9911796707
TMI Blog2006 (12) TMI 262X X X X Extracts X X X X X X X X Extracts X X X X ..... paid, it may be allowed. Coming to the employer's contribution, Tribunal is taking the view constantly that if the payment is made within (beyond) the year but before the due date for filing the return, to this extent assessee's claim is to be allowed. Assessing Officer may verify the date of payment. If it is found that it is paid within (beyond) the year but before the due date for filing the return, to that extent employer's contribution may be allowed. Order accordingly. 4. The third ground of objection by the assessee is directed against the order of the CIT(A) in confirming the disallowance of Rs. 32,328/- being payment made to clubs for availing the facilities and services of the clubs. 5. Considering the rival submissions and also the decisions cited, particularly the decision of the jurisdictional High Court in the case of Otis Elevator Co. (India) Ltd. v. CIT [1992] 195 ITR 682 (Bom.); Hon'ble Gujarat High Court in the case of Gujarat State Export Corporation Ltd. v. CIT [1994] 209 ITR 649 and Hon'ble Madras High Court in the case of CIT v. Sundaram Industries Ltd. [1999] 240 ITR 335 (Mad.); we are of the view that there is no justification in disallowing the assessee' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts as certain expenses have been incurred for earning these receipts and these expenses should be allocated to marketing receipts. In other words, it was contended, only net marketing receipts should be reduced from the profits of the new industrial undertaking while computing the profits derived from the new industrial undertakings for the purpose of deduction under section 80HH. Aggrieved by the above order assessee is in appeal before the Tribunal. 9. The facts leading to the dispute, briefly narrated, are as under : Assessee had two new industrial undertakings at Lote Parshuram, Taluka Khed, District Ratnagiri, a backward area in the State of Maharashtra. While computing the profits derived from the new industrial undertakings, assessee claimed deduction under section 80HH, including the marketing receipts amounting to Rs. 34,25,032/- and interest at Rs. 67,482/-. While computing the profits of the new industrial undertakings, Assessing Officer excluded the gross marketing receipts and interest received and proportionately allocated expenses incurred at research and development unit at Govindi at Rs. 75,70,059/-. Following his orders for the earlier years, i.e., assessment y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... di are independent and separate. The expenditure incurred in the research and development unit does not reduce the profits of the new industrial undertakings in any way. Rather, this expenditure is relatable to the business carried on by the assessee in general. In fact, the research and development work is done to develop new products for promoting the future business of the assessee. The results of research activity at the research and development work is done to develop new products for promoting the future business of the assessee. The results of research activity at the research and development unit cannot be presumed to be automatically utilised in the new industrial undertakings. In any case, no new product was manufactured in the eligible units, which emanated as a result of research and development activities of the assessee-company at least during the relevant previous year. Relying upon the decision of the Hon'ble Madras High Court in the case of Bush Boake Allen (India) Ltd. v. Asstt. CIT [2005] 273 ITR 152 , learned counsel submitted, were there was no research and development expenses pertaining to the new industrial undertaking, apportionment of such expenses to work ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e business, which would be the subject-matter of exemption and there must be profits out of the business carried on by the assessee and the expression "profits" used in the section connotes positive profit earned from the business alone, which can be the subject-matter of exemption. Hence, learned Departmental Representative submitted, the claim of the assessee is liable to be rejected. 14. We have heard the rival submissions and gone through the orders of the Revenue authorities and the decisions cited. The deduction under section 80HH is granted to an industrial undertaking on profits and gains derived by an industrial undertaking. The term "derived from" is narrower than the term "attributable to" as settled by the decision of the Hon'ble Supreme Court in the case of CIT v. Sterling Foods [1999] 234 ITR 5791, therefore, it is only the profits of an industrial undertaking which are eligible for deduction under section 80HH. The assessee may be engaged in multiple business activities and the profits from such activities cannot become eligible for deduction under section 80HH merely because these are the business profits. The assessee has placed strong reliance on the decision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o reduce 90 per cent of marketing receipts as reduced by proportionate salary on field staff and other expenses related while computing profits of business in accordance with clause (baa) of Explanation to section 80HHC of the Act. 20. This issue has been dealt with by the assessment order vide para 7 of his order, observing as under : "The