9911796707
TMI Blog2015 (11) TMI 340X X X X Extracts X X X X X X X X Extracts X X X X ..... paid by the assessee was capital in nature and goodwill it was eligible for depreciation u/s 32 of the Act as relying on SMIF Securities Ltd. (2012 (8) TMI 713 - SUPREME COURT) wherein held that the goodwill is eligible for depreciation u/s 32 Addition on expenses incurred in connection with purchase/acquisition of business assets - purchase of division on slump sale - CIT(A) deleted the addition - Held that:- In the present case, it is an admitted fact that the impugned expenditure was incurred in connection with the acquiring of assets and since the expenses incurred were related to bring the assets into existence those were capital in nature and not the revenue in nature. We, therefore, reverse the findings of the ld. CIT(A) on this issue and hold that the expenses incurred by the assessee for acquiring the assets were capital in nature, so those to be capitalized and the AO is directed to allow the depreciation as per law on those capitalized expenditure. Payment made to the holding company - Revenue v/s capital expenditure - Held that:- In the present case, by incurring the impugned expenses, the assessee had not acquired any tangible/intangible asset which had any las ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cularly when the assessee had written off bad debts in its books of account and insurance claim relating to the business was less recovered to the extent of ₹ 3,57,206/- which was allowable as a business loss u/s 37(1) of the Act. Similarly, the annual performance incentive payable was related to the trading business of the assessee which had subsequently been transferred but since the income till 14.10.2005 had been offered by the assessee in the profit and loss account and this performance incentive payable was related to the period ending on 14.10.2005, therefore, it was to be paid by the assessee and was allowable as expenditure. In that view of the matter, we do not see any valid ground to interfere with the findings of the ld. CIT(A).- Decided in favour of assessee. Disallowance of expenses on account of ESOP expenses - whether expenses not related to slump sale - CIT(A) allowed the claim - Held that:- In order to give effect to the business transfer transaction, it became necessary for the assessee to ensure that the management staff accepts to part with their employment with the assessee company and accept the employment of the new company, as the same was a pre-re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the disallowance of ₹ 12,09,198/-as against the disallowance of ₹ 2,85,288/- suo motu made by the assessee. It is also not the case of the AO that the disallowance worked out suo motu by the assessee u/s 14A of the Act r.w. Rule 8D of I.T Rules at ₹ 2,85,288/- was wrong since no discrepancy was pointed out in the said working of the assessee. We, therefore, are of the view that the ld. CIT(A) rightly deleted the disallowance made by the AO. We do not see any valid ground to interfere with the findings of the ld. CIT(A). - Decided in favour of assessee. - ITA NO. 3388/DEL/2009, ITA NO. 3408/DEL/2009, ITA NO. 3841/DEL/2009, ITA NO. 756/DEL/2009, ITA NO. 2331/DEL/2011, ITA NO. 5801/DEL/2012, CO NO. 314/DEL/2009, CO NO. 322/DEL/2009, CO NO. 367/DEL/2009 - - - Dated:- 3-8-2015 - SH. N. K. SAINI, AM AND SH. I. C. SUDHIR, JM FOR THE ASSESSEE : SH. VED JAIN, CA, MS. RANO JAIN V. M CHORASIYA, ADVS. FOR THE REVENUE : SH. P. DAM KANUNJNA, SR. DR ORDER PER N.K. SAINI, A.M. The appeals by the department and Cross Objections by the assessee for the assessment years 2004-05, 2005-06 2006-07 are directed against the orders dated 04.05.2009, 22. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment year 2004-05. 2. In the said cross objection the assessee has taken three grounds of cross objection and has challenged the addition made by AO with regard to noncompete fee. 3. (i) Posting filing of the cross objections the Hon 'ble Supreme Court has delivered a judgment in the case of CIT, Kolkata v. SMIF Securities Ltd. in SLP(Civil) No. 35600 of 2009 whereby it has been held that the goodwill is a depreciable asset, and, therefore the assessee is entitled to claim depreciation on goodwill under section 32 of the Income Tax Act, 1961. (ii) That the above judgment of the Apex Court will be squarely applicable to the case of the assessee. 4. Accordingly the assessee wants to raise the following additional ground of cross objection before you honour: Additional Grounds of Cross Objections 4. On the facts and circumstances of the case, the AO has erred both on facts and in law in not allowing depreciation on the goodwill. 5. That the above issue is purely question of law and all facts are on record and no new facts are to be brought on record. 