9911796707
TMI Blog2024 (7) TMI 832X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 is partly allowed. Allocation of provisions for contingencies and interest on foreign currency borrowings - As we direct AO to apportion part of the cost towards the income which has been held to be not eligible for claiming deduction u/s. 36(1)(viii), since interest income from housing finance for non-residential purpose has been held to be not eligible for deduction u/s. 36(1)(viii). Also, in respect of other expenses we set aside the allocation done by the ld. AO on ad-hoc basis in the ratio of 80:20 towards income from housing finance and income other than from housing finance and adopt the recomputed ratio in terms of our directon. Considering our observations and findings, certain income has been recharacterized as income from eligible business and those from ineligible business activities. Accordingly, ld. Assessing Officer is directed to reallocate such cost in the ratio as finally determined consequent to the findings given herein on re-characterisation of income into eligible and ineligible business. Ground No.2.4 is partly allowed. Disallowance of expenses towards earning of exempt income u/s. 10(33) - allocation of other expenses, as expenditure incurred in relation t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... defined in the said agreement. Assessee has received the amount for undertaking the restraining obligation and therefore it cannot be treated as business income in the year under consideration which is much prior to the amendment brought in by the Finance Act, 2002. Thus, we hold that noncompete fee received by the assessee under the negative covenant is in the nature of capital receipt not exigible to tax since it relates to Assessment Year 1999-2000. Accordingly, ground no.5 taken by the assessee is allowed. Disallowance made towards discount amortised in the accounts towards stock options granted to its employees by holding the same as capital in nature - HELD THAT:- Considering the facts on record and the judicial precedents discussed above, we find that the issue is covered by the aforesaid judicial precedents in the case of Biocon ltd. [ 2020 (11) TMI 779 - KARNATAKA HIGH COURT] and PVR ltd. [ 2022 (8) TMI 1234 - DELHI HIGH COURT] in favour of the assessee. Respectfully following the same, the ground taken by the assessee in this respect is allowed. - Shri Girish Agrawal, Accountant Member And Shri Sunil Kumar Singh, Judicial Member For the Assessee : Shri Nitesh Joshi, Ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of providing housing loan mobilizes bonds from public and also secures loans from various international agencies. The assessee also borrows from National Housing Bank and Life Insurance Corporation of India. Assessee filed its return of income on 31.12.1999, reporting total income at Rs. 135,53,03,060/-. Assessment was completed at assessed total income of Rs. 239,91,38,121/- after making various additions and disallowances against which after getting partial relief at the first appellate stage, assessee is in appeal before the Tribunal. 4. Grounds of appeal taken by the assessee for Assessment 1999- 2000 are as under: 1. Disallowance of Provision for exchange loss on foreign currency loans - Rs. 54,85,769/- 1.1 The learned Commissioner of Income-tax (Appeals) 1, Mumbai ('Id. CIT(A)') erred in confirming the disallowance of provision for exchange loss on foreign currency loans on the ground that it was contingent in nature. 1.2 The Id. CIT(A) erred in holding that the same was allowable only on actual repayment of the loans. 1.3 The Id. CIT(A) erred in not appreciating that the provision was on account of fluctuation in the exchange rate on foreign currency loans as per the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income from dividends exempt under Section 10(33) of the Act 3.1 The Id. CIT (A) erred in confirming allocation of other expenses, as expenditure incurred in relation to earning the dividend income. 4. Computation of income in respect of tax-free bonds and Section 10(23G) bends 4.1 The Id. CIT (A) erred in not granting full exemption in respect of interest of Rs. 11,60,23,691/ on tax-free bonds and interest of Rs. 32,83,64,856/- on Section 10(23G) bonds, having failed to appreciate that the investments in aforesaid bonds was made out of capital and reserves of the appellant company and therefore no interest on borrowings could be attributed to the tax free interest income earned. 4.2 The Id. CIT(A) erred in not appreciating that the AO has himself observed in the assessment order that the investments in tax free bonds and Section 10(236) bonds have been made out of capital and reserves of the appellant company. 4.3 The Id. CIT (A) failed to appreciate that the AO had worked out the interest cost at 70% of the total interest on such bonds, without any basis, whatsoever and in a totally arbitrary manner. 5. Addition on account of receipt of non-compete fees Rs. 5 crores. 