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TMI Blog2002 (2) TMI 309X X X X Extracts X X X X X X X X Extracts X X X X ..... ted in Dy. CIT v. Shaw Wallace Co. Ltd [2001] 248 ITR 81, wherein it was held that an assessment under section 143(3) can be made even where the assessee is to be assessed by way of block assessment for the block period. The ground is, accordingly, rejected. 2.1 On merits, the first dispute is for not allowing the non-competition fees of Rs. 10 crores [Sri G.R. Murarka Rs. 4 crores and Sri S.R. Gupta Rs. 6 crores]. The assessee purchased two distilleries, viz., M/s. Pampasar Distillery Ltd. wherein Sri G.R. Murarka held 60% shareholding and M/s. Central Distillery Breweries wherein Sri S.R. Gupta together with his relatives were registered holders and exclusively entitled to the beneficial ownership of 1,86,109 equity shares of Rs. 10 each, which approximately fully paid-up equity share capital of Central Distillery Breweries Ltd. As per the agreement, a sum of Rs. 10 crores was given to the promoters of the two Distilleries for the restrictive covenants not to compete with the assessee and as per the averments it was to facilitate its profits by eliminating competition from these two promoters. The Assessing Officer observed that there were limits to the price of shares of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en over were no match for the assessee who had monopoly of manufacture and marketing of its own brand names. On these facts, he further held that there was no business necessity for making the non-competition fees of Rs. 10 crores. He, therefore, upheld the disallowance. 4. The learned counsel of the assessee apart from relying upon the decisions ref erred to in the order of the CIT(A), also placed reliance on the decision of the Supreme Court in the case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 and decision of the Madras High Court in the case of CIT v. G.D. Naidu [1987] 165 ITR 63 and submitted that the payment was made to ward off the competition and, therefore, an allowable deduction. The learned counsel of the Revenue, on the other hand, submitted that the parties were not in a position to compete with the assessee; that the payments were made against the public policy, i.e. against free trade policy and that it was a capital expenditure in view of the Madhya Pradesh High Court decision in the case of CIT v. Sauser Liquor Traders [1996] 222 ITR 33, Madras High Court decision in the case of Chelpark Co. Ltd. v. CIT [1991] 191 ITR 249, Calcutta High Court decision in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. Their Lordships further held that if the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. It is, therefore, held that the test of enduring benefit is not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case. It was further held that what is an outgoing of capital and what is an account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process and the question must be viewed in the larger context of business necessity or expediency. In this case, the pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iting ink and sale thereof or any other business similar or competitive to the business carried on by the company. Distinguishing the case of G.D. Naidu, the Court held that it was a case of payment for acquiring an enduring benefit in the sense that the partnership which was a potential competition to the assessee had vanished and that the ex-Mg. Director had left India and it was clear that the payment was made in order to ward off damaging competition from a potential competitor, resulting in the acquisition by the assessee of a right as well as protection to carry on its business activities as a whole for so long as the assessee carried on such business. Consequently, the payment by the assessee was held to be in the nature of capital expenditure and not revenue expenditure. 5.2 The Calcutta High Court in the case of Hindustan Pilkington Glass Works dealt with a case of an assessee who entered into a tripartite agreement with two other concerns which produced the same type of commodity as was produced by the assessee and the object of the agreement was the elimination of competition in order to prevent possible annihilation of the business of the assessee. Here also the agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5.5 The expenditure incurred in violation of a provision of the Act would not be an allowable deduction, as held by the Supreme Court in the case of Maddi Venkataraman Co. (P.) Ltd. and as held by Karnataka High Court in the case of Bangalore Arrack Co., payment to ward off competition being against a public policy would not be an allowable deduction. 6. In view of the above, the payment made by the assessee to Sri G.R. Murarka and Sri S.R. Gupta to ward off competition for the period of 10 years would be a payment for acquiring an enduring benefit which cannot be allowed as deduction in view of the latter decision of the Madras High Court in the case of Chelpark Co. Ltd., of Calcutta High Court in the case of Hindustan Pilkington Glass Works, of Madhya Pradesh High Court in the case of Sauser Liquor Traders and of Calcutta High Court decision in the case of Vishnu Agencies (P.) Ltd. and, therefore, it cannot be allowed as a deduction. The disallowance is, accordingly, upheld. 7. The next dispute is against the disallowance of depreciation on the cost of electric meters and transformers purchased during the relevant previous year from Andhra Pradesh State Electricity Board ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assets continued to remain in the possession of APSEB. Over the same assets APSEB got 100% depreciation in respect of meters and normal depreciation on transformers and appellant is now claiming identical depreciation resulting in huge tax avoidance. Only to curb this malpractice Explanation 4A to section 43(1) has been inserted w.e.f. 1-10-1996. From a perusal of the deeds of conveyance whereby APSEB transferred all rights etc. in equipments to appellant and agreements of lease of the same equipments by the lessor i.e., appellant to lessee i.e., APSEB, vide deed of conveyance dated 31-1-1994, 19 transformers 694009 meters were transferred to appellant which were leased back to APSEB vide lease agreements dated 1-2-1991, 2-2-1994 3-2-1994. However, by lease agreement dated 21-3-1994, appellant leased out 6 transformers and 267500 meters to APSEB though appellant did not have any such asset as on 21-3-1994. There is a conveyance deed dated 21-3-1994 for transfer from APSEB of 6 transformers and 23,5467 meters but that conveyance deed was to come into effect only from 25-3-1994. Thus vide lease dated 21-3-1994, appellant leased out assets which it did not possess. Appellant's und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat Explanation 3 is not invoked and the value is raised at cost plus tax to APSEB. Explanation 4A could be applicable in such cases that came into being w.e.f. 1-10-1966, which allows depreciation only on W.D.V. to the original owner. The alternate plea of the assessee is that the Department has assessed the entire rental as income and if the depreciation is to be disallowed, it should have been assessed at the rental minus cost recovery included in such rental. The Ld. Departmental Representative, on the other hand, supporting the orders of the Revenue authorities submitted that in absence of physical delivery, the meters and transformers can only form the asset of the assessee and, consequently, no depreciation could be allowed thereon. 