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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 ..... 376 by the Assessing Officer by adding notional 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 circumstanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 authorities have misdirected themselves in reaching conclusion that breakage in bottles and crates is required to be deducted from WDV. He argued that after ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 on the assets after amalgamation in the hands of the amalgamated company. He submitted that there was no dispute regarding transfer of assets as the same was evidenced by Delivery and Possession Receipt wherein even quantitative details of assets had been identified and verified. These assets were movable assets and transferred by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 or not and the Hon'ble Apex Court held in case of Vania Silk Mills (P.) Ltd that such claim was not taxable because there was no transfer of the asset and that is not the issue before us. Otherwise also, the short-term capital gain in the case of depreciable assets has to be computed under section 50, which is as under:- "50. Notwi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f" 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 for a period of seven years i.e., during the lease period, but lease agreement was terminated because the assessee sold plant and machinery during the year under consideration and therefore the balance of deferred revenue expenditure was claimed during the year. The Assessing Officer observed that the assessee never borrowed any money and therefore interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 distorting picture of income of a particular year. He argued that the assessee also treated this expenditure as deferred revenue expenditure with the intention to claim the same over a period of seven years and accordingly 1/7th of the expenditure was claimed as revenue expenditure for the year ending 31-3-1998 and same was allowed by the Assessing Officer after veri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penditure. 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 89 clearly shows that the assessee entered into two separate agreements and the first agreement was titled as "agreement to enter into lease" and was executed on 23-2-1995; whereas pages 74 to 89 clearly shows that lease agreement was executed on 25-3-1997 for leasing the equipment described in the agreement. This means that when assessee-company approached the lesso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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 year. However, when we deeply look at the decision of the Hon'ble Apex Court in the case of Madras Industrial Investment Corpn. Ltd., we find that it is not always necessary for the assessee to claim whole of the revenue expenditure in one year in which it is incurred, because if such deduction is permitted as such, it may give distorted picture of the profits of a particul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 machinery and the goodwill can be sold only after that. The company had to give bank guarantee to HCC and execution of this guarantee clearly shows that consideration on account of goodwill was not received. Reference was also made to Accounting Standard (AS-9), where it is provided that the revenue should be recognized only on accrual basis in accordance with the terms of re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntee. 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 111-132 of the paperbook Vol. II, which is contract packing agreement, which clearly shows that the assessee was still using the know-how and other processing procedure. He submitted that the agreement to sell the business was entered only on 27-4-1999, copy of which is placed at pages 139-143 and consent of the shareholders or selling the undertaking under section 293 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nough 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 considered for taxation purposes. In this case, the assessee sold bottles, crates and vehicles on 28-2-1999 and stopped the manufacturing of beverages and entered into contract packing agreement by which the assessee took the business of packing beverages on the instructions of HCC at an agreed fees. The land, building, etc. were agreed to be sold later on for which the agreement w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o. 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 also and all these facts have not been disputed by the revenue. Now the question is if sale of goodwill was completed, then why the consideration was being treated as advance by the transferee company and the simple answer would be that for all practical purposes this transfer was not complete because same was dependent on other facts such as transfer of other assets which was subject t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 concession has been made, then the only remedy is to go back to the authority before whom wrong admission has been made. Therefore, at best, the assessee can reagitate the issue only before the CIT (Appeals). 32. On merits, he invited our attention to section 32(2) and submitted that the section was amended with effect from 1-4-1997 and now unabsorbed depreciation can be claimed only agains ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 12,02,56,812 in the statement filed along with the return of income, during the course of assessment proceedings the assessee had chosen to file another statement wherein the assessee itself had shown the WDV at Rs. 11,76,09,543 which had been adopted in the assessment." 38. The ld. DR referred to page 4 para 4.3 of the CIT (Appeals) order and submitted that the ld. CIT (Appeals) himself admitted that th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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