2014 (1) TMI 975 - AT - Income Tax

Payment made under Voluntary Retirement Scheme - Revenue or capital expenditure - Held that - Before introction of section 35DDA - The assessee can claim the expenditure incurred on account payment made for the VRS which are in the nature of business expenditure and are deductible u/s.37 - Following G.E.Medical Systems India (P) Ltd 2012 (10) TMI 53 - ITAT, Bangalore - The Tribunal has allowed the claim of the assessee that the impugned expenditure is for the purpose of the business and deductible u/s.37 of the Act - Decided in favour of assessee. Non-compete fees paid - Held that - The supply agreement has nothing to do with the competition fees agreement as the same has been paid on account of Agrimore not engaging in the production of these four items for seven years and fifteen years - Following CIT vs. Coal Shipment Pvt. Ltd 1971 (10) TMI 6 - SUPREME Court - Payment made to ward of competition in the business of arrival would constitute capital expenditure of the object of making that payment is to derive an advantage by eliminating the competition over some length of time - The same result would not follow if there is no uncertainty of the duration of the advantage and the same can be put on an end any time - Although an enduring benefit need not be everlasting character it should not be so transitory and ephemeral that it can be terminated at any time at the volition of any of the parties - In the assessee s case, the three products of the company has advantage for seven years and the 4th product has advantage for fourteen years. The agreement has been entered in order to have the advantage of enduring nature as the life of these products itself in the competition age would be over before the period of seven years and fourteen years is over - Ld. CIT(A) was justified in upholding that this payment is required to be considered as capital in nature - Decided against assessee. Bad debts - Held that - Following TRF Limited Vs. CIT 2010 (2) TMI 211 - SUPREME COURT - After 01.04.1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable - If the bad debt has been written off as irrecoverable in the accounts of the assessee it is enough for claiming deduction u/s.36(1)(vii) - It becomes manifest that the deduction on account bad debt is to be allowed in the year in which the amount is written off in its books of account provided the conditions of section 36(2) are fulfilled - There is no requirement to distinctly prove that the debt has, in fact, become irrecoverable as a pre-requisite condition for allowing of deduction Decided in favour of assessee. Value of closing stock - Held that - Following assessee s own case for the Assessment Years 1994-95 - Post manufacturing expenses are not required to be included in the valuation of the closing stock - Decided against revenue.

Issues Involved:
1. Disallowance of expenditure incurred for VRS payments.
2. Disallowance of non-compete fees.
3. Disallowance of bad debt written off.
4. Addition to the value of closing stock for freight charges.
5. Addition to closing stock for un-utilized Modvat credit.
6. Disallowance of expenditure on production of advertisement film.

Issue-wise Detailed Analysis:

1. Disallowance of Expenditure Incurred for VRS Payments:
The assessee and Revenue filed cross appeals regarding the disallowance of Rs. 3,61,34,164/- incurred by the assessee for VRS payments. The AO treated these payments as capital expenditure, arguing that the VRS was part of the sale process of the Valsad plant and not for rationalizing manpower costs. The Ld.CIT(A) directed the AO to recompute capital gain and adjust the WDV by bifurcating the VRS payment. Upon hearing both sides, it was concluded that the VRS payments were revenue expenditure deductible under section 37(1) of the Act, as supported by various Tribunal and High Court decisions. Consequently, the entire expense of Rs. 3.61 crores was allowed as revenue expenditure, and the assessee's ground was upheld while the revenue's grounds were dismissed.

2. Disallowance of Non-Compete Fees:
The assessee's appeal challenged the disallowance of Rs. 36.75 crores paid as non-compete fees to M/s Agrimore Ltd. The AO and Ld.CIT(A) treated this payment as capital expenditure, referencing the Supreme Court's decision in CIT Vs. Coal Shipment Pvt. Ltd. The assessee argued that the expenditure was for avoiding the manufacture of hazardous substances and should be deductible under section 37(1). However, it was found that the non-compete agreement provided an enduring advantage by eliminating competition for a significant period. Thus, the payment was deemed capital in nature, and the Ld.CIT(A)'s decision was upheld, dismissing the assessee's ground.

3. Disallowance of Bad Debt Written Off:
The assessee's and revenue's appeals concerned the disallowance of Rs. 54,17,792/- written off as bad debt. The AO disallowed the claim, stating the assessee did not prove the debts were irrecoverable. The Ld.CIT(A) allowed the claim for Rs. 44,09,800/- but disallowed the rest. The Tribunal referenced the Supreme Court's decision in TRF Limited Vs. CIT, which stated that post-01.04.1989, it is sufficient if the debt is written off in the books. Consequently, the entire bad debt claim was allowed, and the assessee's ground was upheld while the revenue's ground was dismissed.

4. Addition to the Value of Closing Stock for Freight Charges:
The revenue's appeal challenged the deletion of Rs. 3,44,000/- added to the closing stock for freight charges. The Ld.CIT(A) deleted the addition, following previous Tribunal orders for similar claims in earlier years. In the absence of contradictory facts, the Tribunal upheld the Ld.CIT(A)'s decision, dismissing the revenue's ground.

5. Addition to Closing Stock for Un-utilized Modvat Credit:
The revenue's appeal contested the deletion of Rs. 2,97,992/- added to the closing stock for un-utilized Modvat credit. The Ld.CIT(A) deleted the addition, following the Tribunal's orders for previous years. Without distinguishing facts for the current year, the Tribunal upheld the Ld.CIT(A)'s decision, dismissing the revenue's ground.

6. Disallowance of Expenditure on Production of Advertisement Film:
The revenue's appeal challenged the deletion of Rs. 8,48,424/- disallowed for advertisement film production. The Tribunal had allowed similar expenditures in previous years. Following the precedent, the Tribunal upheld the Ld.CIT(A)'s decision, dismissing the revenue's ground.

Conclusion:
The appeal filed by the assessee was partly allowed, and the appeal filed by the revenue was dismissed. The order was pronounced in the open court on January 8, 2014.

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