9911796707
TMI Blog2016 (4) TMI 1343X X X X Extracts X X X X X X X X Extracts X X X X ..... the right to produce, market and sell the products under each trade mark/brand name licence given by U.K. Company to the assessee constituted a separate source of income and the compensation received on termination of the licence agreement in respect of even one of the said trade marks constituted a capital receipt not liable to tax in the hands of the assessee. In our opinion, CIT(A) has correctly decided the issue in favour of the assessee after analyzing and considering the facts of the case and also the settled legal position. Therefore, we do not see any valid ground in interfering with the findings of the CIT(A) on this issue. Accordingly, we uphold the order of CIT(A) and dismiss ground No. 1 of the appeal. Recompute the deduction u/s. 80HHC after excluding Excise Duty, Octroi and Sales-tax etc from the total turnover - Held that:- We observe that the issue is squarely covered in favour of the assessee and against the Revenue by the decision of the Hon'ble Supreme Court in the case of CIT v Laxmi Machine Works [2007 (4) TMI 202 - SUPREME COURT]. We do not find any infirmity in the findings of the CIT(A) on this issue. Accordingly, we uphold the order of CIT(A) on this issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted by the assessee subject to inclusion of certain expenses - Held that:- Tribunal in assessee's own case for the assessment year 82-83 (supra), uphold the order of the CIT(A) in regard to valuation of closing stock and dismiss the above common grounds of appeals raised by the assessee as well the revenue. Addition on account of MODVAT element not reflected in the value of closing stock - Held that:- Assessing officer had included the modvat credit in the valuation of closing stock. The CIT(A) has recorded a finding of fact that the assessee had decided the purchases not of modvat credit and accordingly has not included the modvat credit in the valuation of closing stock and has accordingly deleted the addition for the respective assessment year. The parties before us agreed that the issue is covered in favour of the assessee by the decision of the Hon'ble Supreme Court in the case of Indo Nippon [2003 (1) TMI 8 - SUPREME COURT]. Respectfully following the said decision of the Hon'ble Supreme Court in the case of Indo Nippon, this common ground raised by the Revenue in respective assessment years is hereby dismissed. Expenditure on account of rent paid for guest house - allowable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt was entered into between Beecham Group Plc. and the assessee company. M/s. Smithkline Beecham Plc. U.K. had sole right to manufacture, pack and sell goods in respect of these trade marks granted the right to use these trademarks to the assessee company. The U.K. Company also granted other trademarks to the assessee, which are as under:-- Trade mark 1. ENO (word) 2. FRUIT SALT 3. SIL VIKRIN (Word) 4. SIL VIKRAN (Brand) 5. MACLEAN (brand) 6. MACLEANS (Word) 7. MACLEANS Signature 8. MACLEANS (Tooth paste carton) 9. BRYLCREEM (word) 10. BRYLCREEM (label)" The Assessing officer noted that on re-organization of its business, M/s. Smithkline Beechan Plc. transferred the trade mark use of 'ENO' and 'Fruit Salt' out of the above items to M/s. Smithkline Beecham Asia(P) Ltd., New Delhi. The agreement terminating the ENO and Fruit Salt trade mark licence agreement reads as under:-- "I refer to the trade mark user agreement between Beecham Group Plc and Smithkline Beecham Consumer Healthcare dated 28 June 1979 as subsequently amended from time to time ("Agreement"). The rights relating to the trade mark ENO & FRUIT SALT, and all other rights and obli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e lump-sum consideration of ₹ 45 Million as a fair and reasonable compensation for the said goodwill, and for transfer of all the marketing, advertising and brand related information generated by SBCH in its development effort. Accordingly we propose to pay SBCH a one-time lump sum consideration of ₹ 45 Millions for the said goodwill and for transfer of all information associated with SBCH's development effort. We would request you to signify your consent to the above terms by signing and returning a copy of this letter to us at the earliest". Yours faithfully for and on behalf of Agreed and accepted for and on behalf of on behalf of SMITHKLINE BEECHAM ASIA PRIVATE LIMITED SMITHKLINE BEECHAM CONSUMER HEALTHCARE LIMITED Sd/- NANDAN DASGUPTA ALTERNATE DIRECTOR Sd/- S.J. SCARFF MANAGING DIRECTOR" The Assessing officer observed that in the return of income, the assessee had treated ₹ 4.5 crores as non taxable capital receipt in its hands. In that background, the Assessing officer required the assessee to show cause as to how the amount of ₹ 4.5 cores was a capital receipt not liable to tax. In response to the above query, the assessee contended ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee. He, therefore, held that receipt of ₹ 4.5 cores is a taxable income of the assessee. 