ASSIGNED TO THE RESTRICTIVE COVENANT WHICH THE COURT HELD WAS IN TH E NATURE OF A CAPITAL RECEIPT. THE OBSERVATIONS WERE THEREFORE MADE TO SUPPORT SPL ITTING UP OF A CONSOLIDATED COMPENSATION WHICH OBSERVATION S THE CIT (A) HAS TORN OUT OF CONTEXT. K. IN THE PRESENT CASE ALSO THE NON COMPETE COVENANT I S AN INDEPENDENT OBLIGATION UNDERTAKEN BY THE APPELLANT CONSIDERATION FOR WHICH WAS ALSO INDEPENDENTLY AGRE ED UPON BETWEEN THE PARTIES. THE LOWER AUTHORITIES WENT ABOUT ARBITRARILY COMBIN ING THE TWO CONSIDERATIONS AND ARRIVING AT CONCLUSIONS CONT RARY TO THE INTENTIONS OF THE PARTIES. L. THE OTHER REASON ADDUCED BY THE CIT (A) WAS THAT TH E ASSESSEE CARRIED ON MULTIPLE ACTIVITIES OF AN ASSES SEE AND IF ONE OF THEM IS TRANSFERRED FOR A NON COMPETE COV ENANT IT CANNOT BE SAID THAT SUCH AN AGREEMENT TAKES AWAY THE SOURCE OF INCOME OF THE ASSESSEE. FOR LIKE REASON H E HELD THAT THE TRADING STRUCTURE OF THE APPELLANT CANNOT BE SAID TO HAVE BEEN AFFECTED. HE FURTHER OBSERVED THAT THE RE WAS NOTHING ON RECORD TO SUGGEST THAT TRANSFER HAS AFFE CTED THE TRADING STRUCTURE. M. IN THE EARLIER PART OF THESE SUBMISSIONS FOLLOWING FIGURES OF THE PRODUCT BUSINESS HAVE BEEN REPRODUCED: YEAR ENDED TURNOVER RS. (CRORES) 31.3.1994 10.77 31.3.1995 15.72 31.3.1996 16.97 31.3.1997 18.18 N. THESE FIGURES UNEQUIVOCALLY SUGGEST IMPAIRMENT OF T HE WATER TREATMENT PRODUCT BUSINESS. THESE FIGURES WHI CH ARE AVAILABLE IN THE ANNUAL ACCOUNTS OF THE COMPANY HAVE NOT BEEN CHALLENGED. O. COURTS HAVE HELD THAT IMPAIRMENT NEED NOT BE OF THE ENTIRETY OF THE BUSINESSES CARRIED ON BY THE ASSESS EE; IT COULD BE OF THE TRANSFERRED UNIT/BUSINESS. RELYING UPON CERTAIN OBSERVATIONS OF THE SC IN THE CASE OF GILANDERS ARBUTHNOTS CASE THE CIT (A) HELD THAT TH E WATER TREATMENT PRODUCT BUSINESS TRANSFERRED BY IT WAS ON E OF THE MANY ACTIVITIES OF DIFFERENT BUSINESS CARRIED ON BY IT. HE THEN PROCEEDS TO CONCLUDE, BECAUSE OF THIS FACT SITUATIO N, THAT THE TRADING STRUCTURE OF THE APPELLANT COMPANY WAS NOT AFFECTED. IT IS RESPECTFULLY SUBMITTED THAT GIVING UP OF ONE MANAGING AGENCY OUT OF THE SEVERAL HELD BY AN ASSESSEE WAS C ONSIDERED BY THE SC AS A NORMAL INCIDENCE OF TRADE SINCE IT DID NOT AFFECT THE TRADING STRUCTURE. THE COURT NOTED THAT COMPENSATI ON RECEIVED BY THE APPELLANT WAS FOR CANCELLATION OF THE AGENCY WHICH WAS TERMINABLE AT WILL. THE APPELLANT WAS TO BE PAID AN AMOUNT WHICH WAS TO BE COMPUTED ON THE BASIS OF THE PROFITS OF T HE BUSINESS. ON THE ASPECT OF MULTIPLE AGENCIES THE COURT HELD THERE IS NOT EVEN A SUGGESTION THAT BY THE DETERMINATION OF THE AGENCY HELD BY THE APPELLANT ----THE TRADING STRUCTURE OF THE A SSESSEE WAS IMPAIRED. IT IS MANIFEST THAT THE AGENCIES OF THE C OMPANIES CONDUCTED BY THE APPELLANT MUST HAVE BEEN OBTAINED AT DIFFERENT TIMES. THERE IS NO EVIDENCE THAT THESE AGENCIES WER E OF ANY FIXED DURATION. IT IS REASONABLE TO INFER THAT SOME OF TH E AGENCIES MAY BE CANCELED AND FRESH AGENCIES OBTAINED. THE COURT WENT ON TO CONCLUDE THAT IT MAY REASONAB LY BE HELD HAVING REGARD TO THE VAST ARRAY OF BUSINESS DO NE BY THE APPELLANTS AS AGENTS, THAT THE ACQUISITION OF AGENC IES WAS IN THE NORMAL COURSE OF BUSINESS AND DETERMINATION OF INDI VIDUAL AGENCIES, A NORMAL INCIDENT, NOT AFFECTING OR IMPAI RING THE TRADING STRUCTURE OF THE APPELLANT. P. IT WILL BE APPRECIATED THAT AN AGENCY AT WILL AND T HEREFORE WITHOUT A FIXED TENURE CANNOT BE EQUATED WITH AN INDUSTRIAL UNDERTAKING OR BUSINESS OF MANUFACTURING WHICH INHERENTLY HAS PERMANENCY. ONE DOES NOT START AND SELL UNDERTAKINGS AND MANUFACTURING BUSINESSES IN THE SAME WAY AS ONE ENTERS INTO AGENCIES AT WILL. T HE VERY FACT THAT THE AGENCY WAS AT WILL SHOWS THAT THE APP ELLANT HAD KEPT FOR ITSELF AN EXIT OPTION FROM THE SAID AG ENCY AND HAD NOT