ASSISTANT COMMISSIONER OF INCOME TAX v. ASEA BROWN BOVERI LTD
[Citation -2007-LL-0405-4]

Citation 2007-LL-0405-4
Appellant Name ASSISTANT COMMISSIONER OF INCOME TAX
Respondent Name ASEA BROWN BOVERI LTD.
Court ITAT
Relevant Act Income-tax
Date of Order 05/04/2007
Assessment Year 1996-97 & 1997-98
Judgment View Judgment
Keyword Tags technical collaboration agreement • city compensatory allowance • benefit of enduring nature • new industrial undertaking • memorandum of association • test of enduring benefit • acquisition of an asset • reasonable opportunity • technical information • commercial expediency • product manufactured • eligible undertaking • controlling interest • house rent allowance • marketing activities • scientific research • technical knowledge • plant and machinery • revenue authorities • revenue expenditure • business expediency
Bot Summary: The assessee rightly included these amounts in computing the profits derived from the new industrial undertakings for working out deduction under s. 80HH. Even assuming that the view of the Department is correct, it is the case of the assessee that appropriate proportion of marketing costs allocated by the assessee to arrive at the profit derived from the new industrial undertakings should be excluded for determining the profit. As far as exclusion of marketing receipts from the profits of the business is concerned for the purposes of computation to deduction under s. 80HHC, we find that these receipts have been earned by the assessee in respect of products of foreign principal marketed by the assessee in India these have got no connection with the export activities of the assessee, especially when no material has been brought on record to show that t h e assessee's exported products and these products are the same and assessee got these marketing rights only because of export of its own products. For the above proposition, assessee relied upon the decision of the jurisdictional High Court in the case of CIT vs. Service Station Equipment Ltd. On the basis of the above decisions, assessee contended that no right of any permanent nature has been assigned to the assessee under the said agreement. With a view to increasing its yield, the assessee negotiated and entered into an agreement with Japanese yield, the assessee negotiated and entered into an agreement with Japanese company to supply the assessee the subcultures of Meiji's most suitable penicillin producing strains in a pilot plant, technical information and know-how. Coming to the next ground of objection by the assessee, it is directed against the order of the CIT(A) in confirming the disallowance of Rs. 12.50 crores paid under the orders of the Company Law B o a r d. According to the assessee, CIT(A) failed to appreciate the voluminous material placed before him that the payment was made to escape the adversely affected business of the assessee. In support of assessee's contention that the litigation expenses incurred to protect the business of the assessee is revenue expenditure as against the litigation expenses incurred for the purpose of creating, curing or completing assessee's title to the capital is capital expenditure, reliance was placed upon the decision of the Hon'ble Supreme Court in the case of Dalmia Jain Co. Ltd. vs. CIT 81 ITR 754. In the instant case of the assessee, the facts clearly show that the business of the assessee, due to infighting between the two groups of the family members, was in a difficult situation and the assessee lost many business opportunities for its growth.


K.P.T. THANGAL, VICE PRESIDENT: Order This appeal by assessee is for asst. yr. 1998-99. 2 . first and second ground of objection by assessee is directed against order of CIT(A) in confirming disallowance of Rs. 3,79,876 in respect of employer's contribution and Rs. 4,05,635 in respect of employees' contribution to PF/FPF/ESIC paid by assessee beyond grace period allowed by Central Government. 3 . We heard rival submissions. Tribunal is constantly taking view that employees' contribution if not paid within due date extended by grace period, same is not allowable. As such, we remand matter back to file of AO as to verify whether payments were made within grace period. If so paid, it may be allowed. Coming to employer's contribution, Tribunal is taking view constantly that if payment is made within (beyond) year but before due date for filing return, to this extent assessee's claim is to be allowed. AO may verify date of payment. If it is found that it is paid within (beyond) year but before due date for filing return, to that extent employer's contribution may be allowed. Order accordingly. 4 . third ground of objection by assessee is directed against order of CIT(A) in confirming disallowance of Rs. 32,328 being payment made to clubs for availing facilities and services of clubs. 5 . Considering rival submissions and also decisions cited, particularly decision of jurisdictional High Court in case of Otis Elevator Co. (India) Ltd. vs. CIT (1991) 96 CTR (Bom) 14 : (1992) 195 ITR 682 (Bom); Hon'ble Gujarat High Court in case of Gujarat State Export Corporation Ltd. vs. CIT (1996) 131 CTR (Guj) 23 : (1994) 209 ITR 649 (Guj); and Hon'ble Madras High Court in case of CIT vs. Sundaram Industries Ltd. (2000) 158 CTR (Mad) 437 : (1999) 240 ITR 335 (Mad); we are of view that there is no justification in disallowing assessee's claim to this extent. Hence, appeal of assessee on this ground is allowed. 6. next ground (ground No. 4) of objection by assessee is directed against order of CIT(A), directing AO to exclude net marketing receipts, i.e. total marketing receipts as reduced by proportionate salary of field staff and other expenses while computing profits of eligible undertakings for purpose of deduction under s. 80HH of IT Act, 1961. 7 . While framing assessment order, AO noticed, assessee claimed deduction under s. 80HH on its units at Lote Parshuram. Assessee claimed deduction of Rs. 2,73,08,504 at rate of 20 per cent of profit of unit. It was noticed by AO that service charges amounting to Rs. 2,76,92,459 was connected with new industrial undertaking. service charges comprised of Rs. 2,42,67,427 received by way of processing charges and Rs. 34,25,032 received by way of marketing receipts for marketing of imported injections in India. This amount of Rs. 34,25,032 received by way of marketing receipts allocated to new industrial undertaking while computing total income of new undertaking, AO held, is not allowable and such marketing receipts do not qualify for deduction under s. 80HH. Out of processing charges of Rs. 2,42,67,427, AO held, Rs. 2,13,46,380 only pertains to new industrial undertaking. amount claimed as processing charges in return was added back. Aggrieved, assessee approached first appellate authority. 