10. We have heard the parties and considered their rival submissions. A lease is an agreement whereby the lessor conveys to the lessee, in return for rent, the right to use an asset for an agreed period of time. Broadly speaking it is of two kinds-a finance lease and an operating lease. A finance lease is a lease whereunder the present value of the minimum lease payments at the inception of the lease exceeds or is equal to substantially the who ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssets remained wherever they were. These were continued to be used without any disturbance or hindrance. Here also it is stated that the lessor has to offer the amount of lease rental as income over the period of lease. There is no tax avoidance or tax effect if the overall position of the entire period of lease is taken together. The money given by way of sale consideration is recovered back including interest in the shape of lease rental. 12. It is true that overall there might not be any advantage profit or gain or loss to either party but income is postponed by both the parties to subsequent years. That is all by mere executing some documents and nothing else. Let us explain this by way of an example- "B" had an asset whose WDV is nil. It is revalued at Rs. 180. The asset is of the nature which is entitled to 100% depreciation. 'B' wants finance of Rs. 100 for 5 years. Normal rate of interest is 16%. Instead of raising loan, he received the finance by selling the assets to 'A' who is a financier for Rs. 180 (Rs. 100 principal + Rs. 80 interest). Lease rental would be fixed @ Rs. 36 per year. 'B' would receive the lease amount and interest in five years as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are carrying on the business of financiers; they are not dealing in motor vehicles. The motor-vehicle purchased by the customer is registered in the name of the customer and remains at all material times so registered in his name. In the letter taken from the customer under which the latter agrees to keep the vehicle insured, it is expressly recited that the vehicle has been given as security for the loan advanced by the appellants. As a security for repayment of the loan, the customer executes a promissory-note for the amount paid by the appellants to the dealer of the vehicle. The so-called 'sale letter' is a formal document which is not made effective by registering the vehicle in the name of the appellants and even the insurance of the vehicle has to be effected as if the customer is the owner. Their right to seize the vehicle is merely a license to ensure compliance with the terms of the hire purchase agreement. We are accordingly of the view that the intention of the appellants in obtaining the hire-purchase and the allied agreements was to secure the return of the loans advanced to their customers, and no real sale of the vehicle was intended by the customer to the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessment of the taxable profit of a year. The profit of one year is likely to be shifted to another year which is an incorrect method of computing profits and gains for the purpose of assessment. Each year being a self-contained unit and the taxes of a particular year being payable with reference to the income of that year, as computed in terms of the Act, the method adopted by the assessee has been found to be such that income properly be deduced therefrom. It is, therefore, not only the right but the duty of the Assessing Officer to act in exercise of his statutory power, as he has done in the instant case, for determining what, in his opinion, is the correct taxable income." 15. Lease is a contract or bailment where returnability of goods is provided after a stipulated period. Without envisaging the return of goods it cannot be a proper bailment and hence not a valid lease. Returnability also necessitates identifying and, therefore, where the assets are not so identified or identifiable, there cannot be a valid lease. Though developed as a commercial device to alternate for traditional loans, leasing has found all over the world massive application as a device to exchange ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge number of premises of consumers of electricity in West Bengal. No inspection of assets was done and it was impossible even; and the assessee solely relied upon the statement of the seller and the lessee about the quality, quantity, existence and the price without being sure of its sustained life or economic viability. 18. Several transactions basic to the scheme were economically inserted to give a colour of sale and lease back which were only entitled to be physically active or make belief. An instrument may not be a magical talisman protecting its executants from payment of due tax. It has to be seen whether it was intended to have real effect as governing their rights and liabilities inter se or it was executed by way of pretence to escape or postpone the liability to tax without any intention that its provision showed in truth have effect as defining the rights of the parties as between themselves. 19. In view of the above facts and circumstances and upon consideration of the terms and conditions of the agreements and the submissions of the parties, we are of the opinion that the transaction was a mere finance transaction and the assessee did not become the owner of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g that any expenditure incurred like stamps, registration fees, Lawyer's fees for raising loans are allowable deduction, allowed the claim of 5% to the assessee and disallowed the balance. He also observed that the service charges worked out to 14% of the loan. Interest payment being 21% and brokerage paid for syndicating the loan being about 5%, the total cost of the loan to the assessee was around 40% as against the real rate of interest being 20 to 24%. The alternate claim was raised by the assessee before the CIT(A) for deduction of 1/7th of Rs. 1.6 crores, but that point has not been accepted by the C.I.T.(A) because the expenditure has been allowed to the extent not considered excessive. Both the Revenue and the assessee are in appeal. 22. We have heard the parties and considered their rival submissions. As observed by the C.I.T. (A), any expenditure incurred on raising loans are allowable expenditure in view of the two decisions referred to above. The service charges have been incurred by the assessee in connection with raising of the loan and this fact has not been disputed. The only dispute raised by the Assessing Officer is that it was paid to the same company which gra ..... X X X X Extracts X X X X X X X X Extracts X X X X
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