RECKONED THAT AS AFFECTING HIS TRADING STRUCTURE. THE COURT HAS, AS A MATTER OF FACT OBSERVED THE CIRCUMSTANCE THAT THE AGENCY WAS DETERMINABLE AT TH E WILL OF THE PRINCIPAL COMPANY WHICH MAINTAINED A LARGE STAFF AT THEIR EXPENSE JUSTIFIES THE INFERENCE THAT UPON CANCELLAT ION OF THE AGENCY APPELLANTS BUSINESS ORGANIZATION WAS NOT SUB STANTIALLY IMPAIRED; THIS WAS BECAUSE THE MANAGED COMPANY HAD ITS OWN BUSINESS INFRASTRUCTURE INDEPENDENT OF THE MANAGING AGENCY IN THE ABSENCE OF ANY EVIDENCE FROM THE APPELLANT T HE COURT WAS SWAYED BY THESE GENERAL CONSIDERATIONS AND TRADE PR ACTICES. Q. IN THE PRESENT CASE A BUSINESS OF SUBSTANCE HAS BEE N SOLD LOCK, STOCK AND BARREL INCLUDING SIZABLE NUMBE R OF EMPLOYEES, IPR, KNOW HOW, LICENSES ETC. THUS THE DECISION IN THE CASE OF GILANDERS TURNED O N ITS OWN FACTS. IN FACT, IN OTHER CASES INVOLVING SURREN DER OF MANAGING AGENCY BUSINESS THE SC ITSELF HAS HELD IN FAVOR OF THE ASSESSEE (PLEASE SEE TABULATION OF CASE LAW AT THE END OF TH ESE SUBMISSIONS. R. RELIANCE PLACED BY THE CIT(A) ON THE DECISION OF TH E SC IN THE CASE OF ARTEX MANUFACTURING CO (227 ITR 262) IS ALSO COMPLETELY MISPLACED. IN THAT CASE, DURING THE COURSE OF ASSESSMENT PROCE EDINGS THE AO WAS MADE AWARE OF THE SALE CONSIDERATION ATT RIBUTABLE TO INDIVIDUAL ITEMS OF FIXED ASSETS. IN THESE CIRCUMST ANCES THE SC HELD THAT PROVISIONS OF S 41(2) WERE ATTRACTED. THE COURT FURTHER HELD THAT SALE CONSIDERATION BEYOND COST WAS CHARGE ABLE AS CAPITAL GAINS. S. IN THE PRESENT CASE IT CANNOT BE ANYBODYS CASE THA T FIRSTLY SALE CONSIDERATION ATTRIBUTABLE TO INDIVIDU AL ASSETS WAS KNOWN. FURTHER IT CANNOT BE ANYBODYS CONSIDERA TION THAT THE RS. 3 CRORE CONSIDERATION RECEIVED UNDER T HE BTA WAS FOR TRANSFER OF DEPRECIABLE ASSETS. THE CONSIDE RATION WAS FOR TRANSFER OF THE ENTIRE BUSINESS ON A GOING CONCERN BASIS AT AN AGREED ENTERPRISE VALUE. T. THE FOLLOWING DECISIONS, WHICH AT TIMES OVERLAP BET WEEN CONSIDERATION FOR SALE OF A BUSINESS AND ATTENDANT NON COMPETE COVENANT, SUPPORT THE CASE OF THE APPELLANT . COPIES OF THESE DECISIONS ARE PART OF THE PAPER BOO K OF CASE LAW ON RECORD: NAME OF THE CASE FACTS AND RATIO IN BRIEF 1 MAFATLAL GANGBHAI & CO. (219 ITR 644)(SC) CASH PAYMENTS DO NOT COME WITHIN THE AMBIT OF PERQUISITES 2 MAHINDRA & MAHINDRA LTD (261 S 28(IV) DOES NOT ITR 501)(BOM) APPLY TO BENEFITS IN CASE OR MONEY 3 PADAMSHI MEGHJI (48 ITD 127)(BOM) CASH RECEIPTS NOT COVERED BY S 28(IV) 4 ALCHEMIC PRIVATE LIMITED (130 ITR 168)(GUJ) 28(IV) APPLIES ONLY TO NON-MONETARY PERQUISITES THEREFORE CANNOT APPLY TO THE AMOUNTS IN QUESTION 5 KETTLEWELL BULLEN AND CO LTD (53 ITR 261)(SC) COMPENSATION FOR LOSS OF AGENCY CAPITAL 6 GILLANDERS ARBUTHNOT AND CO. LTD (53 ITR 283)(SC) COMPENSATION FOR LOSS OF AGENCY REVENUE 7 BEST AND CO. (P) LTD (60 ITR 11)(SC) COMPENSATION FOR RESTRICTIVE COVENANT FORMING PART OF COMPOSITE CONSIDERATION CAPITAL 8 SARASWATHI PUBLICITIES (132 ITR 207) RESTRICTIVE COVENANT CAPITAL 9 AUTOMOBILE PRODUCTS OF INDIA LTD (140 ITR 159)(BOM) CONSIDERATION FOR IMPAIRMENT OF PROFIT MAKING APPARATUS 10 OBEROI HOTEL P LTD (236 ITR 903)(SC) COMPENSATION FOR LOSS OF SOURCE OF INCOME CAPITAL RECEIPT 11 CHARI AND CHARI LTD (57 ITR 400)(SC) COMPENSATION FOR LOSS OF MANAGING AGENCY CAPITAL RECEIPT 12 GOMTI CREDITS P LTD (100 TTJ 1132)(DEL) NON COMPETE CAPITAL A PART OF CONSIDERATION FOR TRANSFER OF SHARES 13 SHANTA BIOTECHNICS LTD (10 SOT 401)( HYD) NON COMPETE 15 YEARS; PART OF GRANT OF EXCLUSIVE MARKETING RIGHTS TO PRODUCTS MANUFACTURED CAPITAL 14 LYKA LABS LTD (310 ITR NON COMPETE 5 427)(TBO M) YEARS CAPITAL RECEIPT; PART OF ARRANGEMENT FOR TRANSFER OF MARKETING INFORMATION ETC 15 TTK HEALTHCARE LTD (306 ITR 19)(MAD) NON COMPETE CAPITAL RECEIPT; 28 (VA) PROSPECTIVE; PARTICULAR