Chemplast Sanmar Limited, CHENNAI V. DCIT, CHENNAI

ITA 985/CHNY/2015

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 8153 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 5 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-10-2016
• Appeal Filed By: Assessee
• Bench Allotted: C
• Assessment Year: 2005-2006
• Appeal Filed On: 30-04-2015
• Court: TRIBUNAL
• Keywords: Depreciation; Scheme of amalgamation; Revenue expenditure; Capital expenditure
• Section: 143(3); 263

Judgement Text

, , IN THE INCOME - TAX APPELLATE TRIBUNAL C BENCH, CHENNAI . , . , BEFORE SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER & SHRI DUVVURU R L REDDY , JUDICIAL MEMBER ./ I T.A. NO. 985 /MDS/201 5 / ASSESSMENT YEAR :20 0 5 - 0 6 M/S. CHEMPLAST SANMAR LIMITED, 9, CATHEDRAL ROAD, CHENNAI 600 086. [PAN:AAACC3000F] VS. THE DEPUTY COMMISSIONER OF INCOME TAX , LARGE TAXPAYER UNIT, NO. 1775, JAWAHARLAL NEHRU INNER RING ROAD, ANNA NAGAR WESTERN EXTENSIONS, CHENNAI 600 101 . ( / APPELLANT ) ( / RESPONDENT ) / APPELLANT BY : SHRI SAROJ KUMAR PARIDA , ADVOCATE / RESPONDENT B Y : SHRI A.V. SREEKANTH , JCIT / DATE OF HEARING : 08 . 0 9 .201 6 / DATE OF P RONOUNCEMENT : 28 . 1 0 .201 6 / O R D E R PER DUVVURU RL REDDY , JUDICIAL MEMBER : THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS) 1 7 , CHENNAI , DATED 2 6 . 12 .20 1 4 RELEVANT TO THE ASSESSMENT YEAR 20 05 - 0 6 . THE ONLY EFFECTIVE GROUND RAISED IN THE APPEAL OF THE ASSESSEE IS THAT THE LD. CIT(A) HAS ERRED IN CONFIRMING THE DISALLOWANCE OF NON - COMPETE FEE PAID BY THE ASSESSEE TREATING IT AS CAPITAL EXPENDITURE. I.T.A. NO . 985 /M/ 15 2 2. BRIEF FACTS OF THE CASE ARE THA THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURE AND SALE OF PVC RESINS, CAUSTIC SODA, CHLOROMETHANE AND REFRIGERANT GASES. THE ASSESSMENT UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961 [ ACT IN SHORT] WAS COMPLETED IN THE CASE OF THE ASSESSEE ON 20.122009 BY DETERMINING TOTAL INCOME AT .32,96,83,539/ - . SINCE THE ABOVE ORDER PASSED BY THE ASSESSING OFFICER WAS FOUND TO BE ERRONEOUS AND P REJUDICIAL TO THE INTEREST OF REVENUE, THE LD. CIT (LTU), CHENNAI VIDE ORDER DATED 12.11.2009 PASSED AN ORDER UNDER SECTION 263 OF THE ACT AND DIRECTED THE ASSESSING OFFICER TO DECIDE THE ISSUE OF NON - COMPETE FEES PAID TO SHRI B.H. KOTHARI, AFRESH AND ALSO DIRECTED THE ASSESSING OFFICER TO VERIFY AND INVESTIGATE THE VERY NATURE OF TRANSACTION. THE ASSESSEE WAS GIVEN OPPORTUNITY TO FILE ITS SUBMISSION AGAINST THE ORDER PASSED UNDER SECTION 263 OF THE ACT. IN RESPONSE THERETO, THE ASSESSEE HAS FILED A DETAILE D WRITTEN SUBMISSION CONTENDING THAT THE NON - COMPETE FEES PAID BY THE ASSESSEE SHOULD BE TREATED AS REVENUE EXPENDITURE AND ALTERNATIVELY, THE ASSESSEE HAS ARGUED BEFORE THE ASSESSING OFFICER THAT IF THE NON - COMPETE FEE IS TREATED AS CAPITAL EXPENDITURE, T HE SAME IS ELIGIBLE FOR DEPRECIATION UNDER THE HEAD INTANGIBLE ASSETS. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE AND BY TAKING CUE OF VARIOUS LEGAL POSITIONS, THE ASSESSING OFFICER HAS TREATED THE EXPENDITURE TOWARDS NON - COMPETE FEES AS CAPITAL IN NATURE AND ALSO HELD THAT THE SAME IS NOT CONSIDERED FOR THE I.T.A. NO . 985 /M/ 15 3 PURPOSE OF ALLOWABILITY OF DEPRECIATION UNDER THE BLOCK INTANGIBLE ASSETS AND ADDED THE SAME TO THE TOTAL INCOME OF THE ASSESSEE. 3. THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE LD. CIT(A). AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, THE LD. CIT(A) HAS OBSERVED THAT THE AGREEMENT BETWEEN THE ASSESSEE AND M/S. KOTHARI P ETROCHEMICALS LTD. DATED 21.04.2003 TO ACQUIRE THE CAUSTIC SODA BUSINESS FROM THE LATER DOES NOT SPEAK ABOUT PA YMENT OF NON - COMPETE FEE TO MR. B.H. KOTHARI, WHO HAS SIGNED THE AGREEMENT ON BEHALF OF M/S. KOTHARI PETROCHEMICALS LTD. THE NON - COMPETE FEE AGREEMENT ENTERED INTO BETWEEN THE ASSESSEE AND SHRI B.H. KOTHARI WAS DATED 22.04.2004 FOR NOT CARRYING OUT THE CAU STIC SODA BUSINESS IN INDIA FOR A PERIOD OF 10 YEARS. ACCORDINGLY, THE ASSESSEE HAS PAID THE CONSIDERATION OF .15 CRORES AND THE ASSESSEE CLAIMED 1/10 TH OF THE EXPENDITURE EACH YEAR STARTING FROM ASSESSMENT YEAR 2005 - 06. HE FURTHER OBSERVED THAT FOR THE TRANSFER OF THE COMPANY M/S. KOTHARI PETROCHEMICALS LTD. AS A GOING CONCERN, THE CONSIDERATION PAID WAS .25,26 ,73,000/ - EXCLUDING THE NON - COMPETE FEE. BY OBSERVING THAT THE NON - COMPETE FEES PAID FOR RESTRICTING SHRI B.H. KOTHARI FOR A PERIOD OF TEN YEARS, THE NON - COMPETE FEE AGREEMENT CANNOT STAND IN ISOLATION WITHOUT THE MAIN AGREEMENT, THE LD. CIT(A) HAS HELD TH AT THE NON - COMPETE FEE PAID BY THE ASSESSEE WAS TOWARDS CAPITAL EXPENDITURE ONLY AND CONFIRMED THE ORDER OF THE ASSESSING OFFICER. I.T.A. NO . 985 /M/ 15 4 4. ON BEING AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. THE LD. COUNSEL FOR THE ASSESSEE HAS SUBMITTED THAT O NCE THE NON - COMPETE FEE PAID BY THE ASSESSEE THROUGH AN AGREEMENT BETWEEN THE ASSESSEE AND SHRI B.H. KOTHARI WAS NOT DISPUTED BY THE LD. CIT(A), WITHOUT GIVEN ANY VALID REASON, HE HAS TREATED THE SAME AS CAPITAL EXPENDITURE. B Y RELYING ON THE RECENT JUDGEM ENT OF THE HON BLE MADRAS HIGH COURT IN THE CASE OF CARBORANDUM UNIVERSAL LIMITED V. JCIT IN T.C.(A) NO. 244 OF 2006 DATED 10.09.2012, THE LD. COUNSEL FOR THE ASSESSEE HAS FURTHER SUBMITTED THAT THE ISSUE INVOLVED IN THIS APPEAL IS SQUARELY COVERED IN FAVO UR OF THE ASSESSEE BY RELYING ON THE DECISION OF THE COORDINATE BENCH OF THE TRIBUNAL IN ASSESSEE S OWN CASE FOR THE ASSESSMENT YEARS 2006 - 07 AND 2007 - 08 VIDE ORDER DATED 13.06.2016 AND PRAYED THAT THE DISALLOWANCE MADE BY THE ASSESSING OFFICER SHOULD BE D ELETED. ON THE OTHER HAND, THE LD. DR STRONGLY SUPPORTED THE ORDERS OF AUTHORITIES BELOW. 5 . WE HAVE HEARD BOTH SIDES, PERUSED THE MATERIALS AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. THE ASSESSEE HAS ENTERED INTO AN AGREEMEN T WITH M/S. KOTHARI PETROCHEMICALS LIMITED ON 21.04.2003 TOWARDS ACQUIRING CAUSTIC SODA BUSINESS. THEREAFTER, THE ASSESSEE HAS ENTERED INTO NON - COMPETITION AGREEMENT WITH SHRI B.H. KOTHARI ON 22.04.2004, WHO IS THE PROMOTER OF KOTHARI PETROCHEMICALS LIMITE D BY WHICH, SHRI KOTHARI HAS AGREED THAT HE SHALL NOT, FOR A PERIOD OF 10 YEARS, CARRY ON I.T.A. NO . 985 /M/ 15 5 CAUSTIC SODA BUSINESS, FOR WHICH THE ASSESSEE COMPANY AGREED TO PAY .1.50 CRORES PER ANNUM FOR A PERIOD OF TEN YEARS. BOTH THE AGREEMENTS ENTERED INTO BETWEEN THE ASSESSEE AND KOTHARI PETROCHEMICALS LIMITED AND SHRI B.H. KOTHARI WERE NOT DISPUTED BY THE DEPARTMENT. IT IS AMPLY CLEAR FROM THE NON - COMPETITION AGREEMENT DATE D 22.04.2004 THAT SHRI B.H. KOTHARI AGREED, FOR A PERIOD OF TEN YEARS FROM THE DATE OF THE AGREEMENT THAT HE SHALL NOT CARRY ON, DIRECTLY OR THROUGH ANY PERSON ACTING AS BHK S NOMINEE OR AGENT OR REPRESENTATIVE, THE CAUSTIC SODA BUSINESS IN INDIA INCLUDING , BUT NOT LIMITED TO, ENGAGING IN ANY BUSINESS IN INDIA DIRECTLY COMPETING OR INDIRECTLY