4. On appeal, the CIT(A) deleted the addition for the reasons stated in para 3 of the impugned order, which reads as under:-- "3. The submissions made by the appellant have been given careful consideration and I have also gone through the various decisions cited by the Assessing Officer as well as learned counsel for the assessee. I have also perused the agreements entered into by the appellant. The Assessing Officer has held that the solatium of ₹ 4.5 crore was received by the appellant for termination of contract and was during the regular course of business, therefore, it represents a revenue receipt, whereas the appellant's contention is that by virtue of transfer and assignment of the trademark of 'ENO" and 'FRUIT SALT', the appellant had lost the valuable business of manufacturing and marketing the said products, and therefore, it was a loss of the source itself, hence the compensation received represented a capital receipt. Whether a compensation received represents a revenue receipt or capital receipt depends entirely upon the peculiarity of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of business, In the case of CIT V. The Mills Store Co., 9 ITR 642. it was held that a restrictive covenant, whereby a person undertakes, for certain consideration to abstain from doing a particular act or from following a particular course or conduct, is something quite outside an ordinary contract of employment and the receipt is not taxable being a capital receipt. Further the Hon'ble Supreme Court in the case of CIT v. Best & Co. Ltd., Supra held that the compensation agreed to be paid was not only in lieu of the loss of the agency but also for the respondent accepting a restrictive covenant for a specified period and the restrictive covenant was an independent obligation which came into operation only when the agency was terminated and that part of me compensation which was attributable to the restrictive covenant was a capital receipt and hence not taxable. Further in the case of Gilliinders Arbuthnot and Co. Ltd. v. CIT, 1964 : 53 ITR 283 it was held that the compensation paid for agreeing to refrain from carrying on competitive business in the commodities in respect of agency terminated or for loss of goodwill is prima facie of the nature of the capital receipt. The Hon& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture of a capital receipt." 5. We have heard Shri S.K. Mittal, Ld. DR and Shri Rohit Jain, Ld. Counsel for the assessee. The Ld. Counsel for the assessee pointed out that the agreement with U.K. Company entered into on 28.6.1979 whereby the assessee was granted licence to use, inter alia, the trade marks 'ENO' and 'Fruit Salt'. Shri Rohit Jain, Ld. Counsel for the assessee vehemently argued that the assessee formed the foundation of carrying on of another line of business viz. producing and marketing 'ENO' and 'Fruit Salt'. According to Ld. Counsel for the assessee, termination of agreement dated 28.6.1979 in part by U.K. Company resulted in cessation of that line of business and the above sum of ₹ 4.5 crores received by the assessee under the arrangement of the aforesaid company was towards compensation of such loss of business/source of income. Shri Jain further submitted that it has been held by the Courts that compensation received on termination of an income producing asset is a capital receipt, and hence is not liable to tax. Before us, the assessment year involved is 1997-98. It is worthwhile to mention here that clause (va) to section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s paid was to compensate it for loss of a capital asset and was not, therefore, in the nature of the Revenue receipt. The Hon'ble Supreme Court at page 262 (head Note) held as under:-- "Held, on the facts, that the arrangement with Mugneeram Bangur and Co. was not in the nature of a trading transaction, but was one in which the appellant parted with an asset of an enduring value. What the assessee was paid was to compensate it for loss of a capital asset and was not, therefore, in the nature of a revenue receipt. It mattered little that the appellant did continue to conduct the remaining managing agencies after the determination of its agency with the Fort William Jute Co. It cannot be said as general rule that what is determinative of the nature of a receipt on the cancellation of a contract of agency or office is extinction or compulsory cessation of the agency or office. Where payment is made to compensate a person for cancellation of a contract which does not affect the trading structure of his business or deprive him of what in substance is his source of income, termination of the contract being a normal incident of the business, and such cancellation leaves him free t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rminated by the Union of Burma and the assessee was paid compensation for the same. The Hon'ble Supreme Court held that the forest leases affected the very structure of the operations and, therefore, constituted capital assets and payment made for cancellation or sterilization of the right would be capital receipt. It is also relevant to mention here that the Hon'ble Supreme Court in the case of Oberoi Hotel (P) Limited (1999) 236 ITR 903 (SC) held that the amount received by the assessee for giving up right to