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TMI Blog2016 (6) TMI 1438X X X X Extracts X X X X X X X X Extracts X X X X ..... f advance share application money by treating it as a capital receipt - HELD THAT:- In the case of Solid Containers [ 2008 (8) TMI 156 - BOMBAY HIGH COURT] the relevant fact was that the money was received by the assessee in course of carrying on his business. Although it was treated as deposit and was of capital nature at the point of time it was received, however by efflux of time the money has become the assessee's own money, because of unclaimed by the customers. What remains after adjustment of the deposits has not been claimed by the customers; hence the claims of the customers have become barred by limitation. The assessee itself has treated the money as its own money and taken the amount to its profit and loss account. There was no explanation from the assessee why the surplus money was taken to its profit and loss account even if it was somebody else's money. It was in light of these facts and background the Hon ble Bombay High Court held that it was the income of the assessee. Here in present case no deposits have received from customers nor it is a loan taken for trading activity and neither has it been transferred to P L Account, albeit here the share appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld have been reduced and also the consequent interest to LML. On this premise he has made the disallowance of interest on the amount of ₹ 13.55 crores. Now, admittedly, it has been shown by the assessee before the CIT(A), which has not been disputed by the revenue before us that, VCCL Ltd has paid the amount of ₹ 13.55 crores to the assessee for which the necessary evidences were also filed before the CIT(A) and Xerox copy of the cheque is also appearing in the paper book. Thus, the entire premise on which the disallowance was made by the AO has no legs to stand. Hence, the ground raised by the revenue has been rendered baseless and without any basis or support from any material on record and accordingly, the same is dismissed. Disallowance of interest on dues - HELD THAT:- As brought out by the assessee before the CIT(A), ₹ 17.59 crores represent the surplus on sale of undertaking which was credited to the P L Account and was offered as long-term-capital gain/loss whereas, the part of the amount was credited to the various block-of-assets and thereby reduce the WDV of those assets. Thus, there was no occasion for disallowance of any interest on the amount o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he result, ground No.6 as raised by the revenue is dismissed. Disallowance u/s 40A(9) - AO has disallowed the said amounts on the ground that, similar disallowance was made in the earlier years - HELD THAT:- Before us, it has been admitted by both the parties that the Tribunal in assessee s own case for the AYs 1997-98, 1998-99 and 1999-00 in the appeal filed by the revenue has confirmed the similar disallowance made under section 40A(9). Accordingly, following the earlier year precedence which is applicable in this year also, this issue is decided against the assessee and in favour of the revenue. Thus, ground No.7 raised by the Department is allowed. Disallowance on account of pre-operative expenses claimed as revenue expenditure - HELD THAT:- We need not to go into merits of the issue, because already assessee had reduced the said amount of ₹ 376.18 lakhs from the pre-operative expenditure which has been added by the AO separately. This is evident from the fact that total pre-operative expenditure was ₹ 1038.20 lakhs, out of which interest and other income of ₹ 376.81 lakhs has already been reduced and only ₹ 661.39 lakhs have been claimed in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... extent assessee gets the benefit on the cost, it will be reflected in the price of the manufactured product and thereby giving a higher profit on the sale of the said product. There is no liability towards Piaggio and accordingly, it cannot be held that there is any extinguishment of any liability which needs to be taxed in this year. CIT(A) has held that the components received without any purchase price constitutes the income cannot be upheld, because the income or profit will result only if the said component is used in the manufacturing of the product and when the product is ultimately sold. The profit imbedded on account of such free component would only be determined at the time of sale of the product and then profit would be taxed and not when the said component (free of cost) has been used, that is, at the time of the purchase itself. Thus, in our opinion, such an addition is not called and same is directed to be deleted. Resultantly ground No. 1 as raised by the assessee is treated as allowed. Disallowance of provision for doubtful debts and provision for Doubtful Advance - HELD THAT:- We agree with the contention of the Ld. Counsel that if a provision for doubtful ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te off of such amount which was not recoverable is to be allowed as deductible expense. Thus, the claim is clearly allowable and we order accordingly. Thus, ground no.4 is partly allowed. Disallowance of payment made towards Royalty and Technical Know-how - HELD THAT:- Both the conditions have to be satisfied, that is, the services that the source of income should be in India and services have been rendered in India. However, if the services have been rendered outside India then same was held to be outside the purview of taxable in India. Once this is the admitted position, then it is very difficult to hold that, assessee should have deducted TDS on such a payment when there was no law that the payment is taxable in India. Here, the maxim of lex non cogit ad impossplia, that is, the law of the possibly compelling a person to do something which is impossible, that is, when there is no provision for taxing an amount in India then how it can be expected that a tax should be deducted on such a payment. This view has been upheld by in catena of decisions wherein, it has been held that, assessee cannot held to be liable for deducting TDS in view of the retrospective amendment w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent year 2000-01. We will first take-up revenue s appeal being ITA 3668/Mum/2004, vide which following grounds have been raised:- 1(a) On the facts and circumstances of the case the learned CIT(A) erred in offering a treatment of capital receipt to the compensation received by the assessee on termination of Joint Venture Agreement with M/s Piaggio. 