Dy. Commissioner of Income Tax , Circle-16(2), Hyderabad v. Mylan Laboratories Limited , Hyderabad

ITA 12/Hyd/2019 | 2014-2015
Pronouncement Date: 13-11-2019 | Result: Dismissed

Appeal Details

RSA Number 1222514 RSA 2019
Assessee PAN AADCM3491M
Bench Hyderabad
Appeal Number ITA 12/Hyd/2019
Duration Of Justice 10 month(s) 9 day(s)
Appellant Dy. Commissioner of Income Tax , Circle-16(2), Hyderabad
Respondent Mylan Laboratories Limited , Hyderabad
Appeal Type Income Tax Appeal
Pronouncement Date 13-11-2019
Appeal Filed By Department
Order Result Dismissed
Bench Allotted DB-A
Tribunal Order Date 13-11-2019
Date Of Final Hearing 14-08-2019
Next Hearing Date 14-08-2019
Last Hearing Date 27-06-2019
First Hearing Date 10-05-2019
Assessment Year 2014-2015
Appeal Filed On 03-01-2019
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD A BENCH : HYDERABAD BEFORE SMT. P. MADHAVI DEVI JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN ACCOUNTANT MEMBER ITA NO. 2335/HYD./2018 ASSESSMENT YEAR: 2014 - 15 MYLAN LABORATORIES LIMITED. VS. DY.CIT CIRCLE 16(2) HYDERABAD HYDERABAD. PAN: AADCM3491M (APPELLANT) (RESPONDENT) ITA NO. 12 / HYD./201 9 ASSESSMENT YEAR: 2014 - 15 DY.CIT CIRCLE 16(2) VS. MYLAN LABORATORIES LIMITED . 2 ND FLOOR B BLOCK PLOT NO.564/A/22 ROAD NO.92 I.T.TOWERS A.C.GUARDS JUBILEE HILLS MASAB TANK HYDERABAD 500 034. HYDERABAD & (APPELLANT) (RE SPONDENT) FOR REVENUE : SH. YVST SAI D.R. FOR ASSESSE : S/SH. SRIRAM SESHADRI PADAM CHAND KINCHA AMIT MISHRA & MS.AMULYA K A.RS. DATE OF HEARING : 14 /0 8 /19 DATE OF PRONOUNCEMENT : 13 /1 1 /19 O R D E R PER SMT. P. MADHAVI DEVI J.M. BOTH ARE CROSS APPEALS FOR A.Y. 2014 - 15. THE APPEAL IS FILED BY THE ASSESSEE WHILE THE CROSS OBJECTION IS FILED BY REVENUE AGAINST THE ORDER OF LD.CIT(A) - 4 HYDERABAD DATED 09.10.2018. 2 2. GROUNDS RAISED BY THE ASSESSEE IN ITA NO. 2335/HYD/18 ARE AS UNDER: GROUND 1: THE LOWER AUTHORITIES ERRED IN PASSING ORDERS WHICH SUFFER FROM LEGAL DEFECTS OF BEING PASSED IN VIOLATION OF PRINCIPLES OF NATURAL JUSTICE AND THE PROVISIONS OF THE ACT AND ARE DEVOID OF MERITS AND ARE CONTRARY TO FACTS ON RECORD AND APPLICABLE LAW AND PROCEEDINGS WERE COMPLETED WITHOUT ADEQUATE INQUIRIES AND AS SUCH THE ORDERS ARE LIABLE TO BE QUA SHED. 2. DISALLOWANCE OF FINE OF RS.141.50 CRORES LEVIED BY EU COMMISSION. 2.1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE LOWER AUTHORITIES ERRED IN DISALLOWING THE FINE OF RS.141.50 CRORES LEVIED BY THE ED COMMISSION UNDER SECTION 37(1) OF THE ACT. 2.2. THE LD. CIT(A) HAS ERRED IN CONCLUDING THAT ONLY EXPENSES INCURRED FOR EARNING AN INCOME FOR THE YEAR SHOULD BE ALLOWED AS A DEDUCTION UNDER SECTION 37(1) FOR THE FOLLOWING REASONS. 2.2.1. THE SETTLEMENT WAS PURELY COMPENSATORY IN NATUR E AND NOT PENAL IN NATURE. 2.2.2. THE FINE WAS DESIGNED ONLY AS A 'TAKE BACK' OF THE AMOUNT ORIGINALLY RECEIVED BY THE APPELLANT FOR ENTERING INTO A NON - COMPETE AGREEMENT WHICH WAS OFFERED TO TAX IN FY 2004 - 05. 2.3. WITHOUT PREJUDICE THE LEVY BY ED COM MISSION IS ALLOWABLE AS A BUSINESS LOSS UNDER SECTION 28 OF THE ACT. 3. DISALLOWANCE OF DE P RECIATION ON G OODWILL RECORDED ON AMAL G AMATION : 3.1. ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LOWER AUTHORITIES ERRED IN NOT ALLOWING THE DEPRECIATION ON GOODWILL ARISING ON AMALGAMATION (AMOUNTING TO RS - 4492 'ORE 1 AS CLAIMED BY THE APPELLANT IN ITS RETURN OF INCOME OF RS.561.60 CR ORES. 3.2. THE LOWER AUTHORITIES HAVE ERRED IN NOT FOLLOWING THE BINDING JUDICIAL P R ECEDENTS OF HON' B LE SUPREME COURT AND THE JURISDICTION BENCH OF THIS H ONBLE TRIBUNAL ON ALLOWABILITY OF DEPRECATION ON GOODWILL. 3.3. ON FACTS AND IN CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. C IT(A) E RRED IN ALLOWING DEP RE CIATION ON GOODWILL OF R S. 2 867 CRORES RECORDED IN BOOK S OF ACCOUN TS IN ACCORDANCE WITH APPLICABLE ACCOUNTING STANDA R D AS AGAIN S T DEPRECIATION UNDER SEC TION 32(1) OF THE ACT ON GOODWILL OF RS .4.492 CR ORES ADDED TO BLOCK OF INTANGIBLE ASSETS . 3 3 . 4. ON F ACTS AND IN CIRCUMSTANCE OF THE CASE AND IN LAW THE LD. C I T(A) ERRED IN DISALLOWING DEPRECIATION ON RS.L 625 CRORES (OUT OF TOTAL GOODWILL OF RS .4.492 CRORES ) AS SELF - GENERATED GOODWILL WIT HOUT APPRECIATING THAT AN ACTUAL CONSIDERATION OF RS . 43 860 MILLION IN CASH HAS BEEN PAID TO ACQUIRE BUSINESS ALONG WITH THE SAID GOODWILL.. 3.5. WITHOUT PREJUDICE THE LD. CIT(A) HAS FAILED TO APPRECIATE THAT DEPRECIATION ON RS. 1 625 CRORES IS ALLOWABLE UNDER SECTION 32 READ WITH SECTI ON 43(1). 3.6. ON THE FACTS AND CIRCUMSTANCES O F THE CASE AND IN LAW THE LD. C I T(A) ERRED IN DISALLOWING DEPRECIATION OF RS.183 CRORES. ON THE ERRONEOUS UNDERSTANDING THAT APPELLANT HAD SEPARATELY CLAIMED DEPRECIATION O N INTANGIBLE ASSETS OF RS. 1 464 CRORES IN ADDITION TO DEPRECIATION ON TOTAL GOODWILL OF R S.4 492 CRORE S RESULTING IN DOUBLE DISALLOWANCE OF DEPRECIATION ON RS.183 CRORES. 3.7. THE LD. CIT(A) HAS ERRED IN CONCLUDING THAT THE INTANGIBLE ' ASSETS QUANTIFI ED AT RS. 1 4 64 CRORE WAS NOT SUPPORTED BY ANY DOCUMENTARY PROOF. 4. ENHANCEMENT BY LD. CIT (A) U/S 68 OF THE ACT : 4.1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. CIT (A) HAS ERRED IN ENHANCING L THE INCOME OF THE APPELLANT TO THE EXTENT OF RS 1 592.6 CRORES SS] S 68 OF THE ACT. 4.2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. CIT (A) HAS ERRED IN DEALING WITH AN ITEM WHICH WAS BEYOND THE SCOPE OF APPELLATE PROCEEDINGS U / S 251 OF THE ACT. 4.3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. CIT (A) HAS ERRED IN ENHANCING THE INCOME OF THE APPELLANT IN VIOLATION OF PRINCIPLES OF EQUIT Y AND NATURAL JUSTICE AND IN VIOLATION OF STATUTORY PROCEDURE LAID DOWN IN SECTION 251 (2) OF THE ACT FOR ENHANCEMENT OF INCOME OF THE APPELLANT. 4 . 4. WITHOUT PREJUDICE THE LEARNED CIT(A) HAS ERR E D IN NOT APPRECIATING THAT THERE ARE NO S UMS FOUND CREDITE D IN THE BOOKS OF ACCOUNT DURING THE PREVIOUS YEAR AND ACCORDINGLY THE PRE - REQUISITE OF SECTION 68 FAILS AT THRESHOLD. 4.5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. CIT (A) HAS ERRED IN MAKING AN ADDITION IN RESPECT OF AN OUT GO OF MONEY WHICH IS A 'DEBIT' AS AN UNEXPLAINED CASH CREDIT U / S 68 OF THE ACT. 4.6. O N THE FACTS A N D IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. CIT (A) HAS ERRED IN DISREGARDING ALL THE DOCUMENTS/EVIDENCE 4 ALREADY ON RECORD WHICH PROVES THE NATURE OF THE TRANSACTION AS WELL AS ITS GENUINENESS AS A LOAN GIVEN BY THE APPELLANT TO ITS WHOLLY OWNED SUBSIDIARIES TO SET TLE THEIR SUBSISTING DEBTS. 5. DISALLOWANCE UNDER SECTION 14A OF RS.3.11 CRORES 5.1. ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. CIT (A) ERRED IN UPHOLDING THE ACTION OF LD.AO IN DISALLOWING AMOUNT OF RS.3.11 CRORES UNDER SECTION 14A UNDER NORMAL COMPUTATION OF THE ACT AND UNDER MAT . 6. INTEREST LEVIED UNDER SECTION 234C 6.1. THE LD. AO HAS ERRED IN LEVYING INTEREST UNDER SECTION 234C. THE APPELLANT DENIES ITS LIABILITY TO PAY INTEREST UNDER SECTION 234C. THE A P PELLANT PRAYS TH AT DIRECTIONS BE GIVEN TO GRANT ALL SUCH RELIEF ARISING FROM THE GROUNDS OF APPEAL MENTIONED SUPRA AND ALL CONSEQUENTIAL RELIEF THERETO. THE GROUNDS OF APPEAL RAISED BY THE APPELLANT HEREIN ARE WITHOUT PREJUDICE TO EACH OTHER. THE APPELLANT CRAWS LEAVE TO ADD TO AND/ OR TO ALTER AMEND RESCIND MODIFY THE GROUNDS HEREIN ABOVE OR PRODUCE FURTHER DOCUMENTS BEFORE OR AT THE TIME OF HEARING OF THIS APPEAL. 2.1 GROUNDS RAISED BY THE REVENUE IN ITA 12/HYD./18 ARE AS UNDER: 1. LD.CIT(A) ERRED IN DIRECTING THE AO TO ALLOW AMORTIZATION OF THE GOODWILL IN RESPECT OF ACQUIRED GOODWILL OVER A PERIOD OF 5 YEARS WITHOUT APPRECIATING THE FACT THAT AS PER SIXTH PROVISO TO SEC.32(1) OF THE ACT THE ASSESSEE IS NOT ENTITLED TO CLAIM DEPRECIATION/AMORTIZATIO N ON GOODWILL SINCE THE WDV OF GOODWILL IN THE BALANCE SHEET OF AMALGAMATING COMPANY IS NIL. 2. ANY OTHER GROUND THAT MAY BE RAISED AT THE TIME OF HEARING. 3 . BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE COMPANY ENGAGED IN PHARMACEUTICAL S BUSINESS FILED ITS RETURN OF INCOME FOR THE A.Y. 2014 - 15 ON 30.11.2014 ADMITTING A TOTAL LOSS OF RS.29 09 02 208/ - UNDER NORMAL PROVISIONS OF THE INCOME TAX ACT 1961 (THE ACT) AND BOOK PROFIT OF RS.928 04 92 606/ - U/S 115 JB OF THE ACT. THE RETURN WAS INITIALLY PROCESSED U/S 143(1) OF THE ACT AND THE CASE WAS SELECTED FOR SCRUTINY UNDER CASS. NOTICES U/S 143(2) OF THE ACT AND U/S 14 2 (1) W ERE ISSUED AND RESPONDED TO BY THE ASSESSE E . 3 .1. THE ASSESSING OFFICER (AO) OBSERVED THAT DURING THE RELEVANT P REVIOUS YEAR (PY) THE ASSESSEE COMPANY HAD CERTAIN INTERNATIONAL 5 TRANSACTIONS PERTAINING TO PURCHASES OF FROM/WITH THE ASSOCIATE ENTERPRISES. A REFERENCE WAS THEREFORE MADE TO TPO FOR DETERMINATION OF ARMS LENGTH PRICE (ALP). THE TPO VIDE HIS ORDER U /S 92CA(3) DATED 31.10.2017 WARRANTED NO ADJUSTMENT AND THEREFORE THE TP ADDITION WAS NIL. 3 .2. DURING THE ASSESSMENT PROCEEDINGS U /S 143(3) R.W.S. 92CA(3) OF THE I.T. ACT 1961 THE AO NOTICED F ROM THE ANNUAL REPORT FOR THE F.Y. 2013 - 14 THAT THE ASSESSEE COMPANY HAD CHARGED RS.141 50 90 000/ - AS LITIGATION COST UNDER THE HEAD OTHER EXPENSES. THE DETAILS OF EXPENDITURE WERE CALLED FOR BY THE AO AND THE ASSESSEE FURNISHED ITS REPLIES FROM TIME TO TIME. ON VERIFICATION OF THE S UBMISSIONS MADE BY THE ASSESSEE THE AO OBSERVED THAT DURING THE FY 2009 - 10 THE E UROPEAN COMMISSION (EC IN SHORT) HAD STATED THAT IT HAD INITIATED ANTI - TRUST PROCEEDINGS AGAINST THE ASSESSEE COMPANY AND OTHER COMPANIES EACH OF WHICH ENTERED INTO AGRE EMENTS WITH ANOTHER COMPANY LES LABORATORIES SERVIER (SERVIER) RELATING TO A PRODUCT PERINDOPRIL AND THAT ON 27 TH OF JULY 2012 THE EC ISSUED A STATEMENT OF OBJECTIONS AGAINST THE ASSESSEE AND OTHERS SETTING OUT ITS PRELIMINARY CASE AND THAT THE ASSESSEE HAD SUBMITTED ITS RESPONSE TO EC ON THE STATEMENT OF OBJECTI ONS . 3 .3 . FURTHER ON 9 TH JULY 2014 THE EC ISSUED A DECISION TO THE EFFECT THAT THE ASSESSEE COMPANY AND MYLAN INC. AS WELL AS THE OTHER COMPANIES HA VE VIOLATED E UROPEAN U NION C OMPETITION RULES AND FOR THIS VIOLATION IT IMPOSED A FINE/FEE EQUIVALENT TO THE PATENT INFRINGEMENT SETTLEMENT CONSIDERATION RECEIVED FROM SERVIER OF APPROXIMATELY RS.1415.09 MILLIONS (E U R 17.2 MILLION) INCLUDING APPROXIMATELY RS.662.29 MILLIONS (E U R 8.05 MILLION) JOINTLY AND SEVERALLY WITH MYLAN INC. USA THE ULTIMATE HOLDING COMPANY. HE OBSERVED THAT THE ASSESSEE COMPANY CONTINUED TO CONTEST THE CASE IN GENERAL COURT OF EU WHILE THE MANAGEMENT HAS MADE A PROVISION TOWARDS THE SAME IN ITS BOOKS OF ACCOUNTS ON PRUDENT BASIS. 3 .4 . THE AO THEREFORE ISSUED A SHOW CAUSE NOTICE TO THE ASSESSEE AS TO WHY THE LITIGATION EXPENDITURE OF RS.141 50 90 000/ - CLAIMED BY ASSESSEE SHOULD NOT BE DISALLOWED UNDER EXPLANATION 1 TO SEC.37(1) OF THE ACT. T HE ASSESSEE FILED ITS REPLY TO THE SHOW CAUSE NOTICE STATING THAT THE 6 PAYMENT IS NOT TOWARDS FINE BUT THAT IT IS ONLY A RETURN BACK OF THE INCOME RECEIVED FROM SERVIER ON ACCOUNT OF THE AGREEMENT FOR DEVELOPMENT OF GENERIC VERSION OF PERINDOPRIL TABLETS. FOR THE SAKE OF CLARITY AND READY REFERENCE THE RELEVANT PORTION IS REPRODUCED HEREUNDER. 5.3. THE ASSESSEES REPLY TO THE SCN DATED 21.12.2017 IS REPRODUCED AS UNDER. 1. WITH RESPECT TO YOUR SCN DATED 21.12.2017 REQUESTING TO JUSTIFY WHY THE FINE PAID TO EU COMMISSION SHOULD NOT BE DISALLOWED U/S 37. FURTHER TO THE ABOVE AND THE DISCUSSION HAD WITH OUR GOOD SELVES IN RELATION TO CLAIM OF PAY BACK TO EU COMMISSION OF GBP 11.8 MILLION INCOME E ARNED EARLIER UNDER A SETTLEMENT AGREEMENT BETWEEN MATRIX LABORATORIES (NOW KNOWN AS 'MYLAN LABORATORIES LIMITED') WE SUBMIT AS UNDER . 1. THE TAXPAYER HAS DEVELOPED AND STABILIZED THE PROCESS FOR MANUFACTURE OF PERINDOPRIL AND FILED NECESSARY REG ULATORY APPLICATIONS ((DMFS) FOR MANUFACTURE OF API DRUG FROM ITS MANUFACTURING UNIT. 2. THE TAXPAYER AND NICHE GENERICS LIMITED ENTERED INTO AN CO - DEVELOPMENT AGREEMENT TO JOINTLY DEVELOP THE GENERIC VERSION OF PERINDOPRIL TABLETS FOR WHICH THE API WOUL D BE SUPPLIED BY THE TAXPAYER. NICHE FILED THE DOSSIERS FOR MANUFACTURE OF PERINDOPRIL AT ITS UNICHERN FACILITY BASED ON THE SUPPLIES FROM TAXPAYER. 3. PERINDOPRIL IS SERVIER LABORATORIES LIMITED ('SERVIER') MOST SUCCESSFUL PRODUCT IN EU AND IT IS THE ORIGINATOR COMPANY/PATENT COMPANY. NICHE WORKING WITH MATRIX AND UNICHEM LABORATORIES LIMITED WOULD RESULT IN A GENERIC ENTRY OF PERINDOPRIL. 4. SERVIER IN FEB'04 WARNED NICHE ABOUT ITS EXISTING PATENT PROTECTION FOR PERINDOPRIL AND AFTER A SERIES OF DISCUSSIONS HAD SETTLED ON 8TH FEBRUARY 2005 SERVIER CONCLUDED WITH NICHE A PATENT SETTLEMENT AGREEMENT. 