assessee-company had not claimed deduction under section 80HHC in the return of income as the business income was less than 90 per cent of interest received. This fact has been stated in the covering letter filed with the return of income. However, on the presumption that after completion of the assessment, the assessed business income would be positive, the assessee-company submitted Form 10CCAC duly certified by the auditor. The auditor has quantified NIL deduction on the basis of the returned income. In the note submitted along with the statement of deduction under section 80HHC, the assessee-company has stated that on completion of assessment deduction under section 80HHC should be computed on the basis of assessed income. However, it has been noticed that while computing the deduction, the assessee has considered total sales inclusive of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such, these arguments have not been repeated. Learned counsel invited our attention to clause III, i.e., the object for which the company is established, particularly item (12), which is already reproduced hereinabove vide para 12 of our order. Learned counsel submitted, the memorandum of association expressly provides that one of the objects of the company is to undertake sales and distribution agencies for the products of other concerns. Thus the marketing receipts are very part of the operational income of the assessee. Hence, learned counsel submitted, CIT(A) went wrong in directing the Assessing Officer to reproduce the profits of the business by 90 per cent of the net marketing receipts for the purpose of computing deduction under section 80HHC of the Act. Learned counsel submitted, the order of the CIT(A) is to be modified to this extent. 24. The learned Departmental Representative, on the other hand, supported the order of the CIT(A). 25. We have heard the rival submissions, gone through the orders of the Revenue authorities and the decisions cited by the contending parties. The assessee has mainly relied on the decision of the jurisdictional High Court in the case of CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It is also the case of the assessee that the CIT(A) erred in holding that part of the payment made to M/s Lyka Labs Ltd. was attributable to parting with the marketing information being in the nature of capital asset and that the expenditure attributable thereto was of capital nature. Without prejudice to above, it is the case of the assessee that the CIT(A) having held that marketing information was capital asset akin to know-how, he ought to have allowed depreciation on the amount of Rs. 6 crores being cost of information. It is also the case of the assessee that the CIT(A) went wrong in enhancing the income of the assessee by withdrawing deduction of Rs. 1,00,00,000/- allowed under section 35AB of the Act. 29. Assessing Officer noticed, during the year under consideration, assessee started marketing of formulations based on Nitroyglycerine. Assessee paid an amount of Rs. 6 crores to M/s Lyka Labs Ltd. towards supply of marketing information, clinical data, scientific details in respect of formulations based on bulk Nitroglycerine. Out of total amount of Rs. 6 crores, assessee debited Rs. 50 lakhs in the P&L a/c with the remark that the amount paid has been deferred and is bei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5AB is industrial information or technique that is likely to assist in manufacture or processing of goods. The information, which assists in the marketing of products in the initial stages, is not know-how contemplated or covered by the provisions of section 35AB. The entire expenditure incurred, it was submitted, is of revenue nature and accordingly to be allowed. 32. CIT(A) agreed with the assessee that the know-how covered by section 35AB does not cover the information with regard to marketing of products in the initial stage. On going through the agreement entered into with M/s Lyka Labs Ltd., CIT(A) observed, the information which is to be passed on to the assessee under the agreement in no way assist the manufacture or processing of goods. CIT(A) however held, though allowing deduction to the assessee under section 35AB was not correct, at the same time he held, this expenditure did not appear to be of revenue nature either, particularly in view of clause 4 and 8 of the agreement between the parties. He held, the expenditure is of capital in nature, which is not eligible for any deduction. Assessee's comments were called for on the point by the CIT(A). 33. CIT(A) noticed, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e passed on to a third party. CIT(A) held, this is of capital nature. Assessee contended before the CIT(A) that the restriction not to compete or to pass the information for three years or five years cannot be treated as long-term benefit. For the above proposition, assessee relied upon the decision of the Hon'ble Madras High Court in the case of CTT v. G.D. Naidu [1987] 165 ITR 63 . Assessee further relied upon the decision of the Hon'ble Supreme Court in the case of CTT v. British India Corpn. Ltd. [1987] 165 ITR 51 (SC), wherein the Hon'ble Supreme Court held, seven years is not a long time and allowed the expenditure as revenue character. Assessee also relied upon the decisions of the Hon'ble Supreme Court in the case of CTT v. Best & Co. (P) Ltd. [1966] 60 ITR 11 (SC) and