1(b) On the facts and circumstances of the case the learned CIT(A) erred in not holding the compensation received on termination of joint venture agreement with M/s Piaggio as revenue receipts, as the agreement was entered into in the ordinary course of business and the line of business of the assessee continued even after termination of the joint venture. 1(c) On the facts and circumstances of the case the learned CIT(A) erred in not brining to tax the compensation received amounting to ₹ 23,88,65,000/- received on termination of joint venture agreement which is a benefit directly springing from regular business activities of the assessee. 2(a) On the facts and circumstances of the case the learned CIT(A) erred in holding the forfeiture of advance share application money received from M/s Piaggio CSPA, amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o assessment year under consideration, which is of no significance while deciding the issue for the year under consideration. 5(a) On the facts and circumstances of the case and law, the learned CIT(A) erred in directing the Assessing Officer to delete ₹ 4,05,75,000/- the disallowance of interest on account of dues from M/s Esslon Synthetics Ltd. 5(b) On the facts and circumstances of the case the learned CIT(A) erred in not appreciating the fact that M/s Esslon Synthetics Ltd., is an associate concern of the assessee form whom it has not recovered outstanding dues to the tune of ₹ 27.05 crores though the assessee company itself faced a financial crunch and the company bore liability of interest on borrowed funds. 5(c) On the facts and circumstances of the case the learned CIT(A) erred in not appreciating the fact that the same sister concern is beneficiary of assignment of loan debts of M/s Perfect Polycon Co. Ltd., for a consideration of Re.1 only indicating contrived accommodation of group concerns at the cost of assessee company s interest bearing borrowed funds. 6. On the facts and circumstances of the case and in law, the learned CIT(A) err ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, etc. Later on, it diversified its business activities in the year 1984, when it started the manufacturing of two wheelers mainly Scooters in technical collaboration and under License Agreement with Piaggo Company of Italy who were the inventors of the scooters and were also the largest two wheeler producers in Europe having more than 50% of the European market not only in two wheelers but also in three wheelers. Piaggio had a global presence through various joint venture collaborations, franchises and license agreements for manufacturing and distribution of the products in and around 130 countries through various subsidiaries, licensees and distributors. The assessee company had entered into a joint venture agreement with the Piaggio group in the year 1990 which has also led to entering of various other agreements and arrangements with Piaggio including licensing agreements, exclusivity agreements, Engineering Agreements and MoUs in which there were two or more parties out of Indian promoters and its affiliates LML, VCCL. Besides there were also business dealings and transactions between Piaggio and LML and VCCL including transactions relating to purchase, sale, supply of comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded this agreement. (8) All contracts shall stand terminated in all respects, without any party thereto having any surviving rights, obligations or liabilities towards any other party thereto. In particular and without limitation but subject to the terms of this settlement agreement, all exclusively which may have been granted to the Indian promoters, LML and/or VCCL under the contract shall cease and non competition obligations assumed by Piaggio shall also cease. Piaggio may freely compete in India except in regard to lateral Engine and Piaggio Motor cycle up to 31.3.2007. (9) The payment by P to LMLL of 5.5 million dollars has been made in consideration of total discharge by Piaggio of any obligation as a co-promoter of VCCL/LML for any debtors of VCCL towards any third party, as well as in consideration of other rights and waivers and release in favour of Piaggio in full and final settlement of the dispute and litigations referred to in the settlement agreement. (10) Indian promoters, LML and VCCL shall be deemed to indemnify protect and hold harmless, and release and waive in favour of Piaggio and CSPA its affiliate etc. from or against any cause of action, c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he above said agreement: (a) The Company has received a sum of US$ 55 lakhs (equivalent to ₹ 2388.65 lakhs) from Piaggio CSpA towards termination of all agreements and of final settlement therein recorded including cessation of non competition obligations assumed by Piaggio and rights of the Company. (b) The amount of ₹ 880 lakhs received from Piaggio Vespa BV in an earlier period as an advance against Share Application Money, no longer refundable, has been forfeited. The Company has obtained legal advice about the accounting and tax treatment of the above amounts. Accordingly, the Company has treated the said amounts as capital receipts and directly credited to capital reserve in respect of which no provision for Income tax is considered necessary . Thus, the amount received from Piaggio was treated as capital receipt not liable for taxation. 