5. THE TAXPAYER DID NOT HAVE CAPABILITY TO PRODUCE A FINAL PERINDOPRIL PRODUCT IT HAD THE CAPABILITY TO PRODUCE AN API AT THAT TIME. IT HAD NO PRESENCE IN THE ED FOR APPLYING MARKET AUTHORIZATION. AS A RESULT OF LOSING NICHE TAXPAYER WAS OUT OF THE RACE AND WOULD NOT HAVE BEEN ABLE TO FIND ANOTHER PARTN ER WILLING AND ABLE TO OVERCOME ALL BARRIERS AND PRODUCE IN A TIMELY MANNER A FINAL PERINDOPRIL PRODUCT 6. WITH NO CHOICE LEFT TAXPAYER SETTLED WITH SERVIER UNDER A SETTLEMENT AGREEMENT WHEREIN FOR A GBP OF 11.8 MILLION - TAXPAYER SHALL NOT AND SHALL PRO CURE THAT ITS AFFILIATES SHALL NOT (I) CARRY OUT IN RELATION TO PERINDOPRIL MADE USING THE PROCESS ANY RESTRICTED ACT IN ANY COUNTRY OF THE TERRITORY; AND/OR (II) MANUFACTURE AND/OR SUPPLY PERINDOPRIL MADE USING THE PROCESS FOR USE ANYWHERE IN THE TERRIT ORY. 7 7. THE NON - COMPETE OBLIGATION PREVENTED TAXPAYER FROM LAUNCHING A GENERIC VERSION OF PERINDOPRIL MANUFACTURED ON THE BASIS OF THE PROCESS DEVELOPED IN COOPERATION WITH NICHE IN THE TERRITORY. 8. SERVIER HAD ENTERED SIMILAR SETTLEMENT AGREEMENT WITH KRKA LUPIN TEVA AND UNICHEM. 9. THE PAYMENT RECEIVED FROM SERVIER OF GBP 11.8 MILLION WAS FULLY OFFERED TO TAX IN F. Y 2004 - 05 AND DEFERRED IN THE BOOKS FOR 44 MONTHS BY TAXPAYER. DURING THE F. Y 2013 - ] 4 IN VIEW OF THE EU COMMISSION ORDER THE EQUIVALE NT AMOUNT OF GBP 11.8 MILLION I.E 17.16 MILLION WAS PAID BACK TO ED BY MYLAN. IN THIS CONNECTION WE WOULD REITERATE THAT IT WILL FALL UNDER THE PROVISIONS OF SEC 28. THE SAME IS EXTRACTED FOR YOUR READY REFERENCE. '28. THE FOLLOWING INCOME SHALL BE C HARGEABLE TO INCOME TAX UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION'. (VA) ANY SUM WHETHER RECEIVED OR RECEIVABLE IN CASH OR KIND UNDER AN AGREEMENT FOR (A) NOT CARRYING OUT ANY ACTIVITY IN RELATION TO ANY BUSINESS; OR (B) NOT SH ARING OUT ANY KNOW. - HOW PATENT COPYRIGHT TRADE - MARK LICENSE FRANCHISE OR ANY OTHER BUSINESS OR COMMERCIAL RIGHT OF SIMILAR NATURE OR INFORMATION OR TECHNIQUE LIKELY TO ASSIST IN THE MANUFACTURE OR PROCESSING OF GOODS OR PROVISION FOR SERVICES; PROVIDED THAT SUB - CLAUSE (A) SHALL NOT APPLY TO - (I) ANY SUM WHETHER RECEIVED OR RECEIVABLE IN CASH OR KIND 011 ACCOUNT OF TRANSFER OF THE RIGHT TO MANUFACTURE PRODUCE OR PROCESS ANY ARTICLE OR THING OR RIGHT TO CARRY ON ANY BUSINESS WHICH IS CHA RGEABLE UNDER THE HEAD 'CAPITAL GAINS' (II) ANY SUM RECEIVED AS COMPENSATION FROM THE MULTILATERAL FUND OF THE MONTREAL PROTOCOL ALL SUBSTANCES THAT DEPLETE THE OZONE LAYER UNDER THE UNITED NATIONS ENVIRONMENT PROGRAMME IN ACCORDANCE WITH THE TERMS OF AGREEMENT ENTERED INTO WITH THE GOVERNMENT OF INDIA EXPLANATION - FOR THE PURPOSES OF THIS CLAUSE - (I) AGREEMENT INCLUDES ANY ARRANGEMENT OR UNDERSTANDING OR ACTION IN CONCERT A. WHETHER OR NOT SUCH ARRANGEMENT OR UNDERSTANDING OR ACTION IS FORMAL OR IN WRITING; OR B. WHETHER OR NOT SUCH ARRANGEMENT UNDERSTANDING OR ACTION IS INTENDED TO BE ENFORCEABLE BY LEGAL PROCEEDINGS; 8 TREATMENT OF THE TAKE BACK UNDER INCOME TAX ACT 1961 GIVEN THE ABOVE RATIONALE FOR THE LEVY OF FINE WHICH IS ENTIRELY RELATED TO ALLEGED VIOLATION OF COMPETITION LAWS OF EUROPEAN UNION (UNTIL FINALLY ADJUDICATED BY A HIGHER APPELLATE AUTHORITY) IT IS OUR PRIMA - FACIE VIEW THAT THE FINE IS NOTHING BUT 'TAKE BACK' OF THE NON - COMPETE SETTLEMENT INCOME RECEIVED F ROM SERVIER. THE RECITALS IN THE COMMISSION ORDERS WOULD BUTTRESS THE ARGUMENT THAT THE AMOUNT IS A 'TAKE BACK' AND NOT A FINE. THEREFORE THE AMOUNT WOULD BE ALLOWABLE AS A DEDUCTION UNDER SECTION 28 OF THE INCOME TAX ACT 1961. UNDER THE INCOME TAX ACT 1961 NON - COMPETE RECEIPTS ARE TAXABLE AS PART OF INCOME IRRESPECTIVE OF THEIR LEGAL ENFORCEABILITY. ANY COURT DECISION THAT DECLARES THAT THE AMOUNT IS REQUIRED TO BE 'GIVEN BACK' ON THE GROUND THAT THEY ARE 'GAINS IMPROPERLY MADE' THE DEDUCTION WOULD AL SO BE MADE UNDER THE SAME SECTION I.E. SECTION 28 OF THE ACT. THIS AMOUNT IS NOT HIT BY EXPLANATION 1 TO SEC 37(1) AND WE PROVIDE OUR REASONS BELOW : A. FOR THE SAKE OF CONVENIENCE THE SUB - SECTION WITH EXPLANATION THERETO IS QUOTED BELOW: '37 (1) ANY EXPENDITURE (NOT BEING EXPENDITURE OF THE NATURE DESCRIBED IN SECTIONS 3010 36 AND NOT BEING IN THE NATURE OF CAPITAL EXPENDITURE OR PERSONAL EXPENSES OF THE ASSESSEE) LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS OR PROFE SSION SHALL BE ALLOWED IN COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION'. EXPLANATION - FOR THE REMOVAL OF DOUBTS IT IS HEREBY DECLARED THAT ANY EXPENDITURE INCURRED BY AN ASSESSEE FOR ANY PURPOSE WHICH IS AN O FFENCE OR WHICH IS PROHIBITED BY LAW SHALL NOT BE DEEMED TO HAVE BEEN INCURRED FOR THE PURPOSE OF BUSINESS OR PROFESSION AND NO DEDUCTION OR ALLOWANCE SHALL BE MADE IN RESPECT OF SUCH EXPENDITURE. B. THE EXPLANATION WAS INTRODUCED IN 1998 AND THE AMENDMEN T WAS MADE RETROSPECTIVE FROM 01ST APRIL 1962. THE MEMORANDUM EXPLAINING THE PROVISIONS OF THE FINANCE BILL 1998 STATED AS FOLLOWS: IT IS PROPOSED TO INSERT AN EXPLANATION AFTER SUB - SECTION (I) OF SECTION 37 TO CLARIFY THAT NO ALLOWANCE SHALL BE MADE IN RESPECT OF EXPENDITURE INCURRED BY AN ASSESSEE FOR ANY PURPOSE WHICH IS AN OFFENCE OR WHICH IS PROHIBITED BY LAW. THIS PROPOSED AMENDMENT WILL RESULT IN DISALLOWANCE OF THE CLAIM MADE BY CERTAIN TAX PAYERS OF PAYMENTS ON ACCOUNT OF PROTECTION MONEY EX TORTION HAFTA BRIBES ETC. AS BUSINESS EXPENDITURE. C. THE DISALLOWANCE UNDER THIS EXPLANATION THEREFORE RESTS ON THE FOLLOWING CONDITIONS PRECEDENT: I. IT SHOULD BE AN EXPENDITURE; AND II. IT SHOULD HAVE BEEN INCURRED FOR ANY PURPOSE WHICH IS AN OFFENCE OR 9 WHICH IS PROHIBITED BY LAW. D. ONCE IT IS ESTABLISHED THAT THE AMOUNT IS 'EXPENDITURE' THE SECOND CONDITION PRECEDENT FOR ATTRACTING DISALLOWANCE UNDER EXPLANATION TO SECTION 37(1) IS WHETHER IT HAS BEEN INCURRED BY THE ASS ESSEE FOR ANY PURPOSE WHICH IS AN OFFENCE OR WHICH IS PROHIBITED BY LAW. THE WORD 'OFFENCE' IS NOT DEFINED IN THE INCOME TAX ACT. HOWEVER IT IS DEFINED IN SECTION 3(38) OF THE GENERAL CLAUSES ACT 1887 AS FOLLOWS: 'OFFENCE' SHALL MEAN ANY ACT OR OMISSION MADE PUNISHABLE BY ANY LAW FOR THE TIME BEING IN FORCE;'. THE EXPRESSION 'PROHIBITED BY LAW' TOO IS NOT DEFINED IN THE INCOME TAX ACT. IT MAY BE VIEWED EITHER AS AN ACT ARISING FROM A CONTRACT WHICH IS EXPRESSLY OR IMPLIEDLY PROHIBITED BY STATUTE OR CO NTRACTS ENTERED INTO WITH THE OBJECT OF COMMITTING AN ILLEGAL ACT. E. THE HON'BLE MADRAS HIGH COURT IN THE CASE OF CIT V. PARTHASARATHY [1995] 78 TAXMAN 470 HELD THAT FOR DECIDING THE QUESTION WHETHER AN EXPENDITURE IS HIT BY THE EXPLANATION 1 TO SECTIO N 37(1) ONE HAS TO EXAMINE THE SCHEME OF THE PROVISIONS OF THE RELEVANT STATUTE PROVIDING FOR PAYMENT OF SUCH IMPOSTS NOTWITHSTANDING THE NOMENCLATURE OF THE IMPOST AS GIVEN BY THE STATUTE TO FIND OUT WHETHER IT IS COMPENSATORY OR PENAL IN NATURE. THE AUT HORITY HAS TO ALLOW DEDUCTION UNDER SECTION 37(1) OF THE INCOME - TAX ACT WHENEVER SUCH EXAMINATION REVEALS THE CONCERNED IMPOST TO BE PURELY COMPENSATORY IN NATURE. WHENEVER SUCH IMPOST IS FOUND TO BE OF COMPOSITE NATURE THAT IS PARTLY OF COMPENSATORY N ATURE AND PARTLY OF PENAL NATURE THE AUTHORITIES ARE OBLIGED TO BIFURCATE THE TWO COMPONENTS OF THE IMPOST AND GIVE DEDUCTION TO THAT COMPONENT WHICH IS COMPENSATORY IN NATURE AND REFUSE TO GIVE DEDUCTION TO THAT COMPONENT WHICH IS PENAL IN NATURE. F. TH E EXPLANATION (1) TO SECTION 37(1} WAS BROUGHT IN TO NULLIFY THE PRANAV CONSTRUCTION CO. V ASSTT. CIT (1998] 96 TAXMAN 323 (MAG.)(MUM.) JUDGMENT. IN THAT CASE A SUM OF RS. 20 LAKHS HAD BEEN PAID AS PROTECTION MONEY BY BUILDER AS THE AREAS WERE VULNERABLE TO HAFTA AND EXTORTION AND THIS MONEY WAS ALLOWED AS DEDUCTION. THUS TO DISALLOW INCOME - TAX DEDUCTIONS FOR HAFTA THE EXPLANATION HAD BEEN INCORPORATED. BUT EXTENDING THE PROVISO TO FINES WAS NEVER INTENDED. HENCE DISALLOWING INCOME - TAX DEDUCTION FOR ANY KIND OF FINE IS NOT PROPER. G. ANOTHER NOTEWORTHY POINT IS THAT THE EXPLANATION TO SECTION 37(1) IS A DEEMING PROVISION. IT ONLY CREATES A LEGAL FICTION. NEXT THE EXPLANATION COMES INTO PLAY WHEN EXPENDITURE THOUGH INCURRED FOR BUSINESS PURPOSE IS CO UPLED WITH PURPOSE WHICH IS OFFENCE OR PROHIBITED BY LAW. HERE THE PURPOSE IS TO DO BUSINESS AND THERE IS NO DOUBLE PURPOSE TO DO UNLAWFUL OR ILLEGAL ACTS. H. THE ANDHRA PRADESH HIGH COURT IN CIT V. HYDERABAD ALLWYN METAL WORKS LTD. [(1988) 172 I1R 113 118 - 19](AP) HAS TAKEN THE VIEW THAT THE AMOUNT OF SUCH DAMAGES COMPRISES BOTH AN ELEMENT OF PENALTY LEVY AS WELL AS COMPENSATORY PAYMENT. THEREFORE THE ENTIRE SUM CAN 10 NEITHER BE CONSIDERED AS MERE PENALTY NOR AS MERE INTEREST. IN THAT VIEW OF THE MATTER THAT PORTION OUT OF THE AMOUNT OF SUCH DAMAGES WHICH IS HELD TO BE COMPENSATION IS AN ALLOWABLE DEDUCTION. I. IT MAY BE THAT A PARTICULAR PAYMENT MADE BY THE ASSESSEE UNDER A STATUTORY PROVISION THOUGH CALLED A PENALTY IS A COMPOSITE ONE COMPRISING BOTH A PENALTY AND A COMPENSATION FOR DELAYED PAYMENT. UNDER SECTION 37( 1) ONLY THAT PORTION OF SUCH PAYMENT HAVING COMPOSITE NATURE WHICH IS ATTRIBUTABLE TO ITS COMPENSATORY CHARACTER CAN ONLY BE ALLOWED AS A DEDUCTION. THE OTHER PORTION WHIC H IS ATTRIBUTABLE TO ITS PENALTY NATURE CANNOT BE ALLOWED AS A DEDUCTION UNDER SECTION 37(1) BECAUSE SUCH PAYMENT IS FOR INFRACTION OF LAW [PRAKASH COTTON MILLS P. LTD. V. CIT (1993) 201 ITR 684 690 - 91(SC) ; STANDARD BATTERIES LTD. V. ERR (J995) 211 IT R 444 446(SC) ; SWADESHI COTTON MILLS CO. LTD. V. ERR. (1998) 233 ITR 199 202(SC) ; CIT V. BHARAT TELEVISION PVT. LTD_ (1996) 218 ITR 173 175 J 78(AP) ; CIT V HYDERABAD ALLWYN METAL WORKS LTD. (1988) 172 ITR 113. 121 (AP) . 10. IN VIEW OF THE ABO VE THE ABOVE THE AMOUNT OF GBP 11.8 MILLION PAYABLE BY MYLAN BEING THE SAME AMOUNT RECEIVED FROM SERVIER UNDER ARTICLE 23(2) OF THE EU REGULATION (EC) NO. 1/2003 WHICH IS CALLED FINE IS NOTHING BUT COMPENSATORY DOESN'T FALL WITHIN EXPLANATION 1 TO SE CTION 37( 1) AND SHOULD BE ALLOWED AS DEDUCTION FROM INCOME. THE AO HOWEVER WAS NOT CONVINCED WITH ASSESSEES CONTENTIONS AND HELD THAT THE LEVY OF FINE IS FOR VIOLATION OF RULES AND HENCE THE EXPENDITURE CLAIM ED AS LITIGATION COST IS TO BE DISALLOWED UNDER THE EXPLANATION 1 TO SEC. 37(1) OF THE ACT. HE ACCORDINGLY BROUGHT THE SAME TO TAX. 4 . AGGRIEVED THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A) WHO CO NFIRMED THE ORDER OF AO ON THIS ISSUE AND THE ASSESSEE IS IN SECOND APPEAL BEFORE US. IN ADDITION TO TH IS DISALLOWANCE THERE WERE ALSO CERTAIN OTHER DISALLOWANCES AND THE CONSEQUENT IAL ADDITIONS MADE BY THE AO AND THE CIT(A) HAD GRANTED PARTIAL RELIEF TO THE ASSESSEE WHICH ARE ALSO CHALLENGED BY BOTH THE PARTIES IN THE APPEAL FILED BEFORE US. 5. WE SHALL DEAL WITH ALL TH E ISSUES IN SERIATUM AFTER DECIDING THE FIRST ISSUE BEFORE US I.E. THE ALLOWABILITY OF THE LIT IGATION COSTS. 