SOURCE MUST BE GIVEN UP AND NOT THE ENTIRE BUSINESS; 16 MAX INDIA LTD (112 TTJ 726)(ASR) SLUMP SALE OF BUSINESS DIVISION; NOT NECESSARY THAT ALL ASSETS AND ALL LIABILITIES SHOULD BE TRANSFERRED; 50B APPLIES ONLY FROM AY 2000-01; CAPITAL RECEIPT; NON COMPETE CAPITAL RECEIPT; 17 NARENDRA DESAI (214 CTR 190)(BOM) NON COMPETE CAPITAL RECEIPT; 28(VA) PROSPECTIVE; INSTRUCTION 1964 REFERRED TO 18 BASF INDIA LIMITED NON COMPETE - CAPITAL RECEIPT; TRANSFER OF MARKETING RIGHTS CAPITAL RECEIPT ; 19 ROHITASAVA CHAND (306 ITR 242)(DEL) SALE OF SHAREHOLDING ACCOMPANIED BY NON COMPETE; LESS THAN 2 YEARS; 20 SAURABH SRIVASTAVA (300 ITR 113)(DEL)(SB) NON COMPETE 18 MONTHS NO CAPITAL GAINS; S 28VA PROSPECTIVE 21 GUFFIC CHEM PVT. LTD. VS. CIT (SC) NO COMPETE AS PART OF TRANSFER OF TRADE MARK; 20 YEARS; LOSS OF SOURCE OF INCOME; CAPITAL RECEIPT; 28(VA) APPLIES PROSPECTIVELY 22 DY. CIT VS. DINESH P LATECHEM (ITAT AHMEDABAD) NON COMPETE (5 YEARS) ARISING OUT OF TRANSFER OF BUSINESS; CAPITAL RECEIPT 23 F.X.PERIARA & SONS (184 ITR 461(SC) BUSINESS SOLD ON GOING CONCERN BASIS 41(2) NOT ATTRACTED THE LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE OTH ER HAND, JUSTIFIED THE ORDERS OF THE AUTHORITIES BELOW AND C ONTENDED THAT NO INTERFERENCE IS CALLED FOR IN THE ORDER OF THE C IT(A). 14.6 WE FIND THAT HONBLE SUPREME COURT IN THE CAS E OF PNB FINANCE LTD. REPORTED IN (2008) 307 ITR 75 (SC) HAS HELD THAT BUSINESS UNDERTAKING CAN CONSIST OF NOT ONLY T ANGIBLE ITEMS BUT ALSO INTANGIBLE ITEMS AND IN A CASE OF SALE OF BUSINESS UNDERTAKING ON A GOING CONCERN BASIS WHERE THE SLUM P PRICE WAS NOT CAPABLE OF BEING ATTRIBUTED TO ITEM-WISE EARMAR KING OF ASSETS AND WHEN THERE WAS NO COST OF ACQUISITION OF THE UN DERTAKING SOLD AS A GOING CONCERN, IT WAS NOT POSSIBLE TO COM PUTE CAPITAL GAINS AND THE RECEIPT ON SALE OF UNDERTAKING WAS NO T CHARGEABLE TO TAX. HONBLE SUPREME COURT HAS OBSERVED THAT THE CHARGING SECTION AND THE COMPUTATION PROVISIONS TOGETHER CON STITUTE AN INTEGRATED CODE AND WHEN IN A CASE THE COMPUTATION PROVISIONS FAIL, SUCH CASE WOULD NOT FALL WITHIN THE AMBIT OF SECTION 45. HONBLE SUPREME COURT HAS INTER ALIA DISTINGUISHED ITS DECISION IN THE CASE OF ARTEX MANUFACTURING CO. REPORTED IN 227 ITR 262 BY OBSERVING THAT ITEMIZED SALE WAS INVOLVED IN THA T CASE AND THEREFORE IT WAS HELD THAT SURPLUS ON SALE OF ASSET S WAS CHARGEABLE TO TAX UNDER PROVISIONS OF SECTION 41 (2 ). IT IS ONLY BY PROSPECTIVE AMENDMENT TO SECTION 50B WITH EFFECT FR OM 01.04.2000, THAT COST OF ACQUISITION HAS COME TO BE NOTIONALLY FIXED IN CASE OF SLUMP SALE AND COMPUTATION MECHANI SM HAS BEEN BROUGHT IN PROSPECTIVELY FROM 1 ST APRIL, 2000. WE ALSO FIND THAT HONBLE SUPREME COURT IN THE CASE OF GUFFIC CH EM P. LTD. REPORTED IN 320 ITR 602 HAS HELD THAT PAYMENT RECEI VED AS NON- COMPETITION FEE UNDER A NEGATIVE COVENANT WAS ALWAY S TREATED AS A CAPITAL RECEIPT TILL AY 2003-04. IT IS ONLY BY SE CTION 28(VA) INSERTED BY FINANCE ACT 2002 WITH EFFECT FROM 1 ST APRIL, 2003 THAT THE SAID CAPITAL RECEIPT IS MADE TAXABLE. IN THE E XTANT CASE THE ASSESSEE HAS TRANSFERRED ON A GOING CONCERN BASIS F OR A LUMP SUM PRICE ITS WATER TREATMENT PRODUCT BUSINESS UNDE RTAKING CONSISTING OF ALL TANGIBLE AND INFORMATION INTANGIB LE ASSETS, PRODUCTS, GOODWILL, MANPOWER, PROPRIETARY INFORMATI ON, TRADEMARK, LICENCES, KNOW HOW, CUSTOMER ORDERS AND ALL OTHER INFORMATION/MATERIAL RELEVANT FOR THE CONDUCT OF BU SINESS. FOR THAT PURPOSE THE ASSESSEE HAS ENTERED INTO BUSINESS TRANSFER AGREEMENT AND NON COMPETITION AGREEMENT UNDER A NEG ATIVE COVENANT FOR 25 YEARS. THE BUSINESS UNDERTAKING HA S BEEN TRANSFERRED BY THE ASSESSEE ON A GOING CONCERN BASI S FOR A LUMP SUM PRICE WITHOUT VALUES ASSIGNED TO THE INDIVIDUAL ASSETS IN THE PREVIOUS YEAR RELEVANT