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Smartchem Technologies Ltd. Vs. Income Tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Ahmedabad
Decided On
Judge
Reported in(2005)97TTJ(Ahd.)818
AppellantSmartchem Technologies Ltd.
Respondentincome Tax Officer
Excerpt:
1. both these appeals by the assessee are against the order of the cit(a), baroda, dt. 14th aug., 2003 and 22nd feb., 2005, respectively.2. the grounds taken therein are quite argumentative, but at the time of hearing, the parties came to an agreement that the issues involved in these two appeals of the assessee are as under: (i) the first issue relates to the assessee's claim of deduction of an expenditure of rs. 6 crores claimed to have been paid, as non-compete fees to m/s vbc industries ltd. (hereinafter referred to as "vbc") and its founder member, mr. m.v.v.s. murthy, after having purchased vbc's plant for manufacturing nitric acid and ammonium nitrate situated at ponnada srikakulam district, andhra pradesh. (ii) the second issue relates to the consideration of delayed payment of.....
Judgment:
1. Both these appeals by the assessee are against the order of the CIT(A), Baroda, dt. 14th Aug., 2003 and 22nd Feb., 2005, respectively.

2. The grounds taken therein are quite argumentative, but at the time of hearing, the parties came to an agreement that the issues involved in these two appeals of the assessee are as under: (i) The first issue relates to the assessee's claim of deduction of an expenditure of Rs. 6 crores claimed to have been paid, as non-compete fees to M/s VBC Industries Ltd. (hereinafter referred to as "VBC") and its founder member, Mr. M.V.V.S. Murthy, after having purchased VBC's plant for manufacturing nitric acid and ammonium nitrate situated at Ponnada Srikakulam District, Andhra Pradesh.

(ii) The second issue relates to the consideration of delayed payment of employees' contribution to PF as not deductible under Section 36(1)(va) of the Act.

(iii) The third issue relates to disallowance of assessee's claim of deduction of the amounts paid on account of employees' contribution to PF after due dates.

(iv) The fourth issue relates to assessee's claim of depreciation @ 100 per cent in respect of items of plant and machinery entitled to depreciation @ 100 per cent, but made for the first time before the CIT(A).

2.1 Issues involved in ITA No. 654/Ahd/2005 for asst. yr. 2002-03 The issues involved in this appeal were admitted to be read as under: (i) Validity of proceedings under Section 154 of the Act, 1961, by the AO for amendment of assessment under Section 143(1) of the Act, after having issued notice under Section 143(2) of the Act.

(ii) Permissible adjustments under Section 143(1) of the Act, and amending of record for that purpose.

(iii) Levy of interest under Section 234B of the Act and 234D of the Act, 1961. 2.2. Since both the appeals are of the same assessee, we, for the sake of convenience, have decided to dispose of these appeals, by this common/ consolidated order.

4. The brief facts, as have been revealed from the records and relevant for disposal of this appeal, are that the assessee who admittedly, was engaged in business of manufacturing and trading of nitric acid and ammonium nitrate, had filed its return for asst. yr. 2001-02 declaring a loss of Rs. 6,92,03,450 on 31st Oct., 2001 which was processed under Section 143(1) of the Act on 21st Jan., 2002. Later on, proceedings for making assessment under Section 143(3) of the Act, 1961, were initiated by issuing a notice under Section 143(2) of the Act, on 23rd Jan., 2002 which was served on assessee on 25th Jan., 2002. Notice under Section 142(1) of the Act, along with detailed questionnaire was also issued on 28th Jan., 2002 which was served upon the assessee on 29th Jan., 2002.

4.1 The proceedings were attended by the assessee or its Authorised Representative from time-to-time and details asked for (by) the AO, as have been admitted in the assessment order, were filed as per replies dt. 11th Feb., 2002, 25th Feb., 2002, 16th May, 2002 and 21st Dec., 2002 as well as on 4th Jan., 2002 and 7th Feb., 2002.

4.2 Books of account and vouchers thereof were produced and were verified on test-check basis.

4.3 During the course of assessment proceedings, the AO had noticed that the assessee-company, which was formerly known as "Arlem Investment & Finance Ltd." had during the previous year, relevant to asst. yr. 2001-02, acquired an industry/plant manufacturing nitric acid (NA) and ammonium nitrate (AN) belonging to another company styled as M/s VBC Industries Ltd. for a total consideration of Rs. 29 crores. The industry/plant so purchased was to include entire business undertaking situated at Ponada including movable and immovable properties and all other tangible and intangible assets relating to the business of manufacturing of aforesaid chemicals.

4.4 In addition to payment of Rs. 29 crores paid for purchase of the so-called industry/plant manufacturing unit, by whatever name it may be called, the assessee entered into another 'non-compete agreement' with VBC and its founder, Shri M.V.V.S. Murthy as a result of which the assessee paid a lump sum amount of Rs. 6 crores to them. The relevant part of the agreement so entered into has been discussed by the Revenue authorities in their respective order and, therefore, need not to be reproduced here.

4.5 In the books of account, the assessee wrote off l/5th of the expenditure of Rs. 6 crores because the period during which agreement was to remain in force was 5 years, but in the computation of income furnished along with return, the assessee claimed whole of the expenditure of Rs. 6 crores, as revenue expenditure.

4.6 The other facts, which have been brought on record by the AO, are as under: "(i) The assessee-company is headed by Shri S.C. Mehta, who is the director of Deepak Fertilizers and Petrochemicals Corporation Ltd. (DFPCL). The company is under common management and part funding of the acquisition cost was made by DFPCL by way of subscription to preference shares of the company. DFPCL is the largest private sector manufacturer and supplier of nitric acid and ammonium nitrate and is one of the major players in nitric acid (NA) and ammonium nitrate (AN) market. The business of DFPCL is same of manufacturing nitric acid (NA) and ammonium nitrate (AN), which was also the business of VBC Industries Ltd. (ii) M/s VBC Industries Ltd. belonged to group of companies under the leadership of M.V.V.S. Murthy. Originally the group was in the bottling business and subsequently got into a number of business including manufacturing and sale of nitric acid and ammonium nitrate. The plant for manufacturing nitric acid was situated in Ponnada, Srikakulam District, Andhra Pradesh. Out of its two main businesses VBG sold bottling business to Coca-Cola Company Ltd. and another main business of manufacturing of nitric acid and ammonium nitrate to the assessee-company. Thereafter, VBC Industries Ltd. has entered into the business of power generation.

(iii) VBC Ltd. set up its chemical ousiness factory during 1990 to 1994 and started commercial production towards the end of 1994. The technical know-how used by VBC Ltd. was acquired from PDIL Sindhri, Norsk Hydro-Norway and UHDE Germany. The technology was under strict secrecy Clause and with the permission of technology provider, VBC Ltd. has also transferred this to the assessee-company as part of business purchase agreement.

(iv) The associate company of assessee-company DFPCL and transferor-company VBC were producing ammonium nitrate prills by spraying the concentrated ammonium nitrate melt in a vertical priling tower. Ammonium nitrate prills were then dried, cooled, coated and finally packed for supply to explosive and mining industries for blasting purpose. Basic raw material for the product is ammonia and VBC was solely dependent on imported ammonia, " 4.7 The AO, further, stated a fact by observing that since VBC Industries Ltd. was incurring losses, it was not able to compete which was because of the fact that it was depending on imported ammonia this fact was claimed to have been noticed from business purchase agreement--paras 3rd and 4th at page No. 2 of the assessment order, which read as under: "The seller for diverse reasons including increased competitive environment and of captive supply of ammonia is desirous of transferring and selling chemical business including aforesaid plant including the land, 'building and certain other specific assets such as inventories and book debts and liabilities such as bank facilities, etc.

The buyer is diversifying into the business of selling and otherwise dealing in chemical including diluted nitric acid and prilled ammonium nitrate and in a position to effectively utilize the aforesaid plant in expansion of its business activities." In this background, the assessee-company entered into business purchase agreement dt. 22nd March, 2000 under which assessee-company acquired business undertaking by making payment of Rs. 29 crores and further payment towards debtors and inventories on determination on the date of transfer. The definition of acquire business undertaking was defined in art. 1.1(1), p. 3 of the agreement as under : "Acquire business undertaking means of all seller's right, title and interest as on pre-closing or the closing, in respect of chemical business. The seller, as the case may be in and upon to the following : (SIC) In connection with our ongoing assessment for captioned assessment year and as required by your notice No. BRD/ITO/Wd.

4(3)/SPL/133(6)/02-03 dt. 13th Dec., 2002, we give details here below : 1. Non-compete consideration of Rs. 6 crores paid to VBC Industries Ltd. The company had paid Rs. 6 crores to VBC Industries Ltd. towards non-compete consideration. The same had been claimed as revenue expenditure in the year under consideration. In this connection, please find enclosed our detailed submission in Annex. 1.

The company acquired chemical business from VBC Industries Ltd. in March 2000, at the end of long negotiations. The business comprise land, building, plant and machinery, inventory, technical know-how, customer base, employees, power, etc. The business was acquired for lump sum cash consideration of Rs. 29 crores based on commercial negotiations including expected profitability, etc.

VBC Industries Ltd. (VBC) belong to group of companies under the leadership of Shri M.V.V.S. Murthy. Originally, the group was in bottling business and subsequently it got into number of businesses including ferro alloys, nitric acid and ammonium nitrate. VBC had two main businesses viz., Coca-Cola bottling and chemical business, manufacturing nitric acid and ammonium nitrate out of imported ammonia, In the year 1998, VBC sold off its bottling business to Coca Cola Co. Ltd. for cash consideration which was utilized to pay off all debts of VBC (copy of directors report of 27th annual report of VBC is enclosed). At that stage, VBC had option of expanding and running the chemical business or sell off the said chemical business and get into more lucrative business. VBC chose to sell off the chemical business to the company and consider other business lines like power generation, etc.

The acquisition was spearheaded by Shri S.C. Mehta, director of the company, who is also deputy managing director of M/s Deepak Fertilisers and Petrochemicals Corporation Ltd. (DFPCL), with part funding of the acquisition cost from DFPCL by way of subscription to preference shares of the company. DFPCL is the largest private sector manufacturer and supplier of nitric acid and ammonium nitrate. Thus, the company enjoys the support of DFPCL, being one of the major player in nitric acid and ammonium nitrate market.

The acquired chemical business was established by VBC between 1990 and 1994 with commercial production commencing towards end of 1994.

The plant design and production processes for manufacturing nitric acid and ammonium nitrate are based on technical information, documentation and know-how from Projects and Development India Limited (PDIL) Sindri, Dhanbad, Bihar, Norsk Hydro, Norway and UHDE Germany. The technology is tailor-made and under strict secrecy Clause contained in the agreements between VBC and the technology providers. VBC while transferring chemical business had obtained permissions... technology providers for the company to continue using the said ... Copies of agreement of confidentiality regarding aforesaid three ... providers as also permission letters from them are enclosed for your perusal. Thus, the key factor in the entire business is the aforesaid ... backdrop of the above, the company entered into non-compete ...with VBC and its founder promoter Shri M.V.V.S. Murthy. The ... provides for restriction on VBC and Shri M.V.V.S. Murthy to engage in manufacturing, trading or dealing in any manner with nitric acid and ammonium nitrate directly or indirectly for a period of 5 years for a cash consideration of ...

to be paid upfront. The detailed analysis of the agreement vis-a-vis ... circumstances reveal the following : VBC and its founder promoter Shri M.V.V.S. Murthy had acquired technical knowledge of manufacturing nitric acid and ammonium nitrate as also they knew the market, prices, costing, international trends and customers.

Continued existence of 28 years old VBC in original name with key management personnel, business contacts and money received from sale of businesses.

Manufacturing and supply of ammonium nitrate in eastern parts of India has not been adequate as compared to demand for the same from explosives manufacturers catering to major mining areas of east central India. This is mainly because of dwindling production of AN from other manufacturers like SAIL Rourkella and FCI Sindri.

Movement of ammonium nitrate from western part of India to east central would be cost inefficient due to freight. This situation could easily give opportunity of manufacturing/trading in ammonium nitrate for any party knowing the business. As mentioned earlier, VBC possessed necessary technical knowledge for manufacturing and supply of ammonium nitrate.

Considering the above, it was a business necessity for the company to stop VBC and its founder promoter to again enter the business of nitric acid and ammonium nitrate directly or indirectly. In the absence of such agreement, VBC can give directly or indirectly, competition to the company by (1) either manufacturing itself or providing knowledge and management skills to an associate to manufacture nitric acid and ammonium nitrate.

(2) import/procure ammonium nitrate and sell in market place where customers are known to them with registered office having full set up already existing in port area of Vizag.

(3) join hands with any other group or provide technical services related to ammonium nitrate to any such group.

As mentioned earlier, with the backing of DFPCL, STL would not have faced the... or any question on utility/value of its capital assets because of any competition from VBC. Such competition would have certainly made dent in the profitability of the company through reduction in sales realizations till the time company would have warded off such competition. With actual running of ... including running of plant with aforesaid technologies and building relationship with the customer base of VBC, the company would in any case be (in a) position with the customer base of VBC, the company would in any case be (in a) position to face any kind of competition in less than a year's time. However... in profitability in the very first year of operations, would have upset the ... and very purpose of this acquisition for the company. Thus, necessity of ... lies in commercial expediency with a view to protect future revenues in shorter period. It may not be out of place to mention here that in subsequent years starting in middle of 2001, the company has faced severe competition from imported ammonium nitrate in the market place, which ... not threatening the existence of the company, has nevertheless put pressure on the margins of the company. However, as stated earlier with customer relationship already in place, the company has been able to face the competition with restrained margins. This also explains the nature and type of competition thought about in the said non-compete agreement. Thus, with the said agreement in place, the company was able to establish itself in the market place within a year. However, the said agreement has not given any enduring benefit to the company, which is demonstrated by the fact that the company has faced competition (may not be from VBC, but otherwise) in the very second year of its operation.

... Thinking on the subject has also evolved over a period of time to very ... establish that any expenditure to avoid competition with a view to improve profitability, would be a revenue expenditure.

Given below are the few case laws supporting this view : 1. The Privy Council held in Commr. of Taxes v. Nchanga Consolidated Copper Mines Ltd. (1965) 58 ITR 241 (PC) that if, with a view to avoid over-production, the assessee made a payment to another manufacturer in the same field, in consideration of the latter agreeing to cease production, the expenditure would be on revenue account.CIT v. Coal Shipments (P) Ltd. took into account the fiercely competitive nature of modem business, holding that expenditure incurred to keep a competitor out of the assessee's field of business should ordinarily be treated as on revenue account, because such expenditure can be appropriately said, generally speaking, to improve the profitability of the assessee's business.

3. If expenditure incurred on facing and conquering competition (through advertisement, etc.) is allowable as being on revenue account, it is difficult to see why expenditure incurred on avoiding competition should not be.

4. The House of Lords pointed out in IRC v. Canon Company (1968) 45 Tax Cases 18 (HL) that if the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of assessee's business to be carried on more efficiently and profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for the indefinite future.

5. Madras High Court in CIT v. Late G.D. Naidu and Ors. By LRs , held that any payment by assessee-firm to retiring partner for not engaging in competitive business is revenue expenditure.

'The compensation paid relied on relatable to the restrictive covenant not to carry on similar business for a period of 5 years is in the nature of a separate transaction unconnected with the business or the assets of the partnership--that it could not be said that the assessee-firm has secured an enduring advantage and that therefore, the payments could only be treated as a revenue outgoing.' It may be worth noting that the entire amount of Rs. 6 crores of non-compete consideration has already been paid to VBC and only on accounting principles the said amount has been amortized over a period of five years in the books of the company. Here we do not wish to waste your time by referring number of case laws settling the issue that mere accounting entry does not determine allowability/non-allowability of an expenditure under income-tax.

... confident that the above submissions will find meritorious...Madras Industrial Investment Corporation Ltd. v. CIT , wherein the Hon'ble Judge Mrs. Sujata Manohar, after perusing series of case laws on the subject, has held that the discount on issue of debentures has to be allowed by spreading over the period of the debentures.

In addition to the aforesaid two claims, we put forth another alternate claim for your consideration. As stated earlier in the note, a technical know-how has been the main fulcrum of the acquired business. One of the major factors behind VBC's capability to compete was their knowledge about the technologies as provided by Norsk Hydro Norway, UHDE Germany, and PDIL India. In this context, your attention is invited to Part B of Appendix 1 of IT Rules, 1962 (under r. 5), prescribing the rates of depreciation allowable under income-tax on assets described therein. Under the said entry know-how and any other business/commercial rights related to or arising out of such know-how qualities for 25 per cent depreciation allowance as intangible assets. The said consideration of Rs. 6 crores directly arising out of/based on the technical know-how, would qualify for depreciation @ 25 per cent, in case such expenditure is interpreted as capital expenditure.STL : OTH : 02-03 L 482 9th Jan., 2003 Sub. : Assessment proceedings for asst. yr. 2001-02 PAN : AACCA 5046 P In connection with our ongoing scrutiny assessment for the captioned assessment year and further to our personal hearing in your office on 23rd Dec., 2002, we give below our submissions : The facts and circumstances behind the said transaction was already explained in our last hearing along with our detailed written submissions. We further state that assuming without admitting, the said expenditure of Rs. 6 crores is non-revenue expenditure, would qualify for depreciation as intangible assets. As you are aware Section 35AB was a statute during asst. yr. 1998-99 with a view to allow deduction of expenditure on know-how in six equal instalments, which otherwise would not be allowable as revenue expenditure. The operation of the said Section 35AB was discontinued from asst. yr.

1998-99 with simultaneous introduction of Part B to Appendix I to IT Rules, 1962 (under Rule 5), being intangible assets qualifying for depreciation. Thus, even if such expenditure is considered non-revenue, the income-tax statute permits allowance of the same on deferred basis earlier under Section 35AB and now under depreciation schedule.

4.10 The AO, however, did not agree with the submissions made by the assessee with respect to claim that the expenditure in question was revenue expenditure. The findings of the AO are found in para Nos. 2.3 to 2.9 of assessment order, which read as under: "2.3 In addition to the business purchase agreement, assessee-company entered into non-competition agreement dt.. 22nd March, 2000, wherein assessee-company agreed to pay Rs. 6 crores to the transferor-company and its founder promoter and it was agreed that the transferor-company for 5 years shall not directly or indirectly manage, operate, joint, have an interest in, control or participate in the ownership, management, operation or control or be otherwise connected in any manner with any corporate, partnership, proprietorship, trust, estate, association or other business entities, which directly or indirectly engaged as a commercial activity anywhere in the world in the business or any business similar to the business of the assessee. The assessee-company paid Rs. 6 crores upfront separately as consideration. In the return of income, assessee-company claimed, this payment has not given any enduring benefit to the company and expenditures were incurred to avoid competition with a view to improve profitability and, therefore, it was treated as revenue expenditure. The assessee-company has also relied on the following decisions and contended that : (i) The Commr. of Taxes v. Nchanga Consolidated Copper Mines Ltd. (1965) 58 ITR 241 (PC). The Privy Council held that with a view to avoid over-production, the assessee made a payment to another manufacturer in the same field under consideration of latter agreeing to cease production, the expenditure would be on revenue account.CIT v. Coal Shipments (P) Ltd. competitor out of assessee's field of business should be treated as revenue expenditure, as it was to improve the profitability of assessee's business.

(iii) In the case of IRC v. Canon Company (1968) 45 Tax Cases 18 (HL) held that if advantage consists merely in facilitating the assessee's trading operation or enabling management and conduct or assessee's business to be carried out more efficiently and profitability by leaving the fixed capital untouched, would be on revenue account.

(iv) Lastly relied on the decision of Madras High Court in the case of CIT v. Late G.D. Naidu and Ors. By LRs held that any payment by assessee-firm to the retiring partner for not engaging in competitive business is revenue expenditure.

2.4 In all other cases, assessees were carrying out particular business and during the course of carrying out of business, payments were made to ward off the competition, whereas, in case of assessee, it was not doing the chemical business prior to the acquisition and the non-competition was associated with acquiring of new business, hence, it cannot be treated as par with the fact of the other cases.

Secondly, in case of Coal Shipments (P) Ltd. (supra), there was no certainty of duration of non-competition arrangement, as there was no written agreement, between the parties, hence Hon'ble Court held that because of uncertainty advantage derived is not of enduring nature. In case of G.D. Naidu (supra), the facts are totally different as the payment were made by the firm to the retiring partner of an existing business.

2.5 Therefore, the decisions quoted by the assessee-company are not applicable on the facts of the case. The Hon'ble Supreme Court in the case of Coal Shipments (P) Ltd. (supra) itself has laid principle very clearly that: It is an accepted preposition that the word 'permanent and enduring' are only relative terms and not synonyms with the perpetual or everlasting. Enduring benefit need not be an everlasting character, it should not at the same time be transitory and ephemeral that it can be terminated at any time at the volition of any of the parties.

Payment made to rival dealer to ward off competition in business would constitute capital expenditure, if the object of making payment is to derive an advantage by eliminating the competition for some length of time. It was further observed that the same result would not follow if there is no certainty of the duration of the advantage. How long the period of contemplated advantage should be in order to constitute enduring benefit would depend upon the facts of each case.

2.6 Hon'ble Calcutta High Court, in the case of CIT v. Hindustan Pilkington Glass Works held such . expenditure as capital expenditure. The facts of the case was that three companies including the assessee were producing the wired figured glass. They came to a conclusion that at the relevant time there was excess production capacity in the country, resulting in losses to the industry. Therefore, one of the companies was asked to stop the production for five years. The assessee-company and other company agreed to pay to such company a compensation in instalments. In that case, agreement could be terminated at any time before the expiry of five years with the consent of all the parties. The question was whether the payment by the assessee is of capital or revenue nature.