6 . THE LD.COUNSEL FOR THE ASSESSEE WHILE REITERATING THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW SUBMITTED AS UNDER: - (A) THAT PRIOR TO THE YEAR 2004 THE ASSESSEE HAD DEVELOPED AND STABILIZED THE PROCESS OF MANUFACTURE OF PERINDOPRIL AN ANTI - HIGH 11 BLOOD PRESSURE DRUG AND FILED THE NECESSARY REGULATORY APPLICATIONS (DMFS) FOR MANUFACTURE OF THE API DRUG FROM ITS MANUFACTURING UNIT. (B) THE ASSESSEE AND NICHE GENERICS LIMITED (NICHE ) ENTERED INTO A CO - DEVELOPMENT AGREEMENT TO JOINTLY DEVELOP THE GENERIC VERSION OF PERINDOPRIL TABLETS FOR WHICH THE API WOULD BE SUPPLIED BY THE ASSESSEE AND ACCORDINGLY NICHE FILED THE DOSSIERS FOR MANUFACTURE OF PERINDOPRIL AT ITS UNICHEM FACILITY B ASED ON THE SUPPLIES FROM THE ASSESSEE. (C) THAT PERINDOPRIL IS SERVIER LABORATIES LIMITEDS (SERVIER) MOST SUCCESSFUL INNOVATOR PRODUCT IN THE EUROPEAN UNION ( EU) REGION FOR WHICH IT IS THE ORIGINATOR COMPANY/PATENT COMPANY. NICHE A COMPETITOR T O SERVIER WAS WORKING WITH MATRIX (NOW CALLED AS MYLAN) AND UNICHEM LABORATORES LIMITED FOR THE GENERIC ENTRY OF PERINDOPRIL IN THE EU REGION. (D) SERVIER IN FEBRUARY 2004 WARNED NICHE ABOUT ITS EXISTING PATENT PROTECTION FOR PERINDOPRIL AND AF TER A SERIES OF DISCUSSIONS ON 8 TH FEBRUARY 2005 A PATENT SETTLEMENT AGREEMENT WAS CONCLUDED BY SERVIER WITH NICHE. (E) AS THE ASSESSEE DID NOT HAVE CAPABILITY TO PRODUCE INDEPENDENTLY THE FINAL PERINDOPRIL PRODUCT BUT ONLY HAD THE CAPABILITY TO PRO DUCE AN API AND SINCE IT HAD NO PRESENCE IN THE EU REGION TO APPLY FOR M ARKET A UTHORIZATION THE ASSESSEE HAD TO ENTER INTO A PARTNERSHIP WITH NICHE AND THEREFORE IT HAD TO SETTLE WITH SERVIER UNDER A SETTLEMENT AGREEMENT FOR GBP OF RS.1.18 CRORES. (F) ACCORDING TO THIS AGREEMENT THE ASSESSEE OR ITS AFFILIATES SHALL NOT : (I) CARRY OUT IN RELATION TO PERINDOPRIL MADE USING THE PROCESS ANY RESTRICTED ACT IN ANY COUNTRY OF THE TERRITORY ; AND /OR (II) MANUFACTURE AND/OR SUPPLY PERINDOPRIL MADE USING THE PROCESS FOR USE ANYWHERE IN THE TERRITORY. (G) IN RETURN SERVIER COMMITTED FIRST NOT TO BRING ANY INFRINGEMENT ACTIONS AGAINST MATRIX BASED ON THE PATENTS IN RESPECT OF ANY ACT OF ALLEGED IN FRINGEMENT OCCURRING BEFORE THE CONCLUSION OF THE AGREEMENT A N D SECONDLY TO PAY MATRIX THE SUM OF GBP RS.1.18 CRORES TOWARDS CONSIDERATION FOR THE COMMITMENTS MADE BY MATRIX 12 AND FOR THE SUBSTANTIAL COSTS AND POTENTIAL LIABILITIES THAT MAY BE INCURRE D BY MATRIX AS A CONSEQUENCE OF CEASING ITS PROGRAMME TO DEVELOP AND MANUFACTURE PERINDOPRIL MADE USING THE PROCESS. (H) THE SAID S ETTLEMENT OBLIGATION PREVENTED THE ASSESSEE FROM LAUNCHING A GENERIC VERSION OF PERINDO PRIL MANUFACTURED ON THE BASIS OF THE PROCESS DEVELOPED BY IT IN COOPERATION WITH NICHE IN THE TERRITORY. (I) THE AMOUNT OF GBP RS.1.18 CRORES RECEIVED BY THE ASSESSEE IN THE SAID SETTLEMENT WAS RECOGNISED IN THE BOOKS OF ACCOUNTS OF THE ASSESSEE AS INCOME ON A DEFERRED BASIS OVER A PE RIOD OF 44 MONTHS. BUT THE ENTIRE AMOUNT OF GBP RS.1.18 CRORES WAS OFFERED TO TAX AS INCOME FROM BUSINESS IN THE SAME YEAR I.E. IN A.Y. 2005 - 06. (J) O N JULY 9 2014 THE ORDER OF THE EU COMMISSION WAS PASSED IMPOSING A FINE ON THE ASSESSEE UNDER ITS A NTI - T RUST L AWS IN THE REGION FOR VIOLATION OF THE C OMPETITION L AWS BY WAY OF ACCEPTING A NON - COMPETE SETTLEMENT FROM SERVIER (K) THE FINE IMPOSED ON THE ASSESSEE WAS IN EURO S EQUIVALENT TO THE AMOUNT OF GBP RS.1.18 CRORES RECEIVED BY IT IN SE TTLEMENT I.E. 1.72 CRORES . THE ASSESSEE WAS THEREFORE REQUIRED TO DISGORGE THE ENTIRE SUM RECEIVED BY IT FROM SERVIER. (L) THUS THE ASSESSEE INCURRED AN AMOUNT OF INR 141.50 CRORES FROM ITS PROFITS FOR THE YEAR AS LITIGATION COSTS UNDER THE HEAD OTH ER EXPENSES. THE ASSESSEE THEREFORE CLAIMED THAT THE PAYMENT TOWARDS LEVY BY EU COMMISSION CONSTITUTES BUSINESS LOSS ELIGIBLE FOR DEDUCTION U/S 28( I ) OF THE ACT. IT WAS SUBMITTED THAT FOR ARRIVING AT THE FIGURE OF PROFITS AND GAINS OF THE BUSINESS OF THE ASSESSEE IN A PARTICULAR YEAR BUSINESS EXPENDITURE OF ALL TYPES WHETHER SPECIFICALLY PROVIDED FOR OR NOT MAY BE ALLOWED U/S 28(I) OF THE ACT ITSE LF. HE ALSO REFERRED TO SECTIONS 30 TO 43C OF THE ACT SUBMITTING THAT THESE SECTIONS EXPRESSLY PROVIDE FOR THE DEDUCTIONS IN COMPUTING BUSINESS INCOME AND IF AN EXPENDITURE COMES WITHIN ANY OF THE ENUMERATED CLASSES OF ALLOWANCES IT CAN BE CONSIDERED UNDER THE APPROPRIATE PROVISION. HE FURTHER SUBMITTED THAT IN 13 ASSESSING THE AMOUNT OF THE PROFITS AND GAINS OF THE YEAR ACCOUNT MUST NECESSARILY BE TAKEN OF ALL LOSSES INCURRED BESIDES THE EXPENDITURE ALLOWABLE U/S EC. 30 TO 43C OF THE ACT. IN SUPPORT OF T HIS CONTENTION HE PLACED RELIANCE UPON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF BADRIDAS DAGA REPORTED IN (1958) 034 ITR 0010 . HE ALSO SUBMITTED THAT IN THE A.Y. 2005 - 06 THE ASSESSEE HAD RECEIVED AN AMOUNT OF GBP RS.1.18 CRORES WHICH WAS DULY OFFERED TO TAX AND DURING THE RELEVANT AY ASSESSEE WAS INTIMATED THAT IT WOULD BE REQUIRED TO PAY BACK THE ENTIRE AMOUNT RECEIVED EARLIER TO THE EU COMMISSION AND THEREFORE IT WOULD CONSTITUTE A LOSS TO BE DEDUCTED IN COMPUTING THE INCOME OF TH E ASSESSEE FOR THE RELEVANT AY. HE SUBMITTED THAT IF SUCH A DEDUCTION WAS NOT ALLOWED IT WOULD TANTAMOUNT TO LEVY ING OF TAX ON THE AMOUNT WHICH WAS NEVER EARNED BY ASSESSEE AND IT IS A SETTLED PRINCIPLE THAT TAX SHOULD BE CHARGED ONLY IN RESPECT OF A REAL INCOME OF THE TAX PAYER. 6 .1. LD.COUNSEL FOR THE ASSESSEE ALSO SUBMITTED THAT WHAT IS TO BE DISALLOWED UNDER EXPLANATION 1 TO SECTION 37(1) OF THE ACT IS A FEE OR FINE WHICH IS PENAL IN NATURE. HE S UBMITTED THAT LEVY BY EU COMMISSION IS NOT PENAL IN NATURE BUT WAS AKIN TO DISGORGEMENT I.E. A MONETARY EQUITABLE REMEDY THAT IS DESIGNED TO PREVENT A PERSON FROM UNJUSTLY ENRICHING HIMSELF . HE SUBMITTED THAT DISGORGEMENT TAKES AWAY THE PROFITS EARNED BY THE SAID PERSON AND THEREFORE IS NOT A FINE OR PENALTY BUT AN EQUITABLE RELIEF. HE SUBMITTED THAT SINCE THE ASSESSEE DID NOT INCUR ADDITIONAL AMOUNT S OVER AND ABOVE THE AMOUNTS RECEIVED IN SETTLEMENT THE DEDUCTIBILITY OF THE SAID PAYMENT CANNOT BE DE NIED UNDER EXPLANATION 1 TO SEC.37(1) OF THE ACT. IT WAS ALSO SUBMITTED THAT ONLY THOSE PAYMENTS WHICH ARE PENAL IN NATURE ARE TO BE DISALLOWED AS PER EXPLANATION 1 TO SEC.37(1) OF THE ACT AND WHAT CONSTITUTES PENAL AND WHAT CONSTITUTES COMPENSATORY IS TO BE DETERMINED INDEPENDENTLY AND IN THE FACTS AND CIRCUMSTANCES OF EACH CASE. HE SUBMITTED THAT THE AO HAD DISALLOWED THE SAID EXPENDITURE / L EVY MERELY GOING BY ITS NOMENCLATURE IN THE ORDER OF THE EU COMMISSION AND DID NOT EXAMINE AS TO THE EXACT NATURE OF LEVY. IN SUPPORT OF HIS CONTENTIONS THAT AO HAS TO ALLOW DEDUCTION OF AN EXPENDITURE U/S 37(1) OF THE ACT WHEREVER 14 SUCH EXAMINATION REVEALS THAT THE CONCERNED IMPOST IS NOT PENAL IN NATURE OR THAT IT IS PUREL Y COMPENSATORY IN NATURE THE LD.COUNSEL FOR THE ASSESSEE PLACED RELIANCE UPON THE FOLLOWING CASES. PRAKASH COTTON MILLS P LTD. (SC) (1993) 201 ITR 684 ; SWADESHI COTTON MILLS CO.LTD. (SC) (1998) 233 ITR 199; STANDARD BATTERIES LTD. (SC) (1995) 211 ITR 44 4; HYDERABAD ALLWYN METAL WORKS LTD. (HIGH COURT OF AP) (1988) 172 ITR 1131; BHARAT TELEVISION PVT.LTD. (HIGH COURT OF AP) (1996) 218 ITR 172. 6 .2 . THE LD.COUNSEL FOR THE ASSESSEE FURTHER REITERATED THAT THE AMOUNT RECEIVED FROM SERVIER IN SETTLEMENT FOR NON - COMPETE WAS DULY OFFERED TO TAX IN AY 2005 - 06 AND THE SAME HAS BEEN DIRECTED TO BE RETURNED EXCEPT TO THE EXTENT OF DIFFERENCE IN FOREIGN EXCHANGE FLUCTUATION RATE AND SINCE IT IS A PAYMENT T OWARDS PATENT INFRINGEMENT OR SETTLEMENT THE SAME IS COMPENSATORY IN NATURE AND CANNOT BE DISALLOWED PARTICULARLY BECAUSE THE EXPENDITURE IS PURELY FOR COMMERCIAL PURPOSE S . FOR THIS PROPOSITION HE PLACED RELIANCE UPON THE DECISION OF HONBLE HIGH COU RT OF DELHI IN THE CASE OF DESICCANT ROTORS INTERNATIONAL (P) LTD. REPORTED IN 245 CTR 572 (2012) . 6 .3 . WITHOUT PREJUDICE TO THE ABOVE ARGUMENTS THE LD.COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE WORD LAW REFERRED TO IN EXPLANATION 1 TO SEC.37( 1 ) OF THE ACT IS ONLY THE LAW OF THE LAND I.E. LAWS IN FORCE IN INDIA AND VIOLATION OF THE PROVISIONS OF THE TREATY ON THE FUNCTIONING OF THE EUROPEAN UNION (TFEU IN SHORT) CANNOT BE CONSIDERED AS VIOLATION OF THE LAW UNDER EXPLANATION 1 TO SEC.37(1) OF THE ACT . HE SUBMITTED THAT THE TREATY ON THE FUNCTIONING OF THE EU (TEFU) IS BETWEEN THE CONSTITUENTS OF THE EU I.E. 28 MEMBER STATES THAT ARE LOCATED PRIMARILY IN EUROPE AN D IS APPLICABLE ONLY WITHIN SUCH STATES AND IS SEPARATE FROM INTERNATIONAL LAW . THEREFORE EU TREATIES ARE LIKE ANY OTHER INTERNATIONAL AGREEMENTS BETWEEN THE COUNTRIES AND THE VIOLATION OF THE ARTICLES OF AGREEMENT CANNOT BE CONSTRUED AS VIOLATION OF LAW EVEN IF SUCH AGREEMENT FORMS THE BASIS OF THE LAWS OF VARIOUS COUNTRIES IN A REGION. IN SUPPORT OF HIS CONTENTION THAT THE WORD LAW MENTIONED IN EXPLANATION 1 TO SEC.37(1) OF THE ACT REFERS TO LAWS 15 IN FORCE IN INDIA THE LD.COUNSEL PLACED RELIANCE UPON THE BOARD S CIRCULAR NO.772 DATED 2.12.1998 REPORTED IN 235 ITR (ST) 35 (1999) EXPLAINING THE AMENDMENT BY WAY OF INSERTION OF EXPLANATION ( 1 ) TO SUB - SECTION ( 1 OF SEC.37 OF THE ACT AND SUBMITTED THAT WHAT IS PROPOSED T ) O BE DISALLOWED IS THE PAYMENT ON ACCOUNT OF PROTECTION MONEY EXTORTION HAFTA BRIBES ETC. (EMPHASIS SUPPLIED BY US) WHICH MAY BE CLAIMED AS BUSINESS EXPENDITURE. HE ALSO PLACED RELIANCE UPON THE DECISION OF HONBLE CALCUTTA HIGH COURT IN THE CASE OF SUSANTA MUKHERJEE IN CW NO.412 OF 1975 WHEREIN SEC.3(38) OF THE GENERAL CLAUSES ACT WHICH DEFINES OFFENCE TO MEAN ANY ACT OR OMISSION MADE PUNISHABLE BY LAW FOR THE TIME BEING IN FORCE WAS CONSIDERED. FURTHER ARTICLE 13 OF THE CONSTITUTION OF INDIA AND THE DECISION OF HONBLE SUP REME COURT IN THE CASE OF EDWARD COMPANY MILLS AIR 1955 (SC) 25 WERE CONSIDERED AND IT WAS HELD THAT ANY LAW FOR THE TIME BEING IN FORCE AS OCCURRING IN SECTION 3(38) OF THE GENERAL CLAUSES ACT 1897 MUST BE CONSTRUED AS ANY LAW FOR THE TIME BEING IN FO RCE IN INDIA AND IT HAS NO REFERENCE TO ANY LAW OF OTHER COUNTRIES OF THE WORLD. HE ALSO REFERRED TO THE DECISION OF THE FULL BENCH OF HONBLE ALLAHABAD HIGH COURT IN THE CASE OF ABDUL HAMEED VS. MOHD. ISHAQ AIR 1975 ALL.166 IN SUPPORT OF HIS CONTENTION THAT REFERENCE TO THE WORD LAW IN THE RELEVANT SECTION MEANS THE LAW OF THE LAND I.E. THE LAW OF INDIA AS THE DEFINITION UNDER THE GENERAL CLAUSES ACT IS APPLICABLE TO ALL THE CENTRAL ACTS AND REGULATIONS INCLUDING THE INCOME TAX ACT. 6 .4. THE LD.COUNSEL FOR THE ASSESSEE FURTHER SUBMITTED THAT THE EXPENDITURE INCURRED TOWARDS LEVY BY EU COMMISSION WAS INC URRED FOR THE PURPOSE OF CARRYING ON ITS BUSINESS AND THEREFORE IT CANNOT BE DISALLOWED U/S 37 ( 1 ) OF THE ACT. HE PLACED RELIANCE UPON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF UDAIPUR DISTILLERY CO.LTD. REPORTED IN 224 CTR 32 (2009) . THUS HE PRAYED THAT THE DISALLOWANCE OF LITIGATION COST MADE BY AO AND CONFIRMED BY CIT(A) BE DELETED. 7 . THE LD.DR ON THE OTHER HAND SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT THE ASSESSEE HAD RESORTED TO ANTI COMPETITIVE PRACTICES BY WAY OF DE LA YING THE ENTRY INTO MARKET OF CERTAIN GENERIC MEDICINES AND THIS ISSUE WAS INVESTIGATED BY THE E UROPEAN COMMISSION 16 AND THE E C HAS LEVIED THE FINE FOR INFRINGEMENT OF EC TREATY RULES THAT OUTLAWS CARTELS AND OTHER RESTRICTIVE BUSINESS PRACTICES AS WELL AS ABUSE OF DOMINANT POSITION. HE SUBMITTED THAT THE E C LEVIES FINES AS A MEASURE OF DETERRENCE SO THAT THE COMPANIES DO NOT RESORT TO SUCH TYPE OF ANTI - COMPETITIVE BEHAVIOUR AND THAT THE GENERAL COURT HAS ALSO CONFIRMED THE LEVY OF PENALTY IMPOSED BY EU COMMISSION. THEREFORE HE ARGUED THAT THE AMOUNT IS PAID AS PENALTY FOR BREACH OF LAW AND NOT AS A COMPENSATORY SE TTLEMENT. HE SUBMITTED THAT FINE IS NOT COMPENSATION BUT IS A PAYMENT MADE FOR INFRINGEMENT OF LAW AND HENCE CANNOT BE ALLOWED U NDER EXPLANATION 1 TO SEC. 37(1) OF THE ACT. HE ALSO SUBMITTED THAT THE SAME IS ALSO NOT ALLOWABLE U/S 28 (I) AS THE PAYMENT IS MADE FOR INFRINGEMENT OF LAW . IN SUPPORT OF HIS CONTENTION S HE PLACED RELIANCE UPON THE FOLLOWING CASES. I. HAJI AZI Z AND ABDUL SHAKOOR BROS (1961) 41 ITR 350 (SC) II. MADDI VENKATARAMAN & CO. (P) LTD. (1998) 96 TAXMAN 643(SC) . III. MAMTA ENTERPRISES (2004) 135 TAXMAN 393 (KAR.) . IV. SUSHIL GUPTA ( 2019 ) 102 TAXMANN.COM 409 (BOM.) . V. NAHAR SPINNING MILLS LTD. (2014) 49 TAXMANN.COM 565 (P&H). 7.1 THE LD.DR ALSO FILED THE COPY OF THE JUDGEMENT OF GENERAL COURT AND OTHER DOCUMENTS ON GUIDELINES OF EUROPEAN COMMISSION ON LEVY OF FINES ETC. AS ADDITIONAL EVIDENCE AND PRAYED FOR ADMISSION OF THE SAME UNDER RULE 29 OF ITAT RULES. THUS HE PRAYED FOR CONFIRMATION OF THE DISALLOWANCE MADE BY AO AND CIT(A). 8 . HAVING REGARD TO RIVAL CONTENTIONS AND THE MATERIAL PLACED ON RECORD WE FIND THAT THE ALLOWABILITY OF THE CLAIM OF LITIGATION COSTS OF RS.141 50 90 000/ - U/S 37(1) OF THE ACT IS BEFORE US. WHILE THE ASSESSEE HAS CLAIMED IT AS BUSINESS EXPENDITURE THE RE VENUE HAS TREATED IT AS PAYMENT OF PENALTY FOR INFRINGEMENT/VIOLATION OF EU TREATY IN LAW AND HENCE NOT ELIGIBLE FOR DEDUCTION DUE TO APPLICATION OF EXPLANATION 1 TO S.37(1) OF THE ACT TO THE SAID PAYMENT . THE ASSESSEE HAS TAKEN VARIOUS GROUNDS TO CLAIM IT AS DEDUCTION I.E. : I. THE LEVY CONSTITUTES BUSINESS LOSS; 17 II. THE LEVY IS NOT PENAL IN NATURE; III. TREATY ON THE FUNCTIONING OF THE EU IS NOT LAW AS PROVIDED IN EXPLANATION 1 TO SEC.37(1) OF THE ACT; IV. THE WORD LAW REFERRED TO IN EXPLANATION 1 TO SEC.37(1) OF THE ACT REFERS TO LAWS IN FORCE IN INDIA. 8 .1. THE LD.COUNSEL FOR THE ASSESSEE HAD RELIED UPON VARIOUS CASE LAWS AND ALSO CBDT CIRCULAR TO ARGUE THAT THE VIOLATION SHOULD ONLY BE OF THE LAWS IN INDIA TO BE CONSIDERED FOR DISALLOWANCE UNDER EXPLANATION 1 TO SEC.37(1) OF THE ACT. 8 .2. THE CBDT CIRCULAR EXPLAIN ED THE AMENDMENTS MADE TO THE FINANCE ACT 1998 FOR THE INTRODUCTION OF THE EXPLANATION 1 TO SEC.37(1) OF THE ACT AS UNDER: 20.1. SECTION 37 OF THE INCOME - TAX ACT IS AMENDED TO PR OVIDE THAT ANY EXPENDITURE INCURRED BY AN ASSESSEE FOR ANY PURPOSE WHICH IS AN OFFENCE OR WHICH IS PROHIBITED BY LAW SHALL NOT BE DEEMED TO HAVE BEEN INCURRED FOR THE PURPOSES OF BUSINESS OR PROFESSION AND NO DEDUCTION OR ALLOWANCE SHALL BE MADE IN RESPECT OF SUCH EXPENDITURE. THIS AMENDMENT WILL RESULT IN DISALLOWANCE OF THE CLAIMS MADE BY CERTAIN ASSESSEES IN RESPECT OF PAYMENTS ON ACCOUNT OF PROTECTION MONEY EXTORTION HAFTA BRIBES ETC. AS BUSINESS EXPENDITURE. IT IS WELL DECIDED THAT UNLAWFUL EXPEND ITURE IS NOT AN ALLOWABLE DEDUCTION IN COMPUTATION OF INCOME. 