TO THE A.Y. 1997-98. IN THE LIGHT OF THE ATTENDANT FACTS AND CIRCUMSTANCES THE TRANSFER OF T HE BUSINESS UNDERTAKING DOES NOT INVOLVE ITEMISED SALE OF ASSET S AND PROVISIONS OF SECTION 50 ARE THEREFORE NOT ATTRACTE D. THE SAID TRANSFER OF BUSINESS UNDERTAKING IS FOR A LUMP SUM PRICE INVOLVING MONETARY CONSIDERATION AND THEREFORE PROV ISIONS OF SECTION 28 (IV) ARE ALSO NOT APPLICABLE IN SUCH A C ASE. WE DRAW SUPPORT IN THIS REGARD FROM THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF MAHINDRA & MAHINDRA LIMITED (2 003) 261 ITR 501 (BOM). WE FIND THAT THE PROVISIONS OF SECT ION 50 B AND 28 (VA) BEING PROSPECTIVE IN NATURE AS HELD BY THE HONBLE APEX COURT ARE NOT APPLICABLE TO THE IMPUGNED CAPITAL RE CEIPTS ON TRANSFER OF BUSINESS UNDERTAKING BY THE ASSESSEE IN THE PREVIOUS YEAR RELEVANT TO THE A.Y. 1997-98. IN THE LIGHT OF THE ATTENDANT FACTS AND CIRCUMSTANCES OF THE CASE AND RESPECTFULL Y FOLLOWING THE DECISIONS OF THE HONBLE APEX COURT AND JURISDICTIO NAL BOMBAY HIGH COURT CITED ABOVE THE GROUNDS RAISED BY THE AS SESSEE ARE ALLOWED. 15. GROUND NO. 13 IS AS FOLLOWS: 13. THE LD CIT(A) ERRED IN HOLDING THAT A SUM OF R S 9,15,250/- WAS ATTRIBUTABLE TO DIVIDEND INCOME WHI LE COMPUTING DEDUCTION U/S 80M. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE A SSESSING OFFICER NOTICED THAT THE ASSESSEE HAD CLAIMED DEDUC TION UNDER SECTION 80M ON GROSS DIVIDEND OF RS 3,66,10,003/-. THE ASSESSING OFFICER REJECTED THE ASSESSEES CONTENTIO N THAT AS PER SECTION 80M DEDUCTION IS AVAILABLE ON GROSS DIVIDEN D RECEIVED IF THE SAME AND THEREFORE EXPENSES ARE NOT TO BE CONSI DERED WHILE COMPUTING DIVIDEND INCOME. AS PER THE ASSESSING OFF ICER, THE EXPENSES HAVE TO CONSIDERED AND FOR THIS, HE DERIVE D SUPPORT FROM THE JUDGMENT OF THE HONBLE SUPREME COURT IN T HE CASE OF DISTRIBUTORS (BARODA) P. LTD. 155 ITR 120. SINCE TH E ASSESSEE FAILED TO FURNISH DETAIL OF EXPENSES INCURRED, THE A.O ESTIMATED THE SAME ON AD HOC BASIS AT THE RATE OF 5% OF GROSS DIVIDEND RECEIVED. HE ACCORDINGLY TREATED THE SUM OF RS 18,3 0,500/- AS EXPENSES ALLOCABLE TO DIVIDEND EARNED AND FURTHER H ELD THAT DEDUCTION U/S 80M WILL BE ACCORDINGLY REDUCED. AS A CONSEQUENCE, THE BUSINESS INCOME OF THE ASSESSEE WI LL BE INCREASED CORRESPONDINGLY. IN APPEAL, THE CIT(A) RE STRICTED THE EXPENSES ATTRIBUTABLE FOR EARNING THE DIVIDEND TO 2 .5% INSTEAD OF 5% ESTIMATED BY THE AO. STILL AGGRIEVED, ASSESSEE I S IN APPEAL BEFORE US. 15.1 BEFORE US, THE LEARNED COUNSEL FOR THE ASSESS EE SUBMITTED THAT EVEN 2.5% OF EXPENSES SUSTAINED BY T HE CIT(A) IS HIGHLY EXCESSIVE AND THAT NO SUCH DISALLOWANCE HAS BEEN MADE IN THE PAST. ACCORDING TO THE ASSESSEE, ONLY DIRECT EX PENSES WHICH HAVE RELATION TO EARNING OF INCOME CAN BE IS ALLOWE D. RELIANCE WAS PLACED ON THE DECISION OF THE HONBLE BOMBAY HI GH COURT IN THE CASE OF GENERAL INSURANCE CORPORATION OF INDIA 254 ITR 203 (BOM) AND CENTRAL BANK OF INDIA 264 ITR 522 (BOM). ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPRESENTATIVE JUSTIFIED THE DISALLOWANCE OF 5% MADE BY THE ASSESSING OFFICE R. 15.2 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. HO NBLE SUPREME COURT IN THE CASE OF DISTRIBUTORS (BARODA) P. LTD. (1985) 155 ITR 120 (SC) HAS HELD THAT IT IS ONLY NET DIVID END WHICH IS TO BE CONSIDERED FOR THE PURPOSE OF DEDUCTION UNDER SE CTION 80 M IN THE LIGHT OF THE PROVISIONS OF SECTION 80 AA OF THE INCOME TAX ACT. THE LEARNED CIT APPEALS HAS ATTRIBUTED EXPENS ES FOR EARNING THE DIVIDEND INCOME AT 2.5% INSTEAD OF 5% O F GROSS DIVIDEND AMOUNT CONSIDERED BY THE ASSESSING OFFICER AS AGAINST THE ASSESSEE'S PLEA THAT NO EXPENDITURE CAN BE CONS IDERED TO BE ATTRIBUTABLE FOR EARNING THE DIVIDEND INCOME. IN TH E LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE CASE WE DO NOT FIND IT NECESSARY TO INTERFERE WITH THE FINDING OF CIT APPEALS IN THIS R EGARD. THE AMOUNT OF EXPENDITURE AT 2.5% OF THE GROSS DIVIDEND INCOME CAN BE CONSIDERED ATTRIBUTABLE TO EARNING THE DIVIDEND INCOME TO MEET THE ENDS OF JUSTICE. WE ORDER ACCORDINGLY. 