6. That this ground goes to the root of the order and is crucial for determining t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring of assets: ( a ) Payment made for legal advice taken from Wadia Ghandy Co. in connection with purchase of NCT business Rs.16,01,585 ( b ) Payment made to Mott MacDonald for valuation of fixed assets Rs.1,62,000 ( c ) Payment made to KPMG India Pvt. Ltd. for professional advice taken for the purchase of division Rs.5,66,810 ( d ) Dua Associates-professional services in relation with the documentation etc. Rs.11,79,818 ( e ) Bharat S. Rawat Co. - payment for advisory services Rs.6,52,000 Rs.41,62,213 11. The AO during the course of assessment proceedings noted that in the notes forming part of computation of income, the assessee company had mentioned that a sum of ₹ 6.80 crores was paid to ICI India Ltd. as a consideration for not to compete with the company for three years in the Nitro Cellulose Chemicals Trading business which was transferred to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Several mutual pre/at/post completion obligations were also mentioned in the date vide clause 12 of the BCT. 6. Vide clause 13 and 14 obligations regarding confidentiality and non competition were also mentioned. As per this ICI India including its affiliate for a period of five years after the completion date shall not use or disclose for any person any information relating to the business. It was further undertaken that for a period of three years after the completion date ICI India shall not directly or indirectly carry on or be engaged in any business competing with this business. 7. Consideration was not for different tangible assets, intangible assets etc. The transfer of business was on slump sale basis hence, nowhere in the agreement separate consideration was mentioned. 8. This was a composite agreement to transfer business as a whole ongoing concern basis along with various mutually agreed conditions/obligations precedent to and subsequent to the transfer. These conditions included those of warranty, know-how, and confidentiality and not to compete in the same business etc. No separate agreement and consideration was fixed for the condition of non compe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... les for export business. c. Tax rate of 20% is assumed on royalty payment. d. Thereafter, discount period of 5 years and discount factor of 13.95% was also assumed to arrive at the value of technical know-how of the business which was self generated in this case. 15. The AO was of the view that valuation of non-compete intangible was based on hypothetical situations that if ICI Ltd. would capture a part of the share in the market what would be the fall in the total value of the business and finally even Valuer could not worked out the goodwill of business hence, residual figure was adopted as the goodwill of the business. The AO observed that in the books of account, the assessee treated entire payment related to the transfer business as capital expenditure and all the assets were made part of the block of assets for the purpose of books and depreciation was claimed on the assets acquired as part of business transfer, but in the statement of total income prepared for the purpose of Income Tax, out of total composite consideration for acquiring the business, ₹ 6.80 crores was claimed as revenue expenditure and balance amount continued as capital expenditure. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tancy, if any, business was acquired on going concern basis then after assigning values and working capital, the amount paid in excess of such value is treated as goodwill of the business and in this case also the assessee company had taken the residual amount as goodwill. According to the AO, the assessee on the one hand contended that the running business was acquired out of the many business of ICI Ltd. hence, valuation of goodwill was not possible, on the other hand, the assessee could assign value on loss in value of business as non-compete intangible. The AO treated the consideration as capital for acquiring the business by observing as under: i) Assessee company purchased a division from ICI Ltd. on a slump sale basis through a composite business transfer agreement. The consideration included payments for fixed assets, know-how, the condition of warranty, confidentiality, non-compete and host of other mutually agreed obligations. ii) In the books of account assessee company had capitalized the entire payment except for working capital as part of schedule of fixed assets. iii) There is no separate agreement for not competing with the assessee company and also no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trictive clause ICI India Ltd. was contractually bounded with the appellant for supportive in the business and not to become competitor for at least 3 years for which they took the price. The restrictive clause was not in any way advantageous of enduring nature as observed by the learned assessing officer. 3. If such kind of clause was not placed in the Business Transfer Agreement then buying a division as slump sale would be disastrous in terms of business and profitability. Therefore, assigning the value of non-compete consideration was an integral part of the terms of the agreement and necessary and essential for the smooth running of the business. The restrictive clause is only for 3 years which is necessary to establish into the business as the appellant company was new in the trade. 4. It was illogical and without application of mind to suggest that restrictive business clause has no value, meaning, commercial expediency and necessity to business and especially to a company who is not into the business of Nitro Cellulose and Chemical Trading business and the same was finally equated/assessed with the goodwill of the business. 5. Therefore, raising the doubt by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applicant is justified in contending the tax should be computed based on the consideration as per the independent valuation adopted by the applicant?. 15.1 It is the case of the applicant that it has obtained an independent valuation report relating to trademarks and Foster's Brand IP as on 30th April, 2006. The values are set out in the penultimate para at attachment (2). However, the report has not been filed. 