COMPETING WITH CAUSTIC SODA BUSINESS. THAT MEANS, THE ASSESSEE ACQUIRED THE RIGHT TO CARRY ON THE CAUSTIC SODA BUSINESS FOR A PERIOD OF TEN YEARS ONLY. HOWEVER, T HE A SSESSING OFFICER HAS TREATED THE NON - COMPETE FEE PAID BY THE ASSESSEE AS CAPITAL EXPENDITURE SINCE THE ABOVE NON - COMPETE FEE HAS BEEN PROVIDING AN ENDURING BENEFIT TO THE ASSESSEE FOR SEVERAL YEARS. HOWEVER, IN THE APPELLATE ORDER, THE LD. CIT(A) HAS HELD THAT THE NON - COMPETE FEE AGREEMENT CANNOT STAND IN ISOLATION WITHOUT THE MAIN AGREEMENT AND NOT GIVEN ANY FINDINGS AS TO WHETHER THE PAYMENT OF NON - COMPETE FEE FOR ACQUISITION OF RIGHT FOR CARRYING ON CAUSTIC SODA BUSINESS IS OF ENDURING NATURE OR NOT TO T REAT THE EXPENDITURE AS CAPITAL IN NATURE. B Y FOLLOWING THE DECISION IN THE CASE OF CARBORANDUM UNIVERSAL LIMITED V. JCIT (SUPRA), THE COORDINATE BENCH OF THE TRIBUNAL , AGAINST THE APPEALS FILED BY THE REVENUE I.T.A. NO . 985 /M/ 15 6 IN ASSESSEE S OWN CASE FOR THE ASSESSMENT YEAR S 2006 - 07 AND 2007 - 08 VIDE ORDER DATED 13.06.2016, HAS OBSERVED AND HELD AS UNDER: 16.5. WE HAVE HEARD BOTH SIDES, PERUSED THE MATERIALS ON RECORD AND GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. THE NON - COMPETE FEES PAID BY THE ASSESSEE HAS BEEN CLAIMED AS DEFERRED REVENUE EXPENDITURE WAS DISALLOWED BY THE ASSESSING OFFICER. BY CONSIDERING THE DECISIONS OF THE CHENNAI BENCHES OF THE TRIBUNAL IN THE CASE OF ORCHID CHEMICALS & PHARMACEUTICALS V. ACIT 137 TTJ 373 AND ALSO IN THE CASE OF ITO V. SEAFIL LEASIN G 124 TTJ 531, THE LD. CIT(A) DIRECTED THE ASSESSING OFFICER TO TREAT THE NON - COMPETE FEES PAID AS DEFERRED REVENUE EXPENDITURE AND ALLOW 1/10 TH OF THE EXPENDITURE AS DEDUCTION FOR EVERY YEAR BY OBSERVING AS UNDER: 4.2 I HAVE CONSIDERED VARIOUS SUBMISSI ONS MADE BY THE APPELLANT DURING THE APPEAL PROCEEDINGS. IN SIMILAR CIRCUMSTANCES, THERE IS A DECISION OF HON'BLE CHENNAI ITAT IN THE CASE OF ORCHID CHEMICALS & PHARMACEUTICALS VS ACIT 137 TTJ 373 AND ALSO ONE MORE DECISION OF HON'BLE ITAT CHENNAI IN THE C ASE OF ITO VS SEAFIL LEASING 124 TTJ 531 ITAT, CHENNAI. I AM OF THE CONSIDERED OPINION THAT THESE DECISIONS HAVE SIMILARITIES TO THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE AND HENCE THIS EXPENDITURE MAY BE ALLOWED AS DEFERRED REVENUE EXPENDITURE FOR A PERIOD OF 10 YEARS. THIS DECISION OF MINE IS IN COMMENSURATE WITH THE METHOD ADOPTED BY THE APPELLANT HIMSELF FOR THE PURPOSES OF MAINTENANCE OF BOOKS OF ACCOUNTS BY THE APPELLANT. IN OTHER WORDS, THE ASSESSING OFFICER IS DIRECTED TO TREAT THE NON - COMPETE FEES PAID AS DEFERRED REVENUE EXPENDITURE AND ALLOW 1/L0TH OF THE EXPENDITURE AS DEDUCTION FOR EVERY YEAR. SINCE THIS ISSUE IS THERE FOR BOTH THE ASSESSMENT YEARS, THIS DECISION IS APPLICABLE FOR BOTH THE ASSESSMENT YEARS IN QUESTION. 16.6 OVER AND ABO VE, THE HON BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CARBORANDUM UNIVERSAL LIMITED V. JCIT (SUPRA) HAS HELD AS UNDER: 5. THIS LEAVES US WITH THE THIRD QUESTION AS REGARDS THE NATURE OF EXPENDITURE ON THE NON - COMPETE FEE PAID TO U.MOHANRAO. IT IS SEEN FROM THE FACTS NARRATED IN THE ORDER DATED 17.07.1998 THAT THIS COURT GRANTED THE SCHEME OF AMALGAMATION OF THE FOLLOWING COMPANIES WITH I.T.A. NO . 