9911796707
Advanced Search 
TMI Blog2010 (1) TMI 980X X X X Extracts X X X X X X X X Extracts X X X X ..... detail. The grounds raised by the assessee are as under : "1. Current repairs : Rs. 53,90,835 The learned Commissioner of Income-tax (Appeals) erred in confirming the disallowance of expenditure on current repairs amounting to Rs. 53,90,835 holding it as capital expenditure. The learned Commissioner of Income-tax (Appeals) ought to have observed that these expenditure were incurred based on the inspection report of inspection and safety wing and these expenditure had not resulted in bringing into any new asset or benefit of enduring nature in the capital field and hence should have directed the Assessing Officer to treat them as revenue in nature. 2. Feasibility studies : Rs. 22,09,481 The learned Commissioner of Income-tax (Appeals) erred in confirming the disallowance of expenditure on feasibility studies amounting to Rs. 22,09,481 considering it as capital expenditure. The learned Commissioner of Income-tax (Appeals) ought to have found that these expenditure were incurred in connection with the existing business of the appellant and that the same had not resulted in bringing into existence any asset or benefit of enduring nature. Assuming but not admitting that these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... il and kerosene and work of this nature is carried out every 6-7 years. The Commissioner of Income-tax (Appeals) holding that since the assessee is not incurring the expenditure every year and has to be incurred only after a period of 6-7 years he confirmed the expenditure as capital expenditure. With reference to the replacement of slop trays and chimney trays, these items are internal components in the vacuum column. Since these are damaged due to some malfunctioning one slop tray out of the three trays were replaced. The Commissioner of Income-tax (Appeals) considered that slop trays are not items which are frequently replaced by the assessee, hence capital expenditure. Learned counsel submitted that the nature of expenditure is revenue and these are for normal maintenance of plant and machinery and has not resulted in any new asset or benefit of enduring nature in capital field. Reliance is also placed on the decision of the hon'ble Income-tax Appellate Tribunal in I. T. A. No. 252/Coch/2001 in the assessee's own case for the assessment year 1997-98. 4. The learned Departmental representative relied on the orders of the Assessing Officer and the Commissioner of Income-tax (App ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsideration for transfer of rights and hence capital. IOC has not transferred any capital asset or right to the assessee in lieu of the payment of Rs. 43 crores. The amount paid by IOC is only an additional or estimated price of the assessee's petroleum products to be sold in the market. As such this is only part of the business receipts of the assessee and hence will be assessed as revenue receipts." 8. Before the learned Commissioner of Income-tax (Appeals) the assessee submitted that the assessee has assigned the exclusive marketing rights of the products to the IOC and this amount was received in consideration of the exclusive marketing rights and so the amount was capital in nature. It was the contention of the assessee that consideration towards surrender of rights is a capital receipt representing right foregone to earn future profit not taxable as per the provisions of the Act and relied on various principles of law established judicially on the issue. After considering the issue in detail vide his order from pages 19 to 32 the Commissioner of Income-tax (Appeals) has elaborately discussed the facts of the case and the principles of law involved therein and ultimately ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tallation of other marketing companies. CRL operates a bitumen packing plant, which has capability to fill bitumen at a rate of 1000 drums/day. IOC is engaged in the business of refining, producing and marketing diverse petroleum products and its derivatives, with 7 out of 15 refineries in the country with a current crude thruput capacity of 37.35 MMTPA. IOC has extensive network of 5762 kms of crude and product pipelines. IOC has 185 terminals and depots, 43 LPG bottling plants, 92 aviation fuelling stations, 3 lube blending plants, 4 regional offices, 15 state offices and 18,000 retail selling outlets across the length and breadth of the country to market various products. IOC is the market leader with a market share of about 55 per cent. IOC also has the only comprehensive R and D centre in the petroleum industry, which has done pioneering work in lubricants, refinery processes and pipeline transportation. CRL and IOC (hereinafter referred to as "parties") have agreed to collaborate in IOC marketing the petroleum products of CRL and have arrived at certain understanding on the structure, scope and operation of the proposed marketing arrangement and intend to record their res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed expanded capacity. 