AQUAPHARM CHEMICAL CO LTD, Pune v. JTCIT SPECIAL RG. 1, Pune

ITA 372/PUN/2002 | 1998-1999
Pronouncement Date: 29-02-2012 | Result: Partly Allowed

Appeal Details

RSA Number 37224514 RSA 2002
Assessee PAN TEDIN1974W
Bench Pune
Appeal Number ITA 372/PUN/2002
Duration Of Justice 9 year(s) 10 month(s) 28 day(s)
Appellant AQUAPHARM CHEMICAL CO LTD, Pune
Respondent JTCIT SPECIAL RG. 1, Pune
Appeal Type Income Tax Appeal
Pronouncement Date 29-02-2012
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted A
Tribunal Order Date 29-02-2012
Assessment Year 1998-1999
Appeal Filed On 01-04-2002
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A PUNE BEFORE SHRI I.C. SUDHIR JUDICIAL MEMBER AND SHRI. G.S. PANNU ACCOUNTANT MEMBER SR.NO. ITA NO./C.O.NO. ASST. YEAR APPELLANT VS. RESPONDENT 1 372/PN/2002 1998 - 99 AQUAPHARM CHEMICAL CO. LTD. S-113/2 MIDC BHOSARI PUNE 26 PAN : NOT AVAILABLE JT. CIT S.R.1 PUNE 2. 1111/PN/2005 2001 - 02 - DO - ADDL.CIT R - 8 PUNE 3. 626/PN/2002 1998 - 99 ASSTT. CIT CIR 8 AKURI PUNE ACQUAPHARM CHEMICAL CO. LTD. S-113/2 MIDC BHOSARI PUNE 26 PAN : NOT AVAILABLE 4. 1193/PN/2007 2001 - 02 - DO - - DO - 5. 1386/PN/2005 2001 - 02 - DO - - DO - 6. C.O.1/PN/2008 (ARISING OUT OF ITA NO. 1193/PN/2007) 2001 - 02 ACQUAPHARM CHEMICAL CO. LTD. S-113/2 MIDC BHOSARI PUNE 26 PAN : NOT AVAILABLE ASST. CIT CIR. 8 PUNE APPELLANT BY : S/SHRI SUNIL PATHAK & R.G. NAHAR DEPARTMENT BY: S/SHRI HARESHWAR SHARMA CIT S.K.MIS RA CIT II & S.K. AMBASTHA DATE OF HEARING : 09/1/12 DATE OF PRONOUNCEMENT: /2/12 ORDER PER I.C. SUDHIR JM ITA NO. 372/PN/2002 THE ASSESSEE HAS QUESTIONED FIRST APPELLATE ORDER ON THE FOLLOWING GROUNDS : (1). THAT THE LEARNED CIT(A) ERRED IN LAW AND ON F ACTS IN REJECTING THE CLAIM OF THE APPELLANT THAT THE COMPENSATION OF RS. 4 53 86 124/- RECEIVED UNDER SETTLEMENT OF DISPUTE WITH AIK GERMANY WAS A CAPITA L RECEIPT NOT LIABLE TO INCOME TAX. THE LEARNED CIT(A) ERRED IN NOT APPRE CIATING THAT SINCE IN SUBSTANCE THE CLAIM AWARDED BY THE INTERNATIONAL C OUNCIL OF ARBITRATION TO THE APPELLANT REPRESENTED DAMAGES FOR NONFULFILMEN T OF THE CONTRACTUAL OBLIGATIONS BY AIK GERMANY DUE TO WHICH THE APPELLA NT COULD NOT IMPLEMENT THE PROJECT AND SINCE THERE WAS STERILIZATION OF THE PROFIT EARNING SOURCES OF THE APPELLANT SUCH COMPENSATION OR DAMAGES AWARDE D FOR BREACH OF ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 2 CONTRACT FELL IN THE CATEGORY OF A CAPITAL RECEIPT NOT CHARGEABLE TO INCOME TAX AS CLEARLY HELD BY A NUMBER OF DIRECT JUDICIAL PRON OUNCEMENTS OF THE HONBLE SUPREME COURT AND VARIOUS HIGH COURT. (2) THAT THE LEARNED CIT(A) ERRED IN LAW AND ON FA CTS IN CONFIRMING THE DISALLOWANCE OF RS. 46 040/- OUT OF EXPENDITURE FO R GIFT AND PRESENTATION ARTICLES. (3) THAT THE LEARNED CIT(A) ERRED IN LAW AND ON FAC TS IN CONFIRMING THE DISALLOWANCE OF RS. 6 92 595/- OUT OF SALES COMMISS ION PAID BY THE APPELLANT. THE LEARNED CIT(A) FURTHER ERRED IN NOT ADMITTIN G ADDITIONAL EVIDENCE UNDER RULE 46-A OF THE I.T. RULES ALTHOUGH THE APPELLANT HAD EXPLAINED THE CIRCUMSTANCES UNDER WHICH THE SAME COULD NOT BE PR ODUCED BEFORE THE A.O..THE LEARNED CIT(A) FURTHER ERRED IN NOT EVEN APPRECIATING THE APPELLANTS CONTENTION AND PRAYER THAT OUT OF RS. 6 92 595/- WHILE RS. 3 16 629/- REPRESENTED COMMISSION ACTUALLY PAID TH E REMAINING AMOUNT OF RS.3 72 966/- PROVIDED DURING A.Y. 1998-99 HAD BEE N ACTUALLY WRITTEN OFF AS NOT PAYABLE IN THE SUBSEQUENT YEARS AND ACCORDINGLY BEEN OFFERED AS INCOME AND THEREFORE THE ASSESSING OFFICER BE SUITABLY DIRECTED TO ENSURE THAT THE APPELLANT WAS NOT DOUBLY TAXED IN RESPECT OF THE SA ME. (4) THAT THE LEARNED CIT(A) ERRED IN LAW AND ON FA CTS IN CONFIRMING THE DISALLOWANCE OF RS. 11 829/- OUT OF TELEPHONE EXPEN SES. (5) THAT THE LEARNED CIT(A) ERRED IN LAW AND ON FAC TS IN NOT ENTERTAINING THE ADDITIONAL GROUND IN RESPECT OF DISALLOWANCE OF RS. 65 854/- OUT OF VEHICLE EXPENSES ALTHOUGH THE SAME WAS REQUESTED TO BE ENTERTAINED IN THE SUBMISSIONS BEFORE THE LEARNED CIT(A) IN VIEW OF T HE FACT THAT A SPECIFIC PRAYER FOR RELIEF IN THIS REGARD HAD ALREADY BEEN T AKEN IN FORM NO. 35 FILED BEFORE HIM. THE LEARNED CIT(A) HAS NOT EVEN DISCU SSED THIS ISSUE AT ALL IN HIS APPELLATE ORDER. 2. BESIDES THE ASSESSEE HAS ALSO RAISED THE BELOW MENTIONED 2 ADDITIONAL GROUNDS WITH REQUEST TO ALLOW THE SAME FOR ADJUDICA TION OF THE TRIBUNAL SINCE ISSUE ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 3 INVOLVED THEREIN IS LEGAL IN NATURE AND ADJUDICATIO N OF THE SAME DOES NOT REQUIRE CONSIDERATION OF ANY MATERIAL OUTSIDE THE RECORD : ADDITIONAL GROUNDS 6] THE LEARNED CIT(A) ERRED IN DIRECTING IN PARA 3 OF HIS ORDER ASST. OF PROFIT ON SALE VALUE OF RS. 19 40 000/- OF OPERATIN G ASSETS TO BE TAXED U/S. 41(2) WITHOUT APPRECIATING THAT THE SALE VALUE BEIN G LESSER THAN THE WDV OF THE BLOCK NO PROFIT WAS TAXABLE IN THE HANDS OF TH E ASSESSEE. 7] THE LEARNED CIT(A) ERRED IN TAXING THE CAPITAL G AINS ON TRANSFER OF TRADEMARK TO HACCL. THE APPELLANT SUBMITS THAT THE RE BEING NO COST OF ACQUISITION OF TRADE MARK THE CAPITAL GAINS ON TRA NSFER THEREOF ARE NOT CHARGEABLE TO TAX. WE MARK THESE ADDITIONAL GROUNDS AS ADDITIONAL GROU ND NOS. 1 & 2. 2.1 THE LD. D.R. OPPOSED THE RAISING OF THE ABOVE STATED ADDITIONAL GROUNDS ON THE BASIS THAT IT IS BELATED. 2.2 CONSIDERING THE ABOVE SUBMISSIONS WE FIND THAT THE ISSUE RAISED IN THE ADDITIONAL GROUNDS IS LEGAL IN NATURE AND ADJUDICAT ION OF THE SAME DOES NOT REQUIRE CONSIDERATION OF FRESH MATERIAL OUTSIDE THE RECORD. WE THUS DO NOT FIND SUBSTANCE IN THE OPPOSITION OF THE LD D.R. AGAINST THE ALLOW ABILITY OF THE ADJUDICATION OF THE ABOVE STATED ADDITIONAL GROUNDS. WE ACCORDINGLY AL LOWED THE SAME. GROUND NO. 1 3. IT IS AGAINST THE HOLDING OF RS.4 53 86 124/- AS A REVENUE RECEIPT BY THE LD CIT(A). 3.1 THE RELEVANT FACTS AS PER ASSESSMENT ORDER ARE THAT THE ASSESSEE COMPANY WAS INCORPORATED IN 1974 WITH ITS PRIMARY OBJECT O F MANUFACTURING SEA WATER ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 4 DESALTING KIT FOR THE INDIAN AIR FORCE AND INDIAN NAVY. IN EARLY 1980 IT DIVERSIFIED ITS OPERATION BY ENTERING INTO THE MANUFACTURING OF NON-TOXIC NON-POLLUTANT WATER TREATMENT CHEMICALS. THE ASSESSEE HAS HAVING 2 DIV ISIONS/PLANTS ONE AT BHOSARI AND THE OTHER AT PIRANGUDE. THE ASSESSEE COMPANY ENTERED INTO AN AGREEMENT DATED 23.12.1989 WITH AIK GERMANY FOR SUPPLY OF TECHNICAL KNOWHOW FOR MANUFACTURE OF FIRE RETARDANT CHEMICALS. THE COMPA NY WAS KEEN TO EXPAND ITS ACTIVITY AND THOUGHT THAT FIRE RETARDANT CHEMICAL HAVE A GOOD MARKET POTENTIAL. THE COMPANY DECIDED TO SET UP THE PROJECT AT PIRANGUDE. IT MADE OUT ITS EXPANSION PROJECT AND GOT IT APPROVED FROM SICOM AND WMDC FOR PROJECT LOAN AND SALES-TAX BENEFITS OF GOVERNMENT OF MAHARASHTRA. AS PER THE AGREEMENT WITH AIK GERMANY THE ASSESSEE COMPANY PAID FIRST INSTALLMENT OF TECH NICAL KNOW HOW FEES AND IT RECEIVED CERTAIN TECHNICAL INFORMATION AND DRAWINGS FROM AIK. SINCE THE INFORMATION PROVIDED BY AIK WAS NOT SUFFICIENT THE ASSESSEE COULD NOT START ITS MANUFACTURING ACTIVITIES OF FIRE RETARDANT CHEMICAL S. DESPITE REPEATED REQUESTS BY IT AIK REFUSED TO DIVULGE ANY FURTHER INFORMATION AND TOOK THE STAND THAT IT HAD SUPPLIED ALL THE NECESSARY INFORMATION. THE ASSESS EE COMPANY LEFT WITH NO ALTERNATIVE BUT TO GO INTO ARBITRATION AS PER TECH NICAL KNOW HOW AGREEMENT AND TO CLAIM COMPENSATION. AS PER THE AGREEMENT BETWEEN THE 2 PARTIES I.E. THE ASSESSEE AND AIK THE DISPUTE BETWEEN THE TWO WAS TO BE SETT LED IN AN ARBITRATION PROCEEDINGS TO BE HELD IN GERMANY. ONE ARBITRATOR EACH WAS TO BE APPOINTED BY BOTH THE PARTIES AND 3 RD UMPIRE WAS TO BE APPOINTED WITH THE MUTUAL CONSENT OF THE PARTIES. IN THE ARBITRATION AN AWARD OF RS. 4 53 86 124/- WAS AWARDED DURING THE PREVIOUS YEAR TO THE ASSESSEE AS COMPENSATION FOR THE SETTLEMENT OF THE DISPUTES. WHILE PROCESSING THE RETURN U/S. 143(1)(A) PRIMA F ACIE ADJUSTMENT OF RS. 4 53 86 124/- WAS MADE TREATING THE SAME AS REVENUE RECEIPT. THE ASSESSEE FILED A RECTIFICATION APPLICATION U/S. 154 BUT COULD NOT SU CCEED. THE AGGRIEVED ASSESSEE PREFERRED FIRST APPEAL BUT AGAIN COULD NOT SUCCEED AS THE LD CIT(A) CONFIRMED THE ADDITION OF RS.4 53 86 724/-. IN THE SCRUTINY PROC EEDINGS THE ASSESSEE WAS ASKED TO EXPLAIN AS TO WHY THE SAID ADJUSTMENT SHOULD NO T BE RETAINED IN THE ASSESSMENT. ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 5 THE ASSESSEE EXPLAINED SEVERAL REASONS FOR TREATING THE AMOUNT RECEIVED AS COMPENSATION IN THE AWARD AS CAPITAL RECEIPT. TH E A.O WAS NOT SATISFIED WITH THOSE EXPLANATION AND TREATED THE AMOUNT RECEIVED IN AWAR D AS REVENUE RECEIPT. THE LD CIT(A) ALSO UPHELD THE SAME. THE SAID FIRST APPELL ATE ORDER ON THE ISSUE HAS BEEN QUESTIONED BY THE ASSESSEE IN GROUND NO. 1 IN ITS APPEAL BEFORE THE TRIBUNAL. 3.2 BEFORE THE TRIBUNAL THE LD. A.R. WHILE REITERA TING THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW ARGUED THAT THE PREVI OUS YEAR RELEVANT TO THE A.Y. UNDER CONSIDERATION WAS FIRST YEAR OF MANUFACTURING OF ANTI FIRE CHEMICALS. HE SUBMITTED THAT THE COMPENSATION RECEIVED WAS AN AWA RD FOR NON-FULFILLING OF THEIR PART OF THE CONTRACT BY AIK. IT IS DAMAGE FOR NON- PERFORMANCE OF THE CONTRACTUAL OBLIGATION BY AIK. THE LD. A.R REFERRED PAGE NOS . 1 TO 11 OF THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE ON 10.2.2010. IT IS COPY OF THE AGREEMENT DT. 25 TH OCTOBER 1989 BETWEEN THE ASSESSEE AND AIK. THE LD . A.R. SUBMITTED THAT AS PER THE TERMS OF THE AGREEMEN AEG ISOLIER-UNDQUNSTSTOFF GMBH A GERMAN COMPANY WAS LICENSOR AND THE ASSESSEE WAS REFERRED AS LICE NCEE. AS PER THIS AGREEMENT THE CONTRACT WORK WAS MEANT AND INCLUDED THE ITE MS DESCRIBED IN ANNEXURE 1 MANUFACTURED BY LICENSOR. AS PER THE AGREEMENT LI CENSOR GRANTED TO LICENSEE THE NON-EXCLUSIVE NON-TRANSFERRABLE RIGHT TO REPRODUCE CONTRACT PRODUCTS IN ITS OWN MANUFACTURING FACILITIES IN INDIA BY USING DOCUMENT ATION AND TO USE AND SELL. AS PER THE CLAUSE (3) OF THE AGREEMENT THE LICENSOR H AD TO FURNISH TO LICENCEE THE DOCUMENTATION WHICH WAS IN LICENSORS POSSESSION ON THE EFFECTIVE DATE OF THE AGREEMENT WITHIN 3 MONTHS IN THE FORM OF COPIES OR BLUE PRINTS. THE LD. A.R. SUBMITTED THAT THE AGREEMENT WAS FOR THE SUPPLY OF KNOWHOW TO THE ASSESSEE IN THE FORM OF DOCUMENTATION DEFINED IN THE AGREEMENT FOR THE PURPOSE OF THE ASSESSEES REPRODUCED CONTRACT PRODUCTS IN INDIA. THE LICENS OR AIK FAILED TO PROVIDE KNOWHOW TO THE ASSESSEE AS AGREED UPON AND THUS THE ASSESSE E WAS HAVING NO OPTION BUT TO INVOKE ARBITRATION CLAUSE OF THE AGREEMENT FOR COMP ENSATION OF DAMAGES CAUSED DUE TO NON-PERFORMANCE OF CONTRACTUAL OBLIGATION BY THE LICENSOR AIK. AFTER CONSIDERING ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 6 THE CASE OF THE PARTIES AN AWARD OF RS. 4 53 86 12 4/- WAS AWARDED TO THE ASSESSEE IN THE ARBITRATION PROCEEDINGS. THE LD. A.R. REFER RED PAGE NOS. 12 TO 39 OF THE PAPER BOOK I.E. COPY OF THE AWARD DATED 31 ST OCTOBER 1996 BY INTERNATIONAL COURT OF ARBITRATION. THE LD. A.R. REFERRED PAGE NO. 17 AND INTERNAL PAGE NO. 4 OF THE SAID AWARD WHEREIN IN PARA NO. VII SUMMARY OF FACTUAL BACKGROUND HAS BEEN GIVEN. THE LD. A.R. ALSO REFERRED PARA NO. VIII OF THE AW ARD WHEREIN SUMMARY OF THE DISPUTE AND THE CLAIMS OF THE PARTIES HAS BEEN GIVE N. THE LD. A.R REFERRED PARA NO. 10.2 OF THE AWARD DISCUSSING THE SUBSTANTIVE ISSUES IN DISPUTE WHICH WERE TO BE DECIDED BY ARBITRATORS AND THE ARBITRATOR HAS ALSO MENTIONED THE RIGHTS AND OBLIGATION OF THE PARTIES UNDER THE AGREEMENT AND ABOUT THE BREACH OF THOSE OBLIGATIONS. THE LD. A.R. ALSO REFERRED PAGE NO. 3 8 OF THE PAPER BOOK AND INTERNAL PAGE NO. 26 OF THE AWARD WHEREBY THE AIK HAS BEEN O RDERED TO PAY THE CLAIMANT ASSESSEE A NET AMOUNT OF 3170000 DEUTSH MARKS (DM) AS ASSESSEES DAMAGES REDUCED BY THE BALANCE DM 160000 DUE UNDER THE AGRE EMENT. THE LD. A.R. SUBMITTED THAT THE ASSESSEE HAS TO START THE MANUFA CTURE OF ANTI FIRE CHEMICALS FOR THE FIRST TIME AND IT WAS NEW LINE FOR IT. HE POIN TED OUT THAT ALTHOUGH AGREEMENT WAS FOR 7 YEARS BUT ASSESSEE WAS TO CONTINUE MANUF ACTURE AND TO LET OUT THE KNOW- HOW TO OTHERS. HE REFERRED CLAUSE NO. 9.6 OF THE AGREEMENT MADE AVAILABLE AT PAGE NO. 6 OF THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. 3.2.1. THE LD. CIT(A) WHILE DECIDING THE ISSUE AGA INST THE ASSESSEE HAS NOT APPRECIATED THE INJURY CAUSED TO THE PROFIT MAKING APPARATUS AND THAT THE KNOW- HOW WAS FOUNDATION OF THE BUSINESS OF THE ASSESSEE. APPRECIATING THE SAME HUGE COMPENSATION WAS AWARDED BY THE ARBITRATORS. THE ARBITRATORS NOTED FAILURE ON THE PART OF THE GERMAN CO. THE BASIS OF AWARD REMA INED THE LOST PROFIT DUE TO NON- SUPPLY OF THE KNOW-HOW AND NOT ON LOSS OF PROFIT. THE LD. A.R SUBMITTED THAT NEWLY INSTALLED MACHINERY IN ABSENCE OF SUPPLY OF KNOW-HO W HAVE GONE COMPLETELY WASTE. THE LD. A.R THUS CONCLUDED HIS ARGUMENT WITH THI S SUBMISSION THAT CONSIDERING THE TOTALITY OF THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE ON THE ISSUE THE ONLY ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 7 INFERENCE CAN BE DRAWN IS THAT THE COMPENSATION RE CEIVED BY WAY OF AWARD BY THE ARBITRATOR DUE TO NON-SUPPLY OF KNOW-HOW BY THE G ERMAN CO. UNDER THE AGREEMENT WAS CAPITAL RECEIPT. IN SUPPORT HE PLA CED RELIANCE ON THE FOLLOWING DECISIONS : 1) CIT VS BOMBAY BURMAH TRADING CORPORATION 161 I TR 386 (SC) 2) SENAIRAM DOONGARMALL VS CIT 42 ITR 392 (SC) 3) CIT VS. BARIUM CHEMICALS LTD. 168 ITR 164 (A.P) 4) CIT VS. ABBASBHOY A. DEHGAMWALLA AND OTHERS 195 ITR 28 (BOM) 5) CIT VS. J. VAJANTIZIES AND OTHERS 91 ITR 345 (B OM) 6) SPACO CARBURETORS (I) (P.) LTD. VS ADDITIONAL CI T 127 ITD 153 (BOM) 7) MS. PAYAL KAPUR VS. ASST. CIT 98 ITD 19 (DEL) 8) SPACO CARBURATORS (I) (P.) LTD. VS. ADDL. CIT 127 TTJ 637 (MUM.) 3.2.2. THE LD. A.R. FURTHER POINTED OUT THAT 2 A GREEMENTS WERE ENTERED INTO THE ONE WITH ASSESSEE (75%) AND OTHER WITH DELHI PARTY (25% ) FOR MARKETING THE PRODUCT. HE REFERRED PAGE NO . 5 289 TO 294 OF THE PAPER BOOK NO. 2 I.E. COPY OF CERTIFICATE A ND OF AGREEMENT WITH M/S. A.R.K INDUSTRIAL PRODUCT PVT. LTD. DELHI. HE SUBMITTED THAT ACCORDING TO THE SAID AGREEMENT M/S. A.R.K. INDUSTRIAL PROD UCTS PVT. LTD. DELHI WERE APPOINTED AS SOLE SELLING AGENT FOR FIRE PRODU CT SYSTEM. THE ASSESSEE HAD MADE MARKETING ARRANGEMENTS WITH TH E SAID COMPANY OF DELHI. THE LD. A.R. ALSO REFERRED PAGE NO. 295 OF THE PAPER BOOK NO. 2 I.E. APPROVAL FROM AIK GERMANY ALLOWING TO USE BR AND NAME FLAMMADUR. HE SUBMITTED THAT ASSESSEE HAD ONLY ONE AGREEMENT WITH AIK GERMANY ON THE BASIS OF WHICH AWARD WAS GIVEN. ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 8 3.3. THE LD. D.R. ON THE OTHER HAND TRIED TO JU STIFY THE FIRST APPELLATE ORDER ON THE ISSUE. HE SUBMITTED THAT TH ERE CANNOT BE A STANDARD TEST TO DETERMINE THE NATURE OF RECEIPT AS CAPITAL OR REVENUE. TO DETERMINE THE CHARACTER OF RECEIPT WHAT HAS TO BE SEEN WHETHER THE VENTURE IN WHICH THE ASSESSEE GIVING UP HIS RIGHT S WAS THE PROFIT EARNING APPARATUS AND SUCH AN ACTION ITSELF REPRESENT THE ENTIRE PROFIT EARNING STRUCTURE OF THE ASSESSEE. IF THAT BE SO ANYTHING RECEIVED WOULD PARTAKE THE CHARACTER OF THE CAPITAL RECEIPT BUT WHERE HO WEVER THE VENTURE IS ONLY FOR THE PURPOSE OF CARRYING ON THE EXISTING BU SINESS BY TAKING HELP OF THE ANOTHER COMPENSATION RECEIVED IN SUCH A VENTUR E WOULD BE A REVENUE RECEIPT. HE PLACED RELIANCE ON THE DECISIO N OF THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. MANORANCHAN PICTU RE CORPORTION (1977) 228 ITR 202 (DEL.). HE SUBMITTED THAT UNDER THE L ICENSE AIK WAS TO PROVIDE DOCUMENTATION (DESIGNS MANUFACTURING & TEST INFORMATION) AS AVAILABLE AND AS USED BY LICENSOR TO THE ASSESSEE FOR USE IN REPRODUCTION OF CONTRACTED PRODUCTS AT ITS OWN MA NUFACTURING FACILITIES IN INDIA. THE ASSESSEE WAS LICENSED TO MANUFACTURE AND SELL SUCH CONTRACTED PRODUCTS BESIDES AIK TO ITS CUSTOME RS IN INDIA AND OTHER SPECIFIED COUNTRIES. AS PER PARA 2 OF THE LICENSED AGREEMENT (PAGE NO.2) OF PAPER BOOK VOLUME II) THE LICENSEE ASSESSEE WAS GRANTED THE NON EXCLUSIVE AND NON-TRANSFERABLE RIGHT TO USE THE DOCUMENTATION AND TO REPRODUCE CONTRACTED PRODUCTS. THUS THE PARTIES T O THE AGREEMENT WERE NOT BOUND BY ANY EXCLUSIVE CLAUSE UNDER THE AGRE EMENT. THE LICENSOR AIK WAS FREE TO ENTER WITH SIMILAR AGREEMENT WITH A NY OTHER PARTY IN INDIA OR ELSEWHERE AND TO SUPPLY SUCH DOCUMENTATI ON FOR THE PRODUCTION OF SUCH PRODUCTS. THE LICENSOR AIK WAS ALSO NOT R ESTRICTED FROM ENTERING INTO SIMILAR CONTRACTS WITH ANY COMPETING PARTY OF AIK. THE DOCUMENTATION FOR THE CONTRACTED PRODUCTS WERE NOT TRANSFERABLE BY THE LICENSEE DURING THE CONTRACTED PERIOD OF 7 YEARS ALTHOUGH THIS CONDITION ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 9 WAS ALSO DILUTED BY CLAUSE 6.3 OF THE AGREEMENT WHE REBY THE ASSESSEE WAS FREE TO ASSIGN ANOTHER INDIAN PARTY TO USE THE DOCUMENTATION AND TECHNICAL KNOW-HOW SUBJECT TO CONCURRENCE OF THE L ICENSOR AND LICENSEE. THUS THE PRODUCTION OF CONTRACTED PRODUCTS COULD B E ASSIGNED TO ANY OTHER MANUFACTURING FACILITIES BY THE ASSESSEE. 