in the case of Gillinders Abruthnot & Co. Ltd. v. CIT [1964] 53 ITR 283 (SC). Regarding the nature of expenditure for obtaining the marketing information, assessee relied upon the following decisions : (i) CIT v. Service Station Equipment (P) Ltd. [1981] 22 CTR (Bom) 72 : (1981) 132 ITR 130 (Bom.); (ii) Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC); (iii) Hallstorms Property Ltd. v. Federal Commr. o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ong period and the benefit as enduring nature. In support of the view that five years is a long period, CIT(A) relied upon the decisions in the case of CIT v. Hindustan Pilkington Glass Works [1983] 139 ITR 581 (Cal.); Assam Bengal Cement Co. Ltd. v. CIT (1955) 27 ITR 34 (SC) and CIT v. Coal Shipments (P) Ltd. (1971) 82 ITR 902 (SC). Thus, he held that part of the payment is attributable to non-compete agreement and is capital in nature. 36. Coming to other part of the payment, such as parting of marketing information, CIT(A) held that M/s Lyka Labs Ltd. invested substantial resources for generating the information. The information that M/s Lyka Labs Ltd. parted therefore is capital asset. He further considered the fact that the assessee started marketing formulations based on Nitroglycerine during this period. Thus the information obtained by the assessee altogether is for new product. He has further taken note that M/s Lyka Labs Ltd. undertook not to disclose information to any third party for three years, which shows the information not to become redundant for three "years at least. As such, the assessee becomes the sole user of information at least for three years. This is a b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed counsel submitted, inviting our attention again to paper book p. 8, cl. 1 of the agreement, wherein it is stated that Lyka shall supply and provide to the assessee clinical data, scientific details reports on clinical trials carried on by Lyka in the past few years, valuable market information more particularly set out in the schedule thereto as 'scientific and marketing know-how'. It is for this the assessee paid Rs. 6 crores and not for non-compete clause. Learned counsel repeated, assessee is already in the field of manufacturing Nitroglycerine, in other words, assessee is already in this line of business and is trying to expand the market, for which purpose the payment is made. Relying upon the 'decision of the Hon'ble Supreme Court in the case of Alembic Chemical Works Co. v. CIT (1980) 77 CTR (SC) 1: (1989) 177 ITR 377 (SC) learned counsel submitted, the decision of the CIT(A) is liable to be reversed, as the facts in the instant case of the assessee are identical with that Alembic Chemical Works Co. Ltd.'s case (supra). 38. Learned counsel again, through written submission para 6.1, brought our attention to cls. A and 8 of the agreement with M/s Lyka Labs Ltd. and submit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue nature is the purpose of the outlay and its intended object and effect, considered in a common sense way having regard to business realities. The test of enduring benefit is not a certain or conclusive test and cannot be applied mechanically without regard to the particular facts and circumstances of a given case. It is not every advantage of enduring nature acquired by an assessee-that brings the case within the principle laid down in the enduring benefit test; what matters is the nature of the advantage in a commercial sense, and it is only where the advantage is in the capital field that the expenditure would be on capital account. If the advantage consists of merely facilitating the assessee's trading operations or enabling the management or conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for the indefinite future. By 'enduring' is meant enduring in the way that fixed capital endures and it does not connote a benefit that endures in the sense that for a good number of years it relieves the assessee of a revenue p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... If the expenditure is recurring and is incurred during the course of business or manufacture, it would be revenue expenditure. Simply because the payment in the hands of the recipient has been considered a capital receipt, it is not necessary that in all cases it will have the same character in the hands of the person who has made the payment and vice versa. It is the true nature of the expenditure that is relevant and not the name or description or treatment given to it by the assessee in his books of account or other documents." 40. Learned counsel submitted, assessee was having the knowledge of manufacturing of products, i.e. to say, formulations based on bulk drug Nitroglycerine. As per the agreement, M/s Lyka Labs Ltd. was only to supply to the assessee the clinical data, reports on clinical trials, other scientific details in respect of formulations, source of manufacture of formulations, statewise list of wholesalers, stockists and dealers, statewise sales for last five years, statewise list of specialists, doctors, cardiologists and institutions as shortlisted by M/s Lyka Labs Ltd., visual aid designs and copies of promotional materials used. Assessee also had the option t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if the assessee obtained an advantage of enduring nature, since the assessee is already in the same line of business