8. This issue has been discussed by CIT(A) vide para 9 of his order. It was contended before CIT(A) that assessee is entitled for deduction under s. 80HH in respect of amount of Rs. 34,92,514. Alternatively, it was contended that AO ought to have computed profits of new industrial undertaking without reducing expenses incurred on research development unit, which is stated to be independent unit physically separate from new industrial undertaking and that he should have reduced proportionate salary of field staff and other expenses from marketing receipts. It was further submitted, it is neither correct nor logical to reduce gross amount of marketing receipts allocated to various units as certain expenses have been incurred for earning these receipts and these expenses should be allocated to marketing receipts. In other words, it was contended, only net marketing receipts should be reduced from profits of new industrial undertaking. CIT(A) directed AO to consider excluding only net marketing receipts while computing profits derived from new industrial undertakings for purpose of deduction under s. 80HH. Aggrieved by above order assessee is in appeal before Tribunal. 9. facts leading to dispute, briefly narrated, are as under : Assessee had two new industrial undertakings at Lote Parshuram, Taluka Khed, District Ratnagiri, backward area in State of Maharashtra. While computing profits derived from new industrial undertakings, assessee claimed deduction under s. 80HH, including marketing receipts amounting to Rs. 34,25,032 and interest at Rs. 67,482. While computing profits of new industrial undertakings, AO excluded gross marketing receipts and interest received and proportionately allocated expenses incurred at research and development unit at Govandi at Rs. 75,70,059. Following his orders for earlier years, i.e. asst. yrs. 1996-97 and 1997-98, amounts of marketing receipts and interest were excluded by CIT(A) for purpose of computing deduction under s. 80HH. 1 0 . During year under consideration assessee received Rs. 60,57,715 from Alfa Wassermann SpA of Italy for marketing their product Fluxum injection in India. amount was allocated between various segments including two eligible units. Out of total marketing receipts of Rs. 60,57,715 amount of Rs. 34,25,032 was allocated to new industrial undertakings in proportion of pharmaceutical sales made by new industrial undertakings to total sales of company. Similarly, marketing expenses were also allocated proportionately to units including new industrial undertakings. According to assessee, business of assessee company consists of manufacturing and marketing of pharmaceutical bulk drugs n d formulations. marketing receipts are not independent source of income. cost incurred by company for marketing its products includes those of new industrial undertakings but was reduced by recovering part of cost through utilisation of marketing infrastructure of assessee company t o market products of others as well, like one marketed viz. Fluxum injection of Alfa Wassermann SpA. Hence, according to assessee, marketing receipts have direct nexus to profits earned from new industrial undertakings. marketing costs of eligible pharmaceutical unit deducted for computing profits of new industrial undertakings were reduced to extent recovered by way of marketing receipts. Therefore, assessee rightly included these amounts in computing profits derived from new industrial undertakings for working out deduction under s. 80HH. Even assuming that view of Department is correct, it is case of assessee that appropriate proportion of marketing costs allocated by assessee to arrive at profit derived from new industrial undertakings should be excluded for determining profit. 11. It is also case of assessee that Departmental authorities failed to appreciate that new industrial undertakings at Lote Parshuram and research and development unit at Govandi are independent and separate. expenditure incurred in research and development unit does not reduce profits of new industrial undertakings in any way. Rather, this expenditure is relatable to business carried on by assessee in general. In fact, research and development work is done to develop new products for promoting future business of assessee. results of research activity at research and development unit cannot be presumed to be automatically utilised in new industrial undertakings. In any case, no new product was manufactured in eligible units, which emanated as result of research and development activities of assessee company at least during relevant previous year. Relying upon decision of Hon'ble Madras High Court in case of Bush Boake Allen (India) Ltd. vs. Asstt. CIT (2004) 192 CTR (Mad) 165 : (2005) 273 ITR 152 (Mad), learned counsel submitted, where there was no research and development expenses pertaining to new industrial undertaking, apportionment of such expenses to work out profit derived from said undertaking for purpose of s. 80HH merely on presumption that products manufactured therein also benefited out of research made at research and development unit is not proper. Further, relying upon decision of Hon'ble Punjab & Haryana High Court in case of CIT vs. Isher Dass Mahajan & Sons (2001) 170 CTR (P&H) 271 : (2002) 253 ITR 284 (P&H), learned counsel submitted that where receipts are relatable to running of business and incidental to normal business activity, as in case of assessee where marketing product is also part of regular business, apportionment of such expenses to work out profits derived from eligible undertaking for purpose of deduction under s. 80HH cannot be done merely on basis of presumption that product manufactured therein received benefit. 1 2 . In support of above claim, learned counsel for assessee brought our attention to memorandum of association, cl. III(12), which reads as under : "To carry on business as chemists, druggists, chemical dealers, importers, exporters, wholesale or retail dealers and to undertake sales and distribution agencies for products of other concerns, firms, persons, companies, whether such products are manufactured in company or otherwise and whether such products are of description hereinabove specified or other products of whatever nature and kind and to buy, sell, refine, manipulate, import, export or deal in products or goods herein specified, either as principals or as agents;" 13. learned Departmental Representative submitted, supporting orders of Revenue authorities, that there is no finding as to whether this is related to assessee's business. issue is whether income is derived from new industrial undertakings. In support of above proposition, learned Departmental Representative relied upon decision of Hon'ble Supreme Court in case of ITO vs. Induflex Products (P) Ltd. (2005) 199 CTR (SC) 712 : (2006) 280 ITR 1 (SC) and also decision of Hon'ble Madhya Pradesh High Court in case of D.P. Agrawal vs. CIT (2005) 193 CTR (MP) 297 : (2005) 272 ITR 118 (MP). Learned Departmental Representative, relying upon both decisions, submitted that there should be close relation and receipt must be received from business carried on by assessee. He further submitted that profits should be derived from business, which would be subject-matter of exemption and there must be profits out of business carried on by assessee and expression "profits" used in section connotes positive profit earned from business alone, which can be subject-matter of exemption. Hence, learned Departmental Representative submitted, claim of assessee is liable to be rejected. 