3.3.1 THE LD. D.R. FURTHER POINTED OUT THAT AS PER THE CLAUSE 8.1.1 THE LICENSEE ASSESSEE WAS ENTITLED AND OBLIGED TO PROVIDE THE CONTAINERS OF RE-PRODUCED CONTRACT PRODUCTS WITH THE DESIGNA TION LICENSED BY AIK AS APPROVED BY LICENSOR AND IN ANY OTHER LANGUAGE. THE DESIGNATION COULD ALSO BE USED BY THE ASSESSEE IN SALES PROMOTI ON ACTIVITY ETC. TO CLAIM THAT THE CONTRACTED PRODUCTS WERE MANUFACTURE D WITH TECHNICAL SUPPORT PROVIDED BY AIK GERMANY. 3.3.2. THE LD D.R. DREW OUR ATTENTION TO THE CONTEN TS OF PARA NO.7.8 AT PAGE 5 AND PARA NO. 10.2.9.5 AT PAGE 17 OF THE ICA AWARD A COPY WHEREOF HAS BEEN MADE AVAILABLE IN THE PAPER B OOK VOLUME 1 DATED 17.11.2005 FILED BY THE ASSESSEE. WITH THE ASSISTA NCE OF THESE PARAGRAPHS THE LD. D.R. SUBMITTED THAT THE LICENSE E ASSESSEE WAS ALSO GRANTED RIGHT TO USE AIKS BRAND NAME FLAMMADUR U NDER THE CONTRACT AGREEMENT. THUS ASSESSEE NOT ONLY WAS GRANTED THE R IGHT FOR DOCUMENTATION AND DESIGNS TO PRODUCE AND THE LICENS E TO MANUFACTURE THE CONTRACTED PRODUCTS BUT ALSO TO USE THE REGISTE RED TRADE MARK OF FLAMMADUR OWNED BY AIK GERMANY. THE ASSESSEE ALSO HAD AN AGREEMENT WITH AIK FOR MARKETING/APPLICATION OF JOI NT VENTURE WITH 75% INTEREST AND THE LOST PROFIT FROM THIS VENTURE HAS BEEN CLAIMED TO BE D.M. 5.625 MILLION. THE LD. D.R. SUBMITTED THAT THE CLA IM OF THE ASSESSEE BEFORE THE ICA AS LISTED IN PARA 8.2.4 ON PAGE 8 A ND PARA NO. 10.3.2 ON PAGE NO. 19 OF THE ICA AWARD WAS RELATING PRIMARILY TO LOSS OF BUSINESS ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 10 OPPORTUNITIES INCLUDE LOSS OF PROFITS FROM ASSESSEE S PARTICIPATION IN THE MARKETING JOINT VENTURE. 3.3.3. THE LD D.R. SUBMITTED FURTHER THAT THE FINAN CIAL AS RENDERED BY ICA ALSO SHOWS THAT IT HAS BEEN COMPUTED WITH R EFERENCE TO LOST PROFIT FOR 7 YEARS (PARA NO. 10.3.2.5 ON PAGE NO. 21 OF TH E ICA AWARD) COMPUTED AT D.M 4.189 MILLION FOR THE MANUFACTURING AND D.M 3 129 MILLION FROM THE JOINT VENTURE. HE SUBMITTED THAT PARA 10.3.2.7 ON PAGE 22 REFERS TO AWARD OF D.M. 3.33 MILLION FOR LOSS IN PROFITS CAUSED BY AIK. 3.3.4. THE D.R. SUBMITTED THAT IT IS CLEAR FROM TH E CLAIMS MADE BY THE ASSESSEE BEFORE THE ICA OF THE DECISION OF IC AS COMPENSATION WAS MADE WITH REGARD TO LOST PROFIT AND NOT FOR THE DI STORTION OR DAMAGE TO ANY CAPITAL COMMERCIAL ASSET OF THE ASSESSEE. THE AGREEMENT WAS NOT MERELY FOR THE TECHNICAL KNOW-HOW BUT ALSO FOR THE TRADE MARK OF AIK AND THE MARKETING JOINT VENTURE. IN FACT THE ASSE SSEE WAS REQUIRED TO PAY THE BALANCE OF D.M 1 60 000 TO AIK AS COST IN CURRED FOR THE LOST FUTURE PROFITS. HE SUBMITTED THAT THE COMPENSATION BEING FOR THE POTENTIALLY LOST PROFIT RESULTING FROM BREACH OF A GREEMENTS IN THE NORMAL COURSE OF BUSINESS AND NOT CAUSING ANY DAMAGE TO THE PROFIT MAKING STRUCTURE OF THE ASSESSEE IS A REVIEW RECEIPT AND THERE IS NOTHING TO INDICATE THAT THE TURNOVER OR THE PROFITS OF THE AS SESSEE WENT DOWN FOLLOWING THE BREACH OF CONTRACT BY THE AIK. THE L D D.R. PLACED RELIANCE ON THE FOLLOWING DECISIONS : 1. CIT VS RAI BAHADUR JAIRAM VALJI ( 1959) 35 ITR 48(S C) 2. GILLANDERS ARBUTHNOT & CO. LTD (1964) 53 ITR 23 (SC ) 3. KETTLEWELL BULLEN & CO. LTD. (1964) 53 ITR 261 (SC) 4. CIT VS. BEST & CO. (1966) 60 ITR 11 (SC)- ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 11 5. CIT VS KARAMCHAND THAPAR & BROS. (P) LTD. (1971) 80 ITR 197(SC) ALSO (1968) 67 ITR 705 (CAL.) 6. CIT VS MANNAJI RAMJI & CO. (1972) 86 ITR 29 (SC) 7. CIT VS. SIEWART & DHOLAKIA (P) LTD (1974) 95 ITR 57 3 (CAL) 8. BISHAMBHER NATH SWAROOP NARAIN VS CIT (1979) 119 IT R 681(ALL.) 9. MATHERSON BOSANQUET CO. LTD. VS. CIT (1988) 171 ITR 359 (MADRAS) 10. BLUE STAR LTD VS. CIT (1994) 217 ITR 514 (BOM) 11. CIT VS MANORANJAN PICTURES CORPN. (1997) 228 ITR 20 2(DELHI) 12. CIT VS HIGHWAY CONSTRUCTION CO. (P) LTD. (1997) 223 ITR 32 (GAU) 13. CHEMPLAST ENGINEERS P LTD VS CIT (1998) 234 ITR 23 (MADRAS) 14. PARRY & CO. LTD. VS CIT (2004) 269 ITR 177 (MADRAS) 15. ELEGANT CHEMICALS ENTERP. P LTD VS ACIT -2004-TIOL- 131- ITAT-HYD 16. IBM INDIA LTD VS CIT (2007) 105 ITD 1 (BANGALORE) 17. ANSAL PROPERTIES & INDUSTRIES LTD (2008) 19 SOT 391 (DELHI) 18. JCIT VS KHANA VS ANNADHANAM 2008-TIOL-377-ITAT-DELHI 19. ANSAL PROPERTIES & INDUSTRIES LTD. (2010)-TIOL-810- HC-DELHI 20. CIT VS. H.S. RAMACHANDRA RAO (2011) 330 ITR 322 (KA RN) 21. B.RACHURAMA PRABHU ESTATE (2011) 239 CTR (KAR) 274 - 22. GUFFIC CHEM (P) LTD. VS CIT (2011) 332 ITR 602 (SC ) 23. LONDON AND THAMES HAVEL OIL WHATVERS LTD. (1968) 70 ITR 460 (CA)- 24. ION EXCHANGE (I) LTD. VS. ITO 52 DTR 411(MUM) 25. S. KUMAR TYRES MANUFACTURING CO. VS. CIT 227 CTR (MP) 181. ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 12 3.3.5. ON THE BASIS OF ABOVE DECISIONS THE LD. D.R . POINTED OUT THAT FOLLOWING BROAD PRINCIPLES ARE EMERGING THERE-FROM : (I) IT IS IMMATERIAL AS TO WHETHER THE PAYMENT IN THE HANDS OF ASSESSEE IS VOLUNTARY OR OTHER-WISE I.E. THROUGH COURT OR ARBITRATION. (I) CESSATION / TERMINATION OF ANY AND EVERY SOURCE OF INCOME WOULD NOT MAKE THE RECEIPT OF SUCH CESSATION AS CA PITAL RECEIPT. (II) THE REAL TEST WOULD BE WHETHER SUCH VENTURE/AGREEM ENT RESULTED IN ANY PROFIT-MAKING APPARATUS OR WHETHER IT WAS A NORMAL BUSINESS VENTURE THE TERMINATION OF WHICH WOULD NOT ADVERSELY AFFECT THE EXISTING BUSINESS STRUCTURE OR THE PROFIT MAKING APPARATUS. (III) WHERE THE COMPENSATION IS COMPUTED WITH REGARD TO THE PROBABLE LOSS OF POTENTIAL INCOME THE RECEIPT IS REVENUE IN NATURE. 3.3.6. THE LD. D.R. SUBMITTED THAT THE DECISIONS RE LIED UPON BY THE LD. A.R. IN THE CASES OF CIT VS. BARIUM CHEMICALS L TD. (SUPRA) SPAC CARBURATORS P. LTD. VS. ACIT (SUPRA) BOMBAY BURMA TRADING CORPORATION LTD. (SUPRA) ABBAS BHOY A. DEHGAMWALLA (SUPRA) AND SINAIRAM DUNGURMAL (SUPRA) ARE HAVING DISTINGUISHABLE FACTS HENCE THESE ARE NOT HELPFUL TO THE ASSESSEE. HE SUBMITTED THAT IN THE CASE OF CIT VS. BARIUM CHEMICALS LTD. (SUPRA) FOREIGN COMPANY HAD GIVEN CONTRACT TO STRUCTURE ERECT AND COMMISSION PLANT AND MACHINER Y OF THE ASSESSEE. THE PLANT WAS PERFORMING ONLY 30% OF THE CAPACITY . THE COMPENSATION WAS AWARDED WHICH HELD TO BE CAPITAL RECEIPT. LIK EWISE IN THE CASE OF SPACE CARBURATORS P. LTD. THE ASSESSEE WAS MANUFAC TURING CARBURATORS FOR HERO HONDO MOBIKES UNDER EXCLUSIVE LICENSE FROM K JAPAN. K OBLIGED TO PROVIDE ADVANCE DESIGNS AND DYES FOR ADV ANCED VERSION. HERO HONDA WAS TO COMPLY WITH Y TO K INITIATION NORMS. K JAPAN REFUSED TO ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 13 PROVIDE Y TO K TECHNOLOGY TO ASSESSEE AND ENTERED I NTO AGREEMENT WITH ANOTHER INDIAN COMPANY RESULTING IN STOPPAGE OF B USINESS OF ASSESSEE COMPLETELY. THE COMPENSATION GRANTED HELD TO BE CA PITAL IN NATURE. 3.4. IN REJOINDER THE LD. A.R. SUBMITTED THAT NAT URE OF RECEIPT EITHER CAPITAL OR REVENUE DEPENDS ON THE FACTS OF T HE CASE HENCE THERE CANNOT BE A STANDARD TEST. HE SUBMITTED THAT THE D ECISIONS RELIED UPON BY THE LD. D.R. HAVING DIFFERENT FACTS ARE NOT APP LICABLE IN THE PRESENT CASE. HE SUBMITTED THAT IN THE CASE OF ION EXCHA NGE (I) LTD. VS. ITO (SUPRA) RELIED UPON BY THE LD. D.R. THE ASSESSEE WAS ALREADY INTO MANUFACTURING AND DISTRIBUTION OF THE PRODUCTS WHIC H WERE TO BE DISTRIBUTED BY VIRTUE OF JOINT VENTURE. THIS JOIN T VENTURE WAS TERMINATED . IT DID NOT AFFECT THE ASSESSEE AS HE REBRANDED BACK TO WHICH OLD SET UP OF MANUFACTURING OF THE DISTRIBUTION OF THE SAME PRODUCTS. IT IS ON THIS FACT THE TRIBUNAL HELD THE SAME TO BE REVENUE RECE IPT. IN THE CASE OF ANSAL PROPERTIES AND INDUSTRIES LTD. (SUPRA) RELIED UPON BY THE LD. D.R. THE RESTRICTIVE COVENANT WAS NOT INTENDED TO DIVE ST THE ASSESSEE OF ITS INCOME EARNING APPARATUS WHEREAS IN THE CASE OF PR ESENT ASSESSEE IT WOULD DEPRIVE OF SOURCE OF INCOME OR THAT THERE WA S STERILIZATION OF SOURCE OF INCOME. HE SUBMITTED FURTHER THAT IN THE CASE OF S. KUMARS TYRE MANUFACTURING COMPANY (SUPRA) RELIED UPON BY THE LD. D.R. THE AMOUNT RECEIVED BY THE ASSESSEE CONSEQUENT UPON TER MINATION OF THE AGREEMENT WAS NOT AGAINST ANY PRICE FOR RELINQUISHM ENT OF ANY RIGHT IN THE CAPITAL ASSET OR PARTING WITH ANY ASSET OF INJU RING NATURE. THE HONBLE HIGH COURT CAME TO THE CONCLUSION THAT THE SAME PA ID WAS IN ORDINARY COURSE OF BUSINESS TO ADJUST THE RELATIONSHIP BETWE EN THE ASSESSEE AND OTHER PARTY TO THE AGREEMENT. THERE IS ALSO FINDIN G THAT IT DID NOT CREATE ANY RIGHT IN FAVOUR OF THE ASSESSEE. ON THESE FACT S IT WAS TREATED AS REVENUE RECEIPT. IN THE CASE OF PRESENT ASSESSEE THE ASSESSEE WAS ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 14 DEPRIVED OF THE SOURCE OF THE INCOME BY VIRTUE OF B REACH OF CONTRACT OR IN FULFILLMENT OF THE CONTRACT. THE ASSESSEE THEREBY WAS PREVENTED FROM COMMENCING THE BUSINESS OF FIRE RETARDANT CHEMICAL S. THAT IS WHY THIS IS A CAPITAL RECEIPT. FINDINGS 3.5 THERE IS NO DISPUTE THAT THERE CANNOT BE A STA NDARD TEST TO DETERMINE THE NATURE OF RECEIPT AS TO WHERE IT IS C APITAL OR REVENUE IN NATURE. THE NATURE OF RECEIPT DEPENDS ON FACTS OF EACH CASE. THE AUTHORITIES BELOW HAVE TREATED THE AMOUNT RECEIVED IN COMPENSATION AS REVENUE IN NATURE MAINLY ON THE BASIS OF FOLLOWI NG GROUNDS / OBJECTIONS : A) THE COMPENSATION IS NOT FOR SUFFERING INJURY TO THE PROFIT MAKING APPARATUS. THE APPARATUS OF THE ASSESSEE WAS THE EXISTING SET UP AND THE PROPOSED MAKING OF FIRE RETARDANT C HEMICAL WAS MERELY AN EXPANSION OF THE EXISTING BUSINESS. B) THE COMPENSATION RECEIVED WAS IN NORMAL COURSE O F BUSINESS CARRIED ON BY THE APPELLANT. C) THE INJURY IF ANY WAS NOT INFLICTED OF ANY CAPIT AL ASSET OF THE APPLICANT. THE AGREEMENT WAS TO USE THE KNOW-HOW A S A LICENSEE FOR A LIMITED PERIOD OF 5 YEARS (SICK 7 YEARS). D) THE FAILURE TO SUPPLY FULL DETAILS OF KNOW-HOW D ID NOT AFFECT THE BASIS INTENTION OF THE BUSINESS OF THE ASSESSEE /APPELLANT. E) THE COMPENSATION FOR THE LOSS SUFFERED BY ASSESS EE WAS INCIDENTAL TO THE BUSINESS AND IT DID NOT AMOUNT T O BE RECEIVED FOR LOSS OF AN ENDURING ASSET. F) THE ASSESSEE HAD MAINLY ACQUIRED THE RIGHT TO U S THE TECHNOLOGY AND THE EXPENDITURE INCURRED HAS ALSO BE EN CLAIMED AS A ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 15 REVENUE EXPENDITURE THEREFORE ANY RECEIPT IN VIEW OF SUCH EXPENDITURE CANNOT BE TERMED AS CAPITAL RECEIPT. G) THE ARBITRATION AWARD THERE CATEGORICALLY STATES THAT THE AMOUNT OF COMPENSATION RECEIVED BY THE ASSESSEE IS IN LIEU OF PROFITS AND NOT BECAUSE THE ASSESSEES PROFITS EAR NING APPARATUS WAS AFFECTED HENCE THE EXPENSES ON ARBITRATION HAS BEEN CLAIMED AS REVENUE EXPENDITURE AND H) THE LOSS OF EXTINCTION OF SOURCE OF INCOME WHICH THE ASSESSEE CONTENDS NEVER CAME INTO EFFECT. THE ARBITRATION AWARD IS ONLY IN LIEU OF PROFITS. 3.5.1 BEFORE US THE LD. A.R. HAS TRIED TO MEET O UT THE OBJECTIONS RAISED BY THE AUTHORITIES BELOW TO THE CLAIM OF THE ASSESSEE AND THE OPPOSITION OF THE LD. D.R. ON THE BASIS OF THESE SUBMISSIONS OF THE PARTY WE WOULD DEAL WITH EACH OF THE ABOVE MENTIONED OBJ ECTIONS ON THE BASIS OF WHICH THE RECEIPT OF COMPENSATION HAS BEEN TREA TED AS REVENUE IN NATURE. OBJECTION A 3.5.2. THE OBJECTION OF THE AUTHORITIES BELOW IS TH AT THE COMPENSATION IS NOT FOR SUFFERING INJURY TO THE PRO FITS MAKING APPARATUS. THEY HAVE OBSERVED THAT THE APPARATUS OF THE ASSE SSEE WAS EXISTING SET UP. THE ASSESSEE IS A PIONEER IN MANUFACTURE OF D ISPERSANTS AND PRODUCES A WIDE RANGE OF FORMULATIONS BASED ON THE SE CHEMICALS. IT WAS HAVING ESTABLISHED MANUFACTURING DIVISION FACTORY RESEARCH & DEVELOPMENT DEPARTMENT AND ADMINISTRATIVE ESTABLISH MENTS WHEN IT ENTERED INTO AN AGREEMENT FOR THE KNOW-HOW. IT WAS FURTHER OBSERVED BY THEM THAT THE PROPOSED MAKING OF FIRE RETARDANTS CH EMICAL WAS MERELY AN EXTENSION OF EXISTING BUSINESS. THE SUBMISSION OF THE LD. A.R. IN THIS REGARD REMAINED THAT THE AGREEMENTS WITH AIK GERMA NY WAS ENTERED ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 16 INTO BY THE ASSESSEE COMPANY WITH A VIEW TO SET UP AT PIRANGUT A FULL- FLEDGED INDIAN MANUFACTURING FACILITIES OF FIRE PR OTECTION CHEMICALS. IT WAS A NEW LINE OF BUSINESS ALTOGETHER SINCE THE A SSESSEE COMPANY WAS EARLIER ENGAGED IN THE MANUFACTURING OF BASIC CHEMI CALS AND FACILITY CHEMICALS. A NEW PROJECT OF FIRE PROTECTION CHEMI CALS REQUIRED A NEW INFRASTRUCTURE IN ITSELF. IT WAS SUBMITTED THAT S INCE THE ASSESSEE COULD NOT COMMENCE ITS NEW LINE OF BUSINESS DUE TO NON-PE RFORMANCE OF THE AGREEMENT ON THE PART OF AIK THE QUESTION OF RECEI VING THE COMPENSATION IN THE NORMAL COURSE OF BUSINESS DOES NOT ARISE AT ALL. 3.5.3. THERE IS NO DISPUTE THAT THE ASSESSEE COMPA NY DECIDED TO SET UP THE PROJECT FOR MANUFACTURING OF FIRE RETARDANT CHEMICAL A NEW LINE OF BUSINESS FOR THE ASSESSESSEE AT PIRANGUT WHERE SUFF ICIENT LAND WAS AVAILABLE AND GOT THE PROJECT APPROVED FROM SICOM A ND WMDC FOR PROJECT LOAN AND SALES TAX BENEFITS OF GOVERNMENT OF MAHAR ASTRA. THUS IN OUR VIEW THERE IS NO REASON TO DOUBT THE INDEPENDENT EXISTENCE OF THE PROJECT. NOW TO VERIFY AS TO WHETHER THE PROJECT WAS IN OPERATION OR NOT WE WILL HAVE TO SEE THE RELEVANT FACTS RELATIN G TO THIS PROJECT ONLY. IT HAS ALSO NOT BEEN DISPUTED THAT IN ABSENCE OF KNOW -HOW WHICH AS PER THE AGREEMENT WAS TO BE SUPPLIED BY AIK THE ASSESSEE COULD NOT START THE PROJECT TO PRODUCE THE FIRE PROTECTION CHEMICALS. IT HAS ALSO NOT BEEN REBUTTED BY THE DEPARTMENT THAT PRODUCTION OF FIRE PROTECTION CHEMICALS AIMED AT THE PROJECT WAS A NEW LINE OF BUSINESS ALT OGETHER AS THE ASSESSEE COMPANY WAS EARLIER ENGAGED IN THE MANUFAC TURING OF BASIC CHEMICALS AND FACILITY CHEMICALS. UNDER THESE CIR CUMSTANCES FIRE PROTECTION CHEMICAL UNIT PROPOSED TO BE SET UP AT P IRANGUT IN OUR VIEW WAS THE PROFIT EARNING SOURCE FROM WHICH THE ASSESS EE COULD HAVE EARNED PROFIT IN FUTURE HAD THE AGREEMENT BEEN FULLY HO NOURED BY AIK. CLEARLY THEREFORE SINCE ASSESSEE WAS DEPRIVED OF THE PRO FIT EARNING SOURCE IT ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 17 WAS AWARDED COMPENSATION BY THE ARBITRATOR APPOINT ED AS PER THE ARBITRATION CLAUSE OF THE AGREEMENT. IN THIS REG ARD WE FIND SUPPORT FROM THE DECISION OF HONBLE BOMBAY HIGH COURT IN T HE CASE OF CIT VS. VOYANTIZIES & OTHERS (SUPRA) RELIED UPON BY THE LD. A.R. IN THAT CASE THE HONBLE BOMBAY HIGH COURT WAS PLEASED TO HOLD T HAT WHEN ASSESSEE WAS PREVENTED FROM THE COMMENCEMENT OF BUSINESS TH E DAMAGES FOR COMPENSATION RECEIVED EVEN IF THEY ARE WORKED OUT O N THE BASIS OF LOSS OF PROFIT WHICH THE ASSESSEE WOULD HAVE EARNED HAD HE CARRIED ON BUSINESS WAS ONLY A CAPITAL RECEIPT AND NOT A REVENUE RECE IPT LIABLE TO TAX. IN THAT CASE BEFORE THE BOMBAY HIGH COURT. UNDER AN AG REEMENT OF LEASE EXECUTED IN 1942 THE ASSESSEE AGREED TO BECOME T ENANT OF CERTAIN PREMISES FOR USING THE PREMISES AS A HOTEL. THE LE ASE WAS TO COMMENCE FROM THE DATE THE BUILDING WAS COMPLETELY CONSTRUCT ED AND READY FOR POSSESSION AND TO CONTINUE FOR A PERIOD OF 5 YEARS. BY A REQUISITION ORDER DATED 25 TH APRIL 1942 THE GOVERNMENT OF INDIA REQUISITIONED AND DIRECTED OF DELIVERY OF POSSESSION ON PRIORITY TO THE GOVER NMENT. THE REQUISITION WAS TO CONTINUE DURING THE PERIOD OF THE WAR AND 6 MONTHS THEREAFTER. IN 1945 THE ASSESSEE PUT IN A CLAIM FOR DAMAGES F OR NOT HAVING BEEN ABLE TO START THE HOTEL BUSINESS. HIS CLAIM WAS FI NALLY SETTLED AND IN 1947 HE RECEIVED A SUM OF RS. 82 460/- FROM THE GO VERNMENT. ON THE QUESTION WHETHER THE SAME WAS ASSESSABLE TO INCOME TAX IT WAS HELD BY THE HONBLE HIGH COURT THAT THE HOTEL BUSINESS WHI CH THE ASSESSEE INTENDED TO START COULD NEVER BE STARTED BECAUSE O F THE REQUISITIONED ORDER PASSED BY THE GOVERNMENT HENCE THE COMPENSAT ION OF RS. 82 460/- WAS NOT RELATED OR CONCERNED WITH ANY BUS INESS OR TRADING ACTIVITY OF THE ASSESSEE. IT WAS HELD THAT IT WAS A SOLITIUM NOT CARRYING OF BUSINESS AND HENCE NOT REVENUE RECEIPT ASSESSABL E TO TAX. THIS DECISION OF HONBLE BOMBAY HIGH COURT FULLY COVERS THE CASE OF THE PRESENT ASSESSEE AS IN CASE OF THE ASSESSEE ALSO THE ASSESSEE COULD NOT ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 18 START ITS BUSINESS DUE TO NON-SUPPLY OF KNOW-HOW BY AIK AS PER THE AGREEMENT BETWEEN