16. THE LAST GROUND RELATING TO LEVY OF 234B OF THE ACT BEING CONSEQUENTIAL IN NATURE. 17. IN THE RESULT, ASSESSEES APPEAL VIDE ITA NO 97 0/PN/01 IS PARTLY ALLOWED. 18. WE NOW TAKE UP REVENUES APPEAL FOR ASSESSMENT YEAR 1997-98 VIDE ITA NO 947/PN/01, WHEREIN GROUND NO. 1 READS AS FOLLOWS: ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD CIT(A) ERRED IN HOLDING THAT FOR THE PURPOSES OF DEDUCTION U/S 80HHC, WHILE COMPUTING INDIRECT COST ATTRIBUTABLE T O THE EXPORT OF TRADING GOODS, ALL INDIRECT COSTS WHICH A RE NOT RELEVANT/ATTRIBUTABLE TO TRADING ACTIVITIES SHOULD BE IGNORED. 18.1 THE ISSUE INVOLVED IN THIS GROUND IS REGARDIN G THE MANNER OF COMPUTING INDIRECT COSTS OF TRADING GOODS FOR THE PURPOSES OF SECTION 80HHC. THE CIT(A), FOLLOWING HI S DIRECTION FOR THE ASSESSMENT YEAR 1994-95 THAT INDIRECT COSTS WHI CH HAD NO NEXUS WITH EXPORT OF TRADING GOODS WERE TO BE EXCLU DED WHILE CALCULATING INDIRECT COSTS OF TRADING GOODS U/S 80H HC(3), DIRECTED RELIEF TO THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION. BEFORE US, IT WAS SUBMITTED THAT PURSUANT TO THE DI RECTIONS OF THE CIT(A), THE AO HAS ALREADY ACCEPTED THE REWORKING O F INDIRECT EXPENSES AS IN THE EARLIER YEARS AND HAS RECOMPUTED THE DEDUCTION U/S 80HHC. IT IS ALSO FOUND THAT ON SIMI LAR ISSUE FOR THE ASSESSMENT YEAR 1995-96, THE TRIBUNAL HAD HELD THAT NO INTERFERENCE WAS CALLED FOR WITH SUCH DIRECTIONS OF THE CIT(A). FOR THE SAKE OF BREVITY, THE RELEVANT OBSERVATIONS OF T HE TRIBUNAL ARE EXTRACTED BELOW: 71. BEFORE PARTING, WE MAY REFER TO AN ADDITIONAL GROUND RAISED BY THE REVENUE VIDE APPLICATION DATED 25.4.2 001, WHICH READS AS UNDER: WHETHER WHILE COMPUTING INDIRECT COSTS ATTRIBUTABL E TO EXPORT OF TRADING GOODS ALL INDIRECT COSTS THAT ARE NOT RELEVANT/ATTRIBUTABLE TO TRADING ACTIVITY SHOUL D BE IGNORED. 72. AT THE TIME OF HEARING, THE LEARNED COUNSEL FOR THE RESPONDENT-ASSESSEE SUBMITTED THAT ASSESSEE HAS NO OBJECTION TO THE ADMISSION OF THE SAID ADDITIONAL G ROUND. IN THIS VIEW OF THE MATTER AND, ALSO NOTICING THAT THE SAID GROUND RAISED BY THE REVENUE ARISES FROM THE ORDERS OF THE AUTHORITIES BELOW AND BEING A LEGAL ISSUE WITH ATTE NDANT PRIMARY FACTS AVAILABLE ON RECORD, THE SAID ADDITIO NAL GROUND IS ADMITTED FOR ADJUDICATION. 73. IN THIS VIEW OF THE MATTER, RIVAL SUBMISSIONS W ERE HEARD. QUITE CLEARLY THE ISSUE RAISED IN THE ADDITI ONAL GROUND RELATES TO THE MANNER OF COMPUTING INDIRECT COST OF TRADING GOODS FOR THE PURPOSES OF DETERMINING QUANT UM OF DEDUCTION UNDER SECTION 80HHC OF THE ACT. 74. THE COMMISSIONER OF INCOME-TAX (APPEALS) HELD, FOLLOWING HIS ORDER IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 1994-95, THAT INDIRECT COSTS WHICH HAD NO NEXUS WITH THE EXPORT OF TRADING GOODS, WERE LIABLE TO BE EXCLUDED WHILE CALCULATING INDIRECT COST OF TRADING GOODS FOR THE PURPOSES OF SECTION 80HHC(3) OF THE ACT. THE SA ID DIRECTION OF THE COMMISSIONER OF INCOME-TAX (APPEAL S) HAS BEEN CHALLENGED BY THE REVENUE BY WAY OF AFORESAID GROUND. 