4. Before the AO, the assessee in response to the show cause notice as to why it shall not be treated as revenue receipts, highlighted the main features of Settlement Agreement and also the approval of the said agreement by the Board of Directors (which has been incorporated by AO in pages 5 and 6 of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gible assets or closure of business. Thus, the receipt is neither for any sale of capital asset nor for sale of any business activity; ii) The amount received by the assessee is nothing but compensation for various benefits that it would have derived, had the agreement with Piaggio would have remained in force. What the assessee had lost is substantial technological advantage as well as market advantages vis- -vis its competitors on account of premature termination of business collaboration agreement. It was under these circumstances and as a matter of business prudence the assessee was suitably compensated for such a colossal loss. However, it does not mean it had any ill-effect towards the present as well as future profits; iii) From the period 1990 to 15.11.1999, that is, a period during which collaboration agreement existed, the assessee had already stabilized its production as well as market in the two wheeler industry. Severance of the agreement has not affected the normal day-to-day business activity and production activity of the assessee company. By virtue of the termination, the assessee s manufacturing activity has not stopped nor has been asked not to use the tech ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to anybody. (3) Substantial sum expected to be received from Piaggio as capital contribution towards the proposed diversification-cumexpansion programme of ₹ 204 crores has fallen through because of termination of relationship affecting the future business structure which would have earned substantial business gains to LML . 6. Ld. CIT(A) after considering the entire material placed on record and also the reasoning of the AO and submissions made by the assessee, held that the amount received by the assessee is to be treated as capital receipts not liable for taxation either as a business income or as a capital gain. First of all, he observed that, the issue regarding the taxation of aforesaid sum needs to be examined from following angle:- (i) Whether receipt could be considered to be a receipt of a casual and non-recurring nature and hence taxable in terms of section 10(3) of the I.T. Act.? (ii) Whether it could be taxed as compensation in terms of section 28(ii) of the Act? (iii) Whether it could be considered income apart from the two provisions mentioned at (i) and (ii) above? and (iv) Whether it could be considered as capital gain taxable in terms ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Srinivasa Shetty, reported in [1981] 128 ITR 294, no capital gain is liable to be taxed. Thus, on these grounds, he deleted the addition made by the AO. 7. Before us, the Ld. Counsel for the assessee after explaining the entire facts which has been succinctly discussed above by us, he submitted that here in this case, by virtue of termination of the JV agreement the entire business of the assessee has been impaired and the adverse affect of such termination can be seen in the profits of the LML for year 31st March, 2000 itself and in later years the assessee ran into heavy losses. The production of the assessee fell down almost by 45% in this year as compared to the previous period and also the installed capacity used was only 61% which earlier was 110%. This effect was there in the immediately first year of the dispute and later on the position had become worst in later years in as much as LML became sick company in the assessment year 2006-07 and is before the BIFR for its revival till date. It is solely because of this termination of Joint Venture, the entire brand value and business of LML has been finished. Thus, the whole profit making apparatus and business has been par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bile Products of India [1981] 7 Taxman 327(Bom) ix South India Flour Mills (P) Ltd [1970] 75 ITR 147 (Mad) x Seshasayee Bros (P) Ltd [1999] 239 ITR 471 (Mad) xi Ghaziabad Eng. Co. (P.) Ltd. [1984] 7 ITD 289 (Del) xii Guffic Chem (P.) Ltd. v CIT [2011] 322 ITR 602 (SC) xiii Bisleri Sales Ltd. [2013] 115 TTJ 285 (Mumbai ITAT) 8. On the other hand, Ld. DR strongly relied upon the order of the AO and submitted that the assessee was in the business prior to Piaggio agreement and also continued to do the same business post-termination of the agreement. There is no loss on account of source of revenue, which continued albeit on a lesser scale. The compensation paid was on breach of an agreement during the normal course of the business, hence is on revenue account. Even otherwise also, any sum received under an agreement either for not carrying out any activity or for not sharing of any technical k ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich has been received by the assessee is mainly on account of compensation attributable to negative/restrictive covenants imposed upon the assessee, adversely affecting the business of assessee and profitability. The assessee was enjoying the technical know-how and the brand name of Piaggio in manufacturing and selling its various models of scooters which was purely from the technological collaboration and various kind of assistance from Piaggio. The joint venture agreement has facilitated the assessee to carry out its business in large scale not only in India but also across the world. As admitted by the AO also, the assessee was reckoned as number two in the country as far as production and sale of two wheelers are concerned. This collaboration has led to large sales and resultantly huge profitability to the assessee. Now by termination of such an agreement, various restrictive covenants were attached which can be highlighted as under:- (i) Manufacture and sale of scooters restricted to India only and also no sub-license in respect of the same can be granted; (ii) Export restricted till December 31, 2007, which impaired assessee s sale and profit; (iii) LML shall not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decision of Karamchand Thapar, reported in [1971] 80 ITR 167(SC) held that, if the enduring benefit was reflected on the capital of the assessee and giving up the contractual right on the basis of principal agreement which had resulted into loss and source of assessee s income, the receipt in hands of the assessee is a capital receipt. 