15.2 We can only answer this question by observing that Independent valuation report can certainly be relied upon by the applicant. It is for the concerned IT Authorities to examine whether it represents true and correct value and apply such relevant factors that have material bearing on quantification of the consideration related to the taxable items. 9. Further, assessing officer has raised the contradictory statement that Had the consideration of non-compete been agreed upon and received specifically other than as slump sale for transfer of business same would have become a revenue receipt in the hands of transferor u/s 28(va). It is not the law of the land that if the one party has considered the transaction as revenue receipt then only second pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the expert independent valuers were hired for the evaluation of the tangible, intangible assets including the goodwill and the assessee followed the advice of the experts of the field and accordingly segregated the entire consideration impartially. It was submitted that the AO had not applied his mind before suggesting that anything over and above the cost of asset was goodwill, therefore, the valuation of goodwill on the basis of residual value after ascertaining realistic figures to each and every item was correct on the part of the independent valuers as well as on the assessee company. It was further submitted that the action of the AO was totally unjustified and not in accordance to the law. It was contended that the accounting entry in the books of account was irrelevant for the determination of the allowability of expenses because it was to be seen in the light of the provisions of Income Tax and whether the payment was allowable or not. It was clarified that while computing the total income under the Income Tax Act, the depreciation on the non-compete consideration had not been claimed and the value of the non-compete consideration was considered as revenue expenses. It wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that there was no separate consideration assigned in the agreement but the restrictive covenant under clause 14 was the part of the agreement which clearly showed that the consideration was paid for this restrictive covenant to protect the business interest of the assessee company and to capture the market and the another purpose of restrictive covenant was to increase the profitability of the assessee company. Therefore, the payment of non-compete fees, the quantum of which was determined later on, upon the valuation of the assets by the professional valuer, was wholly and exclusively for the profitability of the assessee's business. 24. As regards to the AO's comments that no value of the goodwill was worked out, the ld. CIT(A) pointed out that the same valuers had determined the value of goodwill as residual at ₹ 3,50,00,000/- and as no other method of valuation of goodwill was applicable to the assessee's case, the said value had been capitalized in the books of account by the assessee company. However, in the case of non-compete fee, the same was separately identified and payment was inbuilt in the lump sum consideration which was later on valued separate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt previous year. 25. The ld. CIT(A) pointed out that the above parameters made it clear that payment of non-compete fee was not an expenditure covered by sections 30 to 36, it was also not a personal expenditure as the Directors of the assessee company had not been benefited for this payment, it was also not a capital expenditure as no asset of enduring nature had been acquired by paying the non-compete fee and the payment of non-compete fees was made in the previous year relevant to the assessment year under consideration, it was laid out wholly and exclusively for the purpose, i.e. to protect the business of the company from the competition from M/s ICI Ltd. who was the only manufacturer of this product and to enhance the profitability. The ld. CIT(A) accordingly held that the expenditure of non-compete fee in the instant case was revenue expenditure and the same was allowable as expenditure. The reliance was placed on the following case laws: Mc Dowell Co. Ltd. (supra) Eicher Ltd. (supra) Smartchem Technologies Ltd. (supra) Synergy Credit Corpn. Ltd. (supra) Lahoty Brothers Ltd. (supra) 26. The ld. CIT(A) also held that the ground raised by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assigned by the assessee. The AO treated the said amount as capital in nature by observing that the amount of ₹ 6.80 crores claimed as fee for non-compete was nothing but goodwill of the business and was capital expenditure. The AO also held that if a business is purchased on a going concern basis, payment in excess of the value of tangible/intangible asset was goodwill of the business. However, the AO did not allow the alternative claim of the assessee for allowing the depreciation. 30. When the matter was taken to the ld. CIT(A), the said amount of ₹ 6.80 crores was directed to be considered as revenue in nature by observing that by this restrictive covenant, the assessee had warded off a potential competition from the transferor. In the present case, it is noticed that there was no separate consideration assigned for non-compete fee in the agreement but there was a restrictive covenant under clause 14 of the agreement. The said restrictive covenant was to protect the business interest of the assessee and to capture the market. In the instant case the non-compete fee although identified separately by the valuer but it was inbuilt in the lump sum consideration. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and not revenue expenditure. 32. We, therefore, by considering the totality of the facts as discussed hereinabove set aside the findings of the ld. CIT(A) on this issue and upheld the view taken by the AO that the non-compete fee of ₹ 6.80 crores was nothing but goodwill of the business and a capital expenditure. Now question arises as to whether the assessee is eligible for depreciation on the goodwill. In this regard, it is relevant to point out that the Hon'ble Supreme Court in the case of SMIF Securities Ltd. (supra) held that the goodwill is eligible for depreciation u/s 32 of the Act and their lordships in the said case observed as under: It was further explained that excess consideration paid by the assessee over the value of net assets acquired of YSN shares and Securities Pvt. Ltd. (Amalgamating Company) should be considered as goodwill arising on amalgamation. It was claimed that the extra consideration was paid towards the reputation which the Amalgamating Company was enjoying in order to retain its existing clientele. The Assessing Officer held that goodwill was not an asset falling under Explanation 3 to Section 32(1) of the Income Tax Act, 1961 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services in relation with the documentation etc. Rs.11,79,818 Bharat S. Rawat Co. - payment for advisory services ₹ 6,52,000 Rs.41,62,213 37. The above expenditure were claimed as revenue expenditure. The AO asked the assessee to show cause as to why the expenditure in connection with the acquisition of assets or acquiring of business should not be capitalized and depreciation to be allowed thereon. The contention of the assessee was that the expenditure had not resulted into enduring benefit. The AO however, did not accept the contention of the assessee by observing that the expenses were incurred to bring the assets into existence, resulting in the benefit of enduring nature. He, therefore, treated those expenses as capital in nature, however, he did not allow the depreciation by stating that the expenditure was not incurred for specific asset and was relating to purchase of division on slump sale basis. 38. Being aggrieved the assessee carried the matter to the ld. CIT(A) and submitted as under: The Ld. Assessing Officer has erred in law and on facts in disallowin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the submission made before the authorities below and strongly supported the impugned order passed by the ld. CIT(A). 42. We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, it is an admitted fact that the impugned expenditure was incurred in connection with the acquiring of assets and since the expenses incurred were related to bring the assets into existence those were capital in nature and not the revenue in nature. We, therefore, reverse the findings of the ld. CIT(A) on this issue and hold that the expenses incurred by the assessee for acquiring the assets were capital in nature, so those to be capitalized and the AO is directed to allow the depreciation as per law on those capitalized expenditure. Accordingly, the ground raised by the department is partly allowed. ITA No. 3408/Del/2009 for Assessment Year 2005-06 43. In ITA No. 3408/Del/2009 for assessment year 2005-06, the department has raised the following grounds: 1. On the facts and in the circumstances of the case as well as in law, the Ld. CIT(A) erred in deleting the addition of ₹ 1,20,00,000/- being payme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness. Therefore, the assessee had definitely got benefite of enduring nature and the expenses were capital in nature. The AO accordingly disallowed the expenses of ₹ 1,20,00,000/- and added back to the total income of the assessee. 47. Being aggrieved the assessee carried the matter to the ld. CIT(A) and submitted as under: 'Disallowance of fees of Techno Commercial of ₹ 80,00,000/- and Brand Licensing of ₹ 40,00,000/-, as revenue expenditure. In this regard we also most respectfully submit that the said expenditure is annual payment for the use of Brand Name and it is not towards the purchase of the Brand Name and it is annual outgoings as royalty and this regard clause 2, of the said agreement is relevant, which reads as under: Subject to the approval of the regulatory authorities in India, if any required, during the currency of this agreement, Nitrex Mauritius shall grant a licence to Nitrex India for using the trademark/brand name and logo, with no territorial limits to the licence and in return Nitrex India shall pay to Nitrex Mauritius, a royalty for the worldwide licence to use trademark, brand name Nitrex and logo as displayed in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Nitrex Mauritius Ltd. under the head 'Brand Licensing Agreement'. This agreement was made on 14th March, 2005 and was effective from 1st April, 2004. Under this agreements, the Nitrex Mauritius, agreed to allow to the appellant company i.e. M/s Nitrex Chemicals India Ltd. to build an international image to its products under the Nitrex' brand. The Nitrex Mauritius, also agreed to provide all necessary support and expertise to build Nitrex' as an international brand. In consideration of the above services, Nitrex Chemicals India Ltd. agreed to pay ₹ 40,00,000/- per annum for a period of three years at quarterly rests. From the above agreement, it is seen that amount of ₹ 80,00,000/- paid by the appellant company in the form of 'techno commercial fees' was for availing the expertise of M/s Nitrex Mauritius