N.L. KALRA, A.M. assessee has filed this appeal against order of CIT(A), dt. 31st March, 2003. 2. first grievance of assessee is that learned CIT(A) has erred in confirming addition of Rs. 3,76,00,000 by holding that such expenditure is capital in nature and hence not allowable. 3. order of AO on this issue is as under : "The assessee as per note on accounts given in Sch. 13 filed along with return has submitted that other expenses in Sch. 12 included compensation paid to party to withdraw from manufacturing and supply of some telecom equipments. sum so paid is Rs. 3,76,00,000. assessee was asked as to why compensation aid to party, Rs. 3,76,00,000 should not be treated as capital expenditure. assessee has submitted vide reply dt. 25th Feb., 2000 that during year assessee has paid Rs. 3.76 crore to NELCO in consideration of negative covenants agreed to by NELCO not to manufacture and supply some telecom equipment. By expending above amount, assessee did not acquire or bring into existence any asset, but it was incurred for successful running of business and with view to produce profits. Therefore, it is revenue expenditure and is fully allowable and it cannot be treated as capital expenditure. assessee has also filed copy of agreement. It says subject to provisions of cl. 2 below, NELCO shall cease and desist from directly or indirectly carrying on engaging in India whether in brand name of NELCO or any other brand manufacture and or supply, marketing of telecommunications equipment for India. In this agreement at point 5, consideration for encashment covenant as agreed to by NELCO will be paid in following manner : (a) 15 per cent by 30th June, 1997 (b) 35 per cent by 31st Oct., 1997 (c) 25 per cent by 31st Dec., 1998 As perused from details submitted by assessee and explanation given by assessee in this regard, NELCO will not manufacture and supply same telecom equipment. In other words, NELCO will not enter into competition by manufacturing same telecom equipments which assessee is producing. Thus, by this negative covenant assessee s rival in market has ceased to exist. There can be no doubt that payment to NELCO is for purpose of setting profit earning machinery in motion, is expenditure wholly and exclusively for purpose of business of assessee company. But expenditure for purpose of business may be of capital nature, and if it is of that nature then it cannot be claimed as deduction under s. 37 of Act. Assessee has made payment to NELCO once and for all for procuring enduring benefit to business. Enduring does not mean advantage which will last for ever. Further, it is not confined to something material. advantage may be of incalculable in nature. Thus, there is no doubt that expenses incurred by assessee was to procure advantage for enduring benefit of its business. payment made by assessee was price which it paid to NELCO once for all for securing for its exclusive benefit. market for supply of goods which it manufactured is without any competition with other producer of same goods. Therefore assessee cannot claim any deduction under s. 37 of IT Act for this amount." 4. learned CIT(A) after considering arguments of assessee upheld finding of AO that expenditure is capital in nature. learned CIT(A) has discussed this issue in his order as under : "Disallowance of payment made to NELCO : Rs. 3,76,00,000. This payment was treated as capital expenditure while assessee had claimed it as revenue expenditure. It is seen from copy of agreement between assessee and NELCO that both assessee and NELCO are engaged in manufacture and supply of telecommunication equipment. As per terms of agreement, NELCO shall cease to manufacture, market, lease or sell any wireless, local loop equipment or systems . disallowance has been made since NELCO ceases to manufacture equipment which assessee (sic) and therefore expenditure was in capital field. first argument taken by Authorised Representative is that there are other manufacturers who manufacture telecom equipment and still assessee is operating in competitive environment. It is therefore argued that assessee has not secured enduring benefit. This argument is clearly fallacious. agreement has certainly given assessee enduring advantage and fact that other manufacturers were already there or have entered field subsequently is not relevant consideration in deciding whether assessee s arrangement with NELCO gave assessee enduring benefit or not. assessee has further relied upon certain decisions particularly Karnataka High Court decision in case ofCIT vs. Motor Industries Co. Ltd. (1996) 136 CTR (Kar) 513 : (1997) 223 ITR 112 (Kar)which was in context of compensation agreement paid by MICO (which was engaged in manufacture and sale of its products) to sole distributor appointed for specific region. In terms of agreement, MICO paid compensation for taking over distributorship. It is clear that advantage in that case operated in revenue field i.e. in area of marketing only. In present case, agreement provides for cessation of manufacturing activities and therefore expenditure is in capital field. decision of Supreme Court aforesaid cited is on general principles of revenue expenditure and does not address controversy in hand. facts of that case are also totally different." 5 . During course of proceedings before us, learned Authorised Representative has filed paper book containing copy of non-competition agreement and copies of following judgments : (a)Empire Jute Co. Ltd. vs. CIT (1980) 17 CTR (SC) 113 : (1980) 124 ITR 1 (SC) (b)CIT vs. Motor Industries Co. Ltd.(1996) 136 CTR (Kar) 513 : (1997) 223 ITR 112 (Kar) (c)W. Sassoon J. David & Co. (P) Ltd. vs. CIT (1979) 10 CTR (SC) 383 : (1979) 118 ITR 261 (SC). 