5.1 The Id. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess ground No.1 (1.1 to 1.3) in respect of provision for exchange laws of foreign currency borrowings arising out of reinstatement of loan balances for all the three appeals filed by it. Accordingly, the same is dismissed as not pressed in all the three appeals. 7. We now take up second effective issue before us in respect of deduction of Rs. 99,25,79,867/- claimed by the assessee u/s. 36(1)(viii). During the year, assessee has reported income from housing finance business at Rs. 244,46,63,026/-. For the purpose of computing deduction u/s. 36(1)(viii), income from housing business is worked out at Rs. 248,14,668/- and it has claimed 40% of the same as deduction u/s. 36(1)(viii), i.e., at a figure of Rs. 99,25,79,867/-. 1 Interest on Loans Housing Loans 10,167,313,229 Interest on Loans Against Deposits 34,392,439 2 Fee Income: Processing, Administrative Fees and commitment Charges 5,21,253,995 Prepayment Charges 51,953,437 APF Fees 176,000 Dishonoured Cheque Charges 484,845 Draft Agreement Charges 500 3 Interest on Deposits Corporate Deposits 1,301,388,075 COD-Banks/Financial Institutions 2,761,916 IDBI Deposits 92,632,663 Interest on Bank Deposits 362,033,725 4 Interest on Investme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l purposes as the source of such income are different from the activities of providing long term finance for residential purposes. 8.2. Assessee, while computing the deduction under section 36(1)(viii) had segregated the income and the expenses under 3 categories, i.e. income from housing finance, income from capital gains / dividends and other income. Assessee had segregated certain expenses based on the ratio between the income from housing finance and other income which was worked out at 83.80 : 16.70. Ld. Assessing Officer, during the course of assessment inserted one more vertical of business viz., Income from leasing finance. Ld. Assessing officer based on the revised allocation of income between the verticals of business arrived at the revised ratio (excluding capital gain and dividend) at 66.25 : 33.75. The way in which the AO has allocated various expenses is described as under: (i) In the computation of income from business eligible for deduction under section 36(1)(viii) of the Act, the AO has reduced the entire interest on foreign currency borrowings and provision for contingencies as expenditure incurred for earning of income from long term housing finance i.e., the el ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he submitted that these should be allocated in the ratio as finally determined after giving effect of findings in the present appeal, that is consequent to the findings of the Tribunal on re-characterization of income into eligible and not eligible business. For this also he referred to the findings given by the Co-ordinate Bench in assessee s own case for Assessment Year 1998- 99 wherein direction had been given to the ld. Assessing Officer to recompute the profit eligible for deduction u/s. 36(1)(viii). 9.2. From the perusal of the order of the Co-ordinate Bench in assessee s own case (supra), we note that the facts and circumstances are similar in the present case before us and there is no material change in the applicable of law. The said order has extensively dealt with all the issues before us as stated above and has considered the submissions made by the ld. Counsel of the assessee as well as the ld. CIT, DR. We do not find anything more to add on to the elaborate discussions made therein and the findings so arrived at. The relevant observations and findings are extracts below for ready reference which squarely applies in the present case before us, to deal with the issues r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wider connotation than the expression for constructing, manufacturing or producing motor buses............. Having regard to all these aspects we agree with the Tribunal that bus body builders are as much carrying the business of manufacturing motor buses as chassis manufactures are ................. (emphasis supplied). 19. Therefore, the ld AR submitted that section 36(1)(viii) which is a beneficial provision also and which too uses the phrase business of should similarly receive a wide interpretation and consequently, income from loans for a period less than five years, or for non-residential purposes or from treasury operations should also be regarded as fulfilling the requirements of profits derived from the business of providing long term finance. The ld AR also placed reliance on the following decisions where subsidies, interest income etc., have been considered as profits derived from business of the undertaking, and submitted that the same analogy should hold good for the impugned incomes in assessee's case (i) CIT vs. Meghalaya Steels Ltd. 383 ITR 217 (ii) CIT vs. Jagdishprasad M. Joshi 318 ITR 420 (iii) Tema Exchangers Manufacturers Pvt. Ltd. vs. ACIT being