20.2. THIS AMENDMENT WILL TAKE EFFECT RETROSPECTIVELY FROM 1 ST APRIL 1962 AND WILL ACCORDINGLY APPLY IN RELATION TO THE ASSESSMENT YEAR 1962 - 63 AND SUBSEQUENT YEARS. 8 .3. THE GENERAL CLAUSES ACT ALSO DEFINES AN OFFENCE U/S 3 ( 38 ) OF THE ACT TO MEAN ANY ACT OR OMISSION MADE PUNISHABLE B Y LAW FOR THE TIME BEING IN FORCE . 8 .4. THE HONBLE ALLAHABAD HIGH COURT IN THE CASE OF ABDUL HAMEED VS. MOHD. ISHAQ CITED (SUPRA) HAD THE OCCASION TO DEAL WITH THIS PROVISION OF THE GENERAL CLAUSES ACT. THE HONBLE HIGH COURT WAS DEALING WITH THE PROVISIONS OF U.P. (TEMPORARY) CONTROL OF RENT AND EVICTION ACT 1947 AND THE APPLICABILITY OF SEC.7A OF THE ACT WHILE DEALING WITH THE SAID PROVISION THE HONBLE COURT WAS CONSIDERING THE MEANING OF THE WORD LAW AND AT PARA 12 OF ITS DECISION HAS HELD AS UNDER: 12. THE EXPRESSION ' L AW' HAS NOT BEEN DEFINED IN THE CONTRACT ACT NOR IN THE U. P. GENERAL CLAUSES ACT 1904 BUT IN THE CENTRAL 18 GENERAL CLAUSES ACT. 1897 'INDIAN LAW' IS DEFINED IN SECTION 3 (29) AS B ELOW : - ' 'INDIAN LAW' SHALL MEAN ANY ACT ORDINANCE REGULATION RULE ORDER BYE - LAW OR OTHER INSTRUMENT WHICH BEFORE THE COMMENCEMENT OF THE CONSTITU1ION HAD THE F ORCE OF LAW IN ANY PROVINCE OF INDIA OR A PART THEREOF OR THEREAFTER HAS THE FORCE OF LAW IN ANY PART A STATE OR PART C STATE OR PART THEREOF BUT D OES NOT INCLUDE ANY ACT OF PARLIAMENT OF THE UNITED KINGDOM OR ANY ORDER IN COUNCIL RULE OR OTHER INSTR UMENT MADE SUCH ACT.' THIS DEFINITION IS APPLICABLE TO ALL THE CENTRAL ACTS AND REGULATIONS MADE AFTER THE COMMENCEMENT OF THE GENERAL CLAUSES ACT. THE CONTRACT ACT WAS ENACTED IN 1872 BEFORE THE COMMENCEMENT OF THE GENERAL CLAUSES ACT 1897. THEREFORE T HIS DEFINITION IS NOT DIRECTLY APPLICABLE TO THE CONTRACT ACT BUT THERE APPEARS TO BE NO REASON WHY THE PRINCIPLES CONTAINED IN THE ABOVE DEFINITION BE NOT MADE APPLICABLE TO EVEN THE EARLIER ENACTMENTS. 'LAW' MUST THEREFORE INCLUDE NOT ONLY AN ACT AND ORDINANCE BUT ALSO REGULATIONS RULE ORDER BYE - LAW OR OTHER INSTRUMENT WHICH HAS THE FORCE OF LAW . SIMILAR INFERENCE CAN BE DRAWN FROM THE PROVISIONS OF THE CONSTITUTION ALSO. FOR THE PURPOSES OF ARTICLE 13 OF THE CONSTITUTION THE TERM LAW' INCLUDES ANY ORDINANCE ORDER BYE - LAW RULE REGULATION NOTIFICATION CUSTOM OR USAGE HAVING IN THE TERRITORY OF INDIA THE FORCE OF LA W. IN ARTICLE 366(10) THE EXPRESSION 'EXISTING LAW'; HAS BEEN DEFINED FOR THE PURPOSE OF THE CONSTITUTION TO MEAN ANY LAW ORDINANCE ORDER BYE - LAW RULE OR REGULATION PASSED OR MADE BEFORE THE COMMENCEMENT OF THIS CONSTITUTION BY ANY LEGISLATURE AUTHORITY OR PERSON HAVING POWER TO MAKE SUCH A LAW ORDINANCE ORDER BYE - LAW RULE OR REGULATION. BY VIRTUE OF ARTICLE 367(1) T HE GENERAL CLAUSES ACT 1897 IS SUBJECT TO SUCH ADAPTATIONS AND MODIFICATIONS THAT MAY BE MADE THEREIN UNDER. ARTICLE 372 APPLY FOR THE INTERPRETATION OF THE CONSTITUTION AS IT APPLIES FOR THE INTERPRETATION OF AN ACT OF THE LEGISLATURE OF THE DOMINION OF INDIA. 8 .5. FURTHER IN THE CASE OF SUSANTA MUKHERJEE CITED (SUPRA) THE HONBLE CALCUTTA HIGH COURT WAS CONSIDERING THE CASE OF A PERSON WHO WAS AN EMPLOYEE OF FOOD CORPORATION OF INDIA AT CALCUTTA AND ON A VISIT TO SWITZERLAND HE WAS ARREST ED BY SWISS POLICE AND LATER WAS CONVICTED AND SENTENCED TO IMPRISONMENT FOR A PERIOD OF EIGHT DAYS ON A CHARGE OF REPEATED THEFTS. AFTER RELEASE FROM IMPRISONMENT THE SAID PERSON RETURNED TO INDIA AND RESUMED HIS DUTIES. HOWEVER ON RECEIPT OF INFORMAT ION ABOUT THE IMPRISONMENT AND CONVICTION IN SWITZERLAND HE WAS PUT UNDER SUSPENSION UNDER THE CCS RULES. IN THIS CONTEXT THE HONBLE CALCUTTA HIGH COURT A FTER CONSIDERING VARIOUS PROVISIONS OF THE CONSTITUTION OF INDIA AND ALSO THE HONBLE SUPREME COU RT JUDGEMENTS ON THE ISSUE HELD THAT A 19 REFERENCE TO THE WOR D LAW IS ANY LAW FOR THE TIME BEING IN FORCE IN INDIAN TERRITORY AND NOT IN THE FOREIGN COUNTRY. FOR THE SAKE OF CLARITY AND READY REFERENCE THE RELEVANT PARA IS REPRODUCED HEREUNDER. 4. THE POINT THAT ARISES FOR CONSIDERATION IS WHETHER THE WORDS 'OFFENCE' 'CONVICTION' AND 'IMPRISONMENT' OCCURRING IN RULE 10 (2)(B) ALSO INCLUDES AN' OFFENCE' 'CONVICTION' AND 'IMPRISONMENT' UNDER THE PENAL LAW OF A FOREIGN COUNTRY. IN OTHER WOR DS WHETHER WHEN A GOVERNMENT SERVANT IS CONVICTED OF AN OFFENCE AND SENTENCED TO A TERM OF IMPRISONMENT EXCEEDING FORTY - EIGHT HOURS UNDER THE LAW OF A FOREIGN COUNTRY HE CAN BE SUSPENDED IN ACCORDANCE WITH RULE 1O(2)(B). THE RULES DO NOT DEFINE THESE TE RMS. THE WORDS 'OFFENCE' AND 'IMPRISONMENT' HAVE HOWEVER BEEN DEFINED IN THE GENERAL CLAUSES ACT. UNDER SECTION 3(38) OF THE SAID ACT 'OFFENCE' SHALL MEAN ANY ACT OR OMISSION MADE PUNISHABLE BY ANY LAW FOR THE TIME BEING IN FORCE. THE EXPRESSION 'ANY LAW FOR THE TIME BEING IN FORCE' UNDOUBTEDLY REFERS TO ANY INDIAN LAW FOR THE TIME BEING IN FORCE FOR IT IS APPARENT FROM SECTION 3 OF THE GENERAL CLAUSES ACT THAT THE DEFINITIONS GIVEN UNDER THAT SECTION SHALL APPLY TO THE GENERAL CLAUSES ACT AND ALL CENTRA L ACTS AND REGULATIONS MADE A FTER THE COMMENCEMENT OF THE SAID ACT. IT IS UNTHINKABLE THAT THE GENERAL CLAUSES ACT HAS BEEN ENACTED BY PARLIAMENT NOT ONLY FOR THE INTERPRETATION OF THE CENTRAL ACTS AND REGULATIONS HUT ALSO OF THE PROVISIONS OF ANY FA REIGN LAW AS CAN FENDED ON HE HALF OF THE APPELLANTS. THE WORD 'OFFENCE' AS REFERRED TO IN RULE 10 (2) (B) OR THE RULES READ WITH SECTION 3(38) OF THE GENERAL CLAUSES ACT MEANS ANY ACT OR OMISSION MADE PUNISHABLE BY ANY INDIAN LAW FOR THE TIME BEING IN FORCE I F ANY ACT OR OMISSION WHICH IS NOT PUNISHABLE UNDER ANY INDIAN LAW IT WILL NOT HE AN OFFENCE ALTHOUGH SUCH AN ACT OR OMISSION MAY HE AN OFFENCE UNDER THE LAW OF A FOREIGN COUNTRY. WE DO NOT THINK THAT THE DECISION IN EDWARD MILTS CO. LTD. V. STATE OF AJME R HAS ANY HEARING ON THE QUESTION WHETHER THE WORD 'OFFENCE' AS DEFINED IN SECTION 3(38) OF THE GENERAL CLAUSES ACT ALSO INCLUDES AN OFFENCE UNDER THE LAW OF ANOTHER COUNTRY BEYOND INDIA. IN THAT EASE THE SUPREME COURT HAS CONSIDERED THE DIFFERENCE BETW EEN THE EXPRESSIONS 'AN EXISTING LAW' AND 'A LAW IN FORCE' AS USED IN SECTION 94(3) OF THE GOVERNMENT OF INDIA ACT 1935 AND ARTICLE 372 OF THE CONSTITUTION RESPECTIVELY. IT HAS BEEN HELD BY THE SUPREME COURT THAT THERE IS NO MATERIAL DIFFERENCE BETWEEN 'A N EXISTING LAW' AND A 'A LAW IN FORCE'. IT HAS BEEN FURTHER OBSERVED THAT THE WORDS 'A LAW IN FORCE' A USED IN ARTICLE 372 ARE WIDE ENOUGH TO INCLUDE NOT MERELY A LEGISLATIVE ENACTMENT BUT ALSO ANY REGULATION OR ORDER WHICH HAS THE FORCE OF LAW. 'AS ALRE ADY STATED THE PROPOSITION OF LAW WHICH HAS BEEN LAID DOWN BY THE SUPREME COURT IN THE ABOVE DECISION IS NOT RELEVANT TO THE ISSUE WITH WHICH WE ARE CONCERNED. 8 .6. T HEREFORE ACCORDING TO HIM IT IS ONLY LAWS OF THE LAND I.E. THE LAWS IN FORCE IN INDI A IF VIOLATED THE EXTENT OF SUCH VIOLATION IS TO BE DISALLOWED. 20 8 .7 . HE ALSO PLACED RELIANCE ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF HARI SHANKER JAIN VS. SONIA GANDHI DATED 12 TH SEPTEMBER 2001 IN CA NO.4400/200 0 WHEREIN IT HAS BEEN HELD AS UNDER: ITALIAN LAW IS A FOREIGN LAW SO FAR AS THE COURTS IN INDIA ARE CONCERNED. U/S 57(1) OF INDIAN EVIDENCE ACT 1872 THE COURT SHALL TAKE JUDICIAL NOTICE OF INTER ALIA ALL LAWS IN FORC E IN THE TERRITORY OF INDIA. FOREIGN LAWS ARE NOT INCLUDED THEREIN. SECTIONS 45 AND 84 OF EVIDENCE ACT PERMIT PROOF BEING TENDERED AND OPINION OF EXPERTS BEING ADDUCED IN EVIDENCE IN PROOF OF A POINT OF FOREIGN LAW. UNDER ORDER VI RULE 2 OF THE CODE OF C IVIL PROCEDURE 1908 EVERY PLEADING SHALL CONTAIN A STATEMENT IN CONCISE FORM OF THE MATERIAL FACTS RELIED ON BY A PARTY BUT NOT THE EVIDENCE NOR THE LAW OF WHICH A COURT MAY TAKE JUDICIAL NOTICE. BUT THE RULE AGAINST PLEADING LAW IS RESTRICTED TO THAT LAW ONLY OF WHICH A COURT IS BOUND TO TAKE JUDICIAL NOTICE. AS THE COURT DOES NOT TAKE JUDICIAL NOTICE OF FOREIGN LAW IT SHOULD BE PLEADED LIKE ANY OTHER FACT IF A PARTY WANTS TO RELY ON THE SAME (SEE MOGHAS LAW OF PLEADINGS 13TH EDITION PAGE 22). IN GUARANTY TRUST COMPANY OF NEW YORK VS. HANNAY & CO. 1918 (2) KB 623 IT WAS HELD THAT FOREIGN LAW IS A QUESTION OF FACT TO AN ENGLISH COURT THE OPINION OF AN EXPERT ON THE FACT TO BE TREATED WITH RESPECT BUT NOT NECESSARILY CONCLUSIVE. IN BEATTY VS. BE ATTY 1924 (1) KB 807 IT WAS HELD THAT THE AMERICAN LAW IN ENGLISH COURTS MUST BE PROVED BY THE EVIDENCE OF EXPERTS IN THAT LAW. IN LAZARD BROTHERS AND COMPANY VS. MIDLAND BANK LIMITED 1933 AC 289 THEIR LORDSHIPS OF PRIVY COUNCIL OBSERVED THAT WHAT THE RUSSIAN SOVIET LAW IS IS A QUESTION OF FACT OF WHICH THE ENGLISH COURT CANNOT TAKE JUDICIAL COGNIZANCE EVEN THOUGH THE FOREIGN LAW HAS ALREADY BEEN PROVED BEFORE IT IN ANOTHER CASE. THE COURT MUST ACT UPON THE EVIDENCE BEFORE IT IN THAT ACTUAL CASE. TH E STATEMENT OF LAW BY HALSBURY IN LAWS OF ENGLAND (THIRD EDITION VO1.15 PARA 610 AT PAGE 335) IS THAT THE ENGLISH COURTS CANNOT TAKE JUDICIAL NOTICE OF FOREIGN LAW AND FOREIGN LAWS ARE USUALLY MATTERS OF EVIDENCE REQUIRING PROOF AS QUESTIONS OF FACT. 8 .8. FURTHER THE HONBLE DELHI HIGH COURT IN THE CASE OF DESICCANT ROTORS INTERNATIONAL (P) LTD. HAS HELD THAT VIOLATION OF A PATENT IN A FOREIGN COUNTRY CANNOT BE CONSIDERED AS VIOLATION OF INDIA LAWS. THE RELEVANT PARAS ARE AS UNDER: - 11. LEARNED COUNSEL ALSO TOOK SUPPORT FROM THE REASONS GIVEN BY THE AO AS WELL AS THE CIT(A) IN THEIR RESPECTIVE ORDERS . HE POINTED OUT THAT THE CIT(A) HAD CLEARLY HELD THAT IT WAS A CASE WHERE THERE WAS AN INFRING EMENT OF UNITED STATES PATENT LAW BY THE ASSESSEE. THE GOODS WERE MANUFACTURED AND SOLD BY THE ASSESSEE TO VENMAR FOR SALE IN US AND CANADA MARKETS AND AS A MANUFACTURER THE ASSESSEE COULD NOT ESCAPE THE PRIMARY RESPONSIBILITY BY STATING THAT IT WAS NOT D IRECTLY INVOLVED IN INFRINGEMENT. FURTHER FOR MAKING A DISALLOWANCE UNDER SECTION 37 IN RESPECT OF PENALTY ETC. FINDING BY A 21 COMPETENT COURT WAS NOT A CONDITION PRECEDENT TO ATTRACT THE EXPLANATION TO SECTION 37(1) . ACCORDING TO THE CIT (A) THE EXPLANATION SIMPLY STATES THAT IF EXPENDITURE IS INCURRED FOR ANY PURPOSE WHICH IS AN OFFENCE OR WHICH IS PROHIBITED BY LAW SUCH EXPENDITURE WILL NOT BE DEEDED TO HAVE BEEN INCURRED FOR THE PURPOSE OF BUSINESS. THE EXPLANATION DOES EVEN IMPLY THAT THERE MUST BE A FINDING OF A COMPETENT AUTHORITY OR COURT THAT AN OFFENCE WAS COMMITTED OR THAT ANY LAW WAS INFRINGED. IN FACT THERE MAY BE NUMEROUS SITUATIONS WHERE EXPENDITURE IS INCURRED FOR A PURPOSE WHICH IS PROHIBITED BY LAW BUT THERE MAY NOT NECESSARILY BE ANY ORDER OF ANY AUTHORITY OR COURT TO THIS EFFECT. PAYMENT OF PROTECTION MONEY HAFTA MONEY RANSOM ETC. ARE EXAMPLES OF SUCH EXPENDITURE. THERE MAY NOT BE ANY ORDER PROHIBITING A PERSON FROM MAKING PAYMENT OF PROTECTION MONEY BUT NONETHELESS THE PAYMENT WILL BE FOR A PURPOSE PROHIBITED BY LAW AND WOULD NOT BE ALLOWABLE UNDER SECTION 37 OF THE ACT . 