11. Now coming to the argument of Ld. DR that provision of section 28(v)(a) which had been brought in the statute w.e.f. 2003-04 should be held to be applicable in the present assessment year also, we find that such an argument cannot be accepted, because, the provision of section 28(v)(a) was brought specifically into the Act to treat the payment received on non-compete fee under a negative covenant to be taxable as business income under section 28 and such a provision was brought by the Finance Act, 2002 w.e.f. 01.04.2003, therefore it cannot be applied retrospectively for the assessment year 2000-01. This precise issue had come up for consideration before the Hon ble Supreme Court in the case of Guffichem vs. CIT, reported in [2011] 332 ITR 602, wherein, the Hon ble Supreme Court has answered the exact question in the following manner:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the High Court has erred in interfering with the concurrent findings of fact recorded by the CIT(A) and the Tribunal. One more aspect needs to be highlighted. Payment received as non-competition fee under a negative covenant was always treated as a capital receipt till the asst. yr. 2003- 04. It is only vide Finance Act, 2002 w.e.f. 1st April, 2003 that the said capital receipt is now made taxable [see: s. 28(va)]. The Finance Act, 2002 itself indicates that during the relevant assessment year compensation received by the assessee under non-competition agreement was a capital receipt, not taxable under the 1961 Act. It became taxable only w.e.f. 1st April, 2003. It is well-settled that a liability cannot be created retrospectively. In the present case, compensation received under non-competition agreement became taxable as a capital receipt and not as a revenue receipt by specific legislative mandate vide s. 28(va) and that too w.e.f. 1st April, 2003. Hence, the said s. 28 (va) is amendatory and not clarificatory. Lastly, in CIT vs. Rai Bahadur Jairam Valji Ors. (1959) 35 ITR 148 (SC) it was held by this Court that if a contract is entered into in the ordinary course of busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ₹ 23.89 crores, also meted out its liability of ₹ 8.8 crores which was received in the earlier years in share capital. In other words, after termination of the agreement, the assessee company has absolved itself from repayment of its liability to M/s Piaggio and credited the amount to capital reserve fund. In response to the show cause notice, the assessee s submission has reproduced by the AO at page 15 was as under: Forfeiture of Share Application Money ₹ 880 lakhs: In support of our claim for sum of ₹ 880 lakhs received by us as Share Application Money we enclose the copy of communication received by our managing Director, Mr. D K Singhanla on 1st December, 1995 with regard to a sum of ₹ 88 millions sent to the company (Annexure : C) From the said communication it is established that, the relevant amount was sent towards subscription money for equity shares to be issued on a right basis. The company could not make either right issue or preferential issue in respect of its equity shares to finance the diversification and expansion program undertaken by it. In terms of final settlement and clean break agreement executed on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as received as a contribution towards Share Capital, there is nothing brought on record by Assessing Officer which says otherwise. 3.2.2 Now coming to the issue of forfeiting and transferring the above referred amount to a Capital Reserve, it is the submission of the Appellant that it has relevance as far as nature of receipt is concerned. 3.2.3 Alternatively it is contended by the learned AR that, even if it is treated as a loan as held by the Assessing Officer the same cannot be taxed in view of jurisdictional High Court Judgment in case of Mahindra Mahindra vs CIT (261 ITR 501) wherein it has been held that, the loan in respect of which waiver has been made cannot be assessed either u/s 28(iv) or 41(1) of the Income-tax Act, 1961. 3.2.4 Considering the evidence laid down by the learned AR it is not in doubt that, the relevant amount was received towards capital contribution to be raised by the Appellant to finance its diversification cum expansion programme in 1995 and since no shares have been allotted against the said amount the relevant forfeiture by the Appellant would not be taxable as Revenue Receipt . 15. Before us, the Ld. DR submitted that, firs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T, reported in [1973] 87 ITR 542, he submitted that true nature and quality of receipts is to be looked into and not under which head it has entered in the book of accounts. 