Order dat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be not eligible for deduction, then consequently, part of the said cost may also be allocated to the so called income which is not eligible for claiming deduction under the said section because funds raised by way of foreign currency borrowings and the provision for contingencies could be utilised for or relatable to both the eligible and the non-eligible business. Further, other expenses have been allocated by the AO on an adhoc basis in the ratio of 80:20 towards income from housing finance and income other than from housing finance. After re-characterizing the income between eligible business and ineligible business activities, the AO has determined the ratio of such revenue as 64.99 : 35.01. The ld AR in this regard submitted that allocation of such cost should also be made in the ratio as finally determined consequent to findings given by the Tribunal on re-characterisation of income into eligible and ineligible business. 23. The Ld.DR submitted a detailed written submission and the same is taken on record for adjudication. The brief of the key arguments of the ld DR are as given below - (1) The Finance Act, 1995 has amended Section 36(1)(viii) to limit the deduction to 40 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and for non-residential purposes does not fall within the purview of deduction eligible u/s. 36(1)(viii). (6) The assessee's claim of loans to developers for a period less than 5 years, which is later got converted as loans to individuals, who purchased the flats from the developer for a period of more than 5 years cannot be the reason to claim deduction for the entire loan given to the developers since it is the individual loan transaction that needs to be looked into as to whether it is a long term loan given for more than 5 years or not. Therefore, the deduction claimed by the assessee with respect to loans given to developers for a period of less than 5 years cannot be in its entirety being claimed to be eligible for deduction under section 36(1)(viii). (7) The assessee's plea that the loans for non residential purposes are integral part of the loans given to developers engaged in the construction of residential projects which include commercial space like convenient shopping, cannot be considered for eligibility of deduction since the statute has clearly stated that the deduction is given for construction or purchase of houses of residential purposes and, therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... els (supra), the hon'ble court allowed transport, power and interest subsidy as they have immediate nexus with the said direct expenses. The Hon ble Apex Court in the case of Saraf Exports vs CIT (2023) 149 taxmann. com 145 clearly interpreted that the subsidies were reimbursement of an element of cost, and the incentives though had the object to reduce the cost but were not in the nature of reimbursement of cost. Just as the incentives have independent source of income and are far removed from reimbursement of an element of cost, the income from treasury operations as in the case of assessee also have independent source and are not in the nature of reimbursement. (12) As per assessee's submission, it is mentioned that there is always a time gap between the reasons of the funds and the utilization in the activity of lending to the borrowers which shows that the source of such income (from interest on deposits and investments, profit on sale of investments, etc.) in no way can be said to be the income from long term finance business. The nexus is not direct but at the best, can only be said to be incidental. (13) The income from treasury operations in assessee s case has imm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of houses in India for residential purposes, an amount not exceeding forty per cent of the profits derived from such business of providing long-term finance (computed under the head Profits and gains of business or profession before making any deduction under this clause)) carried to such reserve account Provided that the corporation or, as the case may be, the company is for the time being approved by the Central Government for the purposes of this clause Provided further that where the aggregate of the amounts carried to such reserve account from time to time exceeds twice the amount of the paid-up share capital and of the general reserves) of the corporation or, as the case may be. the company, no allowance under this clause shall be made in respect of such excess. Explanation. In this clause- (a) financial corporation shall include a public company and a Government company: (b) public company shall have the meaning assigned to it in section 3 of the Companies Act, 1956 (1 of 1956); (c) Government company shall have the meaning assigned to it in section 617 of the Companies Act. 1956 (1 of 1956).] (d) infrastructure facility shall have the meaning assigned to it in clause 