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TMI Blog2006 (6) TMI 174X X X X Extracts X X X X X X X X Extracts X X X X ..... tional breakage and deducted from WDV on an estimated basis without considering the provisions of section 50 of the Act. (2) The CIT(A) ought to have appreciated and held that the lease compensation charges of Rs. 1,84,63,029 is in the nature of allowable loss or expenditure based on the principles laid down by the Courts. (3) The CIT(A) is not correct in holding that the goodwill of Rs. 3,00,00,000 Was assessable in the assessment year 1999-2000 on the mere fact that the money was received and the agreement signed in this year. The CIT(A) failed to appreciate that goodwill, being an intangible asset ordinarily passes along with transference of the whole business as decided by the Supreme Court in the case of Alapath Venkataramiah v. CIT (Hyd.) (57 ITR 185) and the principles of right to receive the amount accrued to the appellant in the subsequent periods. The CIT(A) failed to note that the goodwill of Rs. 3 crore was assessed by the Assessing Officer in the assessment year 2002-03." 3. In addition to above, permission of the Bench has been sought to raise the following additional ground which is as under:- "On the facts and circumstances of the case the CIT(A) ought to ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... means that bottles and crates which got broken in the meantime did not form part of the assets sold on 28-2-1999, this is particularly so because a separate sum of Rs. 9,12,078 on the sale of said broken pieces was accounted for separately. According to the Assessing Officer, therefore, the value of breakage of bottles and crates should be deducted from the opening WDV plus the additions for the purpose of calculating the short-term capital gain on the sale of bottles and crates. Further, according to him, this conclusion was quite logical in spite of it is being not statutorily recognized because one cannot sell an asset which is non-existent on the date of transfer, and in this regard, he relied on the decision of Supreme Court in the case of Vania Silk Mills (P.) Ltd. v. CIT [1991] 191 ITR 647. In view of these observations, the breakages of bottles and crates were estimated at 15 per cent and reduced from WDV declared by the assessee and thus short-term capital gain computed to Rs. 8,28,97,258 by the assessee was determined at Rs. 10,54,18, 206. The addition was confirmed by the ld. CIT(A). 7. Before us, the ld. counsel for the assessee submitted that both the lower authorit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n in the year and the same had nothing to do with bottle breakages. He also referred to the observation made by the Assessing Officer in the assessment order whereby it is admitted that notional breakage is only logical and not statutorily recognized. He further submitted that the Assessing Officer has accepted the income declared separately amounting to Rs. 9,12,078 on account of sale of broken bottles and crates. He further submitted that two decisions relied by the Assessing Officer are not relevant because in both the cases, the issue was related to treatment of claim received from insurance company on goods damaged and destroyed by fire and it was held that the compensation received from the insurance company cannot be held to be capital gain since there was no transfer. He pointed out that the CIT(A) has further relied on the decision of Bombay High Court in the case of CIT v. Hindustan Petroleum Corpn. Ltd. [1991] 187 ITR 1, but the same is distinguishable because the facts are totally different. In this regard he referred to the question raised before the High Court and submitted that this would make it clear that the revenue was agitating to the allowance of depreciation o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kages from the WDV because one could not sell an asset which was non-existent on the date of transfer. We think at this point, the Assessing Officer has confused himself. There is no doubt that some breakages of bottles must have taken place and that is why the assessee was claiming breakages at the rate of 33.33 per cent earlier and then 15 per cent in its financial accounts. But the breakages were not accounted for under the income-tax proceedings, because same was claimed in the form of depreciation. Such breakages were never claimed and therefore never allowed by the income-tax authorities separately. Therefore, there is no question of taxing the same again by way of reduction from the WDV. We are also not impressed by the contention that the assessee had realized separate sum of Rs. 9,12,078 on some of the broken pieces of bottles and crates because the same has been accounted for separately and accepted also. As far as reliance on the case in the case of Vania Silk Mills (P.) Ltd. is concerned, the ld. counsel of the assessee has very correctly distinguished the same. There, the issue was whether insurance claimed against an asset which has been destroyed in fire, is taxable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these circumstances, we set aside the order of the ld. CIT (Appeals) and delete the addition. 