The Court held that the period of five years was a critical period in the glass manufacturing. The company which stopped the production was the competitor of the assessee and in the five years the competitor could be eliminated and goodwill will generate in those five years, can be considered as advantage of enduring nature, which would last not only beyond one year, not even for five years, but even for longer years. Even the fact that the arrangement could be terminated with the consent of all the parties, did not affect the position. The acquisition of capital assets was held to be capital expenditure and it was held that profit-making apparatus was made to last beyond the year in question and the benefit would last beyond the period of five years. Therefore, expenditure was held to be capital expenditure.Blaze and Central (P) Ltd. v. CIT , the Madras High Court held that payment was not expended for acquiring the stock-in-trade of the business of the assessee, but the assessee had taken over all the business carried on by the competitor for a period of 9 years, so that assessee had warded off competition and derived an advantage by eliminating competition and also acquired business which generated income. Same view was also undertaken by Madras High Court in the case of Chelpark Co. Ltd. v. CIT and Hon'ble Karnataka High Court in the case of CIT v. Bangalore Arrack Co.

.

2.8 Therefore, the principle laid down in the decision of Hon'ble Supreme Court and in the above referred decision of Hon'ble Calcutta High Court, Madras High Court and Karnataka High Court is that if competition is warded off for some length of time, it will constitute advantage of enduring nature and would constitute as capital expenditure. In the case of assessee, there was no existing business of manufacturing and selling of chemical, therefore, the payment was not made for carrying out of any existing business. The non-competition by VBC Industries Ltd. for five years would allow the assessee-company with the support of associate company DFPCL to settle down in the market of east-central India and monopoly would result in enduring advantage. The associate company of assessee is already a major player in the western part of the country and unfettered access in eastern and central part of the country, where VBC had strong presence would give advantage which will last beyond the period of even five years. Since VBC Ltd. was incurring losses in the chemical business and moved to the business of power generation would not be in a position to compete after the period of non-competition, i.e., 5 years. Further, similar new plant would take at least four to five years in setting up, therefore, after the period of non-competition is over, VBC Ltd. would not be in a position to establish and compete in the same line of business.

Hence, advantage of noncom petition would be available for 9 to 10 years and thereafter.

2.9 Moreover, the non-competition agreement is back to back with the business purchase agreement and would give the time to settle down in the market and use the network which was already established by the VBC. After five years, assessee-company would make the place for itself and the advantage would last for several years, hence there is no doubt that expenditure was not incurred for carrying out of business. The expenditure was not incurred for improving the profitability, as there was no existing business and company has acquired the business of chemical for the first time. Further, warding off of competition for five years would result in enduring benefit to the company. Therefore, expenditure of Rs. 6 crores claimed as revenue expenditure is disallowed and treated as capital expenditure. Initiate penalty proceedings under Section 271(1)(c) of the Act for furnishing inaccurate particulars of income/concealing particulars of income." 4.11 Before the AO, the assessee had made an alternative claim that, if the expenditure in question is not considered as revenue expenditure, then the assessee, by having entered into non-compete agreement--as per which M/s VBC and its founder, Shri M.V.V.S. Murthy were not to carry on either manufacturing or trading business in the two chemicals under reference for a period of five years, the assessee had acquired commercial/business rights for a period of 5 years to carry on manufacturing and trading activities in both the chemicals under reference undisturbed and freely for a period of five years, which were of intangible nature entitled to depreciation under Section 32 of the Act. and, therefore, assessee may be allowed depreciation.

4.12 The AO rejected the assessee's alternative claim also by observing as under: Assessee-company had made an alternative claim that technical know-how has been the main fulcrum of the acquiring business. One of the major factors behind VBC's capability to compete was their knowledge. Therefore, payment should be treated as made for business/commercial right related to such know-how and which is eligible for 25 per cent depreciation. If expenditure is held as capital expenditure, depreciation @ 25 per cent should be allowed.

The alternative contention of the assessee is also not acceptable for the reason that : in the business purchase agreement, assessee has clearly agreed to transfer all its tangible and intangible assets including know-how, license, permits, intellectual property rights, etc. as part of acquiring business undertaking at the consideration of Rs. 29 crores. Therefore, there is no scope for separate payment to be made for any intellectual property. No specific intellectual business/ commercial right was acquired by the assessee-company against the payment of Rs. 6 crores. Therefore, it cannot be part of the block of assets under Section 32 of the Act. The payment of Rs. 29 crores includes all such rights along with cost of plant and depreciation is being allowed on them. The assessee has not acquired any specific intellectual right by making payment of Rs. 6 crore, which is eligible for depreciation under Section 32 of the Act, hence no such claim is admissible." 5. The assessee went in appeal before the CIT(A) and in addition to reiterating the submissions made before the AO, relied upon the decisions by referring to specific observations in the following cases : "1. CIT v. Lahoty Brothers Ltd. --In this case, an assessee as a dealer in petroleum and mobil oil and sole agent of an oil company took over the business from a joint family and by an agreement with the said family, the appellant was to pay Rs. 2, 100 annually on the understanding that during the continuance of the agreement, the family would not participate in similar business. The Court allowed the payment as revenue expenditure.

(--Payments towards restrictive covenant was held to be on revenue account.

Court has observed that even if the expenditure is incurred for obtaining an advantage of enduring benefit, the same may be on revenue account, what is material to consider is the nature of advantage in commercial sense and it is only where the advantage is on capital field, it would be disallowable. If the advantage consists merely in facilitating assessee's trading operations or enabling the management and conduct of assessee's business to be carried on more efficiently or more profitably, while leaving the fixed capital intact, the expenditure would be on revenue account, though, advantage may endure for indefinite future.Sree Annapoorna Gowrishankar Hotels (P) Ltd. v. Asstt. CIT (1991) 37 ITD 541 (Mad) In these cases, expenditure incurred for placing restriction on a person from undertaking similar type of business or a competitive business have been held to be on revenue account.

7. Commr. of Taxes v. Nchanga Consolidated Copper Mines Ltd. (1965) 58 ITR 241 (PC) In this case, payment made to avoid over-production in the same field by another manufacturer was held to be on revenue account." 6. The learned CIT(A), after considering the facts of the case and observations of the AO as well as decisions relied upon by the assessee and the AO, came to the conclusion that the expenditure incurred by the assessee, under appeal, was of capital nature. The relevant part of the order of the CIT(A), wherein he distinguished the decision's relied upon by the assessee and supported the decisions relied upon by the AO and other reasons for arriving at the aforesaid finding as contained in para Nos. 3.3 to 4.3 of the appellate order, reads as under: "3.3. In this background, it was submitted that the payment of Rs. 6 crores to the VBC did not result into any advantage to the appellant in the capital field nor any advantage of enduring nature has resulted. What the appellant paid was out of business exigencies and for carrying on all the business of the appellant smoothly.

Therefore, the expenditure is revenue in nature.

The AO, in rejoinder, submitted that the appellant was not engaged in the manufacturing of nitric acid or ammonium nitrate. P&L a/c for the asst. yr. 2000-01 shows only other income on the credit side.

Some trading of chemicals on a small scale in some year does not make the appellant as engaged in chemical business. Manufacturing of these two items on a large scale by a new technology was indeed a new business. It is immaterial whether the other group concerns were engaged in chemical industries as the appellant is a separate entity. Even otherwise, the group concerns were not engaged in manufacturing of chemicals using the technology acquired from VBC. The appellant has wrongly tried to bring in the concept of unity of control over itself and DFPCL as these are two separate entities and not the same one and accordingly, the reference to the decision in the case of CIT v. Prithvi Insurance Co. Ltd. is irrelevant. Similarly, in the case of CIT v. Tata Chemcials Ltd. , one company was amalgamated with the assessee-company and the entity became the same. Therefore, it cannot be said that the appellant was engaged in the business of manufacturing chemicals prior to acquisition from VBC. The AO further observed that for acquiring an enduring advantage, it is not necessary that competition avoided should be so severe as to threaten the very existence of the assessee's business, not establishment of monopoly is necessary condition for enduring advantage to accrue. As long as there is advantage, like of reduced competition, which is not of purely temporary nature, it can be said to have derived enduring advantage. He again relied on the decision of Calcutta High Court in the case of CIT v. Hindustan Pilkington Glass Works and also to the observation of the Supreme Court in the case of Coal Shipments (P) Ltd. (supra) i.e., a payment to ward off competition in business to a rival will constitute capital expenditure, if object of making that payment is to derive advantage by eliminating the competition over some length of time. It is different matter that in that case, the apex Court held the expenditure as revenue as there was uncertainty about the period of advantage whereas, in the appellant's case, it IF not. In respect of the decision cited by the appellant's counsel, the AO has stated that in those cases, the payments were made in respect of the continuing business whereas the appellant has entered into a new business and as such, the decisions would not apply. With respect to the decision of Empire Jute Co. Ltd. (supra), the issue before the Supreme Court was the purchase of loom hours to increase the production and profit thereon. It has nothing to do with non-compete consideration. The AO emphasized that the appellant has got an advantage of enduring nature by making the above payment as brought out in the assessment order and as such, the same is on capital account.

3.4 The issue has been considered carefully. It is seen that the appellant has acquired the chemical business from VBC, which includes transfer of immovable, movable properties and all clearances, permits, license, consents, NOC, etc., tangible and intangible rights and benefits entitled to seller thereunder, registration, intellectual property rights, etc. against a payment of Rs. 29 crores. The appellant is a concern of the group to which another company, DFPCL belongs. Both the companies are under control of Shri S.C. Mehta, who is director in both the companies. It is worthwhile to mention that DFPCL is a major player in the western India in the field of manufacturing and selling of nitric acid and ammonium nitrate. It appears that they did not have any hold, worth the name in the central-eastern India. VBC was a major player in the same business in central-eastern India. For certain reasons, they planned to shift to some other line of business and dispose of this chemical business. The appellant entered at that stage and the appellant, who under the name of 'Arlem Investment Finance Ltd.' did some work related to chemicals, struck a deal with VBC and purchased the chemical business from them against payment of Rs. 29 crores as mentioned above. But, in addition to this payment, they made a further payment of Rs. 6 crores to VBC upfront for non-competition on the part of the VBC. The VBC under the agreement was not supposed to enter either directly or indirectly, in the manufacturing of or trading in the chemicals in that part of the country. The issue to be decided is whether the payment of Rs. 6 crores constituted capital expenditure or revenue expenditure.

On appreciation of the facts of the case, I find that the appellant earlier was doing only some trading business in the chemicals but it was not much. It is true that the another group concern, DFPCL, was manufacturing and selling the two chemicals in the western India, but in the name. So, the starting of the manufacturing business of the two chemicals by the appellant was new business for the appellant. The concept of unit of business of the appellant with that of DFPCL cannot be roped in such cases. A group can have many business under separate entities where they may have common management, etc., but it cannot be said that the business of all entities is the same. Further, DFPCL was not having any presence in the area where the appellant started business. Therefore, I cannot agree with the appellant's contention that there is unity of business between the two concerns. The appellant is separate from DFPCL and accordingly, it is held that the appellant started a new business of manufacturing chemicals after purchase of the same from VBC. For running this chemical business efficiently, the appellant was required to make an effective foothold in that part of the country and in this situation, if the VBC also started similar type of business directly or indirectly, it would have been difficult for the appellant to create an effective base in that area. For that very purpose, the appellant paid Rs. 6 crores to VBC for non-competition. It is now to be considered whether by doing so, the appellant acquired any advantage of enduring nature so as to bring the payment under the capital expenditure. In this regard, many decisions have been cited by the appellant and also by the AO. I find that no thumb rule has been prescribed by any decision and the decisions have been taken by the various Courts based on the facts of the case. This is summarized by the Supreme Court in the case of Coal Shipments Ltd. (supra), wherein, the apex Court has laid down certain principle. It has observed that 'permanent and enduring' are only related terms and not synonymous with the perpetual and everlasting. Enduring benefit need not be an everlasting character.

It should not at the same time, be transitory and ephemeral that it can be terminated at any time at the volition of any of the party.

Payment made to a rival trader to ward off competition in business would constitute capital expenditure, if the object of making payment is to derive an advantage by eliminating the competition for some length of time. But the same result, would not follow if there is no certainty of duration of the advantage. How long the period of contemplated advantage should be in order to constitute enduring benefit would depend upon the facts of each case. The Supreme Court in another case of Assam Bengal Cement Co. Ltd. v. CIT , has observed that ordinarily, money paid to keep out a potential competitor in business, where the benefit is of an enduring nature, is an expenditure in the nature of capital. Similar view has been expressed by Punjab High Court in the case of Behari Lal Beni Parshad v. CIT (1959) 35 ITR 576 (P&H), Allahabad High Court in the case of Neelkamal Talkies , Orissa High Court in the case of Orissa Road Transport Co. Ltd. v. CIT (1970) 75 ITR 126 (Ori). However, when the benefit is not of an enduring nature but is to exhaust in year or in a short period, the expenditure is of a revenue nature. It has been so held by the Supreme Court in the case of M.A Jabbar v. CIT and some other High Courts. So the crucial point is whether whatever benefit has accrued to the appellant, is of enduring nature or not.

The appellant has tried to project that the amount paid was for business exigencies and for carrying on the business of the appellant smoothly and the expenditure did not bring into existence any asset or advantage of enduring nature to the appellant and, therefore, the expenditure is revenue in nature. The appellant has also stated that the benefit has in fact accrued only for one year.

However, I am of the opinion that this stand of the appellant is not supported by the various decisions and the facts on record. It is seen that the sales in the period after the acquisition of the business from the VBC shows an increasing trend though, the NSP has gone down after the first year of acquisition. But, the decrease in NSP depends on many factors and it is the increase in the sales which is relevant. Be that as it may, what is to be seen is the nature of payment at the time of making payment. The payment has been made undoubtedly to ward off competition to the appellant in its newly started business from VBC, which is definitely a benefit.

Coming to the period of benefit accrued because of non-competition, it is seen that the Calcutta High Court in the case of Hindustan Pilkington Glass Works (supra) considered the payment made by the assessee to a competitor for stopping production for five years so that excess production could be avoided in the field of manufacturing of wired figured glass. The Court held that the period of five years was a critical period in the glass manufacturing and in this period, the assessee could eliminate the competitor and could generate goodwill for its product and this can be considered as advantage of enduring nature as this would last not only beyond one year, not even for five years, but even for longer periods. The Madras High Court in the case of Blaze and Central (P) Ltd. (supra) has held that the payment made to a competitor for taking over all the business carried by them for nine years to ward off competition, resulted in advantage of enduring nature and hence, the payment was capital in nature. The appellant has tried to argue that in these cases, there was one competitor, but in its case, VBC was not the only competitor but there were other market players in this field. But in my view though there were certain other market players, but the appellant has avoided competition from at least one major market player, i.e., VBC and thus, advantage has in fact accrued to it by warding off competition from VBC. The appellant's counsel has cited several decisions in support of the case of the appellant. On consideration of these decisions, it is seen that they are not relevant to the case of the appellant, as can be seen from the following brief discussion of those decisions.

Madras High Court considered the receipt in the hands of retiring partners of a firm for not carrying out the bus business for five years and held that it is neither taxable as income or capital gains. The decision was not to the effect that the payment on the part of the firm was revenue expenditure. In fact, in this case, the Court relied on its earlier decision in the case of CIT v. Saraswathi Publicities wherein, it has been held that the receipt referable to restrictive covenant was capital receipt.

In the case of Empire Jute Co. Ltd. v. CIT , the Supreme Court considered the purchase of loom hours by the assessee so that the assessee could run its business for longer hours. The issue did not relate to warding off competition as such.

In the case of CIT v. Bombay Dyeing and Mfg. Co. Ltd. (1996) 219 ITR 521 (SC), what the Supreme Court decided was that the payment made to Solicitors with regard to amalgamation of a company was revenue in nature. It is not understood how this case is related to the appellant's fact where the payment is for non-competition.

In the case of CIT v. Lahoty Brothers Ltd. , the issue involved was annual payment made to previous distributors of petroleum and mobil oil from whom the business was taken over by the assessee without the consent of the assessee obtained in writing.

This indicates that the agreement in this regard was terminable at any stage with the consent of the assessee, whereas, in the appellant's case, the agreement cannot be rescinded.

In the case of Commr. of Taxes v. Nchanga Consolidated Copper Mines Ltd. (1965) 58 ITR 241 (PC), the Council considered the issue of payment made by an assessee to seize production of copper for one year because of fall in price of copper. It can be seen that the period involved was for very short, i.e., for one year.Sree Annapooma Gownshankar Hotels (P) Ltd. v. Asstt.

CIT (1991) 37 ITD 541 (Mad), what the Tribunal, Madras Bench, considered was the reasonableness of payment under Section 40A(2) and the issue was not relating to capital or revenue nature of the payment.

In the case of Pathare Dhru and Co. v. Asstt. CIT (1995) 54 ITD 746 (Bom), the issue involved was payment made to a person for stopping profession for two years. The period thus is very short, only for two years. Similarly, in the case of Modipon Ltd. v. IAC (1995) 52 TTJ (Del) 477, the period of benefit was only for three years.

In the case of IRC v. Canon Company (1968) 45 Tax Cases 18 (HL), the issue involved was expenditure for obtaining the new character, defending the action and payment made to two dissenting shareholders in respect of their shares and expenses in the action. The payments were not for non-competition from another party.

In the case of CIT v. Piggot Chapman and Co. (1949) 17 ITR 317 (Cal), the payment was made to a broker for non-carrying on the business for a certain period unless and until the agreement was rescinded. Thus, it can be seen that the period of benefit was uncertain and the agreement in this regard could be terminated at any time at the volition of the parties concerned.

Thus, it can be seen that these judicial pronouncements do not come to the rescue of the appellant as the facts in those cases are different from that of the appellant. The appellant has started its business in a new field by acquiring its business from VBC and has paid Rs. 6 crores upfront to the said party for noncom petition.

This would definitely result in advantage of enduring nature. The period of five years is a long period during which the appellant by utilizing various information's, network of VBC, from which it has purchased its business, can establish itself in eastern India and this would definitely continue for years to come and, therefore, the advantage has to be considered as enduring in nature. The period of five years is definite and the agreement for noncom petition for this period cannot be terminated on the volition of the parties concerned.

Taking into account, the aforesaid discussion, I have no hesitation in holding that by making a payment of Rs. 6 crores to VBG, the advantage has accrued to the appellant and that too of enduring nature and accordingly, the expenditure is held to be capital in nature.

4. The appellant has taken an alternative plea that the expenditure should be considered as deferred revenue expenditure and should be allowed in five years considering the period of the agreement for non-competition. 4.1 The appellant's counsel submitted that this is supported by the decision of Supreme Court in the case of Madras Industrial Investment Corpn. Ltd. (, wherein, the apex Court has held that though ordinarily, the revenue expenditure for the purpose of business should be allowed in the year in which it is incurred, but in certain cases, facts may justify allowance over a number of years based on the facts where allowing the entire expenditure might gain distorted picture of the profits of a particular year. Madhya Pradesh High Court in the case of M.P. Financial Corporation v. CIT (1987) 165 ITR 765 (MP) held that in the case of issue of bonds at a discount even though the entire amount of discount was not an allowable expenditure in the assessment year in question the said amount of discount had to be spread out proportionately over a number of years for which the bonds are issued. The Bombay High Court in the case of Taparia Tools Ltd. v. Jt. CIT has considered the one-time payment of interest and debentures in advance and has held that this has to be spread over entire period of the debenture.

4.2 The AO, on the other hand, submitted that the IT Act contains provision for allowing revenue expenses, certain specified capital expenditure like depreciation, deduction under Section 35D, etc., but the impugned expenditure is not revenue in nature and there is no other provision under the Act in which the same can be allowed as deferred revenue expenditure. He also added that the decision of the Supreme Court cited by the appellant relates to revenue , expenditure to be allowed in a period spread over several years, but in the case of the appellant, the impugned expenditure is not revenue in nature.

4.3 On consideration of the facts of the case, I fully agree with the stand of the AO. The impugned expenditure has been earlier held as capital in nature. The concept of. deferred revenue expenditure comes only when the expenditure under consideration is revenue in nature and its allowance in one year might result in distorting the figure of income of an assessee. Further, the provisions dealing with allowance of deferred revenue expenditure in the Act like Section 35D do not cover the non-compete fees. Therefore, I hold that the impugned expenditure cannot be considered as deferred revenue expenditure and accordingly, cannot be allowed proportionately in five year as contended by the appellant." 6.1. The assessee's alternative ground of allowing depreciation, if the expenditure is found to be of capital nature was also rejected and the relevant discussion/findings as contained in para Nos. 5 to 5.3 of the order of the CIT(A) are in the following terms : "5. The appellant has taken another alternative plea that if the impugned payment of non-compete fee is considered capital in nature then depreciation @ 25 per cent should be allowed under Section 32 of the Act since the payment of non-compete fees could at worst be said to have resulted in acquisition of business/commercial right to the appellant and this right being intangible asset, qualifies for depreciation under Section 32 of the Act.

The AO in this regard has observed that the appellant, in the business purchase agreement, has clearly agreed to transfer all its tangible and intangible assets including know-how, license, permits, intellectual property rights, etc. as part of acquiring business undertaking at the consideration of Rs. 29 crores. Therefore, there is no scope for separate payment to be made for any intellectual property. No specific intellectual business/commercial right was acquired by the appellant against the payment of Rs. 6 crores.

Therefore, it cannot be part of the block of assets, which is eligible for depreciation under Section 32.

5.1 The appellant's counsel has submitted before me that the appellant, by making payment of Rs. 6 crores towards non-compete fees, has obtained a commercial/business right which is in the nature of technical know-how, etc., which qualifies for depreciation @ 25 per cent. The AO has wrongly concluded that the appellant has paid Rs. 29 crores to VBC for all tangible and intangible assets including license, permits, intellectual property rights, etc. and there is no further scope for separate payment to be made for intellectual property and by making this payment, the appellant has not obtained any commercial right. While coming to this conclusion, the AO has wrongly referred to the definition of acquired business undertaking discussed at Clause 1.1 of the Article 1 at p. 3 of the agreement with VBC, which is as under : (iii) All clearances, permits, licenses, consents, NOC, etc., tangible and intangible rights and benefits entitled to the seller there under, registration, intellectual property rights, etc.

