[Citation -1984-LL-0831-12]

Citation 1984-LL-0831-12
Court ITAT
Relevant Act Income-tax
Date of Order 31/08/1984
Assessment Year 1977-78
Judgment View Judgment
Keyword Tags collaboration agreement • arrears of income-tax • payment of interest • allowable deduction • technical know-how • gratuity liability • enduring advantage • managing director • work-in-progress • levy of interest • paid-up capital • cross-objection • industrial unit • stock-in-trade • capital nature • business loss • capital asset • share capital • special bench • interest paid • capital base • late payment • written off • sales tax • net value • bad debt
Bot Summary: The assessee's interest in finding finance for Ghaziabad concern, as evidenced from the correspondence, does not mean that the assessee was a partner with the Ghaziabad firm. If the assessee was itself promoting the company, it hardly makes sense that the assessee built up a competitor to buy it off. To give an example, while the assessee is interested in having batteries at a cheaper price, it stands to reason that the Ghaziabad company is interested in getting the best price. The relationship between the assessee and the Ghaziabad company is one as between the purchaser and smaller of batteries or as between a supplier and recipient of technical know- how. As for the possible argument that the assessee was acquiring a new source of supply, we find that the factory belonging to another could hardly be considered as the assessee's own source of supply. Even if we were to take the view that the entire venture is one of the assessee or that the assessee was having vital interest in the Ghaziabad matter, we cannot possibly say that it is a capital outlay as long as it is for production of batteries specially in the light of the fact that there are two other units with similar interest. Since the assessee's appeal has been allowed, the assessee's cross-objection has become ineffective and will be treated as infructuous.

These two appeals, one filed by Standard Batteries Ltd. and other by ITO and cross-objection filed by assessee in departmental appeal, all arise out of common order of Commissioner (Appeals) for assessment year 1977-78. They are, therefore, dealt with together. 2. assessee is company engaged in manufacture and production of various types of batteries and minor's cap-lamp. only ground in assessee's appeal relates to disallowance of Rs. 1,00,000 claimed as bad debt in relation to amount advanced to Northern India Batteries Ltd. and written off during year. ITO was of view that it could not be allowed as deduction either as bad debt or as loss inasmuch as advance, in his opinion, was meant to ward off competition and in nature of capital payment. It was assessee's claim that payment was meant to be advance for supply of batteries in future. assessee had relied upon letter placing order for 350 batteries of various types valuing at Rs. 1,27,000, for which this advance of Rs. 1 lakh was paid by cheque. company's receipt, dated 17-6- 1974, also evidenced payment itself as well as nature of payment. However, ITO was not satisfied that it was simply advance for purchase of batteries. In his opinion, it was something more. assessee had already technical know-how agreement with Northern India Batteries Ltd. This agreement was dated 29-12-1973, while advance was paid on 29-3-1974. assessee was to get Jump sum payment of Rs. 5,00,000, in five instalments, besides royalty at 5 per cent. It was also to get 50 per cent of production of said company for its own distribution. He, therefore, inferred from this arrangement that assessee was interested as promoter of said company. He had also seen correspondence between assessee and Northern India Batteries Ltd. of Ghaziabad. This correspondence also revealed that assessee was interested in finding finance for same. It further revealed that assessee was probably aware that money given as advance was not used for purchase of raw materials, but for payment towards acquisition of land for proposed industrial unit at Ghaziabad by Northern India Batteries Ltd. In context of all these facts, he was not impressed by claim that this amount of Rs. 1 lakh was payment simpliciter towards supply of batteries as was contended. assessee, according to him, had obtained advantage of enduring nature. He also referred to some decisions of High Courts and Supreme Court for conclusions that payment was capital one. It is under these circumstances, he disallowed claim. first appellate authority concurred with him practically for same reasons. He pointed out that claim could have never been made as bad debt, inasmuch as this amount was not reckoned as part of assessee's profits at any time. Since payment, according to him, was in capital field, loss would also have same character. It is in this view he confirmed disallowance. assessee is in second appeal. 