14. We have heard rival submissions and gone through orders of Revenue authorities and decisions cited. deduction under s. 80HH is granted to industrial undertaking on profits and gains derived by industrial undertaking. term "derived from" is narrower than term "attributable to" as settled by decision of Hon'ble Supreme Court in case of CIT vs. Sterling Foods (1999) 153 CTR (SC) 439 : (1999) 234 ITR 579 (SC), therefore, it is only profits of industrial undertaking which are eligible for deduction under s. 80HH. assessee may be engaged in multiple business activities and profits from such activities cannot become eligible for deduction under s. 80HH merely because these are business profits. assessee has placed strong reliance on decision of jurisdictional High Court in case of CIT vs. Bangalore Clothing Co. (2003) 180 CTR (Bom) 127 : (2003) 260 ITR 371 (Bom), which, in our opinion, does not render any assistance to cause of assessee because that is in context of s. 80HHC where scheme and language deployed is different as compared to s. 80HH of Act. Further, marketing activities carried on by assessee are independent of activities of industrial undertaking. Thus, net marketing receipts i.e. gross receipts less expenses incurred/allocable to earning of such marketing receipts have been rightly excluded from profits and gains of industrial undertaking by learned CIT(A). Hence, we confirm order of learned CIT(A) on this issue. Hence, appeal of assessee on this ground fails and dismissed. 15. next ground (ground Nos. 5 and 6) of objection by assessee is directed against order of CIT(A), confirming exclusion of interest of Rs. 67,482 while computing profits of eligible undertakings for purpose of deduction under s. 80HH of Act. 16. Learned counsel for assessee submitted, he is under instruction not to press this ground. Hence, this ground is dismissed as not pressed. 1 7 . next ground, i.e. ground No. 7 is regarding allocation of expenses of independent research and development unit while computing profits of new industrial undertaking for working out deduction under s. 80HHC of Act. 18. We find that this issue was raised by assessee before learned CIT(A) vide ground No. 9. learned CIT(A) has dealt issue under s. 80HH vide paras 9 to 15 at pp. 5 to 8 of appellate order. findings given by learned CIT(A) in para 15 are reproduced as under : "Therefore, to sum up ground Nos. 5 to 10 are allowed in part to extent mentioned above and this deduction may be recomputed in accordance with directions contained in preceding paras of these grounds of appeal." However, from perusal of paras 9 to 14 of appellate order, we find that this issue has not been dealt by learned CIT(A) although he has referred to issue in para 10 of appellate order. Accordingly, we remand back this issue to learned CIT(A) for fresh adjudication as per law. Hence, appeal of assessee on this ground is allowed for statistical purposes. 19. issue raised in ground No. 8 is regarding CIT(A)'s direction to AO to reduce 90 per cent of marketing receipts as reduced by proportionate salary on field staff and other expenses related thereto while computing profits of business in accordance with cl. (baa) of Explanation to s. 80HHC of Act. 20. This issue has been dealt with by AO vide para 7 of his order, observing as under : "The assessee company had not claimed deduction under s. 80HHC in return of income as business income was less than 90 per cent of interest received. This fact has been stated in covering letter filed with return of income. However, on presumption that after completion of assessment, t h e assessed business income would be positive, assessee company submitted Form 10CCAC duly certified by auditor. auditor has quantified NIL deduction on basis of returned income. In note submitted along with statement of deduction under s. 80HHC, assessee company has stated that on completion of assessment deduction under s. 80HHC should be computed on basis of assessed income. However, it has been noticed that while computing deduction, assessee has considered total sales inclusive of excise duty but net of sales-tax and also 90 per cent of service charges (marketing receipts) received has not been reduced from business income. deduction has therefore been recomputed after adding back sales- tax of Rs. 1,33,25,843 to total sales and after reducing 90 per cent of service charges and 90 per cent of export benefits from business income alongwith 90 per cent of interest received." 21. AO further noticed that assessee has not furnished report in Form 10CCAC along with return of income as provided under s. 80HHC(4). As such, he held, assessee is not entitled to claim deduction under s. 80HHC. He further held, furnishing of Form 10CCAC along with return is mandatory and in absence of it he disallowed claim of assessee. 22. When matter was carried before CIT(A), he held, filing of Form 10CCAC is procedural and assessee can file it at any time before completion of assessment and this technical objection of AO was thus negatived. CIT(A) further took note of assessee's alternative contention that AO should have reduced proportionate salary of field staff and other expenses from marketing receipts before reducing same from profits. CIT(A), following his decision in assessee's own case for asst. yr. 1996-97, held that marketing receipts are not profits of industrial undertaking and hence AO was justified in reducing 90 per cent of such receipts from profits while computing deduction under s. 80HHC. However, he agreed with assessee's submission that for earning marketing receipts, certain expenses are to be incurred and therefore only 90 per cent of net marketing receipts, which should be reduced from business profits. Accordingly he directed AO to examine as to what is proportionate salary of field staff and other expenses, which are to be reduced from marketing receipts, and to consider only net marketing receipts for computation of deduction under s. 80HHC. Aggrieved by above order, assessee is in appeal before Tribunal. 23. arguments advanced by learned counsel for assessee in support of ground No. 4, given hereinabove vide paras 11, 12 and 13 of our order, is also part of arguments in support of ground No. 8. As such, these arguments have not been repeated. Learned counsel invited our attention to cl. III, i.e. object for which company is established, particularly item (12), which is already reproduced hereinabove vide para 12 of our order. Learned counsel submitted, memorandum of association expressly provides that one of objects of company is to undertake sales and distribution agencies for products of other concerns. Thus marketing receipts are very part of operational income of assessee. Hence, learned counsel submitted, CIT(A) went wrong in directing AO to reduce profits of business by 90 per cent of net marketing receipts for purpose of computing deduction under s. 80HHC of Act. Learned counsel submitted, order of CIT(A) is to be modified to this extent. 2 4 . learned Departmental Representative, on other hand, supported order of CIT(A). 25. We have heard rival submissions, gone through orders of Revenue authorities and decisions cited by contending parties. assessee has mainly relied on decision of jurisdictional High Court in case of CIT vs. Bangalore Clothing Company (supra) to contend that marketing receipts are operational income, hence, same are liable to be included in profits of business. In our humble opinion, in that case Hon'ble jurisdictional High Court found that export activities and labour charges carried by assessee were identical, hence, Hon'ble Court extended deduction under s. 80HHC in very limited manner; however Court did not overrule earlier decisions of Hon'ble Bombay High Court in case of CIT vs. Kantilal Chhotalal (2000) 163 CTR (Bom) 476 : (2000) 246 ITR 436 (Bom) and CIT vs. Ravi Ratna Exports (P) Ltd. (2000) 246 ITR (Bom) 443 : (2000) 246 ITR 443 (Bom). Thus, in our opinion, receipts which can be eligible for deduction under s. 80HHC must have nexus with export. 