23G) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he dispute here is whether the entire income from the business of long term finance should be considered for the purpose of section 36(1)(viii) or only that part of income which is earned from lending long term finance are eligible for deduction under section 36(1)(viii). The language of the legislature while quantifying the amount of deduction is **** of the profits derived from such business of providing long-term finance and whether this would mean the entire profits of the business of providing long-term finance is the issue here. 31. We notice that section 33AB of the Act which allows deduction to assessee carrying on business of growing and manufacturing tea in India uses similar wordings as under (a) a sum equal to the amount or the aggregate of the amounts so deposited: or (b) a sum equal to twenty per cent of the profits of such business (computed under the head Profits and gains of business or profession before making any deduction under this section), whichever is less: 32. The Hon'ble Calcutta High Court in the context of deduction allowable under the said section in the case of Goodricke Group Ltd. vs CIT ([2011] 11 taxmann.com 130 (Calcutta)) held that the a purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... slative intent behind the amendments brought in section 36(1)(viii) of the Act were to deny such deduction in respect of income arising from (a) other business activities or (b) from sources other than business. The income, on which deduction is claimed by the assessee, is not from other business activities but from the core business of long term finance and the source of income is the said business. The purpose for which the loans on which the impugned interest is earned are granted for construction or purchase of house and this fact is not disputed by the lower authorities. In view of these discussions in our considered view, the interest income earned from loans extended for construction or purchase of house for a period of less than 5 years should also be included in the profits for the purpose of deduction under section 36(1)(viii). Income from housing finance for non-residential purposes 35. The assessee has added a sum of Rs. 42,18,07,237 as part of income for the purpose of claiming deduction under section 36(1)(viii) which was denied by the assessing officer for the reason that the interest is earned from loans that are given for non-residential purposes. The contention of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstitutions in India and utilizes the same for lending. At any point in time there is always surplus fund mobilized by the assessee for the reason that the disbursement of loan takes place in tranches and also that the assessee cannot raise a loan only when the requirement to lend arises. These surplus funds are parked by the assessee in investments in order to off set the interest income earned against the interest cost incurred. The assessee also raises funds from public deposits and as per the Guidelines issued by National Housing Bank, the Assessee is mandatorily required to invest a certain percentage of deposits raised in the approved Government securities which yields interest income. Therefore it was argued by the Id AR that there is a first degree nexus between the interest income earned and the business of long term finance for residential purposes. The concept of income derived from in contrast to other related concept like income attributable to has been a subject matter of discussion in various decision of the Apex Court. Highlights of some of the principles laid down by these judicial pronouncements are - (i) Receipts which are incidental to the actual conduct of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment is relevant only insofar as it makes a distinction between the expression derived from , as being something directly from, as opposed to attributable to , which can be said to include something which is indirect as well. 18. The judgment in Sterling Foods case (supra) lays down a very important test in order to determine whether profits and gains are derived from business or an industrial undertaking. This Court has stated that there should be a direct nexus between such profits and gains and the industrial undertaking or business. Such nexus cannot be only incidental. It therefore found, on the facts before it, that by reason of an export promotion scheme, an assessee was entitled to import entitlements which it could thereafter sell. Obviously, the sale consideration therefrom could not be said to be directly from profits and gains by the industrial undertaking but only attributable to such industrial undertaking inasmuch as such import entitlements did not relate to manufacture or sale of the products of the undertaking, but related only to an event which was post-manufacture namely, export. On an application of the aforesaid test to the facts of the present case, it can be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was