75. BEFORE US, THE LEARNED DEPARTMENTAL REPRESENTAT IVE HAS SUBMITTED THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) HAS ERRED IN DIRECTING THE RE-COMPUTATION OF INDIRECT COST OF TRADING GOODS. ON THE OTHER HAND, THE LEARNED COUNSEL FOR THE ASSESSEE POINTED OUT THAT T HE ASSESSING OFFICER, WHILE GIVING EFFECT TO THE DIREC TION OF THE COMMISSIONER OF INCOME-TAX (APPEALS), HAS ACCEPTED THE COMPUTATION OF INDIRECT COST ATTRIBUTABLE TO TRADIN G EXPORTS EXCLUDING THE COSTS THAT HAD NO NEXUS WITH SUCH TRA DING EXPORTS. THE LEARNED COUNSEL FOR THE ASSESSEE POINT ED OUT THAT IN THE ASSESSMENT YEAR 1994-95, THE TRIBUNAL HAD ALSO SET ASIDE THE MATTER TO THE ASSESSING OFFICER AND IN DOING SO, A REFERENCE WAS ALSO MADE TO THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF HERO EXPORTS V . CIT 295 ITR 454(SC). DWELLING FURTHER ON THIS ASPECT, I T WAS POINTED OUT THAT THE ISSUE BEFORE THE HONBLE SUPRE ME COURT WAS CONFINED TO COSTS WHICH WERE NOT TO BE AT TRIBUTED TO EXPORT TRADE, BECAUSE SUCH COSTS WERE CLAIMED TO BE ATTRIBUTABLE TO EXPORT INCENTIVES. WHILE IN THE CAS E OF THE ASSESSEE THE ISSUE EXTENDS TO COSTS THAT WERE ATTRI BUTABLE TO MANUFACTURING AND OTHER SIMILAR OPERATIONS OF THE A SSESSEE SO AS TO HAVE NO NEXUS WITH THE TRADING EXPORTS AND THUS THE SAME WERE EXCLUDIBLE FROM THE COSTS ATTRIBUTABL E TO TRADING EXPORTS. IT IS POINTED OUT THAT THE ASSESSE E IS A MULTI-DIVISIONAL COMPANY AND MAINTAINS INDEPENDENT BOOKS OF ACCOUNT FOR EACH DIVISION AND IN THIS REGARD, RE FERRED TO THE FOLLOWING DECISIONS IN SUPPORT OF THE PROPOSITI ON ADVANCED BY THE COMMISSIONER OF INCOME-TAX (APPEALS ): (I) SNOWCEM INDIA LTD. 12 SOT 333 (MUM); (II) KHIMJI VISHRAM & SONS 1 SOT 618 (MUM); (III) MMTC LTD. 112 TTJ 15 (DEL); AND, (IV) GLAXO SMITHKLINE ASIA 6 SOT 113 (DEL). 76. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND FI ND THAT IN PRINCIPLE THE DIRECTION OF THE COMMISSIONER OF INCOME-TAX (APPEALS) DOES NOT REQUIRE ANY INTERFERE NCE. WE ALSO HAVE TAKEN NOTE OF THE STATEMENT MADE BY THE L EARNED COUNSEL FOR THE ASSESSEE AT BAR THAT WHILE GIVING E FFECT TO THE DIRECTION OF THE COMMISSIONER OF INCOME-TAX (AP PEALS) FOR THE YEAR UNDER CONSIDERATION, THE ASSESSING OFF ICER HAD ACCEPTED THE COMPUTATION OF INDIRECT COSTS ATTRIBUT ABLE TO TRADING EXPORTS EXCLUDING COSTS THAT HAD NO NEXUS WITH SUCH TRADING EXPORTS. IN OUR VIEW, IT WOULD BE IN T HE FITNESS OF THINGS THAT THE ASSESSING OFFICER REVIEWS THE WO RKING ALREADY ACCEPTED BY HIM SO AS TO BE IN CONFORMITY W ITH THE AFORESAID DECISIONS AND ALSO DIRECTIONS OF THE TRIB UNAL CONTAINED IN ITS ORDER FOR THE ASSESSMENT YEAR 1994 -95 (SUPRA). AS A RESULT THEREOF, ON THIS GROUND, THE R EVENUE SUCCEEDS FOR STATISTICAL PURPOSES ONLY. ON THE PARITY OF REASONING, THEREFORE, WE DIRECT TH E ASSESSING OFFICER TO FOLLOW THE DIRECTIONS AS GIVEN FOR ASSESSMENT YEAR 1995-96. THIS GROUND OF APPEAL OF THE REVENUE IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 19. IN GROUND NO. 2 TO 6, THE ISSUE INVOLVED IS I N REGARD TO INCOME RECOGNITION FROM CONTRACT ACTIVITY. THIS GRO UND IS COUNTER-PART OF GROUND NO.7 RAISED BY THE ASSESSEE IN ITS APPEAL FOR THE ASSESSMENT YEAR 1997-98. 20. IN THE RESULT, THE APPEAL OF THE REVENUE IS PARTLY ALLOWED. 21. WE SHALL NOW TAKE UP REVENUES APPEAL FOR ASSES SMENT YEAR, VIDE ITA NO 946/PN/01 FILED IN THE CASE OF MR S ARNAVAZ R. AGA, WHEREIN THE ONLY ISSUE INVOLVED IN THIS APPEAL RELATES TO CHARGING TO TAX THE AMOUNT OF RS 2 CRORES RECEIVED BY THE APPELLANT FROM M/S THERMAX LTD. THE RELEVANT FACTS HAVE BEEN STATED IN EARLIER PART OF THIS ORDER WHILE DEALING WITH ASSESSEES GROUND NO. 11 IN APPEAL NO. 970/PN/2001. TO RECAPIT ULATE THE FACTS, THE RESPONDENT-ASSESSEE, MRS ANU AGA IS THE WIFE OF THE LATE MR. R. D. AGA. MR AGA, WHO WAS THE MANAGING DI RECTOR OF THERMAX LIMITED, DIED IN HARNESS ON FEBRUARY 16, 19 96 WHILE ON A BUSINESS TRIP TO BOMBAY WHEN HE SUFFERED A MASSIV E HEART ATTACK AND DIED SOON THEREAFTER. THE BOARD OF DIREC TORS AT ITS MEETING HELD ON 16/04/1996 DECIDED TO PAY RESPONDEN T-WIDOW AN AMOUNT OF RS.2,00,00,000/- BY WAY OF A TESTIMONI AL. THIS AMOUNT WAS CLAIMED BY THE RESPONDENT TO BE A CAPITA L RECEIPT NOT CHARGEABLE TO TAX. 21.1 THE AO BROUGHT THIS AMOUNT TO TAX ASSIGNING T HE FOLLOWING REASONS: 1. RECEIPT IS IN THE NATURE OF INCOME AS DEFINED IN SE CTION 2(24)(IV) OF THE ACT BEING IN THE NATURE OF A BENEF IT OR A PERQUISITE. 