and ventured into any new unit engaged in manufacturing and the advantage or benefit even if acquired is for facilitating the existing business, the expenditure cannot be treated as capital but it is only revenue expenditure. He particularly relied upon the following observation of the Hon'ble High Court : "The assessee, carrying on business of manufacturing various types of motors and weighing machines, was assessed for the assessment year 1979-80. Before the Assessing Officer, the copy of the agreement, dated 31st March, 1976, was filed. The said agreement as thereafter amended on 3rd March, 1977. In view of the original agreement, the assessee company was under obligation to return the books, technical data capers, drawings relating to the products authorised to be manufactured by the foreign collaborators. However, in view of the amended agreement, the assessee was entitled to retain all these documents, technical data, design, documentation, etc. In view of the earlier agreement, the assessee was allowed manufacture for a period of five years. However, later o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a sum of Rs. 20,56,956/- representing a lump sum payment to its foreign collaborator towards import of technical know-how documentation relating to a new three cylinder diesel engine. Assessing Officer held that the amount paid was capital as the assessee had the benefit of technical know-how indefinitely for the reason that for the first ten years this technical know-how will be assessee's exclusive domain and there was no restriction even for the use of know-how beyond the period of ten years. CIT(A) accepted assessee's claim. Learned counsel submitted, in this case the Hon'ble High Court held that the agreement is entered into for the purpose of running the business more profitably and effectively and with a view to yield profit to the assessee in the already existing field; as such the payment should be regarded as revenue in nature. Coming to the instance case, learned counsel submitted, ever changing market demand necessitated the assessee to diversify its products by marketing formulations of bulk drug Nitroglycerine. For this reason only the assessee entered into the agreement. It is for the benefit of the existing business and to run it more profitably and effectively to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... field of existing business; as such the payment to be treated as revenue expenditure. Learned counsel also relied upon the decision of the Hon'ble Andhra Pradesh High Court in the case of CIT v. Venkateswara Hatchery (P) Ltd. (1997) 227 ITR 116 2 the same proposition. In this case the Hon'ble High Court held : "what is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowed. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of assessee's business more efficiently or more profitably, leaving the fixed capital untouched, the expenditure would be treated under revenue account and not otherwise". Learned counsel also relied upon the decision of the Hon'ble Madras High Court in the case of CIT v. Aquapump Industries (1996) 218 ITR 427. 46. Learned counsel again relied upon the decision of the Hon'ble Supreme Court in the case of Alembic Chemical Works Ltd. (supra). He particularly stressed the following observation of the Hon'ble Supreme Court : "On 8th June, 1961, the appellant, a company engaged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the day-to-day business of the appellant's established enterprise. The financial outlay under the agreement was for the better conduct and improvement of the existing business and was revenue in nature and was allowable as a deduction in computing the business profits of the appellant." "It would be unrealistic to ignore the rapid advances in research in antibiotic medical microbiology and to attribute a degree of endurability and permanence to the technical know-how at any particular stage in this fast changing area of medical science. The state of the art in some of these areas of high priority research is constantly updated so that the know-how could not be said to bear the element of the requisite degree of durability and non-ephemerality to share the requirements and qualifications of an enduring capital asset. The rapid strides in science and technology in the field should make us a little slow and circumspect in too readily pigeonholing an outlay, such as this, as capital. "The idea of 'once for all' payment and 'enduring benefit' are not to be treated as something akin to statutory conditions; nor are the notions of 'capital' or 'revenue' a judicial fetish. What is capi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to entering into agreement with M/s Lyka Labs Ltd., assessee was in the pharmaceutical business and was actually manufacturing the bulk drug Nitroglycerine. Assessee already had the knowledge of manufacture of formulations based on Nitroglycerine. It did not enter into the agreement with M/s Lyka Labs Ltd. for venturing into a new business. The agreement basically provided that M/s Lyka Labs Ltd. would furnish marketing know-how primarily to the assessee. The non-compete clause for five years was inserted into the agreement to enhance profitability of the products of the assessee because if M/s Lyka Labs Ltd. uses the know-how to manufacture identical products, the profitability of the assessee's products would definitely suffer