an export incentive, which is very far removed from reimbursement of an element of cost. A DEPB drawback scheme is not related to the business of an industrial undertaking for manufacturing or selling its products. DEPB entitlement arises only when the undertaking goes on to export the said product, that is after it manufactures or produces the same. Pithily put, if there is no export, there is no DEPB entitlement, and therefore its relation to manufacture of a product and/or sale within India is not proximate or direct but is one step removed. Also, the object behind DEPB entitlement, as has been held by this Court, is to neutralize the incidence of customs duty payment on the import content of the export product which is provided for by credit to customs duty against the export product. In such a scenario, it cannot be said that such duty exemption scheme is derived from profits and gains made by the industrial undertaking or business itself. 21. The Calcutta High Court in Merinoply Chemicals Ltd. v. CIT [1994] 209 ITR 508, held that transport subsidies were inseparably connected with the business carried on by the assessee. In that case, the Division Bench held:- We do not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... draw back could not be treated as a profit derived from the industrial undertaking. We have not been impressed by the submissions advanced by Mr. Bandhyopadhyay. The judgment of the Apex Court in the case of Liberty India (supra) was in relation to the subsidy arising out of customs draw back and duty Entitlement Pass-book Scheme (DEPB). Both the incentives considered by the Apex Court in the case of Liberty India could be availed after the manufacturing activity was over and exports were made. But, we are concerned in this case with the transport and interest subsidy which has a direct nexus with the manufacturing activity inasmuch as these subsidies go to reduce the cost of production. Therefore, the judgment in the case of Liberty India v. Commissioner of Income Tax has no manner of application. The Supreme Court in the case of Sahney Steel and Press Works Ltd. Others versus Commissioner of Income Tax, reported in [1997] 228 ITR at page 257 expressed the following views:- ..Similarly, subsidy on power was confined to 'power consumed for production'. In other words, if power is consumed for any other purpose like setting up the plant and machinery, the incentives will no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nery, and finished goods; subsidy on power consumed by the industry; and exemption from water rate. It was held that such subsidies were treated as assistance given for the purpose of carrying on the business of the assessee. 26. We do not find it necessary to further encumber this judgment with the judgments which Shri Ganesh cited on the netting principle. We find it unnecessary to further substantiate the reasoning in our judgment based on the said principle. 27. A Delhi High Court judgment was also cited before us being Dharam Pal Prem Chand Ltd.'s case (supra) from which an SLP preferred in the Supreme Court was dismissed. This judgment also concerned itself with Section 80-IB of the Act, in which it was held that refund of excise duty should not be excluded in arriving at the profit derived from business for the purpose of claiming deduction under Section 80- IB of the Act. 28.***** 29. For the reasons given by us, we are of the view that the Gauhati, Calcutta and Delhi High Courts have correctly construed Sections 80-IB and 80-IC. The Himachal Pradesh High Court, having wrongly interpreted the judgments in Sterling Foods (supra) and Liberty India's cases (supra) to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be the first degree/direct nexus between the income earned and the business of the assessee. The nature of business of the assessee is lending money for construction/ purchase of residential houses which is funded by raising loans from institutions and there is bound to be a time gap in terms funds mobilised and utilised. The assessee is using the idle funds of housing finance business in temporary investments and it is established that the source of investment from which the impugned income is derived is from the housing finance business of the assessee. Therefore the deployment of surplus funds by the assessee in short term investments with an intention to reduce the burden of cost of interest paid on loans in our view has a direct nexus with the business of housing finance. Therefore the income which has a direct nexus with the housing finance business of the assessee is to be considered as derived from the business of providing long-term finance for construction or purchase of houses in India for residential purposes and accordingly will be eligible for deduction u/s. 36(1)(viii). The nomenclature of income is not so relevant as the nature of income since the same income whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... since there is a direct nexus between the income earned and the business of the assessee. Accordingly the same shall be included for the purpose of claiming deduction u/s. 36(1)(viii). 