18. AT THE OUTSET WE ARE INCLINED TO ACCEPT THE SUBMISSION OF THE ASSESSEE THAT THE PARAMOUNT AND GOVERNING CONSIDERATION BEHIND SUCH A SETTLEMENT/AGREEMENT CAN BE TO AVOID THE EXPENSES AND UNCERTAINTY OF FURTHER LITIGATION. IT IS A MATTER OF COMMON K NOWLEDGE THAT LITIGATION CAN TURN OUT TO BE QUITE EXPENSIVE AND IT CANNOT BE EVEN POSSIBLE WHAT TO TALK OF FEASIBLE FOR A SMALL TIME/MIDDLE LEVEL COMPANY IN INDIA LIKE THE ASSESSEE TO LITIGATE IN US COURT. FURTHERMORE THE SETTLEMENT AGREEMENT CONTAINS A SPECIFIC RECITAL TO THIS EFFECT INASMUCH AS IT RECORDS 'WHEREAS IN ORDER TO AVOID THE EXPENSES OR UNCERTAINTY OR FURTHER LITIGATION THE PARTIES DESIRED TO SETTLE AND ADJUST ALL DIFFERENCES AND CONTROVERSIES AMONG THEMSELVES SUBJECT TO THE TERMS OF THIS AGREEMENT.' NO DOUBT IN THE AGREEMENT THE ASSESSEE ACCEPTED THE PATENT OF SEMCO. THAT BY ITSELF WOULD NOT MEAN THAT THE ASSESSEE ALSO ACCEPTED THAT IT WAS INFRINGING THE SAID PATENT. SECONDLY PAYMENT IS MADE BY THE ASSESSEE TO SEMCO FOR 'LOSS OF GOODWILL AND DAMAGES TO ITS CAPITAL AND FOR TERMINATING OF CASE US COURTS' AS IS CLEARLY MENTIONED IN CLAUSE (3) OF THE AGREEMENT. NO FINDING IS GIVEN BY ANY COURT THAT THE ASSESSEE HAD VIOLATED THE PATENT RIGHT OF SEMCO. WITH THE AFORESAID PAYMENT THE 'COVENANTS TO RELEASE' RECORDED IN CLAUSE (2) IS AS UNDER: '2. COVENANTS TO RELEASE 2.1 SEMCO HEREBY RELEASES REMISES AND FOREVER DISCHARGES THE SETTLING ENTITIES AND THEIR AGENTS ATTORNEYS CONSULTANTS OFFICES EMPLOYEES REPRESENTATIVES HEIRS SUCCESSORS AND A SSIGNS AND THEIR CUSTOMERS FORM ANY AND ALL CLAIMS DEMANDS OR CAUSES OF ACTION THAT ARISE OUT OF OR RELATE TO THE ACTION AND ANY AND ALL OBLIGATIONS ACTIONS CAUSES OF ACTION SUITS DEBTS CONTRACTS CONTROVERSIES AGREEMENTS PROMISES DAMAGES JUDGM ENTS AWARDS EXECUTIONS CLAIMS AND DEMANDS WHATSOEVER IN LAW OR IN EQUITY AND ANY AND ALL CLAIMS FOR DAMAGES (AND ATTORNEYS FEES AND COSTS) BASED UPON THE VIOLATION OF A FEDERAL STATE OR OTHER STATUTE REGULATION OR LAW OR ARISING OUT OF ANY CONDUCT 22 CONTRACT EMPLOYMENTS ACTION EVENT OR CIRCUMSTANCE UNDER THE LAW OF ANY AND ALL NATIONS WHETHER KNOWN OR UNKNOWN WHICH OCCURRED AT ANY TIME UP TO AN INCLUDING THE DATE OF THE EXECUTION OF THIS AGREEMENT EXCEPT OBLIGATIONS CREATED BY THIS AGREEMENT A NY ASSOCIATED LICENCE AGREEMENT AND/OR BY THE CONSENT JUDGMENT TO BE FILED IN ACCORDANCE WITH THIS AGREEMENT.' 19. IT WOULD BE PERTINENT TO HIGHLIGHT THAT THE AGREEMENT IS APPLICABLE WITHIN THE AREA DEFINED AS 'TERRITORY'. THIS TERRITORY MENTIONS SOME SPECIFIC COUNTRIES IN EUROPE AS WELL AS JAPAN AUSTRALIA AND KOREA. THERE IS NO MENTION OF INDIA AT ALL. THAT CLEARLY IMPLIES THAT SEMCO HAS NO OBJECTION IF THE ASSESSEE CONTINUES TO MANUFACTURE THE GOODS IN THE SAME MANNER USING SAME PATENT WHICH IT HAS B EEN USING AND MARKETING IT IN INDIA OR ANY OTHER COUNTRIES WHICH ARE NOT STIPULATED IN THE TERRITORY WITH RESPECT TO WHICH ONLY RESTRAINT IS PROVIDED IN THE AGREEMENT. IT IS FOR THIS REASON THE ASSESSEE EVEN TODAY CONTINUES TO MANUFACTURE THOSE GOODS AND IS SELLING THE PRODUCTS IN THIS COUNTRY. ONCE WE FIND THAT THE SETTLEMENT HAS ARRIVED AT UNDER THE AFORESAID CIRCUMSTANCES THERE IS NO ROOM TO HOLD THAT IT WAS BECAUSE OF THE REASON THAT THE ASSESSEE WAS VIOLATING THE PATENT LAWS OR THE PAYMENT WAS MADE F OR AN OBJECTIVE PROHIBITED BY LAW. THIS IS OUR VIEW EVEN WHEN WE PRESUME THAT THE EXPRESSION PROHIBITED BY LAW WOULD INCLUDE US LAWS AND WOULD NOT BE CONFINED TO LAW IN INDIA. 20. MOREOVER WE ALSO AGREE WITH THE CONTENTION OF THE LEARNED COUNSEL FOR THE A SSESSEE THAT THE PAYMENT UNDER THE SETTLEMENT IS COMPENSATORY IN NATURE. THE REMEDY FOR INFRINGEMENT OF PATENT INVOLVES CIVIL ACTION FOR COMPENSATING THE DAMAGE TO PRIVATE PROPERTIES. IT MAY BE NOTED THAT IN THE PLAINT FILED BY IT SEMCO HAS SOUGHT CIVIL D AMAGES UNDER SECTIONS 284 AND 285 OF THE US PATEN CODE (US 35). CRIMINAL SUIT IS SCORED OUT IN THE PLAINT. THE RELEVANT PROVISIONS OF US 35 (PATENT CODE) READ AS FOLLOWS: ' SECTION 284 . DAMAGES UPON FINDING FOR THE CLAIMANT THE COURT SHALL AWARD THE CLAIMANT DAMAGES ADEQUATE TO COMPENSATE FOR THE INFRINGEMENT BUT IN NO EVENT LESS THAN A REASONABLE ROYALTY FOR THE SUE MADE OF THE INVENTION BY THE INFRINGER TOGETHER WITH INTEREST AND COSTS AS FIXED BY THE COURT. SECTION 285 . ATTORNEY FEES THE COURT IN EXCEPTIONAL CASES MAY AWARD REASONABLE ATTORNEY FEES TO THE PREVAILING PAR TY.' 21. IT WILL BE SEEN FROM THE ABOVE THAT THE DAMAGES ARE CALCULATED FOR COMPENSATING THE OWNER OF THE PATENT RIGHTS FOR THE LOSS OF PROFIT/ROYALTY EVEN UNDER THE LAWS OF USA. THERE IS NO ELEMENT OF PENALTY EVEN IN USA. EVEN THE INDIAN PATENTS ACT 1970 (AS AMENDED BY THE ACT OF 2005) DOES NOT PRESCRIBE ANY PENALTY OR FINE FOR INFRINGEMENT OF A PATENT REGISTERED UNDER THAT ACT. THIS IS CLEAR FROM THE SECTION 108 OF THE INDIAN PATENT ACT WHICH READS AS UNDER: 23 'SEC. 108 RELIEFS IN SUIT FOR INFRINGEMENT THE RELIEFS WHICH A COURT MAY GRANT IN ANY SUIT FOR INFRINGEMENT INCLUDE AN INJUNCTION (SUBJECT TO SUCH TERMS IF ANY AS THE COURT THINGS FIT) AND AT THE OPTION OF THE PLAINTIFF EITHER DAMAGES OR AN ACC OUNT OF PROFITS.' 22. THEREFORE ANY PAYMENT FOR INFRINGEMENT OF PATENT BEING PURELY COMPENSATORY IN NATURE CANNOT BE DISALLOWED AS PER THE LAW SETTLED BY THE SUPREME COURT IN THE CASE OF PRAKASH COTTON MILLS (SUPRA) WHERE THE APEX COURT OBSERVED AS UND ER: '... THEREFORE WHENEVER ANY STATUTORY IMPOST PAID BY AN ASSESSEE BY WAY OF DAMAGES OR PENALTY OR INTEREST IS CLAIMED AS AN ALLOWABLE EXPENDITURE UNDER SECTION 37(1) OF THE INCOME - TAX ACT THE ASSESS ING AUTHORITY IS REQUIRED TO EXAMINE THE SCHEME OF THE PROVISIONS OF THE RELEVANT STATUTE PROVIDING FOR PAYMENT OF SUCH IMPOST NOTWITHSTANDING THE NOMENCLATURE OF THE IMPOST AS GIVEN BY THE STATUTE TO FIND WHETHER IT IS COMPENSATORY OR PENAL IN NATURE. TH E AUTHORITY HAS TO ALLOW DEDUCTION UNDER SECTION 37(1) OF THE INCOME - TAX ACT WHEREVER SUCH EXAMINATION REVEALS THE CONCERNED IMPOST TO BE PURELY COMPENSATORY IN NATURE. WHEREVER SUCH IMPOST IS FOUND TO BE OF A COMPOSITE NATURE THAT IS PARTLY OF COMPENSATORY NATURE AND PARTLY OF PENAL NATURE THE AUTHORITIES ARE OBLIGATED TO BIFURCATE THE TWO COMPONENTS OF THE IMPOST AND GIVE DEDUCTION TO THAT COMPONENT WHICH IS COMPENSATORY IN NATURE AND REFUSE TO GIVE DEDUCTION TO THAT COMPONENT WHICH IS PENAL IN NATURE.' 23. IT WAS AN EXPENDITURE WHICH WAS MOTIVATED PURELY BY COMMERCIAL PURPOSE AND WOULD BE ALLOWABLE UNDER SECTION 37(1) OF THE ACT AS HELD BY THE APE X COURT IN THE CASE OF SRI VENKATA SATYA NARAYANA RICE MILL CONTRACTOR CO. VS. COMMISSIONER OF INCOME TAX [223 ITR 101]. 8 .9 . THUS FROM THE ABOVE DECISIONS IT IS CLEAR THAT WHAT HAS TO BE DISALLOWED UNDER EXPLANATION 1 TO SEC.37(1) OF THE ACT IS A PAYMENT MADE FOR CONTRAVENTION OF LAWS IN FORCE IN INDIA AND NOT OF ANY FOREIGN COUNTRY. THE LAWS ARE SPECIFIC TO EACH OF THE COUNTRIES ACCORDING TO THEIR RULES AND REGULATIONS AND AN OFFENCE IN ONE COUNTRY MAY NOT BE SO IN ANOTHER COUNTRY . T HEREFORE WE AGREE WITH THE CONTENTIONS OF LD.COUNSEL FOR THE ASSESSEE THAT IT IS ONLY PAYMENT MADE FOR CONTRAVENTION OF LAW S IN FORCE IN INDIA THAT DISALLOWANCE UNDER E XPLANATION 1 TO SEC.37(1) OF THE ACT IS TO BE MADE. 8.10 . THE NEXT QUESTION BEFORE US IS WHETHER THE PAYMENT IS COMPENSATORY OR PENAL IN NATURE. 8.11 . WE FIND THAT THE EUROPEAN COMMISSION HAD REQUIRED THE ASSESSEE TO PAY 1.18 CRORES OF GBP WHICH IS EQUIVALENT TO 141 50 90 000 INR WHICH IS THE EXACT AMOUNT RECEIVED BY ASSESSEE FROM NICHE. THE ASSESSEE HAD CLAIMED IT TO BE DISGORGEMENT /COMPENSATORY WHEREAS THE REVENUE HAD 24 PLEAD ED THAT IT IS ONLY BY COINCIDENCE THAT THE PENALTY LEVIED BY EU IS ALSO EXACTLY THE SAME AMOUNT WHICH IS RECEIVED BY THE ASSESSEE . LD.DR ARGUED THAT IT IS NOT DISGORGEMENT BECAUSE THOUGH THE RECEIPT IS FROM NICHE THE PAYMENT BY THE ASSESSEE IS TO EUROPEA N C OMMISSION. THEREFORE WE AGREE WITH THE LD.DR THAT IT CANNOT BE TREATED AS DISGORGEMENT OR COMPENSATORY IN NATURE . THE NEXT CONTENTION OF THE ASSESSEE IS THAT WITHOUT SUCH PAYMENT AND WITHOUT SUCH AGREEMENT THE ASSESSEE COULD NOT HAVE CARRIED OUT ITS BUSINESS IN EU AND T HEREFORE IT IS TOWARDS COMMERCIAL EXPEDIENCY AND TO CARRY ON BUSINESS OF ASSESSEE AND THEREFORE IT IS BUSINESS LOSS. HOWEVER W E FIND THAT THE AUTHORITIES BELOW HAVE NOT EXAMINED THIS ASPECT OF THE ISSUE. THEREFORE WE ARE OF THE OP INION THAT THE QUESTION AS TO WHETHER IT IS TO BE ALLOWED AS BUSINESS LOSS PARTICULARLY WHEN ASSESSEE HAS OFFERED THE RECEIPT AS INCOME IN EARLIER AY AND THE REVENUE HAS ACCEPTED IT AS BUSINESS INCOME IS TO BE EXAMINED BY THE AO. THEREFORE FOR THIS LIMITE D PURPOSE WE SET ASIDE THE ISSUE TO THE AO WITH A DIRECTION TO ALLOW IT AS BUSINESS LOSS IF THE INCOME HAS BEEN OFFERED TO TAX IN THE EARLIER A.Y. IN THE RESULT GROUND NO.2 OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 9. DISALLOWANCE OF DEPRECIATION CLAIMED ON GOODWILL ARISING OUT OF SCHEME OF AMALGAMATION. 10. BRIEF FACTS RELATING TO THIS GROUND ARE THAT DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE HAD ACQUIRED AGILA SPECIALITIES LTD. (ASPL) ALONG WITH WHOLLY OWNED SUBSIDIARY (WOS) ONCO THERAPIES LTD. (OTL) ON 05/12/2013 IN ORDER TO CREATE A GLOBAL INJECTABLES LEADER TO STRENGTHEN ITS PLATFORM AND BECOME A TOP GLOBAL PAYER IN INJECTABLES. THE ACQUISITION WAS MADE FOR A CONSIDERATION OF RS. 59 786 MILLION INR. THE I NTANGIBLES ACQUIRED AND VALUED ALONG WITH GOODWILL WERE DETERMINED AS UNDER: A) CONSIDERATION = 43 860 MN. B) ASSETS TAKEN OVER SUBJECT TO EXPLANATION TO SECTION 43 = 22 403 MN C) LIABILITIES TAKEN OVER = 23 111 MN 25 D) NET ASSETS TAKEN OVER (B - C) = (1 068) MN E) INTANGIBLE ASSETS VALUED INCLUDING GOODWILL AS RESIDUAL VALUE = 43 860 (1068) MN = 44 928 MN. 10.1 IN TERMS OF THE AMALGAMATION SCHEME THE EXCESS OF INVESTMENT MADE OVER THE AGGREGATE VALUE OF THE NET ASSETS ACQUIRED AND LIABILITIES ASSUMED THE INTANGIBLES INCLUDING GOODWILL WERE DEPRECIATED @ 25% ON WDV FROM THE FINANCIALS SUBMITTED. THE AO OBSERVED THAT THE PRICE OF THE INTANGIBLE ASSET WAS IN THE FORM OF GOODWILL HAS BEEN INTRODUCED IN THE BOOKS OF THE ASSESSEE ONLY AS A RESULT OF AMALGAMATION UNDERTAKEN BY THE COMPANY AND ALSO THAT GOODWILL DOES NOT EXIST IN THE BOOKS OF ASPL PRIOR TO THE AMALGAMATION. IN ORDER TO UNDERSTAND THE INTRODUCTION OF GOODWILL IN THE BOOKS AND TAX IMPLICATIONS THEREON AO ISSUED A SHOW CAU SE NOTICE DATED 15/12/2017 TO THE ASSESSEE CALLING FOR ITS REPLY BY 22/12/2017. ASSESSEE VIDE ITS LETTER DATED 22/12/2017 EXPLAINED THE TRANSACTION AND ALSO RELIED UPON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF SMIFF SECURITIES LTD. [2012] 348 ITR 302 TO ARGUE THAT DEPRECIATION ON GOODWILL IS ALLOWABLE. HOWEVER AO WAS OF THE OPINION THAT SINCE THE GOODWILL WAS NOT EXISTENT IN THE BOOKS OF ASPL AND WAS INTRODUCED ONLY UNDER THE SCHEME OF AMALGAMATION THE PROVISO TO SECTION 32(1) OF THE ACT IS APPLICABLE AND THEREFORE THE DEPRECIATION ALLOWABLE IN THE CASE OF SUCCESSION AMALGAMATION OR MERGER DEMERGER SHOULD NOT EXCEED THE DEPRECIATION ALLOWABLE HAD THE SUCCESSION NOT TAKEN PLACE. IN OTHER WORDS THE ALLOWANCE OF DEPRECIATION TO THE SUCCES SOR/AMALGAMATED COMPANY IN THE YEAR OF AMALGAMATION WOULD BE ON THE WDV OF ASSETS IN THE BOOKS OF THE AMALGAMATED COMPANY AND NOT ON THE COST AS RECORDED IN THE BOOKS OF AMALGAMATING COMPANY. THEREFORE HE HELD THAT THE ASSESSEE CANNOT CLAIM DEPRECIATION O N THE GOODWILL THAT HAS ARISEN ONLY AS A RESULT OF AMALGAMATION SCHEME. FURTHER HE ALSO PLACED RELIANCE UPON THE DECISION OF ITAT BANGALORE IN THE CASE OF M/S UNITED BREWERIES LTD. VS. ADDL. CIT VIDE ITS ORDER DATED 30/09/2016 IN ITA NOS. 722 801 & 106 5/BANG/2014 FOR DISALLOWING THE DEPRECIATION ON GOOD WILL. 11. AGGRIEVED ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A) WHO CONFIRMED THE ORDER OF AO AND THE ASSESSEE IS IN SECOND APPEAL BEFORE US . 26 12. THE LD. COUNSEL FOR THE ASSESSEE WHILE REITERAT ING THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW SUBMITTED THAT ASSESSEE HAD ACQUIRED SHARES OF ASPL ALONG WITH THE SHARES OF ITS WHOLLY OWNED SUBSIDIARY ONCO THERAPIES LTD. FROM A COMPANY CALLED STRIDES VIDE A SHARE PURCHASE AGREEMENT (SPA) ON 05/1 2/2013 ACCORDING TO WHICH CONSIDERATION WAS NEGOTIATED AT INR 5 978 CRORES AS AN ENTERPRISE VALUE (EV) ON WHICH APPROVAL WAS OBTAINED FROM FOREIGN INVESTMENT PROMOTION BOARD (FIPB). FROM THE EV THIRD PARTY DEBTS AND OBLIGATION S IN THE BOOKS OF AGILA AND ONCO OF RS. 1 592/ - CRORES WERE CONSIDERED AND THE BALANCE OF RS. 4 386/ - CRORES WAS CONSIDERED AS PAYABLE TO STRIDES. T HUS T HE TOTAL CONSIDERATION PAID WAS RS. 5 978/ - CRORES. HE SUBMITTED THAT PURSUANT TO ACQUISITION OF SHARE S BOTH ASPL AND OTL BECAME DIRECT AND INDIRECT WOS OF THE ASSESSEE AND THE SAID ACQUISITION OF SHARES WAS RECORDED IN THE BOOKS OF THE ASSESSEE AS INVESTMENT AT THE VALUE OF CONSIDERATION PAID TO STRIDES FOR PURCHASE OF SHARES. HE SUBMITTED THAT THE AC QUISITION OF ASPL AND OTL WAS IMMEDIATELY FOLLOWED BY A MERGER WITH THE ASSESSEE UNDER THE SCHEME (EFFECTIVE DATE OF 6 TH DECEMBER 2013) WHICH WAS APPROVED BY THE HONBLE AP HIGH COURT VIDE ORDER DATED 25 TH AUGUST 2014. THUS BOTH THE ASPL AND OTL BECAM E PART OF THE ASSESSEE WITH EFFECT FROM 6 TH DECEMBER 2013. HE SUBMITTED THAT PURSUANT TO THE SCHEME OF AMALGAMATION THE ASSETS AND LIABILITIES OF ASPL AND OTL VESTED WITH THE ASSESSEE WITH EFFECT FROM 6 TH DECEMBER 2013 AND BOTH THE AGILA AND ONCO LEGAL LY CEASED TO EXIST. AS PER THE ACCOUNTING STANDARD 14 WHICH DEALS WITH ACCOUNTING FOR AMALGAMATIONS AND AS PER THE PURCHASE METHOD THE AMALGAMATING COMPANY IS REQUIRED TO ACCOUNT FOR THE AMALGAMATION BY ALLOCATING THE CONSIDERATION TO INDIVIDUAL IDEN TIFIABLE ASSETS AND LIABILITIES OF THE AMALGAMATING COMPANY BASED ON THEIR FAIR VALUES ON THE DATE OF AMALGAMATION AND IF THE AMOUNT OF THE CONSIDERATION IS IN EXCESS OF THE FAIR VALUE OF THE NET ASSETS TAKEN OVER BY THE AMALGAMATING COMPANY SUCH EXCESS I S TO BE ACCOUNTED AS GOOD WILL ARISING ON AMALGAMATION UNDER INTANGIBLE ASSETS. IN CASE OF A DEFICIT THE SHORTFALL IS TO BE ACCOUNTED AS CAPITAL RESERVE UNDER RESERVES AND SURPLUS. IT IS SUBMITTED THAT IN THE LIGHT 27 OF THE ABOVE POSITION THE ASSESSEE ALLO CATED THE CONSIDERATION OF INR 55 CRORES AS FAIR VALUE OF THE IDENTIFIABLE ASSETS AND LIABILITIES TAKEN OVER AND THE EXCESS OF NET CONSIDERATION AMOUNTING TO INR 4 331WAS ACCOUNTED AS GOODWILL INCLUDING VARIOUS INTANGIBLES ARISING ON AMALGAMATION. HE SUBM ITTED THAT THE DETAILS OF TRANSACTION AND ITS ACCOUNTING WAS DULY DISCLOSED IN THE NOTES TO THE ACCOUNTS. 