ASSESSEE AND THE AIK. THE MATTE R WENT IN THE ARBITRATION AS PER THE CLAUSE OF THE AGREEMENT AND THE ARBITRATORS AWARDED THE COMPENSATION AS A SOLITIUM FOR NOT CARR YING ON BUSIESS. WE THUS DO NOT FIND SUBSTANCE IN THE OBJECTION. OBJECTION B 3.5.4 IN OBJECTION NO. B THE AUTHORITIES BELOW HA VE DENIED THE CLAIMED CAPITAL NATURE OF THE RECEIPT OF COMPENSATI ON ON THE BASIS THAT THE COMPENSATION WAS RECEIVED IN NORMAL COURSE OF T HE BUSINESS CARRIED ON BY THE ASSESSEE. THEY OBSERVED THAT ASSESSEE HA S BEEN ENGAGED IN MARKETING OF VARIOUS CHEMICALS AND FORMULATIONS SIN CE 1980 AND IN ORDINARY COURSE OF BUSINESS IT HAS TO ENTER INTO AG REEMENT TO HAVE THE LICENSE FOR USE OF KNOW-HOW. THEY HELD THAT COMPE NSATION OF BREACH OF CONTRACT WOULD BE NATURAL CONSEQUENCE WHICH WOULD B E KNOWN TO THE PARTIES ENTERING INTO AGREEMENT. THE CONTENTION O F THE LD. A.R. REMAINED THAT THE AGREEMENT THAT THE ASSESSEE WAS T O SET UP A NEW INDUSTRIAL UNDERTAKING AND ON ACCOUNT OF BREACH AND NON-PERFORMANCE ON THE PART OF THE AIK THE SAME NEVER CAME INTO BEIN G AND THEREFORE THE OBSERVATION OF THE AUTHORITIES BELOW THAT THE CONTR ACT WAS ENTERED IN THE ORDINARY COURSE OF BUSINESS IS ALTOGETHER UNJUSTIFI ED AND IRRELEVANT ON THE FACTS OF THE PRESENT CASE. IN SUPPORT RELIANCE WA S PLACED ON THE DECISION OF HONBLE ANDHRA PRADESH HIGH COURT IN THE CASE O F CIT VS. BARIUM CHEMICALS LTD. (SUPRA). THE CONTENTION OF THE LD. D.R. REMAINED THAT THIS DECISION OF HONBLE ANDHRA PRADESH HIGH COURT IN TH E CASE OF BARIUM CHEMICALS LTD. IS HAVING DISTINGUISHABLE FACTS HEN CE IT IS NOT HELPFUL TO THE ASSESSEE. THE LD. D.R. ALSO PLACED RELIANCE O N SEVERAL DECISIONS INCLUDING THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF ANSAL ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 19 PROOERTIES AND INDUSTRIES LTD. (SUPRA) & GUFFIC CHE MICALS (P) LTD. VS. CIT (SUPRA) ETC. 3.5.5. WE HAVE ALREADY DISCUSSED THE FACTS OF THE CASE HEREINABOVE AND HAVE HELD THAT IN OBJECTION NO. A THAT THE P ROJECT WAS SEPARATE AND DISTINGUISHED FROM OTHER BUSINESS OF THE ASSESSEE. IT WAS ENTIRELY AN INDEPENDENT SET UP WHEREIN FIRE PROTECTION CHEMIC ALS WAS TO BE PRODUCED. UNDISPUTEDLY THE PROJECT COULD NOT BE S TARTED DUE TO NON- SUPPLY OF THE KNOW-HOW BY THE AIK AS PER THE AGRE EMENT TO THE ASSESSEE. IN OUR UNDERSTANDING THE MEANING OF THE PHRASE IN NORMAL COURSE OF BUSINESS CARRIED ON BY THE ASSESSEE WOUL D COME INTO EFFECT ONLY AFTER STARTING OF THE BUSINESS IF THE ASSESSE E ENTERS INTO AN AGREEMENT WITH THE SUPPLIER OR WITH ANY PERSON FOR AN ACT BENEFICIAL TO THE BUSINESS THE SAID ACTION WILL FALL UNDER THE C ATEGORY OF IN NORMAL COURSE OF BUSINESS CARRIED ON BY THE ASSESSEE. TH E AGREEMENT IN THE PRESENT CASE WITH AIK WAS ENTERED INTO BY THE ASSE SSEE FOR SUPPLIES OF THE KNOW-HOW TO ENABLE THE ASSESSEE FOR MANUFACTUR ING OF FIRE PROTECTION CHEMICALS IN NEW UNDERTAKING SET UP AT P IRANGUT. UNDISPUTEDLY IN ABSENCE OF SUPPLY OF THE SAID KNOW-HOW THE AS SESSEE COULD NOT OPERATE THE PROJECT AND THE FIRE PROTECTION CHEMICA LS COULD NOT BE MANUFACTURED TO START THE BUSINESS OF THE ASSESSEE. THUS IN OUR VIEW THE SAID AGREEMENT CANNOT BE HELD AS ENTERED INTO I N THE NORMAL COURSE OF THE BUSINESS SINCE THE VERY BUSINESS WAS YET TO BE CARRIED ON BY THE ASSESSEE WITH THE ASSISTANCE OF THE SAID KNOW-HOW . WE THUS DO NOT FIND SUBSTANCE IN THE FINDING OF THE AUTHORITIES BE LOW THAT A COMPENSATION RECEIVED IN LIEU OF THE NON-SUPPLY OF THE SAID KNOW -HOW WAS RECEIVED IN NORMAL COURSE OF THE BUSINESS CARRIED OUT BY THE AS SESSEE. IN THIS REGARD WE FIND SUPPORT FROM THE DECISION OF THE H ONBLE A.P. HIGH COURT IN THE CASE OF CIT VS. BARIUM CHEMICALS LTD. (SUPRA ). THE HONBLE ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 20 ANDHRA PRADHESH HIGH COURT IN THAT CASE WAS PLEASE D TO HOLD THAT IN ORDER TO DECIDE WHETHER OR NOT A PAYMENT IS REVENUE IN NATURE ITS TRUE NATURE AND SUBSTANCE MUST BE LOOKED INTO; IF THE PA YMENT IS RECEIVED IN THE ORDINARY COURSE OF THE BUSINESS OF THE ASSESSE E FOR LOSS OF STOCK IN TRADE IT IS A REVENUE RECEIPT; IF ON THE OTHER HA ND THE PAYMENT IS TOWARDS COMPENSATION RECEIVED FOR EXTINCTION OR S TERILIZATION PARTLY OR FULLY OF A PROFIT EARNING SOURCE SUCH RECEIPT NOT BEING IN THE ORDINARY COURSE OF ASSESSEES BUSINESS IS A CAPITAL RECEIPT . FOR A READY REFERENCE WE REPRODUCE HEREUNDER THE RELEVANT PORTION OF THE HEAD-NOTE OF THE DECISION CONTAINING FACTS AND FINDING OF THE HON B LE HIGH COURT AS UNDER : THE ASSESSEE ENTERED INTO AGREEMENT WITH AN ENGLISH COMPANY IN OCTOBER 1961 ACCORDING TO WHICH THE ENGLISH COM PANY WAS REQUIRED TO ERECT A BARIUM CHEMICAL PLANT FOR THE ASSESSEE FOR PRODUCING CERTAIN BARIUM SALTS. THE CONSIDERATION FIXED FOR THE ERECTION OF THE PLANT WAS 1 84 500. THE WORK WAS TO BE COMMENCED WITHIN FOUR MONTHS AND COMPLETED WITHIN 9 TO 12 MONTHS FROM THE ISSUE OF THE LETTER OF CREDIT. TH E ENGLISH COMPANY HAD AGREED TO ENSURE A CERTAIN QUALITY OF BARIUM SALTS AND ALSO GUARANTEED CERTAIN QUANTITY OF PRODUCTION PER A NNUM. AS DIFFERENCE AROSE BETWEEN THE ASSESSEE AND THE ENGLI SH COMPANY A SUPPLEMENTARY AGREEMENT WAS CONCLUDED ON AUGUST 3 1963 UNDER WHICH THE ENGLISH COMPANY AGREED TO TAKE UP COMPLETE RESPONSIBILITY FOR THE PLANT AND MACHINERY SUPPLI ED AND THEY WERE PREPARED TO GIVE NECESSARY GUARANTEE. THE ERECTION OF THE PLANT CONTINUED TILL THE MIDDLE OF 1964. DURING THE TRI AL RUNS IT WAS NOTICED THAT THE PLANT AND MACHINERY WAS COMPLETELY DEFECTIVE AND DID NOT CONFORM TO THE AGREED SPECIFICATIONS AND DE SIGNS. AFTER THE DEFECTS WERE POINTED OUT BY THE ASSESSEE-COMPANY AN D INVESTIGATED INTO BY THE ENGLISH COMPANY THE PLAN T COMMENCED PRODUCTION ON MAY 4 1965. THEN IT WAS NOTICED TH AT THE PRODUCTION CAPACITY WAS ONLY 30% OF THE INSTALLED CAPACITY. IT WAS ALSO FOUND THAT THE QUALITY OF THE BARIUM SALTS PR ODUCED WAS NOT ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 21 ACCORDING TO THE AGREED SPECIFICATIONS. THE ASSESS EE TOOK UP THE MATTER WITH THE ENGLISH COMPANY AND DISCUSSIONS F OLLOWED. MEANWHILE IN MARCH 1966 THE ENGLISH COMPANY ABRU PTLY LEFT THE ERECTION SITE. SUBSEQUENTLY THERE WERE PROTRACTED NEGOTIATIONS AS A RESULT OF WHICH A SETTLEMENT WAS REACHED ON FEBRU ARY 22 1967 WHEREBY THE ENGLISH COMPANY AGREED TO PAY CERTAIN S UMS AGGREGATING TO RS. 56 87 402 IF THE ASSESSEE WAIVED ITS CLAIMS AGAINST THE ENGLISH COMPANY. THE ASSESSEE CONTEND ED THAT THIS SUM WAS A CAPITAL RECEIPT. IT ALSO CLAIMED DEDUCTI ON OF THE FOLLOWING AMOUNTS 1. RS. 50 000 PAID TO A FOR CO NDUCTING INVESTIGATION INTO DEFICIENCIES OF THE VARIOUS PRO DUCTION UNITS AND 2 RS. 42 212 PAID TO C FOR ADVISING THE ASSESSEE REGARDING RECTIFICATION OF THE DEFECTS. ON APPEAL THE APPE LLATE ASSISTANT COMMISSIONER HELD THAT ONLY RS. 47 20 939 SHOULD B E TREATED AS REVENUE RECEIPT AND THE BALANCE WAS CAPITAL RECEIP T. THE TRIBUNAL HELD THAT THE AMOUNT OF RS. 47 20 939 CONSTITUTED A CAPITAL RECEIPT THAT IT COULD NOT BE ASSESSED AS CAPITAL G AINS AND THAT THE PAYMENTS TO A AND C CONSTITUTED CAPITAL EXPENDITUR E. ON A REFERENCE : HELD (I) THAT NEITHER ON THE FINDINGS OF THE TRIBUNAL NOR ON AN EXAMINATION OF THE TERMS OF THE SETTLEMENT DATED FEBRUARY 22 1967 COULD IT BE SAID THAT THE AMOUNT IN QUESTIO N REPRESENTED LOSS OF PROFITS. THE BUSINESS THE ASSESSEE CARRIED ON WAS IN BARIUM CHEMICALS. THE SETTLEMENT DATED FEBRUARY 22 1967 CONCLUDED BETWEEN THE ASSESSEE AND THE ENGLISH COMPANY COUL D NOT BE TREATED AS ONE IN THE ORDINARY COURSE OF THE BUSIN ESS CARRIED ON BY THE ASSESSEE. INSTALLATION OF MACHINERY AND PARTS WAS NOT THE BUSINESS OF THE ASSESSEE. IT WAS THE BUSINESS OF THE ENGLISH COMPANY. THERE HAD BEEN A STERILIZATION OF CAPITA L ASSETS OF THE ASSESSEE IN THAT THE ENGLISH COMPANY FAILED TO ER ECT THE MACHINERY AND PLANT ACCORDING TO THE ORIGINAL STIPU LATIONS. IT HAD ABANDONED THE WORK IN THE MIDDLE. THE OPTIMUM CAP ACITY OF THE MACHINERY INSTALLED WAS NOT EVEN 30 PER CENT OF TH E INSTALLED CAPACITY. THE AMOUNT PAID WAS TOWARDS DAMAGES IN O RDER TO COMPENSATE THE ASSESSEE FOR NOT FULFILLING THE TERM S OF THE CONTRACT. HENCE THE SUM OF RS. 47 20 939 RECEIVED BY THE ASS ESSEE DURING ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 22 THE ASSESSMENT YEAR 1968-69 CONSTITUTED IN ITS ENT IRETY A CAPITAL RECEIPT AND WAS NOT ASSESSABLE. (II) THAT NONE OF THE INGREDIENTS MENTIONED IN SECT ION 2(47) OF THE INCOME-TAX ACT 1961 WAS PRESENT IN THE TRA NSACTION IN QUESTION. THERE WAS NEITHER SALE NOR EXCHANGE NOR RELINQUISHMENT OF ANY RIGHTS IN RESPECT OF THE AMOUNT OF RS. 47 20 939 RECEIVED BY THE ASSESSEE FROM THE ENGLISH COMPANY AS DAMAGES FO R THEIR FAILURE TO FULFIL THEIR OBLIGATIONS UNDER THE AGREEMENTS CO NCLUDED WITH THE ASSESSEE. THE AMOUNT COULD NOT THEREFORE BE BROU GHT TO TAX AS CAPITAL GAINS UNDER SECTION 45; AND (III)THAT WHEN THE DAMAGES RECEIVED BY THE ASSESSE E WERE HELD TO BE CAPITAL RECEIPTS IF NECESSARILY FOLLOW ED THAT THE AMOUNTS OF RS. 50 000 AND RS. 42 212 PAID FOR THE PURPOSE O F INVESTIGATION INTO THE DEFECTS AND FOR ADVICE TO RECTIFY THE DEFE CTS WERE ALSO CAPITAL EXPENDITURE. THE AMOUNTS WERE NOT DEDUCTIB LE. 3.5.6. THERE IS NO DISPUTE THAT IN THE PRESENT CASE BEFORE US THERE WAS NO LOSS OF STOCK IN TRADE OR ANY OTHER LOSS AFT ER STARTING THE BUSINESS FOR WHICH THE ASSESSEE HAS BEEN COMPENSATED BUT TH E COMPENSATION HAS BEEN GRANTED TO THE ASSESSEE ON FAILURE OF AIK IN PERFORMING THEIR PART OF THE AGREEMENT TO SUPPLY THE KNOW-HOW TO THE ASSESS EE TO OPERATE THE PROJECT FOR THE INTENTED MANUFACTURING AT PIRANGUT PLANT WHICH WAS RESULTED INTO EXTINCTION OR STERILIZATION FULLY A S A PROFIT EARNING SOURCE. THUS THE RECEIPT IN COMPENSATION FOR EXTINCTION OR STERILIZATION OF A PROFIT EARNING SOURCE IN VIEW OF THE DECISION OF THE HONBLE ANDHRA PRADESH HIGH COURT IN THE CASE OF CIT VS. BARIUM CH EMICALS LTD. (SUPRA) IS A CAPITAL RECEIPT. WE THUS RESPECTFULLY FOLLOWI NG THE DECISION OF THE HONBLE ANDHRA PRADESH HIGH COURT IN THE CASE OF BA RIUM CHEMICALS LTD. HOLD THAT RECEIPT OF COMPENSATION IN QUESTION NOT BEING IN THE ORDINARY COURSE OF ASSESSEES BUSINESS BUT AWARDED TO COMPE NSATE EXTINCTION OR ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 23 STERILIZATION OF A PROFIT EARNING SOURCE IS A CAPI TAL RECEIPT. SINCE THE FACTS OF THE CASE OF BARIUM CHEMICALS LTD. (SUPRA) AS DIS CUSSED ABOVE ARE ALMOST SIMILAR TO THE FACTS OF THE PRESENT CASE RA THER THE CASE OF THE PRESENT ASSESSEE IS AT BETTER FOOTING IN A SENSE TH AT IN THE PRESENT CASE PRODUCTION COULD NOT EVEN START IN ABSENCE OF THE AGREED SUPPLY OF KNOW-HOW BY THE AIK. WE THUS DO NOT AGREE WITH THE CONTENTION OF THE LD. D.R. THAT DECISION IN THE CASE OF CIT VS. BARIU M CHEMICALS LTD. (SUPRA) RELIED UPON BY THE LD A.R. IS HAVING DISTIN GUISHABLE FACTS AND THUS IS NOT HELPFUL TO THE ASSESSEE. THE DECISIONS RELIED UPON BY THE LD. D.R. IN THE CASES OF ANSAL PROPERTIES & INDUSTRIES LTD. (SUPRA) AND IN THE CASE OF GUFFIC CHEM (P) LTD. (SUPRA) ETC. ARE OF N O HELP TO THE REVENUE AS THEY ARE HAVING DIFFERENT FACTS. IN THE CASE O F ANSAL PROPERTIES AND INDUSTRIES LTD. ADMITTEDLY THE COMPANY CARRIED ON ITS BUSINESS AS BEFORE WITHIN THE EXISTING FRAMEWORK OF THE BUSINESS THU S IT WAS HELD THAT IT WAS NECESSARY INSTANCE OF BUSINESS WITH EXISTING AG ENCIES WERE TERMINATED AND FRESH AGENCIES WERE TAKEN. THE COMP ENSATION IN THAT CASE WAS GRANTED FOR LOSS OF FUTURE PROFITS WHICH WAS HELD AS A REVENUE RECEIPT. IT IS AN ESTABLISHED PROPOSITION OF LAW THAT TO DETERMINE THE NATURE OF RECEIPT AS TO WHETHER IT IS CAPITAL OR RE VENUE CONSIDERATION OF FACTS OF THAT CASE IS OF MORE IMPORTANCE AND DE-HOR SE THE CONSIDERATION OF FACTS THE TEST CANNOT BE APPLIED. THAT IS THE REA SON THAT A DEFINITE STANDARD OF TEST COULD NOT BE FRAMED BUT IMPORTANCE HAS BEEN GIVEN TO THE FACTS OF EACH CASE TO DETERMINE THE NATURE OF RECEIPT APPLYING POSSIBLE TEST COUPLED WITH THE FACTS. LIKEWISE IN THE CASE OF GUFFIC CHEM (P.) LTD. VS. CIT (SUPRA) RELIED UPON BY THE LD. D. R. BEFORE THE HONBLE SUPREME COURT THE ASSESSEE WAS ALREADY CARRYING O N THE BUSINESS OF MANUFACTURING SELLING DISTRIBUTION OF PHARMACEUTI CALS AND MEDICAL PREPARATIONS AND REQUIRED RS. 50 LAKHS FROM RANBA XY AS NON- COMPETITION FEE. THE AGREEMENT WAS FOR 20 YEARS. THE TRIBUNAL HELD THAT ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 24 THE AMOUNT WAS A CAPITAL RECEIPT BUT THE HONBLE HI GH COURT REVERSED THE DECISIONS. THE HONBLE SUPREME COURT ON APPEAL WAS PLEASED TO REVERSE THE DECISION OF HONBLE HIGH COURT WITH THIS FINDIN G THAT THE PAYMENT WAS IN THE NATURE OF CAPITAL RECEIPT. THE DECISION IS THUS ON THE CAPITAL NATURE OF RECEIPT OF NON-COMPETITION FEE HENCE NOT HELPFU L TO THE REVENUE. WE THUS DO NOT FIND SUBSTANCE IN THE OBJECTION. OBJECTION C 3.5.7. IN OBJECTION NO. C THE AUTHORITIES BELO W HAVE HELD THAT THE INJURY IF ANY WAS NOT INFLICTED ON ANY CAPITAL AS SET OF THE ASSESSEE. THE AGREEMENT WAS TO USE THE KNOW-HOW AS A LICENSEE FO R A LIMITED PERIOD OF 7 YEARS THEY OBSERVED THAT THE ASSESSEE WAS NOT GO ING TO ACQUIRE THE KNOW-HOW AS A OWNER AND IT WAS FOR A USE FOR A LI MITED PERIOD AND THEREFORE IT WAS NOT AN ACQUISITION OF ANY ASSET O R ADVANTAGE OF ENDURING NATURE. WE DO NOT FIND SUBSTANCE IN SUCH OBJECTION RAISED BY THE AUTHORITIES BELOW ESPECIALLY WHEN THE FIRE PROTECTI ON CHEMICALS UNIT PROPOSED TO BE SET UP AT PIRANGUDE (MAHARASHTRA) WAS THE EFFECTIVE SOURCE FROM WHICH THE ASSESSEE COULD HAVE EARNED PR OFIT IN FUTURE HAD THE AGREEMENT BEEN FULLY HONORED BY AIK. SINCE TH E ASSESSEE WAS DEPRIVED OF THE PROFIT EARNING SOURCE IT WAS AWAR DED THE COMPENSATION UNDER THE ARBITRATION CLAUSE OF THE AGREEMENT. TH E DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. BOYANTIZIE S & OTHERS (SUPRA) DISCUSSED IN OBJECTION NO. A HEREINABOVE SUPPOR T THE CASE OF THE ASSESSEE WHEREIN IT HAS BEEN HELD BY THE HONBLE H IGH COURT THAT WHEN THE ASSESSEE WAS PREVENTED FROM THE COMMENCEMENT OF BUSINESS THE DAMAGES OR COMPENSATION RECEIVED EVEN IF THEY ARE WORKED OUT ON THE BASIS OF LOSS OF PROFIT WHICH THE ASSESSEE WOULD H AVE EARNED HAD HE CARRIED ON BUSINESS WAS ONLY A CAPITAL RECEIPT AND NOT A REVENUE RECEIPT LIABLE TO TAX. RESPECTFULLY FOLLOWING THIS DECISIO N OF HONBLE BOMBAY HIGH ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 25 COURT IN THE CASE OF BOYANTIZIES & OTHERS WE DO N OT FIND SUBSTANCE IN THE OBJECTION NO. C RAISED BY THE AUTHORITIES B ELOW. THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. MAN ORANJAN CORPORATION (SUPRA) RELIED UPON BY. LD. D.R. IS NOT HELPFUL TO THE REVENUE AS IN THAT CASE THE FACT WAS THAT THE VENTURE WAS ONLY FOR TH E PURPOSE OF CARRYING ON THE EXISTING BUSINESS BY TAKING HELP OF THE ANO THER. UNDER THAT FACT THE HONBLE DELHI HIGH COURT WAS PLEASED TO HOLD THAT COMPENSATION RECEIVED IN SUCH A VENTURE WOULD BE A REVENUE RECE IPT. RATHER THE DECISION OF HONBLE DELHI HIGH COURT IS HELPFUL TO THE ASSESSEE AS THE RATIO LAID DOWN THEREIN IS THAT TO DETERMINE THE CHARACTE R OF RECEIPT WHAT IS TO BE SEEN IS WHETHER THE VENTURE IN WHICH THE ASS ESSEE GIVING UP ITS RIGHT WAS ITSELF THE PROFIT EARNING APPARATUS AND SUCH AN ACTION WOULD DISRESPECT THE ENTIRE PROFIT EARNING STRUCTURE OF T HE ASSESSEE. IT WAS HELD THAT IF THAT BE SO ANYTHING RECEIVED WOULD PARTAK E THE CHARACTER OF CAPITAL RECEIPT. IN THE PRESENT CASE BEFORE US TH E MACHINERY ALONG WITH KNOWHOW WAS THE VENTURE FOR MANUFACTURING THE FIRE PROTECTION CHEMICALS. IN ABSENCE OF NON SUPPLY OF KNOW-HOW/DO CUMENTATION THE MACHINERY COULD NOT BE OPERATED TO START THE MANUFA CTURING AND THE ASSESSEE WAS FORCED TO GIVE UP ITS RIGHT IN THE VEN TURE WHICH ITSELF WAS THE PROFIT EARNING APPARATUS. SUCH ACTION DISRUPTE D THE ENTIRE PROFIT EARNING STRUCTURE OF THE ASSESSEE. OBJECTION NO. D 3.5.8. THE AUTHORITIES BELOW HAS OBSERVED THAT THE FAILURE TO SUPPLY THE FULL DETAILS OF THE KNOW-HOW DID NOT EFFECT T HE BASIC FOUNDATION OF THE BUSINESS OF THE ASSESSEE AND IT CONTINUED TO CONDUCT ITS BUSINESS AS EFFICIENTLY AS IT WAS DURING EARLIER PERIOD. WE DO NOT FIND ANY MATERIAL ON RECORD TO SUPPORT THIS OBJECTION OF THE AUTHORITIES BELOW THAT EVEN IN ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 26 ABSENCE OF SUPPLY OF KNOW-HOW BY AIK THE ASSESS EE CONTINUED TO CONDUCT ITS BUSINESS AS EFFICIENTLY AS IT WAS DURIN G EARLIER PERIOD. UNDISPUTEDLY THE ASSESSEE COULD NOT START MANUFACT URING OF FIRE PROTECTION CHEMICALS AT PIRANGUT WHICH WAS A NEW S ET UP AND NEW LINE OF BUSINESS ALTOGETHER SINCE THE ASSESSEE COMPANY WAS EARLIER ENGAGED IN THE MANUFACTURING OF BASIC CHEMICALS