3.10. It is agreed that CRL shall not offer any decontrolled products to any other marketing company during the pendency of this agreement. Article 11 : Pricing 11.1 For the sale of petroleum products to IOC the prices payable to CRL will be as under : (a) For the controlled products the price fixed by the Ministry of Petroleum and Natural Gas and/or the OCC from time to time till the administered pricing mechanism continues and thereafter as stated below for decontrolled products. (b) For the decontrolled products the RGP payable to CRL shall be based on the prevailing market conditions and import partly principles and the price build up as agreed by the industry from time to time. For all such pricing decisions CRL's representative will be associated and CRL's views will be taken into account. Pricing of JP5 will be separately discussed by the parties. (c) Excise duty paid as per law will be reimbursed to CRL as per procedure laid down in article 16. (e) All sales taxes like CST/local sales tax paid by CRL and recoverable as per law, will be reimbursed to CRL. Irrecoverable taxes/ levies payable by CRL as per law will not be passed on to IOC. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng company through which KRL markets its share and hence all of them were interested in tying up the marketing function of KRL product. KRL and IOC had arrived at an agreement whereby IOC agreed to pay approximately Rs. 43 crores per year for a period of 5 years for KRL granting exclusive marketing rights of its product through IOC and agreeing not to market its product through any other PSU marketing company. Any manufacturing unit has two arms, viz., manufacturing and marketing. If there is any restriction on any one of the two arms, it certainly impairs profit making apparatus of the company even though the company may continue with manufacturing or marketing. KRL bound itself by this restrictive covenant of exclusive marketing not to let its products compete with IOC by marketing through other PSUs. Therefore payment is for KRL granting an enforceable right in favour of IOC for marketing KRL's products is also for the restrictive covenant that it will not market through any other PSU in competition with the products of IOC. The business man has bundle of rights for manufacture, marketing exploitation of its assets, goodwill, etc. When these rights are exploited in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... say that the assessee did not have any right or choice for distribution. It had choice for selecting any of the six PSUs. Restriction placed on the right to market through any of the other PSUs is partly extinguishment of a commercial right and hence payment for the same is on the capital field. Reconciliation of compensation received for marketing rights for each of the year is annexed." 13. Learned counsel also during the argument has referred to various case law on the issue of surrender of marketing rights which are as under : (i) CIT v. Panbari Tea Co. Ltd. [1965] 57 ITR 422 (SC). (ii) Maharaja Chintamani Saran Nath Sah Deo v. CIT [1971] 82 ITR 464 (SC). (iii) Oberoi Hotels P. Ltd. v. CIT [1999] 236 ITR 903 (SC). (iv) PL Chemicals v. Asst. CIT [2003] 86 ITD 46 (Mad). (v) Dy. CIT v. K. S. N. Enterprises P. Ltd. [2008] 303 ITR (AT) 229 (Hyd) ; [2008] 105 ITD 377. (vi) Sarabhai Zydus Animal Health Ltd. v. Asst. CIT 2007-TIOL-202ITAT (Delhi). (vii) Shantha Biotechnics Ltd. v. Asst. CIT 10 SOT 401 (Hyd). (viii) CIT v. Ambadi Enterprises Ltd. [2004] 267 ITR 702 (Mad). (ix) CIT v. T. I. and M Sales Ltd. [2003] 259 ITR 116 (Mad). (x) BASF India Ltd. v. Addl. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exactly tallying to the amounts of claim made in the later two years. Accordingly the following clarification was furnished with reference to the amounts involved : "Computation of marketing rights A. Y. 1999-2000 2000-01 2001-02 Petroleum products 430,000,000 451,500,000 474,075,000 Bitumen mktg. rights Nil 28,822,881 36,565,716 Total 430,000,000 480,322,881 510,640,716 Computation of marketing rights for petroleum products 1999-2000 430,000,000 2000-01 (Rs. 43 crores x 105%) 5% escalation 451,500,000 2001-02 (Rs.45.15 crores x 105%) 5% escalation 474,075,000 In addition to the marketing rights of petroleum product, KRL had agreed to market its bitumen products also through Indian Oil Corporation ('IOC') by an agreement entered into on August 6, 1999. Under this agreement, the assessee claimed compensation for marketing rights of bitumen products of Rs. 2,88,22,881 for the assessment year 2000-01 and Rs. 3,65,65,716 for the assessment year 200102. However, this agreement was not submitted either to the Commissioner of Income-tax (Appeals) or the Income-tax Appellate Tribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpounded) per annum. 18.2 CRL shall raise bill on IOC towards the aforesaid annual compensation in four equal instalments on quarterly basis, at the middle of each quarter. IOC shall make payment to CRL within 3 days of the bill. In regard to compensation for the 3 quarters of the current financial year 1998-99, the amount will be paid to CRL not later than a month after effectuation of the contract and after deducting the financial cost of working capital already availed of by CRL from IOC for the said period." 