purchase hotel and/or to operate the hotel resulting in loss of source of income is capital receipt. In view of the above, we fully agree with the findings of the CIT(A) that the compensation received by the assessee amounting to ₹ 4.5 crores is capital receipt not exigible to tax. 8. Before parting, we may also observe there that in this case the right to produce, market and sell the products under each trade mark/brand name licence given by U.K. Company to the assessee constituted a separate source of income and the compensation received on termination of the licence agreement in respect of even one of the said trade marks constituted a capital receipt not l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ke the formula workable. If so, excise duty and sales tax also cannot form part of the "total turnover" under section 80HHC(3) : otherwise the formula becomes unworkable." 12. Respectfully following the judgement of the Hon'ble Supreme Court in the case of CIT v Lakshmi Machine Works (supra), we do not find any infirmity in the findings of the CIT(A) on this issue. Accordingly, we uphold the order of CIT(A) on this issue and reject ground No. 2 of the appeal. 13. Ground No. 3 of the appeal reads as under:-- "3. On the facts and circumstances of the case the Ld. CIT(A) has erred in directing the Assessing officer to allow 100% depreciation on Effluent Treatment Plant." 14. The facts relating to this issue are that the assessee had claimed 100% depreciation on Effluent Treatment Plant (ETP), installed at Rajmundry on 15.3.1997. The Assessing officer disallowed the claim of the assessee stating that the ETP was not installed and commissioned before 31.3.1997. While holding so, the Assessing officer referred to the enquiry made from M/s. Envirad Project (P) Ltd., the party who had supplied and installed the ETP stated that most of the work relating to ETP was completed in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te samples (2 Nos. ) are being collected for evaluation since 17.3.97. 4) The result of composite samples (2Nos) have shown COD levels to be 245 and 243 mg/lt at final out lets respectively. The BOD results are awaited as the same take longer time. 5) The EIP Plant shall be under continuous operation and manned by the staff of M/s. Envirad, Once the desired output results are achieved the plant shall be further operated under steady state condition for a duration of 2-3 weeks. 6) During this period M/s. SBCH Ltd. shall designate plant personnel in all the three shifts to check and also train. themselves for ETP operation. 7) After steady state performance the ETP shall be taken over by M/s. SBCH Ltd. 8) In case M/s. SBCH Ltd., desire that entire plant be re-commissioned (to gain confidence level for restart the plant) the entire EXP/UASB shall be slushed and recharged. This re-commissioning shall be done by M/s. SBCH Ltd., under the supervision/guidance of M/s. Envirad till they gel (he desired results and confidence. After putting the plant into operation, certain defects were noticed and facts fax was sent on 20th March, 1997. The following defects were brought to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is held that the Effluent Treatment Plant had been commissioned and put to use during the year under reference, and the appellant is entitled to depreciation thereon. The Assessing Officer is accordingly directed to allow depreciation on Effluent Treatment Plant as per rules. Thus this ground of appeal is, therefore, allowed." 16. We have considered the rival submissions. It is apparent from the record that the assessee had produced the minutes of meeting held with Envirad on 19.3.1997, which revealed that the ETP was being operated continuously since 15.3.1997. The said minutes were given by one Mr. Venkat of Envirad. The minutes of meeting are available at page 136 of the assessee's paper book. The assessee had also produced the copies of fax massages dated 24.3.1997 and 28.3.1997 sent by the assessee to Mr. Venkat of Envirad intimating him about the results obtained under operation of the ETP on the various dates. The copies of fax messages dated 24.3.1997 and 28.3.1997 are available at pages 137 to 140 of the assessee's paper book. Besides above documents, the assessee had also submitted a certificate of the assessee's manager (Engg.), asset installation form of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taken by the Tribunal in Revenue's appeal in ITA No. 345/Chandi/2001 in assessee's own case relating to assessment year 1996-97 vide its order dated 28.2.2005. The Tribunal following its earlier orders passed in assessee's case held as under:-- "The second ground of appeal of the Revenue is as under:-- "2. On the facts and in the circumstances of the case, the Ld. CIT(A) allowing the claim of deduction u/s. 80-I of the Income-Tax Act, 1961 after verification of facts in view of ITAT's order passed in assessee's case for earlier years." The relevant facts relating to this issue are that the assessee had claimed deduction under section 80-I of ₹ 6,32,90,368/- which was disallowed by the Assessing Officer on the basis of assessment order for assessment year 1989-90 to 1995-96. In the