It was submitted that the AO has not appreciated the facts in correct perspective. My attention was drawn to the art. 2, Clause 2.2. on p. 5 of the agreement wherein, it is mentioned that in consideration of the seller transferring to the buyer, the acquired business undertaking which shall include the acquired business undertaking movable properties and acquired business undertaking immovable properties, the buyer shall pay to the seller a sum of Rs. 29 crores ...'.. It was argued that the payment of Rs. 29 crores thus not included the payments for intangible assets and also does not include all the items mentioned at Sub-Clause (iii) of Clause 1.1 of art. 1 of the business purchase agreement. The appellant's counsel also referred to the valuation report dt. 31st March, 2002 of M/s Anmol Sekhri and Associates, a leading figure in this line, in which item-wise break-up of assets included as part of the consideration of Rs. 29 crores has been given and the valuation of Rs. 29 crores is with regard to only the plant and machineries, furnitures and fixtures, vehicles, land and building, etc., and this shows that the amount of Rs. 29 crores is paid only towards acquisition of tangible movable and immovable assets. It is not towards acquisition of intangible assets. The payment of Rs. 6 crores was, therefore, made for acquisition of business and commercial rights in the form of noncompetition from VBC. This commercial right is in the nature of the intangible assets mentioned in Section 32 of the Act. Section 32 provides for depreciation in the respect of know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature, being intangible assets. The term 'any other business or commercial rights of similar nature' has not been defined in the Act. But, such right should be in the nature of the intangible assets specifically mentioned in Section 32. But the expression 'similar' indicates that such business or commercial right will include such rights which are corresponding to or resembling to any one of the preceding assets in many respects. The payment for non-compete has resulted in acquisition of capital assets being a right to carry on the business unfettered by any competition from VBC and, therefore, it should be part of block of intangible assets for the purpose of Section 32. The appellant's counsel referred to the decision of Supreme Court in the case of Assam Bengal Cement Co.

Ltd. v. CIT , wherein the assessee, who took lease of limestone quarries, made annual payment to lessor to prevent lessor from granting similar rights in neighbouring quarries. It was held that the assets which the company acquired in consideration of recurring payment was in the nature of capital asset, the right to carry on its business unfettered by any competition from outsiders within the area. It was also stated that in the case of Henriksen v. Grafton Hotel Ltd. (1942) 24 Tax Cases 453, an observation has been made that the payments for monopoly for acquiring a license for period of 3 years must be regarded as attaining the dignity of a capital asset. Similar decision has been given by Madras High Court in the case of Chelpark Co. Ltd. v. CIT . These decisions of the Courts indicate that the payment for non-compete consideration are in the nature of capital asset i.e., the appellant has got the business on commercial rights for which it had payments for non-compete. In view of above, it was submitted that the appellant be allowed depreciation on such acquisition of business/commercial rights under Section 32 in respect of non-compete fees of Rs. 6 crores.

5.2 The AO, on the other hand, in his written submission observed that Section 32(1)(ii) specifies certain intangible assets like know-how, patents, copyrights, trademarks, licenses, franchise and also mentions any other business or commercial right of similar nature. The appellant has never claimed that the payment of non-compete fees was to acquire an asset. All the assets pertaining to chemical business of VBC Industries were acquired as per business purchase agreement dt. 23rd March, 2000 and -as per the definition given in para 1.1. of this agreement, it can be seen that the acquired business undertaking means all of seller right, title and interest in respect of chemical business including all movable and immovable property, licenses, NOCs, etc., tangible and intangible rights and benefits. Thus, all the assets of the chemical business whether tangible or intangibla were part of acquisition of business purchase agreement, for which consideration of Rs. 29 crores has been paid. The payment of Rs. 6 crores for non-compete fees was only to avoid competition from seller for a period of five years and this was not linked with any of the intangible assets like know-how, patents, -etc. Without prejudice, it was submitted that if at all any intangible assets can be said to have been acquired by non-competition, the same is not a right such as know-how, patents, copyrights, trademarks, license, franchise or any other right of similar nature. The appellant might have acquired some commercial right but the same are not similar to the nature of the know-how, patents, etc. Therefore, depreciation cannot be allowed.

5.3 The issue has been considered carefully. First, I am inclined to agree with the AO that the payment of Rs. 29 crores to VBC for transfer of chemical business was for transfer of all its tangible and intangible assets including know-how, license, permits, intellectual property rights, etc. as part of acquiring business undertaking at a consideration of Rs. 29 crores and there is no scope for separate payment to be made for any intellectual property.

This is apparent from Clause 1.1 of the business purchase agreement in which acquired business undertaking has been defined, which includes all these. The argument of the appellant's counsel that it is Clause 2.2 on p. 5, which will be relevant. I do not agree.

Clause 2.2 is only inclusive whereas Clause 1.1 is exhaustive and, therefore, the stand of the AO is upheld. In any case, the payment for non-competition cannot be equated with know-how, patents, copyrights, trademarks, license, franchise as appearing in Section 32(1)(ii) on which, the depreciation has been allowed under the Act.

Section 32 allows depreciation on certain assets, tangible or intangible. The asset is a positive thing which comes in possession of a person even if it is intangible like know-how, patents, copyrights, etc. which appear in the said section. The payment to ward off competition does not bring in any asset much less in the nature of and similar to specified intangible assets mentioned in Section 32(1 )(ii) of the Act. The asset means property in general--all that one owns. The word "asset" has been defined in the 20th Century Dictionary as follows : Property in general; all that one owns considered as applicable to the payment of each debts ...

As a singular : any portion of one's property or effect so considered. The definition as given above, has been noted by the Supreme Court in the case of D.G. Gouse and Co. v. State of Kemla . That is to say, an asset is something which is owned and in this definition, all the assets, tangible or intangible, as specified in Section 32 fit in. Know-how, patents, copyrights, trademarks, license, franchises, etc. which are mentioned in the said section are capable of being owned whereas, the appellant is owning nothing against the payment of Rs. 6 crores to VBC for noncompetition. Of course, in Section 32, business of commercial rights are also mentioned, but these rights have to. be similar in nature with know-how, patents, etc. whatever has been gained by the appellant against the said payment cannot be considered as similar to know-how, patents, etc. That is to say, the appellant has not acquired any asset against the said payment.

Further, any asset, tangible or intangible can be subjected to transfer. But non-compete agreement with a particular person can be subjected to transfer. Thus the non-compete agreement cannot be considered as an asset. The decisions cited by the appellant's counsel in this regard, as discussed above are based on the facts of those cases and the issues involved therein. The Courts in those cases considered the issue which involve the nature of payment, whether revenue or capital and not whether against the payments made in those cases, any capital asset has been acquired. In view of aforesaid, I hold that the non-compete fees of Rs. 6 crores paid by the appellant to VBC did not bring in any asset as mentioned in Section 32(1)(ii) so as to qualify for depreciation. Accordingly, this claim of the appellant cannot be granted. In the result, the stand of the AO is confirmed." 7. It was, in view of above facts and circumstances, that the parties advanced their respective submissions.

(i) That the appellant had entered into business purchase agreement with VBC for the acquisition of the chemical business of VBC. (ii) That VBC belongs to a group of companies operating under the leadership of Shri M.V.V.S Murthy. Originally, the group was in bottling business and subsequently it got into number of businesses including ferro alloys, nitric acid and ammonium nitrate. VBC had two main businesses viz. Coca cola bottling and chemical business manufacturing nitric acid and ammonium nitrate out of imported ammonia. In the year 1998, VBC sold off its bottling business to Coca Cola Co. Ltd. for cash consideration which was utilized to pay off all the debts of VBC. At that stage, VBC had the option of expanding and running the chemical business or sell off the said chemical business and get into more lucrative business. VBC chose to sell off the chemical business to the appellant and consider other business lines like power generation, etc.

(iii) That VBC was competing in the market till the sale of chemical business. As can be observed from the above, the sale of business by VBC was not occasioned due to severe competition or due to its inability to compete due to dependence on imported ammonia but mainly due to change in business focus of the promoters.

(iv) That the acquired chemical business was established by VBC between 1990 and 1994 with commercial production commencing towards end of 1994. The plant design and production processes for manufacturing nitric acid and ammonium nitrate are based on technical information, documentation and know-how from Projects and Development India Limited (PDIL), Sindri, Dhanbad, Bihar, Norsk Hydro, Norway, and UHDE, Germany. The technology is tailor-made and under strict, secrecy Clause contained in the agreements between VBC and the technology providers. VBC while transferring the chemical business had obtained permissions from these technology providers for the appellant to continue using the said technologies.

(v) That the appellant was formerly known as "Arlem Investment & Finance Limited". The acquisition by the appellant of the business of the VBC was spearheaded by Shri S.C. Mehta, director of the company, who was also deputy managing director of M/s Deepak Fertilisers and Petrochemicals Corporation Limited (DFPCL) (currently managing director of DFPCL) during the relevant assessment year. DFPCL is the largest private sector manufacturer and supplier of nitric-acid and ammonium nitrate. Thus, the company enjoys the support of DFPCL, being one of the major player in nitric acid and ammonium nitrate market. In earlier years, the appellant was engaged in the business of trading of chemicals including ammonium nitrate.

(vi) In the backdrop of the above, the company entered into a non-compete agreement with VBC and its founder promoter, Shri M.V.V.S. Murthy. Part of the non-compete Agreement which is relevant in the present context reads as under : "Now this agreement hereby witnesseth and the parties hereto hereby mutually agree as follows : 1. The recitals contained herein shall constitute an integral operative part of this agreement.

2. This agreement and. the covenants recited hereunder shall be effective and binding on both the parties for a period.of five years.

(i) the assignors', and individual shall not directly or. indirectly own, manage, operate, join, have an interest in control or participate in the ownership, management, operation or control of or be otherwise connected in any manner with, any corporate, partnership, proprietorship, trust estate, association or: other business entity which directly or indirectly engages, as a commercial activity anywhere in the world in the business or any business similar to the business.

(ii) the assignors and individual shall not in any manner whatsoever render, sell, supply, market or distribute, advise, assist aid in establishing, managing, providing or developing or act as consultant or professional advisor in respect of the Business or any products or services constituting, part of the business or similar thereto either on its own account or on behalf of any other person whether as an agent or as a licensee or as an advisor, consultant under any Other relationship; and (iii) the assignors' and individual shall not in any manner provide any technical know-how, expertise or any information in any manner and form whatsoever for the purpose of and/or relating to the rendering, selling, supplying, Marketing or distributing of products or services constituting part of the business including rendering any assistance for the purpose of improving, modifying, upgrading, or making any betterment to any existing process, know-how, software methodology or technology whatsoever for the purpose of and/or relating to the manufacturing, selling, supplying, marketing or distributing of the same whether or not the same is patented or proprietary or otherwise.

(iv) The covenant shall be interpreted in the widest possible commercial sense and shall be observed, in letter and in spirit.

The parties hereto have entered into this non-compete agreement as stated in the business purchase agreement. The assignees have agreed for a consideration of Rs. 6 crores towards the non-compete covenants and acquit, release and discharge the assignors forever." (vii) To summarise the above, the learned Counsel for the assessee, submitted that the agreement provides for restriction on VBC and Shri M.V.V.S. Murthy to engage in manufacturing, trading or dealing in any manner with nitric acid and ammonium nitrate directly or indirectly for a period of 5 years for a cash consideration of Rs. 6 crores to be paid upfront. The detailed analysis of the agreement vis-a-vis prevailing circumstances reveal the following : (a) VBC and its founder promoter Shri M.V.V.S. Murthy had acquired technical knowledge of manufacturing nitric acid and ammonium nitrate as also they knew the market, prices, costing, international trends and customers.

(b) The continued existence of 8 years old VBC in original name with key management personnel, business contacts and money received from sale of businesses could pose a serious threat to the appellant's profitability from the chemical business, if VBC or Mr. Murthy decided to compete in the said business.

(viii) The learned Counsel for the assessee, further submitted that as mentioned earlier, VBC possessed necessary technical knowledge for manufacturing and supply of ammonium nitrate. Considering the above, it was a business necessity for the appellant to stop VBC and its founder promoter to again enter the business of nitric acid and ammonium nitrate directly or indirectly. In the absence of such an agreement, VBC directly or indirectly could give competition to the appellant by : (i) either manufacturing itself or providing knowledge and management skills to an associate to manufacture nitric acid and ammonium nitrate.

(ii) import/procure ammonium nitrate and sell in market place as customers are known to them with their registered office having full set up already existing in the port area of Vizag.

(iii) join hands with any other group or provide technical services related to ammonium nitrate to any such group.

(ix) In view of the above facts, it was submitted that the appellant out of commercial expediency agreed to pay to VBC a sum of Rs. 6 crores. The said expense has been amortised in the books of account over a period of five years being the period of non-compete and accordingly l/5th of the amount was charged to the P&L a/c for the year ended 31st March, 2001. A copy of the account is enclosed.

However, the same has been treated as revenue expenditure and claimed as a deduction in the return of income filed by the appellant for the previous year 2000-01 relevant to asst. yr.

2001-02. In this connection, attention is invited to note 1 to the statement of total income enclosed with the return of income, which reads : "While acquiring the chemical business from VBC Industries Ltd. (VBC), the company has paid a consideration of Rs. 600 lacs to VBC and its promoters agreeing not to compete against the company in the same or similar business either directly or indirectly for a period of five years of the said purchase of the business. The said consideration of Rs. 600 lacs is being amortized over a period of five years under consideration. Accordingly, during the previous year the company has written off Rs. 1.20 crores, out of total non-compete fee of Rs. 6 crores paid. It is however submitted that the entire, non-compete fee of Rs. 6 crores is a revenue expenditure and, therefore, fully allowable as a deduction during the previous year. Accordingly, in the tax computation the said consideration is claimed in full as business expense.

Without prejudice to the above, it is submitted that the sum of Rs. 1.20 crores written off during the previous year is allowable as a deduction. The company in this connection relies on the decision of the Supreme Court in the case of Madras Industrial Investment Corporation Ltd. v. CIT (x) It was, further submitted that the learned AO during the course of assessment proceedings had requested to explain why the amount of non-compete payment be allowed as a deductible expenditure and the appellant had explained the same vide letters dt. 21st Dec., 2002 and 9th Jan., 2003. However, the learned AO did . not agree with the, submissions and the judicial pronouncements relied upon by the appellant and disallowed the non-compete compensation paid as being in the nature of capital expenditure.

The learned AO has held that the ratio of the decisions on which the appellant has placed reliance is not applicable to the facts of the case. While coming to the above conclusion, the learned AO has held that in most of the cases relied by the appellant, the assessees were carrying out particular business and during the course of carrying out of business, payments were made to ward off the competition; whereas in the case of appellant, it was not doing any business prior to the acquisition and the non-competition was associated with acquiring of new business. He has, therefore, held that the appellant cannot be treated at par with assessees in the decisions relied upon by the appellant and .CIT(A) has just confirmed the same.

(xi) It was submitted that the observations made by the learned AO/CIT(A), that the appellant was not doing any chemical business prior to the acquisition and accordingly, the ratio of the decisions as quoted by the appellant would not apply, as in those cases the assessees were carrying out the particular business when such payments were made, is also not correct. In this respect, it was submitted that the appellant in earlier years was engaged in the business of trading of chemicals including ammonium nitrate. It is further submitted that the appellant is an associate company of Deepak Fertilisers and Petrochemicals Corporation Limited (DFPCL), which is already into the chemical business. It is managed by Shri S.C. Mehta, who was also deputy managing director of DFPCL (currently managing director of DFPCL). DFPCL is the largest private sector manufacturer of nitric acid and ammonium nitrate. The above fact has already been accepted by AO as can be observed in para (i) under point No. 2 on p. 2 of the assessment order. It was further submitted that: (a) part funding of the acquisition cost had come from DFPCL to the extent of Rs. 18 crores by way of preference shares.

(b) the as'sessee-company enjoyed the support of DFPCL, being one of the major players of nitric acid and ammonium nitrate market.

(xi-a) The learned Counsel for the assessee further submitted that it was DFPCL 'which carried out the due diligence (paid fees for the same) of the VBC for its acquisition and negotiated with VBC for the acquisition of its chemical business and only as business structuring housed the said chemical business with the appellant.

(xii) The learned Counsel for the assessee, further submitted that the appellant was able to procure critical raw materials, i.e., ammonia immediately after the acquisition from Nagarjuna Fertilisers and thereafter through Coromandel Fertilisers Limited only because of DFPCL contacts. Further, the appellant could immediately get the bank facilities from State Bank of India and UTI Bank only on the basis of the personal guarantees of the chairman of DFPCL. The business of the appellant has been guided by experienced employees of DFPCL in technical, marketing and financial aspects.

In view of the above fact that it enjoyed the support of DFPCL, being one of the major players in western India of the nitric acid and ammonium nitrate, it is submitted that the appellant-company, being an associate company of DFPCL, cannot be said that it was not into the chemical business prior to acquisition of VBC; Once, it is held that the appellant was in the chemical business prior to its acquisition of VBC, the ratio of the decisions as quoted by the appellant, wherein It has been held that such payments are in the nature of revenue expenditure/would be clearly applicable to the facts of the case.

(xiii) The learned Counsel for the assessee further submitted that the learned AO has not correctly appreciated the concept of business already in existence. The mere fact that the business acquired a chemical business does not imply that it was not part and parcel of the existing business. Mr. S.C. Mehta holds approximately 99 per cent of the equity share capital of the appellant. He along with the members of his family and associate concerns holds approximately 32 per cent of the equity share capital of DFPCL. Further, as stated earlier, Mr. Mehta is on the board of both the appellant and DFPCL.

Further as stated above, Mr. Mehta was also the director of the appellant. The above facts would clearly indicate that both the companies operate under the common management and have unity of control. The concept of common management, unity of control, -etc.

referred above would, therefore, 'clearly be applicable to the case of the appellant and, therefore, the appellant can be said to have been already In existence in the said line of the business.

Our attention in this connection was invited to the decision of the Hon'ble Supreme Court in the case of CIT v. Prithvi Insurance Co.

Ltd. , wherein it has been held that: "the respondent-company was entitled to the set off claimed by it as the life insurance business and general insurance business constituted one composite business. The interconnection, interlacing, interdependence and unity were furnished by the existence of common management, common business organization, common administration, common fund and a common place of business." ' Our attention was further invited to the decision of the Bombay High Court in the case of CIT v. Tata Chemicals Ltd. wherein the Court has held that the decisive test to decide whether the company is carrying on the same business or separate business, is the unity of control which is indicated by interlacing, interdependence and interconnection between the business and dovetailing of one into the another.

In view Of the above, it was submitted that the observations made by the learned AO that it was not doing any business prior to the acquisition of VBC and the non-compete payment was associated with acquiring of new business are not correct.

(xiv) The learned Counsel for the assessee, further submitted that without prejudice to the above, it is submitted that when the payment is made in respect of non-compete fees, whether the assessee was in the business prior to such payments or not would not alter the nature of transaction. The payments made for non-compete should still be treated as being in the nature of revenue expenditure.

(xv) According to learned Counsel for the assessee, the learned AO/ClT(A) have further relied on certain judgments in disallowing the claim of the appellant. It is submitted that the said judgments do not apply to the facts of the case of the appellant. The learned Counsel for the assessee differentiated the judgments relied upon by the learned AO/CIT(A) by submitting as under:CIT v. Coal Shipments (P) Ltd. (supra), he submitted that the reliance placed by the learned AO/CIT(A) on the above judgment is with regard to the observations made by the Supreme Court as regards the general principle which one may follow in determining the character of the payment, i.e., whether it is capital or revenue. It has been, clearly indicated in the said judgment that the facts and circumstances of each case have to be viewed in order to determine the character of the payment.

That in the above case, the payments made by Coal Shipments (P) Ltd, (supra) towards the restrictive covenant were held to be on revenue account and deductible. The Hon'ble Supreme Court has allowed the said expenditure on the ground that the expenditure incurred to keep a competition out of assessee's field of business should be treated as revenue expenditure as it was to improve the profitability of assessee's business.

(ii)(a) With respect to the decision in the case of CIT v. Hindustan Pilkington Glass Works , he submitted that in the above case the appellant entered into a tripartite agreement with two other concerns which produced the same type of commodity as produced by the appellant. The object of the agreement was the elimination of competition in order to prevent possible annihilation of the business of the assesses. Under the terms of the agreement, one of the concerns agreed not to produce the particular commodity and in consideration thereof the other two concerns agreed to pay to it a stipulated sum every year. The Court held that by making the above payment, competition could be eliminated and the benefit would last beyond the period of five years.

Considering the above facts it was held that the amounts paid were in the nature of capital expenditure.

(b) The learned Counsel for the assessee submitted that it may be observed from the above that the facts of the above case are totally different from the facts of the appellant's case. In the appellant's case, the payment does not put the appellant in a position where it is able to secure all the business available in the market. It is further stated that by making the above payments the appellant has not obtained monopoly in the market as in addition to DFPCL and VBC/appellant, there are other manufacturers of ammonium nitrate like RCF, GNVFC, SAIL, NFL, etc. It is, therefore, submitted that there are other entities also in the same industry who are carrying on competing business. Thus, the benefit that the appellant obtained is a limited one and does not give any enduring advantage which could result in a view being taken that the, expenditure incurred is capital in nature.