6 . learned Authorised Representative drew our attention towards agreement between assessee and NELCO. Adequate compensation was agreed to be paid to NELCO in consideration of NELCO withdrawing from business of manufacture and supply of telecommunication equipments, more particularly described in Annex. to agreement for territory of India only (other item V - SAT and datacom products and services and RAX/MAX to DOT). sum of Rs. 3,76,00,000 was agreed to be paid in 4 instalments in consideration of NELCO ceasing to manufacture, market, lease or sell any wireless local loop (WLL) equipment or system except that product designs available with NELCO currently may be sold or licenced by NELCO to other providers of WLL service. As per learned Authorised Representative AO has treated this expenditure as capital as consideration has been paid to NELCO for not competing with assessee in manufacture and sale of telecom equipments. As per AO, assessee got advantage of enduring benefit and entire competition was warded off. learned Authorised Representative submitted that it is not correct to say that entire competition was warded off. In fact, there are other manufactures who manufacture telecom equipment and still assessee is operating in competitive environment. As matter of fact, after NELCO ceased to manufacture WLL equipment many new manufacturer have entered field. Hence it was argued that assessee has not secured enduring benefit. Without prejudice to claim of not getting advantage of enduring benefit, it is argued that advantage is in revenue field. assessee has attempted to increase its market share and therefore expenditure is allowable as per decision of Supreme Court inEmpire Jute Ltd.case. It was further argued that expenditure is allowable as per principles laid down in following cases : (a)CIT vs. Motor Industries(supra) (b)W. Sassoon J. David & Co. (P) Ltd.(supra) (c)CIT vs. Late G.D. Naidu & Ors. (1986) 51 CTR (Mad) 256 : (1987) 165 ITR 63 (Mad) (d)Commr. of Taxes vs. Nchanga Consolidated Copper Mines Ltd. (1965) 58 ITR 241 (PC) (e)V. Damodaran vs. CIT (1967) 64 ITR 26 (Ker) 7. On other hand, learned Departmental Representative submitted that decisions of Supreme Court as referred to by learned Authorised Representative are not applicable as facts are distinguishable. learned Departmental Representative supported order of authorities below and also relied on decision ofCIT vs. Travancore Sugar & Chemicals Ltd. 1973 CTR (SC) 49 : (1973) 88 ITR 1 (SC). 8 . learned Authorised Representative in his counter-reply submitted that no asset has been acquired by paying compensation. entire business of NELCO has not been taken and NELCO is authorized to continue to do business except in WLL. entire competition has not been warded off. 9 . We have heard both parties. It will be relevant to reproduce relevant clause from agreement : "Whereas NELCO is engaged in activity and supply of telecommunication equipment, data communication equipment and systems, V- SAT equipment and systems, drives, automation and SC ADA systems; and whereas SSIL (assessee) is engaged in manufacture and supply of telecommunication equipment and whereas SSIL and NELCO are affiliated with TATA group of companies. And whereas SSIL has proposed to NELCO to withdraw from manufacture and supply of some of telecommunication equipment in order to facilitate reorganisation of telecommunication business within TATA group of companies and whereas detailed negotiations were held between parties on aforesaid proposal of SSIL. And whereas as result of said protracted negotiations and subject to SSIL making adequate compensation to NELCO, NELCO has agreed to withdraw from business and supply of telecommunication equipment, more particularly described in annexure for territory of India only. 1. With effect from date of this agreement and subject to provisions of cl. 2 below, NELCO shall cease and desist from directly or indirectly carrying on or engaging in India, whether brand name of NELCO or any other brand name, manufacture and for supply, marketing of telecommunication equipment for territory of India, particularly activities described in Annex. A. 4. NELCO acknowledges and agrees that if any of provisions of this agreement are not performed in accordance with their specific terms or are otherwise breached or violated, SSIL is likely to be irreparably damaged thereby and that momentary damages are likely to be inadequate. 9. NELCO acknowledges that compensation it received hereinunder is full, fair and complete compensation for business which it has agreed to forgo under. 10(b). If this agreement or any of activities undertaken under it are subsequently found by competent body to be in violation of any such law or regulations this agreement will be terminated. In that event NELCO will return all compensation received hereunder less expenses and costs actually paid out or incurred in implementation of this agreement, provided that NELCO decides to recommence business of manufacture and supply of telecommunication equipment for territory of India." 10. In any agreement, purpose for which agreement is being made is mentioned in beginning. Such purpose throws light on object of agreement. In instant case, it is clear that both companies belong to same group. negotiations were held for facilitating reorganisation of telecommunication business within TATA group of companies. As per cl. 9 of agreement compensation was paid in consideration of NELCO foregoing business of manufacture, supply and marketing of WLL equipments. Hence primary objective behind agreement was aimed at reorganisation of business in same group. 1 1 . learned Authorised Representative has relied on following observation of Supreme Court in case ofEmpire Jute Co.(supra) : "This test, as parenthetical clause shows, must yield where there are special circumstances leading to contrary conclusion and, as pointed out by Lord Radcliffe inCommr. of Taxes vs. Nchanga Consolidated Copper Mines Ltd. (1965) 58 ITR 241 (PC) : TC 16R. 991, it would be misleading to suppose that in all cases, securing benefit for business would be,prima facie, capital expenditure so long as benefit is not so transitory as to have no endurance at all . There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, none less, be on revenue account and test of enduring benefit may break down. It is not every advantage of enduring nature acquired by assessee that brings case within principle laid down in this test. What is material to consider is nature of advantage in commercial sense and it is only where advantage is in capital field that expenditure would be disallowable on application of this test. If advantage consists merely in facilitating assessee s trading operations or enabling management and conduct of assessee s business to be carried on more efficiently or more profitably while leaving fixed capital untouched, expenditure would be on revenue account, even though advantage may endure for indefinite future." 