2 6 . As far as exclusion of marketing receipts from profits of business is concerned for purposes of computation to deduction under s. 80HHC, we find that these receipts have been earned by assessee in respect of products of foreign principal marketed by assessee in India, therefore, these have got no connection with export activities of assessee, especially when no material has been brought on record to show that t h e assessee's exported products and these products are same and assessee got these marketing rights only because of export of its own products. As learned CIT(A) has directed to exclude only 90 per cent of net marketing receipts i.e. gross receipts as reduced by direct expenditure incurred by assessee to earn same as per cl. (baa) of Explanation to s. 80HHC, same is liable to be upheld. We order accordingly. We further hold that such gross marketing receipts would also not form part of total turnover. Thus, appeal of assessee on this ground fails and dismissed. 27. next ground (Ground Nos. 9 to 14) of objection by assessee is directed against order of CIT(A), confirming disallowance of Rs. 6 crores being payment to M/s Lyka Labs Ltd. under agreement dt. 20th Jan., 1998. 28. It is case of assessee that CIT(A) went wrong in holding that part of payment made to M/s Lyka Labs Ltd. was attributable to non-compete condition and was capital in nature, ignoring fact that alleged enduring benefit was in revenue field and that period of 5 years was long in company's life. It is also case of assessee that CIT(A) erred in holding that part of payment made to M/s Lyka Labs Ltd. was attributable to parting with marketing information being in nature of capital asset and that expenditure attributable thereto was of capital nature. Without prejudice to above, it is case of assessee that CIT(A) having held that marketing information was capital asset akin to know-how, he ought to have allowed depreciation on amount of Rs. 6 crores being cost of information. It is also case of assessee that CIT(A) went wrong in enhancing income of assessee by withdrawing deduction of Rs. 1,00,00,000 allowed under s. 35AB of Act. 2 9 . AO noticed, during year under consideration, assessee started marketing of formulations based on Nitroglycerine. Assessee paid amount of Rs. 6 crores to M/s Lyka Labs Ltd. towards supply of marketing information, clinical data, scientific details in respect of formulations based on bulk Nitroglycerine. Out of total amount of Rs. 6 crores, assessee debited Rs. 50 lakhs in P&L a/c with remark that amount paid has been deferred and is being charged over 36 months. However, in computation assessee claimed deduction of Rs. 6 crores as expenditure incurred wholly and exclusively for business of company. On enquiry, it was submitted before AO that payment is primarily for enabling assessee to efficiently market formulations based on bulk drug Nitroglycerine. Assessee obtained information/details such as clinical data, scientific details/reports on clinical trials carried out by M/s Lyka Labs Ltd. in respect of formulations based on bulk drug Nitroglycerine (which according to assessee, required to convince medical profession about credibility of drug and development of marketing strategy), break-up of state-wise list of wholesalers/stockists/dealers of formulations, break-up of sale of formulations for last 5 years, break-up of state-wise list of specialists/doctors/cardiologists and institutions shortlisted by M/s Lyka Labs Ltd. with respect to formulations, visual aid designs, copies of promotional material used, so as to establish itself in market. Copy of agreement between assessee and M/s Lyka Labs Ltd. dt. 20th Jan., 1998 was submitted before AO. It was further contended that payment is for short-term advantage in marketing of Nitroglycerine formulations in initial stages, as such expenditure being revenue in nature is allowable under s. 37 of Act. It was also contended that expenditure does not fall within ambit of s. 35AB as said section is applicable only in case of "technical know- how" pertaining to manufacturing/processing. 30. However, AO did not agree with contentions of assessee. He held, purpose of this 'know-how' obtained ranges from clinical data, reports on clinical trials, side effect and contra-indications of drug to information to educate doctors, physicians, etc. which shows that it is technical know-how as such covered under s. 35AB. Accordingly, AO allowed deduction of 1/6th of total amount for year under consideration and balance to be allowed in subsequent five years. Aggrieved, assessee approached first appellate authority. 31. It was contended before CIT(A) that know-how obtained by assessee is not covered under s. 35AB. know-how covered under s. 35AB assessee is not covered under s. 35AB. know-how covered under s. 35AB i s industrial information or technique that is likely to assist in manufacture or processing of goods. information, which assists in marketing of products in initial stages, is not know-how contemplated or covered by provisions of s. 35AB. entire expenditure incurred, it was submitted, is of revenue nature and accordingly to be allowed. 3 2 . CIT(A) agreed with assessee that know-how covered by s. 35AB does not cover information with regard to marketing of product in initial stage. On going through agreement entered into with M/s Lyka Labs Ltd., CIT(A) observed, information which is to be passed on to assessee under agreement in no way assist manufacture or processing of goods. CIT(A) however held, though allowing deduction to assessee under s. 35AB was not correct, at same time he held, this expenditure did not appear to be o f revenue nature either, particularly in view of cls. 4 and 8 of agreement between parties. He held, expenditure is of capital in nature, which is not eligible for any deduction. Assessee's comments were called for on point by CIT(A). 33. CIT(A) noticed, as per agreement, M/s Lyka Labs Ltd. invested substantial resources in obtaining market/product information connected with marketing of formulations made from bulk drug Nitroglycerin, which is of vital importance to marketing of products to doctors, institutions, etc. so as to answer their queries related to both bulk drug/formulations of Nitroglycerine and also to educate doctors in new developments. CIT(A) noted, agreement further states that M/s Lyka Labs Ltd. possessed certain clinical data, scientific details, reports on clinical trials carried on by M/s Lyka Labs Ltd. in last few years and it also developed substantial expertise in ethical promotion of formulation and in possession of valuable market information pertaining thereto. Regarding assessee company, agreement further stated that it is in business of manufacturing, marketing and distribution of various cardiac products and desires to expand its market share/activities in field of Nitroglycerine based formulations. While deciding issue, CIT(A) has taken note of following three important clauses : "(3) obligations undertaken by Lyka hereunder shall not be assigned by Lyka to any third party without prior written consent of USV. (4) Lyka undertakes not to disclose data, details and scientific and marketing know-how referred to herein to any third party for period of at least three years from date thereof. (8) For period of 5 years from date of this agreement Lyka shall not compete with USV directly or indirectly or through its affiliates in promoting, distribution and selling activities of formulations made from bulk drug Nitroglycerine i.e. formulations whose major ingredient is bulk drug Nitroglycerine." 