in the field of commercial, marketing, logistics, research results, safety security, health and environment policy and in the areas of expertise which was to be provided by the Nitrex Mauritius described in the Annexure to the Agreement. Such expertise was necessary for smooth running of business of the appellant company and to take advantag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of assets which are not of lasting value and are likely to get exhausted or consumed in the process of the return. Further revenue expenditure are operational in its perspective and solely intended for the furtherance of the enterprise. In view of the above discussion, it is clear that the payment made by the appellant were only in furtherance of appellant business and none of the payment or part thereof was incurred for acquiring any capital asset or tangible/intangible asset which has any lasting or enduring benefit to the appellant's business. These payments were made for only one year in consideration of using the trade mark of M/s Nitrex Mauritius and to obtain expertise in the field of commercial, marketing, logistics, research results, safety security, health and environment policy. This expertise was necessary for smooth running of the business and to make it technically viable, efficient and profitable unit, with a view to yield larger profits and establish itself in the international market. 49. Now the department is in appeal. The ld. DR strongly supported the order of the AO and reiterated the observations made in the assessment order dated 20.12.2007. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid @ ₹ 1.50 per kg plus prompt payment discount of Re. 1 per kg. The AO further observed that in the absence of comparative figures of commission paid on export sales, there was no alternative except to estimate the quantum of disallowance to be made. The AO disallowed 50% of such commission paid by the assessee amounting to ₹ 2,73,57,119/- on export sales and accordingly the disallowance of ₹ 1,36,78,560/- was made. 55. The assessee carried the matter to the ld. CIT(A) and submitted that the commission was not paid to the parties covered u/s 40A(2)(b) of the Act and this payment for export commission was being regularly paid by ICI India Ltd. from whom the assessee purchased the business on slump sale basis. It was further submitted as under: 'The company has entered into export agency agreement (Agreement) with Asha Exports ( Asha Exports ), a copy of the agreement is submitted herewith (Annexure 1). As per the agreement, Asha Exports sells company's goods directly and through sub agents, appointed by Asha Exports, for commission. The commission as per percentage agreed upon in the Agreement, is paid directly by the company to Asha Exports and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mission payment, TDS wherever applicable, has duly been deducted and deposited into the Treasury by the appellant company. All these facts establish that the commission was paid by the appellant company, in furtherance to the agreement entered by it with M/s Asha Exports and sub agents of Asha Exports, for its business expediency. On the basis of the facts and documents filed by the appellant, it is established that the commission on export has been paid by the appellant for its business purpose. The AO was not justified in disallowing 50% of the commission paid on the ground that the same was excessive. It has been held in plethora of case laws that once it is established that there was nexus between the expenditure and purposes of business, the Department cannot justifiably claim to put itself in the arm chair of the businessman or in the position of Board of Directors and assume the role to decide how much is reasonable expense, having regard to the circumstances of the case. In view of factual position discussed above and plethora of judicial pronouncements on the issue, it is well settled that the commission expenses claimed by the appellant on export sales were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the IT Rules, 1962. 60. The last issue vide Ground No. 3 agitated by the department relates to the reduction in disallowance made by the AO on account of water charges by admitting fresh evidences. 61. The facts related to this issue in brief are that the assessee debited water charges of ₹ 72,92,206/- in the profit and loss account. The AO asked the assessee to furnish the Bills of water charges. In response the assessee furnished Bills of ₹ 30,64,348/-and since the Bills in respect of remaining amount of ₹ 42,27,858/-were not furnished, the AO made the addition for those expenses i.e. ₹ 42,27,858/-. When the matter was taken to the ld. CIT(A), the addition to the extent of ₹ 20,79,886/- was confirmed by observing as under: I have considered the observations of the AO and the submission made by the appellant as well as the supporting documents filed before me. It is seen that the appellant has claimed Water Charges expenses of ₹ 72,92,206/-. Out of this the AO disallowed a sum of ₹ 42,27,858/-, on account of non-furnishing of supporting bills by the appellant. During the course of appellate proceeding, the appellant has file ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... udication after providing due and reasonable opportunity of being heard to the assessee. Accordingly, the appeal of the department is partly allowed for statistical purposes. 