2005 (10) TMI 499 - AT - Income Tax

Issues Involved:
1. Deletion of addition on account of unutilized Modvat credit.
2. Exclusion of excise duty from total turnover for deduction under section 80HHC.
3. Deductibility of "non-compete" fees as revenue expenditure.
4. Deletion of disallowance of legal expenses.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Unutilized Modvat Credit:
The first ground of appeal pertains to the deletion by the Commissioner of Income-tax (Appeals) of the addition of Rs. 62,858 made by the Assessing Officer on account of unutilized Modvat credit. Both parties agreed that this ground is covered in the assessee's favor by the Supreme Court decision in CIT v. Indo Nippon Chemicals Co. Ltd. [2003] 261 ITR 275. Accordingly, the finding of the Commissioner of Income-tax (Appeals) on this issue is confirmed.

2. Exclusion of Excise Duty from Total Turnover for Deduction under Section 80HHC:
The second ground pertains to the finding of the Commissioner of Income-tax (Appeals) that excise duty is to be excluded from the total turnover for computation of deduction under section 80HHC. This issue is also admitted to be covered in the assessee's favor by the Bombay High Court decision in CIT v. Sudarshan Chemicals Industries Ltd. [2000] 245 ITR 769. Accordingly, the order of the Commissioner of Income-tax (Appeals) on this issue is confirmed.

3. Deductibility of "Non-Compete" Fees as Revenue Expenditure:
The third ground pertains to the finding that "non-compete" fees of Rs. 38.5 lakhs paid by the assessee is deductible as revenue expenditure. The assessee-company, engaged in the manufacturing and trading of textile chemicals, entered into agreements with two sister concerns to acquire their proprietary businesses as going concerns. The agreements included a "non-compete" clause, under which the assessee agreed to pay Rs. 3.5 lakhs and Rs. 2 lakhs per month to the proprietors for 15 years to prevent them from competing. The Assessing Officer treated this expenditure as capital expenditure, supported by various judicial precedents, including Behari Lal Beni Parshad v. CIT [1959] 35 ITR 576 (Punj) and Blaze and Central P. Ltd. v. CIT [1979] 120 ITR 33 (Mad). The Commissioner of Income-tax (Appeals), however, allowed it as revenue expenditure, relying on judicial pronouncements such as Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC).

Upon appeal, the Tribunal analyzed the agreements and judicial precedents. It concluded that the payments were for eliminating competition over a long period (15 years), thus constituting capital expenditure. The Tribunal reversed the Commissioner of Income-tax (Appeals)'s finding and directed the Assessing Officer to disallow the expenditure as capital expenditure.

4. Deletion of Disallowance of Legal Expenses:
The last ground of appeal pertains to the deletion by the Commissioner of Income-tax (Appeals) of the disallowance of Rs. 2 lakhs made by the Assessing Officer from out of legal expenses of Rs. 3,02,364. The Assessing Officer had disallowed this amount on the ground that it was incurred in connection with the acquisition of the proprietary business, thus capital in nature. The Commissioner of Income-tax (Appeals) deleted the addition, following the Supreme Court decision in CIT v. Bombay Dyeing and Manufacturing Co. Ltd. [1996] 219 ITR 521, which held that professional charges for amalgamation necessary for effectively carrying on business are allowable as business expenditure. The Tribunal confirmed the Commissioner of Income-tax (Appeals)'s order on this issue.

Appeals Nos. 3170 and 3171 - Assessment Years 1998-99 and 1999-2000:
The first ground common for both years pertains to the exclusion of excise duty from total turnover for deduction under section 80HHC, confirmed in favor of the assessee by the Bombay High Court decision in Sudarshan Chemicals Industries Ltd. [2000] 245 ITR 769.

The second ground common for both years pertains to the "non-compete" fees, which the Tribunal held to be capital expenditure, consistent with its decision for the assessment year 1997-98.

Conclusion:
In the result, all three departmental appeals are partly allowed.

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