985 /M/ 15 7 M/S.CARBORANDUM UNIVERSAL LIMITED (CUMI), THE ASSESSEE COMPANY: (I) M/S.CUTFAST ABRASIVES (II) M/S.CUTFAST POLYME RS (III) M/S.EASTERN ABRASIVES LTD. (PREVIOUSLY A SUBSIDIARY OF THE ASSESSEE) AND (IV) M/S.CARBORANDUM UNIVERSAL INVESTMENTS LTD. 6. THE SCHEME OF AMALGAMATION WAS EFFECTIVE FROM 01.04.1997. CONSEQUENT ON THE AMALGAMATION, THE ASSESSEE ENTERED INTO A NON - COMPETE AGREEMENT WITH U.MOHANRAO, FORMERLY CHAIRMAN AND MANAGING DIRECTOR OF CUTFAST ABRASIVE TOOLS LIMITED AND WHO ALSO HAPPENED TO BE THE CHAIRMAN AND MANAGING DIRECTOR OF M/S.CUTFAST POLYMERS PRIVATE LIMITED. THE NON - COMPETE AGREEMENT DATED 29.04 .1996 STATED THAT THE SAID U.MOHANRAO, ASSOCIATED WITH M/S.CUTFAST POLYMERS PRIVATE LIMITED (HEREINAFTER CALLED AS CPPL), HAD ACCESS TO ALL INFORMATION ON PROCESS, KNOWHOW, CLIENTELE OF THE PRODUCTS DEALT WITH BY CPPL AND PRICING AND MARKETING OF ALL THE P RODUCTS RELATING TO CPPL AND WAS IN A POSITION TO INFLUENCE THE BUSINESS OF MANUFACTURE, SALE AND DISTRIBUTION OF THE PRODUCTS HELD BY THE SAID COMPANY. IN THE CIRCUMSTANCES, IN ORDER THAT THE SAID MOHANRAO'S EXPERTISE IN THAT FIELD DID NOT, IN ANY MANNER, PREJUDICE THE GOOD PROSPECTS OF THE BUSINESS OF THE ASSESSEE COMPANY IN FUTURE, THE PARTIES AGREED THAT IN RESPECT OF THE PRODUCTS, NAMELY, PHENOL FORMALDEHYDE RESIN (IN LIQUID AND POWDER FORMS), SATURATED POLYESTER RESIN, UNSATURATED POLYESTER RESIN, MOD IFIED ALKALYD AND ANY OTHER RESIN, ALL HAVING APPLICATION IN COATED AND BONDED ABRASIVES MANUFACTURE, SHALL NOT BE DEALT WITH BY THE SAID U.MOHANRAO. IN CONSIDERATION OF THE SAME, THE SAID U.MOHANRAO WOULD BE PAID A SUM OF RS.50,00,000/ - AS A NON - COMPETE F EE. THE AGREEMENT LAID DOWN THE RESTRICTIVE COVENANTS THAT THE SAID U.MOHANRAO SHALL NOT MANUFACTURE DIRECTLY OR INDIRECTLY ANY OF THE PRODUCTS MENTIONED ABOVE AND SHALL NOT DEAL WITH THE SAID PRODUCTS IN ANY MANNER OR ADVISE, ASSIST, AID, EITHER DIRECTLY OR INDIRECTLY, ANY COMPETITOR OR ANY OTHER PERSON IN EITHER ESTABLISHING, MANAGING, PROMOTING OR DEVELOPING THE BUSINESS OF THE SAID PRODUCTS OR ANY PRODUCT SIMILAR THERETO; HE SHALL NOT ACT AS A CONSULTANT OR USE ANY KNOWHOW, DESIGN OR DRAWINGS DIRECTLY O R INDIRECTLY AND REFRAIN FROM DISCLOSING OR DIVULGING ANY INFORMATION RELATING TO THE I.T.A. NO . 985 /M/ 15 8 KNOWHOW, TRADE PRACTICES, ETC. THE AGREEMENT WAS TO BE EFFECTIVE FOR A PERIOD OF FIVE YEARS FROM THE DATE OF THE AGREEMENT. 7. ON 29.04.1996, YET ANOTHER AGREEMENT WAS ENTERED INTO BETWEEN THE ASSESSEE AND THE SAID U.MOHANRAO, FORMER CHAIRMAN AND MANAGING DIRECTOR OF CUTFAST ABRASIVE TOOLS LIMITED, AS BY WAY OF A NON - COMPETE AGREEMENT THAT THE SAID U.MOHANRAO SHALL NOT, IN ANY MANNER, ASSIST ANY THIRD PARTY, OR SELL OR RENDER ADVISE OR ACT AS A CONSULTANT IN RESPECT OF THE PRODUCTS, NAMELY, COATED AND BONDED ABRASIVES, CURRENT RANGE OF PRODUCTS OF THE ELECTROMINERALS DIVISION OF CATL AND CLOTH PROCESSING FOR COATED ABRASIVES. IN CONSIDERATION OF THE SAID AGREEMENT, THE S AID U.MOHANRAO WAS PAID A SUM OF RS.1,75,00,000/ - TOWARDS NON - COMPETE FEE. ON 14.10.1996, THERE WAS A SUPPLEMENTARY AGREEMENT BETWEEN THE ASSESSEE AND THE SAID U.MOHANRAO, WHICH CONTEMPLATED INCLUSION OF OTHER PRODUCTS, NAMELY, COATED AND BONDED ABRASIVES, CURRENT RANGE OF PRODUCTS OF THE ELECTROMINERALS DIVISION OF CATL AND ALSO ALL OTHER ELECTROMINERAL PRODUCTS, USED OR CAPABLE OF BEING USED IN THE MANUFACTURE OF ABRASIVE PRODUCTS (BOTH BONDED AND COATED), AND CLOTH PROCESSING FOR COATED ABRASIVES. THE AG REEMENT WAS TO BE EFFECTIVE FOR A PERIOD OF FIVE YEARS AND A FURTHER SUM OF RS.35,00,000/ - WAS AGREED TO BE PAID TO THE SAID U.MOHANRAO. THUS, IN ALL, THE ASSESSEE HAD A SUM OF RS.2.6 