due to inevitable competition. Learned counsel submitted, it is not a fact that by virtue of this agreement the assessee would be the sole producer of the formulations of Nitroglycerine. The agreement does not protect the assessee from competition from other manufacturers of similar products who may not have anything to do with M/s Lyka labs Ltd. Due to continuous advancement of science and technology, partial safeguard from competition for mere five years ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal. (h) The products cannot be new for all time to time (come), as the novelty attached to the new product would wane and the tag of newness of the products would wear off after some years of production. So just because the know-how is utilised for an indefinite period for making a product hitherto not made by the assessee, it cannot be said that the expenditure incurred for the said know-how is capital expenditure. (i) The limitations placed in an agreement on the right of the appellant in dealing with the know-how and the conditions as to non-disclosure of the know-how, pertains more to the use of the know-how than to its exclusive acquisition. (j) The expenditure incurred in connection with an agreement to ward off competition, irrespective of the duration of enforceability of such an agreement, would be a revenue expenditure, if it is for the purpose of enhancement of profitability. 50. Learned counsel submitted, even otherwise, in the case of M/s Lyka Labs Ltd. the Assessing Officer treated the impugned receipt of Rs. 6 crores as revenue receipt for the following reasons and the same was confirmed by the CIT(A) : (a) The marketing and clinical data and allied rights ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal. 52. In reply, learned counsel distinguished the facts and contended that the assessee had the knowledge of manufacturing the products, i.e. formulations based or bulk drug Nitroglycerine "arid the assessee was only at the most trying to obtain the latest technology and was trying to expand its market viability. Learned counsel submitted, this in fact supports assessee's case. 53. Who have heard the rival submissions, gone through the orders of the Revenue authorities and the decisions cited by the' contending parties. We are of the view that the appeal by the assessee on this ground is liable to be allowed. From the facts narrated above, it is seen that the assessee was already in the field of producing bulk drugs and pharmaceutical products. Assessee entered into agreement with M/s Lyka Labs Ltd. to improve the market viability and to obtain new technology in the fast changing field of bulk drug formulations. Thus, the decision of the Hon'ble Supreme Court in the case of Alembic Chemical Works Ltd. (supra) is clearly applicable. This was a case wherein the assessee was already manufacturing penicillin. With a view to increasing its yield, the assessee negotiated and e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eting know-how. (a) Clinical data, scientific details and reports on clinical trials carried out by Lyka in respect of the formulations based on the bulk drug Nitroglycerine. (b) Source of manufacture of formulations from the bulk drug Nitroglycerine. (c) Break-up of statewise list of wholesalers, stockists and dealers of the formulations. (d) Break-up of statewise sales of formulations for last 5 years. (e) Break-up of statewise list of specialists, doctors, cardiologists and institutions as shortlisted by Lyka with respect to the formulations referred to in the above agreement. (f) Visual aid designs, copies of promotional material used." The assessee and M/s Lyka Labs Ltd. have also agreed that M/s Lyka Labs Ltd. would not supply data, details and scientific and marketing know-how relating to formulations made from bulk drug Nitroglycerine to any third party for a period of at least three years from the date of the agreement and the assessee would not disclose any information in respect of Nitroglycerine based formulations to any other person without the prior written consent of M/s Lyka Labs Ltd. In addition to it M/s Lyka Labs Ltd. has also agreed not to compete w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ta through various Government/business associations, trade associations, etc. All these expenses are basically of revenue nature and incurred in a regular course and as such are allowable. Hence, one time payment made by the assessee company to M/s Lyka Labs Ltd. does not alter the basic nature of these expenses particularly in the context of present business environment where various activities are being outsourced and various entities undertake such activities on contract basis or on its own and sell such informations and data like any other goods which can be used by other business entities as raw material or support services to carry out it's operations or expand it's activities. To further elaborate some entities work like knowledge centres like" M/s Lyka Labs Ltd. in the present case and derive revenue by selling knowledge to the other party who, in turn, by purchasing the same attains it's objective of becoming bigger faster. Thus, the information, if looked upon in an integrated manner, is no more than the facilitation of profit-earning process. 