43. The AO is directed to re-compute the income eligible for deduction u/s. 36(1)(viii) afresh in accordance with the directions given in this order and allow the deduction accordingly. 9.3. Thus, following the above appellate order for AY 1998-99 in assessee s own case, it is held that for Assessment Year 1999-2000, there being no material change in facts and applicable law, the disallowance made by the ld. Assessing Officer is to be allowed after recomputing the income eligible for deduction u/s. 36(1)(viii) afresh in accordance with the directions noted in the aforesaid appellate order for Assessment Year 1998-99 and allow the deduction accordingly. Thus, ground no.2 (Ground Nos. 2.1 to 2.3) is partly allowed. 9.4. With respect to the allocation of provisions for contingencies and interest on foreign currency borrowings, we direct the ld. Assessing Officer to apportion part of the cost towards the income which has been held to be not eligible for claiming deduction u/s. 36(1)(viii), since interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses based on actual ratio of the investment yielding exempt income to the total average assets for the year under consideration. From perusal of the said appellate order (supra), we note that the issue has been dealt by the Co-ordinate Bench on identical fact pattern, there being no material change in law. The observations and findings arrived at by the Co-ordinate Bench in this issue is extracted as under: 44. The assessee had claimed exemption under section 10(33) of Rs. 40,89,24,273/- u/s. 10(33) against the dividend income earned. The Assessing Officer called on the assessee to show cause as to why expenses to earn the dividend income should not be apportioned and the exemption under section 10(33) be restricted to the net dividend income. The assessee, in reply submitted that the dividend income earning investments are financed from internal accruals and not out of borrowed funds. The assessee further submitted that the loan funds borrowed by the assessee are institutional loans taken for specific purpose of business of housing finance and cannot be utilized for the purpose of any other investments and, therefore, the assessee submitted that the interest paid by the assessee o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tand taken by the Assessing Officer. Accordingly, the CIT(A) gave partial relief to the assessee with regard to the exemption under section 10(33) of the Act. 47. The Ld.AR in this regard invited our attention to paragraphs 7.45 and 7.46 at pages 33 and 34 of the assessment order passed by the AO, wherein, while dealing with section 36(1)(viii) of the Act, the AO has held that the entire borrowings of the Assessee have been utilised for the purposes of the business of housing finance and not for investment in shares. He has specifically held that, shares have been acquired by the Assessee from own funds which are interest free. In view thereof, the Id AR submitted that no part of interest paid on borrowings could be disallowed as incurred for earning of dividend income from shares. The Id AR also submitted that in the allocation of expenses made by the AO for the purposes of section 36(1)(viii) of the Act, no part of interest expenditure has been allocated to income from capital gains/dividend. The Id AR further submitted that the Hon'ble Jurisdictional High Court in CIT vs. Reliance Utilities and Power Ltd. (2009) 313 ITR 340 (Bombay) (refer pages 68 to 72 of the case law comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al ratio of the investments yielding exempt income to the total average assets for the relevant financial year and consider the same for the purpose of exemption u/s. 10(33). Accordingly, ground no.3 is partly allowed. 11. On the fifth issue, relating to disallowance u/s. 14(A) in respect to income-tax free bonds and section 10(23) bonds, we note that this issue has also been dealt with by the Co-ordinate Bench in assessee s own case (supra). The relevant observations and findings arrived at by Co-ordinate Bench in this respect is extracted below: 50. The CIT(A), while adjudicating the issue of exemption under section 10(33) has directed the AO to consider the tax exempt interest arising out investments made by the assessee in tax free bonds and to apply the provisions of section 14A accordingly. In this regard the ld AR submitted that though the tax free bonds would result in interest which would be exempted from tax, the capital gains would be chargeable to tax. It is further submitted that since, such investment would also result in taxable income, no disallowance should be made under section 14A of the Act. The ld AR in this regard placed reliance on judgment of the Hon`ble Ape ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Assessee contended that