12. Ground No. 2- The brief facts regarding this ground are that during the assessment proceedings, the Assessing Officer noticed that the assessee has shown an amount of Rs. 1,84,63,029 with the narration "deferred revenue expenditure written off" under the head "Interest to others". Upon enquiry, it was explained that the assessee has set up a new plant at Nemam in which production was started in March, 1997. The main plant and machinery for this plant was imported and same was basically taken on lease from Sundaram Finance Ltd. ("SFL" for short). It was further explained that at the request of assessee, SFL purchased the machinery from Italy. It seems the interest payable during the installation was capitalized by the assessee and the total amount of interest amounting to Rs. 2,25,80,072 was added as deferred revenue expenditure to be claimed in seven years. The same was written off in the accounts as under:- In 31-3-1998 Rs. 32,26,325 In 31-3-1999 Rs. 1,84,63,029 In 31-3-2000 Rs. 8,90,718 13. It was further explained that the assessee intended to claim the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as expansion of business only. He further pointed out that the machineries were taken on lease and lease charges were separately payable and they should not be confused with lease equalization charges, because lease would commence only from the date when the machinery was installed, whereas the lease compensation charges related to the interest cost which was agreed @ 21 per cent per annum for giving advances etc. to the suppliers. He submitted that in the commercial world, expenditure incurred before the installation of assets are normally provided as deferred expenditure or capital expenditure so that the same can be allocated over the life span of the particular asset. This principle has been recognized under various case laws particularly in the case of Madras Industrial Investment Corpn. Ltd. v. CIT [1997] 225 ITR 802(SC), where the Hon'ble Apex Court had held that ordinarily the revenue expenditure which was incurred wholly and exclusively for the purpose of the business must be allowed in its entirety in the year in which it was incurred or it may be allowed over a period of years, depending on the facts of the case, more so, when such allowance will produce a very distor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ociated Cement Co. Ltd [1988] 172 ITR 257 (SC) 16. On the other hand, the ld. DR while supporting the orders of the lower authorities submitted that the assessee himself has treated this expenditure as deferred revenue expenditure and in earlier year only 1/7th of the expenditure was claimed, which clearly shows that the expenditure was in the nature of capital expenditure. He further submitted that applying the ratio of Madras Industrial Investment Corpn. Ltd.'s case and Madras Auto Services (P.) Ltd.'s case what is required is that expenditure should have been incurred during the previous year. Since no expenditure was incurred during the previous year, the same could not be allowed as revenue expenditure and at best, the assessee could have capitalized the same against the assets. 17. In the rejoinder, the ld. AR submitted that since the assessee was not the owner of the assets and the same were taken on lease basis, therefore, there was no question of capitalizing the same. 18. We have considered the rival submissions carefully and have gone through the relevant material on record as well as the judgments cited by the parties. Perusal of paperbook at pages 65-66 and 74 to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enditure in a particular year to spread and Claim it over a period of ensuing years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year." 20. This means that whenever circumstances of the case require the revenue expenditure may be treated as deferred revenue expenditure and amortised over a number of years during which such benefit out of such expenditure is going to accrue to the assessee. Now in the case before us, the assessee wanted to install plant and machinery on lease basis which was not readily available and therefore the assessee agreed to pay compensation charges @ 21 per cent, which is nothing but only interest during the installation period of machinery and such machinery was to be leased over a period of seven years. Therefore, the assessee treated such compensation charges as deferred revenue expenditure. The Revenue is not trying to make a case that the assessee is the owner of the machinery and in such a situation applying the ratio of the Hon'ble Apex Court in the case of Madras Auto Services (P.) Ltd., the whole of expenditure could have been claimed by the assessee in the very first yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is instead of manufacturer basis and such leased assets were also transferred to the other party. In such a situation, the expenditure which was right from the beginning in the nature of revenue expenditure has to be allowed when such lease was required to be terminated. In these circumstances, we set aside the order of the ld. CIT (Appeals) and delete the addition. 22. Ground No. 3- The brief facts in respect of this ground are that during the assessment proceedings, the Assessing Officer noticed that though the assessee has sold its goodwill for a consideration of Rs. 3 crores to HCC, but the same was not offered for taxation and therefore the assessee was asked to show cause why the said amount of Rs. 3 crores should not be assessed as long-term capital gain. It was explained that the goodwill was accounted for in the year ending 31-3-2002 and offered to tax accordingly. It was contended that the receipt of sum of Rs. 3 crores received during the year was only an advance and there were so many conditions to be fulfilled by the seller. It was also contended that the company sold its business undertaking only in the years 2000 and 2001 comprising of land, building, plant and mac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only as advance and the assessee-company was asked to arrange bank guarantee against the same and bank guarantee was accordingly arranged. It was further argued that the bank guarantee executed by the assessee-company was released only in January, 2001 and in this regard he referred to pages 158-159 of Vol. II paperbook, which is copy of the letter releasing the bank guarantee. This itself shows that the transfer of the goodwill