12.1 SIMILARLY THE ASSESSEE FOR THE PURPOSES APPLYING THE PRINCIPLES OF PURCHASE METHOD OF ACCOUNTING CONSIDERED THE DIFFERENCE BETWEEN THE AMOUNT OF INVESTMENT (INR 4 386 CRORES) AND THE FAIR VALUE/ TAX WDV VALUE OF NET ASSETS (BEING INR (106) CRORES) AS GOODWILL ARISING ON AMALGAMATION. THIS GOODWILL OF INR 4 492 CRORES ENCOMPASSING THE SPECIFIED INTANGIBLE ASSET (INR 1 465 CRORES) WERE GROUPED UND ER THE INTANGIBLE ASSETS BLOCK AS 'GOODWILL' AND DEPRECIATION AT HALF OF ELIGIBLE RATE OF 25 PER CENT WAS CLAIMED BY THE APPELLANT IN RETURN OF INCOME FOR AY 201415 SINCE ASSETS WERE PUT TO USE FOR LESS THAN 180 DAYS. 12.2 HE SUBMITTED THAT THE ISSUE OF D EPRECIATION ON GOODWILL ARISING ON AMALGAMATION IS DIRECTLY COVERED BY THE DECISION OF THE HONBLE APEX COURT IN THE CASE OF SMIFF SECURITIES LTD. (SUPRA). IN SUPPORT OF THE CONTENTION THAT THE LAW INTERPRETED BY THE HONBLE SUPREME COURT IS BINDING ON A LL COURTS AND LOWER AUTHORITIES HE RELIED ON THE DECISION OF THE APEX COURT IN THE CASE OF ALUMINIUM CORPORATION OF INDIA 85 ITR 167 (1972) (SC) AND ALSO RELIED UPON THE DECISION OF THE HONBLE GUJARAT HIGH COURT IN THE CASE OF KARAMCHAND PREMCHAND PVT. LTD. 101 ITR 46 (GUJ.). HE FURTHER SUBMITTED THAT GOODWILL ARISING ON AMALGAMATION IS A BUSINESS OF COMMERCIAL RIGHT OR OF SIMILAR NATURE AS REFERRED TO IN CLAUSE (B) TO EXPLANATION 3 OF SECTION 32(1) AND IN SUPPORT OF HIS CONTENTION HE PLACED RELIANCE U PON THE DECISION OF THE COORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF AP PAPER MILLS LTD. 128 TTJ 596 (HYD.) AND ALSO THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF AREVA T&D INDIA LTD. 345 ITR 451. IN SUPPORT OF HIS CONTENTION THAT THERE CANNOT BE A DIFFERENTIAL TAX TREATMENT BETWEEN GOODWILL GENERATED ON SLUMP SALE AND AMALGAMATION THE LD. COUNSEL FOR THE ASSESSEE PLACED RELIANCE UPON THE DECISION OF THE HONBLE DELHI HIGH COURT 28 IN THE CASE OF TRIUNE ENERGY SERVICES (P) LTD. 65 TAXMANN .COM 288 [2016] (DEL.). 12.3 HE ALSO REFERRED TO 6 TH PROVISO TO SECTION 32(1) OF THE ACT AND SUBMITTED THAT IT IS THE ONLY MECHANISM OF ALLOCATION OF DEPRECIATION OTHERWISE ALLOWABLE ON THE WDV OF ASSETS OWNED AND CARRIED BY THE AMALGAMATING COMPANY WH EREBY SUCH DEPRECIATION GETS ALLOCATED BETWEEN THE AMALGAMATING AND AMALGAMATED COMPANY IN THE YEAR OF AMALGAMATION AND HAS NO APPLICABILITY FOR ANY NEW ASSET ARISING ON ACCOUNT OF THE AMALGAMATION IN THE HANDS OF THE AMALGAMATED COMPANY. HE ALSO REFERRED TO THE MEMORANDUM EXPLAINING THE PROVISIONS OF FINANCE BILL 1996 INTRODUCING THE SIX PROVISO TO SECTION 32(1) OF THE ACT TO ARGUE THAT THE INTENT OF THE LEGISLATURE BEHIND INTRODUCTION OF THE PROVISO WAS TO COVER WITHIN ITS AMBIT ONLY THOSE ASSETS WHI CH WERE RECORDED IN THE BOOKS OF ACCOUNT OF THE PREDECESSOR COMPANY AND WHICH ARE TRANSFERRED PURSUANT TO THE AMALGAMATION. HE ARGUED THAT SIXTH PROVISO WAS INTRODUCED TO CURB THE PRACTICE OF CLAIMING DEPRECIATION ON THE SAME ASSETS BY BOTH THE PREDECESSO R COMPANY AND THE SUCCESSOR COMPANY IN THE CASE OF A MERGER OR SUCCESSION AND THEREFORE THE SAID PROVISO IS NOT APPLICABLE TO THE ASSESSEE. HE ALSO TRIED TO DISTINGUISH THE FACTS BETWEEN THE CASE OF THE ASSESSEE AND UNITED BREWERIES LTD. (SUPRA). 12.4 TH E LD. COUNSEL FOR THE ASSESSEE ALSO SUBMITTED THAT SIMILAR ISSUE HAD ARISEN BEFORE THE HONBLE KOLKATA HIGH COURT ON REVENUE APPEAL IN THE CASE OF SMIFS SECURITIES LTD. (SUPRA) FOR THE AY 2001 - 02 AND THE SAID QUESTION WAS NOT PRESSED BY THE DEPARTMENT BY CONCEDING THAT IT WAS COVERED BY THE DECISION OF THE HONBLE SUPREME COURT. IT IS SUBMITTED THAT THE REVENUE HAS NOT FILED ANY APPEAL BEFORE THE SC AND ONCE THE REVENUE HAS CHOSEN NOT TO CHALLENGE A PARTICULAR DECISION IT IS BOUND BY THE PRINCIPLES LAI D DOWN IN THOSE DECISIONS. IN THIS REGARD RELIANCE WAS PLACED ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF NARENDRA DOSHI 254 IYT 606 [2002][SC]. 12.5 LD. COUNSEL FOR THE ASSESSEE ALSO SUBMITTED THAT THOUGH LD. CIT(A) IN PRINCIPLE AGREED THAT DEPRECIATION IS ALLOWABLE ON GOODWILL IN VIEW OF THE 29 SUPREME COURT JUDGEMENT IN THE CASE OF SMIFFS SECURITIES LTD. SHE HAS HELD THAT ASSESSEE SHOULD HAVE CARRIED THE EXPENDITURE OVER A PERIOD OF 5 YEARS AND DEPRECIATION SHOULD HAVE BEEN CLAIMED ACCO RDINGLY. HE SUBMITTED THAT THERE IS NO PROVISION UNDER THE ACT WHICH REQUIRES THAT ONLY A PORTION OF GOODWILL IS TO BE RECOGNIZED DURING A YEAR FOR CLAIMING DEPRECIATION. HE THEREFORE ARGUED THAT ARTIFICIALLY SPLITTING OF THE GOODWILL BY THE LD. CIT(A) IS AN ARBITRARY ACTION AND THE SAID DIRECTION GOES BEYOND THE PROVISIONS OF THE ACT AND HENCE ARE INVALID AND WITHOUT JURISDICTION. 12.6 HE ALSO SUBMITTED THAT LD. CIT(A) HAS HELD THAT THE HONBLE SUPREME COURT IN THE CASE OF SMIFFS SECURITIES REFERS TO GOODWILL ARISING ON AMALGAMATION AND CONCLUDED THAT DEPRECIATION WOULD BE ALLOWABLE ONLY ON THE AMOUNT OF GOODWILL RECOGNIZED AS PER THE ACCOUNTING STANDARD AND NOT ON THE SELF - GENERATED GOODWILL. HE SUBMITTED THAT THE GOODWILL AMOUNT ALLEGED TO BE INTERNALLY GENERATED GOODWILL IS ACTUALLY THE CONSIDERATION PAID BY THE ASSESSEE TOWARDS INTANGIBLE ASSETS IN THE NATURE OF INTELLECTUAL RIGHTS TRADEMARKS PRODUCTS UNDER DEVELOPMENT LICENSES ETC. AS IS DEMONSTRATED FROM THE SPA WHICH FORMS PART OF THE ASSESSMENT RECORD. HE SUBMITTED THAT CONSIDERATION PAID TOWARDS THE SAID INTANGIBLES WAS ALLOCATED IN THE BOOKS ACCOUNT OF THE ASSESSEE IN RECORDING THE ENTRY FOR AMALGAMATION AND BY THE ORDER OF CIT(A) THE FURTHER DISALLOWANCE OF THE CLAIM WHICH WAS ALREADY DISALLOWED BY THE AO AMOUNTS TO DOUBLE DISALLOWANCE. HE SUBMITTED THAT THE ASSESSEES TOTAL CLAIM OF DEPRECIATION WAS INR 561 CRORE WHEREAS TOTAL DISALLOWANCE MADE BY THE CIT(A) IS OF INR 745 CRORES. THEREFORE HE SUBMITTED THAT SECTION 32 OF T HE ACT CANNOT BE USED TO PRESCRIBE THE VALUE AT WHICH THE ASSET IS RECORDED FOR THE PURPOSE OF CLAIMING DEPRECIATION. HE THEREFORE PRAYED THAT THE DEPRECIATION CLAIM BY THE ASSESSEE IN ITR SHOULD BE ALLOWED IN FULL. 13. THE LD. DR ON THE OTHER HAND SUP PORTED THE ORDERS OF AUTHORITIES BELOW AND SUBMITTED THAT THE ASSESSEE ACQUIRED THE SHARES OF AGILA SPECIALITIES LTD. ALONG WITH ITS WHOLLY OWNED SUBSIDIARY ONCO THERAPIES LTD. ON 05/12/2013. THE NET ASSETS ACQUIRED WERE VALUED AT RS. ( - ) 106.8 CRORES AFTE R REDUCING THE LIABILITIES. HE SUBMITTED THAT WHEN THE NET ASSET VALUE IS NEGATIVE THERE CANNOT BE ANY GOODWILL BECAUSE NO POSITIVE VALUE CAN BE 30 ATTRIBUTED TO A NEGATIVE ASSET. HE ALSO SUBMITTED THAT THE PURCHASE OF SHARES WAS PART OF GLOBAL ACQUISITION O F THE STRIDES ACRO LAB GROUP AND THERE WAS A GLOBAL AGREEMENT PRIOR TO THE ACQUISITION OF SHARES. HE SUBMITTED THAT IT IS ONLY AFTER THE SHARES WERE ACQUIRED AND THE ASSESSEE BECAME 100% OWNER OF M/S AGILA SPECIALITIES LTD THAT THE AMALGAMATION TOOK PLACE AND THEREFORE WHEN THE ASSESSEE COMPANY IS THE OWNER OF ANOTHER COMPANY THROUGH SHAREHOLDING SUBSEQUENT MERGER WOULD NOT LEAD TO TRANSFER OF ASSETS U/S 2(47) OF THE ACT. THEREFORE U/S 2(47)(V) TRANSFER OF CAPITAL ASSETS BY SUBSIDIARY TO PARENT IS NOT RECOGNIZED AS TRANSFER AND CLAIMING GOODWILL WOULD BE A CASE OF MAKING PROFIT OUT OF ONESELF. HE ALSO REFERRED TO CLAUSE 3.1 OF THE SHARE PURCHASE AGREEMENT TO SUBMIT THAT THE PURCHASE PRICE WAS EQUAL TO THE ENTERPRISE VALUE MINUS A SUM EQUAL TO CASH A SU M EQUAL TO DEBT A SUM EQUAL TO WITHHOLDING OR DEDUCTIONS AND SR. MANAGER TRANSACTION PROCEEDS AND THEREFORE THERE IS SUBSTANTIAL OUT GO IN THE FORM OF PAYMENTS TO SR. MANAGERS AND AS A RESULT THE ASSESSEE LOST TECHNICAL EXPERTISE LET ALONE GAINING ANY GOODWILL. ACCORDING TO HIM THE PAYMENT MADE TO SR. MANAGERS CANNOT BE CONSIDERED FOR DEDUCTION FROM THE ASSET VALUE. WITH REGARD TO DEBT WITHHOLDINGS AND DEDUCTIONS ALSO HE SUBMITTED THAT IT IS NOT KNOWN WHETHER THEY ARE RELATED TO THE ASSETS OR NOT AN D THEREFORE THE VALUATION OF THE GOODWILL SUFFERS FROM SERIOUS FLAWS BECAUSE THE PAYMENTS WHICH ARE UNRELATED TO ASSETS ARE SET OFF AGAINST THE VALUE OF ASSETS. HE SUBMITTED THAT THE VALUATION OF THE ENTERPRISE FOR PURCHASE OF SHARES CANNOT BE EQUATED TO THE VALUATION FOR AMALGAMATION AS THERE IS NO BASIS MADE AVAILABLE IN THE VALUATION REPORT FOR THE VALUATION OF PLANT AND MACHINERY LAND ETC. BY THE VALUER MR. H.V. KRISHNA SWAMY BUT IT HAD SIMPLY STATED THAT THE VALUATION HAS BEEN DONE BY CONSIDERING RESPECTIVE BOOK VALUES/MARKET VALUES PROVIDED BY THE ASSESSEE. HE SUBMITTED THAT THE VALUATION OF INTANGIBLES BY PWC LLP IS ALSO BASED ON THE INFORMATION PROVIDED BY THE ASSESSEE AND IS NOT BASED ON ANY INDEPENDENT VERIFICATION. THEREFORE ACCORDING TO HI M NO GOODWILL ARISES ON THE AMALGAMATION AND SINCE THE NET ASSET WAS NEGATIVE IF THERE IS ANYTHING ARISING OUT OF AMALGAMATION IT IS ONLY NEGATIVE GOODWILL. 31 13.1 ON THE ISSUE OF NON - ALLOWABILITY OF DEPRECIATION ON GOODWILL LD. DR PLACED RELIANCE ON TH E DECISION OF ITAT VISAKHAPATNAM BENCH IN THE CASE OF KANAKA MAHALAKSHMI CO - OPERATIVE BANK LTD. [2018] 97 TAXMANN.COM 638 (VIZAG - TRIB.) WHEREIN IT WAS HELD THAT WHEN THE OTHER COMPANY HAS NOT SHOWN ANY GOODWILL AND WHEN THE ASSESSEE HAS TAKEN OVER ACCUMU LATED LOSSES HE DID NOT ACQUIRE ANY GOODWILL. HE ALSO PLACED RELIANCE ON THE DECISION OF ITAT MUMBAI BENCH IN THE CASE OF TOYO ENGINEERING INDIA LTD. WHEREIN IT WAS HELD THAT WHEN THE PURCHASE OF GOODWILL IS NOT PROVED BY THE ASSESSEE DEPRECIATION ON TH E SAME CANNOT BE ALLOWED. HE ALSO PLACED RELIANCE ON THE DECISION OF THE ITAT BANGALORE IN THE CASE OF UNITED BREWERIES LTD. [2016] 76 TAXMANN.COM 103 AND DECISION OF ITAT PANAJI BENCH IN THE CASE OF CHOWGULE & CO. (P) LTD. [2011] TAXMANN.COM 224 (PANAJ I). 14. HAVING REGARD TO THE RIVAL SUBMISSIONS AND MATERIAL ON RECORD WE FIND THAT ON ACCOUNT OF AMALGAMATION THE CONSIDERATION PAID BY THE ASSESSEE TO THE VENDOR IS MUCH MORE THAN THE NET VALUE OF ASSETS AND LIABILITIES TAKEN OVER BY THE ASSESSEE. SUC H EXCESS CONSIDERATION PAID BY THE ASSESSEE HAS BEEN TREATED BY THE ASSESSEE AS GOODWILL AND HAS CLAIMED DEPRECIATION THEREON AT THE APPLICABLE RATE. THE FINDING OF THE AO THAT THE GOODWILL CANNOT BE SELF - GENERATED AND THAT THE CLAIM OF THE ASSESSEE IS ON ACCOUNT OF SELF - GENERATED GOODWILL IS NOT CORRECT. THE CONSIDERATION TO BE PAID TO STRIDES FOR ACQUISITION OF THE SHARES OF AGILA AND ONCO IS AFTER NEGATIONS BETWEEN THE ASSESSEE AND STRIDES. IT IS AN ADMITTED FACT THAT STRIDES IS NOT A RELATED PARTY TO TH E ASSESSEE AND THEREFORE THE CONSIDERATION AGREED UPON CANNOT BE DOUBTED AND IN FACT IS NOT DISPUTED BY THE AO OR THE CIT(A). THE AO HAS RELIED UPON THE SIXTH PROVISO TO SECTION 32(1) OF THE ACT TO HOLD THAT THE CLAIM OF DEPRECIATION ON GOODWILL CANNOT E XCEED THE DEPRECIATION ALLOWABLE TO THE AMALGAMATING COMPANY IF THE SUCCESSION HAD NOT TAKE N PLACE. BUT AS EXPLAINED IN AS - 14 AMALGAMATION CAN BE A) IN THE NATURE OF MERGER; AND B) IN THE NATURE OF PURCHASE. IN THE SECOND TYPE OF AMALGAMATION BY PURCHASE THE CONSIDERATION PAID IN EXCESS OF THE NET VALUE OF ASSETS AND LIABILITIES OF THE AMALGAMATING COMPANY IS TO BE TREATED AS GOODWILL. IN THE CASE BEFORE US THE GOODWILL ON WHICH DEPRECIATION IS CLAIMED BY THE 32 ASSESSEE IS ARISING OUT OF THE AMALGAMATIO N SCHEME BUT IS NOT SOLELY THE SELF - GENERATED GOODWILL AS ALLEGED BY THE AO. FURTHER THE AO FOLLOWED THE DECISION OF BANGALORE BENCH OF ITAT IN THE CASE OF UNITED BREWERIES (CITED SUPRA) TO DISALLOW THE CLAIM OF DEPRECIATION ON GOODWILL. THE TRIBUNAL HAD CONSIDERED THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF SMIFF S SECURITIES LTD. AND HAS HELD THAT THE HONBLE SUPREME COURT HAS ONLY HELD THAT GOODWILL IS AN INTANGIBLE ASSET AND THAT DEPRECIATION IS ALLOWABLE THEREON BUT THAT IT DOES OVERRID E THE PROVISIONS OF 5 TH PROVISO TO SECTION 32(1) OF THE ACT. WE FIND THAT THE FACTS OF UNITED BREWERIES ARE DISTINGUISHABLE FROM THE FACTS OF THE CASE BEFORE US AS IN THE CASE OF UNITED BREWERIES THERE WAS A MERGER WITH ITS WHOLLY OWNED SUBSIDIARY WHERE AS IN THE CASE OF THE ASSESSEE IT IS AMALGAMATION BY PURCHASE. THEREFORE THE DECISION IN THE CASE OF UNITED BREWERIES IS NOT APPLICABLE TO THE CASE BEFORE US. LET US THEREFORE NOW CONSIDER THE FACTS IN THE JUDGEMENT OF THE HONBLE SUPREME COURT IN THE CA SE OF SMIFF SECURITIES LTD. FOR THE SAKE OF CLARITY AND READY REFERENCE THE RELEVANT PARAS ARE REPRODUCED HEREUNDER: QUESTION NO.