AND FACILITY C HEMICALS. THE NEW PROJECT OF FIRE PROTECTION CHEMICALS REQUIRED AN IN DEPENDENT INFRASTRUCTURE HENCE IT WAS A SEPARATE PROFIT EARN ING APPARATUS IN ITSELF. WE THUS DO NOT FIND SUBSTANCE IN THE OBJECTION. OBJECTION E 3.5.9. THE AUTHORITIES BELOW HAVE ALSO REFUSED TO A CCEPT THE CLAIM OF THE ASSESSEE THAT RECEIPT OF AWARD WAS CAPITAL IN NATURE ON THE BASIS THAT THE COMPENSATION AWARDED FOR THE LOSS SUFFERED BY T HE ASSESSEE WAS INCIDENTAL TO THE BUSINESS AND DID NOT AMOUNT TO BE RECEIVED FOR LOSS OF AN ENDURING ASSET. WE HAVE ALREADY DISCUSSED THE ISSU E IN DETAIL HEREINABOVE THAT THIS MATERIAL FACT THAT DUE TO NO N-SUPPLY OF NOWHOW BY AIK THE ASSESSEE COULD NOT START MANUFACTURING OF FIRE PROTECTION CHEMICALS AT PIRANGUT PLANT HAS REMAINED UNDISPUTED HENCE WE DO NOT FIND SUBSTANCE IN THE OBJECTION OF THE AUTHORITIES BELOW THAT THE RECEIPT OF COMPENSATION FOR LOSS SUFFERED BY THE ASSESSEE WAS INCIDENTAL TO THE BUSINESS. OBJECTION F 3.5.10. THE FURTHER OBJECTION OF THE AUTHORITIES BE LOW REMAINED THAT THE ASSESSEE HAD MAINLY ACQUIRED THE RIGHT TO USE THE TECHNOLOGY AND EXPENDITURE INCURRED HAS ALSO BEEN CLAIMED AS REVEN UE EXPENDITURE THEREFORE ANY RECEIPT IN LIEU OF SUCH EXPENDITURE CANNOT BE TERMED AS ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 27 CAPITAL RECEIPT. THE EXPLANATION OF THE ASSESSEE R EMAINED THAT IN ITS PROFIT AND LOSS ACCOUNT FOR THE ACCOUNTING PERIOD 1 997-98 RELEVANT TO THE A.Y. 1998-99 CORRESPONDING RS. EQUIVALENT OF DUTCH DM 1 60 000 WHICH WAS EARLIER APPEARED AS BALANCE PAYABLE TO AIK GERMANY WAS DULY WRITTEN BACK AND CREDITED UNDER THE HEAD OTHE R INCOME AS REFLECTED UNDER SCHEDULE 12 OF THE PROFIT & LOSS ACCOUNT. BE SIDES WE ARE ALSO OF THE VIEW THAT WHATEVER CLAIM ASSESSESSEE MAKES I.E . EITHER REVENUE OR CAPITAL RECEIPT THE DUTY OF THE A.O IS TO ALLOW JU ST AND PROPER CLAIM AFTER EXAMINING THE VERY NATURE OF THE CLAIM AS PER THE LAW. UNDER THESE CIRCUMSTANCES WE ARE OF THE VIEW THAT THE NATURE OF RECEIPT OF COMPENSATION WHETHER CAPITAL OR REVENUE IN NATURE IS TO BE DECIDED KEEPING IN MIND TOTALITY OF THE FACTS AND CIRCUMSTA NCES UNDER WHICH THE SAID COMPENSATION WAS AWARDED. THE LOSS WAS COMPEN SATED BY THE AWARD BY THE ARBITRATOR KEEPING IN MIND THAT THE A SSESSEE COULD NOT START THE MANUFACTURING AND EARN PROFIT THERE-FROM DUE T O NON-SUPPLY OF THE KNOW-HOW BY THE AIK TO THE ASSESSEE. WE THUS FIND NO SUBSTANCE IN THE PLEA OF THE AUTHORITIES BELOW THAT THE EXPENDITURE INCURRED TO ACQUIRE THE RIGHT TO USE THE TECHNOLOGY BY THE ASSESSEE WAS CLA IMED AS REVENUE EXPENDITURE THEREFORE ANY RECEIPT IN LIEU OF SUCH EXPENDITURE CANNOT BE TERMED AS CAPITAL RECEIPT. OBJECTION G 3.5.11. THE AUTHORITIES BELOW HAVE POINTED OUT THAT THE ARBITRATION AWARD VERY CATEGORICALLY STATES THAT THE AMOUNT OF COMPENSATION RECEIVED BY THE ASSESSEE IS IN LIEU OF PROFITS AND NOT BECAUSE THE ASSESSEES PROFIT EARNING APPARATUS WAS AFFECTED. THEY FURTHER POINTED OUT THAT NO CLAIM WAS ALLOWED FOR LOSS OF GOODWILL LOSS OF BUSINESS OPPORTUNITY OR ANY CAPITAL ASSET. IN SUPPORT THE AUTHORITIES BELOW HAVE PLACED RELIANCE ON THE DECISION IN THE CASES OF R AGHUWANSI MILLS LTD. VS. ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 28 CIT 22 ITR 484 (SC) AND TRAVANCORE RUBBER & TEA CO . LTD. VS. CIT 243 ITR 158 (SC). UNDER THE BACKGROUND OF THE PRESENT CASE WE DO NOT FIND SUBSTANCE IN SUCH TYPE OF OBJECTION RAISED BY THE A UTHORITIES BELOW ESPECIALLY IN VIEW OF THIS UNDISPUTED FACT THAT THE LOSS SUFFERED BY THE ASSESSEE IN THE PRESENT CASE WAS IN FACT ATTRIBUTED TO THE EXTINCTION OF THE PROFIT EARNING APPARATUS VIZ. THE FIRE PROTECTION CHEMICALS UNIT PROPOSED TO BE SET UP AT PIRANGUDE. IT WAS THE EFFECTIVE SO URCE FROM WHICH THE ASSESSEE COULD HAVE EARNED PROFIT IN FUTURE HAD T HE AGREEMENT BEEN FULLY HONORED BY AIK. SINCE THE ASSESSEE WAS DEPR IVED OF THE PROFIT EARNING SOURCE IT WAS AWARDED COMPENSATION UNDER ARBITRATORS AGREEMENT. THE HONBLE BOMBAY HIGH COURT IN THE C ASE OF CIT VS. VOYENTIZIES & OTHERS (SUPRA) RELIED UPON BY THE LD. A.R. HAS BEEN PLEASED TO HOLD THAT WHEN THE ASSESSEE WAS PREVENT ED FROM THE COMMENCEMENT OF THE BUSINESS THE DAMAGES OR COMPE NSATION RECEIVED EVEN IF THEY ARE WORKED OUT ON THE BASIS OF LOSS O F PROFIT WHICH THE ASSESSEE HAVE EARNED HAD HE CARRIED ON BUSINESS W AS ONLY A CAPITAL RECEIPT AND NOT A REVENUE RECEIPT LIABLE TO TAX. THE DECISIONS RELIED UPON BY THE AUTHORITIES BELOW IN THE CASES OF RAGH UWANSI MILLS LTD. VS. CIT AND TRAVANCORE RUBBER AND TEA CO. LTD. (SUPRA) ARE HAVING DISTINGUISHABLE FACTS AND ISSUE HENCE ARE NOT HELP FUL TO THE REVENUE. IN BOTH THESE CASES THE ASSESSEES WERE ALREADY IN THE BUSINESS WHEREAS IN THE PRESENT CASE BEFORE US THE ASSESSEE COULD NOT START ITS BUSINESS OF MANUFACTURING FIRE PROTECTION CHEMICALS DUE TO NON- SUPPLY OF KNOW-HOW BY THE AIK GERMANY. WE THUS DO NOT FIND SUBSTANCE IN THE OBJECTION NO. G. WE ALSO FIND STRENGTH FROM THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF SENAIRAM DOONGARWELL VS. CIT 42 ITR 3 92(SC). IN THAT CASE THE COMPENSATION WAS PAID TO THE ASSESSEE FOR REQUI SITION OF HIS FACTORY BY THE MILITARY AND THE YARDSTICK FOR DETERMINING T HE AMOUNT OF ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 29 COMPENSATION WAS THE LOSS OF FUTURE PROFITS. IN P ARA NOS. 6 AND 7 OF THE DECISION THE FACTS ARE CLEARLY STATED. IN THAT CO NTEXT THE HONBLE SUPREME COURT HELD IN PARA NOS. 15 AND 17 AND THERE AFTER THAT JUST BECAUSE THE COMPENSATION IS DETERMINED WITH REFERE NCE TO THE LOST PROFITS IT IS NOT AMOUNTING TO A REVENUE RECEIPT. THE BASIC CONDITION IS WHETHER THE PROPOSED BUSINESS IS STERILIZED OR COU LD NOT TAKE OFF. IN THIS CASE BEFORE US BECAUSE OF THE BREACH OF THE AGREEM ENT BY AIK THE BUSINESS COULD NOT TAKE PLACE AND THEREFORE IT IS A CAPITAL RECEIPT. OBJECTION H 3.5.12 THE AUTHORITY BELOW HAVE POINTED OUT THAT E XPENSES ON ARBITRATION HAS BEEN CLAIMED AS REVENUE EXPENDITURE . WE HAVE ALREADY DISCUSSED IN OBJECTION NO. F HEREINABOVE THAT THE TYPE OF CLAIM OF THE ASSESSEE CANNOT BE A DECISIVE FACTOR FOR THE A.O T O VERIFY THE NATURE OF THE RECEIPT AS HE IS SUPPOSED TO EXAMINE THE ISSU E INDEPENDENTLY ON THE BASIS OF THE FACTS OF THE CASE BEFORE HIM AND THE REQUIREMENT OF THE LAW. THE ASSESSEE HAD TO INCUR THE ARBITRATION EXPE NDITURE IN ORDER TO PROTECT OR SAVE ITS BUSINESS INTEREST OF GETTING CO MPENSATION AND THEREFORE IT CAN NOT BE HELD THAT SUCH EXPENDITUR E IS NOT A REVENUE EXPENDITURE. THE RECEIPT BY WAY OF COMPENSATION AW ARDED BY THE ARBITRATORS IS NOT DEPENDENT ON THIS EXPENDITURE. THEREFORE THE QUESTION OF HOLDING THE COMPENSATION AS A CAPITAL RECEIPT JUST BECAUSE THE ARBITRATION EXPENDITURE IS CLAIMED AS REVENUE E XPENDITURE DOES NOT ARISE AT ALL. APPLYING SAME LOGIC AS DISCUSSED IN OBJECTION NO. F WE DO NOT FIND SUBSTANCE IN OBJECTION NO. H. OBJECTION NO.I 3.5.13. THE AUTHORITIES BELOW POINTED OUT THAT THE LOSS WERE EXTINCTION OF SOURCE OF INCOME WHICH THE ASSESSEE C ONTENDS NEVER CAME ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 30 INTO EXISTENCE AND THE ARBITRATION AWARD IS ONLY I N LIEU OF PROFITS. WE HAVE ALREADY DISCUSSED THIS ASPECT OF THE MATTER H EREINABOVE IN OBJECTION NO. G. WE HAVE ALSO CITED THE DECISION OF HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. V OYENTIZIES & OTHERS (SUPRA) HOLDING THAT WORKING OUT THE DAMAGES EVEN O N THE BASIS OF LOSS OF PROFIT WHICH THE ASSESSEE WOULD HAVE EARNED HAD HE CARRIED ON BUSINESS WAS ONLY CAPITAL RECEIPT AND NOT A REVENU E RECEIPT LIABLE TO TAX WHEN THE ASSESSEE WAS PREVENTED FROM THE COMMENCEM ENT OF BUSINESS. IN VIEW OF THIS BINDING DECISION OF HONBLE JURISDI CTIONAL HIGH COURT WE DO NOT FIND SUBSTANCE IN OBJECTION NO. I RAISED BY T HE AUTHORITIES BELOW IN DENYING THE CLAIMED TREATMENT OF THE RECEIPT OF AWA RD AS CAPITAL NATURE. 3.5.14. UNDER THE ABOVE CIRCUMSTANCES WE HOLD THAT THE AWARD RECEIVED BY WAY OF COMPENSATION ON THE BASIS THAT IN ABSENCE OF SUPPLY OF KNOWHOW THE ASSESSEE WAS PREVENTED FROM THE COM MENCEMENT OF THE BUSINESS WAS CAPITAL RECEIPT AND NOT A REVENUE RECEIPT LIABLE TO TAX. WE THUS WHILE SETTING ASIDE ORDERS OF THE AUTHORITI ES BELOW IN THIS REGARD DIRECT THE A.O TO TREAT THE RECEIPT OF AWARD IN QUE STION AS CAPITAL RECEIPT FOR THE PURPOSE OF THE ASSESSMENT. THE GROUND NO. 1 IS ACCORDINGLY ALLOWED IN FAVOUR OF THE ASSESSEE. GROUND NO. 2 4. THE A.O DISALLOWED RS. 46 040/- OUT OF EXPENDIT URE FOR GIFT AND PRESENTATION ARTICLES. 4.1. THE RELEVANT FACTS ARE THAT A.O NOTED FROM THE DETAILS OF OFFICE AND GENERAL EXPENSES THAT THE ASSESSEE HAS INCURRED RS. 4 60 307/- ON GIFT AND PRESENTATIONS WORTH ABOVE AND BELOW RS. 1000/-. IN REPLY THE ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 31 ASSESSEE STATED THAT DETAILS OF GIFTS ARTICLES ARE AVAILABLE AND HAVE BEEN FILED BUT THE DISTRIBUTION RECORD OF THE SAME AR E NOT MAINTAINED. SINCE THE ASSESSEE COULD NOT EXPLAIN AS TO WHETHER ALL T HE GIFTS DISTRIBUTED ARE RELEVANT FOR THE PURPOSE OF BUSINESS THE A.O KEEPI NG IN MIND THE ASSESSMENT ORDER FOR A.Y. 1995-96 ON THE ISSUE HELD 10% OF RS. 4 60 307/- AS NOT INCURRED WHOLLY AND EXCLUSIVELY F OR THE PURPOSE OF BUSINESS WHICH HAS RESULTED INTO DISALLOWANCE OF RS . 46 030/- ON THIS ACCOUNT. THE LD CIT(A) HAS UPHELD THE SAME. 4.2. SINCE THE ASSESSEE COULD NOT IMPROVE ITS CASE BEFORE THE TRIBUNAL WE ARE NOT INCLINED TO INTERFERE WITH THE ORDERS OF THE AUTHORITIES BELOW IN THIS REGARD. THE SAME IS UPHELD. THE GROUND NO. 2 IS ACCORDINGLY REJECTED. GROUND NO. 3 5. THE A.O HAS DISALLOWED A SUM OF RS. 6 92 595/- O UT OF THE COMMISSION ON THE GROUND THAT THE ASSESSEE HAS NEIT HER PRODUCED THE DETAILS OF COMMISSION PAID NOR ANY DOCUMENTARY EVID ENCE AS TO WHAT BUSINESS PURPOSE WAS SERVED FOR THE COMMISSION PAID . THE A.O NOTED THAT THE ASSESSEE HAS NOT FURNISHED THE CONFIRMATIO NS FROM THESE PERSONS. THE LD CIT(A) HAS ALSO UPHELD THE SAME WI TH THIS OBSERVATION THAT EVEN IF AT THE APPELLATE STAGE THE ASSESSEE H AS FAILED TO FURNISH ANY CONTRACT CONFIRMATIONS FROM THE PERSONS TO WHOM THE COMMISSION OF RS. 6 92 595/- WAS SHOWN TO HAVE BEEN PAID. 5.1. THE CONTENTION OF THE LD. A.R. REMAINED THAT T HAT THE ASSESSEE WAS REQUIRED TO FURNISH DETAILS REGARDING SALES COMMISS ION AMOUNTING TO RS. 74 81 032/- OUT OF WHICH IT WAS ABLE TO COMPLY IN RESPECT OF COMMISSION ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 32 PAID TO THE EXTENT OF RS. 66 88 436/-. FOR THE BA LANCE AMOUNT OF RS. 6 92 595/- THE LD. A.R. SUBMITTED THAT IT PERTAINE D TO 9 PARTIES ONLY FROM WHOM CONFIRMATIONS COULD NOT BE PRODUCED SINCE THEY COULD NOT BE CONTACTED AS THEY HAD CLOSED THEIR BUSINESS OR WERE UNAVAILABLE. THE LD. A.R. SUBMITTED THAT BEFORE THE LD CIT(A) THE ASSE SSEE HAS FURNISHED THE DETAILS WITH SUPPORTING EVIDENCE REGARDING THIS AMO UNT WITH REQUEST TO THE LD CIT(A) FOR ADMISSION OF ADDITIONAL EVIDENCE UNDER RULE 46A OF THE I.T. RULES AS THE ASSESSEE WAS PREVENTED FOR SUFFIC IENT CAUSE FROM PRODUCING THE EVIDENCE BEFORE THE A.O. THE LD. A. R. SUBMITTED THAT THE AMOUNT OF RS.3 19 629/- OUT OF THE AMOUNT DISALLOWE D REPRESENTS THE COMMISSION ACTUALLY PAID BY THE ASSESSEE DULY SUPPO RTED BY CREDIT NOTE ATTACHED IN THE ASSESSEES PAPER BOOK AGENCY AGREE MENT AND JOURNAL OF THE VOUCHER AND CHEQUE PAYMENT DETAILS. THE REMAINI NG AMOUNT OF RS. 3 72 966 PROVIDED DURING THE YEAR BUT WRITTEN OFF I N SUBSEQUENT YEARS AND HAS BEEN OFFERED AS INCOME. THE SAME MAY THERE FORE EITHER BE ALLOWED DURING THE YEAR UNDER CONSIDERATION OR IN C ASE THE SAME IS NOT ALLOWED THEN THE SAME SHOULD NOT BE TAXED AS INCOM E AGAIN IN THE SUBSEQUENT YEARS BEING A.YS. 2000-01 AND 2001-02. 5.2. THE LD. D.R. ON THE OTHER HAND PLACED RELIAN CE ON THE ORDERS OF THE AUTHORITIES BELOW. HE POINTED OUT THAT THE AS SESSEE COULD NOT PRODUCE ANY DOCUMENTARY EVIDENCE AS TO WHAT BUSINES S WAS SERVED FOR THE COMMISSION PAID. 5.3. CONSIDERING THE ABOVE SUBMISSION WE FIND THAT THE ASSESSEE UPON WHOM ONUS WAS LYING TO ESTABLISH ITS CLAIM COULD NOT IMPROVE ITS CASE BEFORE THE TRIBUNAL. THE DOCUMENTS WHICH WERE NOT ALLOWED TO BE ADMITTED AS ADDITIONAL EVIDENCE BY THE LD CIT(A) WE RE MERELY CREDIT NOTES RAISED BY THE ASSESSEE AND NOT CONFIR MATION FROM THE ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 33 PARTIES. THE LD CIT(A) WAS THUS JUSTIFIED IN REJE CTING THE REQUEST OF THE ASSESSEE FOR ADMITTING THOSE EVIDENCE. IN RESULT WE ARE OF THE VIEW THAT THE ASSESSEE FAILED TO DISCHARGE ITS ONUS TO ESTABL ISH THE GENUINENESS OF THE CLAIM. THE AUTHORITIES BELOW WERE THUS JUSTIFI ED IN DISALLOWING RS.6 92 595/- OUT OF THE CLAIMED SALES COMMISSION O F RS. 74 81 032/- IN ABSENCE OF THE EVIDENCE IN SUPPORT TO THE EXTENT OF THE SAID AMOUNT OF RS.6 92 595/-. THE DISALLOWANCE IS THUS UPHELD. T HE GROUND NO. 3 IS ACCORDINGLY REJECTED. GROUND NO.4 6. THIS GROUND IS AGAINST THE DISALLOWANCE OF RS. 1 829/- OUT OF TELEPHONE EXPENSES. 6.1. HAVING GONE THROUGH THE ORDERS OF THE AUTHORIT IES BELOW WE FIND THAT OUT OF RS. 26 26 409/- UNDER THE HEAD POSTAG E TELEPHONE TELEX A SUM OF RS. 59 144/- WAS SPENT ON ACCOUNT OF RESIDEN TIAL TELEPHONES OF DIRECTORS. SINCE IT WAS NOT POSSIBLE FOR THE A.O T O VERIFY THAT ALL THE TELEPHONE CALLS HAVE BEEN MADE ONLY FOR THE BUSINES S PURPOSES THE A.O FOLLOWING THE ACTION OF THE FIRST APPELLATE AUTHORI TY FOR THE A.Y. 1997-98 RESTRICTED THE DISALLOWANCE TO THE EXTENT OF 20% OF THE EXPENSES INCURRED ON TELEPHONES INSTALLED AT THE RESIDENCE OF THE DIR ECTORS. IT HAS RESULTED INTO DISALLOWANCE OF RS. 11 829/-. THE SAME HAS BE EN UPHELD BY THE LD CIT(A). SINCE THE ASSESSEE COULD NOT IMPROVE ITS C ASE BEFORE THE TRIBUNAL ON THE ISSUE WE DO NOT FIND REASON TO INTERFERE WI TH THE FIRST APPELLATE ORDER IN THIS REGARD. THE SAME IS UPHELD. THE GRO UND IS ACCORDINGLY REJECTED. ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 34 GROUND NO.5 7. THE CONTENTION OF THE LD. A.R. IS THAT BEFORE T HE LD CIT(A) AN ADDITIONAL GROUND REGARDING DISALLOWANCE OF RS. 65 854/- OUT OF VEHICLE EXPENSES WAS RAISED BUT THE LD CIT(A) HAS NOT ENTER TAINED THIS ADDITIONAL GROUND. 7.1. HAVING GONE THROUGH FORM NO. 35 WE FIND THAT IN GROUND NOS. 1 TO 9 THE ASSESSEE HAS NOT RAISED SUCH GROUND BUT IN PRAYER CLAUSE OF THE GROUNDS MARKED AS PARA NO. 10 THE ASSESSEE HAS PRA YED THAT THE DISALLOWANCE OF RS. 65 854/- OUT OF VEHICLE EXPENSE S BE DIRECTED TO BE DELETED. 7.2. BEFORE US THE LD. A.R. HAS NOT SPECIFICALLY P OINTED OUT WHEN THIS PRAYER WAS RAISED AS AN ADDITIONAL GROUND BEFORE THE LD CIT(A) TO AGREE WITH HIS CONTENTION THAT THE LD CIT(A) HAS FAILED T O ENTERTAIN THIS ADDITIONAL GROUND. UNDER THESE CIRCUMSTANCES WE A RE NOT INCLINED TO ENTERTAIN THE ABOVE CONTENTION OF THE LD. A.R. AND ACCORDINGLY GROUND NO. 5 IS REJECTED. ADDITIONAL GROUND NOS.1 & 2 8. BESIDES THE GENERAL GROUNDS 1 TO 5 THE ASSESSEE HAS RAISED TWO ADDITIONAL GROUNDS REPRODUCED HEREUNDER WITH REQU EST TO ALLOW THE ADJUDICATION OF THE SAME ON THE BASIS THAT LEGAL IS SUE IS INVOLVED THEREIN AND ADJUDICATION OF THE SAME DOES NOT REQUIRE CONSI DERATION OF FRESH MATERIAL OUTSIDE THE RECORD. 6) THE LEARNED CIT(A) ERRED IN DIRECTING IN PARA 3 OF HIS ORDER ASST. OF PROFIT ON SALE VALUE OF RS. 19 40 000/- OF OPERATING ASSETS TO BE TAXED U/S. 41(2) WITHOUT APPRECIATING THAT TH E SALE VALUE BEING LESSER THAN THE WDV OF THE BLOCK NO PROFIT WAS TAXABLE IN THE HANDS OF THE ASSESSEE. ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 35 7) THE LEARNED CIT(A) ERRED IN TAXING THE CAPITAL G AINS ON TRANSFER OF TRADEMARK TO HACCL. THE APPELLANT SUB MITS THAT THERE BEING NO COST OF ACQUISITION OF TRADE MARK THE CAP ITAL GAINS ON TRANSFER THEREOF ARE NOT CHARGEABLE TO TAX. 8.1. FOR PROPER IDENTIFICATION WE HAVE MARKED THESE ADDITIONAL GROUNDS AS ADDITIONAL GROUND NOS. 1 AND 2. 8.2. ON PERUSAL OF APPEAL PREFERRED BY THE REVENUE WE FIND THAT THE REVENUE VIDE GROUND NO. 1 OF THE APPEAL QUESTIONED THE FIRST APPELLATE ORDER ON THE GROUND THAT THE LD CIT(A) HAS ERRED IN DIRECTING TO COMPUTE THE CONSIDERATION RECEIVED ON TRANSFER OF TRADE NA MES TRADE MARK MARKETING DATA BASE ETC. UNDER THE HEAD INCOME FR OM CAPITAL GAIN. SINCE THE ISSUE RAISED IN GROUND NO. 1 OF THE APPEA L PREFERRED BY THE REVENUE IS CONNECTED TO THE ISSUE RAISED IN ADDITIO NAL GROUND NO.1 WE FOR THE SAKE OF BREVITY PREFERRED TO ADJUDICATE BOTH TH ESE ISSUES VIDE A CONSOLIDATED ORDER. 