said assessment years, the claim was disallowed on the ground that all the machines were installed in the existing factory premises and according to the Assessing Officer the same could be treated as routine replacements with better capacity. The Assessing Officer also mentioned that neither in the annual report of the company, there was any mention about the expansion of bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e same had to be excluded after the insertion of section 43B w.e.f. 1.4.84, in order to give full effect to the said provisions. The Tribunal in assessment year 85-86, while deciding the issue, in principle, against the assessee directed the AO to decide the issue afresh in accordance with the decision of the Special Bench of the Tribunal constituted in the case of Indian Communication Network Ltd. Subsequently, the Special Bench of the Tribunal in the case of ITO v. Food Specialties Ltd. 206 ITR (AT) 119, held that excise duty paid is not a part of direct cost while valuing the closing stock In the case of Indian Communications Network P. Ltd. v. I A C 206 ITR (AT) 96, the Special Bench held that it was necessary to remove the amount of excise duty from the value of the closing stock in order to give full effect to the provisions of section 438 of the Act. 16. In assessment year 86-87 in ITA No. ......., the Tribunal relying upon the Special Bench decision in the case of Food Specialties Ltd. and Indian Communications Network (P) Ltd. (supra) held that (i) change in the method of valuation of closing stock to exclude excise duty paid from the cost was bona fide &(ii) in any case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d therefore, we do not see any merit in this ground of appeal. Accordingly, the same is dismissed. 24. Ground No. 6 of the appeal, reads as under:-- "6. On the facts and in the circumstances of the case the Ld. CIT(A) has erred in allowing relief of ₹ 83,97,899/- by directing the Assessing officer to value the closing stock on the direct cost method as adopted by the assessee subject to inclusion of certain expenses." 25. After hearing Ld. Representatives of both the parties, we find that the issue is squarely covered in favour of the assessee and against the Revenue by the decision of the Tribunal for assessment years 1991-92 to 1995 & 1996-97 referred to above. While deciding a similar issue in earlier years, the Tribunal held as under:-- "3. The relevant facts relating to the above-mentioned grounds of appeals are that in assessment year 1982-83, the assessee had changed the method of valuation of closing stock from "total cost basis" to "direct cost basis". It was claimed on behalf of the assessee that it had valued the finished goods in hand at total cost till assessment year 1981-82 not realizing the fact that there are various expenses incurred after the finished ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... At these packing stations, which have their own machines required for packing, filling the product in various bottles, placing of cocks, fixing of lids and labels. The components of direct cost according to the assessee, are prime cost comprising of raw-materials, packing materials, direct labour of factory workers concerned with the production and the packing stations, direct expenses -of (he factory and of the packing stations. The direct overhead comprising of workers, electricity, coal, oil and lubricants, other oils and water are taken into closing stock on the basis of tonnage of stock on hand, divided by the total tonnage produced in the year, applying that ratio to the total tonnage direct, overheads as stated above. Similarly, the milk collection centres have direct overheads an wages, vehicles, depreciation on milk chilling plants, truck hire, ice expenses, ice expenses, pension cost of the staff in the factory, are also considered in the same proportion as the tonnage in hand to the total tonnage produced. The elements of excise duty on the stocks is taken into account and the total of the above is treated as the value of the finished goods as well as the work in progre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... staff and also exclusion of works, maintenance, watch and ward staff that are kept in readiness is not proper, because they directly 'are related to the production as such, as they are involved in the planning, procurement, actual production, manner of production and the like. They also are concerned with the quality of the milk as such for which veterinary executives are also made part. Therefore, the entire direct labour should be included of not only of the workers operating the machines but also the managers of factory, personnel and administration who control law and order as far as the staff goes, production managers concerned with the quality produced, milk procurement development manager, purchase manager, stores and accounts manager are inseparable in so far as the production of product is concerned. The same is the case of the staff, such as supervisors. Centre incharge. The concept of direct labour as is understood by the assessee, to mean only that cost of labour which is involved in actual production, in our view, is restricting it to a small section while the production involves the managerial, supervisory and other executives who control the entire production ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the facts and in the circumstance of the case the Ld. CIT(A) has erred in deleing the addition of ₹ 54,74,522/- on account of MODVAT element not reflected in the value of closing stock." 