(iii)(a) With respect to the decision in the case of Chelpark Company Ltd. v. CIT , (he) submitted that in this case the assessee was engaged in the business of manufacture, of ink. Over the years the assessee had established a good reputation, and market for, writing inks by the manufacture and sale of ink under the brand name of 'Quink'. The managing director of the assessee who was heading the company for substantial period of time left the company and decided to start his own venture. The assessee believed that if the managing director started the new venture, it will make the goodwill of the assessee-company vulnerable.

Considering the above and other factors, it was decided that an agreement be entered into with the managing director so as to prevent him to commence his venture which would have made the goodwill of the assessee vulnerable. It was further found that pursuant to the above agreement, the managing director had liquidated his venture and had left the shores of India. This clearly established that the benefit that the assessee obtained was of permanent or enduring quality in the sense that competition was totally eliminated and protection had been acquired by the assessee for Its business for rest of the period of the business activities.

Considering the above facts, it was held that the amounts paid were in the nature of capital expenditure.

(b) The learned Counsel for the assessee submitted that in the instant case, the facts are entirely different. The payment has not resulted in the competition being eliminated totally as was the position in the case of Chelpark Co. Ltd. (supra). The competition for the appellant continued to exist and, therefore, the payment did not result in any benefit of enduring nature as contemplated. At best the payment made by the company supplemented the profit-making apparatus of the appellant and such the payment ought to be regarded as being made on revenue account.Blaze and Central (P) Ltd. v. CIT , it was submitted that in the above case also payments were made by the assessee to acquire the business for a period of 9 years. The Court on the facts of the case held that the assessee has not only warded off the business rivalry but also acquired the business of the rival for a period of 9 years in a specified area. By this arrangement the assessee has not only derived an advantage by eliminating the competition but also acquired a business which generates income or for avoiding competition. Such payments are to be treated as capital in nature.

(b) The learned Counsel for the assessee submitted that the facts of the case are different than the case of the appellant. Again as can be observed from the above judgment by making the above payment : the assessee had warded off the business rivalry for a period of 9 years and had the advantage of elimination of the competition in that business. As discussed earlier in the given case, the appellant has made the payment for non-compete only for a period of five years and moreover the appellant has not eliminated the competition by making payment to VBC. Accordingly, the ratio of the said judgments is not applicable to the facts of the case. However, the learned AO/CIT(A) have not appreciated the fact that the ratio of the judgments as relied by them are not applicable to the facts of the case of the appellant. Accordingly, by relying on these judgments, the learned AO/CIT(A) have come to a conclusion that the payment of non-compete fees to VBC for a period of 5 years, would allow the appellant to settle down in the market of east-central India and the resultant monopoly would result in an enduring advantage. The benefit of the above will even last for a period of more than five years. Hence by making the above payment it has got an advantage of non-competition, which will be available for the period of 9 to 10 years and even thereafter.

(xvi) The learned Counsel for the assessee submitted that the appellant has not got any advantage of enduring nature by entering into a non-compete agreement with VBC and its promoters. It is submitted that the appellant along with DFPCL would not have faced any closure or any question of utility/value of its capital assets because of any competition from VBC. Such competition would have certainly made dent in the profitability of the appellant through reduction in sales realisations till the time the appellant could have warded off such competition. With actual running of business including running of plant with the available technology and building relationship with the customer base of VBC, the appellant would have been in a position to face any competition in less than a year's time. However, any dent in profitability in its first year of operations, would have upset the payback and the very purpose of acquisition of VBC. With the aforesaid background in mind, the appellant had entered into a non-compete agreement with VBC. (xvii) It was further submitted that the appellant saw an opportunity in the eastern part of the country, as the supply of ammonium nitrate in such market from existing manufacturer catering to major mining areas of east-central India was not adequate as compared to the demand for the same. This was. mainly because of dwindling production from manufacturers like FCI, Sindhri, SAIL, Rourkela. A statement showing the manufacturing, capacity per metric ton in each part of the country is enclosed at p. 220 of the compilation. As can be observed from the above statement the total manufacturing capacity per metric ton of the major player in the eastern part of the country, viz., SAIL and FCI was reducing.

Accordingly, the appellant-company saw an opportunity in the eastern market of the country and decided to buy the business of VBC, which had a strong presence in eastern part of the country. However it is submitted that by purchasing the business of VBC, the appellant-company did not enjoy any monopoly in the market of eastern India.

(xviii) Referring to the statement giving the comparative details of the sales and the net selling price (NSP) of ammonium .nitrate with and without competition, (he) submitted that the sales of the appellant had increased in the financial year 2000-01 and subsequent years, pursuant to the acquisition of VBC as compared to the sales of the VBC in the financial year 1999-2000. On a further perusal of the statement it is observed that NSP: of; the appellant did increase in the financial year .2000-01 -as:compared, to NSP of VBC in the financial year 1999-2000 pursuant to acquisition. However, the NSP of the appellant has started declining in the years 2001-02 and 2002-03 as compared to the NSP in the earlier years. It can be further observed that the total turnover of ammonium nitrate increased @ 69'.83 per cent from. asst. 'yr. .1999-2000 (Rs. 18.73 crores in case of VBC) to asstv yr. 2000-01 (Rs. 31.81 crores in case of the appellant) pursuant to the acquisition. However, the total turnover of ammonium nitrate of the appellant increased only @ 3.61 per, cent in the asst. yr. 2001-02 (Rs. 32:96 crores) as compared to asst. yr. 2000-01 and @ 0.42 per cent in asst. yr, 2002-03 (Rs. 33.10 crores) as compared to, asst. yr. 2001-02.

It was, therefore, submitted that though the restriction imposed as per the terms of the non-compete agreement on VBC was for five years, the benefit accrued to the appellant was only for one year as there was enough competition in the market of ammonium nitrate.

(xix) In view of the above; it Was submitted that the observation made by the learned AO/CIT(A) that due to acquisition of the business of VBC, the appellant would have an advantage of enduring nature for a period of 9 to 10 years due to its monopoly is not correct. As can be observed from the above statement though there was increase in sales of the appellant subsequent to acquisition of VBC, the margin of the company was effected due to competition from the other players in the market. Accordingly, the company did not enjoy any monopoly in the eastern market pursuant to acquisition of VBG as stated by the learned AO. In view of the above facts, it was submitted that the ratio of the decisions relied upon by the learned AO/CIT(A) are not applicable to the facts of the case 'of the appellant.

(xx) The learned Counsel for the assessee further submitted that as can be observed from the submissions made hereinbefore, the appellant did not get any benefit of an enduring nature by entering into the aforesaid agreement but has only tried to ward off the dent to its profitability during the first year of its operations.

Accordingly, it is submitted that by entering into the aforesaid agreement the appellant has not got any advantage of enduring nature. The learned AO erred in making an observation that VBC decided to sell its business to the appellant as it was incurring losses due to the fact that they were dependent on the imported ammonia and the CIT(A) followed the same mistakably.

(xxi) To counter this, it was submitted that VBC in fact was competing in the market till the sale of chemical business. Sale of business by VBC was not occasioned due to severe competition but mainly due to change in .business focus of the promoters. Again the inability to compete was not due to dependence on imported ammonia as even after the acquisition of chemical business the same plant is itself being run profitably with imported ammonia. The above fact can be observed from the cash flow statement of VBC for the year ended 31st March, 2000. Perusal of the said cash flow statement shows that VBC had positive cash or cash equivalent as on 31st March, 2000. Therefore, the observations made by the learned AO that the sale by VBC was only due to continuing losses in the business are not correct.

(xxii) The learned Counsel for the assessee further submitted that the amount was paid out of business exigencies and for carrying on the business of the appellant smoothly. The expenditure did not bring into existence any asset. or advantage of enduring nature for the appellant. It is submitted that the appellant has paid separate consideration for the acquisition of the chemical business. On this basis. it is submitted that the expenditure was incurred for the purposes of carrying on the business of the appellant and is thus deductible in computing the total income of the appellant.

(xxiii) It was further submitted that since the afore said expenditure is incurred wholly and exclusively for the purpose of the business and is not in the nature of capital or personal expenditure, it is fully allowable as a deduction under Section 37(1) of the Act. In this connection, the appellant relied on the decisions and observations/findings as reproduced hereunder : "The assessee a private limited company, carried on business as dealers in petroleum and mobil oil. It was also the sole agent of an oil company for the distribution of kerosene oil in a particular area. Prior to the taking up of this business by the assessee, it was run by joint family. By an agreement between the joint family and the assessee it was agreed, inter alia, that the assessee would pay Rs. 2, 100 annually to the joint family on the understanding that during the continuance of the agreement the joint family either directly or indirectly in its own or in the benami name of anybody else should not participate in any business in petrol, mobil oil and kerosene oil with the oil company within a particular area without the consent of the assessee obtained in writing. The question was whether the sum of Rs. 2, 100 paid by the assessees to the joint family was an allowable deduction." "As the sum of Rs. 2, 100 was paid for the purpose of the business and with a view to keep the competitor out of the area in which the assessee was carrying on its business, it was an allowable deduction under Section 10(2)(xv)." (ii) The learned Counsel for the assessee, therefore, submitted that from the above, it can be observed that facts of the appellant's case are similar to the above decision and, therefore, the amount paid to keep the competitor out of the area in which the appellant was to carry on its business activities, ought to be held as being deductible.

"In the aforesaid case, the deceased and his son along with others were partners in five different firms carrying on business in transport services. During the relevant assessment year, all old partners were retired and firms were constituted with new groups of partners. The deceased and his son were paid varying amounts by the various firms. The Tribunal came to the conclusion that the compensation paid was consisted of amount paid for share in the assets, share of the goodwill and for the restrictive covenant." "So far as the cash compensation paid by the new partners referable to the assets and goodwill of the firm, was concerned, the cash took the place of the assets of partnership and the compensation paid for restrictive covenant not to carry on similar business for a period of five years was in the nature of a separate transaction unconnected with the business of the assets of the partnership. The Tribunal was right in its view that the total compensation paid by the firms to the old partners was for (a) the share in the assets, (b) the share of the goodwill, and (c) for the restrictive covenant and that the part of the amount referable to the acquisition of the share in the assets and the share of the goodwill would be on capital account as it was in the nature of an initial outgoing and the payment towards the restrictive covenant was on revenue account and it would not amount to an acquisition of an advantage of an enduring nature." (ii) The learned Counsel for the assessee, therefore, submitted that it may be observed from the above that the Madras High Court in the above case held that the payment made towards restrictive covenant was on revenue account and it did not amount to an acquisition of an advantage of an enduring nature. Considering the above decision, it is submitted that it may be held that the payment made by the appellant is deductible.

(c) Empire Jute Co. Ltd v. CIT In the aforesaid case, the apex Court observed that : "Expenditure even if incurred for obtaining an advantage of enduring benefit may be on revenue account, what is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is on the capital field that the expenditure would be disallowable.

If the advantages consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital intact, the expenditure would be on revenue account even though the advantage may endure for a indefinite future." Referring to. above observations, the learned Counsel for the assessee submitted that from the above, it can be observed that the apex Court has observed that what is material is the nature of the advantage in a commercial sense and where the advantage is in the capital field then the expenditure is disallowable. The appellant submits that by way of payment of non-compete fees of Rs. 6 crores to VBC, the appellant has not received any advantage in the capital field. Further, no new capital asset belonging to the appellant came into existence by way of the aforesaid payment. Hence, in view of the above, the appellant submits that the payment ought to be held to be on revenue account and hence deductible.

(d) In addition to above, the learned Counsel for the assessee relied upon the following decisions also : (i) In the case of Pathare Dhru and Co. v. Asstt. CIT (1995) 54 ITD 746 (Bom), wherein the Hon'ble Tribunal allowed as a deduction the payment made to retiring partner of the firm as a consideration of the restrictions placed on the retiring partner from undertaking any professional work which will affect the assessee's professional practice for a period of two years.Sree Annapoorna Gowrishankar Hotels (P) Ltd. v. Asstt. CIT (1991) 37 ITD 541 (Mad) wherein payments made to directors to refrain them from starting a competitive business were held not to be excessive and, therefore, not disallowable under Section 40A(2) the Act.

(iii) In the case of Commr. of Taxes v. Nchanga Consolidated Copper Mines Ltd. (1965) 58 ITR 241 (PC), the Privy Council has held that with a view to avoid overproduction, the assessee made a payment to another manufacturer in the same field under consideration of latter agreeing to cease production, the expenditure would be on revenue account.

(iv) in the case of CIT v. Coal Shipments Ltd. (1971) 82 ITR 903 (SC), wherein the Hon'ble Supreme Court has held that expenditure inclined to keep a competition out of assessee's field of business should be treated as revenue expenditure as it was to improve the profitability of assessee's business.

(v) In the case of IRC v. Canon Company (1968) 45 Tax Cases 18 (HL), wherein it was held that if advantage consist merely in facilitating the assessee's trading operation or enabling management and conduct of assessee's business to be carried out more efficiently and profitably by leaving the fixed capital untouched, the payment would be on revenue account.

(xxiv) Apart from the above judgments, the appellant placed reliance on the following judgments : (xxv). In view of the above submissions, it was submitted that it may be held that the expenditure incurred is on revenue account and accordingly, the learned ITO may be directed to allow deduction for the amount of Rs. 6 crores paid by the appellant.

9. The learned Counsel for the assessee, alternatively, submitted that without prejudice to the above, it is submitted that l/5th of the amount of non-compete consideration should be allowed as a deduction from the income of the appellant and in this connection, relied on the decision of the Supreme Court in the case of Madras Industrial Investment Corporation Ltd. v. CIT , wherein the Hon'ble apex Court has observed as under : "Ordinarily, revenue expenditure which is incurred wholly and exclusively for the purposes of business must be allowed in its entirety in the year in which it is incurred. It cannot be spread over a number of years even if the assessee has written it off in his books, over a period of years. However, the facts may justify as assessee who has incurred expenditure in a particular, year to spread and claim it over a period of ensuing years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year: Issuing debentures is an instance where, although the assessee has incurred the liability to pay the discount in the year of issue of debentures, the payment is to secure a benefit over a number of years. There is a continuing benefit to the business of the company over the entire period. The liability should, therefore, be spread over the period of the debentures." 9.1. The learned Counsel for the assessee further submitted that the Supreme Court has approved the decision of the Madhya Pradesh High Court, Indore Bench in the case of M.P. Financial Corporation v. CIT (1987) 165 ITR 765 (MP), wherein in the context of issue of bonds at a discount, the High Court held that though the entire amount of discount was not an allowable expenditure in the assessment year in question, the said amount of discount had to be spread out proportionately over the number of years for which the bonds are issued and the proportionate premium, of discount would be allowable expenditure in the assessment year in question. However, the learned AO has not even considered the aforesaid claim of the appellant and accordingly, did not allow deduction of 1/5th of the amount of non-compete consideration paid by the appellant.

In support of above submissions, he relied on the decision of the Bombay High Court in the case of Taparia Tools Ltd. v. Jt. CIT .

In view of the facts of the case and the decision of the Hon'ble Supreme Court and the Bombay and Madhya Pradesh High Courts, it was submitted that the l/5th of the non-compete fees as debited to the accounts should be allowed as a deduction.

9.2 In support of above, reliance was placed with respect to alternative ground of allowing expenditure in five yearly instalments by considering the same as deferred expenditure, reliance was placed on the decisions in following cases :M.P. Financial Corporation v. CIT 10. The learned Counsel for the assessee raised another alternative plea saying that without prejudice to the above it is submitted that the appellant had obtained a commercial or business right pursuant to the above payment, that (intangible assets) being in the nature of technical know-how, qualifies for 25 per cent depreciation as applicable to intangible assets.

(i) The appellant invited our attention to the Explanatory Memorandum to the Finance Act, 1998, for making an amendment in Section 32 thereby allowing depreciation to be claimed in case of intangible assets.

"Under the existing provisions of Section 32 of the IT Act, depreciation is allowable only on tangible assets, being building, machinery, plant or furniture. The Act amends this section to widen its scope by providing that depreciation will also be allowable in respect of intangible assets, being know-how, patents, copyrights, trade-mark, licenses or franchises or any other business or commercial rights of similar nature, acquired on or after the 1st day of April, 1998. The Act also amends the definition of the term 'block of assets' so as to include these intangible assets within the meaning of block of assets. The rate of depreciation in respect of these intangible assets has since been prescribed at 25 per cent vide Notification S.O. No. 781 (E), dt. 4th Sept., 1998.

These amendments will take effect from 1st April, 1999, and will, accordingly, apply in relation to the asst. yr. 1999-2000 and subsequent years." (ii) Reverting to the assessment order, the learned Counsel submitted that the learned AO has held that the payment of Rs. 29 crores for acquisition of business of VBC includes payments for tangible and intangible assets including know-how, licence, permits, intellectual property rights, etc. Therefore, there is no further scope for separate payment to be made for intellectual property. He has further held that by making payment of Rs. 6 crores no business/commercial right has been obtained by the appellant and, therefore, has not allowed depreciation under Section 32 of the Act to the appellant; and while coming to the above conclusion, the learned AO has gone by the definition of "acquired business undertaking" which has been discussed at Clause 1, 1 of art. 1 at p.

3 of the business purchase agreement.

"Acquired business undertaking means all of seller's right, title and interest as of the pre-closing or the closing, in respect of the chemical business of the seller, as the case may be, in and upon to the following : (iii) all clearances, permits, licenses, consents, NOCs, etc., tangible and intangible rights and benefits entitled to the seller thereunder, registrations, intellectual property rights, etc." (iii) Further submitted that the learned AO has erred in not appreciating the facts of the case in its correct perspective. He erred in making an observation that the appellant by making the payment of Rs. 6 crores has not derived any intellectual business or commercial right and, therefore, it cannot be part of the block of assets under Section 32 of the Act. The learned AO erred in not accepting the above contention of the appellant on the ground that the payment of Rs. 29 crores includes payments for intangible assets on the basis of the definition of the "acquired business undertaking" as provided in the business purchase agreement and, therefore, there is no further scope for separate payment to be made for an intellectual property.

Our attention, in this connection, was invited to art. H, Clause 2.2 on p. 5 of the business purchase agreement, the relevant part of which is reproduced below : "In consideration of the seller transferring to the buyer, the acquired business undertaking which shall include the acquired business undertaking movable properties and the acquired business undertaking immovable properties, the buyer shall pay to the seller a sum of Rs. 29 crores (Rupees twenty nine crores)...." (iv) He, therefore, submitted that it can be observed from the agreement that payment of Rs. 29 crores did not include payments for intangible assets and it also does not include all the items mentioned at Sub-Clause (iii) of Clause 1.1 of art. 1 of the business purchase agreement.

(v) Our attention in this connection was also invited to the valuation report dt. (sic-31st March, 2002) of M/s Anmol Sekhri and Associates giving asset-wise values for book purposes in respect of the above report which gives the item-wise break-up of the assets included as part of the consideration of Rs. 29 crores which is as follows : From the above details, the learned Counsel for the assessee submitted that the amount of Rs. 29 crores paid is only towards acquisition of tangible and movable assets. It is not towards acquisition of intangible assets.

(vi) In view of above, it was further submitted that the payment of Rs. 6 crores is for acquisition of business/commercial rights and the payment of Rs. 29 crores was for the acquisition of the business as the whole which is separate from acquisition of the business/commercial rights. The payment of Rs. 29 crores was towards acquisition of the movable and the immovable properties of VBC. It is further submitted that no part of that payment was towards acquisition of intangible assets. Accordingly, the observation made by the learned AO that the payment of Rs. 29 crores for acquisition of business of VBC includes payments for tangible and intangible assets including know-how, license, permits, intellectual property rights, etc. is not correct. Accordingly, the learned AO erred in not allowing the claim of depreciation under Section 32 of the Act.

(vii) Our attention was invited to para (iii) of p. 3 of the assessment order wherein the learned AO has made an observation that the technical know-how which was used by VBC Ltd. was acquired from PDIL Sindhri, Norsk, Norway and UHDE, Germany. The technology was under strict secrecy Clause and with the permission of technology provider, VBC Ltd. has also transferred this to the assessee-company as part of business purchase agreement.

(viii) The learned Counsel for the assessee submitted that separate agreements were entered into between the appellant-company and VBC for transfer of the technical know-how. The said agreements were not part of the business purchase agreement as has been observed by the learned AO. Accordingly, the consideration paid of Rs. 29 crores was not for the transfer of technology but was only for the transfer of business , as. discussed earlier. A copy of the said agreements is enclosed.

In view of the above, it was submitted that the payment of Rs. 6 crores made for acquisition of business/commercial rights which were part of the non-compete agreement entered into between the appellant and VBC, (ix) The learned Counsel for the assessee further submitted that Section 32 of the Act so amended inter alia, provides for the depreciation in respect of know-how, patents, copyrights, trade-marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the last day of April, 1998, owned wholly or partially, by the assessee and used for the purpose of the business.

Such depreciation is to be allowed in the case of any block of assets at such percentage on. the WDV thereof as may be prescribed.

(x) According to him, though the term "any other business or commercial rights of similar nature" referred to in Section 32 has not been defined in. the Act, but, applying the principle of ejusdem generis, such rights should be in the nature of know-how, patents, copyrights, trademarks, licences, etc. The expression "similar" is a significant expression. It does not mean identical but it means corresponding to or resembling to in many respects, somewhat like, or having a general likeness. The expression, if interpreted restrictively, will include only business or commercial rights if they are corresponding to or resembling to any one of the preceding assets in many respects. However, the use of word 'or' instead of 'and' enlarges the ambit and commercial rights like rights to trade for a specific period or in a specified area, etc. will be covered by this expression 'similar nature'.

(xi) In view of the above, it was submitted that the appellant by making' the payment for non-compete has acquired the technical know-how. It was further submitted that payments for non-compete results in the acquisition of a capital asset being a right to carry on the business unfettered by any competition from the said competitors, i.e., it gives a business or commercial right to the assessee and, therefore, should be part of the block of assets for the purpose, of Section 32 of the Act. Accordingly, it was submitted that depreciation @ 25 per cent should be allowed to the appellant in respect of the said capital asset, being business or commercial rights.