58. The other aspect involved is that the agreement also provides for noncompetition by M/s Lyka Labs Ltd. Further, there has not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er provision of this section, whatever amount the assessee would have spent on scientific research including clinical trials and approvals from competent authorities including the capital expenditure on plant and machinery would have been eligible for weighted deduction and the expenditure relating to marketing information and statistics would have been allowed under the normal provisions of the Act as such. 60. In view of the foregoing discussion, we are of the view that the decision of the learned CIT(A) is not correct in law and reverse the same and direct the Assessing Officer to allow the expenditure as revenue expenditure. 61. Coming to the next ground (ground Nos. 15 and 16) of objection by the assessee, it is directed against the order of the CIT(A) in confirming the disallowance of Rs. 12.50 crores paid under the orders of the Company Law Board (CLB). According to the assessee, CIT(A) failed to appreciate the voluminous material placed before him that the payment was made to escape the adversely affected business of the assessee. Assessee was facing enquiries/proceedings on account of complaints made by disputing parties, which adversely affected assessee's business. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... principal terms of which have been recorded by us effectively put to an end the extensive litigation between the parties/companies involved. The pendency of the Irrigation, adversely affected the reputation, inter alia, of USV, triggered false signals in the pharmaceutical industry, and, serious affected the business growth and prosperity of USV. We are satisfied that the money paid by USV and to be paid by USV is for the legitimate and genuine business reasons of USV." 63. On the basis of the above, Assessing Officer found that the finding of the CLB "the legitimate and genuine business reasons of USV" for parting with Rs. 12.06 crores (approximately) was the outcome of family arrangement that was the culmination of extensive litigation between the family members of late Shri A.V. Gandhi, such litigation arising from mutual distrust among them coupled with the intention to acquire and/or retain controlling interest in the companies promoted and built up by late Shri A.V. Gandhi, to the exclusion of those who were on the other side of a particular dispute. Basically, the opponent camps consisted of Mrs. Prarnila Gandhi and her two daughters, viz., Sheela Gandhi Rao and Sunita Arv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... could not be considered as an expenditure laid out or expended wholly and exclusively for the purpose of business of the assessee company. He also relied upon the decision of the jurisdictional High Court in the case of Premier Construction Co. Ltd. v. CIT [1966] 62 ITR 176 (Bom.). In that case the tussle was between the shareholders against the Board of Directors. The shareholder filed a suit praying for declaration that the ruling of the President was illegal and invalid and subsequent resolutions passed at the meeting were also invalid and asked for relief by way of several injunctions restraining the company and its Board of Directors from giving effect to and acting in accordance with the resolutions passed at the said meeting. In this case the Hon'ble High Court held that an expense may in some indirect way be conducive to the benefit of the business or to better management of the business but that would not make an expenditure wholly and exclusively for the purpose of business. So also, Assessing Officer relied upon the decision of the Hon'ble Calcutta high. Court in the case of Albert David Ltd. v. CIT [1931] 131 ITR 192 . 66. In short, Assessing Officer held that to allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee company and its business were total strangers. The companies having been family companies, (ii) the parties to the disputes being cognates (excepting one), Leena Gandhi Tewari and her husband having owned dominant shareholding in the assessee company through their dominance in the shareholding the American Products (P) Ltd. [(see para 10(c)(1) and ( ii)] before as well as subsequent to the orders of the CLB, (iii) the assessee company having recorded incremental growth during the subsistence of the disputes and, (iv) as concluded above, the facts of the case not disclosing any nexus between the impugned expenditure and the business of the assessee company, the inference is inescapable that the 'family arrangement' arrived at by the disputants was a sequel to a change of heart that was legitimatised by praying to the CLB for formal concurrence. A family- arrangement is a most convenient legal solution where the properties are not amenable to partition, whether on grounds of law or on grounds of feasibility. But, there must be consideration for the same [MM Aryamurthi v. M.I. Subbaiaya Shetty AIR 1972 SC 1279, 1285]. It also facilitated transfer of shares in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r claiming deduction under section 37(1), CIT(A) held, Assessing Officer rightly referred to the decision in the case reported in Madurai District Central Co-operative Bank Ltd. v. ITO [1975] 101 ITR 24 (SC) to argue that it is settled law that IT Act is a permanent enactment and outside the IT law the decision does not affect the taxability or otherwise. For the above proposition, he also referred