12. In abovereferred case, expenditure related to purchase of loom hours. Loom hours were not transferable from one week to another and advantage obtained was for six months. Hence it was observed that no enduring benefit was derived from purchase of loom hours. 13. learned Supreme Court also pointed out that there are always cases falling indisputable on one or other side of line and it is familiar argument in Tax Courts that case under review bears close analogy to case falling on right side of line and must, therefore, be decided in same manner. If we see observation of Supreme Court that by purchase of loom hours, no enduring benefit was derived, then, case of assessee cannot be decided on analogy of theEmpire Jute case. 1 4 . In this judgment, worthy Supreme Court also referred to following question to be posed for deciding as to whether expenditure is on revenue account or capital account : "Whether outgoing expenditure is related to carrying on or conduct of business. If yes then it is on integral part of profit earning process and not for acquisition of asset or right of permanent character." 1 5 . In instant case, if such question is put then expenditure has resulted into right of permanent character. Such right of permanent character is in capital field. It cannot be said profit making apparatus has not been enlarged. marketing of equipments has become less competitive when one considers that equipment being made is from group company of TATA while other group company is not competing at all. In present day marketing, brand name is very important. 16. CIT vs. Motor Industries Co. Ltd.(supra). Company G was marketing products of MICO in region comprising Delhi and portions of States around it. arrangement worked on basis of n unwritten understanding between parties till 10th Feb., 1967 when written agreement was executed between them valid for period of 5 years. Before expiry of this agreement on 10th Feb., 1972, MICO vide letter dt. 28th Jan., 1972 specified pattern of proposed take over in phases. Shortly after aforesaid protocol, agreement was made on 18th March, 1972 made effective from 10th Feb., 1972 and such agreement was to run for five years. Instead of renewing agreement any further, MICO decided to take over remaining territories at once without going through phased programme of take over as was originally contemplated under protocol. Negotiations were held with G by MICO and after discussions and deliberations G agreed to premature termination of agreement upon payment to it of compensation of Rs. 99 lakhs. issue before learned Karnataka High Court was as to whether expenditure is capital or revenue. 17. learned High Court observed that protocol which permitted phased take over of territories was not mentioned in agreement dt. 10th Feb., 1972. It also held that agreement dt. 10th Feb., 1972 has superseded protocol. There was no clause in agreement dt. 10th Feb., 1972 which gave right to G for its renewal. If agreement was to be consistent with protocol, then same should have recognized right of G to continue with distributionship business at least in respect of third phase territories till year 1992. Hon ble High Court further observed that Tribunal had returned finding that continuation of G as MICO s sole distributor was commercially disadvantageous for latter and termination of distributorship would benefit assessee. 18. learned Authorised Representative during course of arguments has drawn our attention to following observation of learned High Court : "In said judgment this Court took view that construction of roads by assessee under scheme sponsored by State Government was revenue in nature as it facilitated assessee s business, and enabled assessee to carry on same with greater efficiency and profitability. It was held that even though construction of road had conferred upon assessee enduring advantage for its business, it did not secure any tangible or intangible asset. Further because advantage gained by assessee was chiefly to facilitate assessee s business operation with greater efficiency and profitability without touching fixed capital of assessee, expenditure could only be treated to be revenue in nature. Two other judgments relied upon by Mr. Dattu, namelyEmpire Jute Co. Ltd. vs. CIT (1980) 17 CTR (SC) 113 : (1980) 124 ITR 1 (SC) : TC 16R. 953andAlembic Chemical Works Ltd. vs. CIT (1989) 77 CTR (SC) 1 : (1989) 177 ITR 377 (SC) : TC 16R. 1277, may also be noticed at this stage. In former, Supreme Court was considering question as to whether expenditure incurred by assessee on purchase of loom hours for working of looms constituted capital expenditure. Repelling contention that expenditure had acquired for assessee advantage of enduring nature in capital field, their Lordships held that assessee had at best acquired only advantage in nature of relaxation of restriction on working hours imposed by working time agreement thereby enabling assessee to operate its profit earning structure for longer number of hours. distinction was drawn between profit earning structure of assessee on one hand and operation of profit earning structure for longer hours on other. Acquisition of more working hours was held to be falling in second category and, therefore, did not amount to held to be falling in second category and, therefore, did not amount to acquisition of capital asset. Seen from point of view of Revenue, answer given by their Lordships of Supreme Court inEmpire Jute Company scase (supra) ought to have gone in its favour, for, according to Revenue it could be said that expenditure made by assessee had acquired for assessee enduring benefit. This was not, however, so and distinction made between profit earning structure of assessee and its utilisation was invoked to hold that acquisition of advantage notwithstanding same was not in capital field. Similarly, in theAlembic Chemical Workscase (supra) distinction between revenue and capital expenditure was stated in following terms : ...the distinction between revenue and capital corresponds with distinction between business entity, structure or organisation set up or established for earning of profit on one hand and process by which organisation operates to obtain regular returns on other hand... . Applying rationale of aforesaid two judgments, to facts of instant case, it is fairly obvious that payment made by assessee to GEC did not make any augmentation in profit making structure but simply brought about change in process by which organisation operated or facilitated such operations." 