(a) The appellant in this connection relied on the decision of the Hon'ble Supreme Court in the case of Assam Bengal Cement Co. Ltd. v. CIT , wherein it has been held that: "The consideration in question was to be paid by. the company to the lessor during the whole period of the lease and his advantage or benefit was to continue for the whole period of the lease. It was an enduring benefit for the benefit of the whole of the business of the company. It was not a lump sum payment but was spread over the whole period of the lease and it would be urged that it was a recurring payment. The feet however that it was a recurring payment was immaterial, because one had to look to the nature of the payment which in its turn was determined by the nature of the asset which the company had acquired. The asset which the company had acquired in consideration of the recurring payment was in the nature of a capital asset, the right to carry on its business unfettered by any competition from outsiders within the area. It was a protection acquired by the company for its business as a whole...." (i) on the ratio of the decision in the case of--Henriksen v. Grafton Hotel Ltd. (1942) 24 Tax Cases 453, wherein an observation has been made that the payments for monopoly for acquiring a license for a period of three years must be regarded as attaining the dignity of a capital asset.

(ii) on the decision of the Chelpark Company Ltd. (supra) wherein it has been held that : "though, under the agreement, the benefit of the restrictive covenant was for a period of five years, from the terms of the dissolution deed as well as from the facts of the case stated in the Tribunal's order that the partnership which was a potential competitor to the assessee had vanished and it was clear that the assessee paid the amount to the partnership in order to ward off damaging competition from a potential competitor, resulting in the acquisition by the assessee of a right as well as protection to carry on its business activities as a whole for so long as the assessee carried on such business. Consequently, the payment by the assessee was in the nature of a capital expenditure and not revenue expenditure." (c) Referring to above decisions, (he) submitted that the Courts have held that payments for non-compete consideration are in the nature of a capital asset, i.e., the assessee has got a business or commercial rights for which it has made payments, for non-compete.

The assessees by entering into such an agreement has acquired the right from the seller to not to produce or deal or do any business in respect of a particular product or business, etc., for a particular period of time as mentioned in such agreements.

Accordingly, such payments are in the nature of acquisition of the business or commercial rights from the buyer, which are in the nature of capital assets, as held by the Courts within the meaning of Section 32 of the Act.

(xii) Concluding his submissions on this point, it was again submitted that the appellant be allowed depreciation on such acquisition of business/commercial rights under Section 32 of the Act in respect of non-compete fees of Rs. 6 crores paid to VBC.11. In addition to above, the learned Counsel for the assessee in support of the submissions relating to ground No. 'A', further relied upon the decision in following cases : 12. Ground Nos. B and C relate to disallowance of an amount of Rs. 1, 50, 766 and Rs. 1, 66, 657 under Sections. 36(1 )(va) and 43B of the Act, respectively, in respect of delay in payment of employer's and employee's contribution towards employees provident fund on or before the due date. The grounds read as under: 4. The learned CIT(A) erred in confirming the disallowance of Rs. 1, 50, 766 under Section 36(1)(va) of the IT Act for delayed payment of employees' contribution to provident fund. He erred in not appreciating that since the payment was made within the grace period permitted and/or during the relevant previous year, the same was fully allowable as a deduction.

5. The learned AO erred in making a disallowance of Rs. 1, 66, 657 under Section 43B of the IT Act for delayed payments of employer's contribution to provident fund. He erred in not appreciating that since the payment was made within the grace period permitted and/or during the relevant previous year, the same was fully allowable as deduction." 12.2 The brief facts relating the issue involved in these two grounds, as have been revealed from the records are that during the course of assessment proceedings, the AO noticed that the assessee had not paid the following amounts, which were payable as employees' contribution to employees' PF within the limitation prescribed under the law and, therefore, considered the same as assessee's income by invoking the provisions of Section 36(1 )(va) of the IT Act, 1961 [details are as per para No. 12(ii) of this order].

12.3 Similarly, the AO found that the following payments were payable by the assessee on account of employees' contribution towards employees' PF, pension fund and Employees' Link Deposit Insurance Scheme, but were paid after the due date permissible under relevant provisions of law and, therefore, disallowed these payments by invoking the Section 43B of the IT Act, 1961 [details are as per para No. 12(ii) of this order], 13. (i) It was in view of above facts that the learned Counsel for the assessee submitted that the learned CIT(A) and AO disallowed the payments made by the appellant-company in respect of employees' provident fund to the provident fund authorities without appreciating the facts of the case in its correct perspective.

(ii) According to him, the following were the details of payments made by the employer in respect of employees' contribution and employer's contribution to provident fund, which has been disallowed by the learned AO : Details of disallowance under Section 36(1)(va) of the Act--Emnlover's contribution : Month Amount (Rs.) Due Date Date of payment April, 2000 64, 002 20-5-2000 24-6-2000 May, 2000 64, 204 20-6-2000 24-6-2000 Total 1, 28, 206 July, 2000 2, 400 20-8-2000 9-3-2001 August, 2000 2, 400 20-9-2000 9-3-2001 September, 2000 2, 400 20-10-2000 9-3-2001 October, 2000 3, 840 20-11-2000 7-12-2000 November, 2000 3, 840 20-12-2000 9-3-2001 December, 2000 3, 840 20-1-2001 9-3-2001 January, 2001 3, 840 20-2-2001 9-3-2001 Total 22, 560 Details of disallowance under Section 43B of the Act -- Employees' contribution .

Month Amount (Rs.) Due Date Date of payment April, 2000 72, 572 20-5-2000 24-6-2000 May, 2000 72, 812 20-6-2000 24-6-2000 Total 1, 45, 384 July, 2000 2, 647 20-8-2000 9-3-2001 August, 2000 2, 647 20-9-2000 9-3-2001 September, 2000 2, 647 20-10-2000 9-3-2001 October, 2000 600 20-11-2000 7-12-2000 November, 2000 4, 244 20-12-2000 9-3-2001 December, 2000 4, 244 .

20-1-2001 9-3-2001 January, 2001 4, 244 20-2-2001 9-3-2001 Total 21, 273 (iii) It was submitted that the learned AO while disallowing the claim of the appellant has failed to appreciate the fact that the delay in the aforesaid payments made by the appellant in respect of employees' contribution and employers' contribution of provident fund were due to reasons which were unavoidable. The learned AO/CIT(A) while disallowing the claim of the appellant also failed to appreciate the following notes forming part of Annex. 4 and Annex. 6 of the tax audit report.

The CIT(A) has followed suit. According to learned Counsel, the assessee was entitled to the deduction because of following : (a) The appellant has been granted registration by the Regional Provident Fund Commr., Vishakapatnam, and a code number was allotted on 13th June, 2000. The company has thereafter paid the provident fund dues for April and May, 2000, on 25th June, 2000, which is the date for remittance noted in the letter granting registration.

(b) The company's head office at Pune has been granted registration by the Regional Provident Fund Commr., Pune, and a code number was allotted on 19th Jan., 2001. The intimation of the same was received by the appellant on 5th March, 2001. The appellant has thereafter paid the provident fund dues, on 9th March, 2001.

(c) The due date for payment includes 5 days of grace period allowed under the provisions of the Employees' Provident and Miscellaneous Provisions Act, 1952. Reference : Para 27.4 of the Fourth Edition of the Guidance Note on Tax Audit under Section 44AB of the IT Act, 1961, issued by ICAI.(iv) The learned AO as well as CIT(A) has failed to appreciate the fact that delay in payment of provident fund dues by the appellant-company were due to unavoidable reasons. As can be observed from the aforesaid notes, the delay in respect of the payments in respect of the earlier contributions were due to the fact that the appellant-company had not received the registration certificate from the respective provident fund authorities. After receiving approval from the provident fund authorities both in the case of Pune and Srikakulam Plant, the appellant-company had deposited the dues at the earliest to the provident fund authorities. It was never the intention of the company to delay the deposits of the provident contribution dues with the respective provident fund authorities.

(v) In this connection, our attention was invited to the relevant extract of Circular No. 372, dt. 8th Dec., 1983 giving Explanatory Notes in respect of amendments made in Finance Act, 1983, stating the intention of the introduction of Section 43B in the IT Act : "Several cases have come to notice where taxpayers do not discharge their statutory liability such as in respect of excise duty, employer's contribution to provident fund, Employee's State Insurance Scheme, etc., for long period of times, extending some times to several years. For the purpose of their income-tax assessments, they claim the liability as deduction on the ground that they maintain accounts on mercantile or accrual basis. On the other hand, they dispute the liability and do not discharge the same. For some reason or the other, undisputed liabilities also are not paid.

To curb this practice, the Finance Act has inserted a new Section 43B to provide that deduction for any sum payable by the assessee by way of tax or duty under any law for the time being in force or any sum payable by the assessee as an employer by way of contribution to any provident fund for the welfare of employees shall irrespective of the previous year in which the liability to pay such sum was incurred, be allowed only in computing the income of that previous year in which such sum is actually paid." (vi) From the above, it was submitted that the intention for insertion of Section 43B was to curb the practice of employers not depositing provident fund dues for long period of times, sometimes of several years and claiming such liability with the IT Department authorities.

(vii) According to him, it was never the intention of the appellant to hold the amount of provident fund dues for a long period of time and dispute the payment of such liability before the provident fund authorities. It was only because of delay in getting the registration code, the appellant could not deposit the provident fund dues in time.

It can be further observed from the tax audit report that no other payments made by the appellant had been delayed during the year, i.e., all the subsequent payments were made within the due date as prescribed under the Provident Fund Act.

In view of the above facts, it was submitted that a lenient view needs to be taken as the delay of payments made by the appellant in respect of employer's as well as employees' contribution to the provident fund were due to unavoidable reasons. Accordingly, it is submitted that the disallowances of the amount paid in respect of provident fund of Rs. 1, 50, 766 and Rs. 1, 66, 657 under Sections. 36(1)(va) and 43B of the Act, respectively, needs to be deleted.

(viii) Without prejudice to the above it was submitted that the learned AO has erred in not appreciating the fact that the said payments were made during the relevant previous year.

(ix) Referring to Section 43B, it was submitted that Section 43B of the Act provides that notwithstanding anything to the contrary contained in any other provisions of the Act, a deduction otherwise allowable under this Act in respect of any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of the employees, shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in Section 28 of that previous year in which such sum is actually paid by him.

The second proviso to Section 43B before its omission provided that no deduction shall be allowed in respect of the sum referred above, unless such sum has actually been paid on or before the due date as defined in Explanation below Clause (va) of Section 36(1) of the Act.

In view of the above, it was submitted that once the payment has been made during the previous year, the same is fully allowable as a deduction. The restriction contained in the second proviso is only applicable in respect of payments which are due at the end of the year in respect of which the due date falls in the subsequent year. The same is not applicable to payments which have been made during the previous year beyond the due date prescribed.

(x) It was further submitted that without prejudice to the above, Section 43B(b) of the Act provides that the payments as specified therein should be made within the specified due dates, as provided in the respective laws. The Employees Provident Fund Act provides that the payment should be made within 15 days of the month next following the month for which the salary has been paid. Further, a grace period of 5 days has been extended for the payment of the said sum. Hence, if the payments have been made within the extended period as specified in the respective laws, then the assessee should not be denied the benefit of deduction under Section 43B of the Act.

Reliance, in this connection, was also placed on following decisions and observations therein : (a) Decision of Gauhati High Court in the case of CIT v. Assam Tribune , wherein the High Court has held as under : "Where the contribution towards provident fund, etc., has been paid before the filing of the return by the assessee, the amounts would be deductible." (b) Decision of Mumbai Tribunal in the case of Fluid Air (India) Ltd. v. Dy. CIT (1997) 63 ITD 182 (Mumbai), wherein the Hon'ble Tribunal has held as under : "...Section 43B was inserted to provide that deduction for any sum payable by the assessee by way of tax or duty--under any law or any sum--payable by the assessee as employee by way of contribution to any provident fund or superannuation fund or gratuity fund, etc.

shall be allowed as deduction in computing the income of the year in which sum is actually paid by the assessee. Further, the Finance Act, 1987, inserted two provisos before the Explanation to Section 43B w.e.f. 1st April, 1988 to the effect that the second proviso dealt with liabilities falling under Clause (b) of Section 43B to the effect that no deduction will be allowed in the assessment of the employers unless such contribution is paid to the fund on or before the 'due date', due date means the date by which an employer is required to credit the contribution to the employees' account in the relevant fund under the provisions of any law or terms of contract of service or otherwise. As the assessee had deposited the amounts within the period relevant to the asst. yr. 1992-93, so, if the assessee's claim was not allowed in this year then it will not get any benefit in any of the subsequent years. If a strict interpretation of Sections. 43B and 2(24)(x) r/w Section 36(1)(va) is taken then it would certainly lead to injustice and absurd result which was never the intention of the legislature. Therefore, on the basis of equitable construction, if the construction results in equity and justice, rather than injustice and absurdity then such construction should be preferred to the strict literal construction.

Thus, the provisions of Section 43B, Section 2(24)(x) rule with Section 36(1)(va), so far as they are concerned with the time for making payment, should be interpreted liberally keeping in view; principle of equity and legislative intent behind enacting such prohibitory provisions so that the injustice and the absurdity could be avoided.

As to the determination of 'due date' for making payment, reading together Sections. 36 and 38 it could be said that there is certain amount of ambiguity over the expression '15 days from the close of the month'. In the instant case, the salary and wages had been paid on the 7th day from the end of the month to which it related. So there arose certain amount of ambiguity with regard to the period of 15 days from the close of each month. So, the benefit of ambiguity should be given to the assessee. Viewed in that context, most of the payments having been made within 9 to 22 days from the date of payment of salary and wages should be deemed to have been made within due date and, therefore, no disallowance could be made on that account. Even assuming that the due date for the payment of the contributions fell within a period of 15 days from the end of the month for which salaries were payable since all the payments had been made in the year itself though with a marginal delay of a few days on certain occasions, no part of the contributions received by the assessee from its employees towards PF and ESI could be disallowed so as to consider the same as the assessee's income under Section 2(24)(x) r/w Section 36(1)(va). Therefore, none of the payments in question were hit by the provisions of Section 43B or Section 2(24)(x) r/w Section 36(1)(va), as the case might be, and the additions made by invoking these provisions were accordingly, deleted"Hunsur Plywood Works Ltd. v. Dy. CIT (1996) 54 TTJ (Bang) 260 : (1995) 54 ITD 394 (Bang), wherein Bangalore Tribunal has held as under: "So far as the first addition was concerned, the amounts might not have been paid within 15 days from the expiry of the month, yet in each case they were paid within the accounting year itself.

... In terms of the provisions of Clause (va) of Section 36(1), the amount is to be paid by the employer to the office of the CPF within time as allowed to him in accordance with the relevant law, etc. If an employer makes payment within 5 days' period of grace, not only is he not liable to pay any damage in accordance with the EPF Scheme and the relevant Act, but by virtue of CPFC's circular dt. 29th April, 1967, he will also not be treated to be in default. Hence, from the practical point of view, the 5 days' period of grace after the 15th of the succeeding month was to be considered merely as an extension of the earlier period of 15 days and all the consequences of making payment within the said 15 days should be considered to follow if the payment be made within the grace period following the said period of 15 days.

The Explanation to Clause (va) of Section 36(1), again, defines due date rather in a vague way to mean the date by which the assessee is required to make the payment in accordance with the relevant Act, rule, order or notification or even any standing order, award, contract of services or otherwise. It is clear therefrom that the concept of due date here is to be taken in a rather very flexible sense. Inasmuch as the assessee is very much under impunity if he paid the amount under consideration within the 20th of the following month, the purpose of Clause (va) of Section 36(1) would be substantially complied with if the payment be made within such period of 20th of the following month. In the instant case, inasmuch as the assessee had actually made the payment within such date, the assessee should get the benefit of deduction of the amount under Clause (va) of Section 36(1).

Hence, the entire amount relating to employees' contributions being deductible under Section 36(1)(va) was to be deleted from the addition as made in the assessment." (d) Decision of Madras Tribunal in the case of Madras Radiators and Pressings Ltd. v. Dy. CIT (1996) 56 TTJ (Mad) 662, wherein the Madras Tribunal has held as under : "If the due date is taken to refer to the period of 15 days from the end of the month for which salary is payable to the employees, there was no doubt that in the instant case, there was a delay of only 4 days for two months in respect of PF contribution and a delay of 5 days in respect of ESI contributions. Section 36(1)(va) yields to Section 43B as the latter section starts with a non obstante Clause.

According to Section 43B, the deduction is to be regulated only on the basis of actual payment in the previous year in which it is so paid.

... According to second proviso to Section 43B unless the payment in respect of contributions to PF, etc. have been actually made during the previous year on or before the due date as prescribed under the relevant Acts or the Rules, no deduction should be allowed in respect of the same. Thus, the first proviso in a sense is an enabling provision and the second proviso appears to be a disabling provision. The expression 'during the previous year' was committed from second proviso to Section 43B w.e.f. 1st April, 1989 and with this omission so long as the payments were made within the previous year the payments are to be allowed as deduction under the main section, in respect of the contributions recovered on the last day of the previous year or any other subsequent dates under the second proviso deduction has to be allowed if the payment has been made within the due date prescribed under the Act. Thus, the second proviso to Section 43B has also been made an enabling provision just as the first proviso by the substitution of the second proviso w.e.f. 1st April, 1989. Further, provisos first and second are meant to helpmate the main section rather than hinder its course. In this view of the matter, even assuming that the due date for the payment of the contributions fell within a period of 15 days from the end of the month for which salaries were payable since, in the instant case, all the payments had been made in the year itself though with a marginal delay of a few days on certain occasions, no part of the contributions received by the assessee from its employees towards PF and ESI could be disallowed.

Reading Sections. 30 and 32 of the EPF Scheme together, it would be clear that it is the liability of the employer to pay his own contribution and also the contribution of the member of the PF Scheme employed by him and the employer is also given the right to recover the amount of member's contribution from the wages bill.

Therefore, the provisions of Section 43B which has an overriding effect over other sections must prevail over Section 36(1)(va).

Hence, the assessee's appeal was allowed." (xi) It was further submitted that the Hon'ble Tribunal Delhi Bench "C" in the case of Addl. CIT v. Vestas RRB India Ltd. (2005) 93 TTJ (Del) 144 : (2005) 92 ITD 1 (Del) has held that since introduction of second proviso to Section 43B of the Act, had been held to be retrospective in nature, its omission by the Finance Act, 2003, is also retrospective and will be deemed to be with effect from the date of introduction of this proviso itself, and has further held that the payments covered by that proviso will be allowed if the same have been paid before the due date for furnishing of the return of income for the concerned assessment year and, therefore, so far as the present case is concerned, the payments in question having been made within the previous year, relevant to asst. yr. 2001-02, the same were deductible in asst. yr. 2001-02 itself.

(xii) The learned Counsel for the assessee concluded his submissions on this point by submitting that as can be observed from the details all the payments have been made within the grace period allowed and/or during the relevant previous year. Therefore, the amount of Rs. 1, 50, 766 and Rs. 1, 66, 657 being employees' and employer's contribution to provident fund should, therefore, not be disallowed, under Sections.

36(1)(va) and 43B of the Act, respectively.

(xiii) The learned Counsel for the assessee has submitted that the aforesaid disallowance was not justified and were liable to be deleted in view of following decisions in the following cases : (1) Commr. of Taxes v. Nchanga Consolidated Copper Mines Ltd. (supra)CIT v. Coal Shipments (P) Ltd. (4) Hon'ble Madras High Court in the case of CIT v. Late G.D. Naidu By LRs (supra) (5) Hon'ble Calcutta High Court in the case of CIT v. Hindustan Pilkington Glass Works (supra)Blaze and Central (P) Ltd. v. CIT (7) Hon'ble Madras High Court in the case of Chelpark Company Ltd. v. CIT (supra) (8) Hon'ble Karnataka High Court in the case of CIT v. Bangalore Arrack Company Asstt. CIT v. Rotex Mfg. and Engg. (Guj) (P) Ltd. (2004) 90 TTJ (Ahd) 171Dy. CIT v. Shree Vallabh Glass Works Ltd. (2002) 76 TTJ (Ahd) 652 14. The learned Departmental Representative has supported the order of the Revenue authorities.

We have considered the rival submissions, facts and circumstances of the case and various decisions relied upon by the assessee as well as Revenue authorities and after having considered the totality of the facts and circumstances of the case, what we are able to gather is that the AO has rejected the assessee's claim that the expenditure of Rs. 6 crores incurred in consequence upon "non-compete agreement" was revenue expenditure mainly because of the following reasons : (i) As is gathered from para No. 2.4 of assessment order, the AO distinguished all the decisions except as discussed in ensuing paragraph relied upon by the assessee on the basis of which the assessee had pleaded that the expenditure in question had resulted in enhancement of assessee's profitability/sales by observing that in those cases, the assessees were carrying on similar business earlier to incurring of the expenditure, whereas the assessee was not carrying on the business of dealing in these two chemicals prior to incurring of the expenditure.

(ii) The decision of Hon'ble Supreme Court in the case of Coal Shipments (P) Ltd. (supra) was distinguished by observing that in that case there was no certainty of duration of non-compete agreement because there was no written agreement and because of uncertainty, advantage derived was not of 'enduring nature'.

(iii) Similarly, the decision of Hon'ble Madras High Court in the case of G.D. Naidu By LRs. (supra) was distinguished by observing that the payment in that case was made by a firm to the retiring partner of an existing business.

(iv) The decision of Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. (supra) and the decision followed by the Hon'ble Supreme Court, while deciding this case have not been discussed.