did not take place in the year under consideration. He also referred to the letter dated 28-3-2002 addressed by Hindustan Coco Cola Breweries Pvt. Ltd. directly to the Assessing Officer, in which the payment of Rs. 3 crores was shown as advance payment. This further fortifies the claim of the assessee. He also referred to Accounting Standard (AS-9), which states that the revenue should be recognized only when there was certainty of receiving the same and the Assessing Officer was not correct in observing that the Accounting Standard (AS-9) applies only to income and not capital gains, because in the case of capital gains also, unless and until transferee enjoyed the full benefit of transfer, the transfer cannot be said to be completed. He referred to pages ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... HCC on agreed fee basis, which clearly means that the assessee had stopped its own manufacturing and thus goodwill also stood transferred. He also argued that the assessee cannot find any fault with taxation of goodwill in assessment year 2002-03 because same has been offered by the assessee itself and the Department has no option but to assess the same. However, he was fair enough to acknowledge that double taxation of the same income was not possible and therefore, the Tribunal may issue appropriate directions. 26. We have considered the rival submissions carefully and have gone through the relevant material on record as well as decisions cited by the parties. There is no doubt that the goodwill agreement contains the following clause:- "The seller hereby sells and the buyer hereby purchases the goodwill of the seller as valued by seller for a consideration of Rs. 3 crores the receipt and sufficiency whereof is hereby, acknowledged by the seller." This apparently indicates that the transaction regarding sale of goodwill was complete by way of this agreement. However, it is well-settled that it is the substance of the agreement and not the form of agreement which is to be c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o in sub-section (1) or, as the case may be, sub-section (2) and deliver copies thereof to the transferor and the transferee." 27. Now, if the sale of assets is not permitted, it is doubtful whether the buyer would purchase the goodwill alone and perhaps that is why the construction for goodwill was given as advance and the assessee-company was required to furnish bank guarantee also. The letter addressed by HCC dated 28-3-2002 placed at page 164 of the paperbook has clearly mentioned the consideration for goodwill as advance. Again, the letter dated 19-2-1999 which is placed at page 99 of paperbook Vol. II reads as under:- "Re: Securitisation of Goodwill Payment.- Pursuant to our agreement to the sale of your soft drinks business to us, we would be advancing a sum of Rs. 3,00,00,000 (Rupees Three Crores only) towards Company Goodwill. As already discussed with you, we would be requiring some form of security to cover this advance of Rs. 3,00,00,000 (Rupees Three Crores only) from the total cash consideration. Security by way of a Bank Guarantee for the said amount would be acceptable to us." 28. In pursuance of this letter, the assessee-company had furnished bank guarantee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssed before the AAC, such ground could be considered by the Tribunal. He also relied on CIT v. Eveline International (1 RSDTD 1196) (Punj. Har.) (copy of the decision filed on record). He then referred to the provisions of section 32(2) and submitted that carry forward depreciation i.e., unabsorbed depreciation partakes the character of current depreciation under section 32(2) and could be adjusted against any head of the income and therefore the CIT (Appeals) should have allowed the set off of carry forward depreciation against the income earned by the assessee. 31. On the other hand, the ld. DR submitted that once the ground is withdrawn then normally the assessee will not have any grievance and cannot agitate the matter again before the Tribunal because the order passed on the basis of concession cannot be challenged. He then referred to the decision of the Hon'ble jurisdictional High Court in the case of CIT v. Cherian Leasing Ltd. [TC (Appeal) No. 1029 of 2004] (copy of the order filed), whereby it was held that once the issue is decided on the basis of mutual agreement, then normally there is no grievance to the party who has agreed to such decision. However, if a wrong c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peal is dismissed with this observation." 35. In the above decision, the issue involved is almost identical, the only difference being that concession was granted before the CIT (Appeals) in the case before us, whereas in the case before the High Court, concession was granted before the Tribunal. But the issue remains the same. From the above order, it becomes clear that the only remedy left to the assessee is to go back to the CIT (Appeals), if it is of the opinion that a wrong concession was made by the counsel and move application for rectification, if so advised. Therefore, we would not adjudicate this issue and in our considered opinion, if it is so that a wrong concession was given, then it should move the ld. CIT (Appeals) by way of appropriate proceedings. Thus, this ground is dismissed. 36. In the result, the appeal is partly allowed. ITA 1217/2005 37. In this appeal, the revenue has raised the following grounds:- "2. The learned CIT(A) erred in holding that the WDV of bottles as on 1-4-1998 should be adopted at Rs. 12,01,13,238 as against the sum of Rs. 11,76,09,543. 3. The learned CIT(A) ought to have seen that while the assessee adopted the figure of Rs. 12, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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