19. learned jurisdictional High Court in above referred case has also observed that there is no universally applicable test and broad principles evolved are at best only helpful in arriving at correct conclusion without any one single test or principle being conclusive in nature. 20. Sassoon J. David and Company (P) Ltd. vs. CIT(supra). In this case compensation was paid on termination of directors. Directors sold their shares to TATAs for takeover of company by TATAs and compensation paid by company to directors was deductible from amount to be paid by TATAs. learned Supreme Court in this judgment was required to decide as to whether expenditure was incurred wholly and exclusively for purpose of business. learned Supreme Court held that company continued functioning even after its control passed on to TATAs and expenditure in question was laid for purpose of company s own trade and not for trade of TATAs who were only its shareholders. This case law is of no help to assessee. 21. CIT vs. Late G.D. Naidu & Ors.(supra) In this case assessee and son were partners with others and were carrying o n transport business. New partners took over firms in stages. There were payment by firms to assessee and son for not carrying bus business for 5 years. learned Madras High Court held that payment towards restrictive covenants i s revenue in nature and is allowable. learned Madras High Court while giving abovereferred finding observed that no separate business of old partner was acquired or any competition was eliminated by such acquisition. Since there is no acquisition of any business by payment of amount referable to restrictive covenant and there is no benefit of enduring nature being acquired, payment can only be treated as revenue outgoing and not capital in nature. 22. Commr. of Taxes vs. Nchanga Consolidated Copper Mines Ltd.(supra) In this case, payment was made by one company of group to another to cease production for one year in order to check fall in price of copper. issue before Privy Council was as to whether such expenditure is capital or revenue. In that judgment it was held that such payment was operating cost of payer company. In this case payment was made to another company for stopping production only for one year and hence it was not case of enduring benefit. 23. V. Damodaran vs. CIT(supra) In this case, assessee paid amounts to rival forest contractors to persuade them not to bid at auction of forest coupe. learned Kerala High Court allowed expenditure as revenue as it was incurred to obtain raw material by assessee. 24. Tamil Nadu Dairy Development Corporation vs. CIT (1999) 239 ITR 142 (Mad) In this case compensation was paid to Madras Co-operative Milk Supply Union as vendor i.e. Madras Co-operative Milk Supply Union undertook not to market milk in Madras city. learned Madras High Court held that compensation was clearly expenditure of capital nature. learned Madras High Court relied on decision of same High Court in case ofChelpark Company Ltd. vs. CIT (1991) 94 CTR (Mad) 71 : (1991) 191 ITR 249 (Mad),in which it was held that amount paid to ward off competition from potential competitor resulting in acquisition by assessee of right as well as protection to carry on its business activity as whole so long as assessee carried on such business was in nature of capital expenditure and not revenue expenditure. 25. CIT vs. Coal Shipments (P) Ltd. 1972 CTR (SC) 151 : (1971) 82 ITR 902 (SC) In this case, payment was made to competitor as per agreement but agreement was terminable at will. Hon ble Supreme Court observed (head note) "Payment to ward off competition in business to rival would constitute capital expenditure if object of making that payment is to derive advantage by eliminating competition over some length of time; same result would not follow if there is no certainty of duration of advantage and same can be put to end at any time. How long period of contemplated advantage should be in order to constitute enduring benefit, would depend on circumstances and facts of each individual case. Although enduring benefit need not be of everlasting character it should not be so transitory and ephemeral that it can be terminated at any time at violation of any of parties." 26. Gujarat Mineral Development Corporation Ltd. vs. CIT (1983) 34 CTR (Guj) 250 : (1983) 143 ITR 822 (Guj) assessee with view to expanding its business and avoiding competition on adjacent land with view to getting required raw material for desired number of years, paid sum of Rs. 3 lakhs to Madras company on condition that Madras company agreed to give up its claim for mining lease in respect of said adjacent land. Madras company withdrew suit as well as writ petition and vacated land with view to facilitating assessee to obtain mining lease in respect of land. Madras company as per law was having preferential right to get mining lease in respect of adjacent land. Payment thus not only avoided competition but facilitated allotment of mining lease to assessee. Expenditure was held as capital. Since in instant case learned Authorised Representative has heavily relied on judgment of Supreme Court inEmpire Jute Co. scase, it will be relevant to reproduce following paras from judgment of learned Gujarat High Court in which it is said that Supreme Court judgment does not suggest that if expenditure is capital as per facts laid down, Revenue must show that capital asset has come into existence. "But before we apply these tests, we must deal with submission of Mr. J.P. Shah, learned counsel for assessee, who vehemently contended before us