28. This issue is also covered in favour of the assessee and against the Revenue by the decision of the Tribunal passed in assessee's case for earlier years referred to above. While deciding a similar issue, the Tribunal held as under:-- "25. The relevant facts relating to this issue are that the Assessing officer had included the modvat credit in the valuation of closing stock. The CIT(A) has recorded a finding of fact that the assessee had decided the purchases not of modvat credit and accordingly has not included the modvat credit in the valuation of closing stock and has accordingly deleted the addition for the respective assessment year. 26. The parties before us agreed that the issue is covered in favour of the assessee by the decision of the Hon'ble Supreme Court in the case of Indo Nippon 2003 : 261 ITR 271. Respectfully following the said decision of the Hon'ble Supreme Court in the case of Indo Nippon, this common ground raised by the Revenue in respective assessme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich was actually paid by the assessee has to be allowed as deduction without looking into the year of incurring liability. Further the expression "irrespective of the previous year" dispenses with the concept of previous year, in the matter of the sums covered by section 43B. The expression "irrespective" means lacking relation, regardless of what is mentioned. Here the subject-mentioned is "previous year". It means the deduction has to be allowed regardless of the previous year. Any reference to the time of incurring or accruing of the liability is dispensed with by the statute while concentration is made on the point of actual payment of the sum to the Treasury of the Government. The Supreme Court had an occasion to consider the very same issue of payment of duty vis-`-vis deduction under section 43B in Berger Paints (India) Ltd. V CIT [2004] 255 ITR 99/ 2004 : 135 Taxman 586 (SC). In fact the decision of the Supreme Court in the case of Berger Paints (India) Ltd. (supra), settles the issue raised before the Special Bench which has upheld the view advanced by the assessee that deduction on payment basis should be allowed under section 43B irrespective of the previous year to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uction and reducing the taxable income. Concurrently in many cases, the assessees were challenging the very liability itself before the Courts and Tribunals, finally resulting the payments belated, deferred, and sometimes never made. In order to stop such exploitation practised by the assessees, section 43B has been brought in the statute declaring that "well you claim the deduction, but only on actual payment." The law has made it clear that such payments are to be allowed as deductions in the year of payment. Section 43B does not lay down any sequence or order of events in which the liability has to be incurred and the payment has to be made by the assessee. Section 43B does not laid down any rule that the liability to pay the duty must incur first and only thereafter the payment of such duty to be made so as to claim the deduction under section 43B. But the Revenue tries to make out a case that the statute has prescribed such an order of events. In fact there is no such prescription in the statute. We have seen that the expression "otherwise allowable" refers to a declaration of permission in law that which are available as deductions on payment under section 43B, are those expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enue. Resultantly, this ground of appeal is allowed. 36. Ground No. 10 of the appeal, reads as under:-- "10. On the facts and in law, the Ld. CIT(A) has erred in directing the Assessing officer to delete the interest charges u/s. 234B of the Act." 37. At the time of hearing of the appeal, Shri Rohit Jain, Ld. Counsel for the assessee was fair enough to concede that this issue is covered against the assessee by the decision of the Hon'ble Supreme Court in the case of CIT v M/s. Bhagat Construction in Civil Appeal No. 1169 of 2006 dated 6.8.2015 reported in 2015 : 235 Taxman 135, wherein the Hon'ble Supreme Court has observed as under:-- "We are of the view that the facts of the present case are squarely covered by the decision contained in Kalyankumar Ray's case in as much as it is undisputed that Form I.T.N.S. 150 contained a calculation of interest payable on the tax assessed. This being the case, it is clear that as per the said judgment, the Form must be treated as part of the assessment order in the wider sense in which the expression has to be understood in the context of Section 143, which is referred t in Explanation 1 to Section 234B. This being the case ..... X X X X Extracts X X X X X X X X Extracts X X X X
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