17. We have heard the rival submissions and perused the relevant finding given in the impugned orders. The assessee had undertaken expansion-cum-diversification of its scooter business and for that purpose financial institution agreed to grant loan on a condition that promoters LML and Piaggio will contribute or infuse 20% of funds. In pursuance thereof, on 1st December, 1995, Piaggio confirmed that it shall remit the sum of ₹ 8.8 crores by 7th January, 1996 as advanced share application money. On 8th January, 1996, LML received ₹ 8.8 crores form Piaggio as share application money in its bank account. Approval was sought from Reserve Bank of India for inward remittance of share application money. Bank issued the certificate certifying the foreign inward remittance certifying that receipt of ₹ 8.8 crores is towards share capital. Not only that the RBI also gave approval on the account of share application money only. It is also an admitted fact that, assessee could not be allot the shares in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uidelines and under the Company s Act, the same is not relevant and also it has not been shown to us which provision has been violated. In our opinion, what is required to be looked into is, whether under the provisions of the Income-tax Act, if a receipt which was on account of a capital can be treated as on revenue account or not; and lastly, the addition has been made finally by the AO after invoking provision of section 41(1). The first and foremost condition which needs to be examined before invoking the provisions of section 41(1) is that, whether an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee or not; which is clearly absent in the present case. Thus, the share application money received by the assessee, in any manner does not fall within the ambit and scope of section 41(1). The decision of Hon ble Supreme Court in the case of T V Sundram Iyengar Sons Ltd (supra) as relied upon by the ld. DR is not applicable because in that case it was a case of a trade deposit received in the course of carrying on the business and such unclaimed deposits were written back by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and its management for alleged oppression and mismanagement. The Indian promoters have incurred significant expenses on litigation which was far more than the amount spent by the assessee in such disputes. The AO held that the dispute was between the two promoters of the company and not with the assessee company. In sum and substance, the AO s reasoning for rejecting the claim was that: (i) Firstly, the dispute was between the two promoters of the assessee company with Piaggio and suit was filed for oppression and mismanagement by the promoters against each other and not against the assessee; (ii) Secondly, the assessee company was only party to the extent that it was defending before the Company Law Board against any probable liquidation order that might have been passed because of dispute between the promoters; (iii) Thirdly, such litigation amongst the promoters is no way related to the business activity of the company and it does not contribute to the normal revenue generation of the company and hence it has not been incurred during the course of carrying out business; (iv) Fourthly, the company is a separate artificial legal entity and, therefore, litigation betw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee. In support, various decisions have been relied upon by Ld. Counsel which for the sake of convenience is reproduced herein below: Sr. No. Case Law Citation 1 Bilasraijharmal (HUF) v CIT 9 taxman179 (Bom) 2 CIT v Indo Burmah Petroleum Co Ltd. 142 ITR 141 (Ca 3 Rampur Distillery Chemicals Co. Ltd 140 ITR 725 (All.) 4 CIT v Muir Mills Co Ltd 148 ITR 418 (All.) 5 CIT v O P N Arunachalla Nadar 141 ITR 620 (Mad) 6 CIT v Card Board Products 96 taxman282 (Pat) 24. We have heard the rival submissions and perused the relevant finding given in the impugned orders. The main reason for not allowing the assessee s claim for legal expenses debited to the P L account by the AO is that, firstly, these legal expenses pertain to dispute between Indian Promoters and foreign promoters and the suits/arbitra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his angle also, if the assessee would not have been dragged into such litigation and proceedings before the Company Law Board, then there would not have been any requirement for the assessee to incur such expenditure. Assessee got involved only because it was made one of the respondent and defendant in the suit and in order to save its business from possible liquidation the assessee had to incur the legal expenses. Thus, in our opinion, such expenditure on legal expenses is wholly and exclusively incurred for the purpose of the business and accordingly, same needs to be allowed. Accordingly, ground no.3 of the revenue s appeal stands dismissed. 25. In ground No.4, revenue has challenged the deletion of disallowance of interest of ₹ 2.03 crores attributable to the interest free advance to the associated concern, VCCL Ltd. 26. The facts in brief are that there were outstanding debt and advances due form VCCL Ltd. which stood at ₹ 1514.65 lakhs as on 31st March, 2000, as against the due amount of ₹ 2,785.71 lakhs as on 31st March, 1999. It was declared in the notes to the account in the financial statement that net worth of VCCL Ltd. is negative and company s m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... record and accordingly, the same is dismissed. 