that as pointed out by Supreme Court inEmpire Jute Co. scase (supra), these tests are not conclusive and are found to have broken down. According to learned counsel, Supreme Court, therefore, sidetracked these tests and evolved new test to effect that in order that expenditure can be said to have been incurred on capital account, it must be shown that capital asset has come into existence otherwise, expenditure must be taken to be of revenue nature. Bhagwati J., who spoke for Supreme Court, after reproducing test laid down by Lord Cave inAtherton scase (supra), observed as under (p. 10 of124 ITR) : This test, as parenthetical clause shows, must yield where there are special circumstances leading to contrary conclusion and, as pointed out by Lord Radclife inCommr. of Taxes vs. Nchanga Consolidated Copper Mines Ltd. (1965) 58 ITR 241 (PC), it would be misleading to suppose that in all cases, securing benefit for business would be,prima facie, capital expenditure, so long as benefit is not so transitory as to have no endurance at all . There may be cases where expenditure, even if incurred for obtaining advantage of may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, none less, be on revenue account and test of enduring benefit may break down. It is not every advantage of enduring nature acquired by assessee that brings case within principle laid down in this test. What is material to consider is nature of advantage in commercial sense and it is only where advantage is in capital field that expenditure would be disallowable on application of this test. If advantage consists merely in facilitating assessee s trading operations or enabling management and conduct of assessee s business to be carried on more efficiently or more profitably while leaving fixed capital untouched, expenditure would be on revenue account even though advantage may endure for indefinite future. test of enduring benefit is, therefore, not certain or conclusive test and it cannot be applied blindly and mechanically without regard to particular facts and circumstances of given case.' 21. These observations, in our opinion, do not say that test evolved by Lord Cave cannot be applied even if facts for its application are laid before Court. Supreme Court has merely stated that test of enduring benefit is not conclusive test and ought not to be applied blindly and mechanically without regard to particular facts and circumstances of given case. It has at same time stated that where expenditure is in capital field, expenditure would be disallowable on application of this test. Therefore, submission of Mr. Shah that Supreme Court in decision ofEmpire Jute Co. Ltd.(supra), sidetracked all earlier tests and now evolved new test of universal application cannot be accepted. Dealing with second test applied by Lord Haldane by drawing distinction between fixed capital and circulating capital, Supreme Court observed as under (p. 11 of124 ITR) : But this test also sometimes breaks down because there are many forms o f expenditure which do not fall easily within these two categories and not infrequently, as pointed by Lord Radcliffe inCommr. of Taxes vs. Nchanga Consolidated Copper Mines Ltd.(supra), line of demarcation is difficult to draw and leads to subtle distinctions between profit that is made out of assets and profits that is made upon assets or with assets. Moreover, there may be cases where expenditure, though referable to or in connection with fixed capital, is nevertheless allowable as revenue expenditure. illustrated example would be of expenditure incurred in preserving or maintaining capital assets. This test is therefore, clearly not one of universal application. 22. These observations do not lay down, as urged by Mr. J.P. Shah for assessee, that said test evolved by Lord Haldane is outdated and cannot be applied even if facts of given case attract its application. 23. At this stage we may also refer observations of H.H. Bhagwati, J. inAssam Bengal Cement Co. scase (supra), where he pointed out that this test can be applied only if test evolved by Lord Cave is not attracted. learned Judge, speaking for Supreme Court stated (p. 45): It is only in those cases where this test is of no avail that one may go to test of fixed or circulating capital and consider whether expenditure incurred was part of fixed capital of business or part of its circulating capital. If it was part of fixed capital of business it would be of nature of capital expenditure and if it was part of its circulating capital it would be of nature of revenue expenditure. These tests are thus mutually exclusive and have to be applied to facts of each particular case in manner above indicated.. One has therefore got to apply these criteria one after other from business point of view and come to conclusion whether on fair appreciation of whole situation expenditure incurred in particular case is of nature of capital expenditure or revenue expenditure in which latter event only it would be deductible allowance under s. 10(2)(xv) of IT Act. 24. It would, therefore, appear from above observations of Supreme Court that test of fixed capital or circulating capital could be invoked only if test of acquisition of asset or advantage for enduring benefit of trade, has no application to facts of given case. In theEmpire Jute Co. scase (supra), Supreme Court has not stated that these tests are no more relevant and that expenditure would be on revenue account even if it was incurred for acquisition of capital asset or advantage of enduring nature if assessee s fixed capital remains untouched, meaning thereby, remains unaugmented. It must be remembered that their Lordships had come to conclusion that allotment of loom hours, under working time agreement, to different mills constituted not right conferred but merely contractual restriction on right of every mill to work its loom to their full capacity, and purchase of loom hours by mill had, therefore, effect of relaxing restriction on operation of looms to extent of number of working hours per week transferred to it, so that transferee mill could work its looms for longer hours than permitted tinder working time agreement and increase its profitability. It was