8.3. THE RELEVANT FACTS ARE THAT VIDE AGREEMENT FOR ASSIGNMENT OF BUSINESS DATED 30 TH JANUARY 1998 THE ASSESSEE COMPANY ACL ASSIGNED ITS BUSINESS OF SPECIALITY CHEMICAL DIVISIONS FOR A CONSIDERATION OF RS. 10 CRORES TO HOUSEMAN LTD. U.K. 8.3.1. THE QUESTION BEFORE THE A.O WAS AS TO WHETHE R THIS AMOUNT OF RS. 10 CRORES RECEIVED FOR ASSIGNING THE BUSINESS OF SPECIALITY CHEMICAL DIVISION AS A GOING CONCERN CAN BE ELIGIBLE FOR TAX . 8.3.2. THE ASSESSEE CLAIMED THAT CONSIDERATION WAS RECEIVED IN A SLUMP TRANSACTION FOR THE SALE OF BUSINESS AS A GOI NG CONCERN HENCE NO PART OF THIS AMOUNT IS TAXABLE EITHER AS REVENUE R ECEIPT OR EVEN AS CAPITAL ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 36 GAINS. IT WAS CLAIMED THAT CONSIDERATION OF RS. 1 0 CRORES RECEIVED FROM HOUSEMAN LTD. U.K. WAS FOR THE ASSIGNMENT OF THE ENTIRE BUSINESS OF SPECIALITY CHEMICALS DIVISION AS A GOING CONCERN ALONG WITH ALL THE ASSETS EXISTING CONTRACT TRADE NAMES TRADEMARKS MARKETING DATA BASE AND RELATED KNOW-HOW TECHNICAL KNOWHOW AND TECHNIC AL SPECIFICATION. HENCE NO PORTION OF THE SLUMP PRICE IS ATTRIBUTABL E TO ANY INDIVIDUAL ASSET AND THUS NO PART OF THE SLUMP PRICE IS TAXABLE. 8.3.3. THE ASSESSEE SUBMITTED FURTHER THAT REFERENC E MADE TO HOUSEMAN LTD U.K. IN THE LETTER DATED 22 ND JANUARY 2001 OF THE ASSESSEE SHOULD BE READ AS DESAI MANGWANI CHEMICALS LTD.. IT WAS SUBMITTED THAT THE AGREEMENT FOR THE ASSIGNMENT OF THE BUSIN ESS DATED 30 TH JANUARY 1998 BETWEEN THE ASSESSEE I.E. M/S. ACQUAPH ARM CHEMICALS LTD. (ACL) AND HOUSEMAN ACQUAPHARM CHEMICALS PVT. LTD. (HACPL) WAS FURNISHED. IT WAS POINTED OUT THAT HACPL IS A NEW NAME OF DESAI MANGWANI CHEMICALS PVT. LTD. (DMCPL). THE NAME OF DMCPL WAS CHANGED TO HACPL. 8.3.4. THE DETAILS OF ASSETS TRANSFERRED TO HACPL A RE AS UNDER : COMPUTERS :WDV RS. 3 68 113.22 VEHICLES :WDV RS. 6 49 952.27 TOOLS & EQUIPMENTS :WDV RS. 7 42 729.94 TRADEMARKS & TRADE NAMES : SELF GENERATED HENCE COST UNASCERTAINABLE. TECHNICAL KNOW-HOW : -DO- GOODWILL : -DO NO LIABILITIES TRANSFERRED TO THE ASSIGNEE. THE VALUATION REPORT FILED IN CASE OF HACL GIVING THE BREAK UP THE CONSIDERATION OF RS. 10 CRORES PAID TOWARDS THE VAR IOUS ASSETS OF THE SPECIALITY CHEMICAL DIVISION PRESENTED BY THE ASSE SSEE ARE AS UNDER : ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 37 SR. NO. ASSETS FOR TRANSFEROR (RS.LACS) 1 OPERATING ASSETS LIKE 19.40 COMPUTERS TYPEWRITER MOTORCARS TEST KITS ETC. 2. TRADEMARKS OF AQUAPHARM 223.10 3. TECHNICAL KNOWHOW 421.95 4. GOODWILL 305.55 970.00 NET OF STAMP DUTY OF RS. 30 LACS BORNE BY THE TRASF EROR I.E. AQUAPHARM. 8.3.5. THE ASSESSEE CLAIMED THAT THEY HAVE SOLD THE ENTIRE BUSINESS OF SPECIALITY CHEMICALS ON A LUMPSUM PRICE AS PER THE AGREEMENT FOR ASSIGNMENT OF BUSINESS. THE ASSESSEE SUBMITTED F URTHER THAT THEY HAVE SOLD THE MANUFACTURING DATA MANUFACTURING RIGHTS MARKETING DATA BASE EVERYTHING CONNECTED WITH THIS ACTIVITY OF HACL WH O ARE THE OWNERS OF THIS ACTIVITY AFTER THEY HAVE PURCHASED THEIR BUSIN ESS. IF AT ALL THE ASSESSEE IS MANUFACTURING THESE CHEMICALS ONLY FO R THEM AND UNDER THEIR ORDERS. THE ASSESSEE DOES NOT MANUFACTURE A ND MARKET THE SAME PRODUCTS FOR ANY OTHER PARTY. THE ASSESSEE HAS SEI ZED THE BUSINESS OF THIS NATURE. 8.3.6. THE A.O DID NOT AGREE WITH THE CLAIM OF THE ASSESSEE. BASICALLY THE A.O HAS DENIED THE CLAIM OF THE ASSE SSEE WITH OBSERVATION THAT TECHNICAL KNOW-HOW TECHNICAL SPECIFICATION TRADE MARKS TRADE NAMES IF AT ALL THERE IS TRANSACTION FOR THEM IT IS ONLY FOR THE USE OF THESE TECHNICAL KNOWHOW TECHNICAL SPECIFICATION T RADE MARKS TRADE NAMES THE REASON BEING THE ASSESSEE IS STILL MANUF ACTURING THE PRODUCTS IN RELATION TO WHICH THE SAME TRADE MARK TRADE NAM ES TECHNICAL KNOW- ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 38 HOW AND TECHNICAL SPECIFICATIONS ARE STATED TO HAVE BEEN TRANSFERRED. THE A.O OBSERVED FURTHER THAT CONSIDERATION HAS BEE N RECEIVED IN THE NORMAL COURSE OF BUSINESS TRANSACTIONS FOR REGULAR SUPPLY OF THE FORMULATIONS AND COMMERCIALIZATION OF SPECIALITY CHEMICALS. THE A.O TREATED THE RECEIPT OF CONSIDERATION OF RS. 10 CRO RES BY THE ASSESSEE AS A REVENUE RECEIPT. 8.3.7. BEFORE THE LD CIT(A) WHILE REITERATING SUBMI SSIONS MADE BEFORE THE A.O THE ASSESSEE MADE AN ALTERNATIVE P LEA THAT EVEN IF FOR THE SAKE OF ARGUMENTS IT IS ACCEPTED THAT CONSIDERA TION OF RS. 10 CRORES IS RECEIVED FROM THE TRANSFER OF SPECIALITY CHEMICAL D IVISION I.E. FOR THE TRANSFER OF TRADE NAMES TRADEMARK MARKETING DATA BASE TECHNICAL SPECIFICATIONS ETC. EVEN THEN IT IS TAXABLE UNDER CAPITAL GAINS. 8.3.8. THE LD CIT(A) CALLED FOR THE COMMENTS OF THE A.O ON THE SUBMISSIONS OF THE ASSESSEE ON THE ISSUE AND AFTER DISCUSSING THE ISSUE IN DETAILS HE HELD THE RECEIPT OF RS. 10 CRORES AS NOT BUSINESS INCOME. HE HAS DELETED THE ADDITION OF RS. 10 CRORES AS BU SINESS INCOME WITH THIS FINDING THAT RS. 7 TO 9.36(NET) CRORE SHALL BE LIAB LE FOR LONG TERM CAPITAL GAIN TAX (GROUND NO. 1 OF THE APPEAL OF REVENUE). HE HELD FURTHER THAT ON THE SALE VALUE OF OPERATING ASSETS OF RS. 19 40 000/- THE ASSESSEE IS HOWEVER LIABLE FOR TAX U/S. 41(2) OF THE I.T. ACT F OR BUSINESS INCOME (ADDITIONAL GROUND NO. 1 OF THE APPEAL OF THE ASSES SEE). THE ASSESSEE CLAIMED THAT THE VALUE OF TRADEMARK WAS NOT LIABLE TO CAPITAL GAIN TAX. THE LD CIT(A) HELD THAT THE ASSESSEE SHALL NOT BE LIABLE FOR CAPITAL GAIN ON TRADEMARKS FOR THIS A.Y. SINCE THERE WAS NO COST OF ACQUISITION. HE OBSERVED THAT THE VALUE OF THE OPERATING ASSET HAS BEEN DEDUCTED FROM THE BLOCK OF ASSETS AND THE BLOCK HAS NOT RESULTE D INTO NEGATIVE SO THERE IS NO QUESTION OF SHORT TERM CAPITAL GAIN. HE ROUNDED OFF THE ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 39 VALUE OF TRADEMARK DETERMINED AT RS. 228.14 LAKHS T O RS. 230 LAKHS WITH THIS DIRECTION THAT WHILE COMPUTING THE CAPITAL GAI NS THE ASSESSEES CALCULATIONS SHALL BE INCREASED BY RS. 1.86 LAKHS (ADDITIONAL GROUND NO.2 OF THE ASSESSEES APPEAL). 8.4. IN SUPPORT OF GROUND NO. 1 OF THE APPEAL OF TH E REVENUE THE LD. D.R. HAS BASICALLY PLACED RELIANCE ON THE ASSESSME NT ORDER WHICH WE HAVE ALREADY DISCUSSED HEREINABOVE. THE LD. A.R. ON THE OTHER HAND TRIED TO JUSTIFY THE RELIEF GIVEN BY THE LD CIT(A) AND REITERATED THE SUBMISSIONS MADE BEFORE THE LD CIT(A) ON THE ISSUE RAISED IN ADDITIONAL GROUND NOS. 1 & 2. 8.5. CONSIDERING THE ABOVE SUBMISSIONS WE FIND TH AT THE A.O HAS DENIED THE CLAIM OF THE ASSESSEE THAT THE RECEIPT OF RS. 10 CRORE AS A CONSIDERATION WAS AGAINST THE SELLING OF ENTIRE BUS INESS OF SPECIALITY CHEMICALS AS A SLUM SALE ON THE FOLLOWING GROUNDS : A) THERE IS NO SLUMP SALE OR SALE OF BUSINESS AS A GOING CONCERN. B) THE CONSIDERATION HAS NOT BEEN RECEIVED FOR THE SLUMP SALE AS THERE IS NO SLUMP SALE AS A GOING CONCERN. HENE IT IS NOT A CAPITAL RECEIPT. C) THE TECHNICAL KNOW-HOW TECHNICAL SPECIFICATIONS TRADEMARKS TRADE NAMES IF AT ALL THERE IS TRANSACTION FOR THE M IT IS ONLY FOR THE USE OF THESE TECHNICAL KNOW-HOW TECHNICAL SPECIFICATIONS TRADEMARKS TRADE NAMES THE REASON BEING THE ASSESSEE IS STILL MANUFACTURING PRODUCTS IN RELATIO N TO WHICH THE SAME TRADEMARKS TRADE NAMES TECHNICAL KNOW-HO W AND TECHNICAL SPECIFICATIONS HAVE BEEN STATED TO HAVE B EEN TRANSFERRED. ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 40 D) THE CONSIDERATION HAS BEEN RECEIVED IN THE NORMA L COURSE OF BUSINESS TRANSACTION FOR REGULAR SUPPLY OF THE FORM ULATIONS AND COMMERCIALIZATION OF SPECIALITY CHEMICALS. 8.5.1. BEFORE THE LD CIT(A) THE ASSESSEE TRIED TO CLARIFY THAT THEY HAVE SOLD THE MANUFACTURING DATA MANUFACTURING RI GHTS MARKETING DATA BASE EVERYTHING CONNECTED TO THIS ACTIVITY TO HAC L WHO ARE THE OWNERS OF THIS ACTIVITY AFTER THEY HAVE PURCHASED THE B USINESS OF THE ASSESSEE. IT WAS SUBMITTED THAT IF AT ALL THE ASSESSEE IS MAN UFACTURING THIS CHEMICAL IT IS ONLY FOR HACL AND UNDER THEIR ORDE RS. THE ASSESSEE DOES NOT MANUFACTURE AND MARKET THE SA ME PRODUCT FOR ANY OTHER PARTY AND IT HAD CEASED THE BUSINESS OF THIS NATURE. THE LD CIT(A) INVITED COMMENTS OF THE A.O ON THE ABOVE SUBMISSION OF THE ASSESSEE. THE A.O. DENIED SUCH EXPLANATION OF THE ASSESSEE WI TH THIS OBSERVATION THAT THE STAND TAKEN BY THE ASSESSEE THAT IT IS NO W WORKING ON JOB WORK BASIS FOR HACL WAS NOT MENTIONED ANYWHERE IN THE D OCUMENTS AND AGREEMENTS FILED BY THE ASSESSEE NOR THE ASSESSEE MENTIONED THE SAME EARLIER DURING THE COURSE OF ASSESSMENT PROCEEDING S. THE A.O REPORTED FURTHER THAT THE ASSESSEE WAS STILL MANUFACTURING T HE SPECIALITY CHEMICALS EITHER ON JOB WORK BASIS AS STATED BY IT OR OTHERWI SE. THUS THE ASSESSEE HAS NOT PARTED WITH OR ASSIGNED THE SPECIALITY CHEM ICALS DIVISION TECHNICAL KNOWHOW SERVICES OF THE KEY PERSONNEL M ARKETING DATA BASE TRADE NAMES ETC. RELATING TO MANUFACTURING COMMER CIALIZATION AND FORMULATION OF THE SPECIALITY CHEMICALS. HE OBSER VED THAT AGREEMENT FOR ASSIGNMENT OF BUSINESS IS JUST A COLOURABLE DEVICE TO AVOID THE TAX. 8.5.2. BEFORE THE LD CIT(A) THE ASSESSEE ALSO RAI SED ALTERNATIVE PLEA BASED ON THE FOLLOWING SUBMISSIONS THAT EVEN I F FOR THE SAKE OF ARGUMENTS IT IS ACCEPTED THAT CONSIDERATION OF RS. 10 CRORE HAS BEEN ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 41 RECEIVED FROM THE TRANSFER OF SPECIALITY CHEMICAL D IVISION I.E. FOR TRANSFER OF TRADE NAMES TRADEMARK MARKETING DATA BASE TEC HNICAL SPECIFICATION ETC. EVEN THEN IT IS TAXABLE UNDER CAPITAL GAINS : 1) TECHNICAL KNOW-HOW ETC. ARE RIGHTS OF THE ASSE SSEE RELATING TO THE MANUFACTURE OF SPECIALITY CHEMICALS. 2) THIS RIGHT ALONGWITH THE OTHER ASSETS HAVE BEEN TRANSFERRED AS STATED. 3) SALES OF THESE RIGHTS TRADEMARKS TRADE NAMES GOODWILL ARE TAXABLE UNDER THE HEAD CAPITAL GAINS. 4) THE COST OF ACQUISITION FOR THE DEPRECIABLE AS SETS BEING CLAIMED IS AVAILABLE AS PER THE BOOKS WHICH HAS ALS O BEEN GIVEN BY THE ASSESSEE EVEN IN ITS LETTER DATED 2 ND FEB 2001 AND ALSO AS PER DEPRECIATION CHART ATTACHED TO THE RETURN. FOR THE INTANGIBLE ASSETS THE COST OF ACQUISITION IS T O BE TAKEN AT NIL AS PER SECTION 55 AMENDED W.E.F. 1.4.98 5) THE SALE CONSIDERATION FOR DIFFERENT ASSETS CAN BE TAKEN AS PER VALUATION REPORT FILED IN THE CASE OF HOUSEMAN AQUA PHARM CHEMICALS LTD WHERE THE DIRECTORS ARE COMMON 8.5.3. THE LD CIT(A) HAS DISCUSSED THE ISSUE IN DE TAIL. HE HAS CALLED UPON THE COMMENTS OF THE A.O ON THE SUBMISSI ONS OF THE ASSESSEE AND CONSIDERING THE SAME HE HAS COME TO THE FOLLO WING FINDINGS : 36. THE SUBMISSIONS OF BOTH THE SIDES HAVE BEEN CO NSIDERED. ON THE FACTS AND CIRCUMSTANCES OF THE CASE I AM NOT I NCLINED TO AGREE WITH THE ASSESSING OFFICER THAT THE RECEIPT OF RS . 10 CRORE RECEIVED BY THE APPELLANT ON ASSIGNMENT OF ITS SPECIALITY C HEMICAL DIVISION TO M/S. HOUSEMAN AQUAPHARM CHEMICALS LTD WAS A REVE NUE RECEIPT. THERE IS NOTHING TO SHOW THAT WHATEVER WAS TRANSFE RRED BY THE APPELLANT SUCH AS SALE OF TRADE MARKS TRADE NAMES TECHNICAL SPECIFICATIONS MARKETING DATABASE WAS PART OF TRAD ING OR BUSINESS RECEIPT OF THE APPELLANT. THE APPELLANT WAS NOT IN THE BUSINESS OF SALE OF TECHNICAL SPECIFICATIONS KNOW-HOW OR MARK ETING DATA BASE. ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 42 THE APPELLANT WAS ENGAGED IN THE BUSINESS OF PRODU CING BASIC CHEMICALS AND SPECIALITY CHEMICALS AND IT WAS SELL ING THE CHEMICALS AND FORMULATIONS. THE APPELLANT WAS NOT ENGAGED I N THE BUSINESS OF SELLING THE DATA BASE AND KNOW-HOW OF THE FORM ULATIONS. THEREFORE IN MY OPINION TO HOLD THE RECEIPT OF RS. 10 CRORE ON SALE OF SPECIALITY CHEMICAL DIVISION AS BUSINESS INCOME IS FAR-FETCHED. IT CAN BE HELD AS TRANSFER OF ASSETS AND NOT SALE OF T RADING ITEMS OR STOCK IN TRADE. THE PERUSAL OF THE AGREEMENTS CLEA RLY SHOWS THAT IT IS A SALE OF BUSINESS AND THE CONSIDERATION HAS BEE N RECEIVED BY THE APPELLANT FOR THE SALE OF SUCH ASSETS. THEREFORE I AM ALSO NOT INCLINED TO HOLD THAT THE RECEIPT BY THE APPELLANT WAS ROYALTY FOR THE USE OF SERVICES. THE APPELLANT HAS AMPLY CLARIFIED THAT IN THE ASSI GNMENT OF BUSINESS THE STOCK OF SUCH CHEMICALS AND FORMULATIO NS WHOSE KNOW- HOW WAS SOLD WERE NOT PART OF THE ASSIGNMENT OF BUS INESS. IT IS FOR THIS REASON THAT PART OF THE STOCK OF THE FORMULATI ONS AND CHEMICALS PERTAINING TO THE CHEMICALS WHOSE KNOW-HOW AND TECH NICAL SPECIFICATIONS WERE SOLD REMAINED AS A PART OF THE CLOSING STOCK AT THE END OF THE YEAR WHICH WERE SUBSEQUENTLY SOLD AS A TRADING ITEM. IT HAS ALSO BEEN CLARIFIED BY THE APPELLANT THAT A FTER THE ASSIGNMENT OF BUSINESS OF THE SPECIALITY CHEMICAL DIVISION THEY WERE SUBSEQUENTLY DOING JOB WORK FOR M/S. HACCL. IT WAS FOR THIS REASON THAT THE APPELLANT HAD NOT TRANSFERRED THE P LANT AND MACHINERY AND THE TECHNICAL PERSONNELS RELATING TO THE SCPECIALITY CHEMICAL TO M/S. HACCL. THIS IS CLEAR FROM THE AG REEMENT FOR THE SUPPLY OF CHEMICALS DATED 30 TH JANUARY 1998 WHICH HAVE SEPARATE RATES FOR JOB WORK AND SEPARATE RATES FOR SALE OF C HEMICALS. ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 43 THE ASSESSING OFFICER HAS ALSO RAISED THE ISSUE OF USE OF TRADE MARKS AND TRADE NAMES BY THE APPELLANT EVEN AFTER THE ASSIGNMENT OF BUSINESS. THE APPELLANT HAS SOLD THE TRADE MAR KS AND TRADE NAMES TO M/S. HACCL IN RESPECT OF THE CHEMICALS AND FORMULATIONS FOR WHICH THE KNOW-HOW TECHNICAL SPECIFICATIONS AN D DATA BASE HAVE BEEN SOLD. THE DETAILS OF THE TRADE MARK AND T RADE NAMES SOLD ARE MENTIONED IN THE ANNEX.F OF THE ASSIGNMENT OF BUSINESS AGREEMENT. THOSE WHICH ARE SOLD ARE NOT BEING USED BY THE APPELLANT. THE USER OF OF CORPORATE NAME OR MARK AQUAPHARM OR AQUAPHARM LOGO IS NOT COVERED BY THE AGREEMENT FOR THE ASSIGNMENT OF BUSINESS. THIS ASP ECT IS SEPARATELY COVERED BY THE SHAREHOLDERS AGREEMENT D ATED 30 TH JAN. 1998. ON THE FACTS OF THE CASE I AM INCLINED TO HOLD THA T THE RECEIPT OF RS. 10 CRORES ON SALE OF SPECIALITY CHEMICAL DIV ISION WAS NOT A TRADING/REVENUE RECEIPT BY THE APPELLANT. THE AO H AS HERSELF MENTIONED IN THE ASSESSMENT ORDER THAT IN THE ALTER NATIVE AND WITHOUT PREJUDICE TO HER HOLDING THAT IT WAS A REVE NUE RECEIPT THE COULD BE TAXED AS A CAPITAL GAIN BASED ON THE VALUA TION REPORT FILED IN THE CASE OF M/S. HACCL WHERE THE DIRECTORS WERE COMMON. THE CASE OF THE APPELLANT IS ALSO COVERED BY THE DECISI ON OF THE HONBLE SUPREME COURT IN THE CASE OF ARTEX MANUFACTURING CO MPANY VS. CIT 277 ITR 260(SC). ON THE FACTS OF THE CASE I AM INC LINED TO HOLD THAT THE RECEIPT OF ASSIGNMENT OF BUSINESS OF SPECI AITY CHEMICAL DIVISION WAS A CAPITAL RECEIPT LIABLE FOR TAX. THE APPELLANT HAS ALSO FINALLY CONCEDED THAT THE SUM OF RS. 10 CRORES WAS LIABLE TO CAPITAL GAIN TAX. AS PER THE VALUATION REPORT OF THE CHART ERED ACCOUNTANT ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 44 FILED IN THE CASE OF HACCL THE VALUE OF RS. 970 LA CS (RS. 1000 LACS-30 :LACS FOR STAMP DUTY) HAS BEEN BIFURCATED A S UNDER : RS. LAKH VALUE OF TECHNICAL KNOW-HOW 421.95 VALUE OF GOODWILL 305.65 VALUE OF TRADE MARKS 223.10 VALUE OF OPERATING ASSETS 19.40 ------------------- 970.00 COST OF STAMP DUTY 30.00 ------------------- 1000.00 THE APPELLANT GAVE THE COMPUTATION OF LONG TERM CAP ITAL GAIN WHICH WAS FORWARDED TO THE ASSESSING OFFICER FOR HE R COMMENTS ON THE CORRECTNESS OF THE COMPUTATION OF LONG TERM CAP ITAL GAIN GIVEN BY THE APPELLANT. THE ASSESSING OFFICER VIDE REPOR T DATED 31 ST JANUARY 2002 SUBMITTED AS UNDER : WITHOUT PREJUDICE TO THE STAND TAKEN BY THE ASSESS ING OFFICER IN THE ASSESSMENT ORDER THAT AMOUNT OF RS.1 0 CRORES RECEIVED BY THE ASSESSEE IS REQUIRED TO BE TREATED AS BUSINESS INCOME IT IS SUBMITTED THAT THE COMPUTATI ON OF CAPITAL GAIN AS MADE BY THE ASSESSEE ON THE BASIS O F VALUATION REPORT IS CORRECT. THE VALUE OF THE OPER ATING ASSET SOLD BY THE ASSESSEE TO HOUSEMAN AQUAPHARM CO.