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2002 (2) TMI 309 - AT - Income Tax

Issues Involved:
1. Separate assessment u/s 143(3) during block period after search u/s 132.
2. Allowability of non-competition fees as business expenditure.
3. Disallowance of depreciation on electric meters and transformers.
4. Disallowance/allowance of service charges paid for loan arrangement.

Summary:

1. Separate Assessment u/s 143(3):
The first issue was whether a separate assessment could be made u/s 143(3) for an assessment year within the block period after a search u/s 132. The tribunal upheld the CIT(A)'s view, rejecting the assessee's ground, referencing the Calcutta High Court decision in Dy. CIT v. Shaw Wallace & Co. Ltd [2001] 248 ITR 81, which allowed assessments under section 143(3) even during block assessments.

2. Non-Competition Fees:
The second issue concerned the disallowance of non-competition fees of Rs. 10 crores paid to promoters of two distilleries. The Assessing Officer (AO) viewed the payment as part of the acquisition cost rather than a deductible business expenditure. The CIT(A) upheld the disallowance, stating the payment was for an enduring benefit and lacked business necessity. The tribunal, referencing various judgments, including Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 and CIT v. G.D. Naidu [1987] 165 ITR 63, concluded that the payment was for acquiring an enduring benefit and thus not allowable as a deduction.

3. Depreciation on Electric Meters and Transformers:
The third issue involved the disallowance of depreciation on electric meters and transformers purchased from Andhra Pradesh State Electricity Board (APSEB) and leased back to them. The AO and CIT(A) viewed the transactions as sham, aimed at tax avoidance, and not genuine purchases. The tribunal upheld this view, stating the transactions were mere finance arrangements and not actual sales, thus disallowing the depreciation claim.

4. Service Charges for Loan Arrangement:
The fourth issue was the disallowance of a portion of service charges paid to Peerless General Finance & Investment Co. Ltd. for arranging a loan. The AO disallowed the entire claim, while the CIT(A) allowed 5% of the charges. The tribunal, referencing decisions like India Cements Ltd v. CIT [1966] 60 ITR 52 (SC), concluded that the service charges were related to raising the loan and directed that 1/7th of the expenditure be allowed, considering the loan period.

Conclusion:
The tribunal upheld the CIT(A)'s decisions on all major issues, maintaining the disallowance of non-competition fees and depreciation on electric meters and transformers, while partially allowing the service charges related to loan arrangement.

 

 

 

 

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