19. A bare perusal of the above article indicates that the IOC has paid this compensation for consideration of the exclusive marketing rights of CRL products which include controlled and decontrolled products. As stated above the marketing rights of controlled products are always with six PSU marketing companies, IOC being one in that. Hence it cannot be stated and cannot be accepted on the basis of the arguments of the assessee that it has an exclusive marketing rights which was assigned to the IOC hence, the amount is a capital receipt. When an assessee does not have any marketing rights for the controlled products it cannot be stated that the assessee has parted with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arketing its products earlier and continued with the similar arrangements during this year also. Vide article 18.1 not only the lumpsum amount of Rs. 43 crores was paid in the first year with an escalation of 5 per cent. for the later year the IOC also paid an amount of Rs. 10 crores per annum for utilising the marketing facilities with escalation of 5 per cent. per annum. There is no dispute of this amount being revenue in nature and the assessee has offered the amount as income. In fact as seen from the statement of account and computation of income enclosed in the paper book the assessee has treated the entire amount Rs. 43 crores as part of its other income and offered as income in the profit and loss account but made claim only in computation of income based on certain principles of law. This aspect of legal principles was rightly considered by the Commissioner of Income-tax (Appeals) elaborately in the order. Some of the extracts were worth mentioning here (page 287): "(b) Now the decision relied on by the appellant in support of its contentions are considered below. The appellant has relied on the decision of the hon'ble Supreme Court in the case of Gillanders Arbuthnot an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of the Judicial Committee in CIT v. Shaw Wallace and Co. [1932] 2 Comp Cas 276 (PC) was not intended to, and did not, lay down that in every case cancellation of an agency resulted in a loss of source of revenue or that amounts paid to compensate for loss of agency must be regarded as capital loss.' The fact is that in the said case the assessee was carrying on business in diverse lines namely buying and selling on its own account, introducing customers, acting as managing agents, acting as shipping agents, acting as purchasing agents, acting as sole importers and distributors on behalf of the foreign principals and acting as secretaries. In the above background the Supreme Court held that having regard to the vast array of business done by the said assessee as agents, the acquisition of agencies was in the normal course of business and determination of individual agencies a normal incident not affecting or impairing its trading structure. Accordingly, the Supreme Court held that the amount received by the appellant for the cancellation of the explosive agency did not represent the price paid for the loss of the capital asset. It was held to be of the nature of income. Analy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the compensation which was attributed to the restrictive covenant was a capital receipt. Therefore the Supreme Court held that an apportionment had to be made of the compensation on a reasonable basis between consideration for the loss of agency in the normal course of the business and consideration for the restrictive covenant. At this stage I have to note that payment as consideration for a restrictive covenant may be a capital receipt or a revenue receipt as held by the hon'ble Supreme Court. In this back ground, the appellant's case can be examined. Now coming to the case of the appellant, it can be seen that by entering into a sales agreement with IOC for a five year period, the appellant has not created any new capital asset called marketing rights and has not lost any such capital asset on account of the agreement. Further by agreeing not to offer any decontrolled products to any other marketing company during the pendency of the agreement, the appellant was not entering into an independent obligation which came into operation when the sale agreement was entered into. The obligation was a dependent obligation and was a part of the whole agreement which required the IOC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deem fit and was not under any obligation requiring the purchaser thereof to enter into any agreement with the operator (assessee) for the purpose of operating and managing the hotel or otherwise, and in its return, agreed consideration was as stated above in clause X. On the basis of the said agreement, the assessee has received the amount in question. The amount was received because the assessee had given up its right to purchase and/ or to operate the property. Further it is loss of source of income to the assessee and that right is determined for consideration. Obviously, therefore, it is a capital receipt and not a revenue receipt.' The Supreme Court held that the amount received was the consideration for giving up its right to purchase and/or to