(v) The AO, on the contrary, relied upon the following observations of decision of Hon'ble Supreme Court in the case of Coal Shipments (P) Ltd. (supra) : "It is an accepted preposition that the words 'permanent and enduring' are only relative terms and not synonyms with the perpetual or everlasting. Enduring benefit need not be an everlasting character, it should not at the same time be transitory and ephemeral that it can be terminated at any time at the volition of any of the parties. Payment made to rival dealer to ward off competition in business would constitute capital expenditure, if the object of making payment is to derive an advantage by eliminating the competition for some length of time. It was further observed that the same result would not follow if there is no certainty of the duration of the advantage. How long the period of contemplated advantage should be in order to constitute enduring benefit would depend upon the facts of each case." 15.1 The AO having held that the decisions relied upon by the assessee were not applicable to this case and for arriving at a conclusion that the expenditure in question was of capital nature relied upon on the decisions of Hon'ble High Court of Calcutta in the case of CIT v.Hindustan Pilkington Glass Works (supra), where on the facts of that case (is being discussed hereinafter), the Hon'ble High Court has held the expenditure to be of capital nature.

(i) The brief facts in that case were that the assessee entered into a tripartite agreement with two other concerns which produced the same type of commodity as was produced by the assessee. The object of the agreement was the elimination of competition in order to prevent possible annihilation of the business of the assessee. Under the terms of the agreement, one of the concerns agreed not to produce the particular commodity and in consideration thereof the other two concerns agreed to pay to it a stipulated sum every year.

The agreement was for a period of five years but it could be brought to an end earlier only if there was mutual consent in writing by all the parties. On the question whether the sum paid by the assessee under the agreement was allowable as business expenditure.

(ii) It was in view of above facts, that the Hon'ble High Court after having observed as under (to be reproduced hereinafter) held, that in the instant case, the expenditure was incurred with the declared intention of preventing what the parties to the agreement described as annihilation from business. The expenditure would, in all probability, secure a goodwill for the assessee in its field by sterilizing the operation of a competition for five years, and the benefit would last beyond the period of five years. The profit-making apparatus of the assessee was thereby vastly improved.

The expenditure in question was, therefore, of a capital nature.

"In considering whether an expenditure was revenue expenditure or not, the Court has to consider the nature and ordinary course of business and the objects for which the expenditure was incurred. The question whether a particular expenditure was a revenue expenditure incurred for the purpose of the business should be viewed in the larger context of business necessity or expediency. If the outgoing or the expenditure was so related to the carrying on or conduct of the business that it might be regarded as an integral part of the profit-earning process and not for the acquisition of an asset or a right of a permanent character, the possession of which was a condition to the carrying on of the business, the expenditure might be regarded as a revenue expenditure. Payment made to ward off competition in a business would constitute capital expenditure if the object of making that payment was to derive an advantage by eliminating the competition over some length of time. The same result should not follow if there was no certainty of duration of the advantage and the same could be put an end to at any time. How long the period of contemplated advantage should be, in order to constitute an enduring benefit, would depend on the facts and circumstances of each individual case."Blaze and Central (P) Ltd. v. CIT (i) The brief facts in this case were that the assessee, which was carrying on business of arranging exhibition of advertisement and film shorts in licensed public cinema theatres in the four southern States of Madras, Andhra, Kerala and Mysore, entered into an agreement with one S, who was also carrying on similar business on behalf of two companies in the four States, under which S agreed to part with its business in the four States for a period of 9 years in consideration of the assessee paying a sum of Rs. 1, 50, 000. The assessee paid this amount and its claim for deduction of the same as a business expenditure was negatived by the Departmental authorities and the Tribunal.

(ii) It was in , view of above facts and on reference at the instance of the assessee that the Hon'ble High Court held the expenditure to be of capital nature by observing as under : "That the sum of Rs. 1, 50, 000 was not expended for acquiring the stock-in-trade of the business of the assessee but the assessee had taken over the business carried on by S in the four States for a period of 9 years for a consideration of Rs. 1, 50, 000 so that the assessee had warded off competition and derived an advantage by eliminating competition and also acquired a business which generated income. Consequently, the payment was capital in nature and was not allowable as a revenue expenditure." (iii) In addition to above, the learned AO has relied on similar findings of Hon'ble Madras High Court in the case of Chelpark Co.

Ltd. (supra) and of Hon'ble Karnataka High Court in the case of CIT v. Bangalore Arrack Co. (supra).

16. From the order of the learned CIT(A), we are able to gather that he distinguished the decisions relied upon by the assessee almost on the same reasoning as given by the AO and/or given by him--with respect to decisions which were not referred to before the AO as per his observations contained in para No. 3.4 at page Nos. 11, 12, 13, 14, 15 and 16 of the appellate order, which reads as under : "3.4 The issue has been considered carefully. It is seen that the appellant has acquired the chemical business from VBC, which includes transfer of immovable, movable properties and all clearances, permits, license, consents, NOC, etc., tangible and intangible rights and benefits entitled to seller thereunder, registration, intellectual property rights, etc. against a payment of Rs. 29 crores. The appellant is a concern of the group to which another company, DFPCL belongs. Both the companies are under control of Shri S.C. Mehta, who is director in both the companies. It is worthwhile to mention that DFPCL is a major player in the western India in the field of manufacturing and selling of nitric acid and ammonium nitrate. It appears that they did not have any hold, worth the name in the central eastern India. VBC was a major player in the same business in central eastern India. For certain reasons, they planned to shift to some other line of business and dispose of this chemical business. The appellant entered at that stage and the appellant, who under the name of "Arlem Investment Finance Ltd." did some work related to chemicals, struck a deal with VBC and purchased the chemical business from them against payment of Rs. 29 crores as mentioned above. But, in addition to this payment, they made a further payment of Rs. 6 crores to VBC upfront for non-competition on the part of the VBC. The VBC under the agreement was not supposed to enter either directly or indirectly, in the manufacturing of or trading in the chemicals in that part of the country. The issue to be decided is whether the payment of Rs. 6 crores constituted capital expenditure or revenue expenditure.

On appreciation of the facts of the case, I find that the appellant earlier was doing only some trading business in the chemicals but it was not much. It is true that the another group concern, DFPCL, was manufacturing and selling the two chemicals in the western India, but in the name. So, the starting of the manufacturing business of the two chemicals by the appellant was new business for the appellant. The concept of unit of business of the appellant with that of DFPCL cannot be roped in such cases. A group can have many business under separate entities where they may have common management, etc., but it cannot be said that the business of all entities is the same. Further, DFPCL was not having any presence in the area where the appellant started business. Therefore, I cannot agree with the appellant's contention that there is unity of business between the two concerns. The appellant is separate from DFPCL and accordingly, it is held that the appellant started a new business of manufacturing chemicals after purchase of the same from VBC. For running this chemical business efficiently, the appellant was reguired to make an effective foothold in that part of the country and in this situation, if the VBC also started similar type of business directly or indirectly, it would have been difficult for the appellant to create an effective base in that area. For that very purpose, the appellant paid Rs. 6 crores to VBC for non-competition. It is now to be considered whether by doing so, the appellant acguired any advantage of enduring nature so as to bring the payment under the capital expenditure. In this regard, many decisions have been cited by the appellant and also by the AO. I find that no thumb rule has been prescribed by any decision and the decisions have been taken by the various Courts based on the facts of the case. This is summarized by the Supreme Court in the case of Coal Shipment Ltd. (supra), wherein, the apex Court has laid down certain principle. It has observed that "permanent and enduring" are only related terms and not synonymous with the perpetual and everlasting. Enduring benefit need not be an everlasting character.

It should not at the same time, be transitory and ephemeral that it can be terminated at any time at the volition of any of the parties.

Payment made to a rival trader to ward off competition in business would constitute capital expenditure if the object of making payment is to derive an advantage by eliminating the competition for some length of time. But the same result, would not follow if there is no certainty of duration of the advantage. How long the period of contemplated advantage should be in order to constitute enduring benefit would depend upon the facts of each case. The Supreme Court in another case of Assam Bengal Cement Co. Ltd. v. CIT , has observed that ordinarily, money paid to keep out a potential competitor in business, where the benefit is of an enduring nature, is an expenditure in the nature of capital. Similar view has been expressed by Punjab High Court in the case of Behari Lal Beni Parshad v. CIT (1959) 35 ITR 576 (P&H), Allahabad High Court in the case of Neelkamal Talkies v. CIT , Orissa High Court in the case of Orissa Road Transport Co. Ltd. v. CIT (1970) 75 ITR 126 (On). However, when the benefit is not of an enduring nature but is to exhaust in year or in a short period, the expenditure is of a revenue nature. It has been so held by the Supreme Court in the case of M.A. Jabbar v. CIT and some other High Courts. So the crucial point is whether whatever benefit has accrued to the appellant, is of enduring nature or not.

The appellant has tried to project that the amount paid was for business exigencies and for carrying on the business of the appellant smoothly and the expenditure did not bring into existence any asset or advantage of enduring nature to the appellant and, therefore, the expenditure is revenue in nature. The appellant has also stated that the benefit has in fact accrued only for one year.

However, I am of the opinion that this stand of the appellant is not supported by the various decisions and the facts on record. It is seen that the sales in the period after the acquisition of the business from the VBC shows an increasing trend though the NSP has gone down after the first year of acquisition. But, the decrease in NSP depends on many factors and it is the increase in the sales which is relevant. Be that as it may, what is to be seen is the nature of payment at the time of making payment. The payment has been made undoubtedly to ward off competition to the appellant in its newly started business, from VBC, which is definitely a benefit.

Coming to the period of benefit accrued because of non-competition, it is seen that the Calcutta High Court in the case of Hindustan Pilkington Glass Works (supra) considered the payment made by the assessee to a competitor for stopping production for five years so that excess production could be avoided in the field of manufacturing of wired figured glass. The Court held that the period of five years was a critical period in the glass manufacturing and in this period, the assessee could eliminate the competitor and could generate goodwill for its product and this can be considered as advantage of enduring nature as this would last not only beyond one year, not even for five years, but even for longer period. The Madras High Court in the case of Blaze and Central (P) Ltd. (supra) has held that the payment made to a competitor for taking over all the business carried by them for nine years to ward off competition, resulted in advantage of enduring nature and hence, the payment was capital in nature. The appellant has tried to argue that in these cases, there was one competitor, but in its case, VBC was not the only competitor but there were other market players in this field. But in my view, though there were certain other market players, but the appellant has avoided competition from at least one major market player, i.e., VBC and thus, advantage has infact accrued to it by warding off competition from VBC. The appellant's counsel has cited several decisions in support of the case of the appellant. On consideration of these decisions, it is seen that they are not relevant to the case of the appellant, as can be seen from the following brief discussion of those decisions.

Madras High Court considered the receipt in the hands of retiring partners of a firm for not carrying out the bus business for five years and held that it is neither taxable as income or capital gains. The decision was not to the effect that the payment on the part of the firm was revenue expenditure. In fact, in this case, the Court relied on its earlier decision in the case of CIT v. Saraswathi Publicities , wherein it has been held that the receipt referable to restrictive covenant was capital receipt.

In the case of Empire Jute Co. India Ltd. v. CIT , the Supreme Court considered the purchase of loom hours by the assessee so that the assessee could run its business for longer hours. The issue did not relate to warding off competition as such.

In the case of CIT v. Bombay Dyeing and Mfg. Co. Ltd. (1996) 219 ITR 521 (SC), what the Supreme Court decided was that the payment made to Solicitors with regard to amalgamation of a company was revenue in nature. It is not understood how this case is related to the appellant's fact where the payment is for non-competition.

In the case of CIT v. Lahoty Brothers Ltd. , the issue involved was annual payment made to previous distributors of petroleum and mobil oil from whom the business was taken over by the assessee without the consent of the assessee obtained in writing.

This indicates that the agreement in this regard was terminable at any stage with the consent of the assessee, whereas, in the appellant's case, the agreement cannot be rescinded.

In the case of Commr. of Taxes v. Nchanga Consolidated Copper Mines Ltd. (1965) 58 ITR 241 (PC), the Council considered the issue of payment made by an assessee to seize production of copper for one year because of fall in price of copper. It can be seen that the period involved was for very short, i.e., for one year.Sree Annapoorna Gowrishankar Hotels (P) Ltd. v. Asstt. CIT (1991) 37 ITD 451 (Mad), what the Tribunal, Madras Bench, considered was the reasonableness of payment under Section 40A(2) and the issue was not relating to capital or revenue nature of the payment.

In the case of Pathare Dhru and Co. v. Asstt. CIT (1995) 54 ITD 746 (Bom), the issue involved was payment made to a person for stopping profession for two years. The period thus is very short, only for two years. Similarly in the case of Modipon Ltd. v. IAC (1995) 52 TTJ (Del) 477, the period of benefit was only for three years.

In the case of IRC v. Canon Company (1968) 45 Tax Cases 18 (HL), the issue involved was expenditure for obtaining the new character, defending the action and payment made to two dissenting shareholders in respect of their shares and expenses in the action. The payments were not for non-competition from another party.

In the case of CIT v. Piggot Chapman and Co. (1949) 17 ITR 317 (Cal), the payment was made to a broker for non-carrying on the business for a certain period unless and until the agreement was rescinded. Thus, it can be seen that the period of benefit was uncertain and the agreement in this regard could be terminated at any time at the volition of the parties concerned.

Thus, it can be seen that these judicial pronouncements do not come to the rescue of the appellant as the facts in those cases are different from that of the appellant. The appellant has started its business in a new field by acquiring its business from VBC and has paid Rs. 6 crores upfront to the said party for noncompetition. This would definitely result in advantage of enduring nature. The period of five years is a long period during which the appellant by utilizing various information's, network of VBC, from which it has purchased its business, can establish itself in eastern India and this would definitely continue for years to come and, therefore, the advantage has to be considered as enduring in nature. The period of five years is definite and the agreement for noncompetition for this period cannot be terminated on the volition of the parties concerned.

Taking into account, the aforesaid discussion, I have no hesitation in holding that by making a payment of Rs. 6 crores to VBC, the advantage has accrued to the appellant and that too of enduring nature and accordingly, the expenditure is held to be capital in nature." 16.1 The order of the AO was supported on the basis of same decisions which were relied upon by the AO.17. After having considered the reasoning given in the order of the CIT(A), another fact observed by us is that : (i) though he had supported the order of the AO that the non-compete agreement had not enhanced the assessee's profitability and that the decisions relied upon by the assessee were not applicable because the assessee was not carrying on the business of same chemicals prior to entering into the noncompetition agreement, but in second para at page No. 12 of his order (para No. 34. continued), the learned CIT(A) specifically admits that the assessee was carrying on trading business in the chemicals, though he further observed that it was not much. The observations of the CIT(A) are that "on appreciation of facts of the case, I find that the appellant earlier was doing only some trading business in chemicals, but it was not much" (ii) We have further noticed that in this very para, the learned CIT(A) had accepted that another group concern DFPCL, was manufacturing and selling the two chemicals in the western India, but in the central eastern part of India, they did not have any hold worth the name.

18. After having considered the totality of the facts and circumstances of the case, we, first of all, are of the opinion that, we should decide the question as to whether for appreciating the fact that the non-compete agreement was to enhance the assessee's profitability, was it necessary for the assessee carrying on of the same business and that too on large scale and also the question as to whether the assessee, prior to entering into non-compete agreement was carrying on the business of dealing in same chemicals or not.

19. So far as the first question is concerned, we are of the opinion that carrying on of the same business prior to entering into a non-compete agreement is not necessary to appreciate as to whether the non-compete agreement is to enhance the assessee's profitability or not, because the stage when increase in profitability is to be seen has to be subsequent to entering into such an agreement and not before that. In our opinion, what is relevant, for appreciating that such an agreement has been entered for keeping in view that assessee's profitability will increase, is the carrying on of business with respect to which the agreement has been arrived at in future. Increase in profitability may not happen from the very first day. It is to happen only after the agreement in question has been acted upon and, therefore, even if a person, while starting absolutely a new business, comprehends that another known person may compete him in future and, therefore, to avoid such a competition in the assessee's line of business to be carried on, he enters into a non-competition agreement with such person, then the agreement, in our opinion, is certainly for increasing the assessee's profitability--it is so because the assessee will be able to carry on the business definitely without any competition and may be with enhanced profitability which he otherwise may have not done during the persistence of competition. We are, therefore, of the opinion that the Revenue authorities were not justified in holding that the decisions relied upon by the assessee were not applicable because the assessee was not carrying on the business in chemicals prior to entering into a non-competition agreement, as carrying on of the same business is not relevant.

20. Without prejudice to the above, we, as explained below, are of the opinion that the factual position as stated by the Revenue authorities was not correct.

(i) As explained below, the observations of the AO himself are contrary : (a) The AO himself has, in first para at page No. 1 of the assessment order, accepted that the assessee-company was engaged in business of manufacturing and trading of weak nitric acid and ammonium nitrate. The relevant sentence reads as under : "Assessee-company is engaged in the business of manufacturing and trading of weak nitric acid and ammonium nitrate." (b) In para No. 3.2 of the appellate order, the CIT(A) after referring to the submission of the appellant's counsel to the effect that the appellant was carrying out the trading business of chemicals for last several years and its associated company DFPCL, which was also under the control of same person, Shri C.S. Mehta as was the assessee was one of major players in western India of nitric acid and ammonium nitrate and refutes the observations of the AO that appellant was not in the business of chemicals and also the submission that the fact that the appellant was not in the same business, prior to the acquisition of VBC is not decisive or relevant factor in determining whether the payment of non-compete fee is allowable as revenue expenditure, refers to the remand report procured from the AO [see para 3.3 of CIT(A)'s order) and in the said remand report, the AO has stated to have again submitted that the appellant was not engaged in the manufacturing of nitric acid or ammonium nitrate. Here, it is important to mention that in the assessment order, the AO had taken a plea that the assessee was not carrying on the business of same chemicals, whereas in the remand report he takes a stand that the assessee was not in the manufacturing of nitric acid or ammonium nitrate.

In the same breadth, the AO has stated to have been admitted that "some trade of chemicals on a small scale in some year does not make the appellant as engaged in chemical business" (c) The CIT(A) on appreciation of facts, in para 3.4 admits that the assessee-company as well as DFPCL were under the control of the director, Shri C.S. Mehta and that the assessee was doing some trade business in the chemicals earlier, but according to him, it was not much.

20.1 In view of above facts and circumstances of the case, one fact, which has been duly accepted by both the authorities is that the assessee was doing at least trade business in the chemicals under reference. Here, we would like to raise a question that had the assessee been carrying on the trading business of that very chemicals on large scale, then where was the necessity for him to incur any expenditure for non-competition. Such an expenditure has to be incurred only when assessee's business is not so much and he wants to enhance the same.

20.2 In the totality of the facts and circumstances of the case, relating to this issue, we are of the opinion that in view of factum that the assessee was, prior to entering into this agreement, carrying on the trading business in the same chemicals, the findings of Revenue authorities that he was not carrying on such business get dismantled and, consequently, the very basis for rejecting the assessee's claim that the non-competition agreement was for the purpose of enhancement of his profitability ceased to exist, meaning thereby that if this reason is omitted, then assessee's claim stands accepted. We are of the opinion that the assessee's claim that the expenditure in question was of revenue expenditure is allowable on the basis of aforesaid discussion only.

21. The Revenue authority's stand that assessee was not carrying on same business prior to entering into an agreement having ceased to exist, their findings that decisions relied upon by the assessee were not applicable also got refuted/reversed, meaning thereby that decisions relied upon by the assessee, wherein it has been held that such type of expenditure, if results in enhancement of assessee's profitability, will be revenue expenditure, are fully applicable.

22. Though the assessee has relied upon various decisions, but we are of the opinion that the leading landmark judgment which supports the assessee's case is that of Hon'ble Supreme Court in the case of Empire Jute Company Ltd. v. CIT (supra) and instead of discussing all other judgments, we would like to consider only the decision of the Hon'ble Supreme Court in this case.

22.1 The facts in the case of Empire Jute Company Ltd. (supra) were that the appellant, a company carrying on the business of manufacture of jute, was a member of the Indian Jute Mills Association, which was formed with the objects of, inter alia, protecting the trade of its members, imposing restrictive conditions on the conduct of the trade and adjusting the production of the mills of its members. A working time agreement was entered into between the members restricting the number of working hours per week for which the mills were entitled to work their looms. Clause 4 of the working time agreement provided that no signatory shall work for more than 45 hours per week. Clause 6(b) provided that the signatories shall be entitled to transfer, in part or wholly, their allotment of hours of work per week to any one or more, of the other signatories. Under this Clause the appellant purchased "loom hours" from four other mills for the aggregate sum of Rs. 2, 03, 255 during the previous year relevant to the asst. yr. 1960-61 and claimed to deduct that amounts as revenue expenditure. The Tribunal held that the expenditure incurred by the appellant was revenue in nature and hence deductible in computing the appellant's profits. On a reference, feeling that the decision of the Supreme Court in CIT v.Maheshwari Devi Jute Mills Ltd. concluded the matter, the High Court held that the amount paid by the appellant for purchase of loom hours was in the nature of capital expenditure and was, therefore, not deductible under Section 10(2)(xv) of the Indian IT Act, 1922.