held that by purchase of loom hours no new asset was created and there was no addition to or expansion of profit making apparatus of assessee. In other words, acquisition of additional loom hours did not add to fixed capital of assessee, permanent structure of which income was product or fruit, remained same, that is, unenlarged. It is in special facts of that case that Supreme Court came to conclusion that profit making apparatus of assessee remained untouched and unaltered; there was no enlargement of permanent structure and what assessee acquired was merely advantage in nature of relaxation of restriction on working hours imposed by working time agreement so that it could operate its profit earning structure for longer number of hours. It was in backdrop of these facts that Supreme Court came to conclusion that payment made for acquisition of additional loom hours could not be said to be in direction of acquiring capital asset because no capital asset was in fact acquired as profit making apparatus of assessee was not enlarged and, therefore, expenditure must be taken to be on revenue account. That, however, does not mean that even if expenditure is made with view to acquiring capital asset or advantage of enduring nature and case falls directly within test laid down by Lord Cave and there are no circumstances pointing to contrary, expenditure would still be on revenue account if no fixed asset or advantage for enduring benefit of trade is ultimately acquired. We are, therefore, of view that decision of Supreme Court does not go so far as to say that tests evolved by Courts earlier are not relevant and in order that expenditure could be branded as on capital account, Revenue must show that assessee has acquired fixed asset or advantage of enduring nature by expenditure so incurred." 27. Coromandel Fertilizes Ltd. vs. CIT (1984) 39 CTR (AP) 210 : (1984) 148 ITR 546 (AP) assessee entered into agreement with EID parry whereby party agreed to impart to assessee its know-how regarding agronomical research, s o i l formation and chemical compositions, cropping patterns particularly applicable to South India as also its know-how for promoting sale of fertilizes manufactured by it. EID parry agreed not to sell its products in AP and other areas adjacent thereto. In this case, amount paid was held as revenue as according to Hon ble High Court acquisition of sales know-how, market conditions and soil compositions were not of lasting and enduring nature. Hon ble High Court held that no tangible benefit of enduring nature was acquired by assessee. 28. CIT vs. Hindustan Pilkinton Glass Works (1981) 24 CTR (Cal) 327 : (1983) 139 ITR 581 (Cal) assessee entered into tripartite agreement with two other concerns which produced same type of commodity as was produced by assessee. T h e object of agreement was elimination of competition in order to prevent possible annihilation of business of assessee. Under terms of agreement one of concerns agreed not to produce particular commodity and in consideration thereof other two concerns agreed to pay to it stipulated sum every year. agreement was for period of 5 years but it could be brought to end earlier only if there was mutual consent in writing by all parties. learned High Court held that expenditure would in all probability secure goodwill for assessee in its field by sterilizing operation of competitor for 5 years and benefit would last beyond period of 5 years. profit making apparatus of assessee was thereby vastly improved. expenditure in question was therefore of capital nature. Calcutta High Court has also discussed decision of Supreme Court in case ofEmpire Jute Company Ltd.(supra). learned Calcutta High Court was of opinion that facts in case before them were entirely different from case before worthy Supreme Court but principles laid down by Supreme Court would be applicable. learned High Court further observed that if competition can be eliminated for 5 years, goodwill that would generate in those 5 years could be considered to be from practical and business point of view point of view which enjoined Supreme Court to look into question advantage of sufficient enduring (effect) not only beyond one year, not even for 5 years, but even for longer years, because goodwill thus acquired would linger beyond period of 5 years. 29. Neelkamal Talkies vs. CIT (1973) 87 ITR 691 (All) assessee owned cinema house at Bijnore. There was another cinema house at Bijnore run by Delhi firm. assessee entered into agreement with Delhi firm under which it was agreed that in consideration of assessee paying sum of Rs. 600 per month for period of 5 years to Delhi firm, latter would not exhibit any film at his theatre. learned Allahabad High Court held that payment was made under agreement which extended for 5 years and resulted in elimination of competition. payment was therefore of capital nature and was not deductible. 30. Chelpark Company Ltd. vs. CIT(supra) assessee entered into agreement with firm consisting of managing director of assessee company, his wife and 2 daughters and as per that agreement company paid sum of Rs. 1 lakh as compensation to its erstwhile managing director of his undertaking to discontinue and not recommence at any time within period of 5 years, manufacture of writing ink and sale thereof or any other business similar or competitive to business carried on by company. Hon ble High Court held that such expenditure is capital in nature. 31. learned Madras High Court in above judgment at p. 255 has discussed judgment of Supreme Court in case ofEmpire Jute Co. Ltd.The learned High Court observed that : "It is true that, in that case also, there is reference to test of enduring benefit breaking down in some cases but, as pointed out earlier, it has not been laid down that this test should not be considered for application even if facts and circumstances of case warranted it." 3 2 . learned Madras High Court also distinguished its own judgment(1986) 51 CTR (Mad) 256 : (1987) 165 ITR 63 (Mad)(supra) as according to judgment, decision in that case was given on basis of finding that no benefit or advantage of enduring nature was acquired. Such finding was accepted in that judgment. At p. 260 of judgment, learned High Court has observed that decision inEmpire Jute Co. Ltd.cannot be read as lying down universal test that if capital asset is not ultimately acquired, expenditure initially incurred for acquisition of that capital asset would be on revenue account. 