CRORES TO THE SAID U.MOHANRAO AS BY WAY OF NON - COMPETE FEE. THE ASSESSEE CLAIMED THIS AMOUNT AS A REVENUE EXPENDITURE. IT IS A FACT THAT THE ASSESSEE DID NOT WRITE OFF THIS AMOUNT IN THE BOOKS OF ACCOUNTS. HOWEVER, PLACING RELIANCE ON THE DECISION REPORTED IN [1987] 165 ITR 63 (COMMISSIONER OF INCOME TAX VS. LATE G.D.NAIDU AND OTHERS) (MAD.) AND 87 ITD 541 (SRI ANNAPURNA GOWRI SHANKAR HOTEL PVT. LTD. VS. CIT), THE ASSESSEE CONTENDED THAT IT WAS ENTITLED TO DEDUCTION. THE CLAIM OF THE ASSESSEE WAS REJECTED BY THE ASSESSING OFFICER ON THE GROUND THAT THE SAID U.MOHANRAO WAS THE E RSTWHILE CHAIRMAN AND MANAGING DIRECTOR OF THE COMPANY AND SUCH NON - COMPETE AGREEMENT HAD INCREASED THE ASSESSEE'S MARKET PRESENCE AND IMPROVED ITS POTENTIAL TO HAVE BETTER RESULTS IN THE MARKET; THE PAYMENT MADE OVER A PERIOD OF MORE THAN FIVE YEARS ONCE WAS FOR PROCURING AN ENDURING BENEFIT TO THE BUSINESS. CONSEQUENTLY, THE OFFICER HELD THAT THE EXPENDITURE WAS IN THE CAPITAL FIELD AND NOT AS REVENUE. 8. AGGRIEVED BY THIS, THE ASSESSEE WENT ON APPEAL BEFORE THE COMMISSIONER OF INCOME TAX (APPEALS), WH O UPHELD THE DECISION I.T.A. NO . 985 /M/ 15 9 OF THE ASSESSING AUTHORITY. AGGRIEVED BY THIS, THE ASSESSEE WENT ON FURTHER APPEAL BEFORE THE INCOME TAX APPELLATE TRIBUNAL. REFERRING TO THE DECISION REPORTED IN [1991] 191 ITR 249 (CHELPARK COMPANY LTD. VS. COMMISSIONER OF INCOME TA X) AND [1999] 239 ITR 142 (TAMILNADU DAIRY DEVELOPMENT CORPN. LTD. VS. COMMISSIONER OF INCOME - TAX), THE TRIBUNAL, BY A CRYPTIC ORDER, REJECTED THE ASSESSEE'S CLAIM. THERE IS HARDLY ANY DISCUSSION IN THE ORDER, PARTICULARLY WITH REFERENCE TO THE NON - COMPETE FEE AGREEMENTS, REFERRED TO ABOVE. AGGRIEVED BY THIS, THE ASSESSEE IS ON APPEAL BEFORE THIS COURT. 9. LEARNED COUNSEL APPEARING FOR THE ASSESSEE PLACED RELIANCE ON THE DECISION OF THE APEX COURT REPORTED IN [1971] 82 ITR 902 (CIT VS. COAL SHIPMENTS P. LTD (S.C.)), [1980] 124 ITR 1 (EMPIRE JUTE CO. LTD. VS. COMMISSIONER OF INCOME TAX (S.C.)) AND [1989] 177 ITR 377 (ALEMBIC CHEMICAL WORKS CO. LTD.) AND POINTED OUT TO THE GUIDING FACTOR IN THE MATTER OF CONSIDERING THE CLAIM AS TO WHETHER THE EXPENDITURE W OULD FALL UNDER THE CAPITAL OR REVENUE HEAD. MAKING PARTICULAR EMPHASIS ON THE FACT THAT THE EXPENDITURE INCURRED WAS MORE IN THE FIELD OF INDEFINITE INCOME EARNING OPERATION AND NOT IN THE CONTEXT OF STRENGTHENING THE INCOME EARNING STRUCTURE, HE SUBMITTE D THAT THE TRIBUNAL AND THE AUTHORITIES BELOW COMMITTED A SERIOUS ERROR IN LOOKING AT THE ENDURING BENEFIT CONCEPT FOR THE PURPOSE OF REJECTING THE ASSESSEE'S CASE. 10. REFERRING TO THE DECISION REPORTED IN [1980] 124 ITR 1 (EMPIRE JUTE CO. LTD. VS. COM MISSIONER OF INCOME TAX (S.C.)), HE SUBMITTED THAT THE EXPENDITURE INCURRED WAS FOR THE EXPLOITATION OF A COMMERCIAL ASSET; HENCE WAS REVENUE IN CHARACTER. EVEN WHERE AN EXPENDITURE IS INCURRED BY OBTAINING AN ADVANTAGE OF ENDURING BENEFIT, IT MAY, NONETHE LESS, BE ON REVENUE ACCOUNT AND THE TEST OF ENDURING BENEFIT MAY BREAK DOWN. HE FURTHER SUBMITTED THAT WHAT IS MATERIAL HEREIN IS TO CONSIDER THE NATURE OF ADVANTAGE IN A COMMERCIAL SENSE. IF THE ADVANTAGE IS IN THE FIELD OF FACILITATING THE ASSESSEE'S BUS INESS OPERATION MORE EFFECTIVELY OR MORE PROFITABLY LEAVING THE FIXED CAPITAL UNTOUCHED, THE EXPENDITURE WOULD BE ON REVENUE ACCOUNT. 11. REFERRING TO THE DECISION REPORTED IN [1991] 191 ITR 249 (CHELPARK COMPANY LTD. VS. COMMISSIONER OF INCOME TAX), LE ARNED COUNSEL POINTED OUT THAT THE DECISION HAS TO BE I.T.A. NO . 