(P) L TD. HAS BEEN VERIFIED AND THE SAME HAS BEEN REDUCED BY THE ASSESSEE FROM THE OPENING W.D.V. OF THE BLOCK OF A SSETS. THE APPELLANT HAS DISTRIBUTED THE COST OF STAMP DUT Y BETWEEN TRADE MARKS OPERATING ASSETS TECHNICAL KNOW-HOW A ND GOODWILL ON PRO-RATE BASIS. AS PER THE AGREEMENT IT WAS THE A PPELLANTS LIABILITY TO BEAR THE STAMP DUTY ETC IN RESPECT OF THE TRANSF ER OF THE SPECIALITY CHEMICAL DIVISION. THE APPELLANT HAS CL AIMED THAT THE VALUE OF TRADE MARKS WAS NOT LIABLE TO CAPITAL GAIN S TAX IN VIEW OF THE DECISION IN THE CASE OF B.C. SRINIVASA SHETTY 128 ITR 294(SC) AND ALSO FOR THE REASON THAT TRADE MARKS HAD BEEN C OVERED UNDER 55(2)(A) ONLY W.E.F. A Y 2002-03. I FIND MERIT IN THE CONTENTION OF THE APPELLANT ON THIS POINT AND THEREFORE I HOLD T HAT APPELLANT SHALL NOT BE LIABLE FOR CAPITAL GAIN ON TRADE MARKS FOR T HE ASSESSMENT YEAR SINE THERE IS NO COST OF ACQUISITION. THE VAL UE OF THE OPERATING ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 45 ASSETS HAS BEEN DEDUCTED FROM THE BLOCK OF ASSETS A ND THE BLOCK HAS NOT RESULTED INTO NEGATIVE SO THERE IS NO QUEST ION OF SHORT TERM CAPITAL GAIN. THE VALUE OF THE TRADE MARK HAS BEEN DETERMINED AT RS.228.14 LACS. HOWEVER IT HAS BEEN ROUNDED AT 230 LACS. THEREFORE WHILE COMPUTING THE CAPITAL GAINS THE AP PELLANTS CALCULATION SHALL BE INCREASED BY RS. 1.86 LACS. IT IS HELD THAT APPELLANT SHALL BE LIABLE FOR LONG TERM CAPITAL GAINS ON RS. 729.36 LACS (RS. 727.50 LACS + RS. 1.8 6 LACS) COMPRISING OF RS. 421.95 LAKH ON SALE OF TECHNICAL KNOW-HOW AND RS. 305.55 LAKH ON GOODWILL AND THE DIFFERENCE (EXC ESS) IN VALUE OF TRADE MARKS THE APPELLANT HAS ALSO ADMITTED ITS LI ABILITY TO PAY TAX ON LONG TERM CAPITAL GAIN ON RS. 727.50 LAKHS. THE ADDITION OF RS. 10 CRORES AS BUSINESS INCOME IS DELETED HOWEVER RS. 729.36(NET) SHALL BE LIABLE FOR LONG TERM CAPITAL G AIN TAX. ON THE SALE VALUE OF OPERATING ASSET OF RS. 19 40 000/- THE APPELLANT IS HOWEVER LIABLE FOR TAX U/S. 41(2) OF THE IT ACT AS BUSINESS INCOME. THE APPELLANT HAD SUBMITTED THAT THE TOTAL COST OF THE OPERATING ASSET WAS RS. 50 37 040/- COMPRISING OF VEHICLE RS. 10 23 449/- TOOLS AND EQUIPMENTS RS. 34 90 397/- A ND COMPUTERS RS.5 23 194/- AND DEPRECIATION CLAIMED ON THESE ASS ETS RS.32 7Y6 246/-. THE WDV WAS SHOWN AT RS. 17 60 79 4/-. THE INCOME U/S 41(2) AS PER THIS CALCULATION COMES TO R S.1 79 206/- [19 40 000 17 60 795]. THE ASSESSING OFFICER IS DIRECTED TO COMPUTE THE INCOME U/S 41(2) AFTER VERIFYING THE AC TUAL COST OF THE OPERATING ASSETS AND DEPRECIATION CLAIMED AND THE W DV. 8.5.4 WE FIND THAT THE FIRST APPELLATE ORDER ON TH E ISSUE IS COMPREHENSIVE AND REASONED ONE. SINCE THE ASSESSEE WAS STILL MANUFACTURING THE PRODUCTS IN RELATION TO WHICH TH E SAME TRADE MARK TRADE NAMES TECHNICAL KNOWHOW AND TECHNICAL SPECIF ICATIONS CLAIMED TO HAVE BEEN TRANSFERRED WE ARE OF THE VIEW THAT THE AUTHORITIES BELOW HAVE RIGHTLY HELD THAT RECEIPT OF RS. 10 CRORES IN CON SIDERATION AGAINST SELLING OF SPECIALITY CHEMICAL DIVISION IS NOT A SLUMP SALE . THE ISSUE FOR CONSIDERATION BEFORE THE AUTHORITIES BELOW WAS THE REFORE THE TRUE NATURE ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 46 OF RECEIPT OF RS. 10 CRORES AS TO WHETHER THE SAME CAN BE TREATED AS BUSINESS RECEIPT OR TO BE TAXED AS INCOME UNDER THE HEAD CAPITAL GAIN. THE A.O HELD THAT ENTIRE AMOUNT OF RS. 10 CRORES RE CEIVED BY THE ASSESSEE IS ON ACCOUNT OF ACTIVITY OF COMMERCIALIZA TION AND FORMULATION OF SPECIALITY CHEMICAL AND ARE TO BE TREATED AS NORMAL BUSINESS ACTIVITY OF THE ASSESSEE AND HENCE RECEIPTS ARE REQUIRED TO BE TREATED AS REVENUE RECEIPT. THE LD CIT(A) HOWEVER AFTER DISCUSSING THE ISSUE DID NOT AGREE WITH THE A.O WITH THIS OBSERVATION THAT THERE IS NO THING TO SAY THAT WHATEVER WAS TRANSFERRED BY THE ASSESSEE SUCH AS SA LE OF TRADEMARK TRADE NAMES TECHNICAL SPECIFICATIONS AND MARKETI NG DATA BASE WAS PART OF TRADING OR BUSINESS RECEIPT. HE OBSERVED THAT TH E ASSESSEE WAS NOT IN THE BUSINESS OF SALE OF TECHNICAL SPECIFICATION KN OW-HOW OR MARKETING DATA BASE BUT IT WAS ENGAGED IN THE BUSINESS OF PR ODUCING BASIC CHEMICALS AND SPECIALITY CHEMICALS AND WAS SELLING THE CHEMICALS AND FORMULATIONS. THESE ARE UNDISPUTED FACTS. WE THUS FULLY CONCUR WITH THE VIEW OF LD CIT(A) THAT RECEIPT OF RS. 10 CRORES ON SALE OF SPECIALITY CHEMICAL DIVISION CANNOT BE TREATED AS BUSINESS IN COME. IT CAN BE HELD AS TRANSFER OF ASSETS AND NOT SALE OF TRADING ITEMS OR STOCK IN TRADE. THE OBSERVATION OF THE LD CIT(A) THAT THOSE TRADEMARK A ND TRADE NAMES SOLD BY THE ASSESSEE WERE NOT BEING USED BY THE ASSESSEE AND THE USE OF CORPORATE NAME OR MARK AQUAOHARM OR AQUAPHARM L OGO WAS NOT COVERED BY THE AGREEMENT FOR ASSIGNING OF BUSINESS. THE A.O HERSELF MENTIONED IN THE ASSESSMENT ORDER THAT IN THE ALTER NATIVE AND WITHOUT PREJUDICE TO HER HOLDING THAT IT WAS A REVENUE REC EIPT THE SUM COULD BE TAXED AS A CAPITAL GAIN BASED ON THE VALUATION REPO RT FILED IN THE CASE OF HACL WHERE THE DIRECTORS WERE COMMON. UNDER THESE CIRCUMSTANCES WE DO NOT FIND INFIRMITY IN THE FINDING OF THE LD CIT( A) THAT THE RECEIPT OF ASSIGNMENT OF BUSINESS OF SPECIALITY CHEMICAL DIV ISION WAS A CAPITAL RECEIPT LIABLE FOR TAX. ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 47 8.5.5. BEFORE THE LD CIT(A) THE ASSESSEE HAD ALSO CLAIMED THAT THE VALUE ON TRADEMARK WAS NOT LIABLE TO CAPITAL GAIN T AX IN VIEW OF THE DECISION IN THE CASE OF B.C. SRINIVASA SHETTY 128 ITR 294 (SC) AND ALSO FOR THE REASON THAT THE TRADEMARKS HAD BEEN COVERED U/S. 55(2)(A) ONLY W.E.F. A.Y. 2002-03. THE LD CIT(A) HAS ACCEPTED TH E SAME WITH THIS OBSERVATION THAT THE ASSESSEES SHALL NOT BE LIABLE FOR CAPITAL GAINS ON TRADEMARK FOR THE A.Y. UNDER CONSIDERATION SINCE TH ERE WAS NO COST OF ACQUISITION. UNDER THESE CIRCUMSTANCES WE FIND TH AT THE FIRST APPELLATE ORDER ON THE ISSUE IS REASONED ONE AND DOES NOT NEE D INTERFERENCE. THE SAME IS UPHELD. GROUND NO. 1 OF THE APPEAL PREFER RED BY THE REVENUE QUESTIONING THE ACTION OF LD CIT(A) IN DIRECTING T O COMPUTE THE CONSIDERATION RECEIVED ON TRANSFER OF TRADEMARK TR ADE NAMES MARKETING DATA BASE ETC. UNDER THE HEAD INCOME FROM CAPITAL GAIN THUS DOES NOT HOLD WATER. THE GROUND IS ACCORDINGLY REJECTED. 8.5.6. THE ADDITIONAL GROUND 2 RAISED IN THE APPEAL PREFERRED BY THE ASSESSEE IS ALSO REJECTED WHEREBY THE ASSESSEE HAS QUESTIONED ACTION OF THE LD CIT(A) IN TAXING THE CAPITAL GAINS ON TRANSF ER OF TRADEMARK TO HACL. 8.5.7. IN ADDITIONAL GROUND NO. 1 THE ASSESSEE HAS QUESTIONED THE ACTION OF THE LD CIT(A) IN DIRECTING THE A.O TO ASS ESS THE PROFIT ON SALE VALUE OF RS. 19 40 000 OF OPERATING ASSETS AS TAXA BLE U/S. 41(2). THE CONTENTION OF LD. A.R. REMAINED THAT THE DIRECTION OF LD CIT(A) IS WITHOUT APPRECIATING THAT THE SALE VALUE BEING LESSER THAN THE WDV OF THE BLOCK NO PROFIT WAS TAXABLE IN THE HANDS OF THE ASSESSEE. WE FIND THAT BEFORE THE LD CIT(A) IT WAS CLAIMED THAT THE INCOME U/S.41 (2) AS PER TAKING WDU AT RS. 17 60 794/- AGAINST THE VALUE OF OPERATING A SSET AT RS. 19 40 000/- WAS SHOWN AT RS.1 79 206/- THE LD CIT( A) HAS ACCORDINGLY ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 48 DIRECTED THE A.O TO COMPUTE INCOME U/S. 41(2) AFTER VERIFYING THE ACTUAL COST OF OPERATING ASSET AND DEPRECIATION CLAIM AND THE W.D.V.. NOW BEFORE THE TRIBUNAL THE ASSESSEE CLAIMS THAT THE S ALE VALUE OF OPERATING ASSET WAS LESSER THAN THE WDV OF THE BLOCK HENCE N O PROFIT WAS TAXABLE IN THE HANDS OF THE ASSESSEE WHICH PRIMA FACIE AP PEARS TO BE JUSTIFIED. WE THUS DIRECT THE A.O TO VERIFY THIS CLAIM OF THE ASSESSEE AS WELL WHILE DECIDING THE ISSUE IN COMPLIANCE OF THE DIRECTION O F THE LD CIT(A) IN THIS REGARD. THE DIRECTION OF THE LD. CIT(A) TO THE A.O. ON THE ISSUE IS THUS STANDS MODIFIED TO THIS EXTENT. THE ADDITIONAL GROU ND NO.1 IS ACCORDINGLY ALLOWED FOR STATISTICAL PURPOSES. 8.5.8. ITA NO. 372/PN/2002 PREFERRED BY THE ASSESS EE IS THUS PARTLY ALLOWED. ITA NO. 626/PN/2002 9. IN THIS APPEAL THE REVENUE HAS RAISED FOLLOWING 2 GROUNDS : 1. THE CIT(A) ERRED IN DIRECTING TO COMPUTE THE CO NSIDERATION RECEIVED ON TRANSFER OF TRADE NAMES TRADE MARK MA RKETING DATA BASE ETC. UNDER THE HEAD INCOME FROM CAPITAL GA IN. 2. CIT(A) ERRED IN HOLDING THAT THE CAPITAL SUBSIDY RECEIVED FROM WMDC OF RS.7 06 606/- IS CAPITAL RECEIPT GROUND NO. 1 9.1. WE HAVE ALREADY DECIDED THIS GROUND HEREINABO VE WHILE ADJUDICATING CONNECTED ADDITIONAL GROUNDS RAISED IN THE APPEAL (ITA NO. 372/PN/2002) PREFERRED BY THE ASSESSEE AGAINST THE FIRST APPELLATE ORDER FOR THE SAME A.Y. FOLLOWING THE DECISION TAKEN THE REIN THIS GROUND IS REJECTED. ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 49 GROUND NO. 2 9.2. THE RELEVANT FACTS ARE THAT DURING THE YEAR T HE ASSESSEE HAD RECEIVED RS. 7 06 606/- TOWARDS CAPITAL SUBSIDY FRO M WMDC. BEFORE THE A.O THE ASSESSEE WAS ASKED TO EXPLAIN AS TO WHY T HIS RECEIPT SHOULD NOT BE TREATED AS REVENUE RECEIPT AND ACCORDINGLY BE AD DED TO THE INCOME RETURNED. THE EXPLANATION OF THE ASSESSEE REMAINED THAT THE ASSESSEE COMPANY IS COVERED BY PACKAGE INCENTIVE SCHEME 1988 ANNOUNCED BY THE GOVERNMENT OF MAHARASHTRA INDUSTRIAL ENERGY AND LA BOUR DEPARTMENT. IT WAS SUBMITTED THAT THE SAID SCHEME IS IMPLEMENT ED THROUGH THE OPERATING AGENCY KNOWN AS WMDC. THE ASSESSEE EXP LAINED THAT THE PREAMBLE OF THE SAID SCHEME MAKES IT CLEAR THAT TH E OBJECT OF PUTTING SUCH INCENTIVE SCHEME INTO THE PRACTICE IS TO ACHI EVE DISPERSAL OF INDUSTRIES OUTSIDE THE BOMBAY THANE PUNE BELT AN D TO ATTRACT THEM TO THE UNDERDEVELOPED AND DEVELOPED AREAS OF THE SAID GOVERNMENTS. THIS SUBSIDY HAS BEEN GRANTED BY THE STATE GOVERNMENT WI TH SPECIFIC VIEW TO ENCOURAGE THE INDUSTRIES TO GO TO BACKWARD AREAS A ND SET UP THE INDUSTRIAL UNITS THEREON. IT WAS FURTHER STATED TH AT EVEN THOUGH SUCH INCENTIVE IS COMPUTED ON THE BASIS OF INVESTMENT OF CAPITAL IN PLANT & MACHINERY ETC. FOR SETTING UP INDUSTRY IT IS A C APITAL SUBSIDY AND THEREFORE A CAPITAL RECEIPT. RELIANCE WAS PLACED ON THE DECISIONS IN THE CASES OF PJ CHEMICAL 210 ITR 830 (SC) ELYAS PLASTI CS PVT. LTD. 188 ITR 11 (BOM.) AND MERINOPLY AND CHEMICALS LTD. 209 IT R 508 (CAL.). THE A.O. DID NOT AGREE WITH THE SUBMISSION OF THE ASSES SEE AND FOLLOWING THE DECISIONS INCLUDING DECISION OF HONBLE SUPREME COU RT IN THE CASE OF SAHANI STEEL AND PRESS WORKS LTD. VS. CIT 228 ITR 253 (SC) HELD THAT THE PAYMENTS IN THE NATURE OF SUBSIDY WERE MADE ON LY AFTER INDUSTRIES HAVE BEEN SET UP HENCE SUCH SUBSIDY COULD ONLY B E TREATED AS ASSISTANCE GIVEN FOR THE PURPOSE OF CARRYING ON TH E BUSINESS OF ASSESSEE ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 50 HENCE IT IS OF REVENUE CHARACTER. THE A.O ACCORDI NGLY TREATED THE RECEIPT AS REVENUE INCOME OF THE ASSESSEE. 9.2.1.. THE LD CIT(A) HAS HOWEVER ACCEPTED THE SU BSIDY AS CAPITAL RECEIPT FOLLOWING ORDER OF ITS PREDECESSOR IN THE APPEAL OF THE ASSESSEE ON AN IDENTICAL ISSUE FOR THE A.Y. 1997-98. 9.2.2. IN SUPPORT OF THE GROUND LD. D.R. HAS BASIC ALLY PLACED RELIANCE ON THE ASSESSMENT ORDER AND THE DECISION FOLLOWED BY HIM ON THE ISSUE. THE LD. A.R. ON THE OTHER HAND TRIED TO JUSTIFY THE FIRST APPELLATE ORDER. HE SUBMITTED THAT THE FACTS OF EV ERY CASE ARE IMPORTANT TO CONSIDER THE ISSUE UNDER THAT BACKGROUND. HE RE ITERATED HIS SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW THAT THE OBJECT OF THE SCHEME IS IMPORTANT TO CONSIDER AS TO WHETHER THE SUBSIDY GRANTED UNDER THAT SCHEME IS CAPITAL OR REVENUE IN NATURE. HE SUBMITTED THAT THE SUBSIDY IN QUESTION WAS GRANTED TO SET UP INDUSTRIE S IN BACKWARD AREAS AS IT APPEARS FROM NOMENCLATURE CAPITAL SUBSIDY OF T HE SCHEME AND THUS IT IS CAPITAL IN NATURE. 9.3. HAVING GONE THROUGH THE ORDERS OF THE AUTHORI TIES BELOW WE FIND THAT THE LD. CIT(A) HAS DECIDED THE ISSUE BY SIMPL Y FOLLOWING THE FIRST APPELLATE ORDER IN THIS REGARD BY HIS PREDECESSOR FOR THE EARLIER ASSESSMENT YEAR. HE HAS NOT DISCUSSED THE REASONS BASED UPON WHICH HIS PREDECESSOR HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE TO WHICH HE CONCURRED WITH. UNDER THESE CIRCUMSTANCES WE SE T ASIDE THE MATTER TO THE FILE OF THE LD. CIT(A) TO DECIDE THE ISSUE AFR ESH AFTER HEARING THE PARTIES AND BY AN SPEAKING ORDER. THE GROUND IS T HUS ALLOWED FOR STATISTICAL PURPOSES. ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 51 9.4. IN RESULT ITA NO. 626/PN/2002 PREFERRED BY TH E REVENUE IS PARTLY ALLOWED. ITA NOS. 1386/PN/2005 & 1111/PN/2005 10. THESE ARE CROSS APPEALS AGAINST THE FIRST APPEL LATE ORDER FOR THE A.Y. 2001-02 WHEREIN THE ASSESSMENT WAS FRAMED U/S. 14 3(3) OF THE ACT. THERE ARE ANOTHER SET OF MATTERS I.E. ITA NO. 1193 /PN/2007 (PREFERRED BY THE REVENUE) AND C.O. NO. 1/PN/2008 (PREFERRED B Y THE ASSESSEE) FOR THE SAME A.Y. 2001-02 AGAINST THE FIRST APPELLATE O RDER ARISING OUT OF THE ASSESSMENT FRAMED U/S. 147 READ WITH 143(3) OF THE ACT. ISSUES RAISED IN THESE APPEALS ARE DIFFERENT HENCE THESE MATTER S REQUIRE ADJUDICATION BY THE TRIBUNAL. ITA NO. 1111/PN/2005 11. THE ASSESSEE HAS RAISED FOLLOWING GROUNDS : 1. ON FACTS AND CIRCUMSTANCES PREVAILING IN THE CA SE AND AS PER PROVISIONS OF LAW IT BE HELD THAT DISALLOWANCE OU T OF REPAIRS TO PLANT AND MACHINERY OF RS. 20 904/- IS RESULTING OUT OF MISAPPREHENSION OF THE FACT ON THE PART OF AUTHORI TIES BELOW AND THE SAME IS NOT IN ACCORDANCE WITH THE PROVISIONS O F THE ACT. THE ADDITIONS SO RETAINED ON ACCOUNT OF DISALLOWANCE OU T OF REPAIRS TO PLANT AND MACHINERY AND OTHERS BE DELETED. 2. ON FACTS AND CIRCUMSTANCES PREVAILING IN THE CA SE AND AS PER PROVISIONS OF LAW IT BE HELD THAT DISALLOWANCE OF RS. 15 000/- RETAINED OUT OF STAFF WELFARE EXPENSES IS WITHOUT G IVING JUST AND PROPER REASONS AND THE SAME IS BASED ON GUESS WOR K. THE DISALLOWANCE BEING NOT IN ACCORDANCE WITH THE PROV ISIONS OF THE ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 52 ACT BE DELETED AND IT BE HELD THAT ENTIRE EXPENDIT URE IS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS . ALTERNATIVELY THE DISALLOWANCE MAY BE REDUCED CONSIDERABLY ON T HE FACTS AND CIRCUMSTANCES PREVAILING IN THE CASE AND AS PER PRO VISIONS OF THE ACT. 3. ON FACTS AND CIRCUMSTANCES PREVAILING IN THE CAS E AND AS PER PROVISIONS OF LAW IT BE HELD THAT THAT ENTIRE EXP ENDITURE OF RS.7 30 000/- INCURRED ON GRANT OF LICENSE TO USE THE SOFTWARE BE HELD AS REVENUE EXPENDITURE. THE FINDING OF THE AU THORITIES BELOW TO THE EFFECT THAT SUCH SOFTWARE ENTAILS THE BENEFI T OF ENDURING NATURE IS IMPROPER AND NOT IN ACCORDANCE WITH THE FACTS PREVAILING IN THE CASE. THE ENTIRE EXPENDITURE OF RS. 7 30 0 00/- BE ALLOWED AS REVENUE EXPENSES BEING INCURRED FOR THE PURPOSE OF BUSINESS. 4. ON FACTS AND CIRCUMSTANCES PREVAILING IN THE CAS E AND AS PER PROVISIONS OF LAW IT BE HELD THAT DISALLOWANCE OF RS. 20 000/- RETAINED OUT OF OFFICE AND GENERAL EXPENSES ADMIN ISTRATIVE EXPENSES ARE BASED ON GUESS WORK AS WELL AS MISAPPR EHENSION ON THE PART OF THE AUTHORITIES BELOW. THE DISALLOWANC E SO MADE BE DELETED. 5. ON FACTS AND CIRCUMSTANCES PREVAILING IN THE CAS E AND AS PER PROVISIONS OF LAW IT BE HELD THAT DISALLOWANCE OF RS. 1 000/- U/S. 14A RETAINED OUT OF MANAGERIAL ADMINISTRATIVE AND OTHER OVERHEADS IS BASED ON GUESS WORK AND WITHOUT HAVING ANY SUPP ORTING EVIDENCE IN THIS BEHALF. IT FURTHER BE HELD THAT DI SALLOWANCE SO MADE IS WITHOUT PROPERLY APPRECIATING THE FACTS PREVAIL ING IN THE CASE AND THE SAME IS NOT IN ACCORDANCE WITH THE PROVISIONS O F THE ACT. THE DISALLOWANCE U/S. 14A SO MADE BE DELETED. 6. ON FACTS AND CIRCUMSTANCES PREVAILING IN THE CAS E AND AS PER PROVISIONS OF LAW IT BE HELD THAT DEDUCTION U/S. 8 0HHC SHOULD HAVE BEEN COMPUTED BEFORE DEDUCTION OF UNABSORBED DEPRE CIATION PERTAINING TO THE EARLIER YEARS AMOUNTING TO RS. 3 0 17 455/-. JUST & PROPER RELIEF BE GRANTED TO THE APPELLANT IN THIS SCORE. ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 53 7. ON FACTS AND CIRCUMSTANCES PREVAILING IN THE CAS E AND AS PER PROVISIONS OF LAW INTEREST ON DELAYED RECEIPT RS. 7 22 139/- SALES TAX REFUND RS. 6 22 456/- & OTHER INTEREST OF RS. 9 209/- BE ASSESSED AS BUSINESS INCOME INSTEAD OF THE SAME BEI NG ASSESSED UNDER THE HEAD INCOME FROM OTHER SOURCES & SAME B E TREATED AS FORMING PART OF THE BUSINESS INCOME ELIGIBLE FOR TH E PURPOSE OF COMPUTATION OF CLAIM U/S. 80HHC. 8. ASSUMING WITHOUT ADMITTING THAT THE INTEREST ON FIXED DEPOSIT AMOUNTING TO RS.15 10 562/- IS TO BE TREATED AS IN COME FROM OTHER SOURCE THEN IT SHOULD HAVE BEEN NETTED OFF BEFORE IT WAS CONSIDERED FOR THE PURPOSE OF EXCLUSION OF THE SAME FROM THE COMPUTATION OF ELIGIBLE CLAIM U/S. 80HHC. 9. IT FURTHER BE HELD THAT DEDUCTION OF 90% BE REST RICTED WITHIN THE MEANING EXPLANATION (BAA)(I) TO THE SEC. 80HHC ONLY TO THE NET INTEREST INCOME & NOT THE GROSS INTEREST INCOME. JU ST & PROPER RELIEF BE GRANTED TO THE APPELLANT IN THIS OFFICE. GROUND NO. 1 12. THE LD. A.R. SUBMITTED THAT THE ASSESSEE DOES NOT WISH TO PRESS THIS GROUND. THE GROUND IS ACCORDINGLY REJECTED AS WITHDRAWN. GROUND NO. 2 13. THE ASSESSEE CLAIMED EXPENSES OF RS.9 04 662/- CONSISTING OF RS.2464/- TOWARDS CAKE AND BISCUITS RS. 5 13 204/ - TOWARDS ROOM EXPENSES AND RS. 1 61 432/- TOWARDS STAFF WELFARE E XPENSES. THE A.O. DISALLOWED RS. 50 000/- OUT OF THE CLAIMED AMOUNT O N THE BASIS THAT BILLS WERE NOT VERIFIABLE HENCE PERSONAL ELEMENT IN THE EXPENSES COULD NOT BE RULED OUT. THE ASSESSEE OBJECTED THE SAME ON THE B ASIS THAT THE DISALLOWANCE IS BASED ON ESTIMATION WITHOUT ANY EVIDENCE AND SUPPORTING JUSTIFYING REASONS. IT WAS SUBMITTED TH AT THE ASSESSEE ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 54 COMPANY HAS GOT ABOUT 180 STAFF AND WORKERS TO WHO M THE ASSESSEE PROVIDES REGULAR TEA DURING THE OFFICE HOURS FROM I TS CANTEEN HENCE THERE WAS NO QUESTION OF PERSONAL EXPENSES. IT WAS ALSO PLEADED THAT TURNOVER OF THE ASSESSEE IS ABOUT RS. 20 CRORES AND THE CLA IMED EXPENDITURE ON STAFF AND WELFARE IS JUST .3% WHICH IS VERY REASO NABLE. CONSIDERING TOTALITY OF THE FACTS ON THE ISSUE THE LD CIT(A) H AS RESTRICTED THE DISALLOWANCE TO RS. 15 000/-. 