to the decision, of the Hon'ble Allahabad High Court in the case of Shailmdra Kumar v. Union of India [1989] 175 ITR 4941 CIT(A) held that the Assessing Officer was right in relying upon the decision of the jurisdictional High Court Premier Construction Co. Ltd. v. CIT [1966] 62 ITR 176 (Bom.) (supra). He rejected assessee's reliance on the decision in the case of D.W. Noble Ltd. v. Mitchell. He also distinguished the decision relied upon by the assessee in the case of IRC v. Carom Co. [1968] 45 RDC 18 (HL). He held, this decision is not applicable. That was a case wherein, amounts were spent for the-objects of new charter, which aimed for removing obstacles to profitable trading and removal of such restriction was for the purpose of well management of the assessee company. CIT(A) reject ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the dispute inevitably causing some adverse publicity in the market was settled sooner than later. CLB observed vide its order dated 3rd April, 1998 : "the pendency of the litigation, adversely affected the reputation, inter alia, of USV, triggered false signals in the pharmaceutical industry, and seriously affected the business, growth and prosperity of USV. We are satisfied that the money paid by USV and to be paid by USV is for legitimate and genuine business reasons of USV". However, Assessing Officer disallowed the claim of the assessee mainly for the reasons stated below : (a) The payment was really the outcome of a family dispute that culminated in litigation between the family members, due to mutual distrust and/or the intention to retain the controlling interest of the companies. (b) The. payment as per the direction of CLB is an integral and inseparable part of total package that the CLB handed down for restructuring the shareholdings of the assessee as only solution to the long standing family feud. (c) Observation of the CLB that the money paid by the assessee is for legitimate and genuine business reasons only contextual in nature and content of the dispute. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le Bombay High Court and CLB. There were also litigations before the CLB, Principal Bench, New Delhi in petition Nos. 63 and 64 of 1993, No. 3 of 1994 and No. 43 of 1996. It is in petition Nos. 63 of 1993 that the assessee was impleaded in the proceedings before the CLB by the petitioners by riling an application dated 4th February, 1998 under regulation 44 of CLB (Regulation) Procedure, 1988, making various unsubstantiated allegations against the assessee, in order to bring its name into disrepute, like the earlier suit filed before the Hon'ble Bombay High Court in Suit No. 606 of 1995, which went to the extent of seeking injunction from the Hon'ble High Court, restraining the assessee from passing any resolutions or taking any steps to sell, alienate, encumber, transfer or create third party rights with regard to shares and assets. Assessee was unable to start any new scheme, project or collaboration agreement to expand its business and to augment the profitability. During the period 1994 to 1998, assessee was under constant attack through misconceived litigations, frivolous complaints to various authorities and unwarranted hindrances caused to regular day-to-day functioning of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iate is that during this intervening period the growth and development of the company had come to a standstill. Between 1994 and 1998 the assessee company could not take up any ambitious plans to expand its business and increase, profitability, 74. Leamed counsel submitted, prior to commencement of litigation, two plants at Lote Parshuram near Chiplun, Maharashtra; one for manufacture of formulations and the other for manufacture of bulk drugs were set up by the assessee. During this period of litigations, precious little could be done in these plants. After the litigations came to an end, assessee could again go ahead with these ambitious plans for manufacturing and marketing of formulations based on Nitroglycerine. In fact, between 1994 and 1998, assessee had to give up a number of plans for collaboration with multinationals, which would have substantially expanded its business and augmented its profitability. In September, 1994, assessee was approached by LIPHA, which is part of Merk Group and. originator of bulk drug metformin for alliance to manufacture/market/source for international generic market, the bulk drug. Representatives of LIPHA visited India and held discussions w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (c) Assessee set up a state of the art formulations plant at Daman in October, 2001. (d) Licencing agreements entered into with B-Brown for Glucometer. (e) Assessee obtained following certificates from various foreign authorities regarding manufacturing facilities at Chiplun : (i) European Directorate for the quality of medicines regarding Metformin Hydro chloride, Glibenclamide and Ticlopidine Hydrochloride, (ii) Therapeutic Goods Administration of Australia for Metformin, (iii) German Medical and Drug Control Authorities for Metformin, (iv) US FDA approval for Metformin and Glipizide. (f) Brands/business acquiring agreements were signed with : (i) Glaxo - Derobin and Annovate (ii) Lyka - Amlopin and Nitroglycerine (marketing and scientific data only). 