985 /M/ 15 10 UNDERSTOOD IN THE LIGHT OF THE FACTS FOUND HEREIN. SO TOO [1987] 165 ITR 63 (COMMISSIONER OF INCOME TAX VS. LATE G.D.NAIDU AND OTHERS) (MAD.). THUS, REITERATING THE PRINCIPLES LAID DOWN IN [1980] 124 IT R 1 (EMPIRE JUTE CO. LTD. VS. COMMISSIONER OF INCOME TAX (S.C.)) AND [1989] 177 ITR 377 (ALEMBIC CHEMICAL WORKS CO. LTD.), LEARNED COUNSEL FURTHER MADE REFERENCE TO [1999] 239 ITR 142 (TAMILNADU DAIRY DEVELOPMENT CORPN. LTD. VS. COMMISSIONER OF INCOME - TAX) AND [2008] 302 ITR 249 (CIT VS. EICHER LTD. (DELHI)) TO SUBMIT THAT THE AGREEMENT ENTERED INTO BETWEEN THE ASSESSEE COMPANY WITH U.MOHANRAO WOULD CLEARLY SHOW THAT THE EXPENDITURE WAS ONLY ON THE REVENUE ACCOUNT. 12. COUNTERING THE CLAIM OF THE ASSESSE E, LEARNED STANDING COUNSEL APPEARING FOR THE REVENUE SUPPORTED THE ORDER OF THE TRIBUNAL AND PLACED RELIANCE ON THE DECISION REPORTED IN [1971] 82 ITR 902 (CIT VS. COAL SHIPMENTS P. LTD (S.C.)) AND [1991] 191 ITR 249 (CHELPARK COMPANY LTD. VS. COMMISSIONE R OF INCOME TAX) THAT WHEN THE ASSESSEE HAD NOT WRITTEN OFF THE SAID EXPENDITURE IN ITS ACCOUNTS AND THE AMOUNT PAID WAS TO WARD OFF ANY COMPETITION IN THE BUSINESS OF THE ASSESSEE, THE EXPENDITURE MADE WAS ONLY A CAPITAL EXPENDITURE; HENCE, NOT ENTITLED T O DEDUCTION. 13. HEARD LEARNED COUNSEL APPEARING FOR BOTH SIDES AND PERUSED THE MATERIALS PLACED ON RECORD. 14. AS FAR AS THE QUESTION AS TO WHETHER AN EXPENDITURE COULD BE A CAPITAL EXPENDITURE OR REVENUE EXPENDITURE IS CONCERNED, THE CONCEPT THAT T HE EXPENDITURE YIELDING AN ADVANTAGE OF AN ENDURING NATURE WOULD BE ONLY A CAPITAL EXPENDITURE, HAS BEEN FINE - TUNED, THAT EVEN WHEN EXPENDITURE WAS INCURRED FOR OBTAINING ADVANTAGE OF ENDURING BENEFIT, NONETHELESS, THE SAME CAN BE TAKEN AS ONE OF REVENUE A CCOUNT. IN THE DECISION REPORTED IN [1980] 124 ITR 1 (EMPIRE JUTE CO. LTD. VS. COMMISSIONER OF INCOME TAX (S.C.)), THE APEX COURT POINTED OUT THAT THE TEST OF ENDURING BENEFIT IS NOT A CERTAIN OR CONCLUSIVE TEST AND IT CANNOT BE APPLIED BLINDLY AND MECHANI CALLY WITHOUT REGARD TO THE PARTICULAR FACTS AND CIRCUMSTANCES OF A GIVEN CASE. IN A TRANSACTION OF TRANSFER OF ALLOTMENT OF LOOM HOURS, ON THE QUESTION AS TO WHETHER IT IS A REVENUE EXPENDITURE OR A CAPITAL EXPENDITURE, THE APEX COURT POINTED OUT THAT A P AYMENT MAY BE A REVENUE PAYMENT FROM THE POINT OF VIEW OF THE PAYER AND A I.T.A. NO . 985 /M/ 15 11 CAPITAL PAYMENT FROM THE POINT OF VIEW OF THE RECEIVER AND VICE VERSA. THUS WHETHER AN EXPENDITURE IS CAPITAL OR REVENUE HAS TO BE DETERMINED WITH REGARD TO THE NATURE OF THE TRANSAC TION AND OTHER RELEVANT FACTORS. REFERRING TO THE DECISION REPORTED IN [1965] 58 ITR 241 (PC) (COMMISSIONER OF TAXES V. NCHANGA CONSOLIDATED COPPER MINES LTD.), THE APEX COURT POINTED OUT THAT 'THERE MAY BE CASES WHERE EXPENDITURE, EVEN IF INCURRED FOR OBT AINING ADVANTAGE OF ENDURING BENEFIT, MAY, NONETHELESS, BE ON REVENUE ACCOUNT AND THE TEST OF ENDURING BENEFIT MAY BREAK DOWN. ... WHAT IS MATERIAL TO CONSIDER IS THE NATURE OF THE ADVANTAGE IN A COMMERCIAL SENSE AND IT IS ONLY WHERE THE ADVANTAGE IS IN TH E CAPITAL FIELD THAT THE EXPENDITURE WOULD BE DISALLOWABLE ON AN APPLICATION OF THIS TEST. IF THE ADVANTAGE CONSISTS MERELY IN FACILITATING THE ASSESSEE'S TRADING OPERATIONS OR ENABLING THE MANAGEMENT AND CONDUCT OF THE ASSESSEE'S BUSINESS TO BE CARRIED ON MORE EFFICIENTLY OR MORE PROFITABLY WHILE LEAVING THE FIXED CAPITAL UNTOUCHED, THE EXPENDITURE WOULD BE ON REVENUE ACCOUNT, EVEN THOUGH THE ADVANTAGE MAY ENDURE FOR AN INDEFINITE FUTURE.' 