64. In the Cross Objection No. 322/Del/2009 for the assessment year 2005-06, the assessee has raised additional ground in the same manner as was raised for the assessment year 2004-05 and another issue relating to depreciation is also same. Therefore, our findings given for the assessment year 2004-05 shall apply mutatis mutandis for this year also. Accordingly, the Cross Objection of the assessee is partly allowed for statistical purposes. ITA No. 3841/Del/2009 and CO No. 367/Del/2009 for the A.Y. 2006-07 65. First issue in this appeal of the department relates to the direction of the ld. CIT(A) to allow the expenses of ₹ 8,43,000/-, ₹ 3,57,206 and ₹ 6,00,000/- against business income. 66. Facts related to this issue in brief are that the AO during the course of assessment proceedings noticed that the assessee had claimed to have incurred expenses of ₹ 40,90,048/- in connection to the transfer which included following expenses: ( a ) R. R. Enterpris ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds to the insurance claim, the ld. CIT(A) observed that such claim raised in earlier year was shown as income in the books and when the claim actually materialized, the assessee received short claim to the extent of ₹ 3,57,206/- and since it was a business loss relating to the trading business, the same was allowable expenditure u/s 37(1) of the Act. As regards to the annual performance incentive payable to the employees of the trading unit who had been subsequently transferred, the ld. CIT(A) pointed out that it was related till 14.10.2005, which had been offered in the profit and loss account. Therefore, incentive till that date had to be paid by the assessee. The ld. CIT(A) held that all the aforesaid expenses were business expenditure and allowable against the income under the head business and profession . Accordingly, the AO was directed to allow the same against the assessee's business income. 68. Now the department is in appeal. The ld. DR supported the order of the AO and reiterated the observations made in the assessment order. In his rival submissions the ld. Counsel for the assessee reiterated the submissions made before the ld. CIT(A) and strongly support ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act the ETA as per clause 4.4 lays that EAC and/or Newco shall employ the employees from the completion date on terms and conditions of service which are no less favorable than those which the employees enjoyed immediately prior to the completion date with Nitrex India without any interruption or break in service. 4.4 As such the legal onus in cast on EAC/Newco to suitably compensate the employees and no adverse terms of employment is imposed on them on account of the business transfer. The act of funding the buy back of the management shares is an expenditure which is independent of the business transfer and cannot be allowed u/s 48 of the Act for computation of Short Term Capital Gain. 71. Being aggrieved the assessee carried the matter to the ld. CIT(A) and submitted as under: That the assessee company was formed by Nitrex Mauritius Ltd. after acquiring Nitrocellulose and Trading business from ICI Ltd. vide ETA dated 3rd December 2003. It was agreed that for the smooth running of the business of the company, it would be prudent that the employees of the business acquired by the company may also have stake in the company. Therefore, 5.5% of the shares were subscri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yee their management holding was bought back by the Trust at following rate. Name Shareholding Management Holding Rate of Buy Back by Trust Paid to them on transfer Mr. Sanjay Gupta 120000 85.00 Rs.10,200,000 Mr. Manish Bahuguna 40000 60.46 Rs.2,418,400 Mr. Murali Duvvuri 32000 30.46 Rs.1,934,720 Mr. Satish Kumar 32000 60.46 Rs.1,934,720 Total 224000 Rs.1,64,87,840 4. That in pursuance to said Business Transfer Agreement and Employee Transfer Agreement, ESOP Scheme, consent of the management employee dated 9th December 2005, the aforesaid buy back was required to be funded by the assessee company and therefore, said amount of ₹ 1,39,76,352/- (Rs. 1,64,87,840 - ₹ 25,11,488), was non-recoverable from the Trust. The amount from the Trust is non-recoverabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that subject to the completion they will accept to be employee by Newco instead of Nitrex India Ltd. 4.4 EAC and/or Newco shall employ the employees from the completion date on terms and conditions of service which are no less favourable than those which the employees enjoyed immediately prior to the completion date with Nitrex India without any interruption and break in service (but excluding employees stock share holding option) . As per the terms and conditions listed above, it was the condition precedent to the completion of transaction contemplated in the BTA that the management staff shall have confirmed to accept the employment in the new company instead of the appellant company. It was also a condition that on acceptance of employment, the new company shall employ the employees on terms and conditions of service which are no less favourable than those which the employees were enjoying immediately prior to completion date of business transfer without any interruption or break up of service. However, in the agreement it is clearly mentioned that in the new company they will not be given any employee stock or share holding options. It is seen that the manageme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntractual liability of the company. Without buy back of the shares from the employees, the business transfer of the trading division would not have been possible. It is claimed by the appellant that the amount spent on buy back of shares by the Trust has been incurred wholly and exclusively in connection with the transfer of the capital assets as contemplated in section 48 of the IT Act. Hence, the same has to be allowed as deduction while computing the capital gain in respect of the slump sale of trading business.' 