76. Learned counsel submitted that it shows the veracity of the claim of the assessee that the impugned expenditure was incurred for the purpose of protection and development of its business. This fact is further fortified by the figures of ORG Marg rankings of the pharmaceutical industries achieved by the assessee company during the period December, 1994 to April, 2000, which are as under : Period Rank December ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... areholders does not increase the capital of the assessee and such expenditure could only be treated as wholly and exclusively incurred in the course of carrying on of the business and therefore it was deductible. Learned counsel further relied upon the decision of the Hon'ble Delhi High Court in the case of South Asia Industries (P) Ltd. v. CTT [1981] 132 ITR 144 , wherein the Hon'ble High Court held that the expenditure incurred to protect the business and reputation of the company is an amount spent for safeguarding and saving the assets of assessee's business and keeping it on a sound footing. The expenses incurred in its business or trading capacity, -for the purpose of business, amounts to allowable expenditure. Hence, learned counsel submitted, the orders of the Revenue authorities are liable to be reversed. 79. Replying to the above, learned Departmental Representative, submitted, heavily relying upon the order of the Assessing Officer as well CIT(A), that there was a family dispute between the two warring groups of the family. The matter ultimately reached before the CLB. They ordered certain payments to one group, this is nothing but a payment made to keep the interest of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee was ranking 23rd in December, 1994. Subsequently from December, 1995 to December, 1998 it was lagging somewhere between 30 to 36. In December, 1999, immediately after the settlement, its rank went up to 23 and by April, 2000, it was 19, which itself shows that the settlement has taken the assessee out of the trouble period. The contention of the learned counsel recorded vide para 68 is also relevant in this context. Assessee was approached by LIPHA, part of Merk Group and originator of bulk drug metformin for alliance but it was to be dropped because of the dispute; so also the talk with "Larocare" of Australia and. New Zealand for launching of skin care products. The negotiation with Alfa Wassermann was also dropped because of the disputes. These all indicate that the affairs of the company were not running well due to the disputes between the family members. Therefore, saying that the settlement is to control the assets of the company itself is oversimplification. Had these disputes not been settled, the company would not have revived well. It is not correct to say that reaching such a conclusion is out of context. 81. Now we come to the decisions relied upon by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for interpretation of the meaning of the words and expressions used in one Act may not have the same meaning in another Act. It is not to say that the facts found out by a competent authority cannot be taken at all into consideration, to arrive at the 82. Coming to the decision relied upon by the Revenue authorities in the case Malayalam Plantations Ltd. (supra), the issue before their Lordships was whether the estate duty paid by the resident company incorporated outside India on behalf of the principal not domiciled in India is deductible from its profits while computing the assessable income under section 10(2)(xv) of the Indian IT Act, 1922. At p. 149, their Lordships, discussing the issue on the basis of the decision of the Hon'ble Supreme Court in the case of Badridas Daga v. CTT [1958] 34 ITR 10 observed : "This decision, though not direct in point, lays down the principle that an expenditure can be deducted only if it arises out of the carrying on of the business and is incidental to it." In fact, this decision supports the case of the assessee. Discussing the issue, their Lordships held : "the expenditure incurred by the assessee in his capacity as agent of another is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een incurred by the assessee in its character as a trader and the transaction in respect of which the proceedings were taken must have arisen out of, or must have been incidental to, the assessee's business. An assessee could be said to have incurred the expenditure In his character as a trader if the litigation was necessary to be carried on by the assessee or defended by it to protect its trade or business or to avert a danger or threat to its carrying on of its business". In other words, the allowability or non-allowability of expenditure, even if it is incurred for the purpose of litigation, depends on the facts of that particular case. The stand of the Revenue authorities in the instant case of the assessee is that this is purely a domestic quarrel between the shareholders. It is further the stand of the Revenue authorities, as is clear from the order of the CIT(A), that the expenses may, in some indirect way be conducive to the benefit of the business or to the betterment of the business, even then, it cannot be held, it is an expenditure wholly and exclusively for the purpose of business. In the instant case of the [assessee we have seen that had the settlement not been take ..... X X X X Extracts X X X X X X X X Extracts X X X X
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