2. BEING A DIRECTOR OF THE COMPANY IT IS IMMATERIAL HO W SUCH BENEFIT OR PERQUISITE IS DERIVED; EVERY CONCEIVABLE BENEFIT IS TAXABLE. 3. EVEN A TESTIMONIAL WOULD BE INCOME REFERRED TO S 2( 24)(IV). 4. ENTIRE AMOUNT IS PUT IN FULL DOMINION OF THE ASSESS EE WHO IS ENTITLED TO USE IT THE WAY SHE WANTS AND HAS ACT UALLY BEEN USED BY HER; 5. EVEN IF THE AMOUNT IS A FREE VOLUNTARY GIFT AND TES TIMONIAL IN NATURE IN RECOGNITION OF SERVICES RENDERED BY HE R HUSBAND IT IS TAXABLE IN HER HANDS. 6. CIRCULAR NO. 573 RELIED UPON BY THE ASSESSEE IS NOT APPLICABLE SINCE NEITHER THE ASSESSEE NOR HER LATE HUSBAND WERE EMPLOYEES OF THE COMPANY SINCE THE AGA FAMILY , DIRECTLY AND INDIRECTLY HELD OVER 63% SHAREHOLDING IN THERMAX; THEY WERE ALSO DIRECTORS OF THERMAX. 7. THE AO ALSO RELIED ON THE DECISIONS IN THE CASE OF LALA LAKSHMIPAT SINGHANIA (104 ITR 466)(ALL); J.DALMIA ( 138 ITR 653)(DEL); NARHARI DALMIA (80 ITR 454)(DEL) FOR THE PROPOSITION THAT THE RECEIPT IN QUESTION WAS CHARGE ABLE TO TAX UNDER S 2(24)(IV) OF THE ACT. 21.2 IN APPEAL, THE CIT(A) DECIDED THE ISSUE I N FAVOUR OF THE ASSESSEE. ACCORDING TO HIM, IN THE CASE OF THERMAX THE PAYMENT HAS BEEN HELD TO BE GRATUITOUS AND HENCE NOT IN THE NATURE OF EXPENDITURE AND THEREFORE DID NOT QUALIFY FOR ALLOW ANCE U/S 28 TO 43B OF THE ACT; THAT THE CBDT CIRCULAR NO. 573 APPL IES SINCE THERE EXISTED A CONTRACT OF BETWEEN THERMAX AND MR AGA; MR AGA HAS BEEN DISCLOSING INCOME FROM SALARY FROM THERMAX WHICH HAS ALSO BEEN BROUGHT TO TAX UNDER THAT HEAD OF INCOME. AGAINST THE SAID DECISION OF THE CIT(A), REVENUE IS IN APPEAL B EFORE US. 21.3 THE LEARNED DEPARTMENTAL REPRESENTATIVE ASSAI LED THE DECISION OF THE CIT(A) AND SUBMITTED THAT THE ASSES SING OFFICER WAS JUSTIFIED IN CHARGING TO TAX THE AMOUNT OF RS 2 CRORES RECEIVED BY THE ASSESSEE FROM M/S THERMAX LTD. 21.4 THE LEARNED COUNSEL FOR THE RESPONDENT-ASSESS EE, ON THE OTHER HAND, SUBMITTED THAT THE LATE MR AGA WAS AN EMPLOYEE OF THE COMPANY NOTWITHSTANDING THE FACT THAT HE WAS A SHAREHOLDER AND A DIRECTOR OF THERMAX; AND THE INCO ME TAX ASSESSMENT ORDERS, COMPUTATION OF INCOME AND TDS CE RTIFICATES ON RECORD SUPPORT THE FACT THAT HE WAS AN EMPLOYEE AND EARNINGS FROM THERMAX WERE SHOWN BY HIM UNDER THE HEAD SALAR IES; THAT CIRCULAR NO. 573 DATED 21.8.1990 SQUARELY APPLIES T O THE FACTS OF THE CASE. IT WAS SUBMITTED THAT IN TERMS OF THE JUD GMENT IN THE CASE OF UCO BANK (237 ITR 889) (SC) CIRCULARS ARE B INDING ON THE REVENUE AUTHORITIES. ACCORDING TO THE LEARNED C OUNSEL, THE PAYMENT DID NOT ARISE OUT OF EXERCISE OF ANY PROFES SION OR VOCATION BY EITHER THE ASSESSEE HERSELF OR HER LATE HUSBAND; AND THEREFORE, THE RECEIPT WAS NOT TAXABLE AS INCOME UN DER THE ACT. HE ALSO CANVASSED THAT IN VIEW OF THE SUBMISSIONS M ADE IN THE APPEAL OF THE COMPANY M/STHERMAX LTD. IT IS A CAPI TAL RECEIPT. THE LEARNED COUNSEL FURTHER CONTENDED THAT DE HORS THE CIRCULAR ALSO THE PAYMENT WAS IN THE NATURE OF A CAPITAL REC EIPT IN THE HANDS OF THE WIDOW. REGARDING THE OBSERVATION OF TH E CIT(A) WHILE ALLOWING THE APPEAL THAT IN THE HANDS OF THE COMPANY DISALLOWANCE OF THIS PAYMENT WAS UPHELD BEING GRATU ITOUS IN NATURE AND THEREFORE NOT ELIGIBLE FOR DEDUCTION IN COMPUTING ITS INCOME FROM BUSINESS, THE LEARNED COUNSEL SUBMITTED THAT CHARACTERIZATION OF PAYMENT AND ITS ALLOWABILITY IN THE HANDS OF THE PAYER CANNOT DETERMINE THE TAXABILITY THEREOF I N THE HANDS OF THE RECIPIENT. AS REGARDS THE STAND OF THE AO THAT, SINCE THE ASSESSEE WAS A DIRECTOR/SHAREHOLDER OF THERMAX, THE SUM WAS TAXABLE IN THE HANDS OF THE ASSESSEE U/S 2(24)(IV) AS BEING IN THE NATURE OF A BENEFIT OR