73. While deleting the impugned addition the ld. CIT(A) also observed as under: On going through the various clauses of Nitrex Chemicals Employees Stock Option Trust and Nitrex Chemicals Employees Stock Option Plan-2004, like objectives, beneficiaries and eligibility as discussed above, it is observed that ESOP-2004 scheme and the Trust were created for attracting the talented management team and retain and reward them for performing services for the growth and profitability of the company and not part of these scheme were meant for the direct benefit of the company and their stock holder. The amount paid to the Trust for retaining the shares of the managem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s per the ESOP scheme. In order to give effect to the business transfer transaction, it became necessary for the assessee to ensure that the management staff accepts to part with their employment with the assessee company and accept the employment of the new company, as the same was a pre-requisite for consummation of the transactions. At the time of parting share holding from management was bought back which was required to be funded by the assessee company. However, the impugned amount was non-recoverable and was a loss on account of business transfer, so it was required to be deducted from the capital gain in respect of slump sale of trading business. In our opinion the ld. CIT(A) was justified in holding that the impugned amount was allowable from the capital gain arisen to the assessee. We do not see any valid ground to interfere with the findings of the ld. CIT(A) on this issue. 78. Vide Ground No. 3 the grievance of the department relates to the deletion of addition of ₹ 10,00,000/- made by the AO on account of Techno Commercial Licensing Fees. 79. The facts related to this issue are identical to the facts involved in the assessment year 2005-06 which we have alr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loyees Stock Option Trust acquired shares from existing shareholders out of funds borrowed from the assessee company and issued these shares to the employees eligible to exercise stock option. The AO observed that the trust had purchased 421,727 shares belonging to the employees of the Trading Business. Out of the above shares 224,000 pertained to the original allotment of shares to these employees and the balance 197,727 shares pertained to share allotted in exercise of options vested on them. The AO asked the assessee to explain the ESOP and to justify as to how the expenses claimed on purchase of shares were revenue expenditure. 86. In response, the assessee submitted as under: With reference to your query for deducible amount of ₹ 58,55,345/- for ESOP, payments relating to Trading Business, we submit herewith as follows:- During the A.Y 2006-07 (in Dec 05), the assessee company had sold the Trading Business originally acquired from ICI to EAC vide BTA dated 14.10.2005. As per the Employee Transfer Agreement of the even date, it was a condition precedent to the completion of transactions contemplated in BTA that the management staff shall have confirmed to acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal. 89. We have considered the submissions of both the parties and carefully gone through the material available on the record. It is noticed that the facts for the year under consideration relating to this issue are identical to the facts involved in the earlier year in ground no. 2 of the departmental appeal, which we have already adjudicated in the former part of this order. Therefore, our findings given in respect of this issue while deciding the appeal for the preceding assessment year i.e. assessment year 2006-07 shall apply mutatis mutandis for this year also. In that view of the matter, we do not see any merit in this ground of the departmental appeal. 90. Next issue vide Ground No. 2 relates to the deletion of disallowance of ₹ 85,23,127/- made by the AO out of selling commission. 91. The facts related to this issue are similar to the facts involved in the preceding assessment years which we have already adjudicated in the former part of this order. Therefore, our findings given in the former part of this order relating the issue of selling commission shall be applicable with the same force for this year also. In that view of the matter, we do not see any m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee made the investment in the mutual funds and was not having any surplus funds. Therefore, the interest bearing borrowed funds were used for making the investment in the mutual funds. As such disallowance u/s 14A of the Act read with Rules 8D of I.T Rules, 1962, was rightly made by the AO and the ld. CIT(A) was not justified in restricting the disallowance to ₹ 37,740/- only as against ₹ 3,97,880/- made by the AO. 97. In his rival submissions the ld. Counsel for the assessee submitted that the AO was not justified in applying Rule 8D while making the disallowance u/s 14A of the Act because the said rule is applicable w.e.f assessment year 2008-09 and not for the assessment year under consideration. The ld. Counsel for the assessee strongly supported the order of the ld. CIT(A). 