22.2 The Hon'ble High Court has considered various judgments--of Indian Courts as well as English Courts and after explaining the decision of Hon'ble Supreme Court in the case of CIT v. Maheshwari Devi Jute Mills Ltd. (supra), wherein similar type of expenditure was held to be capital expenditure and after following the decision in the case of Hailstorm's Proprietary Ltd. v. Federal Commr. of Taxation 72 CLR 634 and Bombay Steam Navigation Co. (1953) (P) Ltd v. CIT (1965) 56 ITR 52 (SC) and reserved the decision of Calcutta High Court in the case of CIT v. Empire Jute Co. Ltd. , held as reproduced in para No. 21.4 22.3 The decisions discussed by the Hon'ble Supreme Court were as under : (ii) Recourse Belting Contract Board v. Wild (1938) 22 Tax Cases 182, 188 (KB) (iii) Observation of Lord Cane L.C. in Atherton v. British Insulated and Helsby Cables Ltd. (1925) 10 Tax Cases 155, 192 (HL) (iv) Observation of Lord Raddiff in Commr. of Taxes v. Nchanga Consolidated Copper Mines Ltd. (supra) (vi) Dixon J. observation in Halstorms Proprietary Ltd. v. Federal Commr. of Tax Law (supra)(P) Ltd. v. CIT (viii) Observation of Lord Oyde in Robert Addle and Sons Collieries Ltd. v. IRC (1924) 8 Tax Cases 671, 676 (S Sess) 22.4 It was, in view of above facts and circumstances of the case, that the Hon'ble Supreme Court held as under : "Held, reversing the decision of the High Court, that the allotment of loom hours, under the working time agreement to different mills constituted not a right conferred but merely a contractual restricting on the right of every mill to work its looms to their full capacity, and purchase of loom hours by a mill hand, therefore, the effect of relaxing the restriction on the operation of looms to the extent of the number of working hours per week transferred to it, so that the transferee-mail could work its looms for longer hours than permitted under the working time agreement and increase its profitability. The expenditure incurred by the appellant for the purpose of removing a restriction on the number of working hours for which it could operate its looms with a view to increasing its profits was revenue in nature and allowable as a deduction under Section 10(2)(xv). By the purchase of loom hours no new asset was created and there was no addition to or expansion of the profit-making apparatus of the appellant. The acquisition of additional loom hours did not add to the fixed capital of the appellant; the permanent structure of which the income was the product or fruit remained the same; it was not enlarged nor did the appellant acquire a source of profit or income when it purchased the loom hours. The expenditure incurred for the purpose of operating the looms for longer working hours was primarily and essentially related to the operation or working of the looms which constituted the profit-making apparatus of the appellant and was expenditure laid out as part of the process of profit-earning. It was an outlay of a business in order to carry it on and to earn a profit out of this expense as an expense of carrying it on; it was part of the cost of operating the profit-earning apparatus and was clearly in the nature of revenue expenditure.

By the Court : (i) It is not a universally true proposition that what may be capital receipt in the hands of the payee must necessarily be capital expenditure in relation to the payer. The fact that a certain payment constitutes income or capital receipt in the hands of the recipient is not material in determining whether the payment is revenue or capital disbursement qua the payer.

(ii) there may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case.

(iii) What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process. The question must be viewed in the larger context of business necessity or expediency." 23. After careful consideration of aforesaid decision and decision of Hon'ble Andhra Pradesh High Court (Full Bench) in the case of Praga Tools Ltd. v. CIT (FB), decision of Hon'ble Gujarat High Court in the case of Sarabhai M. Chemicals (P) Ltd. v. CIT , and observations in the case of B.W. Noble Ltd. v.Mitchell (1927) 11 Tax Cases 372, 420 referred to in the case of R.S.Radhakishan Kapoor v. CIT (1963) 47 ITR 938, 946 (All), what we are able to conclude is that, though, there are no set principles or tests or rules which can be said to be universally applicable to decide as to whether a particular expenditure is capital expenditure or revenue expenditure because whatever principles have been laid down by various Courts can be applied only with reference to facts of a particular case, but still, we are of the opinion that some of the tests which play a dominant role and should be kept in mind while deciding as to whether the expenditure in question is capital expenditure or revenue expenditure, are as under : (i) That the question must be viewed in the larger context of business necessity or business expediency. This principle had been applied by the Hon'ble High Court of Andhra Pradesh (Full Bench) in the case of Praga Tools Ltd. (supra) which we will discuss later on.

(ii) That if a payment is found to have been made for augmenting the productivity of the profit-making structure, that payment would be revenue expenditure and not capital expenditure, as have been held by the Hon'ble High Court of Gujarat in the case of Sarabhai M. Chemicals (P) Ltd. (supra).

(iii) That if the benefit procured in consequence upon incurring of an expenditure consists merely in facilitating or enabling the management and conduct of assessee's business to be carried on more efficiently or more profitably, the expenditure would be on revenue account, even though the benefit may endure for an indefinite future [Decision of Hon'ble Supreme Court in the case of Empire Jute Co.

Ltd. v. CIT (supra)].

(iv) It is the totality or the cumulative effect of all the facts and circumstances that would be the prime guiding factor to decide the aim and object of the expenditure, be it capital or revenue.

(v) Where the expenditure has a direct nexus, connection or relation to the carrying on or conducting the business of the assessee, it must be regarded as integral part of the profit-making process and in such a case, it must be held to be a revenue expenditure.

(vi) The period for which a right or benefit is available is not relevant because if the expenditure is found to have direct nexus with the profitability, then this test must fail.

24. So far as the present case is concerned, if we consider the expenditure in the light of assessee's necessity or commercial expediency, it will be found that it satisfies both the tests because as admitted by the Revenue authorities, the non-competition agreement was to enhance the assessee's sales of relevant two chemicals in central and eastern parts of India without any competition.

25. Even otherwise, we are of the opinion that the benefit to be procured by the assessee for a period of five years could not be said to be of "enduring nature", as explained hereinafter and since the Revenue authorities have rejected the assessee's claim solely on the ground that the benefit procured by the assessee was of "enduring nature", the orders of the Revenue authorities cannot be upheld.25.1 Our aforesaid finding, finds support from the decision of Hon'ble Andhra Pradesh High Court (Full Bench) in the case of Praga Tools Ltd. v. CIT (supra), where procuring of know-how rights for a period of 10 years with a condition of renewal for another period of 5 years and having right to keep the drawings, etc. after expiry of the term by the assessee, was held to be as not having procured the benefits of enduring nature.

(i) The brief facts in the case and as have been revealed from the records were that the assessee, which was carrying on business in the manufacture of precision and machine tools, machinery and for goings, entered into a licence agreement with J. and S. Ltd., a foreign company of U.K., for the manufacture of certain tools and cutter grinding machines for which J. and S. Ltd. was to supply the accessories, design, technical know-how with latest modifications and assistance. J. and S. Ltd. also agreed to assist the assessee in the manufacture of main castings of the machine and sell to the assessee all the fixtures, jigs, tools, gauges, raw materials and special parts at their commercial retail value. In consideration of grant of manufacturing rights and for providing assistance under the agreement, the assessee agreed to pay initially 1, 000. The agreement was for a period of ten years and renewable thereafter for five years by mutual consent. During the subsistence of the agreement, the assessee had to pay royalty at 5 per cent on the Indian selling price on the production of the machine, subject to Indian taxes. The termination of the agreement was not to affect the rights of the assessee to use, for the purpose of their business, all the information, techniques, technical know-how, patents, copyrights and drawings transferred by J.S. to the assessee or which might have come into the possession of the assessee during the subsistence of the agreement. But the assessee had no right thereafter to use the trade-mark of the collaborator. Similarly, the assessee entered into another agreement with another foreign company, K.T. of U.K., for the manufacture of "drill chucks". The assessee claimed that the royalty payment made to J.S. and K.T. on the production of goods during the asst. yrs. 1965-66 and 1966-67 constituted revenue expenditure and was deductible in computing its profits. The ITO rejected the plea. On appeal, the AAC held that the payments related to production and hence they must be treated as an integral part of the profit-earning process and were deductible. On further appeal by the Revenue, the Tribunal held that the two types of machinery manufactured by the assessee under the agreements were entirely new items which were patented by collaborators and the same was not in the product ional range of the, assessee before entering into such agreement, the payments were made to secure an enduring advantage and, therefore, the expenditure incurred in connection therewith was capital expenditure.

(ii) It was, in view of above facts and circumstances of the case, that the Hon'ble High Court reversed the decision of the Tribunal by holding as under: "That the expenditure incurred had a direct nexus or relation to the carrying on or conduct of the business of the assessee and, therefore, it had to be treated as an integral part of the profit-making process. The very object of payment of royalty based upon the production and sale of the products manufactured by the assessee, was to obtain manufacturing licence and technical know-how including drawings, design, specifications and other technical information, to enable the assessee make and sell the products indicated in the agreements. Merely because the agreements provided that the assessee shall be entitled to retain technical know-how, designs, drawings, etc., even after expiry of the agreements, it did not alter the nature of the transactions. There was no property right transferable in the technical know-how. The fact that the assessee was not entitled to use the trade-mark of J.S. for the products after expiry of the agreement period, clinched the issue.

The expenditure incurred by the assessee for the purpose of payment of royalty to the collaborators was revenue in nature and hence deductible.

It is the totality or cumulative effect of all the material facts evidenced by the documents and the surrounding circumstances that are to be taken into consideration to arrive a decision as to what is the nature of the expenditure. Viewed in the larger context of business, each factor or circumstance by itself may not be decisive." 26. Without prejudice to our aforesaid findings, if we, for the sake of discussion, consider that the benefits derived by the assessee in the present case were of 'enduring nature', then also the assessee is to succeed because of the decision of Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. (supra), and our findings arrived at after following the same to the effect that the effect of the agreement in question being directly related to the sale and production capacity and of two chemicals, which in turn had effect of carrying on assessee's business efficiently and profitably in central and eastern parts of India, the test of enduring nature fails and the expenditure has to be held as revenue expenditure.

27. In view of aforesaid totality of the facts and circumstances of the case, we, after respectfully following the various decisions including the decision of Hon'ble Supreme Court in the case of Empire Jute Co.

Ltd. (supra), are of the opinion that the expenditure incurred by the assessee by entering into a non-compete agreement with "VBC" and its founder, Shri M.V.V.S. Murthy, was of revenue nature and, hence, an allowable deduction.

28. Before parting with the matter, we would like to deal with the AO's another observation made for holding the expenditure in question to be capital expenditure, that there was no fear of competition from "VBC" or that VBC would not have been able to compete within a period of 5 years and that assessee was to continue to get the benefit, even after 5 years, which were of 'enduring nature'.

(i) First of all, we are of the opinion that the AO/CIT(A) have considered the threat for competition only with reference to "VBC" and not with reference to its founder, Mr. M.V.V.S. Murthy, in his individual capacity and, therefore, the conclusion arrived at by them cannot be sustained in law.

(ii) Secondly, we are of the opinion that the chemicals produced by "VBC" before sale of the manufacturing plant to assessee, were being sold in a particular area, i.e., in the central and eastern parts of India and probably without any brand which means that whatever market the VBC and its founder had captured was only because of their personal rapport with the consumers of these two chemicals and, therefore, in the presence of other manufacturers of these two chemicals situated in that area namely, M/s Steel Authority of India Ltd. at Rourkela and Food Corporation of India at Sindhri, VBC as well as its founder, Shri M.V.V.S. Murthy could enter into market for selling the chemicals produced by those two manufacturers and were definitely a potential threat at least in central and eastern parts of India. Consequently, the Revenue authorities' observations that the benefit to be derived by the assessee was of 'enduring nature' because VBC was not in a position to compete during the period of 5 years because it could not start manufacturing these chemicals within 5 years and by that assessee would get established itself so well in the market that it will be difficult to dislodge it, in our opinion, was misplaced, without any basis or reasoning and devoid of any merit.

(iii) Lastly, we are of the opinion that the expenditure has to be seen from the angle of the business or the businessman and not from the Revenue's attitude and it is so because had the assessee any mala fide intention to reduce its tax burden, it could have easily included this payment of Rs. 6 crores in purchase price of the manufacturing plant itself, and could have purchased the plant for Rs. 35 crores instead of Rs. 29 crores. In that case, the assessee would have got depreciation on whole of the amount, i.e., including payment of Rs. 6 crores, and in that situation, nobody was going to question the assessee's bona fide and, therefore, to term the expenditure as of capital nature, only because the assessee has claimed the payments separately, in our opinion, was not justified.

29. So far as decisions, relied upon by the AO and CIT(A) are concerned, we are of the opinion that all those decisions are either distinguishable on facts or had been decided without considering the decision of Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. (supra). Therefore, they are not applicable to the facts of the case.

30. The only decision which could have been applicable, had it considered the decision of Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. (supra), is the decision of High Court of Calcutta in the case of Hindustan Pilkington Glass Works (supra), relied upon by the CIT(A) as well as the AO. But since, admittedly, the decision of the Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. (supra) where the Hon'ble Court has followed the similar decision in the case of Nchanga Consolidated Copper Mines Ltd. (supra) was neither referred to nor had been considered, we are of the opinion that the law laid down by the Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. (supra) which prevails as the law of the land, not only prevails but is binding on all Tribunals and High Courts in India and, therefore, with respect to Hon'ble High Court of Calcutta, we prefer to follow the binding decision of Hon'ble Supreme Court (supra).

31. So far as other two decisions relied upon by the Revenue authorities are concerned, we are of the opinion that they being distinguishable on facts are not of any help to the assessee.

32. To conclude, we, with respect to the issue as to whether the assessee carried on the same business or not or was it necessary for claiming that expenditure incurred by the assessee in consequence upon entering into a noncompetition agreement was of revenue nature, have found that : (i) The assessee already carried on the trading business in the relevant two chemicals, i.e., nitric acid and ammonium nitrate.

(ii) The scale of business is not relevant so far as the fruits of non-competition agreement are concerned because if this agreement is found to have direct effect or enhancement of assessee's profitability, which has to have the effect, irrespective the scale of assessee's earlier business.

(iii) After having purchased the manufacturing unit, the assessee was to sell these two chemicals in central and eastern parts of India where VBC and its founder, Shri M.V.V.S. Murthy, had been selling the chemicals, though not under any special brand, for the last 8-10 years and had definitely earned a good rapport, relationship and name with the consumers of these chemicals, consequently, they could be a potential threat by entering into the trading of same chemicals of other manufacturers. By entering into this agreement, the assessee had not only prevented the potential threat but had derived a benefit/right as a result of which prospects of assessee's sale/profitability of these two chemicals, which were not branded, was bound to increase.

(iv) Even if it is assumed that the assessee was not carrying on the business in these two chemicals at all, even then, the purchase of manufacturing unit was itself relevant and sufficient to support the assessee's claim that subsequent agreement was only to enhance the assessee's sales of these two chemicals in central and eastern parts of India which in turn was bound to enhance the profitability.

(v) So far as Revenue's view that VBC was not able to compete after sale of manufacturing unit because it would have taken about five or more years to install such a plant and by that time, the assessee might have established itself well in the market, we are unable to subscribe to this theory, firstly, because the authorities have not pointed out as to how the installation of such a plant was to take five or more years and, secondly, the authorities have not considered the fact that agreement was with two parties, namely, VBC as well as its founder, Shri M.V.V.S. Murthy, in his individual capacity and was for both manufacturing and trading activities.

Since, not only these two chemicals, but all such type of chemicals are normally sold without any brand because manufacturing of these chemicals does not require any secret formula or secret know-how and even if, sold under a brand, then also, it is not of such importance because in case of goods whose quality is dependent on secret formula or secret skill or secret know-how, it is the 'brand' which matters. For example, nitric acid is always sold as nitric acid--it has neither secret formula nor secret know-how. Similarly, ammonium nitrate is always sold as ammonium nitrate--again does not require any secret formula or secret know-how, and, since there were other manufacturers (manufacturing on large scale) of these two chemicals in the field, namely, Steel Authority of India Ltd. at Rourkela and Food Corporation of India at Sindhri, there was an existing cut-throat competition from these manufacturers and since VBC as well as its founder, Shri M.V.V.S. Murthy had been in this business for the last 8-10 years, they were definitely a potential/substantial threat in marketing of these two chemicals by the assessee. They could easily get trading rights for sale of these two chemicals from the aforesaid two manufacturers.

33. It is in view of above facts and circumstances of the case, we are of the opinion that findings of the Revenue authorities were only on the basis of fictional thinking without there being any cogent material on record, whereas assessee's apprehension of future threat was real and supported by facts already existing.

34. So far as the Revenue's claim that benefit gathered by the assessee (was) 'enduring nature', we are of the opinion that-- (i) The Revenue authorities have accepted incurring of the expenditure and that too for that business.

(ii) So far as the 'enduring nature' is concerned, we are of the opinion that there cannot be any hard and fast rules which may prescribe time limitation, i.e., period during which the benefit survives is not uniform in every case. It may differ from case to case and in our opinion, it bears on the facts of the individual case and future probabilities. In some case, it may be a period of one year, and in other case, it may be five years or in other may be 15 years which may not bring benefit of 'enduring nature'. The only point is to be considered is that can the threat, which is perceived at the time of agreement/incurring of the expenditure will cease to exist after expiry of the period or will re-occur. If the threat has the potential of re-occurring after the expiry of period, then the benefit derived cannot be said to be of 'enduring nature'.

35. So far as the present case is concerned, M/s VBC and founder, .

Shri M.V.V.S. Murthy, both being well in a position financially, as well as otherwise, to compete the assessee even after a period of five years, the threat which was perceived at the time of agreement still subsists and liable to reoccur at the expiry of period of five years in the present case, could not be said to be 'enduring nature' and, therefore, Revenue's plea that expenditure in question was of 'capital nature' because benefits derived were of 'enduring nature' fails.

36. In view of above facts and circumstances of the case, we, after following the decision of Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. (supra), are of the opinion that benefit to be derived by the assessee in consequence upon incurring the expenditure of Rs. 6 crores by entering into a non-competition agreement with VBC and Mr.

M.V.V.S. Murthy was directly related to, the enhancement of the assessee's profitability in the business of manufacturing and trading of these two chemicals under reference and, therefore, the same is held to be of revenue nature and is allowed as business expenditure.

37. Alternatively, this issue can be seen from another angle, as discussed hereunder : (i) It is not the case of the Revenue that the vendor, bereft of all its resources by virtue of the sale (for a consideration of Rs. 29 crores), including its total intangible property (of whatever genre) and human resources, is, in effect, not in a position to provide, in reality, any significant or effective competition to the vendee.

This assumes significance as the payment, being contended as laid out wholly and exclusively for business purposes, its nexus with the ostensible/stated (business) purpose, i.e., to scotch/throttle competition, which forms its raison de'tre, would, necessarily be required to be looked into in order to be justified. And which leads us to the inquiry afore-referred. Moreso, as it becomes incumbent on any authority, faced with the situation where reliance is sought to be placed on a particular document, to view it practically and holistically, before deciding on its basis, even as held by the Hon'ble apex Court, among others, in Lachminarayan Madan Lal v. CIT . This question, in fact, was specifically addressed by the Bench to the learned Authorised Representative, who submitted, in reply, that this is not the Department's case. The learned Departmental Representative, in rejoinder, stated that the AO adverts to this matter, when he states that the vendor would, even otherwise, i.e., independent of this agreement, take several years to build up the required infrastructure (that shall be needed to be put in place so as to pose any effective threat of competition/see para 2.8 of the assessment order). However, we find that the AO takes this argument only to refurbish/advance his case of the impugned expenditure as being capital in nature, the benefit(s) arising therefrom being for an extended period of time, or beyond the embargo period of five years stipulated under the agreement, and thus, of an enduring character.

(ii) While we may agree with his (AO's) this observation, inasmuch as a product which may be introduced in the market only after a minimum period of five years, would, 'take' or 'consume' considerable, and in any case, no insignificant period of time, to dislodge, or make a dent in the market share of a product firmly established (in the market) for the past several years, we find no merit in the contention raised by the learned Departmental Representative. As such, we proceed on the premise, being borne out of record, that the Revenue has not assailed the agreement as to its purport and import, and rather, inferred it to bestow the benefit of non-competition to the assessee even beyond the stipulated five years, over which it (assessee) claims, in the alternative, the deduction (of the revenue expenditure) to be evenly spread. Further, in view of the foregoing, it is also, therefore, not the case of the Department that the consideration of Rs. 6 crores, though purportedly for abstaining (by the vendor-company) from engaging in the trade, is, in reality, a part of the acquisition deal (admittedly, a transaction on capital account) and whereby all the assets and liabilities stand acquired by the assessee; and only camouflaged as a non-compete fee to avail any tax benefits, saving(s) on stamp duty, etc.

(iii) Examining the expenditure for its nature, i.e., revenue or capital, we are of the opinion that once the vendor has sold its entire bundle of rights, whether relating to the manufacturing unit, or the marketing of product(s) being dealt in, it has, effectively, transferred--for a stated consideration of Rs. 29 crores, its entire market share (of the product/product group), as existing, to the assessee-vendee. Further, it would be appreciated that the profits of any organization arise on account of the market share (which includes both quantitative and financial dimensions) its product(s) enjoys; its product cost being governed by the product quality on one hand, and the technology employed (for production) and/or the effectiveness of its management, on the other; all essentially internal variables, which may be deemed as quasi constant, at least in the short to medium-term. As such, it is difficult to see as to how the incurrence of the impugned expenditure (of Rs. 6 crore) would add to the profit-making apparatus assumed by the assessee through the sale agreement. It may, by incurring this expenditure, ensure, at least insofar as the vendor is concerned, that the profit-making apparatus continues to yield returns, as envisaged, or in other words, continues to be as effective, and nothing more, i.e., is akin to a 'maintenance' expenditure. Such expenditure, as would be readily agreed, is incurred only to ensure the operational efficiency of the underlying subject or the income: yielding source.

In marketing parlance, one may draw comparison (to the extent such comparisons can be validly drawn), to the profit of one's understanding, with the expenditure on advertisement. One would easily recall a decline in the market share of a number of products in the public eye, consequent to a sudden or phased withdrawal of advertisement support. In fact, the advertisement also enables an 'increase' in the market share--without doubt--a prized capital asset/advantage; though, however, no firm or definite relationship can be established, in the nature of things, between the two; the success (including its level) or otherwise of an advertisement campaign depending upon a variety of disparate and subjective factors, including the intensity and appeal of that of the rival product(s).