14. SIMILAR ARGUMENTS HAVE BEEN ADVANCED BY THE LD. A.R. IN SUPPORT OF THE GROUND. HE PLACED RELIANCE ON THE DECISION OF HONBLE GUJARAT HIGH COURT IN THE CASE OF SAYAJI IRON & STEEL COMPANY LT D. 254 ITR 749 (GUJ.). THE LD. D.R. ON THE OTHER HAND TRIED TO JUSTIFY T HE FIRST APPELLATE ORDER ON THE ISSUE. 15. CONSIDERING THE ABOVE SUBMISSION WE FIND THAT KEEPING IN MIND THE ARGUMENTS ADVANCED BY THE ASSESSEE TO JUSTIFY T HE CLAIMED EXPENSES THE LD CIT(A) HAS ALREADY GIVEN SUFFICIENT RELIEF E VEN IN ABSENCE OF REBUTTAL TO THE OBSERVATION OF THE A.O THAT THESE WERE NOT VERIFIABLE. SINCE THE ASSESSEE HAS NOT BEEN ABLE TO IMPROVE ITS CASE BEFORE THE TRIBUNAL WE DO NOT FIND REASON TO INTERFERE WITH THE FINDING OF LD CIT(A) ON THE ISSUE. THE SAME IS UPHELD. GROUND NO. 2 IS ACCORDINGLY REJECTED. GROUND NO. 3 16. THE ASSESSEE CLAIMED RS. 7 30 000/- INCURRED ON GRANT OF LICENCE TO USE THE SOFTWARE AS REVENUE EXPENDITURE. THE A.O WAS OF THE VIEW THAT LICECE TO USE THE SOFTWARE IN QUESTION WAS IN THE N ATURE OF DURABLE BENEFITS TO THE ASSESSEE HENCE HE TREATED THE SAME AS CAPITAL EXPENDITURE. AT THE SAME TIME HE OBSERVED THAT SO FTWARE BEING ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 55 INSEPARABLE PART OF OVERALL WORKING OF THE COMPUTE R DEPRECIATION HE ALLOWED DEPRECIATION ON THOSE SOFTWARE AT THE RATE OF 60%. 17. BEFORE THE LD CIT(A) IT WAS ARGUED ON BEHALF O F THE ASSESSEE THAT LOOKING TO THE SIZE OF THE COMPANY OPERATION AND TH E REQUIREMENTS OF THE COMPETITIVE WORLD IT WAS ESSENTIAL ON THE PART OF THE ASSESSEE TO INTEGRATE THE VARIOUS FUNCTIONS OF THE BUSINESS AN D TO HAVE EFFECTIVE CONTROL OVER THE ORGANIZATION THE ASSESSEE FELT TH AT EXISTING SOFTWARE WAS NOT ADEQUATE AND REPLACE IT TO GET THE APPROP RIATE OUTPUT FROM A NEW COMPUTER SOFTWARE SYSTEM. IT WAS SUBMITTED THA T THE SOFTWARE OBTAINED WAS RELATED TO ALL THE AREAS OF OPERATION S VIZ. ACCOUNTS PURCHASE SALE AND PRODUCTION OPERATION OF THE COMP ANY TO STREAMLINE THE SAME. DUE TO EVER CHANGING TECHNOLOGY THE ASSESSE E REQUIRES TO CHANGE THE SOFTWARE IN SHORT SPAN OF TIME. FOR THI S REASONS BY AND LARGE ANY SOFTWARE BECOMES OUTDATED VERY SOON DUE TO TECHNOLOGICAL OBSOLETENESS. IT WAS CONTENDED THAT THE ADVANTAGE DERIVED FROM SOME SYSTEM THEREFORE CANNOT BE CALLED AS AN EXPENDITU RE GIVING ENDURING BENEFIT. 18. CONSIDERING THE ABOVE SUBMISSION THE LD CIT(A) OBSERVED THAT THE SOFTWARE RELATES TO THE AREAS OF OPERATION VIZ-A-V IZ ACCOUNTS PURCHASES SALES AND PRODUCTION OPERATION OF THE COMPANY. HE HELD THAT AS FAR AS THE SOFTWARE RELATING TO THE ACCOUNT PURCHASES SA LES IS CONCERNED THE SAME CAN BE SAID TO BE OF THE REVENUE NATURE BECAUS E IT IS NOT PART OF THE PROFIT EARNING APPARATUS BUT IT IS A PART OF PROFI T EARNING PROCESS. HE ACCORDINGLY RELYING UPON THE DECISIONS CITED BY TH E ASSESSEE HELD THAT EXPENDITURE IN RELATION TO THE SOFTWARE WHICH RELAT ES TO THE AREAS OF OPERATION IN ACCOUNTS AND PURCHASES AND SALES CAN B E SAID TO BE OF REVENUE NATURE. SO FAR AS THE SOFTWARE RELATED TO PRODUCTION OPERATION OF ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 56 THE COMPANY IS CONCERNED HE HELD THAT THE SAME CAN NOT BE SAID TO BE OF REVENUE NATURE BECAUSE SUCH SOFTWARE IS NOT PART OF THE PROFIT EARNING PROCESS BUT IT IS A PART OF THE PROFIT EARNING APP ARATUS ITSELF. HE THUS FOLLOWING THE DECISION OF HONBLE RAJASTHAN HIGH C OURT IN THE CASE OF CIT VS. ARAWALLI CONSTRUCTION COMPANY PVT. LTD. 259 ITR 30 (RAJASTHAN) HELD THAT ANYTHING WHICH IS PART OF THE PROFIT EARNING A PPARATUS ITSELF HAS TO BE CAPITAL EXPENDITURE. SINCE THE BIFURCATION WAS NO T AVAILABLE ON RECORD THE LD CIT(A) DIRECTED THE A.O TO EXAMINE THE ISSU ES AND TREAT THE EXPENDITURE AS OF CAPITAL NATURE RELATED TO THE PRO DUCTION OPERATION OF THE COMPANY AND THE EXPENDITURE WHICH IS UNRELATED TO T HE PRODUCTION ACTIVITY BUT RELATED TO THE ACCOUNTS AND MANAGEMENT AS REVENUE EXPENDITURE. HE DIRECTED FURTHER THAT IF IT IS NOT POSSIBLE FOR THE ASSESSEE TO FURNISH THE DETAILS AND INFORMATION IN THAT CAS E THE ENTIRE EXPENDITURE HAS TO BE TREATED AS CAPITAL EXPENDITURE. 19. BEFORE THE TRIBUNAL THE LD. A.R. WHILE REITERA TING THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW PLACED RELIANCE ON THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF AMWAY INDIA 111 ITD 112 (SPECIAL BENCH) AND ON THE RECENT DECISION OF HONB LE BOMBAY HIGH COURT IN THE CASE OF CIT VS. RAYCHEM RPG LTD. ITA NO. 1476 OF 2009 DATED 4 TH JULY 2011. THE LD. D.R. ON THE OTHER HAND TRIE D TO JUSTIFY THE FIRST APPELLATE ORDER. 20. HAVING GONE THROUGH THE DECISIONS RELIED UPON BY THE LD. A.R WE FIND THAT THE HONBLE JURISDICTIONAL BOMBAY HIGH C OURT IN THE CASE OF CIT VS. RAYCHEM RPG LTD. (SUPRA) HAS APPROVED THE DECI SION OF THE TRIBUNAL BASED ON THE DECISION OF SPECIAL BENCH OF THE TRIBU NAL IN THE CASE OF AMWAY INDIA (SUPRA). THE TRIBUNAL IN THE CASE OF R AYCHEM RPG LTD. HELD THAT WHEN FUNCTIONAL TEST SUGGESTED BY SPECIA L BENCH OF THE ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 57 TRIBUNAL IS APPLIED THEY FIND THAT THE GROUND THA T SOFTWARE DOES NOT FORM PART OF THE PROFIT MAKING APPARATUS OF THE ASSESSEE AND HENCE THE SAME IS TO BE DISALLOWED AS REVENUE EXPENDITURE. THE TR IBUNAL OBSERVED THAT THE BUSINESS OF THE ASSESSEE COMPANY WAS THAT OF MA NUFACTURING TELECOMMUNICATION AND POWER CABLE ACCESSORIES AND T RADING IN OIL RE- TRACING SYSTEM & OTHER PRODUCTS AND IMPUGNED SOFT WARE IS AN ENTERPRISES RESOURCES PLANNING (ERP) PACKAGE AND H ENCE ITS FACILITATES THE ASSESSEES TRADING OPERATIONS OR ENABLING THE M ANAGEMENT TO CONDUCT THE ASSESSEES BUSINESS MORE EFFICIENTLY OR MORE PR OFITABLY BUT IT IS NOT IN THE NATURE OF PROFIT MAKING APPARATUS. IN OUR VIE W THERE IS NO DOUBT THAT SOFTWARE GENERALLY BRINGS BUSINESS ADVANTAGE S WHICH CONSISTS OF FACILITATING THE ASSESSEES BUSINESS OPERATIONS. THUS EVEN THOUGH THE SOFTWARE DOES NOT DIRECTLY CONTRIBUTE TO THE PROFIT EARNING PROCESS OF AN ENTERPRISE IT CERTAINLY NECESSARY FOR THE EFFECTIV E MANAGEMENT AND CONDUCT OF THE BUSINESS. KEEPING IN VIEW THE DYNAM ICS AND UNCERTAINTY INVOLVED IN OBTAINING ENDURING BENEFITS FROM SOFTWA RE WE ARE OF THE VIEW THAT THE EXPENDITURE OF SOFTWARE DOES NOT PARTAKE T HE NATURE OF CAPITAL EXPENDITURE. UNDER THESE CIRCUMSTANCES WE ARE OF THE VIEW THAT EVEN ON PROPER ANALYSIS OF FUNCTIONING ONE WOULD COME T O THE CONCLUSION THAT EVEN IF FOR ARGUMENTS SAKE IT BRINGS BENEFITS OF E NDURING NATURE THE SAME IS IN REVENUE FIELD AND NOT IN CAPITAL FIELD S INCE IT IMPROVES AND HELPS THE ADMINISTRATION AND DAY TO DAY WORKING OF AN ORGANIZATION. WE THUS DO NOT AGREE WITH THE APPROACH OF THE LD CIT(A ) ON THE ISSUE AND RESPECTFULLY FOLLOWING THE DECISION OF HONBLE BOMB AY HIGH COURT IN THE CASE OF CIT VS. RAYCHEM RPG LTD. (SUPRA) HOLD THAT THE CLAIMED EXPENDITURE OF RS. 7 30 000/- IS OF REVENUE NATURE. WE THUS DIRECT THE A.O TO ALLOW THE CLAIMED REVENUE EXPENDITURE. THE GROUND NO. 3 IS ACCORDINGLY ALLOWED. ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 58 GROUND NO. 4 21. IN THE PROFIT & LOSS ACCOUNT THE ASSESSEE HAD DEBITED THE FOLLOWING EXPENSES : I) OFFICE & GENERAL EXPENSES RS. 243595 II) ADMINISTRATIVE EXPENSES RS. 8048 III) POOJA EXPENSES RS. 12083 IV) CLUB PAYMENT RS. 103760 V) ENTERTAINMENT (RESTAURANT) RS. 2 4480 EXPENSES VI) GIFTS/PRESENTS RS. 43481 THE A.O. DISALLOWED A SUM OF RS. 80 000/- OUT OF TH E ABOVE EXPENDITURE ON THE BASIS THAT PERSONAL AND NON-BUSINESS ELEMEN T IN MANY OF THE EXPENSES ARE INVOLVED. 22. BEFORE THE LD. CIT(A) THE ASSESSEE SUBMITTED T HAT THE DISALLOWANCE HAS BEEN MADE ON PRESUMPTION AND THAT THE PERSONAL AND NON-BUSINESS EXPENDITURE ARE INCLUDED IN THE EXPENDITURE REFERRE D ABOVE. IT WAS CONTENDED THAT THE A.O HAS NOT POINTED OUT THE DE TAILS OF SUCH NON- BUSINESS EXPENSES IF ANY. THE ASSESSEE ALSO FILED LEDGER ACCOUNTS OF ALL THE EXPENSES WITH THIS SUBMISSION THAT THESE EXPENS ES HAVE BEEN INCURRED IN ORDINARY COURSE OF BUSINESS AND ARE THU S ALLOWABLE. CONSIDERING THE TOTALITY OF THE CIRCUMSTANCES THE LD CIT(A) HAS RESTRICTED THE ADDITION TO RS. 20 000/-. 23. SIMILAR ARGUMENTS HAVE BEEN ADOPTED BY THE LD. A.R. IN SUPPORT OF THE GROUND BEFORE THE TRIBUNAL. THE LD. D.R. ON THE OTHER HAND TRIED TO JUSTIFY THE FIRST APPELLATE ORDER. ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 59 24. CONSIDERING THE SUBMISSIONS WE FIND THAT THE L D. CIT(A) KEEPING IN MIND THE CASES OF THE PARTIES ON THE ISSUE HAS ALRE ADY GIVEN SUFFICIENT RELIEF. THE SAME IS UPHELD. THE GROUND NO. 4 IS A CCORDINGLY REJECTED. GROUND NO. 5 25. THE A.O DISALLOWED A SUM OF RS. 25 000/- U/S. 1 4A WITH THIS OBSERVATION THAT THE ASSESSEE HAD INCURRED THE MAN AGERIAL AND ADMINISTRATIVE AND OTHER OVERHEAD COSTS TO EARN THE INCOME OF THE DIVIDEND OF RS. 19 52 949/-. IT IS PERTINENT TO ME NTION OVER HERE THAT THE EXEMPTED DIVIDEND WAS RS. 18 85 224/- WHICH WAS CLA IMED AS EXEMPT U/S. 10(33) OF THE ACT. 26. BEFORE THE LD CIT(A) THE ASSESSEE FURNISHED D ETAILS OF ENTIRE DEALINGS IN SHARES AND MUTUAL FUNDS ALONG WITH THE DIVIDEND CLAIMED AS EXEMPT. IT WAS SUBMITTED THAT THE MOST OF THE DIVI DEND HAS BEEN EARNED FROM ONE TIME INVESTMENT IN MUTUAL FUNDS AND THERE WAS NO COST INCURRED EITHER ADMINISTRATIVE OR OTHERWISE AS IS PRESUMED W ITHOUT ANY EVIDENCE BY THE A.O. CONSIDERING THIS SUBMISSION THE LD CI T(A) HAS RESTRICTED THE ADDITION TO RS. 1000/-. 27. SIMILAR ARGUMENTS HAVE BEEN ADVANCED BY THE LD. A.R. BEFORE THE TRIBUNAL. WE ARE OF THE VIEW THAT THE LD CIT(A) H AS DULY CONSIDERED BOTH THE SUBMISSIONS AND AGREEING WITH IT HE HAS ALREAD Y GIVEN SUFFICIENT RELIEF BY RESTRICTING THE DISALLOWANCE TO RS. 1000/- FROM RS. 25000/- MADE BY THE A.O. THE FIRST APPELLATE ORDER ON THE ISSUE IS THUS UPHELD. THE GROUND NO. 5 IS ACCORDINGLY REJECTED. GROUND NO. 6 ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 60 28. THE LD. A.R. FAIRLY WITHDREW THIS AMOUNT WITH THIS SUBMISSION THAT THE ISSUE RAISED IS COVERED AGAINST THE ASSESSEE B Y THE DECISION OF HONBLE JURISDICTIONAL BOMBAY HIGH COURT IN THE CAS E OF SUDARSHAN CHEMICALS LTD. 245 ITR 769 (BOM.). THE GROUND IS ACCORDINGLY REJECTED. GROUND NOS. 7 & 8 29. THE GRIEVANCE OF THE ASSESSEE IN THESE GROUNDS IS THAT INTEREST ON FIXED DEPOSIT AMOUNTING TO RS. 15 10 562/- INTERES T ON DELAYED RECEIPT OF RS. 7 22 139/- SALES TAX REFUND OF RS. 6 22 456 /- AND OTHER INTEREST OF RS. 9 209/- BE ASSESSED AS BUSINESS INCOME INSTEAD OF THE SAME BEING ASSESSED UNDER THE HEAD INCOME FROM OTHER SOURCES AND SAME BE TREATED AS FORMING PART OF THE BUSINESS INCOME ELI GIBLE FOR THE PURPOSE OF COMPUTATION OF CLAIM U/S. 80 HHC. 30. BEFORE THE TRIBUNAL THE LD. A.R. SUBMITTED TH AT EVEN THOUGH VIDE PARA NO. 8.4 OF THE FIRST APPELLATE ORDER THE LD C IT(A) HAS DISCUSSED THIS ISSUE BUT HE HAS NOT GIVEN ANY FINDING THEREON. H E SUBMITTED THAT EVEN FOR THE SAKE OF ARGUMENT IT IS ADMITTED THAT THE I NTEREST ON FIXED DEPOSITS AMOUNTING TO RS. 15 10 562/- IS TO BE TREA TED AS INCOME FROM OTHER SOURCES THEN IT SHOULD HAVE BEEN NETTED OFF BEFORE IT WAS CONSIDERED FOR THE PURPOSE OF EXECUTIONS OF THE SAM E FROM THE COMPUTATION OF ELIGIBLE CLAIM U/S. 80 HHC OF THE A CT. HE SUBMITTED FURTHER THAT SO FAR AS THE INCOME FROM CUSTOMERS O N DELAYED PAYMENTS OF RS. 722139/- AND THE SALES TAX REFUND OF RS. 6 22 4 50/- RE CONCERNED THE SAME WERE REQUIRED TO BE TREATED AS BUSINESS IN COME FOR THE COMPUTATION OF CLAIM U/S. 80HHC OF THE ACT. IN SUP PORT HE PLACED RELIANCE ON THE DECISION OF HONBLE BOMBAY HIGH COU RT IN THE CASE OF ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 61 ALPHA LAVAL LTD. 266 ITR 418 (BOM.). THE LD. A.R. ARGUED FURTHER THAT THE LD CIT(A) HAS GIVEN CLEAR FINDING ON THE ISSUE DISCUSSED BY HIM IN PARA NOS. 26 & 27 OF THE FIRST APPELLATE ORDER. 31. THE LD. D.R. ON THE OTHER HAND TRIED TO JUSTI FY THE FIRST APPELLATE ORDER ON THE ISSUE RAISED IN THE GROUNDS. 32. HAVING GONE THROUGH THE ORDERS OF THE AUTHORIT IES BELOW WE FIND THAT THE LD CIT(A) HAS DEALT WITH THE ISSUES RAISE D IN THE GROUNDS AT PAGE NOS. 20 TO 27 OF THE FIRST APPELLATE ORDER. S O FAR AS RELIANCE ON THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE O F ALPHA LAVAL LTD. VS. CIT (SUPRA) RELIED UPON BY THE LD. A.R. IS CONCERNE D THE LD CIT(A) HAS TRIED TO DISTINGUISH THIS DECISION ON THE ISSUE PER TAINING TO THE INTEREST FROM CUSTOMERS SALES TAX SET OFF AND OTHER REFUND CLAIMS ETC. BEING NOT TREATED AS PART OF THE BUSINESS PROFIT THE HONBLE BOMBAY HIGH COURT HAS DECIDED THE ISSUES IN FAVOUR OF THE ASSES SEE MAINLY ON THE BASIS THAT THE A.O HAS NOT ASSESSED THE INTEREST IN COME FROM THE CUSTOMERS AND SALES TAX SET OFF UNDER THE HEAD INC OME FROM OTHER SOURCES. HAVING GONE THROUGH THIS DECISION OF HON BLE BOMBAY HIGH COURT WE ALSO CONCUR WITH THE ABOVE OBSERVATION OF THE LD CIT(A) THAT IN THAT CASE BEFORE THE HONBLE HIGH COURT THE INTERE ST INCOME FROM CUSTOMERS AND SALES TAX SET OFF HAVE BEEN COMPUTED AND ASSESSED BY THE A.O UNDER THE HEAD PROFITS AND GAINS OF BUSINE SS OR PROFESSION AS PART OF THE OPERATIONAL INCOME AND NOT UNDER THE HE AD INCOME FROM OTHER COURSE. UNDER THESE CIRCUMSTANCES THE ISSU ES HAVE BEEN DECIDED BY THE HONBLE BOMBAY HIGH COURT IN FAVOUR OF THE A SSESSEE. THE HONBLE HIGH COURT HAS GIVEN REFERENCE OF EARLIER DECISION OF BOMBAY HIGH COURT IN THE CASE OF BANGALORE CLOTHING CO. 260 ITR 3 71(BOM.) HOLDING THAT THE A.O MUST ASCERTAIN THE NATURE OF RECEIPT IN EAC H CASE INDEPENDENTLY. ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 62 INTEREST INCOME MAY OR MAY NOT BE OUT OF THE BUSINE SS ACTIVITY. IN THE PRESENT CASE BEFORE US WE FIND THAT THE A.O HAS EX AMINED THE ISSUE OF INTEREST ON DELAYED RECEIPT FROM THE CUSTOMERS AND SALES TAX REFUND INTEREST RECEIVED ON FIXED DEPOSIT AND OTHERS ETC. AND HAS COME TO THE CONCLUSION THAT THESE ARE INCOME FROM OTHER SOURCES ADMISSIBLE FOR DEDUCTION U/S. 80 HHC OF THE ACT. WE ARE ALSO OF T HE VIEW THAT THE LD CIT(A0 HAS RIGHTLY UPHELD THIS ACTION OF THE A.O BE CAUSE THE ABOVE MENTIONED RECEIPT CAN NOT BE SAID TO BE PART OF BUS INESS INCOME FOR CONSIDERATION OF DEDUCTION U/S. 80HHC OF THE ACT IN ABSENCE OF THEIR DIRECT NEXUS WITH THE ELIGIBLE BUSINESS OF THE ASSE SSEE. THE FIRST APPELLATE ORDER IN THIS REGARD IS THUS UPHELD. GROUND NOS. 7 & 8 ARE ACCORDINGLY REJECTED. GROUND NO. 9 33. IN SUPPORT OF THIS GROUND THE LD. A.R. CONTEND ED THAT DEDUCTION OF 90% BE RESTRICTED WITHIN THE MEANING OF EXPLANATION OF (BAA)(I) TO SECTION 80 HHC ONLY TO THE NET INTEREST INCOME AND NOT TO THE GROSS INTEREST INCOME. 34. IT IS AN ESTABLISHED POSITION OF LAW THAT NETTI NG OF INTEREST FOR THE PURPOSE OF DEDUCTION CAN BE ALLOWED ONLY WHEN THE A SSESSEE IS ABLE TO ESTABLISH NEXUS BETWEEN THE INCOME EARNED AND EXPEN DITURE INCURRED FOR EARNING THAT INCOME OF INTEREST. NO SUCH NEXUS HAS BEEN ESTABLISHED BY THE ASSESSEE TO JUSTIFY THE CLAIM OR GRIEVANCE RAIS ED IN GROUND NO. 9. WE THUS DO NOT FIND SUBSTANCE IN GROUND NO. 9. THE SA ME IS REJECTED. 34. IN RESULT APPEAL IS PARTLY ALLOWED. ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 63 ITA NO. 1386/PN/2007 35. THE REVENUE HAS QUESTIONED FIRST APPELLATE ORDE R ON THE FOLLOWING GROUNDS : 1.1 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE THE LD. CIT(A) ERRED IN DIRECTING TO EXCLUDE SALES TAX AND EXCISE DUTY FROM THE TOTAL TURNOVER FOR THE PURPOSE OF CALCULATING D EDUCTION U/S. 80HHC. 1.2 THE LD. CIT(A) FAILED TO APPRECIATE THE FACT TH AT THE HONBLE SUPREME COURT IN THE CASE OF CHOWRINGHEE SALES BURE AU PVT. LTD. 87 ITR 542 AND THE HON. BOMBAY HIGH COURT IN THE CA SE OF HINDUSTAN PETROLEUM CORPORATION LTD. (143 ITR 318) HELD THAT THE AMOUNT OF EXCISE DUTY AND/OR SALES TAX COLLECTED BY THE ASSESSEE FORM PART OF THE SALE PRICE AND HENCE GETS NATURALL Y INCLUDED IN THE TURNOVER. 