98. We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, it is noticed that the assessee earned the dividend income of ₹ 3,77,330/- while the AO worked out the disallowance at ₹ 3,97,880/- which was more than the said income. The disallowance was made by the AO in accordance with Ru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Loss/(Gain) Remark Export Sales (9364096) Export debtors Commission 1853626 Commission on export sale booked on actual realization instead of sale value in 2008-09 rectified. Forward Contract (734748) Short accounting of forward contract gain in previous year, now booked. IDBI Loan of Yen 437445319.34 48369188 Reinstatement of IDBI Yen term loan as on 31.3.2009 ECB Loan of USD 3100000 32674000 Reinstatement of loan as on 31.3.2009 Others 76067 Total 72874037 103. From the above details, the AO noticed that the substantial portion was on account of reinstatement of loan as on 31.03.2009. He also observed that on account of regular sale/purchase transactions, the assessee had accrued a gain on account of increase in exchange rates. However, out of forex loss of ₹ 7,28,74,0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a sum of ₹ 2,77,72,900/- on account of foreign exchange loss on ECB Loan of USD 31,00,000, by treating the same to be capital expenditure. (b) The ld. AO while passing the said order has not properly taken into consideration the detailed written submission dated 27.12.2011 submitted during the assessment proceedings. The copy of the said written submission is submitted herewith as Annexure 1. (c) That the said loans are for the purpose of the business of the company and it is old one and no new loans have been taken during the year under consideration and that whenever there is gain or loss in respect of foreign exchange fluctuation of loan the same treatment is given in the earlier year as in the current year and in subsequent years i.e. it has been transferred to the profit and loss account and same was allowed in the earlier years by the Ld. AO. In the earlier year there was foreign exchange gain which was shown in the profit and loss account and thus was offered for taxation. Therefore, following the principle of consistency the loss should be allowed this year. Supporting evidences in this regard are submitted herewith as Annexure 2. In this regard, reliance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Vs Goyal M.G. Glasses Pvt. Ltd. 320 ITR 669 (Del) 107. The ld. CIT(A) after considering the submissions of the assessee observed that the assessee had been disclosing in its return of income, the gain resulting from the fluctuation from the foreign exchange in the earlier as well as subsequent years and if the AO had accepted the foreign exchange fluctuation gains, the loss resulting on that score during the year under consideration has also to be accepted. The ld. CIT(A) also observed that the provisions of section 43A of the Act are not applicable to the assessee's case. He, therefore, deleted the addition made by the AO. 108. Now the department is in appeal. The ld. DR strongly supported the order of the AO and further submitted that ECB loan had been availed for acquisition of capital asset, so it was capital in nature. Therefore, the AO rightly disallowed the foreign exchange fluctuation loss claimed as revenue expenditure by the assessee and the ld. CIT(A) was not justified in deleting the addition made by the AO. 109. In his rival submissions the ld. Counsel for the assessee reiterated the submissions made before the authorities below and strongly supported ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relates to the deletion of disallowance of ₹ 12,09,198/- made by the AO u/s 14A of the Act r.w rule 8D of the I.T Rules, 1962. 116. Facts related to this issue in brief are that the AO during the course of assessment proceedings noticed that the assessee had made the following investments over the current year and the immediately preceding year: Particulars FY 2008-09 FY 2007-08 Excelex Biopolymers Pvt. Ltd. 95,759,000 10,000,000 Eco Acqua Ltd. 3,932,500 3,932,500 Mutual Funds - 500,000 Total 99,682,500 14,432,500 117. The AO also observed that the assessee earned the dividend on mutual fund amounting to ₹ 1,06,498/-. The AO was of the view that as per sub-section (2) of section 14A of the Act, expenses connected with the exempt income (received or receivable) have to be necessarily disallowed regardless of whether they were direct or indirect, fixed or variable and managerial or fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion. (Disallowance under Rule 8D : ₹ 12,09,198/-) 118. Being aggrieved the assessee carried the matter to the ld. CIT(A) and submitted as under: The ld. Assessing Officer has erred in law and facts by disallowing a sum of ₹ 12,09,198/- u/s 14A r.w Rule 8D. The assessee has suo motu made a disallowance of ₹ 2,85,288/- on the said account in the computation of income. The AO has straightaway disregarded the claim of the assessee, made his own computation by applying Rule 8D, without recording any satisfaction as to how the assessee's calculation of section 14A was incorrect. 119. The reliance was placed on the following case laws: Maxopp Investment Ltd. (2012) 247 CTR 162 (Del) DCIT Vs Jindal Photo Ltd., ITA No. 4539/Del/2010 (ITAT Delhi) 120. It was further submitted that there was no finding for non-satisfaction for the amount disallowed by the assessee, therefore the disallowance made by the AO may be deleted. 121. The ld. CIT(A) after considering the submissions of the assessee deleted the addition by observing as under: After consideration of the facts of the case and the discussion in the assessment order, I am ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