34. Considering that M/s Lyka Labs Ltd. was prevented from disclosing know-how to any third party for minimum of three years and further it undertook not to compete with assessee company in this field for five years, which is in nature of non-compete agreement and further taking note that this information will not be disclosed to any third party without prior written consent of assessee, CIT(A) came to conclusion that payment made by assessee is in nature of capital expenditure. He held, firstly, payment was for passing certain information to assessee, which cannot be passed on to third party. CIT(A) held, this is of capital nature. Assessee contended before CIT(A) that restriction not to compete or to pass information for three years or five years cannot be treated as long-term benefit. For above proposition, assessee relied upon decision of Hon'ble Madras High Court in case of CIT vs. Late G.D. Naidu by LRs (1986) 51 CTR (Mad) 256 : (1987) 165 ITR 63 (Mad). Assessee further relied upon decision of Hon'ble Supreme Court in case of CIT vs. British India Corporation Ltd. (1987) 60 CTR (SC) 54 : (1987) 165 ITR 51 (SC), wherein Hon'ble Supreme Court held, seven years is not long time and allowed expenditure as revenue character. Assessee also relied upon decisions of Hon'ble Supreme Court in case of CIT vs. Best & Co. (P) Ltd. (1966) 60 ITR 11 (SC) and in case of Gillinders Abruthnot & Co. Ltd. vs. CIT (1964) 53 ITR 283 (SC). Regarding nature of expenditure for obtaining marketing information, assessee relied upon following decisions : (i) CIT vs. Service Station Equipment (P) Ltd. (1981) 22 CTR (Bom) 72 : (1981) 132 ITR 130 (Bom); (ii) Empire Jute Co. Ltd. vs. CIT (1980) 17 CTR (SC) 113 : (1980) 124 ITR 1 (SC); (iii) Hallstorms Property Ltd. vs. Federal Commr. of Taxation 72 CLR 634. It was contended before CIT(A), if outgoing expenditure is related to carrying on or conduct of business, it may be regarded as integral part of profit-earning process and not for acquisition of asset/right of permanent character. For above proposition, assessee relied upon decision of jurisdictional High Court in case of CIT vs. Service Station Equipment (P) Ltd. (supra). On basis of above decisions, assessee contended that no right of any permanent nature has been assigned to assessee under said agreement. As such, expenditure is to be treated as revenue in nature. 35. CIT(A) held, to avoid competition, payment made is to be treated as capital expenditure. He got support from following passages under heading "Expenditure incurred in order to avoid business competition" at p. 1622 of Vol. II of 1991 Edition of Chaturvedi & Pithisaria's Income-tax Law : "Payment made 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 could 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 [CIT vs. Coal Shipments (P) Ltd. 1972 CTR (SC) 151 : (1971) 82 ITR 902, 910 (SC), Devidas Vithaldas & Co. vs. CIT 1972 CTR (SC) 28 : (1972) 94 ITR 277, 285 (SC)]. Ordinarily, money paid to keep out potential competitor in business, where benefit is of enduring nature, is on expenditure in nature of capital. [Behari Lal Beni Parshad vs. CIT (1959) 35 ITR 576 (Punj); Assam Bengal Cement Co. Ltd. vs. CIT (1955) 27 ITR 34 (SC);........ Orissa Road Transport Co. vs. CIT (1970) 75 ITR 126 (Ori)]. Where, however, benefit is not of enduring nature but is to exhaust in year or short period expenditure is of revenue nature and is allowable. [M.A. Jabbar vs. CIT (1968) 68 ITR 493 (SC);..... Champion Engineering Works Ltd. vs. CIT (1971) 81 ITR 273 (Bom)]." CIT(A) held that payment made to M/s Lyka Labs Ltd. by way of non-compete fee is capital expenditure and five years is sufficient to hold as long period and benefit as enduring nature. In support of view that five years is long period, CIT(A) relied upon decisions in case of CIT vs. Hindustan Pilkington Glass Works (1981) 24 CTR (Cal) 327 : (1983) 139 ITR 581 (Cal); Assam Bengal Cement Co. Ltd. vs. CIT (1955) 27 ITR 34 (SC) and CIT vs. Coal Shipments (P) Ltd. 1972 CTR (SC) 151 : (1971) 82 ITR 902 (SC). Thus, he held that part of payment is attributable to non-compete agreement and is capital in nature. 3 6 Coming to other part of payment, such as parting of marketing information, CIT(A) held that M/s Lyka Labs Ltd. invested substantial resources for generating information. information that M/s Lyka Labs Ltd. parted therefore is capital asset. He further considered fact that assessee started marketing formulations based on Nitroglycerine during this period. Thus information obtained by assessee altogether is for new product. He has further taken note that M/s Lyka Labs Ltd. undertook not to disclose information to any third party for three years, which shows information not to become redundant for three years at least. As such, assessee becomes sole user of information at least for three years. This is benefit of enduring nature as far as assessee is concerned. He held, decision of jurisdictional High Court in case of CIT vs. Service Station Equipment (P) Ltd. (supra) is not relevant and helpful to assessee as facts were different. In that case agreement was to remain in force for period of ten years. Not so in instant case of assessee, he held. Thus CIT(A) held, assessee's contention that payment made to M/s Lyka Labs Ltd. for obtaining marketing information is of revenue nature, is not acceptable. He further held, assessee is not entitled to deduction under s. 35AB, which has been allowed to it and therefore same, he directed, to be withdrawn. However, he accepted alternative same, he directed, to be withdrawn. However, he accepted alternative submission of assessee that it had claimed deduction of only Rs. 50 lakhs in P&L a/c while AO added Rs. 6 crores, need to be rectified. Aggrieved by above order, assessee is in appeal before Tribunal. 