vide this non-compete agreement, GECC was to restrain assessee from carrying on certain business activity. Under this agreement, assessee was not required to perform any positive activity or render any service. This receipt by the assessee for undertaking the restraining obligations could not be stretched as to pertaining to performance of any other duty. Assessee thus, claimed that it cannot be treated as business income but constituted capital receipt and therefore not chargeable to tax. 12.1. Ld. Assessing Officer after considering the submissions of the assessee, held the receipt as revenue receipt, assessable to tax. Ld. CIT(A) justified the stand taken by the ld. Assessing Officer and sustained the addition so made. 12.2. Ld. Counsel for the assessee took us through the relevant terms and conditions of the non-compete agreement to demonstrate that this agreement restrained the assessee from carrying on the business activity rather than requiring it for performance of any positive activity or rendering any service. In respect of the agreement, it was stated that GE Capital Services India (GECSI) is an affiliate of GECC who had entered into a joint ven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Co- promoted Companies in its/their normal course of business (a) to provide or avail any financial facility including but not limited to term lending, inter-corporate deposits, commercial paper, bills discounting, securitization of assets, portfolio buy-outs from or to any Person, and (b) from undertaking Restricted Business in its/their own name or through a joint venture or other similar arrangement with any Promoted or Co-promoted Companies. 12.4. Thus, it was submitted that in the said agreement, there are pre conditions which preceded the payment of non-compete fee to the assessee for which assessee had to sell 20% of its shareholding of CCFSL to GECSI and the earlier agreement dated 23.12.1993 which was executed for setting up of CCFSL was to be terminated. Assessee had to surrender its rights in CCFSL. The non-compete agreement restricted certain rights of the assessee for a period of three years only which are in regard to only restricted business . 13. On a specific query by the Bench in respect of whether this agreement tentamounts to agreement in restraint of trade, ld. Counsel submitted that Section 27 of the Indian Contract Act, 1872 provides for an exception to deal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry course of business, any compensation received for its termination (loss of agency) would be a revenue receipt. In the present case, both CIT(A) as well as the Tribunal, came to the conclusion that the agreement entered into by the assessee with Ranbaxy led to loss of source of business, that payment was received under the negative covenant and therefore the receipt of Rs. 50 lakhs by the assessee from Ranbaxy was in the nature of capital receipt. In fact, in order to put an end to the litigation, Parliament stepped into specifically tax such receipts under non-competition agreement with effect from 1-4-2003. 8. For the above reasons, we set aside the impugned judgment of the Karnataka High Court dated 29-10-2009 and restore the order of the Tribunal. Consequently, the civil appeal filed by the assessee is allowed with no order as to the costs. 13.3. Ld. Counsel, further placed reliance on the decision of Hon ble Supreme Court in the case of Shivraj Gupta vs. CIT [2020] 425 ITR 420 (SC) wherein also similar issue was dealt with relating to Assessment Year 1995-96. Hon ble Court followed its earlier decision in the case of Guffic Chem (supra) to hold that prior to 01.04.2003, amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e pointed out that the decision of Gillanders Arbuthnot Co. Ltd. (supra) has been dealt by the Hon ble Supreme Court in its later decision of Shivraj Gupta (Supra) in para 6 and 7 whereby it has been observed that High Court misinterpreted the judgment in Gillanders Arbuthnot Co. Ltd. since in the present case, the Revenue has not impugned the genuineness of the transaction. 15.1. Ld. Counsel also submitted in respect of contention of ld. CIT, DR that assessee was carrying on the business of consumer finance since 1993 through CCFSL that only dividend income was earned for the shareholding of the assessee and the compensation received towards non-compete fee is not in lieu of the erstwhile dividend income it had earned. 15.2. He referred to yet another decision of the Hon ble Supreme Court in the case of CIT vs. Best and Co. (P) (Ltd.) [1966] 60 ITR 11 (SC) to submit that the non-compete fee received by the assessee under a negative covenant is a capital receipt. In this decision also, Hon ble Court had dealt with its earlier decision in Gillanders Arbuthnot Co. Ltd. (supra). The specific observations and findings by the Hon ble Court are as under: This court in Gillanders Arbuthno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fined in the said agreement. Assessee has received the amount for undertaking the restraining obligation and therefore it cannot be treated as business income in the year under consideration which is much prior to the amendment brought in by the Finance Act, 2002. 