33. Blaze and Central (P) Ltd. vs. CIT (1979) 120 ITR 33 (Mad) assessee which was carrying on business of arranging exhibition of advertisement and film shorts in licenced theatres in four southern States, entered into agreement that one S, who was also carrying on similar business on behalf of two companies in four States, under which S agreed to part with its business in four States for period of 9 years in consideration of Rs. 1,50,000. learned High Court held that payment was capital in nature as assessee had warded off competition and derived advantage by eliminating competition. learned High Court distinguished judgment of learned Kerala High Court reported at(1967) 64 ITR 26 (Ker)(supra) as in that case expenditure was incurred to secure position of stock-in-trade of assessee s timber business at advantageous price and therefore expenditure was in nature of business expenditure. In case before Madras High Court, expenditure was held as capital by following decision of Full Bench in case ofAlaganan Chetty vs. CIT AIR 1928 Mad 902. 34. CIT vs. Bangalore Arrack Company (1992) 108 CTR (Kar) 57 : (1993) 201 ITR 25 (Kar) assessee purchased rival bidder, so that he would not come forward to participate in public auction to vend arrack. Such act was contrary to public interest as well as public welfare and therefore was not valid payment for purpose of IT Act, moreover expenditure was incurred in instant case once and for all with view to bring into existence asset or advantage of obtaining privilege to vend liquor for one year and therefore expenditure was capital in nature. learned Karnataka High Court agreed with enunciation of tests laid down by Gujarat High Court in case reported at(1983) 34 CTR (Guj) 250 : (1983) 143 ITR 822 (Guj)(supra). test which is relevant in instant case is as under : "When expenditure is incurred only once and for all, and with view to bringing into existence asset or advantage for enduring benefit of trade, ordinarily such expenditure is on capital account." Applying this test, learned Karnataka High Court in case under reference held that assessee got advantage of obtaining privilege to vend liquor for one year. 35. Vinod Kothari Consultants Ltd. vs. Dy. CIT (2004) 84 TTJ (Cal)(TM) 1058 : (2004) 91 ITD 153 (Cal)(TM) In this case consideration was paid by company for taking over business of another company of conducting training course in that field of leasing and hire purchase and related areas vide agreement. question before Tribunal was as to whether such expenditure is capital or revenue. learned Tribunal observed that no tangible asset had come into existence as result of takeover of business, yet enduring benefit had enured to assessee by warding off competition in business for all times to come. expenditure was held as capital. 36. Montgomery Watson Consultants India (P) Ltd. vs. Asstt. CIT (2004) 90 TTJ (Mumbai) 115 : (2004) 90 ITD 324 (Mumbai) assessee company paid certain sum as consideration for preventing rival management from competition with assessee company for period of 1 0 years. question before Tribunal was whether such expenditure is capital or revenue. expenditure was held as capital as assessee company derived benefit of enduring nature by entering into agreement of business competition of sufficiently long period of 10 years. 37. Shaw Wallace Company Ltd. vs. Asstt. CIT (2003) 86 ITD 315 (Cal) assessee purchased 2 distilleries and paid sum of Rs. 10 crores to promoter of 2 distilleries for restrictive covenant for not competing with assessee. learned Tribunal also considered judgment of Supreme Court in case ofEmpire Jute(supra); it was observed that this test of enduring benefit cannot be applied blindly and mechanically but it does not mean that this test is not to be applied. learned Tribunal held that expenditure is capital in nature. While holding so, learned Tribunal has also relied on judgment of Hon ble Madhya Pradesh High Court in case ofGrover Soap (P) Ltd. vs. CIT (1997) 137 CTR (MP) 546 : (1996) 221 ITR 299 (MP), in which it was held that payment made to ward off competition for business by rival would constitute capital expenditure if object of making that payment is to derive advantage by eliminating computation over some length of time. 38. After considering ratio of law laid down by various High Courts and Supreme Court, it is clear that test of enduring benefit can be applied. If enduring benefit is on revenue account, then this test may fail to hold expenditure as capital. It is not necessary that new capital asset should come into existence as result of incurring such expenditure. Such expenditure may result into enduring benefit or may result into enduring right. In instant case by avoiding of competition by rival company of same group, assessee company got advantage of enduring nature. consideration was paid for closure of one particular type of business by another company of TATA group. It is also observed by Supreme Court in case of Empire Jute that ratio of law as laid down by case should be that whose facts are similar to case of facts to which such ratio of law is to be applied. 39. Keeping in view above facts and ratio of law laid down in similar cases, it is clear that assessee has secured advantage of enduring nature and expenditure has been rightly held as capital by learned CIT(A). This ground of appeal is therefore dismissed. 