15. REFERRING TO THE DECISION REPORTED IN [1965] 56 ITR 52 (SC) (BOMBAY STEAM NAVIGATION CO. [1953] P. LTD. V. CIT) AS WELL AS [1924] 8 TC 671 AT 676, (ROBERT ADDIE AND SONS' COLLIERIES LTD. V. IRC), THE APEX COURT REFERRED TO THE WORDS OF LORD SUMNER, WHICH MAY USEFULLY BE EXTRACTED HEREIN TOO: ' IF THE OUTGOING EXP ENDITURE IS SO RELATED TO THE CARRYING ON OR THE CONDUCT OF THE BUSINESS THAT IT MAY BE REGARDED AS AN INTEGRAL PART OF THE PROFIT - EARNING PROCESS AND NOT FOR ACQUISITION OF AN ASSET OR A RIGHT OF A PERMANENT CHARACTER, THE POSSESSION OF WHICH IS A CONDITI ON OF THE CARRYING ON OF THE BUSINESS, THE EXPENDITURE MAY BE REGARDED AS REVENUE EXPENDITURE. SEE BOMBAY STEAM NAVIGATION CO. (1953) P. LTD. V. CIT [1965] 56 ITR 52 (SC). THE SAME TEST WAS FORMULATED BY LORD CLYDE IN ROBERT ADDIE AND SONS' COLLIERIES LTD. V. IRC [1924] 8 TC 671, 676 (C SESS) IN THESE WORDS: 'IS IT A PART OF THE COMPANY'S WORKING EXPENSES? -- IS IT EXPENDITURE LAID OUT AS PART OF THE PROCESS OF PROFIT EARNING? -- OR, ON THE OTHER HAND, IS IT A CAPITAL OUTLAY? -- IS IT EXPENDITURE NECESSARY FOR THE ACQUISITION OF PROPERTY OR OF RIGHTS OF A PERMANENT CHARACTER, THE POSSESSION OF WHICH IS A CONDITION OF CARRYING ON ITS TRADE AT ALL?' IT IS CLEAR FROM THE ABOVE I.T.A. NO . 985 /M/ 15 12 DISCUSSION THAT THE PAYMENT MADE BY THE ASSESSEE FOR PURCHASE OF LOOM HOURS WAS EXPENDIT URE LAID OUT AS PART OF THE PROCESS OF PROFIT EARNING. IT WAS, TO USE LORD SUMNER'S WORDS, AN OUTLAY OF A BUSINESS 'IN ORDER TO CARRY IT ON AND TO EARN A PROFIT OUT OF THIS EXPENSE AS AN EXPENSE OF CARRYING IT ON'. [JOHN SMITH AND SON V. MOORE [1921] 12 TC 266, 296 (HL)]. IT WAS PART OF THE COST OF OPERATING THE PROFIT - EARNING APPARATUS AND WAS CLEARLY IN THE NATURE OF REVENUE EXPENDITURE. ' 16. THUS THE QUESTION AS TO WHETHER AN EXPENDITURE IS REVENUE OR NOT HAS TO BE SEEN FROM THE CONTEXT OF AN EXPENDI TURE FORMING 'PART OF THE COST OF THE INCOME - EARNING MACHINE OR STRUCTURE' AS OPPOSED TO PART OF 'THE COST OF PERFORMING THE INCOME - EARNING OPERATIONS'. -- [1971] 82 ITR 902 (CIT VS. COAL SHIPMENTS P. LTD. (S.C.). 17. THUS, THE CONSISTENT GUIDING PRINCI PLES IN MATTERS OF UNDERSTANDING AN EXPENDITURE AS A CAPITAL OR REVENUE, AS HELD BY THE APEX COURT, IS TO FIND OUT THE AIM AND OBJECT OF THE EXPENDITURE AND THE COMMERCIAL NECESSITIES OF MAKING SUCH AN EXPENDITURE. THE QUESTION HAS TO BE CONSIDERED IN THE BACKGROUND OF THE FACTS OF EACH CASE, THAT 'THE IDEA OF 'ONCE FOR ALL' PAYMENT AND 'ENDURING BENEFIT' ARE NOT TO BE TREATED AS SOMETHING AKIN TO STATUTORY CONDITIONS; NOR ARE THE NOTIONS OF 'CAPITAL' OR 'REVENUE' A JUDICIAL FETISH. ' - [1989] 177 ITR 377 ( ALEMBIC CHEMICAL WORKS CO. LTD.). 18. GOING BY THE ABOVE - SAID PRINCIPLE, IF ONE LOOKS AT THE DECISION REPORTED IN [1991] 191 ITR 249 (CHELPARK COMPANY LTD. VS. COMMISSIONER OF INCOME TAX), ONE MAY FIND THAT THE DECISION THAT THE EXPENDITURE WAS A CAPITA L EXPENDITURE AND HENCE NOT DEDUCTIBLE, RESTED IN THE CONTEXT OF THE PECULIAR FACTS OF THE CASE; THE PARTNERSHIP WITH WHICH THE ASSESSEE HAD THE NON - COMPETE AGREEMENT GOT DISSOLVED IMMEDIATELY AFTER THE PAYMENT OF THE NON - COMPETE FEE AND THE POTENTIAL COMP ETITOR HAD VANISHED. ON THESE FACTS, THIS COURT OBSERVED THAT, WHATEVER THE ASSESSEE HAD PAID FOR WAS OF PERMANENT OR ENDURING QUALITY, IN THE SENSE THAT COMPETITION HAD BEEN TOTALLY ELIMINATED AND PROTECTION HAD BEEN ACQUIRED FOR THE BUSINESS OF THE ASSES SEE AS A WHOLE. WE DO NOT FIND THAT THE REVENUE COULD DRAW ANY SUPPORT FROM THE SAID DECISION OF THIS COURT, IT BEING ONE BASED ON THE FACTS OF THE SAID DECISION. THE QUESTION HEREIN AS TO I.T.A. NO . 