16.1. Considering the facts on record, detailed discussion made above, judicial precedents relied upon by the ld. Counsel and those distinguished as submitted by the ld. CIT, DR, we hold that noncompete fee received by the assessee under the negative covenant is in the nature of capital receipt not exigible to tax since it relates to Assessment Year 1999-2000. Accordingly, ground no.5 taken by the assessee is allowed. 17. In the result, appeal of the assessee in ITA No.7447/Mum/2004 for Assessment Year 1999-2000 is partly allowed. 18. In ITA No.286/Mum/2005 for Assessment Year 2000-01 and in ITA No.287/Mum/2005 for Assessment Year 2001-02, the common grounds are disposed off as noted here under: i) Ground no.2 relating to deduction u/s. 36(1)(viii), the fact pattern and the applicable law are similar to what we have already dealt with in ITA No.7447/Mum/2004 for Assessment Year 1999- 2000. ii) Also ground no.3 4, in these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services of employees. Ld. Counsel for the assessee in this respect referred to the substantial questions of law before the Hon'ble Court held in favour of the assessee which squarely covers the present case. The same are reproduced as under: (1) Whether on the facts and in the circumstances of the case and in law the tribunal was right in holding that the discount on issue of ESOP is allowable deduction in computing the income under the head profits and gains of the business? ii) Whether on the facts and in the circumstances of the case and in law the tribunal was ( right in holding that difference between market price of the shares at the time of grant of option and offer price amounts to discount and the same has to be treated as remuneration to the employees for their continuity of service? (iii) Whether on the facts and in the circumstance of the case and in law the tribunal committed an error in not in not examining the scheme of ESOP from which it is clear that the employees will not get any right in the shares till completion of the period prescribed and the expenditure claimed is contingent and recorded perverse finding? 21.1. Ld. Counsel referred to para 11 of the sai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of expenditure claimed towards maintenance of Guest House amounting to Rs. 33,12,188/-. 3. On the facts and in the circumstance of the case and in law, the Ld. CIT(A) erred in directing the AO to delete the disallowance of interest of Rs. 67,74,15,880/- relating to dividend income exempt u/s 10(33) of the I.T.Act. 3b) The Ld. CIT(A) further erred in directing the AO to substitute the working of disallowances by reducing the expenses relating to Capital Gains in the ratio of 29.60% out of Rs. 2,24,16,628/- and on the balance amount of expenses to apply the ratio of 54.66% for the purpose of working out the disallowance relating to dividend income exempt u/s 10(33) of the I.T.Act. 25.2. Ground no.3 above is common in all the three appeals of the Revenue except for variation in the quantum of disallowance. Ground no.1 2 are specific to Assessment Year 1999-2000. 26. At the outset, it is submitted before us that ground no.1 towards disallowance of entertainment expenses and ground no.2 in respect of guest house expenses have already been dealt by the Co-ordinate Bench of ITAT in assessee s own case in ITA No.477/Mum/2004 for Assessment Year 1998-99, order dated 16.05.2006, whereby the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the general provisions of section 37(1) of the Act. The Assessing Officer disallowed the same on the ground that they were ostentations in the nature and therefore non-business expenditure. Aggrieved, the assessee filed an appeal before learned CIT(A) who allowed the same on the ground that the Assessing Officer has not given any specific reason for the same 5. Having considered the submissions of learned DR of the revenue, who relied upon the order of Assessing Officer and the learned counsel for the assessee who relied upon the order of learned CIT(A), we find that the Assessing Officer has in fact not considered the nature of the expenses in detail and has not given any specific reason for such disallowance except saying that they were ostentations in nature. As held by us in ground No. 1 above, no addition can be made without a specific finding that the expenses were not wholly and exclusively for the purpose of business. In this view of the matter, the order of the learned CIT(A) is confirmed. 6. Thus, revenue appeal is dismissed. 27. There being no material change in fact pattern and applicable law on the two issues before us, we, by following the decision of the Co-ord ..... X X X X Extracts X X X X X X X X Extracts X X X X
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