operate the property or for getting it on lease before it was transferred or let out to other persons. It was not for settlement of rights under a trading contract but the injury was inflicted on the capital asset of the assessee and giving up the contractual right on the basis of the principal agreement had resulted in loss of source of the assessee's income. Therefore, the receipt in the hands of the assessee was held to be a capi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in that case had a large sales organisation, a large dealership network of sub-dealers of various industrial products. The assessee has transferred the entire establishment including the dealership network established by the assessee. It is in this background that the Madras High Court held that the amount received was a capital receipt. (h) In the case on hand there is no transfer of any sales organisation or a network of dealers. The restrictive covenant is a part of the sales agreement and is not independent of the same. As already stated it has been stipulated so as to ensure a firm supply of decontrolled products manufactured by the appellant. As discussed already there is no injury to the appellant's trading structure. Therefore, the facts in the appellant's case are distinguishable. In fact the Supreme Court has held in the case of (Oberoi Hotels P. Ltd. v. CIT [1999] 236 ITR 903 at page 906) that the question whether a receipt is capital or revenue is to be determined by drawing a conclusion of law ultimately from the facts of the particular case and it is not possible to lay down any single test as infallible or any single criterion as decisive. The Supreme Court has a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he proposed expanded capacity. As stated already, all the rights transferred relate to stock-in-trade and are hence not capital rights. The claim of the appellant that the marketing rights should be construed as a property forming part of the capital asset of the company is hence not correct. The marketing rights are part and parcel of the trading rights and hence any amount received for transferring the same amounts to a revenue receipt. (j) The claim of the appellant that the consideration received is in respect of the right foregone to earn future profits is also not correct. In fact the impugned amount received annually is for the profits if any for that year. It is seen that the appellant is earning income from the sale of petroleum products to the IOC as per the price determined as per article 11 of the agreement. It is also stated in article 11 that for all the pricing decisions the appellant's representative will be associated and its views will be taken into account. In the case of controlled products the prices fixed by the Ministry of Petroleum and Natural Gas or the OCC from time to time till the administered pricing mechanism continues shall be payable by the IOC to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovided in section 55(2) would continue to be exempt in view of the decision of the Supreme Court in the case of CIT v. B. C. Srinivasa Setty [1981] 128 ITR 294. (m) I have examined the above claims of the appellant. It has been already held that the marketing right transferred by the appellant to the IOC have not generated any capital asset. The reason is that the agreement entered into by the assessee is only a sales agreement for a 5 year period starting from April 1, 1998 and ending on March 31, 2003. As discussed already the right, if any, transferred by the appellant is not a capital asset. Hence, the question of computation of capital gains or the application of the decision of the Supreme Court in the case of CIT v. B. C. Srinivasa Setty [1981] 128 ITR 294, does not arise. The appellant has also relied on Circular No. 763 dated February 18, 1998 ([1998] 230 ITR (St.) 54) wherein it has been clarified that it is only subsequent to the amendment to section 55(2) effected to insert specific provisions for computing the cost of acquisition in respect of self generated capital assets that any receipt on transfer thereof is eligible to capital gains. In view of the fact that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew of this, it is submitted that the ratio of the decision of CIT v. Rai Bahadur Jayram Valji [1959] 35 ITR 148 (SC) does not apply to the appellant's case. (b) Further the learned Commissioner of Income-tax (Appeals) has relied on the following cases to conclude that the said receipt is in the nature of business income. (a) Gammon India P. Ltd. v. CIT [1993] 202 ITR 986 (Bom). (b) N. R. Sirker v. CIT [1978] 111 ITR 281 (Gauhati). We submit that the above mentioned cases can be distinguished on facts with the appellant's case and are based on different principles altogether. In the first case, the assessee had assigned a civil construction contract to a new company for which the assessee received an amount of Rs. 1 lakh. The said arrangement did not affect in any manner the trading structure of the assessee's business nor did it deprive him of any source of income. But the appellant's case IOC had been granted an exclusive right to market the decontrolled products. The agreement also