40. second grievance of assessee is that learned CIT(A) has erred in not allowing foreign exchange loss incurred on reinstatement of foreign exchange liability on account of purchase of raw material and obtaining services as expenditure of year. 41. assessee deducted foreign exchange loss of Rs. 4,91,22,842 in P&L a/c. Before AO, it was contended that such loss is allowable, as same is claimed having regard to guidelines prescribed by institute of chartered accountants in accounting Standard-11. assessee also relied on judgment of Karnataka High Court inMico scase. However, AO did not allow loss, as according to him CIT vide order under s. 263 for asst. yr. 1996-97 has not allowed this loss. 42. learned CIT(A) considered decision of Karnataka High Court. According to learned CIT(A), learned High Court has considered exchange loss in relation to value of tools consumed and machinery in respect of which depreciation was not admissible. It was held by learned CIT(A) that facts in instant case are different from facts considered by jurisdictional High Court. learned CIT(A) followed decision of Madras High Court inCIT vs. Indian Overseas Bank (1984) 41 CTR (Mad) 212 : (1985) 151 ITR 446 (Mad). 43. During course of proceedings before us, learned Authorised Representative submitted that foreign exchange liability is on account of purchase of raw material and obtaining services. assessee reinstated foreign exchange liability as required under mandatory accounting standard prescribed by Institute of Chartered Accountants of India. Even accounting standard prescribed by CBDT under s. 145 vide SO No. 69 (E) dt. 20th Jan., 1 9 9 6 , assessee is required to follow prudent accounting policies i.e. provisions should be made for all known liabilities and losses even though amount cannot be determined with certainty and represents only best estimate in light of available information. 4 4 . learned Authorised Representative argued that amount as deductible as per accounting standards and as held by Supreme Court in case ofCIT vs. UP State Industrial Development Corporation (1997) 139 CTR (SC) 267 : (1997) 225 ITR 703 (SC). 4 5 . learned Authorised Representative also relied on order of Special Bench in case ofONGC Ltd. vs. Dy. CIT (2002) 77 TTJ (Del)(SB) 387and Karnataka High Court inMico scase. 46. learned Departmental Representative supported orders of authorities below : 4 7 . This Bench in case ofTata Lucent Technologies Ltd.in ITA No. 52/Bang/2000 for asst. yr. 1996-97 has held that liability of foreign exchange fluctuation is on trading account and is crystallized on last date of financial year and therefore same is allowable. 48. While allowing foreign exchange fluctuation loss, this Bench has relied on decision of Special Bench. 49. Keeping in view decision of this Bench in case of assessee for asst. yr. 1996-97, it is held that foreign exchange fluctuation loss is allowable deduction. assessee gets relief of Rs. 4,99,22,863. 50. third grievance of assessee is against upholding addition of new office expenses of Rs. 6,79,119 and compensation of Rs. 22,19,000 paid to lessor for making alteration of leasehold premises for new office. 51. Order of AO in this issue is as under : "On perusal of details of other expenses it is observed that assessee has incurred expenditure of Rs. 28,98,119 on new office, details of which are as follows : Expenses incurred for proposed new office 6,79,119 Compensation to lessor of new office premises for 22,19,000 alteration done by company 28,98,119 As this is expenditure on building which is not owned by assessee, therefore, as per provisions of s. 32 Expln. (I), assessee will be entitled for depreciation thereon deeming assessee as owner thereof. Therefore addition of Rs. 28,98,119 is made. However depreciation at rate of 10 per cent is allowed on same which comes to Rs. 2,89,811." 52. order of learned CIT(A) on this issue is as under : "It is seen from assessment order that assessee has incurred aforesaid expenditure for its new office which was leased premises. same was treated as capital expenditure and depreciation was allowed as per provisions of s. 32 Expln. (1). assessee has argued that expenditure w s wholly and exclusively for business purposes. This may be true. However, expenditure is clearly capital in nature as it is admittedly for new office and therefore disallowance made by AO is in order. appeal is therefore dismissed on this point." 53. During course of proceedings before us, learned Authorised Representative submitted that as result of expenditure incurred, assessee has not become owner of new asset. amount was spent for opening new office and this facilitated working of company. learned Authorised Representative relied on following judgments : (i)CIT vs. Rex Talkies (1984) 42 CTR (Kar) 97 : (1984) 148 ITR 560 (Kar) (ii)Girdhari Das & Sons vs. CIT 1975 CTR (All) 156 : (1976) 105 ITR 339 (All) (iii)CIT vs. Kishenchand Challaram (India) (P) Ltd. (1980) 16 CTR (Mad) 248 : (1981) 130 ITR 385 (Mad) (iv)CIT vs. Madras Auto Services (1983) 33 CTR (Mad) 106 : (1985) 156 ITR 740 (Mad) (v)CIT vs. Madras Auto Services (P) Ltd. (1998) 148 CTR (SC) 398 : (1998) 233 ITR 468 (SC) 54. learned Departmental Representative supported order of authorities below. learned Departmental Representative further submitted that in view of Expln. 1 to s. 32, expenditure is to be treated as capital. 55. Karnataka High Court in case ofRex Talkies(supra) had occasion to consider allowability of expenditure incurred on renovation and repairs to ceiling etc. in respect of cinema theatre taken on lease. learned Karnataka High Court held that amount spent on repairs or of so called renovation cannot be considered as capital expenditure. They also held s. 32(1A) as it existed at relevant time was not applicable. worthy Supreme court in case ofMadras Auto Serviceshad occasion to consider expenditure incurred on constructing new building after demolishing premises, which was taken on lease. learned Supreme Court held that assessee did not acquire capital asset but obtained only business advantage. learned Supreme Court held that amount spent on construction was deductible as revenue expenditure. Explanation 1 to s. 32 is akin to 32(1A). Hence in view of judgment of Karnataka High Court, expenditure incurred cannot be considered to have been covered under Expln. 1 to s. 32. It is not case of Revenue that expenses incurred for new office and amount paid to lessor in relation to renovation resulted into any new asset belonging to assessee. Hence, expenditure of Rs. 28,98,119 is allowed. On this issue, order of learned CIT(A) is reversed and assessee gets corresponding relief. In result, appeal is partly allowed. *** LUCENT TECHNOLOGIES HINDUSTAN LTD. v. JOINT COMMISSIONER OF INCOME TAX