28. In ground No.5, the revenue has challenged the deletion of ₹ 4,05,75,000/- on account of disallowance of interest on dues from M/s Esslon Synthetics Ltd. 29. The brief facts are that, in the notes of the accounts in the Balance-sheet, vide note No.11, the assessee has reported that, sum of ₹ 2709 lakhs out of total sum of ₹ 7103 lakhs was recoverable from M/s Esslon Synthetics Ltd (ESL) against the sale consideration for transfer of undertakings and other debts for which no payment has been received by the assessee. This amount represents the unpaid sale consideration in respect of its Fibre Business transferred to M/s ESL in the year 1987. In the year 1990, the relevant approval of financial institutions/banks were received and the price was reworked and in terms of the agreement the purchase consideration of ₹ 71.03 crores was paid by ESL, by taking over liability of the institutions/banks to the extent of ₹ 29.99 crores and down payment of ₹ 14 crores. The amount of ₹ 9.45 crores was payable on or before 31st March 1992 and a sum of ₹ 17.59 crores was payable in 28 equal i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was shown as recoverable. The assessee has chosen to assign the entire amount of loan for a consideration of Re 1/- to another sister concern, which is not justified under normal business prudence but it is a case of generous charity towards its sister concern. Accordingly, he held that 15% disallowance should be made on the amount recoverable, that is on ₹ 27.05 crores which works out to ₹ 4,05,75,000/-. 30. Before the CIT(A), the assessee submitted that, out of the said amount of ₹ 27.05 crores, ₹ 17.59 crores represents the surplus of undertaking which was credited to the profit and loss account and for tax purpose the said amount was partly offered as long-term-capital-gain whereas part of the amount was credited to the various block of assets and thereby reduce the written down value of those assets. Thus, no addition was required to be made on sum of ₹ 17.59 crores so much so that there could be any notional disallowance of interest in respect of sum receivable from the company. It was further pointed out that, even the relevant sum has been written off in the books of account and as such there is no question of disallowing any notional inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before the CIT(A), ₹ 17.59 crores represent the surplus on sale of undertaking which was credited to the P L Account and was offered as long-term-capital gain/loss whereas, the part of the amount was credited to the various block-of-assets and thereby reduce the WDV of those assets. Thus, there was no occasion for disallowance of any interest on the amount of ₹ 17.51 crores. Further, it is undisputed that the sum of ₹ 9.45 crores is a part of a sale consideration receivable from ESL from the transfer of Fiber Business, then how it can be reckoned as money advanced by the assessee to its AE or sister concern out of interest bearing funds. A disallowance of interest in such cases can only be when the department/revenue makes out a case that interest bearing funds have been diverted to the sister concerns without any business purpose and without charging any interest. Ostensibly it is not the case here that any interest bearing funds have been diverted to the sister concern albeit certain sum was to be received by the assessee as part of sale consideration and in such a case how the interest component can be imputed for making any disallowance is not understandable. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... old DTAA provision of 1963 between India and Austria which existed up till September, 2001 would be applicable. The old Article 7 read as under:- Amounts paid by an enterprise of one of the territories for technical services furnished by an enterprise of the other territory shall not be subject to tax by the firstmentioned territory except in so far as such amounts are attributable to activities actually performed in the firstmentioned territory. In computing the income so subject to tax, there shall be allowed as deductions the expenses incurred in the first-mentioned territory in connection with the activities performed in that territory. From the above, it is clear that if the amount is paid by an Indian enterprise for technical services furnished by enterprise in Austria then same shall not be subject to tax in India except in so far as such amount is attributable to the activities actually performed in India. This article is different from the new Article 7 applicable post September 2001 and, therefore, the benefit of old article has to be given to the assessee in the AY 2000-01. Here in this case admittedly, the activity of rendering of technical services has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red in relation to the expansion project under implementation have been capitalized and carried forward as pre-operative expenditure pending allocation under the fixed assets. The amount of ₹ 1038.20 lakhs was capitalized in the books, however, in the return of income the net pre-operative expenditure of ₹ 661.39 lakhs was claimed as revenue expenditure. The AO held that, interest income of ₹ 376.81 lakhs is to be taxed as income from other sources based on the decision of Hon ble Supreme Court in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. v. CIT [1997] 227 ITR 172 (SC) and also the jurisdictional High Court in the case of Ravi Ratna Exports Co. Ltd., 246 ITR 443 and host of other decisions. The Ld. CIT(A) reversed the action of the AO, following the decision of Tata Chemicals Ltd vs DCIT, reported in 72 ITD 1. 42. Before us, the contention of the Ld. Counsel has been that, these pre-operative expenditure was part of ongoing expansion and in any case, there is no requirement to go on to the merits because the amount of ₹ 376.81 lakhs, which has been taxed by the AO amounts to double taxation, because the said amount was already reduced by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... certificate of ISO 9002 , and World Class Manufacture Facility ; only conveys that the LML products were manufactured by adhering the international quality and best manufacturing practices. It does not give any vested right to the assessee or assign any special or exclusive right in the nature of trademark as held by the AO, because, it only gives recognition of the product that it was made of good quality and standard. There is no enduring benefit to the assessee giving any impetus to its profit making apparatus. These certificates give value to the products and help the assessee to fairly compete in the market and