provides that the appellant shall not offer the said products to any other marketing company during the pendency of this agreement. In the second case, the assessee who carried on the bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l receipt. From the decisions laid down in CIT v. Prabhu Dayal [1971] 82 ITR 804 (SC) ; CIT v. Ambadi Enterprises Ltd. [2004] 267 ITR 702 (Mad) ; 139 Taxman 96 (Mad) and CIT v. T. I. and M Sales Ltd. [2003] 259 ITR 116 ; 129 Taxman 444 (Mad) it is clear that where an amount is received by an assessee towards its income generating assets, then it is a capital receipt. On the other hand, if the receipt is towards the loss of income and not loss of source of income, then it is of revenue nature attracting the liability to tax." 22. In the abovesaid case there is a finding that the assessee transferred its business not only the distribution network but also 8 employees along with data relating to the business comprising customer list, sales data, etc. In those facts of the case the hon'ble Tribunal held that the amount received by the assessee on assigning of its marketing rights was capital receipt. However, as seen from the facts of this case, first of all the assessee had no exclusive marketing rights over the controlled products and secondly, out of the decontrolled products also the assessee has not given any exclusive marketing rights to IOC whereas it has retained certain marke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tored to the file of the Assessing Officer. The assessee should be given an opportunity before deciding the matter afresh by the Assessing Officer. 24. Ground No. 5 is not required to be adjudicated as there is no such permission from the COD. The appeal is partly allowed. I. T. A. No. 1128/Coch/2004 25. The assessee has raised two grounds in this appeal, one with reference to expenditure on feasibility study of Rs. 87,25,972. This issue is considered and decided in favour of the assessee in earlier assessment years and also in ground No. 2 above in the appeal I. T. A. 1127/Coch/2004. Consistent with the view taken in the assessee's own case, we direct the Assessing Officer to allow the expenditure as revenue expenditure. 26. Ground No. 2 pertains to surrendering of marketing rights. In line with the decision taken in ground No. 3 above, assessee's ground is rejected. The Assessing Officer and the Commissioner of Income-tax (Appeals) are correct in holding that surrender of marketing rights is a revenue receipt. Accordingly the ground is rejected. The appeal partly allowed. I. T. A. No. 1129/Coch/2004 27. The assessee has raised five grounds in this appeal. Ground No. 1 is si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat this amount of provision was added back in the regular computation of income for the assessment year 1998-99 and there was no computation under section 115JB/JA for that assessment year as the regular profit was more than the book profit. In the current year the assessee has excluded the above amounts in the computation of book profit under the Explanation to section 115JB. The Assessing Officer did not agree with the above as the same was not disallowed under section 115JB applicable in the assessment year 1998-99. The Commissioner of Income-tax (Appeals) has confirmed the same holding that the assessee has not added back the amounts in that year accordingly, withdrawal in this year cannot be allowed. 31. It was the submission of the assessee-counsel that under Explanation (i) any amount withdrawn from the provisions or reserve is to be excluded from the book profit but with the further requirement as per proviso to this Explanation, that if provisions was made after first April, 1997 it should have been added back in computing the book profit in the year in which the provision was made. Therefore it has to be seen whether in the year in which provision was made, viz. assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 998-99 and the same amount was added back in the regular computation. By virtue of law, it is the duty of the Assessing Officer to compute the normal total income and also the book profit under section 115JA in that year and then compare and decide to invoke the normal provisions of the Act or special provisions of book profit under section 115JB. Once the Assessing Officer invokes the normal provisions of tax, it indirectly means that he has compared the computation under section 115JA and decided that the income under normal provisions was more. In that situation it is to be presumed that the provision was added back to the book profit of that year. Even by means of Explanation (g) introduced to section 115JA by the Finance (No. 2) Act, 2009, with retrospective effect from April 1, 1998 the provision for bad and doubtful debts would be deemed to have been added back in computing the book profit in that year and so the amount, now credited to the profit and loss account, is to be reduced by virtue of the provision of section 115JB. In view of this there is justification in the assessee's contention in claiming the provision as deduction in the computation of book profit in thi ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