3. learned counsel for assessee took us over agreement, correspondence, order, receipt and other facts relating to transaction. He fairly conceded that amount could not have been claimed as bad debt. However, he stoutly opposed inference that payment was for any purpose other than one as evidenced by contemporary documents relating thereto. letter placing order and receipt clearly showed that entire transaction related to purchase of batteries. fact that assessee might be interested in Ghaziabad concern as future supplier has nothing to do with this advance. assessee, in collaboration agreement, had undertaken to supply paid-up capital to extent of 10 per cent. It had not done so. There was no other step undertaken towards execution of collaboration agreement. Since Ghaziabad company had only industrial licence and could not succeed in establishing concern, collaboration agreement itself died natural death. He claimed that it is well established that loss of advance towards purchase of goods can well be treated as revenue loss. He also urged that even if departmental version of facts is accepted, assessee's claim was still allowable. assessee not only manufactures batteries by itself, but also gets it done through others. It has arrangement with Power-Pack at Haryana for manufacture of motor-cycle batteries. There is also similar arrangement with M/s Kasturi for manufacture of batteries at Hyderabad. assessee attempted non-exclusive licensing arrangement for manufacture of batteries on very similar basis at Ghaziabad. Dividend, if any, on promised share capital, technical fees and royalty would have been assessable as revenue receipts. There was, therefore, no reason why loss should not be considered to be on same account. assessee's interest in finding finance for Ghaziabad concern, as evidenced from correspondence, does not mean that assessee was partner with Ghaziabad firm. It was interested in ensuring supplies of batteries at cheaper price for distribution in Delhi market. He also pointed out to decision of Supreme Court in case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1, wherein it was held that even any enduring advantage in revenue filed would not constitute right of capital nature. If such enduring advantage is in revenue filed, expenditure, therefore, has to be allowed as revenue deduction. He also sought to distinguish decisions cited on behalf of revenue. He claimed that in any view of matter, claim was admissible. 4. learned departmental representative, on other hand, read out orders of authorities below and relied upon them. He stressed fact that there was no infrastructural facilities available to company at time, when orders were placed against it. Even lands were not purchased. This, according to him, clearly established fact that payment was towards promotion of venture at Ghaziabad, He claimed that assessee was either interested in venture itself or had acquired new source of supply. In either event, assessee's contribution was towards participation in capital field and that on such factual inference, there could not be any other view than one adopted by authorities. 5. We have carefully considered records as well as arguments. order placed by assessee on Northern India Batteries Ltd., Ghaziabad, and receipt do indicate that payment was towards purchase of batteries. If it were merely loss of advance paid for purchase of goods, there cannot be any doubt that loss is one which is incidental to business and, therefore, to be allowed as business deduction. But at same time, we are not prepared to consider this fact in isolation with other facts. assessee had agreement for supply of technical knowhow in manufacture of batteries. This agreement expected capital participation. It also provided for supply of machinery and technical know-how. assessee was to receive technical fee amount of Rs. 5 lakhs to be paid in five instalments. It was to receive further royalty at 5 per cent of net value of sales, besides right to 50 per cent of supplies at cent of net value of sales, besides right to 50 per cent of supplies at specified rates to be determined. This agreement is in form of standard contract agreement for such supplies of technical know-how. correspondence also shows that assessee could not have been unaware of fact that advance of Rs. 1 lakh paid by it was utilized for purchase of land. This was certainly knowledge available to it even on 9-4-1974, while cheque itself must have reached them only little prior to that date, as it was dated 29-3-1974. receipt itself is dated 17-6-1974. We, therefore, share view of authorities that amount is not one which was paid merely for purchase of batteries, though it was probably meant to be adjusted against such future supplies. Since no attempt had been made by authorities to