1.3 THE LD. CIT(A) HAS ERRED IN DIRECTING THE REMOV AL OF RENT OF RS. 12 19 500/- MISCELLANEOUS RECEIPT OF RS. 42 55 0/- AND EXCHANGE FLUCTUATION RECEIPT OF RS. 13 12 994/- FRO M THE TOTAL TURNOVER OF BUSINESS; AS THE CORRESPONDING INCOME HAS BEEN TREATED AS BUSINESS INCOME BY THE ASSESSEE ITSELF THEREFORE THOSE ALSO FORM PART OF THE TURNOVER FOR THE PURPOSES OF COMPUTATION OF DEDUCTION U/S. 80 HHC OF THE I.T. ACT. 36. GRIEVANCE OF THE REVENUE IN THE ABOVE GROUNDS I S THAT THE LD CIT(A) HAS ERRED IN DIRECTING TO EXCLUDE SALES TAX EXCISE DUTY RENT AND MISCELLANEOUS RECEIPT EXCHANGE FLUCTUATION RECEIPT FROM THE TOTAL TURNOVER OF BUSINESS FOR THE COMPUTATION OF DEDUCTI ON U/S. 80 HHC OF THE ACT. 37. AT THE OUTSET OF HEARING THE LD. A.R. POINTED OUT THAT THE ISSUE RAISED IN GROUND NOS. 1.1 AND 1.2 REGARDING THE EX CLUSION OF SALES TAX AND EXCISE DUTY FROM THE TOTAL TURNOVER FOR COMPUTA TION OF DEDUCTION U/S. ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 64 80HHC IS CONCERNED THE SAME IS FULLY COVERED BY TH E DECISION OF HONBLE SUPREME COURT IN THE CASE OF CIT VS. LAXMI MACHINE WORKS 290 ITR 667. HAVING GONE THROUGH THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CIT VS. LAXMI MACHINE WORKS (SUPRA) WE FIND THAT THE HONBLE SUPREME COURT ON THE ISSUE HAS BEEN PLEASED TO HOLD THAT EX CISE DUTY AND SALES TAX CANNOT FORM PART OF TURNOVER AS THEY DO NOT EM ANATE FROM SUCH TURNOVER. IN VIEW OF THIS SETTLED POSITION OF LAW BY THE HONBLE SUPREME COURT WE DO NOT FIND INFIRMITY IN THE FIRST APPELL ATE ORDER ON THE ISSUE WHEREBY THE LD CIT(A) HAS DIRECTED THE A.O TO EXCL UDE SALES TAX AND EXCISE DUTY FROM THE TOTAL TURNOVER FOR THE PURPOS E OF COMPUTING DEDUCTION U/S. 80 HHC OF THE ACT. THE SAME IS UPHE LD. GROUND NOS. 1.1 & 1.2 ARE THUS REJECTED. 38. IN GROUND 1.3 THE REVENUE HAS QUESTIONED FIRST APPELLATE ORDER IN DIRECTING THE A.O FOR REMOVAL OF RENT OF RS. 12 19 500/- AND MISCELLANEOUS RECEIPT OF RS. 42 550/- AND EXCHANGE FLUCTUATION RECEIPT OF RS. 13 12 904/- FROM THE TOTAL TURNOVER OF THE B USINESS FOR THE PURPOSE OF COMPUTATION OF DEDUCTION U/S. 80 HHC OF THE ACT. 39. THE LD. A.R. POINTED OUT THAT THE ISSUE RAISED IN THE GROUND ARE ALSO FULLY COVERED BY THE DECISION OF HONBLE KERALA HIG H COURT IN THE CASE OF CIT VS. K. RAJENDRANATH NAIR & OTHER 265 ITR 35 (K ER.) AND BY THE DECISION OF HONBLE MADRAS HIGH COURT IN THE CASE O F CIT VS. MADRAS MOTORS LTD. 257 ITR 60 (MAD). 40. HAVING GONE THROUGH THE ABOVE CITED DECISIONS WE FIND THAT THE HONBLE KERALA HIGH COURT IN THE CASE OF CIT VS. K . RAJENDRANATH NAIR & OTHER (SUPRA) HAS BEEN PLEASED TO HOLD THAT INCOME EARNED BY PROCESSING GOODS BELONGING TO THIRD PERSONS CAN NOT BE HELD P ART OF TURNOVER FOR ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 65 PURPOSES OF COMPUTATION OF DEDUCTION U/S. 80HHC OF THE ACT. THE HONBLE HIGH COURT HAS OBSERVED THAT THE WORD TURN OVER IS NOT DEFINED IN THE ACT. GOING BY THE DEFINITION IN THE SALES TAX ACT OF THE WORD TURNOVER IT IS CLEAR THAT THE CONSIDERATION RECE IVED MUST BE FOR THE SALE OF GOODS AND IT MUST BE AVAILABLE WITH THE ASSESSEE FOR BEING TURN OVER OR IN OTHER WORDS IT MUST COME TO THE ASSESSEES T ILL AS MONEY BELONGED TO HIM. IT HAS GOT RELATION TO THE CAPITAL EMPLOYE D IN THE BUSINESS TURNOVER HAS ALSO GOT RELATIONSHIP WITH PROFITS OF THE BUSINESS. IN ORDER THAT AN AMOUNT CAN BE INCLUDED IN THE TOTAL TURNOVE R IT MUST EITHER BE THE PURCHASE PRICE OR SALES PRICE OR SOMETHING INC IDENTAL TO THE TRANSFER OF GOODS DEAL WITH BY THE ASSESSEE. IN OTHER WORDS THE TURNOVER MUST RELATE TO THE PURCHASE AND SALE OF THE GOODS MADE B Y THE ASSESSEE HELD THE HONBLE HIGH COURT. 40.1. IN THE CASE OF CIT VS. LAXMI MACHINE WORKS ( SUPRA) THE HONBLE SUPREME COURT HAS BEEN PLEASED TO HOLD THAT RENT DO ES YIELD PROFITS BUT IT DOES NOT PARTAKE OF THE CHARACTER OF TURNOVER AND T HEREFORE THEY ARE NOT INCLUDIBLE IN TOTAL TURNOVER. THE LD CIT(A) IS THU S JUSTIFIED IN PRESENT CASE TO DIRECT THE A.O TO EXCLUDE RENT OF RS. 12 19 500/ - FROM THE TOTAL TURNOVER OF BUSINESS FOR THE PURPOSE OF COMPUTATIO N OF DEDUCTION U/S. 80HHC OF THE ACT. SIMILAR ARE THE NATURE OF THE MI SCELLANEOUS RECEIPT AND EXCHANGE FLUCTUATION RECEIPTS. THE LD CIT(A) W AS THUS JUSTIFIED IN DIRECTING THE A.O TO EXCLUDE THESE RECEIPTS FROM TH E TOTAL TURNOVER OF THE BUSINESS FOR THE PURPOSE OF COMPUTATION OF DEDUCTIO N U/S. 80 HHC OF THE ACT. THE SAME IS UPHELD. THE GROUND NO. 1.3 IS AC CORDINGLY REJECTED. 41. IN RESULT ITA NO. 1386/PN/2005 PREFERRED BY THE REVENUE IS DISMISSED. ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 66 C.O. NO. 1/PN/2008 & ITA NO.1193/PN/2007 44. THE ASSESSEE HAS OBJECTED THE FIRST APPELLATE O RDER WHEREBY THE LD CIT(A) HAS UPHELD THE VALIDITY OF RE-OPENING OF THE ASSESSMENT PROCEEDINGS U/S. 147 BY ISSUING NOTICE U/S. 48 BY THE A.O. 45. THE CONTENTION OF THE LD. A.R. IS THAT THE A.O HAD NO JURISDICTION TO RE-OPEN THE ASSESSMENT PROCEEDINGS U/S. 147 BY IS SUING THE NOTICE U/S. 148 THUS SUCH NOTICE AS WELL AS ASSESSMENT FRAMED IN CONSEQUENCE OF SUCH NOTICE IS UNWARRANTED AND ILLEGAL. HE SUBMIT TED THAT ALL THE NECESSARY INFORMATION REGARDING RECOVERED LABOUR CH ARGES AND DUTY DRAW BACK WERE FURNISHED BEFORE THE A.O DURING THE COUR SE OF REGULAR ASSESSMENT PROCEEDINGS AND AFTER CONSIDERING THE S AME THE ASSESSMENT WAS FRAMED U/S. 143(3) OF THE ACT. THUS A.O HAD I NITIATED RE-OPENING PROCEEDINGS MERELY ON THE BASIS OF CHANGE OF OPINIO N WHICH IS NOT PERMISSIBLE UNDER THE PROVISIONS OF SEC. 147 OF THE ACT. HE SUBMITTED FURTHER THAT WHILE THE LD CIT(A) HAS UPHELD THE VAL IDITY OF RE-OPENING BUT ON MERITS HE HIMSELF HAS HELD THAT THE ISSUE RAISE D IN THE REASONS FOR RE- OPENING IS FULLY COVERED BY THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF BANGALORE CLOTHING CO. 260 ITR 371 (B OM.). ON THE ISSUE OF VALIDITY OF RE-OPENING THE LD. A.R. HAS PLACE RELI ANCE ON THE FOLLOWING DECISIONS : 1. KELVINATOR INDIA 320 ITR 561 (SC) 2. LEGATO SYSTEMS (I) PVT. LTD. VS. DCIT 231 CTR 526 (DEL.) 46. THE LD. D.R. ON THE OTHER HAND TRIED TO JUSTIFY THE ACTION OF THE FIRST APPELLATE AUTHORITY ON THE ISSUE. HE PLACED RELIA NCE ON THE FOLLOWING DECISIONS : ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 67 1. HONDA SIEL POWER PRODUCTS LTD. VS. DCIT 52 DTR (2011) 353 (DELHI) 2. DALMIA PVT. LTD. VS. CIT 2011-TIOL-628-HC-DEL- I.T. 47. CONSIDERING THE ABOVE SUBMISSIONS WE FIND FRO M THE ORDERS OF THE AUTHORITIES BELOW THAT THE REGULAR ASSESSMENT FRAM ED U/S. 143(3) FOR THE A.Y. 2000-01 WAS REOPENED AFTER RECORDING THE FOLL OWING REASONS TO BELIEVE FOR ESCAPEMENT OF ASSESSABLE INCOME : ON VERIFICATION OF RECORD IT IS SEEN THAT THE DED UCTION U/S 80 HHC HAS BEEN ALLOWED OF RS.56 16 404/- BUT IT IS SEEN T HAT THE A HAS RECOVERED LABOUR CHARGES OF RS.1 23 57 201/- AND T HIS AMOUNT HAS BEEN INCLUDED IN THE TOTAL TURNOVER. HIS INCOME BE ING THE NATURE OF SERVICES RENDERED/JOB WORK DONE & THEREFORE IT IS TO BE CONSIDERED AS INCOME FROM OTHER SOURCES & NOT INCOME DERIVED F ROM MANUFACTURING BUSINESS. THEREFORE HIS INCOME IS R EQUIRED TO BE EXCLUDED FROM THE TOTAL TURNOVER & 90% OF IT IS TO BE REDUCED FROM THE TOTAL PROFIT WHILE CALCULATING DEDUCTION U/S 80 HHC. IT IS ALSO REVEALED THAT A HAS REDUCED RS.71 600 /- DUTY DRAW BACK (EXPORT INCENTIVE) FROM THE TOTAL TURNOVER & ALSO C LAIMED 90% OF IT FROM PROFIT FOR THE PURPOSE OF DEDUCTION U/S. 80HHC . BUT IN VIEW OF THE BOARD CIRCULAR NO. F.NO. 153/93/2004/TPL DT. 08 /09/04 THE COMPUTATION OF DEDUCTION PROVED U/S. 80HHC (3) OF THE IT ACT 1961 DOES NOT COVER PROFIT ON SALE OF DEPB CREDIT. THEREFORE THE EXPORT INCENTIVE (DEPB) IS NOT TO BE CONSIDERED FOR CALCULATION OF DEDUCTION U/S. 80HHC. THIS RESULTED IN UNDER ASSESSMENT OF INCOME BY RS.4 9 48 759/- & SHORT LEVY OF TAX BY RS. 27 74 379/- FOR AY: 01-02 I THEREFORE HAVE REASONS TO BELIEVE THAT INCOME CH ARGEABLE TO TAX HAS BEEN ESCAPED ASSESSMENT WITHIN THE MEANING OF S EC. 147 OF THE IT ACT 1961. ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 68 ISSUE NOTICE U/S 148 OF THE ACT 1961 ACCORDINGLY. 48. WE ARE OF THE VIEW THAT AT THE STAGE OF INITIA TION OF RE-OPENING OF THE ASSESSMENT THE REQUIREMENT ON THE PART OF T HE A.O IS TO HAVE A REASONABLE BELIEF WHICH A PRUDENT PERSON COULD HAV E UNDER SIMILAR CIRCUMSTANCES OF THE CASE THAT CHARGEABLE INCOME HA S ESCAPED ASSESSMENT. IT IS THUS A PRIMA FACIE BELIEF OF AN A.O TO INITIATE THE RE- OPENING PROCEEDINGS BY RECORDING SUCH REASONS TO BELIEF TO ISSUE NOTICE U/S. 148 OF THE ACT AFFORDING AN OPPORTUNITY TO TH E ASSESSEE TO SHOW CAUSE AS TO WHY RE-OPENING PROCEEDINGS SHOULD NOT B E INITIATED AGAINST HIM ON THE BASIS OF THOSE REASONS. AFTER CONSIDER ING THE CAUSE SHOW BY THE ASSESSEE THE AO IF HE IS NOT SATISFIED WITH T HE CAUSE SHOW BY THE ASSESSEE WILL PROCEED FOR RE-ASSESSMENT AND FRAME THE RE-ASSESSMENT ON THOSE ISSUES WHICH IS A SUBMITTING MATTER OF REASON S TO BELIEF AND ANY OTHER INCOME WHICH HE FEELS DURING THE RE-ASSESSMEN T PROCEEDINGS HAS ESCAPED ASSESSMENT. IT IS AN ESTABLISHED POSITION OF LAW THAT SUFFICIENCY OF REASON TO BELIEVE CAN NOT BE QUESTION IN A COUR T OF LAW BECAUSE IT IS ONLY A PRIMA FACIE BELIEF OF THE A.O TO INITIATE RE-OPENING PROCEEDINGS WHICH IS ALWAYS SUBJECT TO FINAL CONCLUSION AFTER HEARING THE ASSESSEE DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS FRA MED U/S. 147 R.W.S. 143(3) OF THE ACT. IN THE PRESENT CASE THE REASO NS SHOWN BY THE A.O FOR THE ESCAPED ASSESSMENT ARE FIRSTLY THE DEDUCTI ON U/S. 80HHC ALLOWED BY INCLUSION OF RECOVERED LABOUR CHARGES OF RS.1 23 57 201/- IN THE TOTAL TURNOVER. THE A.O WAS OF THE VIEW THAT THIS INCOME BEING IN THE NATURE OF SERVICES RENDERED/JOB WORK DONE THEREFORE TO BE C ONSIDERED AS INCOME FROM OTHER SOURCES AND NOT INCOME DERIVED FROM MANU FACTURING BUSINESS. THE A.O THUS FORMED A REASON TO BELIEF THAT THIS INCOME IS REQUIRED TO BE EXCLUDE FROM THE TOTAL TURNOVER AND 90% OF IT IS T O BE REDUCED FROM THE TOTAL PROFIT WHILE CALCULATING DEDUCTION U/S. 80HHC . THE SECOND REASON ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 69 RECORDED BY THE A.O TO INITIATE RE-OPENING PROCEE DINGS REMAINED THAT THE ASSESSEE HAD REDUCED RS.71 600/- DUTY DRAW BACK FROM THE TOTAL TURNOVER AND HAS CLAIMED 90% OF IT FROM PROFIT FOR THE PURPOSE OF DEDUCTION U/S. 80HHC. THE A.O WAS HAVING REASON TO BELIEF THAT THE COMPUTATION OF DEDUCTION PROVIDED U/S. 80HHC (3) O F THE ACT DOES NOT COVER THE PROFIT ON SALE OF DEPB CREDIT THEREFORE THE EXPORT INCENTIVE (DEPB) IS NOT TO BE CONSIDERED FOR CALCULATION OF D EDUCTION U/S. 80HHC. ON PERUSAL OF THIS REASON UNDER THE FACTS AND CIRC UMSTANCES OF THE PRESENT CASE WE ARE OF THE VIEW THAT ANY PRUDENT PERSON IN THE PLACE OF A.O WOULD HAVE FORMED THE ABOVE REASONS TO BELIEVE THAT ASSESSABLE INCOME ON THE ABOVE MATTERS HAS ESCAPED ASSESSMENT TO JUSTIFY INITIATION OF RE-OPENING PROCEEDINGS BY HIM. WE THUS DO NOT F IND INFIRMITY IN THE ACTION OF THE AO FOR INITIATION OF REOPENING PROC EEDINGS IN THE PRESENT CASE. THE ISSUANCE OF NOTICE U/S. 148 TO INITIATE THE RE-OPENING PROCEEDINGS AND THE RE-ASSESSMENT MADE IN FURTHER ANCE THERETO U/S.147 R.W.S. 143(3) ARE VALID. WE THUS DO NOT FIND REASO N TO INTERFERE WITH THE FIRST APPELLATE ORDER ON THE ISSUE RAISED IN THE O BJECTION OF CROSS OBJECTION PREFERRED BY THE ASSESSEE. THE FIRST APP ELLATE ORDER IN THIS REGARD IS THUS UPHELD. THE OBJECTION IS ACCORDINGL Y REJECTED. 49. CONSEQUENTLY CROSS OBJECTION IS DISMISSED. ITA NO. 1193/PN/2007 50. THE REVENUE HAS QUESTIONED FIRST APPELLATE ORDE R ON THE FOLLOWING GROUNDS : 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE CIT(A) ERRED IN HOLDING THAT LABOUR CHARGES ARE PAR T OF THE BUSINESS WITHOUT CONSIDERING THE ISSUES RAISED BY THE AO IN THE ASSESSMENT ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 70 ORDER IN HOLDING THAT THE LABOUR CHARGES ARE SQUAR ELY COVERED IN CHARGES OR ANY OTHER RECEIPTS OF SIMILAR NATURE AS MENTIONED IN EXPLANATION (BAA) OF SEC. 80HHC(4C) AND THEREFORE 9 0% OF THE AMOUNT WAS TO BE REDUCED FOR DETERMINING THE DEDUCT ION UNDER SEC. 80HHC. 2. IN ALLOWING THE ABOVE RELIEF THE CIT(A) HAS ERRE D (A) IN NOT CONSIDERING THE REMAND REPORT SENT IN THE MATTER AN D (B) IN HOLDING THAT THE A.O HAS NOT SENT THE REMAND REPORT WHEN TH E SAME WAS DULY SENT THROUGH LETTER DATED 18/5/07 OF THE A.O. AND FORWARDING LETTER DATED 22/5/07 OF THE RANGE HEAD. 51. SUBSEQUENT TO ESCALATION ASSESSMENT U/S. 143( 3) FOR THE A.Y. 2000-01 THE SUCCEEDING A.O ISSUED NOTICE U/S. 148 FOR RE-OPENING THE REGULAR ASSESSMENT AND FRAMED THE ASSESSMENT U/S. 1 47 R.W.S. 143(3) OF THE ACT. THE AGGRIEVED ASSESSEE WENT IN FIRST APPE AL AND GOT RELIEF ON THE ISSUE OF LABOUR CHARGES WHETHER TO TREAT AS PART OF THE BUSINESS. RELIEF GIVEN BY THE LD CIT(A) IN THIS REGARD HAS BEEN QUES TIONED BY THE REVENUE WHEREAS IN ITS CROSS OBJECTION THE ASSESSEE HAS QU ESTIONED THE VALIDITY OF RE-OPENING UPHELD BY THE LD CIT(A). 52. THE ISSUE RAISED IN THE ABOVE GROUNDS IS AS TO WHETHER LD CIT(A0 WAS JUSTIFIED IN HOLDING THAT LABOUR CHARGES ARE P ART OF THE BUSINESS AND ARE COVERED IN CHARGES OR ANY OTHER RECEIPTS OF SI MILAR NATURE AS MENTIONED IN EXPLANATION (BAA) OF SEC. 80HHC ? 53. THE RELEVANT FACTS ARE THAT DURING THE YEAR TH E ASSESSEE COMPANY RECEIVED LABOUR/PROCESSING CHARGES FROM AQUAZUR IND IA PVT. LTD. FOR MANUFACTURING OF WATER TREATMENT CHEMICALS. IN THE RE-ASSESSMENT U/S. 147 R.W.S. 143(3) OF THE ACT THE A.O HELD THAT THE LABOUR RECEIPTS ARE OUT OF THE INCIDENTAL BUSINESS ACTIVITY AND IT IS NOT CASE THAT THE ASSESSEE HAS PRODUCED SIMILAR MANUFACTURED PRODUCTS ONE FOR HIS EXPORTS AND ONE FOR ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 71 THE CLIENTS FROM WHOM HE RECEIVES LABOUR CHARGES. WITH THIS OBJECTION THE A.O DENIED THE CLAIMED DEDUCTION U/S. 80-HHC OF THE ACT ON THE LABOUR CHARGES. HE HELD THAT THE LABOUR CHARGES OF RS.12 35 720/- ARE SQUARELY COVERED IN CHARGES OR ANY OTHER RECEIPTS OF SIMILAR NATURE AS MENTIONED IN EXPLANATION (BAA) OF SECTION 80HHC (4C ) OF THE ACT THEREFORE HE CONSIDERED 90% OF THE SAID AMOUNT RED UCING FROM THE PROFITS ELIGIBLE FOR DEDUCTION U/S. 80HHC OF THE AC T. 54. BEFORE THE LD CIT(A) THE ASSESSEE CONTENDED T HAT IT WAS SUBMITTED BEFORE THE A.O THAT THE ISSUE OF PROCESS ING CHARGES IS DIRECTLY COVERED BY THE DECISION OF HON BLE BOMBAY HIGH COU RT IN THE CASE OF CIT VS. BANGALORE CLOTHING CO. (SUPRA). BUT WITHOUT E XAMINING AS TO WHETHER SUCH LABOUR CHARGES/PROCESSING CHARGES ARE FORMING PART OF THE OPERATIONAL INCOME THE A.O HAS TAKEN THE ADVERSE VIEW. 55. THE LD. D.R. TRIED TO JUSTIFY THE ASSESSMENT OR DER WHEREAS THE FIRST APPELLATE ORDER ON THE ISSUE HAS BEEN RELIED UPON B Y THE LD. A.R. CONSIDERING THE ABOVE SUBMISSIONS WE FIND THAT THE ISSUE IS FULLY COVERED BY THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. BANGALORE CLOTHING CO. AS THE FATE OF THE ISSUE D EPENDS UPON THE NATURE OF RECEIPT OF LABOUR CHARGES . IN THAT CASE BEFORE THE HONBLE HIGH COURT LABOUR CHARGES WERE FOUND TO BE PART OF OPERATIONAL INCOME AND THUS THE HONBLE COURT WAS PLEASED TO HOLD THAT THE SAME IS NOT TO BE EXCLUDED UNDER EXPLANATION (BAA) TO SECTION 80HHC OF THE ACT . HERE IN THE PRESENT CASE ALSO THE LD CIT(A) HAS NOTED THAT ASSESSEE HA D RECEIVED LABOUR CHARGES FROM AQUAZUR INDIA PVT. LTD. FOR MANUFACTUR ING OF WATER TREATMENT CHEMICALS AND FURTHER THAT THE ASSESSEE W AS ALSO ENGAGED IN THE ACTIVITY OF MANUFACTURING OF WATER TREATMENT CH EMICALS. THE ASSESSEE HAD MANUFACTURED WATER TREATMENT CHEMICALS FOR ITS CLIENT M/S AQUAZUR ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 72 INDIA PVT. LTD. ON LABOUR CHARGES BASIS THROUGH TH E YEAR AND NOT ON STARY OCCASION. UNDER THESE CIRCUMSTANCES AND IN VIEW O F THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF BANGALORE CLOTHING CO. (SUPRA) WE ARE OF THE VIEW THAT LD CIT(A) HAS RIGH TLY HELD THAT A.O WAS NOT JUSTIFIED IN REJECTING ASSESSEES CLAIM THAT IT S CASE IS SQUARELY COVERED BY THE DECISION OF HONBLE BOMBAY HIGH COURT IN TH E CASE OF BANGALORE CLOTHING CO. AND ACCORDINGLY THE LD CIT(A) HAS RIG HTLY ALLOWED THE CLAIMED DEDUCTION TO THE ASSESSEE. THE SAME IS UPH ELD. THE ISSUE IS THUS DECIDED IN FAVOUR OF THE ASSESSEE. RELATED GR OUNDS ARE REJECTED. CONSEQUENTLY APPEAL IS DISMISSED. 56. TO SUM UP RESULT OF THESE APPEALS ITA NOS. 372 /PN/2002 & 1111/PN/2005 ARE PARTLY ALLOWED; MITA NO. 626/PN/20 02 ITA NO. 1386/PN/2005 ITA NO. 1193/PN/2007 & C.O. NO. 01/P N/2008 ARE DISMISSED. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 29TH FEBRUARY 2012. SD/- SD/- ( G.S. PANNU ) ACCOUNTANT MEMBER (I.C. SUDHIR ) JUDICIAL MEMBER PUNE DATED THE 29TH FEBRUARY 2012 US COPY OF THE ORDER IS FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT III PUNEK 4. THE CIT(A)-CONCERNED ITAS . NOS. 372 626/PN/2002 ETC. AQUAPHARM CHEMICAL CO LTD. A.YS. 98-99 2001-02 ETC. PAGE OF 73 73 5. THE D.R. A BENCH PUNE 6. GUARD FILE BY ORDER SENIOR PRIVATE SECRETARY INCOME TAX APPELLATE TRIBUNAL PUNE