985 /M/ 15 13 WHETHER NON - COMPETE FEE PAID TO THE EX - MANAGING DIRECTOR WAS A REVE NUE OR A CAPITAL EXPENDITURE, HAS TO BE SEEN IN THE CONTEXT OF THE FACTS OF THIS CASE AND THE CIRCUMSTANCES IN WHICH THE PAYMENTS WERE MADE. 19. IT IS NOT DENIED BY THE REVENUE THAT U.MOHANRAO WAS THE CHAIRMAN AND MANAGING DIRECTOR OF SOME OF THE COMPAN IES WHICH GOT MERGED WITH THE ASSESSEE COMPANY. THE SAID U.MOHANRAO HAD ACCESS TO ALL INFORMATION STARTING FROM MANUFACTURING PROCESS, KNOWHOW TO THE CLIENTELE AND THE PRODUCTS, INCLUDING THE PRICING OF THE PRODUCTS. BY A PROCESS OF AMALGAMATION, THE ASSES SEE HAD ACQUIRED THE BUSINESS OF THE AMALGAMATING COMPANIES. HOWEVER, FOR THE FRUITFUL EXERCISE OF ITS BUSINESS AS A BUSINESS PROPOSITION, THE ASSESSEE THOUGHT IT FIT TO ENTER INTO A NON - COMPETE AGREEMENT WITH A PERSON WHO HAD THE KNOWLEDGE OF THE ENTIRE O PERATIONS, SO AS TO GET THE FULL YIELD OF THE AMALGAMATED COMPANY'S BUSINESS. IN THAT CONTEXT, RIGHTLY, THE ASSESSEE TOOK A COMMERCIAL DECISION TO PAY NON - COMPETE FEE TO U.MOHANRAO AND GOING BY THE DECISION OF THE APEX COURT, PARTICULARLY THE DECISION REPO RTED IN [1971] 82 ITR 902 (CIT VS. COAL SHIPMENTS P. LTD (S.C.)), THAT THE PAYMENT WAS IN RE SPECT OF THE PERFORMING OF THE BUSINESS OF THE ASSESSEE, WE HAVE NO HESITATION IN HOLDING THAT THE EXPENDITURE IS ONLY ON REVENUE ACCOUNT AND NOT ON CAPITAL ACCOUNT. IN THE CIRCUMSTANCES, WE ACCEPT THE CASE OF THE ASSESSEE, SET ASIDE THE ORDER OF THE TRIBU NAL AND ALLOW THE TAX CASE. 16.7 AS THE CASE LAW RELIED ON BY THE LD. DR, THE DEPARTMENT HAS ALSO RELIED ON BOTH THE DECISIONS IN THE CASE OF TAMILNADU DIARY DEVELOPMENT CORPORATION (SUPRA) AND CHELPARK COMPANY LTD. (SUPRA) BEFORE THE HON BLE JURISDICTIO NAL HIGH COURT IN THE CASE OF CARBORANDUM UNIVERSAL LIMITED V. JCIT (SUPRA). HOWEVER, BY CONSIDERING THE JUDGEMENT OF THE HON BLE APEX COURT IN THE CASE OF CIT V. COAL SHIPMENTS P. LTD. (SUPRA), THE HON BLE HIGH COURT HAS OBSERVED THAT THE PAYMENT WAS IN R ESPECT OF THE PERFORMING OF THE BUSINESS OF THE ASSESSEE, HELD THAT THE EXPENDITURE IS ONLY ON REVENUE ACCOUNT AND NOT ON CAPITAL ACCOUNT. RESPECTFULLY FOLLOWING THE ABOVE DECISION OF THE HON BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CARBORANDUM UNIVERS AL LIMITED V. JCIT (SUPRA), WE FIND NO INFIRMITY IN THE ORDER PASSED BY THE LD. CIT(A) FOR BOTH ASSESSMENT YEARS 2006 - 07 AND 2007 - 08 AND THUS, THE GROUND RAISED BY THE REVENUE IS DISMISSED. I.T.A. NO . 985 /M/ 15 14 6. RESPECTFULLY FOLLOWING THE ABOVE DECISION OF THE COORDINATE BENCH IN ASSESSEE S OWN CASE FOR THE ASSESSMENT YEARS 2006 - 07 AND 2007 - 08, WE HOLD THAT THE EXPENDITURE TOWARDS NON - COMPETE FEE IS ONLY ON REVENUE ACCOUNT AND NOT ON CAPITAL ACCOUNT AND ACCORDINGLY, DIRECT THE ASSESSING OFFICER TO DELETE THE DISALLOWANCE M ADE ON THIS ACCOUNT. 7. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED ON THE 28 TH OCTOBER , 2016 AT CHENNAI. SD/ - SD/ - (A. MOHAN ALANKAMONY ) ACCOUNTANT MEMBER ( DUVVURU RL REDDY ) JUDICIAL MEMBER CHENNAI, DATED, THE 28 . 1 0 .201 6 VM/ - / COPY TO: 1. / APPELLANT , 2. / RESPONDENT , 3. ( ) / CIT(A) , 4. / CIT , 5. / DR & 6. / GF.