37. Learned counsel for assessee brought our attention to paper book pp. 5 to 10, agreement dt. 20th Jan., 1998, entered into between M/s Lyka Labs Ltd. and assessee, particularly cl. 5, which reads as under : "5. Lyka shall not disclose to any third party any information pertaining to business of USV which comes in its possession in course of discharging its obligations hereunder unless same is in public domain. Schedule referred to above Scientific and marketing know-how (a) Clinical data, scientific details and reports on clinical trials carried out by Lyka in respect of formulations based on bulk drug Nitroglycerine. (b) Source of manufacture of formulations from bulk drug Nitroglycerine. (c) Break up of statewise list of wholesalers, stockists and dealers of formulations. (d) Break up of statewise sales of formulations for last 5 years. (e) Break up of statewise list of specialists, doctors, cardiologists and institutions as shortlisted by Lyka with respect to formulations referred to in above agreement. (f) Visual aid designs, copies of promotional material used." Learned counsel submitted, by this assessee is only trying to increase business by expanding its existing business. Assessee is already in this field. Assessee was manufacturing Nitroglycerine, which is similar business, for which agreement is also entered into. Learned counsel submitted, inviting our attention again to paper book p. 8, cl. 1 of agreement, wherein it is stated that Lyka shall supply and provide to assessee clinical data, scientific details reports on clinical trials carried on by Lyka in past few years, valuable market information more particularly set out in schedule thereto as 'scientific and marketing know-how'. It is for this assessee paid Rs. 6 crores and not for non-compete clause. Learned counsel repeated, assessee is already in field of manufacturing Nitroglycerine, in other words, assessee is already in this line of business and is trying to expand market, for which purpose payment is made. Relying upon decision of Hon'ble Supreme Court in case of Alembic Chemical Works Co. Ltd. vs. CIT (1989) 77 CTR (SC) 1 : (1989) 177 ITR 377 (SC), learned counsel submitted, decision of CIT(A) is liable to be reversed, as facts in instant case of assessee are identical with that (1989) 77 CTR (SC) 1 : (1989) 177 ITR 377 (SC) (supra). 38. Learned counsel again, through written submission para 6.1, brought our attention to cls. 4 and 8 of agreement with M/s Lyka Labs Ltd. and submitted, CIT(A) held that by virtue of cl. 4, which provides that Lyka not to disclose know-how etc. as mentioned in agreement to any third party for three years, ensures that benefit derived by assessee is long-term benefit. Similarly, stand of CIT(A) is that by virtue of cl. 8, which is non- compete clause for five years, assessee derived long-term benefit. This finding is also assailed by learned counsel. finding of CIT(A) that payments made to M/s Lyka Labs Ltd. are on two counts'one is attributable to passing on information and data to assessee and non-disclosure of same to any third party for period of three years; and other is attributable to non- compete clause in agreement, which would remain effective for period of five years, learned counsel submitted, is incorrect. He submitted, decisions relied upon by CIT(A) to come to above conclusion cannot be applied strictly. Learned counsel submitted, particularly bringing our attention to decision of Hon'ble Supreme Court in case of K.T.M.T.M. Abdul Kayoom & Anr. vs. CIT (1962) 44 ITR 689 (SC), what is attributable to capital and what to revenue cannot be decided either exhaustively or universally. Each case depends on its own facts. Even single significant detail may alter entire aspect and conclusion arrived at cannot be made applicable in given case. He particularly stressed finding of Hon'ble Supreme Court : "to decide, therefore, on which side of line case falls, its broad resemblance to another case is not at all decisive. What is decisive is nature of business, nature of expenditure, nature of right acquired, and their relation inter se, and this is only key to resolve issue in light of general principles, which are followed in such cases." 39. Relying upon Special Bench decision of Tribunal in case of Peerless Securities Ltd. vs. Jt. CIT (2005) 93 TTJ (Kol)(SB) 325 : (2005) 277 ITR 57 (Kol)(SB)(AT), learned counsel submitted that Tribunal laid down certain general principles for determining whether expenditure should be considered as capital or revenue nature, fairly comprehensively. To stress point, learned counsel particularly brought our attention to following observation of Tribunal : "What is relevant in determining whether expenditure is of capital or revenue nature is purpose of outlay and its intended object and effect, considered in common sense way having regard to business realities. test of enduring benefit is not certain or conclusive test and cannot be applied mechanically without regard to particular facts and circumstances of given case. It is not every advantage of enduring nature acquired by assessee that brings case within principle laid down in enduring benefit test; what matters is nature of advantage in commercial sense, and it is only where advantage is in capital field that expenditure would be on capital account. If advantage consists of merely facilitating assessee's trading operations or enabling management or 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. By 'enduring' is meant enduring in way that fixed capital endures and it does not connote benefit that endures in sense that for good number of years it relieves assessee of revenue payment or disadvantage. payment made by assessee to free himself from capital liability, is capital expenditure, while payment which frees assessee from liability to make recurring revenue payments or annual revenue payments is revenue expenditure. Where assessee has existing right to carry on business, any expenditure made by assessee has existing right to carry on business, any expenditure made by it during course of business for purpose of removal of any restriction or obstruction or disability, would be on revenue account, provided expenditure does not acquire any capital asset. expression 'once and for all' is used to denote expenditure which is made once and for all for procuring enduring benefit to business as distinguished from recurring expenditure in nature of operational expenses. If expenditure is for initial outlay or for acquiring or bringing into existence asset or advantage of enduring benefit to business that is being carried on, or for extension of business that is going on, or for substantial replacement of existing business asset, it would be capital expenditure. If, on other hand, expenditure, although for purpose of acquiring asset or advantage, is for running of business or for working out that asset with view to produce profit, it would be revenue expenditure. If outgoing is so related to carrying on or conduct of business that it may be regarded as integral part of profit-earning process or operation, and not for acquisition of asset of permanent character, possession of which is condition precedent for running of business, then it would be expenditure of revenue nature. If it is intrinsically capital asset, it is immaterial whether price for it is paid once and for all, or periodically, or whether it is paid out of capital, or income, or linked up with net sales, outgoing, in such case, would be of nature of capital expenditure. lump sum amount for liquidating recurring claims would not cease to be revenue expenditure or get converted into capital expenditure merely because its payment is spread over number of years. It is intention and object with which asset is acquired, that determines nature of expenditure incurred over it, and not method or manner in which payment is made, or source of such payment. If expenditure is recurring and is incurred during course of business or manufacture, it would be revenue expenditure. Simply because payment in hands of recipient has been considered capital receipt. it is not necessary that in all cases it will have same character in hands of person who has made payment and vice versa. It is true nature of expenditure that is relevant and not name or description or treatment given to it by assessee in his books of account or other documents." 