[B]: 'WHETHER GOODWILL IS AN ASSET WITHIN THE MEANING OF SECTION 32 OF THE INCOME TAX ACT 1961 AND WHETHER DEPRECIATION ON `GOODWILL' IS ALLOWABLE UNDER THE SAID SECTION?' ANSWER: IN THE PRESENT CASE THE ASSESSEE HAD CLAIMED DEDUCTION OF R S.54 85 430/ - AS DEPRECIATION ON GOODWILL. IN THE COURSE OF HEARING THE EXPLANATION REGARDING ORIGIN OF SUCH GOODWILL WAS GIVEN AS UNDER: 'IN ACCORDANCE WITH SCHEME OF AMALGAMATION OF YSN SHARES & SECURITIES (P) LTD WITH SMIFS SECURITIES LTD (DULY SANCTIONED BY HON'BLE HIGH COURTS OF BOMBAY AND CALCUTTA) WITH RETROSPECTIVE EFFECT FROM 1ST APRIL 1998 ASSETS AND LIABILITIES OF YSN SHARES & SECURITIES (P) LTD WERE TRANSFERRED TO AND VEST IN THE COMPANY. IN THE PROCESS GOODWILL HAS ARISEN IN THE BOOKS OF THE COMPANY.' IT WAS FURTHER EXPLAINED THAT EXCESS CONSIDERATION PAID BY THE ASSESSEE OVER THE VALUE OF NET ASSETS ACQUIRED OF YSN SHARES AND SECURITIES PRIVATE LIMITED [AMALGAMATING COMPANY] SHOULD BE CONSIDERED AS GOODWILL ARISING ON AMALGAMATION. I T WAS CLAIMED THAT THE EXTRA CONSIDERATION WAS PAID TOWARDS THE REPUTATION WHICH THE AMALGAMATING COMPANY WAS ENJOYING IN ORDER TO RETAIN ITS EXISTING CLIENTELE. 2 HTTP://WWW.ITATONLINE.ORG THE ASSESSING OFFICER HELD THAT GOODWILL WAS NOT AN ASSET FALLING UNDER EXPLANATION 3 TO SECTION 32(1) OF THE INCOME TAX ACT 1961 [`ACT' FOR SHORT]. WE QUOTE HEREINBELOW EXPLANATION 3 TO SECTION 32(1) OF THE ACT: 33 'EXPLANATION 3. -- FOR THE PURPOSES OF THIS SUB - SECTION THE EXPRESSIONS `ASSETS' AND `BLOCK OF ASSETS' SH ALL MEAN -- [A] TANGIBLE ASSETS BEING BUILDINGS MACHINERY PLANT OR FURNITURE; [B] INTANGIBLE ASSETS BEING KNOW - HOW PATENTS COPYRIGHTS TRADEMARKS LICENCES FRANCHISES OR ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE.' EXPLANATION 3 STAT ES THAT THE EXPRESSION `ASSET' SHALL MEAN AN INTANGIBLE ASSET BEING KNOW - HOW PATENTS COPYRIGHTS TRADEMARKS LICENCES FRANCHISES OR ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE. A READING THE WORDS `ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE' IN CLAUSE (B) OF EXPLANATION 3 INDICATES THAT GOODWILL WOULD FALL UNDER THE EXPRESSION `ANY OTHER BUSINESS OR COMMERCIAL RIGHT OF A SIMILAR NATURE'. THE PRINCIPLE OF EJUSDEM GENERIS WOULD STRICTLY APPLY WHILE INTERPRETING THE SAID EXPRES SION WHICH FINDS PLACE IN EXPLANATION 3(B). IN THE CIRCUMSTANCES WE ARE OF THE VIEW THAT `GOODWILL' IS AN ASSET UNDER EXPLANATION 3(B) TO SECTION 32(1) OF THE ACT. ONE MORE ASPECT NEEDS TO BE HIGHLIGHTED. IN THE PRESENT CASE THE ASSESSING OFFICER AS A MATTER OF FACT CAME TO THE CONCLUSION THAT NO AMOUNT WAS ACTUALLY PAID ON ACCOUNT OF GOODWILL. THIS IS A FACTUAL FINDING. THE COMMISSIONER OF INCOME TAX (APPEALS) [`CIT(A)' FOR SHORT] HAS COME TO THE CONCLUSION THAT THE AUTHORISED REPRESENTATIVES HAD FI LED COPIES OF THE ORDERS OF THE HIGH COURT ORDERING AMALGAMATION OF THE ABOVE TWO COMPANIES; THAT THE ASSETS AND LIABILITIES OF M/S. YSN SHARES AND SECURITIES PRIVATE LIMITED WERE TRANSFERRED TO THE ASSESSEE FOR A CONSIDERATION; THAT THE DIFFERENCE BETWEEN THE COST OF AN ASSET AND THE AMOUNT PAID CONSTITUTED GOODWILL AND THAT THE ASSESSEE COMPANY IN THE PROCESS OF AMALGAMATION HAD ACQUIRED A CAPITAL RIGHT IN THE FORM OF GOODWILL BECAUSE OF WHICH THE MARKET WORTH OF THE ASSESSEE - COMPANY STOOD INCREASED. THIS FINDING HAS ALSO BEEN UPHELD BY INCOME TAX APPELLATE TRIBUNAL [`ITAT' FOR SHORT]. WE SEE NO REASON TO INTERFERE WITH THE FACTUAL FINDING. ONE MORE ASPECT WHICH NEEDS TO BE MENTIONED IS THAT AGAINST THE DECISION OF ITAT THE REVENUE HAD PREFERRED AN APP EAL TO THE HIGH COURT IN WHICH IT HAD RAISED ONLY THE QUESTION AS TO WHETHER GOODWILL IS AN ASSET UNDER SECTION 32 OF THE ACT. IN THE CIRCUMSTANCES BEFORE THE HIGH COURT THE REVENUE DID NOT FILE AN APPEAL ON THE FINDING OF FACT REFERRED TO HEREINABOVE. F OR THE AFORE - STATED REASONS WE ANSWER QUESTION NO.[B] ALSO IN FAVOUR OF THE ASSESSEE. THUS IT IS CLEAR THAT THE HONBLE SUPREME COURT HAS CONSIDERED THE CIRCUMSTANCES UNDER WHICH THE GOODWILL HAS ARISEN ON WHICH DEPRECIATION WAS CLAIMED. THEREFORE THE JUDGEMENT IN THE CASE OF SMIFF SECURITIES LTD. IS APPLICABLE TO THE FACTS OF THE CASE BEFORE US. THE FOLLOWING DECISIONS 34 RELIED UPON BY THE LD. COUNSEL FOR THE ASSESSEE ALSO HOLD THAT DEPRECIATION ON GOODWILL IS ALLOWABLE.: 1. ZYDUS WELLNESS LTD. 348 ITR 302 (SC) 2. SRI KRISHNA DRUGS LTD. TS - 5874 - ITAT - 2011 (HYD. TRIB.) 3. AP PAPER MILLS LTD. TS - 5628 - 2009 (HYD. TRIB.) 4. ZUARI CEMENT LTD. TS - 5823 - ITAT - 2016 (HYD. TRIB.) 5. MTANDT RENTALS LTD. TS - 7175 - ITAT - 2018 ( HYD. TRIB.) 6. DR. REDDYS LABORATORIES LTD. 78 TAXMANN.COM 63 (HYD.TRIB.) 7. COSMOS COOPERATIVE BANK LTD. TS - 47 - ITAT - 2014 (PUNE TRIB.) 8. AREVA T&D INDIA LTD. 345 ITR 421 (DEL.) 9. TRIUNE ENERGY SERVICES (P) LTD. 237 TAXMANN 230 (DEL.) 10. CLC & SONS PVT. LTD. 95 TAXMANN.COM 219 (ITAT - DEL. - SB) 11. VOLVO INDIA PVT. LTD. IT(TP) A NO. 1537/BANG/2012. 14.1 THE DECISIONS RELIED UPON BY THE LD. DR ARE ALL DECISIONS OF COORDINATE BENCHES OF THE TRIBUNAL AND ALSO ARE ALL DISTINGUISHABLE ON FACTS. RESPECTFULLY FOLLOWING THE ABOVE PRECEDENTS RELIED UPON BY THE ASSESSEE ON THE ISSUE WE ARE INCLINED TO ALLOW THE GROUND OF APPEAL NO. 3. 15. THE NEXT GROUND IS AGAINST THE ENHANCEMENT MADE BY THE LD. CIT(A) U/S 68 OF THE ACT. 16. THE FACTS RELATING TO THIS ISSUE ARE THAT HE LD. CIT(A) DURING THE COURSE OF HEARING HELD IN SEPTEMBER 2018 SOUGHT FOR THE DETAILS OF THE TRANSACTION OF AMALGAMATION UNDERTAKEN BY THE ASSESSEE WHICH RESULTED IN THE GOODWILL BEING RECORDED IN ITS BOOKS. THE ASSESSEE EXPLAINED IN DETAIL THE MECHANISM OF THE SAID TRANSACTION AND THAT THE GOODWILL WAS THE EXCESS OF CONSIDERATION PAID OVER AND ABOVE THE FAIR VALUE OF THE ASSETS AND LIABILITIES TAKEN OVER BY IT. LD. CIT(A) INVOKING THE PROVISIONS OF SECTION 251(2) OF THE ACT AND ASKED THE ASSESSEE TO EXPLAIN (I) HOW THE GOODWILL WAS ARRIVED AT AND WHY THE GOODWILL WHICH IS SHOWN AS AN ASSET SHOULD NOT BE TREATED AS NON - EXISTING AND ADDED BACK (II) WHY SHOULD THE CLAIM OF DEPRECIATION ON GOODWILL NOT BE T REATED AS WRONG CLAIM THAT SHOULD BE DISALLOWED; AND (III) HOW EXTENDING LIABILITIES WERE SHOWN IN THE FINANCIALS OR BOOKS OF ACCOUNT. THE ASSESSEE FILED ITS DETAILED REPLY. HOWEVER LD. 35 CIT(A) WAS NOT CONVINCED AND HE HELD THAT DEAL VALUE OF THE SHARES WAS INR 5 978 CRORES WHILE THE CORRESPONDING INVESTMENT RECORDED IN THE BOOKS OF ASSESSEE IS INR 4 386/ - AND THE DIFFERENTIAL AMOUNT OF RS. 1 592 CRORES USED FOR REPAYMENT OF THIRD PARTY LOAN AND LIABILITIES OF AGILA AND ONCO WAS HELD TO BE UNEXPLAINED C REDITORS IN THE BOOKS OF ACCOUNT U/S 68 OF THE ACT AND BROUGHT THE SAME TO TAX. 17. THE LD. COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE CIT(A) IN RESPONSE TO THE ENHANCEMENT NOTICE AND SUBMITTED THAT THE TREATMENT OF THE DEBTS OF A GILA AND ONCO AGREED TO BE SETTLED BY THE ASSESSEE PURSUANT TO THE SPA WAS NOT DEALT WITH BY THE AO DURING THE COURSE OF ASSESSMENT PROCEEDING AND THEREFORE THE SAID ASPECT WAS NOT A SUBJECT MATTER OF APPEAL BEFORE THE LD. CIT(A). HE SUBMITTED THAT LD. CIT(A) HAS TRAVELLED BEYOND HER JURISDICTION IN ENHANCING THE INCOME OF ASSESSEE IN RESPECT OF THE ISSUE WHICH WAS NEVER CONSIDERED BY THE AO. HE RELIED UPON THE PROVISIONS OF SECTION 251(1) OF THE ACT TO ARGUE THAT THE ENHANCEMENT IS PROHIBITED IN RESPE CT OF ISSUES THAT WERE NEVER CONSIDERED BY THE AO DURING THE ASSESSMENT PROCEEDINGS. IN RESPECT OF HIS CONTENTION HE PLACED RELIANCE UPON THE DECISION OF HONBLE APEX COURT IN THE CASE OF RAI BAHADUR HARDUTROY MOTILAL CHAMARIA [1967] 66 ITR 443 (SC). HE SUBMITTED THAT VARIOUS HIGH COURTS AND TRIBUNALS HAVE HELD THAT CIT(A) DOES NOT HAVE THE POWER TO QUESTION THE TAXABILITY OF INCOME FROM A NEW SOURCE WHICH WAS NOT CONSIDERED BY THE AO. IN SUPPORT OF THIS SUBMISSION HE PLACED RELIANCE ON THE FOLLOWING O THER DECISIONS: 1. SHAPOORJI PALLONJI MISTRY 44 ITR 891 (SC) 2. SARDARILAL & CO. 251 ITR 364 (DELHI) 3. BIKRAM SINGH 48 ITR 689 4. HARI MOHAN SHARMA IN ITA NO. 2953/DEL/2018 5. B.P. SHERAFFUDIN 23 SOT 227 (2008) 17.1 FURTHER HE ALSO SUBMITTED THAT CIT(A) CANNOT ENH ANCE AN ASSESSMENT UNLESS THE ASSESSEE HAS BEEN GIVEN A REASONABLE OPPORTUNITY OF BEING HEARD. HE SUBMITTED THAT NO ENHANCEMENT NOTICE WAS GIVEN TO THE ASSESSEE AND THEREFORE THE ENHANCED INCOME CANNOT BE SUSTAINED. ACCORDING TO HIM 36 ENHANCEMENT MADE BY T HE CIT(A) IS CONTRARY TO THE FACTS AND LAW AND INVALID AND BEYOND JURISDICTION AND IT IS TO BE DELETED. 18. THE LD. DR ON THE OTHER HAND RELIED UPON THE ORDER OF CIT(A) AND SUBMITTED THAT LD. CIT(A) HAD THE POWERS OF ENHANCEMENT AND HAD ACCORDINGLY ISSU ED ENHANCEMENT NOTICE ON 17/09/2018 TO THE ASSESSEE TO WHICH ASSESSEE FILED ITS REPLY ON 08/10/2018 AND ONLY AFTER CONSIDERING THE REPLY OF THE ASSESSEE THE CIT(A) HAS PASSED THE ORDER. HE THEREFORE SUPPORTED THE FINDINGS OF CIT(A) THAT RS. 1592.6 CRO RES ON ACCOUNT OF REPAYMENT OF LOANS AND DEBTORS WHICH HAVE NOT BEEN PROVED BY THE ASSESSEE AS GENUINE. AS PART OF TOTAL INCOME AND ADDED THE SAME TO THE TOTAL INCOME U/S 68 OF THE ACT FOR WANT OF PROOF. 19. HAVING REGARD TO THE RIVAL CONTENTIONS AND MAT ERIAL ON RECORD. WE FIND THAT U/S 251(1) OF THE ACT THE CIT(A) HAS THE POWER TO CONFIRM REDUCE ENHANCE OR ANNUL THE ASSESSMENT IN AN APPEAL AGAINST AN ORDER OF ASSESSMENT. THE HONBLE SUPREME COURT IN THE CASE OF SHAPOORJI PALLONJI MISTRY (SUPRA) CONFIR MED THE DECISION OF THE HONBLE BOMBAY HIGH COURT REPORTED IN [1958] 34 ITR 342 (BOM WHEREIN THE HONBLE HIGH COURT HELD AS UNDER: SO THE POWER OF THE APPELLATE ASSISTANT COMMISSIONER IS CONFINED TO CONSIDERING THE MATTER WHICH HAS BEEN CONSIDERED BY TH E INCOME - TAX OFFICER AND DETERMINED IN THE COURSE OF THE ASSESSMENT; AND 'MATTER' IS USED NOT IN THE SENSE OF A HEAD OF INCOME BUT IN THE SENSE OF A SPECIFIC SOURCE OF INCOME. SO THE QUESTION THAT HAS TO BE ASKED WHEN DECIDING WHETHER THE APPELLATE ASSIS TANT COMMISSIONER HAS THE POWER OR NOT IS : 'IS THIS THE MATTER WHICH WAS CONSIDERED AND DECIDED BY THE INCOME - TAX OFFICER ?' IF IT WAS IRRESPECTIVE OF THE NATURE OF THE APPEAL PREFERRED BY THE ASSESSEE THE APPELLATE ASSISTANT COMMISSIONER COMMISSIONER W OULD HAVE THE POWER TO CONSIDER THAT MATTER. NOW IT IS CLEAR ON THE RECORD THAT THE INCOME - TAX OFFICER NEVER CONSIDERED THIS MATTER IN THE ASSESSMENT YEAR 1947 - 48. STRANGELY ENOUGH AS THE RECORD SHOWS HE DID CONSIDER IT IN THE ASSESSMENT YEAR 1946 - 47 WH EN IT WAS UNNECESSARY FOR HIM TO CONSIDER IT BECAUSE THE RECEIPT DID NOT FALL IN THAT ASSESSMENT YEAR; AND THE OPINION THEN EXPRESSED BY HIM WAS THAT THIS PAYMENT COULD NOT BE TREATED AS A BUSINESS RECEIPT. NOW IF HIS SUCCESSOR HAD EXPRESSED THE SAME OPIN ION FOR THE ASSESSMENT YEAR 1947 - 48 THEN UNDOUBTEDLY THE APPELLATE ASSISTANT COMMISSIONER COULD HAVE REFUSED TO ACCEPT THAT OPINION AND BROUGHT THIS AMOUNT TO TAX. IN OUR OPINION THEREFORE IT IS CLEAR THAT UNDER THE CIRCUMSTANCES OF THIS CASE THE APPE LLATE 37 ASSISTANT COMMISSIONER WAS NOT COMPETENT TO ENHANCE THE ASSESSMENT OF THE ASSESSEE FOR THE ASSESSMENT YEAR 1947 - 48 BY A SUM OF RS. 40 000. IT IS ALWAYS WISE TO CONSIDER THE PRACTICAL EFFECTS OF ONES JUDGMENT AND ESPECIALLY IN MATTERS OF TAX AND REVENUE. IT IS NOT AS IF A COURT SHOULD COME TO A DIFFERENT CONCLUSION WAS INESCAPABLE IN LAW EVEN THOUGH ITS DECISION MAY LEAD TO SERIOUS DIFFICULTIES IN THE WAY LEAD TO LOSS OF REVENUE OR EVASION OF TAX IT SHOULD HESITATE BEFORE IT COMES TO A PARTICULAR CONCLUSION. NOW IN THIS CASE OUR DECISION WILL NOT IN ANY WAY PUT DIFFICULTIES IN THE WAY OF THE TAXING DEPARTMENT. IN THIS VERY CASE TWO REMEDIES WERE OPEN TO THE DEPARTMENT NEITHER OF WHICH WAS RESORTED TO. IT WAS OPEN TO THE INCOME - TAX OFFICER TO HAV E PROCEEDED AGAINST THE ASSESSEE UNDER THE FIRST PART OF SECTION 34 ; OR