boost its sale. The benefit if at all is on revenue account. The Ld. Counsel before us has relied upon the decision of Hon ble P H High Court in the case of CIT vs Upper India Steel Mfg. and Engineering Co Ltd, reported in [2014] 50 taxman.com 345, wherein the Hon ble High Court has allowed the expenditure incurred for ISO 9002 certificate as revenue expenditure. Thus, we do not find any merits in the contention of the AO that payment for getting such certificates for quality products or World Class Manufacturing Facility is in the nature of trademark and hence is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ospective amendment made to the Income-tax Act by virtue of which the bad debt was to be allowed only being written off and not upon provision. During the year the Appellant assigned the said debt for a consideration of Re.1/- to its subsidiary M/s Perfect Polycons Ltd and claimed a Long Term Capital Loss by indexing the said sum of ₹ 17.59 crores . 48. The assessee s case before the CIT(A) to rebut the finding of the AO was that, the part of the amount which is recoverable by virtue of guarantee being written off has no relevance to the issue of allowability of ₹ 17.59 crores. The fact that the said amount has been assigned for a price of Re.1/- to a subsidiary company also has no relevance. The impugned issue is to be examined from the angle, whether any outsider would have got more than the sum of Re.1/- on facts of the case when nothing was recoverable. The assessee had also relied upon the valuation report filed at the assessment stage in respect of such debt and reiterated that the same is a capital asset. Alternatively, it was contended that AO himself has admitted that relevant amount is nothing but a sundry debt which has been written off during the year, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the provision for bad and doubtful debt was adjusted against the parties account. LML claimed the loss on assignment as longterm- capital-loss after indexation of ₹ 17.59 crores which worked out to ₹ 37 crores (approx.). The AO had disallowed the claim on the ground that it was sundry debt, which was outstanding since 1987 and the same was never treated as capital asset by showing either under the head investment or fixed assets . The assignment of such debt had Re.1/- is not genuine. The Ld. CIT(A) held that, it is not the case of long-term-capital-loss albeit the assessee is entitled for claim of a bad debt as assessee has written off the debts in the aforesaid manner. 51. We agree with the finding of the CIT(A), firstly, that it cannot be a capital asset, because it was money receivable by the assessee from ESL towards sale consideration. The assessee had treated as a bad and doubtful debt in its books of account in the earlier year which has been written off in this year by way of adjustment against the parties account, because it was assigned to M/s Perfect Polycon which has been taken on a consideration of Re.1/-. Secondly, the AO himself had admitted th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s or ₹ 26.27 lacs; Ground No.9: Disallowance of amount incurred of ₹ 19,90,486/- in respect of expenditure incurred towards purchase of sundry equipment; Ground no.10: Disallowance of expenditure incurred towards purchase of Equipment and Tools for Training Centre of ₹ 6,29,617/-; Ground No.11: Addition of ₹ 7,46,139/- being 10% of ₹ 74,61,398/- on account of gifts to company s Guests and Employees on various occasions; and Ground No.12: Long term capital loss on assignment of Debt of ₹ 37,59,62,087/-. 54. At the outset, the Ld. Counsel submitted that, ground no.2, ground No.6, ground No.7, ground No.9 and ground No.10 are not pressed. Accordingly, these grounds are dismissed as not pressed. 55. Brief facts qua the ground No.1 are that, the assessee used to import certain components free of cost from M/s Piaggio BV, the collaborator for performing job work and thereafter such components were exported. As per the arrangement the assessee had to pay the import duty on behalf of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een imported, on which the above referred duty was paid. The same were filed vide letter dtd. 4.3.2003. The assessable value as declared for Custom purpose works out as under: Import Dept. Sr. No. Date Amount (Assessable Value of goods imported) 009398 17/02/99 630,668 014332 25/02/99 203,361 007840 04/12/99 507,882 007239 13/12/96 943,956 000110 03/02/97 4,825,828 009403 15/03/97 209,193 007309 13/06/97 151,096 019109 31/03/97 619,249 019110 31/03/97 65,105 002952 27/05/97 3 3,936,842 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 180/- being assessable value of components imported, he submitted that components were imported free of cost, therefore, there was no liability towards Piaggio. Accordingly, there is no question of extinguishment of any liability. Even otherwise also, the said sum was never claimed as deduction either in the earlier year or in the year under consideration; therefore, section 41(1) as invoked by the AO cannot be upheld. 58. On the other hand, Ld. DR strongly relied upon the order of the CIT(A) and submitted that, the assessee has derived the benefit by virtue of relinquishment by the Piaggio in wake of SCB and, therefore, same has rightly been taxed. 59. We have considered the rival submissions and also perused the relevant finding given in the impugned order. From the facts as discussed above, it is clear that the assessee used to import certain components free-of-cost from Piaggio BV for performing the job work and re-export the same after completion of the job. As per the arrangement the LML used to pay the import duty on behalf of Piaggio and when such components were re-exported, the refund of custom duty was credited to the Piaggio s account. The assessee had paid sum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bilities. The amount has not been actually written off in the books of accounts, therefore, assessee could not have claimed these expenses and in the computation of income also such an amount has not been added back by the assessee. Accordingly, disallowed and added back the same to the income of the assessee. 