40. Learned counsel submitted, assessee was having knowledge of manufacturing of products, i.e. to say, formulations based on bulk drug Nitroglycerine. As per agreement, M/s Lyka Labs Ltd. was only to supply to assessee clinical data, reports on clinical trials, other scientific details in respect of formulations, source of manufacture of formulations, statewise list of wholesalers, stockists and dealers, statewise sales for last five years, statewise list of specialists, doctors, cardiologists and institutions as shortlisted by M/s Lyka Labs Ltd., visual aid designs and copies of promotional materials used. Assessee also had option to obtain assistance from M/s Lyka Labs Ltd in planning campaigns with doctors, medical institutions, etc. for conducting continuous medical education for doctors, devising sampling strategies and promotional schemes, market surveys and training medical representatives and other field force of company. M/s Lyka Labs Ltd. would provide above for sole benefit of assessee for period of at least three years from date of agreement. In consideration, assessee agreed to pay Rs. 6 crores. Basically know-how that was obtained by assessee was for developing market for product, viz. formulations of Nitroglycerine, which was already very much within existing line of assessee's business. Agreement with M/s Lyka Labs Ltd. was not for venturing into any new line of business. It was only for developing market intrinsically linked with running of existing business. It is true, assessee entered into agreement with M/s Lyka Labs Ltd with sole intention of getting scientific and commercial know-how with view to increase profit. Hence, learned counsel submitted, in view of Special Bench decision of Tribunal in case of Peerless Securities Ltd. vs. Jt. CIT (supra), expenditure partakes character of revenue expenditure and thus it is to be allowed. 41. Learned counsel assailed view taken by learned CIT(A) that assessee acquired know-how from M/s Lyka Labs Ltd. and it is enduring benefit. He submitted, assessee has not obtained any benefit or advantage except advantage of enabling to conduct assessee's business more profitably by adopting techniques of manufacturing and marketing formulations of existing basic product, while keeping fixed capital unaltered and intact. Assessee's expenditure was not at all in capital field. 42. Coming to decision of jurisdictional High Court in case of CIT vs. Service Station Equipment (P) Ltd. (supra), learned counsel submitted, distinction made by learned CIT(A) is not at all correct. In that case agreement was to remain in force for ten years; whereas in instant case of assessee it is less than 1/3 of period with regard to disclosure of information. Relying upon decision of Hon'ble Gujarat High Court in case of CIT vs. Power Build Ltd. (2000) 162 CTR (Guj) 41 : (2000) 244 ITR 19 (Guj), learned counsel submitted, even if assessee obtained advantage of enduring nature, since assessee is already in same line of business and not ventured into any new unit engaged in manufacturing and advantage or benefit even if acquired is for facilitating existing business, expenditure cannot be treated as capital but it is only revenue expenditure. He particularly relied upon following observation of Hon'ble High Court : "The assessee, carrying on business of manufacturing various types of motors and weighing machines, was assessed for asst. yr. 1979-80. Before AO, copy of agreement, dt. 31st March, 1976, was filed. said agreement was thereafter amended on 3rd March, 1977. In view of original agreement, assessee company was under obligation to return books, technical data papers, drawings relating to products authorised to be manufactured by foreign collaborators. However, in view of amended agreement, assessee was entitled to retain all these documents, technical data, design, documentation, etc. In view of earlier agreement, assessee was allowed to manufacture for period of five years. However, later on, there was no such restriction. It is in view of this AO has not considered amount of Rs. 79,916 as revenue expenditure. Tribunal on facts found that in original agreement there was no renewal clause and documents, that is to say, technical know-how was required to be returned to collaborators. However, in view of later agreement for which no extra payment was to be made, assessee was entitled to retain technical know-how. Tribunal held that if it had any value, assessee might have been expected to pay for it. Tribunal further held that it cannot be inferred that there was no particular value in retention of know-how documentation. Therefore, it can hardly be said that assessee obtained advantage of, enduring nature. It is required to be noted that assessee was not new unit engaged in manufacturing various types, of motors and weighing machines and this advantage or benefit even if acquired to facilitate to run existing business, it should be treated as revenue expenditure." 4 3 . Again learned counsel brought our attention to decision of Hon'ble Calcutta High Court in case of CIT vs. Avery India Ltd. (1994) 207 ITR 813 (Cal), which is in tune with decision of Hon'ble Supreme Court in case of Empire Jute Co. Ltd. vs. CIT (supra), wherein their Lordships observed : "a benefit that might endure long in assessee's business may nonetheless be in revenue field, if benefit is in respect of asset which is part of circulating capital". Learned counsel submitted, in instant case of assessee, know-how obtained by assessee from M/s Lyka Labs Ltd. does not form part of its fixed capital. Possession of know-how is intrinsically linked with running of existing business of assessee. Assessee merely wanted to take advantage of fast developing market for formulations of Nitroglycerine. Know-how is utilised for improving profitability of existing business and not for starting new business. Hence, learned counsel submitted, expenditure is for expanding already existing field and it is therefore revenue expenditure. 44. Further, relying upon decision of Hon'ble Madras High Court in case of CIT vs. Simpson & Co. Ltd. (1998) 150 CTR (Mad) 492 : (1999) 239 ITR 83 (Mad), learned counsel submitted, this was case wherein assessee claimed sum of Rs. 20,56,956 representing lump sum payment to its foreign collaborator towards import of technical know-how documentation relating to new three cylinder diesel engine. AO held that amount paid was capital as assessee had benefit of technical know-how indefinitely for reason that for first ten years this technical know-how will be assessee's exclusive domain and there was no restriction even for use of know-how beyond period of ten years. CIT(A) accepted assessee's claim. Learned counsel submitted, in this case Hon'ble High Court held that agreement is entered into for purpose of running business more profitably and effectively and with view to yield profit to assessee in already existing field; as such payment should be regarded as revenue in nature. Coming to instance payment should be regarded as revenue in nature. Coming to instance case, learned counsel submitted, ever changing market demand necessitated assessee to diversify its products by marketing formulations of bulk drug Nitroglycerine. For this reason only assessee entered into agreement. It is for benefit of existing business and to run it more profitably and effectively to yield better profit. Learned counsel submitted, as matter of fact. as per cl. 7 of agreement, assessee undertakes to use data details and scientific and marketing know-how furnished by M/s Lyka Labs Ltd. only for its own business and/or business of its affiliates with respect to business activities relating to formulations and not to disclose or divulge same to any other person without prior consent of M/s Lyka Labs Ltd. There is no time frame mentioned in agreement unlike in case of CIT vs. Simpson & Co. Ltd. (supra). Hence, in case of assessee, benefit/ advantage derived by virtue of impugned agreement is not unfettered and would remain so even after ten years, learned counsel submitted, assessee has not derived any enduring benefit from know-how obtained by this agreement. 