show that either order or receipt are entirely fabricated or otherwise unreliable, we have to consider them as part of other records like correspondence. Reading together entire matter, we are of view that there was close relationship between assessee-company and Ghaziabad company. assessee was no doubt interested in its promotion as potential collaborator and supplier of goods. It is on these facts that we have to come to finding as regards admissibility or otherwise of claim for deduction as revenue loss. 6. Though ITO had tried to say that assessee was trying to ward-off competition by this payment, there is absolutely no material to suggest that there was any competition from this company either at time of payment or even later. If assessee was itself promoting company, it hardly makes sense that assessee built up competitor to buy it off. However, it appears that what ITO had in mind was that assessee had some sort of joint venture with Ghaziabad company and that loss in respect of such joint venture would, therefore, be capital loss. He also appears to have had view that assessee was purchasing new source of supply and, therefore, was having enduring advantage. Though he has not clearly spelt out basis of his legal inference, we will examine whether claim of assessee could be disallowed on either of these possible grounds. 7. Though assessee was interested in success of Ghaziabad company which had industrial licence, it is clear that it only wanted batteries from them. By supply of technical know-how, there was scope for earning technical fees and royalty. By capital participation, it could have earned dividends. But technical fees, royalty or dividend could have been taxable as income in hands of assessee. Besides, collaboration agreement itself had never been implemented. It was agreement which did not take off. If assessee were interested in Ghaziabad company, it is not as co- adventurer. Capital participation implies risk. No doubt, assessee and Ghaziabad company were interested in success of venture. But they were not interested in same way. assessee would not have got any further benefit out of success of Ghaziabad venture except supplies of batteries, which it was already manufacturing not only at Bombay but also at Hyderabad and Haryana. joint venture implies sharing of profits of venture. To give example, while assessee is interested in having batteries at cheaper price, it stands to reason that Ghaziabad company is interested in getting best price. Therefore, though they are both interested in transaction, their interests are not identical but complementary, if not competitive. If there had been any right on part of assessee to profits of Ghaziabad venture, we could have certainly accepted department's case that amount of Rs. 1 lakh was capital contribution. It is clear that order and receipt, whenever made, were intended to make it clear that this amount was not towards capital promised. assessee was not prepared to put money even towards share capital in view of greater risk involved. It made it clear that it was towards supply of batteries, so that it can have right over goods as soon as they are produced. Even if amount is treated as simple loan, it is difficult to imagine that amount was intended for any other purpose than for obtaining batteries, inasmuch as, it is only way that amount could be adjusted. collaboration agreement itself contemplated supplies of 50 per cent of batteries expected to be manufactured. Hence, relationship between assessee and Ghaziabad company is one as between purchaser and smaller of batteries or as between supplier and recipient of technical know- how. In either event, there is no element of joint venture as we understand it. 8. As for possible argument that assessee was acquiring new source of supply, we find that factory belonging to another could hardly be considered as assessee's own source of supply. case law holding that t h e payment for source of supply is of capital nature, has developed in respect of ' mine ' cases. It has been held that receipts and payments in connection with acquiring or disposing of leaseholds of mines and minerals is on capital account. It is because mine, though wasting asset, is source of raw materials and, therefore, capital asset. What is acquired is right to mine, mineral and not mineral itself. In assessee's case, factory with infrastructure thereto will continue to belong to Ghaziabad company. assessee will have no right whatsoever except to its technical fees, royalties, dividend and batteries manufactured by it at price. Under these circumstances, it is not possible to say that assessee has acquired, for itself, source. licence is non-exclusive one. As for price at which assessee was to take batteries, it was to be fixed mutually at some future date. licence itself was not to take