PERQUISITE, IT WAS SUBMITTED THAT THE SAME IS CONTRARY TO THE PLAIN TEXT OF THE SECTION AND TH E DECIDED CASE LAW. ACCORDING TO THE COUNSEL, SECTION 2(24)(IV) SP EAKS OF THE VALUE OF ANY BENEFIT OR PERQUISITE, WHETHER CONVERT IBLE INTO MONEY OR NOT. REFERRING TO VARIOUS JUDICIAL PRONOUNCEM ENTS, HE SUBMITTED THAT IT HAS BEEN HELD BY VARIOUS COURTS T HAT CASH OR MONETARY PAYMENTS WOULD NOT BE COVERED BY THE AFORE SAID PHRASE AND THAT ONE CANNOT SPEAK IN TERMS OF VALUE OF MONE Y BEING CONVERTIBLE INTO MONEY. MONEY CANNOT HAVE ANY VALUE OTHER THAN ITS FACE VALUE. FOR THIS, HE HAS PLACED RELIANCE ON THE FOLLOWING DECISIONS: I) MAFATLAL GANGBHAI & CO 219 ITR 644 (SC); II) MAHINDRA &MAHINDRA LTD 261 ITR 501 (BOM); III) PADAMSHI MEGHJI 48 ITD 127 (BOM); IV) ALCHEMIC P LTD 130 ITR 168 (GUJ); V) KANAN DEVAN HILLS PRODUCE CO LTD 119 ITR 431; VI) G VENKATARAMAN 111 ITR 444 (MAD); VII) RAVINDER SINGH V CIT 205 ITR 353 (DEL); AND, VIII) V KASTURI & SONS LTD 237 ITR 24 (SC). FINALLY, THE LEARNED COUNSEL ARGUED THAT THE VIEW T HAT PAYMENTS BY WAY OF A TESTIMONIAL OR TRIBUE ARE NOT TAXABLE IN THE HANDS OF THE RECIPIENT IS SUPPORTED BY THE FOLLOWIN G DECISIONS: I) DILIP KUMAR ROY 94 ITR 1 (BOM); II) MAHESH ANANTRAI PATTANI 41 ITR 481 (SC); III) PADAMRAJE KADAMBANDE 195 ITR 877 (SC); IV) H H MAHARANI SHRI VIJAYKUVERBA SAHEB OF MORVI & ANR. 49 ITR 594 (BOM); V) P H DIVECHA 48 ITR 222 (SC); VI) RAJALAKSHMI VENKATAKRISHNAN 215 ITR 596 (MAD); VII) REED V SEYMOUR 11 T.C 625 (HL); VIII) R PARTHEPAN 72 ITD 289 (MAD); IX) BEYNON V THORPE 14 TC 1 (KBD); X) G R VISHWANATH 29 ITD 142 (BGL) XI) M BALAMURLIKRISHNA 171 ITR 447 (MAD); XII) DR B M SUNDARAVADANAM 148 ITR 333 (MAD); XIII) K K ROY 84 ITR 701 (SC); XIV) MRS LAKSHMI M AIYAR (ITA NO 5892/MUM/02; AND XV) MRS JAYA BHASKARAN 168 ITR 256 (PAT) THE LEARNED COUNSEL SUMMED UP HIS ARGUMENT BY SUBMITTING THAT THE ORDER OF THE CIT(A) BE CONFIRME D AND DEPARTMENTAL APPEALS BE DISMISSED. 21.5 HAVING CONSIDERED THE RIVAL SUBMISSIONS AND M ATERIAL ON RECORD, WE FIND THAT THE LEARNED COUNSEL FOR THE ASSESSEE HAS SUBMITTED THAT CENTRAL BOARD OF DIRECT TAXES HAS IS SUED CIRCULAR NO. 573 DATED 21.8.1990 CLARIFYING THAT ANY SUCH GR ATUITOUS LUMP SUM PAYMENT WILL NOT BE TAXABLE AS INCOME IN T HE HANDS OF THE RECIPIENT WIDOW UNDER THE INCOME TAX ACT. LEARN ED CIT APPEALS HAS GIVEN THE FINDING ACCORDINGLY UPHOLDING THE CLAIM THAT SUCH A RECEIPT IS NOT TAXABLE IN THE HANDS OF MRS. AGA. WE FIND THAT THE LUMP SUM GRATUITOUS PAYMENT IS A TEST IMONIAL OF THE NATURE OF A GIFT AND NOT REMUNERATION TO THE EM PLOYEE FOR HIS SERVICES. THE PURPOSE FOR WHICH THE AMOUNT WAS PAI D WAS TO EXPRESS GRATITUDE FOR WHAT HE HAD DONE AND IN APPRE CIATION OF HIS PERSONAL QUALITIES. THE AMOUNT PAID BY THERMAX LTD . HAS BEEN HELD BY US TO BE NOT DEDUCTIBLE IN ITS HANDS FOR TH E IMPUGNED A.Y. 1997-98 IN APPEAL OF THERMAX LTD. (REF. 970/PN /01). IN THE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE CASE WE DO NOT FIND IT NECESSARY TO INTERFERE WITH THE FINDING OF THE CIT( A) THAT THE SAID RECEIPT IS THEREFORE NOT TAXABLE IN THE HANDS OF MR S. AGA. WE ORDER ACCORDINGLY. 22. IN THE RESULT, REVENUES APPEAL IN ITA NO.946/P N/2001 IS DISMISSED. 23. IN THE RESULT, THE ASSESSEES APPEAL IN ITA NO. 970/PN/2001 AND REVENUES APPEAL IN ITA NO.947/PN/2001 ARE PART LY ALLOWED AND REVENUES APPEAL IN ITA NO.946/PN/2001 IS DISMI SSED. DECISION PRONOUNCED IN THE OPEN COURT ON THIS 3 RD DAY OF SEPTEMBER, 2014 SD/- SD/- (G.S. PANNU) (SHAILENDR A KUMAR YADAV) ACCOUNTANT MEMBER JUDICIAL MEMBER PUNE, DATED 3 RD DAY OF SEPTEMBER, 2014 GCVSR COPY TO:- 1) ASSESSEE 2) JT.CIT SPL.RANGE-3, PUNE 3) THE CIT (A)-1 PUNE 4) THE CIT-1 PUNE 5) DR, A BENCH, I.T.A.T., PUNE. 6) GUARD FILE BY ORDER //TRUE COPY// SR. PS, ITAT PUNE