62. The Ld. CIT(A) too has confirmed the action of the AO on the ground that in view of amendment made in the provision of the Act, such a provision for doubtful doubts. 63. Ld. Counsel s submission before us has been that, LML has debited the individual account of the debtors with the provision for doubtful debts and provisions for doubtful loans and advances. In support, he referred to the relevant pages in paper-book-II at pages 449 to 451. He further submitted that, if a provision for doubtful debt is debited to the profit and loss account with simultaneously reduction from the debtors account is made then; it would be allowable as deduction. In support, he strongly relied upon the decision of Hon ble Bombay High Court in the case of CIT vs Tainwalla Chemicals and Plastics, reported in [2013] 215 taxman. 153 and catena of other decisions including that of the Hon bl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed all the disallowance on the ground that nothing has been brought on record with regard to substantiate the write off of debit balances. 67. Before us, the Ld. Counsel submitted that, details of party-wise write off were submitted during the course of assessment proceedings along with the reasons to why these were written back and under which circumstances. Otherwise also, he submitted that the same can be allowed as business loss. 68. On the other hand, Ld. DR strongly relied upon the order of the CIT(A) and AO. 69. After considering the submissions of the parties and the finding given in the impugned orders, we find that, so far as sundry balance written off for the amount of ₹ 21,37,200/- receivable from M/s Modern Trading Company, it is not clear for what purpose license of ₹ 4.11 crores was procured, whether for trading purpose or for acquisition of capital asset. The assessee could not establish or bring any proof, under what circumstances, the assessee could not use the license and for what purpose it was purchased and why the desired import on these licenses could not be affected. For any claim of business expenditure or claim of write off or a busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m Motors Co. Ltd. S. Korea FTS 53,41,830 4 M/s Sun Electric Co, S. Korea FTS 9,13,995 5 M/s Youngshin Industrial Corporation, S. Korea FTS 9,89,470 6 Ricardo, UK FTS 15,09,196 To the extent of payment royalty made to M/s Daelim Motors Co. Ltd, Korea and M/s China Terminal Electrical Co Ltd., Taiwan, the same has not been pressed by the Ld. Counsel, therefore, disallowan ce of payment made to these two parties is confirmed. 73. As regards the payment on account of fee for technical services paid to various parties, the AO has disallowed the same on the ground that, assessee has failed to deduct TDS on such amount and same cannot be allowed as deduction. This has been confirmed by the CIT(A) also. 74. Before us the Ld. Counsel submitted that, as per the terms of certain agreement which has been placed in the paper book, all these services have been rendered by nonresidents outside India and, therefore, the payment made to the n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n India. Once this is the admitted position, then it is very difficult to hold that, assessee should have deducted TDS on such a payment when there was no law that the payment is taxable in India. Here, the maxim of lex non cogit ad impossplia, that is, the law of the possibly compelling a person to do something which is impossible, that is, when there is no provision for taxing an amount in India then how it can be expected that a tax should be deducted on such a payment. This view has been upheld by in catena of decisions wherein, it has been held that, assessee cannot held to be liable for deducting TDS in view of the retrospective amendment which has come at a much later date. Thus, without going into the aspect of FTS clause in DTAAs, we hold that, at the relevant time while making the payment, assessee was not liable to deduct TDS under the domestic law. Accordingly, disallowance under section 40(a)(i) could not have been made by the AO. 77. In ground No.8, assessee has challenged the disallowance of prior period expenses of ₹ 26.27 lacs. 78. The assessee s claim before the AO was that, this income has been crystallized in the impugned year; however, the AO dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s allowed for statistical purposes. 81. In ground No.11, the assessee has challenged the addition on account of gift to various employees on various occasions. The AO has disallowed 10% of the expenses amounting to ₹ 7.46 lakhs which has been confirmed by the AO on ad-hoc basis. The assessee s submission has been that the same is based on surmises, conjectures and no proper reasoning has been given for adhoc disallowance. 82. After considering the rival submission it has been seen that, the expenses of ₹ 74,61,398/- have been debited to P L Account towards giving gifts to company s guests and company s employees. The AO has made the adhoc disallowance @10% on the ground that these expenses cannot be held to be incurred wholly for the business purpose. Such an addition has been confirmed by the first appellate authority also on estimate basis @10% of ₹ 74,61,398/-. Though there is some degree of adhocism in such a disallowance, however, the onus was on the assessee to show that entire expenditure debited is wholly and exclusively for the purpose of business and there is no element of nonbusiness- purpose or for any personal nature expenditure. In case of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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