effect if assessee had not started production within 12 months from date of licence, which was on 29-12-1973. company had not even succeeded in getting loan and much less infrastructural facilities during that period. agreement, therefore, proved abortive on 29-12-1974. assessee, as pointed out earlier, was already having its supplies. It was having similar arrangement in two other places. All that assessee was ensuring was probably larger supplies of batteries. transaction, which assessee had, was in its own line. advantage, even if it is enduring, is in revenue field. Supreme Court in case of Empire Jute Co. Ltd. clearly pointed out that existence of enduring advantage does not automatically mean that there has been capital disbursement. advantage was merely one of facility in assessee's trading operations in more efficient and profitable manner. assessee was not to get any fixed or other capital. It had no right over assets of Ghaziabad company by payment of Rs. 1 lakh. It could either get batteries, against which this amount could be adjusted or get it back if supplies were not received. Even if this amount is towards not only order placed but for future supplies as inferred by authorities, it cannot be said that benefit is such as to create capital asset either in tangible or intangible manner. It is under these circumstances, we find it difficult to accept that merely because of close relationship and assessee's interest in promoting Ghaziabad company and making its venture success, contribution could be taken to be capital outlay. We have to point out that authorities have not suggested that assessee had any interest other than proclaimed ones. None of directors in assessee- company are stated to be interested in Ghaziabad venture. No other collateral interests other than business ones have been suggested. Even if we were to take view that entire venture is one of assessee or that assessee was having vital interest in Ghaziabad matter, we cannot possibly say that it is capital outlay as long as it is for production of batteries specially in light of fact that there are two other units with similar interest. enduring advantage, if any, which might have accrued, is in revenue field. It is in this view, we find that though we have substantially accepted departmental inference on facts, we are unable to say that amount will have to be disallowed as capital payment. If outlay was business one for acquiring batteries which are assessee's stock-in-trade, loss thereof will have to be allowed as business loss. It is clear that assessee had no prospect of recovery during accounting year. In fact, there is no suggestion that it was recoverable. Though it could not be allowed as bad debt, it has to be allowed as business loss under section 28 of Income-tax Act, 1961 (' Act '). In result, appeal succeeds. Relief due is Rs. 1 lakh. 9. first ground in departmental appeal relates to question of treatment to be accorded to work-in-progress in computation of capital base for purposes of relief under section 80J of Act. This issue has been decided in taxpayer's favour by Bombay High Court in case of CIT v. Alcock Ashdown & Co. Ltd. [1979] 119 ITR 164. first appellate authority has followed this decision in allowing this claim. This was view taken by this Tribunal in assessee's own case for assessment year 1976-77 in IT Appeal No. 1928 (Bom.) of 1980, dated 15-5-1981. His order has to be, accordingly, upheld. appeal on this point fails. 10. second ground in departmental appeal relates to claim of assessee for deduction of interest paid towards arrears of income-tax and sales tax. These were obviously disallowed by ITO on ground that they were in nature of penalties. As for claim of interest of Rs. 1,17,968 being interest as sales tax arrears, we have no doubt that first appellate authority was right in deleting this addition as he found that payment was in nature of in deleting this addition as he found that payment was in nature of interest and that assessee had use of funds in view of delayed payment. Hence, payment of interest towards arrears of sales tax was business interest. Non-payment of interest would have jeopardised its business as sales tax authorities would have used coercive measures to recover same. Hence, in any view of matter, payment had to be made. authorities have not satisfied us either with reference to sales tax law or otherwise that payment was in nature of penalty. This was view taken by this Tribunal for assessment years 1974-75 and 1975-76 in IT Appeal Nos. 317 and 1130 (Bom.) of 1979, dated 23-1-1980, and IT Appeal Nos. 765 and 1287 (Bom.) of 1979, dated 8-2-1980. In these circumstances, we have to uphold part of order relating to allowance of interest on sales tax to extent of Rs. 1,17,968. However, first appellate authority also allowed interest of Rs. 5,269 for late payment of income-tax. Here, we are of view that considerations are different. Though payment is not in nature of penalty, it cannot be considered as allowable deduction under section 37 of Act, because income-tax itself is not allowable deduction. Sales tax and interest thereon are trading liabilities. They have to be allowed before income is determined. It is not so with income-tax. character of interest on income- tax cannot be different from income-tax itself. It is for this reason that we have to allow departmental appeal in respect of payment of Rs. 5,269. addition made by ITO to this extent stands restored. 