(iv) As such, by incurring this expenditure, the assessee only maintains its profit-making apparatus, as acquired, at its assumed level (and that too, only by cutting off only one of the possible sources of competition), and which, in result, may or may not obtain, so that presuming an extended benefit, would not be appropriate. Again, the analogy of the advertisement expenditure may prove useful; the high level of uncertainty associated with any advertisement campaign, howsoever intensive, and thus high-cost, precludes ascribing (for most part) any capital (in terms of increase in market share) or deferred revenue (in terms of maintaining the existing market share over an extended period of time) value to it. We, therefore, are of the view, that, under the given facts and circumstances of the case, the nature of the non-compete fee of Rs. 6 crores incurred by the assessee is revenue.

After careful consideration of the rival submissions, facts and circumstances of the case and decision relied upon by the assessee (supra), we are of the opinion that the issues involved in these two grounds are covered in assessee's favour and against the Revenue by the decision of Tribunal 'Delhi Bench' in the case of Addl. CIT v. Vestas RRB India Ltd. (supra), wherein the Hon'ble Tribunal has held that the omission of second proviso to Section 43B of the Act, is retrospective; i.e.. from the date the proviso was inserted and consequently, has held that deduction of these kinds of payments is allowable if paid on or before the due date for furnishing of return under Section 139(1) of the Act.

"For the months of April, 1996, December, 1996 and March, 1997, the employees' contribution and employer's contribution towards provident fund were deposited on 24th May, 1996, 21st Jan., 1997 and 20th April, 1997, respectively. The assessee-company's claim for deduction under Section 43B r/w Section 36(1)(va), was disallowed by the AO for non-compliance of mandatory provisions of those sections, the deposits having not been made within the time specified." 40.2 It was in view of above facts, the Tribunal (supra) held as under : "The Finance Act, 2003, has deleted the second proviso and amended the first proviso to Section 43B with effect from asst. yr. 2004-05.

The amendment has an effect of deleting the specified Clauses as mentioned in the first proviso. It also has the effect of bringing existing Clause (b) at par in terms of allow ability of expenses. As per the amended provisions of Section 43B, the payments made, by the employer towards contribution to PF, ESI, gratuity, superannuation and other welfare funds are allowable if the same are paid before filing the return of income and necessary evidence of such payment is enclosed with the return of income. In other words, no disallowance of such payment would be made even if the same are made beyond the due dates prescribed in Section 36(1)(va). The amendment has been made to remove the hardship caused by the total disallowance of the amount paid for the welfare Of employees, if the same had been paid after the due date. Since the amendment in proviso Clause has been done to remove the hardship being caused due to total disallowance, the amendment becomes curative so as to be construed retrospectively in view of decisions of the Supreme Court in Allied Motors (P) Ltd. v. CIT Cement (P) Ltd. and rules of interpretation so as to give due regard to the legislative history and background that led to enactment of the section (paras 12 and 16).

Further, in case the amendment is not accepted to be operative retrospectively, then the amendment, so brought into statute by the Finance Act, 2003, would produce inequitable and illogical result.

For instance, in case of assessees where there has been delay in labour welfare payments by a few days after the due date, the same attracts total disallowance. However, in the case of an assessee who did not make payment and persisted with the default and deposited said amounts after 1st April, 2004, he shall be eligible to the benefit of deduction after the date of amendment. That would give a premium on a persistent default vis-a-vis the small default.

According to the rules of interpretation, equitable construction should be preferred to the literal construction, (para 17).

In view of the above and following the rule of equitable construction, the assessee would be eligible to deduction for all such payments made before the due date of filing of return. (para 19)." 40.3 In the present case, admittedly, the payments were made within the financial year itself and, therefore, respectfully following the decision of Delhi Bench (supra), the disallowance covered by these two grounds are deleted.

"6(i) The learned CIT(A) erred in holding that the date of passing of the assessment order is the date of assessment and that no claim was made either in the return of income or before assessment for depreciation @ 100 per cent in respect of certain items of plant and machinery. Accordingly he erred in not considering the ground of appeal related to non-allowance by the AO of additional depreciation on certain items of plant and machinery.

(ii) The learned CIT(A) erred in not accepting the appellant's alternate plea to admit the claim for the additional amount of depreciation as an additional ground of appeal. He erred in not appreciating the submissions made by the appellant in its correct perspective." 43. The brief facts as have been revealed from the records and are relevant for disposal of this issue are that the assessee while furnishing its return of income had claimed depreciation on all assets relating to plant and machinery, including purchases during the previous year, relevant to asst. yr. 2001-02 @ 25 per cent. However, when the assessment proceedings were in progress, the assessee, as per letter dt. 28th Feb., 2003 furnished before the AO on 12th March, 2003, requested the AO to allow depreciation @ 100 per cent on the assets liable to depreciation @ 100 per cent.

44. The AO was not in a position to entertain the assessee's claim because he had already completed the assessments on 3rd March, 2003.

When the assessee went in appeal before the CIT(A) against other various, additions, the assessee took a ground with respect to depreciation @ 100 per cent and relied upon the decision in following cases :Polymer and Allied Chemicals v. Asstt. CIT (1994) 50 TTJ (Ahd) 110 : (1995) 52 ITD 260 (Ahd) (iii) JAC v. Rollatainers Ltd. (1988) 30 TTJ (Del) 59 : (1987) 23I TD 440 (Del)CIT v. Prabhu Steel Industries (P) Ltd. (xii) Union Coal Co. Ltd. v. CIT (1968) 70 ITR 45 (Cal) 45. The CIT(A), however, rejected the assessee's request and refused to entertain the assessee's claim on the ground that the ground was additional one and requires verification of facts. In support of his conclusion, the CIT(A) relied upon the following decisions :Addl. CIT v. Gurjargravures (P) Ltd. 45.1 The relevant part of his order as contained in para No. 8.2 reads as under: "8.2 The issue has been considered carefully. I find that the appellant, in this case, had filed its return of income in which it claimed depreciation @ 25 per cent on its plant and machinery. On 12th March, 2003, the appellant filed a letter dt. 28th Feb., 2003 before the AO claiming that it is entitled to depreciation @ 100 per cent in respect of certain items of plant and machinery valued at Rs. 1, 81, 67, 725. However, it is seen that the assessment order in this case was passed much before that, i.e., on 3rd March, 2003. The appellant's counsel has stated that the order was received on 14th March, 2003 and, therefore, it cannot be said that the claim was not made before the AO before the completion of the assessment. The plea of the appellant is incomprehensible. The date of passing of the assessment is the date on which the order is passed and not the date on which the order is served. After passing of the assessment order, if any claim is made on behalf of the appellant, the appellant, cannot take a plea that it has made a claim before the assessment order was passed, because the assessment order was not served on him on the date when the claim was made. The stand of the appellant does not at all stand to reason. Therefore, I am of the considered opinion that the appellant neither made claim in the return of income nor during the course of assessment proceedings before the AO with regard to depreciation @ 100 per cent in respect of certain items of plant and machinery. The appellant has however, taken a ground in this regard before me. The position, therefore, is that the appellant has filed the claim under consideration for the first time before the CIT(A) and this does not emerge out of the assessment order or any discussion made during the course of assessment proceedings before the AO. It is now to be considered whether the CIT(A) can adjudicate the ground related to this claim. The issue has been settled by two decisions of the Supreme Court one, in the case of Addl. CIT v. Guijargravures (P) Ltd. and another in the case of Jute Corporation of India Ltd. v. CIT . In the former case, the Supreme Court considered the issue as to whether a new claim made before the first appellate authority for deduction in respect of tax holiday profits under Section 84 can be made when the same was not made by the assessee before the AO nor was there any material on record supporting such a claim. The apex Court held that the first appellate authority cannot entertain the new claim made before him. In the said case, the Supreme Court made it clear that their Lordships were not called upon to consider a case where the assessee failed to make a claim though there were evidence on record to support it, or a case where a claim was made but no evidence or insufficient evidence was adduced in support thereof. This decision was distinguished by the Supreme Court in the case of Jute Corporation of India Ltd. v. CIT (supra), wherein it has been observed that the power of the first appellate authority is coterminous with that of the AO and if that is so, there appears to be no reason as to why, the appellate authority cannot modify the assessment order on an additional ground even if not raised before the AO. However, the decision in the case of Addl. CIT v. Gurjargravures (P) Ltd. (supra) was not overruled by the Supreme Court in this case as the apex Court considered that decision is founded on the special facts of that case wherein, there was no material on record to sustain the claim of exemption which was made for the first time before the first appellate authority. The apex Court further added that the observations in the case of Gurjargravures (supra) (as mentioned above within quotes) do not rule out a case for raising an additional ground before the first appellate authority if the ground so raised could not have been raised at a particular stage when the return was filed, when the assessment order was made or that the ground became available on account of change of circumstances or law. There may be several factors justifying the raising of such a new plea in appeal and each case has to be considered on its own facts. While admitting the new ground, the appellate authority must be satisfied that the ground raised was bona fide and the same could not have been raised earlier for good reasons.

From the two decisions, it is clear that an assessee can raise certain ground before the first appellate authority, which was neither claimed in the return nor raised before the AO before the completion of assessment, only when there is any material on record supporting such a claim and there were good and sufficient reasons for not raising the claim earlier to that. If the facts of the appellant's case are considered in the light of this, it is seen that in the record, there is no material available which can be said to be supportive of the claim of depreciation (c) 100 per cent in respect of certain items. The appellant claimed deduction of depreciation @ 25 per cent in the return and in the return, there is nothing to indicate that certain items do qualify for depreciation @ 100 per cent. During the course of assessment proceedings also, though the matter of depreciation was discussed, the appellant neither made the present claim before the AO nor filed any details on the basis of which, it can be said that certain items were entitled for depreciation @ 100 per cent. In fact, the claim itself requires further investigation on facts and as such, cannot be said to be a matter of record available before the AO. Further, the appellant has not come out with any reason as to why this claim was not made earlier. Therefore, in my view, the claim of the appellant cannot be entertained by the CIT(A). This is also supported by the decision of Tribunal, Ahmedabad Bench, in the case of Polymers and Allied Chemicals (supra). Various decisions cited by the appellant's counsel, wherein the Courts have held that the first appellate authority can entertain such new ground are in the cases where there was certain material on record in support of the claim and there were good reasons for not claiming them earlier. The other plea of the appellant that the Departmental officers are duty bound to assist the assessee in respect of any relief, etc. is not very much relevant as it has been stated earlier that there was nothing on record before the AO to indicate that certain items qualify for depreciation @ 100 per cent and in such circumstances, the AO could not have advised the appellant to claim a depreciation (c) 100 per cent on some items. It was the duty of the appellant to make a claim in this regard by producing supporting evidence, which have not been done and there is no reason for not taking this ground earlier before incorporating this claim in the ground before the CIT(A).

Therefore, it is held that this new ground cannot be entertained at this stage. Accordingly, I do not go into the merits of this claim." 46. It was in view of above facts, the learned Counsel for the assessee, submitted that the CIT(A) was not justified in holding that the issue under reference stood settled by the decision of Hon'ble Supreme Court in the case of Gurjargravures (P) Ltd. (supra). According to the learned Counsel for the assessee, this decision was of two Members Bench, whereas another decision in the case of CIT v. Kanpur Coal Syndicate (supra) was of three Members Bench and the Hon'ble Supreme Court in the case of Jute Corporation of India Ltd. v. CIT (supra) had doubted and distinguished this decision and relied on the decisions listed in para No. 44 of this order.

46.1 Coming to the finding of the CIT(A) that details of machinery which were entitled to depreciation @ 100 per cent were not on record, the learned Counsel for the assessee submitted that it is not correct.

According to him, the assessee's balance sheet wherein the details of fixed assets including additions and sales relating to the plant and machinery and other depreciable assets were duly incorporated was already on record and, therefore, to say that the details were not on record is not correct.

46.2 The learned Counsel for the assessee, further, submitted that when the Revenue has itself allowed depreciation @ 25 per cent on additions to various assets, then how it can be said that details were not available on record. According to him, there was only a mistake in assessee's claim, i.e., the assessee had mistakenly claimed depreciation on additions entitled to 100 per cent depreciation only @ 25 per cent and, therefore, in fact, the claim before the CIT(A) was not new or for the first time. He, therefore, submitted that the CIT(A) was, in view of various decisions including decisions of Hon'ble Supreme Court in the case of Jute Corporation of India Ltd. (supra), New India Industries v. CIT (supra), National Thermal Power Company Ltd. v. CIT (supra) and Baby Samuel v. Asstt. CIT (supra), he should have admitted the assessee's claim.

47. After careful consideration of the rival submissions, facts and circumstances of the case as well as the various decisions relied upon by the parties, first of all, we are of the opinion that the decision of Hon'ble Supreme Court in the case of Gurjargravures (P) Ltd. (supra), in view of subsequent decision of Hon'ble Supreme Court in the case Of Jute Corporation of India Ltd. (supra) and in National Thermal Power Company Ltd. v. CIT (supra) do not seem to be a good law.

48.1 In case of Jute Corporation of India (supra), the Hon'ble Supreme Court distinguished the decision in the case of Gurjargravures (P) Ltd. (supra) and relied upon the decision of three Members Bench of Hon'ble Supreme Court in the case of CIT v. Kanpur Coal Syndicate (supra). It was, for this reason, that the Hon'ble Supreme Court held as under : "(ii) An appellate authority has all the powers which the original authority may have in deciding the question before it subject to the restrictions or limitations, if any, prescribed by the statutory provisions. In the absence of any statutory provision, the appellate authority is vested with all the plenary powers which the subordinate authority may have in the matter. There is no good reason to justify curtailment of the' power of the AAC in entertaining an additional ground raised by the assessee in seeking modification of the order of assessment passed by the ITO.Addl. CIT v. Gurjargravures (P) Ltd. additional ground before the AAC, if the ground so raised could not have been raised at the stage when the return was filed or when the assessment order was made or if the ground became available on account of change of circumstances or law. There may be several factors justifying the raising of such a new plea in an appeal, and each case has to be considered on its own facts. If the AAC is satisfied, he would be acting within his jurisdiction in considering the question so raised in all its aspects. He must be satisfied that the ground raised was bona fide and that the same could not have been raised earlier for good reasons. While permitting the assessee to raise an additional ground, the AAC should exercise his discretion in accordance with and reason." 48.2 In the case of National Thermal Power Co. Ltd. v. CTT (supra), the Hon'ble Supreme Court after applying decision of Jute Corporation of India (supra) held that : "The Tribunal has jurisdiction to examine a question of law which arose from the fact as found by IT authorities and having a bearing on the tax law of the assessee. The Hon'ble Supreme Court further held that the view that the Tribunal is confined only to issues arising out of the appeal before the CIT(A) takes too narrow a view of the powers of the Tribunal (vide, e.g., CIT v. Anand Prasad and Ors. , CIT v. Karamchand Premchand (P) Ltd. discretion to allow or not allow a new ground to be raised. But where the Tribunal is only required to consider a question of law arising from the facts which are on record in the assessment proceedings, we fail to see why such a question should not be allowed to be raised when it is necessary to consider that question in order to correctly assess the tax liability of an assessee." 49. In view of above decisions, and as has been admitted by the CIT(A) also, we are of the opinion that the assessee can raise a claim relating to deduction of any admissible deduction at any stage of the matter, i.e., before the CIT(A) or before the Tribunal as the case may be.

50. Coming to specific findings of the CIT(A) that he was not inclined to admit, the assessee's claim of 100 per cent depreciation on certain additions to plant and machinery on the ground that it requires further investigation of facts, we are of the opinion that this finding of the CIT(A) was misplaced because : (i) The assessee's claim of depreciation @ 100 per cent as against 25 per cent already claimed and allowed, was not a new or fresh or additional ground, as envisaged under the law.

(ii) When the assessee's balance sheet, which contained the details of fixed assets, wherein the additions and sales relating to various depreciable assets had been incorporated was already on record (this fact has not been refuted by the Revenue during the course of appeal before us), there was no question for arriving at the finding that details in addition to plant and machinery or other depreciable assets were not available on record.

(iii) The Revenue having allowed depreciation @ 25 per cent on such additions, the observation of the CIT(A) that assessee's claim required further investigation on facts, was not justified rather was arbitrary and misplaced.

51. Coming to another observations of CIT(A), that the assessee had not given any good and sufficient reason for not raising the claim earlier, we are of the opinion that the law does not specify any such requirements. On the contrary, we are of the opinion that it is incumbent upon the Revenue authorities to tax correct and proper income and levy only lawful and due tax liability and it includes their duty to allow any lawful deduction and also to withdraw or disallow any unlawful claim of deduction. So, when the AO considered the issue relating to depreciation, it was incumbent upon him to find out as to what rate of depreciation the additions in various assets were entitled. Simply saying that the assessee having claimed depreciation @ 25 per cent, the details with respect to assets entitled to depreciation @ 100 per cent were not available is nothing but an arbitrary finding which cannot be sustained in law.

52. In view of above facts and circumstances of the case, we are of the opinion that the CIT(A) was not justified in rejecting to entertain the assessee's claim of depreciation @ 100 per cent on various additions in depreciable assets. In the interest of justice and in view of various decisions of Hon'ble Supreme Court, we, in normal course would have directed the CIT(A) to entertain and allow the assessee's claim, but in the present case, since the claim is to be allowed by the AO, we, instead of directing the CIT(A), remand this issue back to the file of AO with the directions to allow the assessee 100 per cent depreciation on the additions in various assets found to be entitled to depreciation @ 100 per cent.

53. Before parting with the matter, we would like to state that so far as the issue involved in ground "A" is concerned, since we have allowed the assessee's claim on the ground that expenditure in question was of revenue nature, the assessee's alternative grounds, such as : (i) That the expenditure may be allowed in five equal yearly instalments; or (ii) That the assessee had acquired tangible assets, it may be allowed depreciation @ 25 per cent, are not adjudicated at this stage.

In this appeal, the assessee has objected to the order of the CIT(A)-II, Baroda, dt. 22nd Feb., 2005 by way of following grounds : (a) The learned CIT(A) erred in holding that in view of the amendment in Section 154 of the IT Act, 1961 ('the Act'), the AO was fully justified in rectifying the intimation passed under Section 143(1) of the Act.

(b) He erred in not appreciating the fact that once a notice for regular assessment is issued under Section 143(2) of the Act, notice under Section 154 of the Act cannot be issued to rectify the summary assessment under Section 143(1) of the Act.

(c) The appellant in this connection relies on the decision of the Hon'ble Supreme Court in the case of CIT v. Gujamt Electricity Board .

(a) The learned CIT(A) further erred in holding that the AO was justified in treating the following as 'record' for the purposes of passing the order under Section 154 of the Act : (i) the assessment order dt. 3rd March, 2003, passed for asst. yr.

2002-03.

(ii) The order dt. 14th Aug., 2003, passed by the CIT(A) for asst.

yr. 2001-02.

(b) He erred in not appreciating that since the AO was rectifying the intimation passed under Section 143(1) of the Act, only the documents available at the time of passing the said intimation could be treated as 'record' for the purposes of Section 154 of the Act.

(a) The learned CIT(A) further erred in holding that the adjustment made by the AO in the order passed under Section 154 of the Act was mistake apparent from the record.

(b) He erred in not appreciating the fact that the adjustments made by the AO in the order under Section 154 of the Act were not permitted under Section 143(1) of the Act as amended by the Finance Act, 1999, w.e.f. 1st June, 1999.

(c) He, therefore, erred in not appreciating that since the said adjustments were not permissible under Section 143(1) of the Act, the said adjustments could also not be made in the order passed under Section 154 of the Act.

(a) The learned CIT(A) erred in not appreciating the fact that the adjustments made by the AO in the order passed under Section 154 of the Act was not mistake which are apparent from records.

(b) The learned CIT(A) erred in not appreciating the fact that the issues sought to be rectified are debatable and cannot be classified as mistake apparent on record, which could be rectified under Section 154 of the Act.

The learned CIT(A) erred in confirming the levy of interest under Section 234B of the IT Act.

The learned CIT(A) erred in confirming the levy of interest under Section 234D of the IT Act." 57.1 The brief facts, relevant for disposal of this appeal and as have been revealed from the records, are that the return of income for asst.

yr. 2002-03 was filed by the assessee on 29th Oct., 2002 declaring nil income after claiming set off of brought forward unabsorbed depreciation of Rs. 4, 24, 51, 112. The assessee's income was computed under Section 143(1) of the IT Act, 1961.

57.2 Later on, the AO initiated proceedings under Section 154 of the Act on the ground that after the order of the CIT(A) in assessee's case for asst, yr. 2001-02, which is also under appeal before us, unabsorbed depreciation to be carried forward remained only at Rs. 88, 76, 604.

Consequently, the AO, after allowing the assessee an opportunity of being heard rectified the intimation issued under Section 143(1) of the Act, which resulted in an assessed income of Rs. 3, 34, 75, 510.

58. It was in view of above facts that the learned Counsel for the assessee, submitted that the result of assessee's appeal for asst. yr.

2002-03 is consequential to the result of assessee's appeal for asst.

yr. 2001-02. In other words, the learned Counsel for the assessee submitted that if the assessee is allowed any relief in asst. yr.

1991-92, the same will result in increase of unabsorbed depreciation to be carried forward to asst. yr. 2002-03 and, therefore, the AO may be directed to allow consequential relief.

59. The learned Departmental Representative did not raise any objection.

60. After careful consideration of the rival submissions, facts and circumstances of the case and the fact that the assessee has been allowed certain reliefs in consequence upon the decision of its appeal for asst. yr. 2001-02 as per order of Tribunal of the even date, we restore the issue relating to quantum of unabsorbed depreciation to be carried forward from asst. yr. 2001-02 for setting off against the income of asst. yr. 2002-03, back to the file of AO with the directions that the same may be recomputed after giving effect to Tribunal's order in assessee's case for asst. yr. 2001-02 and may be set off accordingly.


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