ALTERNATIVELY THE COMMISSIONER COULD HAVE EXERCISED HIS POWERS OF REVISION UNDER SECTION 33B . SECTION 34 EXPRESSLY DEALS WITH A CASE WHERE AN ASSESSEE FAILS TO DISCLOSE FULLY AND TRULY ALL MATERIAL FACTS NECESSARY FOR HIS ASSESSMENT; AND CLEARLY THIS IS A CASE WHERE THE ASSESSE E FAILED TO DISCLOSE THE SUM OF RS. 40 000. NOW IF WE WERE TO HOLD THAT THE APPELLATE ASSISTANT COMMISSIONER HAS THE POWER - WHICH MR. JOSHI CONTENDS HE HAS - HE IN EFFECT WOULD BE BRINGING TO TAX AN INCOME WHICH THE ASSESSEE HAD FAILED TO DISCLOSE AND WH ICH HAD NEVER BEEN SUBJECTED TO THE PROCESS OF ASSESSMENT. THAT SURELY IS NOT THE POWER WHICH SECTION 31 GIVES TO THE APPELLATE ASSISTANT COMMISSIONER WHEN IT REFERS TO THE POWER OF ENHANCING AN ASSESSME NT. 19.1 IN THE SUBSEQUENT JUDGMENT IN THE CASE OF RAI BAHADUR HARDUTORY MOTILAL CHAMARIA (SUPRA) ALSO THE HONBLE SUPREME COURT REITERATED ITS STAND AS UNDER: THE PRINCIPLE THAT EMERGES AS A RESULT OF THE AUTHORITIES OF THIS COURT IS THAT THE APPELL ATE ASSISTANT COMMISSIONER HAS NO JURISDICTION UNDER S. 31(3) OF THE ACT TO ASSESS A SOURCE OF INCOME WHICH HAS NOT BEEN PROCESSED BY THE INCOME - TAX OFFICER AND WHICH IS NOT DISCLOSED EITHER IN THE RE TURNS FILED BY THE ASSESSEE OR IN THE ASSESSMENT ORDER AND THEREFORE THE APPELLATE ASSISTANT COMMISSIONER CANNOT TRAVEL BEYOND THE SUBJECT - MATTER OF THE ASSESSMENT. IN OTHER WORDS THE POWER OF ENHANCEMENT UNDER S. 31 (3) OF THE ACT IS RESTRICTED TO THE SUBJECT - MATTER OF ASSESSMENT OR THE SOURCES OF INCOME WHICH HAVE BEEN CONSIDERED EXPRESSLY OR BY CLEAR IMPLICATION BY THE INCOME - TAX OFFICER FROM THE POINT OF VIEW OF THE TAXABILITY OF DIE ASSESSEE. IT WAS ARGUED BY MR. VISHWANATH LYER ON BEHALF OF THE APPELLANT THAT BY APPLYING THE PRINCIPLE TO THE PRESENT CASE THE APPELLATE ASSISTANT COMMISSIONER HAD JURISDICTION TO ENHANCE THE QUANTUM OF INCOME OF THE ASSESSEE. IT WAS POINTED OUT THAT THE FACT OF ALL EGED TRANSFER OF RS. 5 85 000 TO FORBESGANJ BRANCH WAS NOTED BY THE INCOME - TAX OFFICER AND ALSO THE FACT THAT IT DID NOT REACH FORBESGANJ ON THE SAME DAY. SO IT WAS ARGUED THAT IN THE APPEAL THE APPELLATE ASSISTANT 38 COMMISSIONER HAD JURISDICTION TO DEAL WI TH THE QUESTION OF THE TAXABILITY OF THE AMOUNT OF RS. 5 85 000 AND TO HOLD THAT IT WAS TAXABLE AS UNDISCLOSED PROFITS IN THE HANDS OF THE ASSESSEE. WE ARE UNABLE TO ACCEPT THE ARGUMENT PUT FORWARD ON BEHALF OF THE APPELLANT AS CORRECT. IT IS TRUE THAT THE INCOME - TAX OFFICER HAS REFERRED TO THE REMITTANCE OF RS. 5 85 000 FROM THE CALCUTTA BRANCH BUT THE INCOME - TAX OFFICER CONSIDERED THE DESPATCH OF THIS AMOUNT ONLY WITH A VIEW TO TEST THE GENUINENESS OF THE ENTRIES RELATING TO RS. 4 30 000 IN THE BOOKS OF THE FORBESGANJ BRANCH. IT IS MANIFEST THAT THE INCOME - TAX OFFICER DID NOT CONSIDER THE REMITTANCE OF RS. 5 85 000 IN THE PROCESS OF ASSESSMENT FROM THE POINT OF VIEW OF ITS TAXABILITY. IT IS ALSO MANIFEST THAT THE APPELLATE ASSISTANT COMMISSIONER HAS CONSI DERED THE AMOUNT OF REMIT - TANCE OF RS. 5 85 000 FROM A DIFFERENT ASPECT NAMELY THE POINT OF VIEW OF ITS TAXABILITY. BUT SINCE THE INCOME - TAX OFFICER HAS NOT APPLIED HIS MIND TO THE QUESTION OF THE TAXABILITY OR NONTAXABILITY OF THE AMOUNT OF RS. 5 85 0 00 THE APPELLATE ASSISTANT COMMISSIONER HAD NO JURISDICTION IN THE CIRCUMSTANCES OF THE PRESENT CASE TO ENHANCE THE TAXABLE INCOME OF THE ASSESSEE ON THE BASIS OF THIS AMOUNT OF RS. 5 85 000 OR OF ANY PORTION THEREOF. AS WE HAVE ALREADY STATED. IT IS NO T OPEN TO THE APPELLATE ASSISTANT COMMISSIONER TO TRAVEL OUTSIDE THE RECORD I.E. THE RETURN MADE BY THE ASSESSEE OR THE ASSESSMENT ORDER OF THE INCOME - TAX OFFICER WITH A VIEW TO FIND OUT NEW SOURCES OF INCOME AND THE POWER OF ENHANCEMENT UNDER S. 31(3) OF THE ACT IS RESTRICTED TO THE SOURCES OF INCOME WHICH HAVE BEEN THE SUBJECT - MATTER OF CONSIDERATION BY THE INCOME - TAX OFFICER FROM THE POINT OF VIEW OF TAXABILITY. IN THIS CONTEXT 'CONSIDERATION' DOES NOT MEAN 'INCIDENTAL' OR 'COLLATERAL' EXAMINATION OF ANY MATTER BY THE INCOME - TAX OFFICER IN THE PROCESS OF ASSESSMENT. THERE MUST BE SOMETHING IN THE ASSESSMENT ORDER TO SHOW THAT THE INCOME - TAX OFFICER APPLIED HIS MIND TO THE PARTICULAR SUBJECT - MATTER O R THE PARTICULAR SOURCE OF INCOME WITH A VIEW TO ITS TAXABILITY OR TO ITS NON - TAXABILITY AND NOT TO ANY INCIDENTAL CONNECTION. IN THE PRESENT CASE IT IS MANIFEST THAT THE INCOME - TAX OFFICER HAS NOT CONSIDERED THE ENTRY OF RS. 5 85 000 FROM THE POINT OF VIE W OF ITS TAXABILITY AND THEREFORE THE APPELLATE ASSISTANT COMMISSIONER HAD NO JURISDICTION IN AN APPEAL UNDER S. 31 OF THE ACT TO ENHANCE THE ASSESSMENT. 19.2 THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. SARDARILAL & CO. (SUPRA) ALSO HELD AS UND ER: 'THE APPELLATE ASSISTANT COMMISSIONER ON AN APPEAL PREFERRED BY THE ASSESSED HAD JURISDICTION TO INVOKE FOR THE FIRST TIME THE PROVISIONS OF RULE 33 OF THE INDIAN INCOME TAX RULES 1922 (HEREINAFTER REFERRED TO AS 'THE RULES') FOR THE PURPOSE OF COMPU TING THE INCOME OF A NON - RESIDENT EVEN IF THE INCOME TAX OFFICER HAD NOT DONE SO IN THE ASSESSMENT PROCEEDINGS. BUT IN SHAPOORJI PALLONJI MISTRY'S CASE (SUPRA) THIS COURT WHILE CONSIDERING THE EXTENT OF THE POWER OF THE APPELLATE ASSISTANT COMMISSIONER REFERRED TO A NUMBER OF CASES DECIDED BY VARIOUS HIGH COURTS INCLUDING THE BOMBAY HIGH 39 COURT JUDGMENT IN NARRONDAS' CASE (SUPRA) AND ALSO THE DECISION OF THIS COURT IN MCMILLAN AND CO.'S CASE (SUPRA) AND HELD THAT IN AN APPEAL FILED BY THE ASSESSED THE APPELLATE ASSISTANT COMMISSIONER HAS NO POWER TO ENHANCE THE ASSESSMENT BY DISCOVERING NEW SOURCES OF INCOME NOT CONSIDERED BY THE INCOME TAX OFFICER IN THE ORDER APPEALED AGAINST. IT WAS URGED ON BEHALF OF THE REVENUE THAT THE WORDS 'ENHANCE THE ASSESSMEN T' OCCURRING IN SECTION 31 WERE NOT CONFINED TO THE ASSESSMENT REACHED THROUGH A PARTICULAR PROCESS BUT THE AMOUNT WHICH OUGHT TO HAVE BEEN COMPUTED IF THE TRUE TOTAL INCOME HAD BEEN FOUND. THE COURT OB SERVED THAT THERE WAS NO DOUBT THAT THIS VIEW WAS ALSO POSSIBLE BUT HAVING REGARD TO THE PROVISIONS OF SECTIONS 34 AND 33B WHICH MADE PROVISION FO R ASSESSMENT OF ESCAPED INCOME FROM NEW SOURCES THE INTERPRETATION SUGGESTED ON BEHALF OF THE REVENUE WOULD BE AGAINST THE VIEW WHICH HAD HELD THE FIELD FOR NEARLY 37 YEARS.' IN THE CASE BEFORE US THE AO DID NOT EXAMINE THE ALLOWABILITY OF THE SUM PAID TO SETTLE THE LIABILITIES OF AGILA AND ONCO AS PART OF THE SALE CONSIDERATION. IN FACT THE AO ACCEPTED THE PAYMENT. IF THE CIT(A) WAS OF THE OPINION THAT THE AO OUGHT TO HAVE VERIFIED THE GENUINENESS OF THE SAME THE OPTION AVAILABLE TO THE DEPARTMENT AR E UNDER SECTION 147 OR UNDER SECTION 263 OF THE IT ACT BUT CIT(A) COULD NOT HAVE EMBARKED ON BRINGING A NEW SOURCE OF INCOME TO TAX. THEREFORE RESPECTFULLY FOLLOWING THE ABOVE JUDICIAL PRECEDENTS ON THE ISSUE WE DELETE THE INCOME ENHANCED BY THE CIT(A) AND BROUGHT TO TAX. THE GROUND NO. 4 IS ALLOWED. 20. THE NEXT ISSUE IS WITH REGARD TO THE ADDITION OF RS. 3 11 70 470/ - TOWARDS DISALLOWANCE OF EXPENDITURE U/S 14A OF THE ACT. 21. BRIEF FACTS OF THE CASE ARE THAT ON 31/03/2014 THE ASSESSEE HAD SHOWN UN DER THE HEAD NON - CURRENT INVESTMENTS A SUM OF RS. 2 48 80 000 AND RS. 152 91 50 000/ - AS CURRENT INVESTMENTS. AO OBSERVED THAT ASSESSEE HAD DEBITED INTEREST & FINANCE COST OF RS. 248 46 20 000/ - AND THAT THE ASSESSEE HAD TAKEN SECURED LOANS OF RS. 340 33 50 000/ - AND UNSECURED LOANS OF RS. 199 56 60 000/ - . HE OBSERVED THAT SINCE THE INCOME FROM SUCH INVESTMENT WAS NOT TAXABLE NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENSES INCURRED BY THE ASSESSEE IN RELATION TO SUCH INCOME. THEREFORE ASSESSEE WAS ASKED TO JUSTIFY AS TO WHY INTEREST EXPENDITURE SHOULD NOT BE DISALLOWED U/S 14A OF THE ACT RWR 8D OF THE IT RULES . ASSESSEE SUBMITTED THAT PROVISIONS OF SECTION 14A ARE NOT APPLICABLE TO THE 40 ASSESSEES CASE SINCE IT HAS NOT INCURRED ANY EXPENDITURE FOR EARNING EXEMPT INCOME I.E. IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. FURTHER IT WAS SUBMITTED THAT NO EXEMPT INCOME WAS RECEIVED FROM THE INVESTMENTS FOR THE YEAR UNDER CONSIDERATION. IT WAS ALSO SUBMITTED THAT TH E INVESTMENTS WERE MADE STRATEGICALLY IN THE GROUP COMPANIES FOR ACHIEVING BETTER BUSINESS RESULTS AND NOT FOR EARNING EXEMPT INCOME. AO HOWEVER HELD THAT FOR MAKING DISALLOWANCE U/S 14A IT IS NOT NECESSARY THAT EXEMPT INCOME SHOULD NECESSARILY BE INCLU DED IN A PARTICULAR YEARS INCOME FOR DISALLOWANCE TO BE TRIGGERED. HE ALSO PLACED RELIANCE ON CBDT CIRCULAR NO. 5/2014 DATED 11/02/2014 TO HOLD THAT THE EXPENDITURE IS TO BE DISALLOWED U/S 14A RWR 8D OF THE ACT. ACCORDINGLY HE WORKED OUT THE DISALLOWAN CE AT RS. 3 11 70 470/ - . ON APPEAL THE CIT(A) CONFIRMED THE DISALLOWANCE MADE BY THE AO. AGGRIEVED THE ASSESSEE IS IN SECOND APPEAL BEFORE US. 22. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT ASSESSEE HAD SUFFICIENT INTEREST FREE FUNDS IN THE FORM OF SHARE CAPITAL AND RESERVE AND SURPLUS IS FAR IN EXCESS OF THE AMOUNT OF INVESTMENTS AND THEREFORE IT IS TO BE PRESUMED THAT SUCH INVESTMENTS WOULD BE OUT OF SUCH INTEREST - FREE FUNDS AVAILABLE WITH THE ASSESSEE. FOR THIS PURPOSE HE PLACED RELIANCE UPON T HE DECISION OF THE HONBLE APEX COURT IN THE CASE OF RELIANCE INDUSTRIES LTD. 410 ITR 466 (SC) HDFC BANK LTD. 36 ITR 505 AND RELIANCE UTILITIES & POWER LTD. 313 ITR 640. HE ALSO SUBMITTED THAT NO ACTUAL EXPENDITURE WAS INCURRED BY THE ASSESSEE FOR EARN ING EXEMPT INCOME AND THAT BEFORE MAKING A DISALLOWANCE U/S 14A OF THE ACT RWR 8D IT IS NECESSARY FOR THE AO TO PERUSE THE ACCOUNTS OF THE ASSESSEE AND RECORD A FINDING THAT HE WAS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE AND THAT SUCH AN EXERCISE WAS NOT DONE IN THIS CASE. HE FURTHER SUBMITTED THAT THE ASSESSEES INCOME WAS TAXED AT BOOK PROFIT U/S 115JB AND NO DISALLOWANCE U/S 14A CAN BE MADE UNDER MAT PROVISIONS. IN SUPPORT OF HIS CONTENTION HE RELIED ON THE SPECIAL BENCH DECISI ON OF THE ITAT DELHI IN THE CASE OF VIREET INVESTMENTS PVT. LTD. 23. THE LD. DR ON THE OTHER HAND SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT IRRESPECTIVE OF WHETHER THE ASSESSEE HAS INCURRED 41 ANY EXPENDITURE IN EARNING OF EXEMPT I NCOME THE DISALLOWANCE U/S 14A IS REQUIRED TO BE AS PER CBDT CIRCULAR NO. 5/14. HE PRAYED FOR THE CONFIRMATION OF THE ORDERS OF AUTHORITIES BELOW ON THIS ISSUE. 24. HAVING REGARD TO THE RIVAL CONTENTIONS AND MATERIAL ON RECORD WE FIND THAT THE ASSESSEE HAS EARNED EXEMPT INCOME OF RS. 3 86 52 685/ - DURING THE RELEVANT AY WHEREAS THE DISALLOWANCE MADE BY THE AO IS OF RS. 3 11 70 470/ - AND THEREFORE AS HELD BY THE HONBLE DELHI HIGH COURT IN THE CASE OF JOINT INVESTMENTS (P) LTD. VS. CIT REPORTED IN [2015] 37 ITR 694 (DELHI) THAT THE DISALLOWANCE U/S 14A RWR 8D IS TO BE RESTRICTED TO THE EXEMPT INCOME EARNED DURING THE YEAR. THE AY BEFORE US IS AY 2014 - 15 AND THEREFORE RULE 8D IS VERY MUCH APPLICABLE TO THE ASSESSEE. FURTHER IN A NUMBER OF CASES I T HAS BEEN HELD THAT ONLY THE AVERAGE OF THE INVESTMENTS WHICH HAVE YIELDED EXEMPT INCOME IS TO BE CONSIDERED FOR COMPUTATION OF 14 A DISALLOWANCE. AO IS DIRECTED ACCORDINGLY. THIS GROUND OF APPEAL IS ACCORDINGLY PARTLY ALLOWED. 25. IN THE RESULT APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. 26. AS REGARDS THE APPEAL OF THE REVENUE WHICH IS LINKED TO THE GROUND OF APPEAL NO. 3 OF ASSESSEES APPEAL SINCE WE HAVE ALREADY ALLOWED ASSESSEES GROUND OF APPEAL THE FINDING OF THE CIT(A) THAT GOODWILL HAS TO BE AMORTIZED OVER A PERIOD OF 5 YEARS CANNOT BE SUSTAINED. PARTICULARLY WHEN THE RE IS NO PROVISION FOR SUCH AMORTIZATION OF GOODWILL AND ALLOWABILITY OF DEPRECIATION THERE ON OVER A PERIOD OF 5 YEARS. THUS REVENUE APPEAL IS DISMISSED . 27. TO SUM UP APPEAL OF THE ASSESSEE IN ITA NO. 2335/H / 18 IS PARTLY ALLOWED AND APPEAL OF THE REVEN UE IN ITA NO. 12/H/18 IS DISMISSED . ORDER PRONOUNCED IN OPEN COURT ON 13 TH NOVEMBER 2019 . SD/ - SD/ - (S.RIFAUR RAHMAN) (P MADHAVI DEVI) ACCOUNTANT MEMBER JUDICIAL MEMBER HYDERABAD DATED: 13 TH NOVEMBER 2019. 42 *GMV /KV COPY FORWARDED TO: 1. M/S MYLAN LABORATORIES LIMITED PLOT NO.564/A/22 ROAD NO.92 JUBILEE HILLS HYDERABAD 500 034 . 2. DY. CIT CIRCLE 16(2) HYDERABAD. 3. PR.CIT - 4 HYD. 4. D.R. ITAT HYDERABAD 5 . GUARD FILE // C O P Y // 1. DRAFT DICTATED ON 30 /10/19 01/11/19 2. DRAFT PLACED BEFORE THE AUTHOR 01/11/19 04/11/19 07/11/19 3. DRAFT PLACED BEFORE THE SECOND MEMBER 4. DRAFT APPROVED BY SECOND MEMBER 5. APPROVED DRAFT COMES TO SRPS 6. KEPT FOR PRONOUNCEMENT 7. FILE SENT TO BENCH CLERK