11. third ground in departmental appeal relates to question of treatment to be accorded to salaries and perquisites paid to managing director as to whether allowance of same should be re-valued under section 40(c) or section 40A(5) of Act. This issue has been decided by Special Bench of this Tribunal in case of Geoffrey Manners & Co. Ltd. v. ITO [1983] 3 SOT 40 (Bom.) in tax-payer's favour, holding that section 40(c) should apply and not section 40A(5). Since this is view taken by first appellate authority, departmental appeal on this point should fail. 12. last ground in departmental appeal relates to question of treatment to be given to payment of commission of Rs. 60,000 to managing director. question is whether it can be taken as part of remuneration or perquisites, so as to be affected by ceiling under section 40(c) [or according to revenue, section 40A(5)]. While holding this amount will be hit, if at all, by section 40(c), we must also hold that we cannot accept assessee's claim that commission cannot be treated as remuneration/ perquisites. Commissioner (Appeals) had followed decision of one of Benches of this Tribunal in deciding this issue in tax-payer's favour. However, Special Bench of this Tribunal has taken different view in revenue's favour in case of Mettur Chemical & Industrial Corpn. Ltd. v. ITO [1982] 1 SOT 265 (Mad.). This issue, therefore, has to be decided in revenue's favour and departmental appeal has to be allowed on this point. ITO would re-work disallowance with reference to section 40(c) by considering Rs. 60,000 as part of assessee's remuneration including perquisites. 13. In result, departmental appeal is partly allowed in manner indicated in preceding paragraphs. 14. first ground in assessee's cross-objection relates to claim for addition of gratuity liability to extent of Rs. 1,85,563 allegedly ascertained with reference to Payment of Gratuity Act, 1972. first appellate authority found that this being provision is hit by section 40A(7). assessee claims that it could be allowed under section 36 or 37 of Act. This Tribunal has been consistently holding that in view of special provision relating to gratuity liability, which required that certain conditions should be satisfied before allowance of this amount on provision basis, same cannot be allowed unless those conditions are satisfied. first appellate authority has referred to decision of this Tribunal for taking view adverse to assessee. We uphold his order on this point. 15. next ground in cross-objection relates to amount of Rs. 1 lakh, which was advanced to Northern India Batteries Ltd. and which became irrecoverable during year. This issue was dealt with in assessee's appeal itself in assessee's favour in paragraph 8 supra. Since assessee's appeal has been allowed, assessee's cross-objection has become ineffective and will, therefore, be treated as infructuous. We will, accordingly, treat this ground as having been dismissed. 16. last ground relates to assessee's objection against levy of interest of Rs. 46,541 under section 215 of Act. We find that issue has been remitted by Commissioner (Appeals) to ITO for examining assessee's objection. learned counsel for assessee expressed apprehension that ITO may understand order of Commissioner (Appeals) as one which directs mere recalculation of interest. first appellate authority has stated in operative part of his order that ' He will recalculate interest if said section is applicable '. earlier part of order also asks him to examine claim of assessee that no interest should have been levied. We, therefore, find that there is no cause for any apprehension on part of assessee. entire matter has been restored to ITO. Even if there be any further doubt on this matter, this order should make it clear. We are, therefore, of view that there could not be any appeal on this point. order of first appellate authority makes it clear that issue has been remitted to ITO for fresh consideration in accordance with law. 17. In result, assessee's appeal is allowed, departmental appeal is partly allowed and cross-objection is treated as dimissed. *** STANDARD BATTERIES LTD. v. INCOME TAX OFFICER
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