45. Learned counsel again relied upon decision of Hon'ble Delhi High Court in case of CIT vs. Goodyear India Ltd. (2000) 161 CTR (Del) 359 : (2000) 243 ITR 239 (Del). In this case Hon'ble High Court held that consideration was paid for betterment of product and to enlarge range of its existing products and expenditure was outlay of business in order to carry it on to earn better profit; as such this is to be treated as revenue expenditure. Learned counsel submitted, in instant case assessee acquired right to use technical knowledge and information to manufacture/ market product already in existing line of business. Agreement with M/s Lyka Labs Ltd. was for enlarging range of existing products by marketing formulations based on bulk drug Nitroglycerine. Assessee basically obtained scientific and marketing information. This has not been disputed at any stage. Hence, learned counsel submitted, this is revenue expenditure. For same proposition he relied upon decision of Hon'ble Madras High Court in case of S.R.P. Tools Ltd. vs. CIT (1998) 148 CTR (Mad) 133 : (1999) 237 ITR 684 (Mad). This was case wherein assessee was already in business of manufacture of motor vehicle accessories. Assessee entered into technical collaboration agreement with Japanese company for obtaining technical know-how for manufacture of precision tools such as hobs, gear shaper cutters, broaches, shaving cutters, etc. Assessee's claim of revenue expenditure was disallowed by AO. Hon'ble High Court held that collaboration was in field of existing business; as such payment to be treated as revenue expenditure. Learned counsel also relied upon decision of Hon'ble Andhra Pradesh High Court in case of CIT vs. Venkateswara Hatchery (P) Ltd. (1998) 144 CTR (AP) 251 : (1997) 227 ITR 116 (AP) for same proposition. In this case Hon'ble High Court held : "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 disallowed. If advantage consists merely in facilitating assessee's trading operations or enabling management and conduct of assessee's business more efficiently or more profitably, leaving fixed capital untouched, expenditure would be treated under revenue account and not otherwise". Learned counsel also relied upon decision of Hon'ble Madras High Court in case of CIT vs. Aquapump Industries (1996) 132 CTR (Mad) 506 : (1996) 218 ITR 427 (Mad). 4 6 . Learned counsel again relied upon decision of Hon'ble Supreme Court in case of Alembic Chemical Works Ltd. vs. CIT (supra). He particularly stressed following observation of Hon'ble Supreme Court : "On 8th June, 1961, appellant, company engaged in manufacture of antibiotics and pharmaceuticals, was granted licence for manufacture of penicillin. By year 1963, it had already made outlay of more than Rs. 66 lakhs for setting up plant for production of penicillin. In initial years, appellant was able to achieve only moderate yields of penicillin With view to increasing yield, appellant started negotiations in 1963, with Meiji, reputed Japanese enterprise engaged in manufacture of antibiotics, which culminated in agreement dt. 9th Oct., 1963, whereunder Meiji, in consideration of 'once for all payment' of US $ 50,000 (equivalent then to Rs. 2,39,625), agreed to supply to appellant 'subcultures of Meiji's most suitable penicillin producing strains' in pilot plant, technical information, know-how and written description of Meiji's process for fermentation of penicillin along with flowsheet of process in pilot plant, and design and along with flowsheet of process in pilot plant, and design and specifications of main equipment in such pilot plant, and to arrange for training of appellant's representatives in Meiji's plant in Japan at appellant's expense and advise appellant in large scale manufacture of penicillin for period of two years. appellant was to keep technical know-how confidential and secret and was not to seek any patent for process. For asst. yr. 1964-65, appellant claimed deduction of sum of Rs. 2,39,625 as revenue expenditure. Both Department and Tribunal rejected claim holding that expenditure was capital in nature". in support of assessee's claim and submitted that in instant case of assessee facts are identical. Learned counsel further brought our attention to observation of Hon'ble Supreme Court in case of Alembic Chemical Works Ltd. vs. CIT (supra), which reads as under : "That improvisation in process and technology in some areas of enterprise was supplemental to existing business and there was no material to hold that it amounted to new or fresh venture. further circumstance that agreement pertained to product already in line of appellant's established business and not to new product indicated that what was stipulated was improvement in operations of existing business and its efficiency and profitability not removed from area of day-to-day business of appellant's established enterprise. financial outlay under agreement was for better conduct and improvement of existing business and was revenue in nature and was allowable as deduction in computing business profits of appellant." "It would be unrealistic to ignore rapid advances in research in antibiotic medical microbiology and to attribute degree of endurability and permanence to technical know-how at any particular stage in this fast changing area of medical science. state of art in some of these areas of high priority research is constantly updated so that know-how could not be said to bear element of requisite degree of durability and non- ephemerality to share requirements and qualifications of enduring capital asset. rapid strides in science and technology in field should make us little slow and circumspect in too readily pigeonholing outlay, such as this, as capital. "The idea of 'once for all' payment and 'enduring benefit' are not to be treated as something akin to statutory conditions; nor are notions of 'capital' or 'revenue' judicial fetish. What is capital expenditure and what is revenue are not eternal verities but must needs be flexible so as to respond to changing economic realities of business. expression 'asset or advantage of enduring nature' was evolved to emphasise element of sufficient degree of durability appropriate to context." 4 7 . Learned counsel also brought our attention to decision of Ahmedabad Bench of Tribunal in case of Smartchem Technologies Ltd. vs. ITO in ITA Nos. 3955/Ahd/2003 and 654/Ahd/2005 [reported at (2005) 97 TTJ (Ahd) 818'Ed.]. In this case, Tribunal held, after discussing issue in great detail, that if person starting absolutely new business, comprehends that another known person may compete with him in future, and to ward off such competition enters into non-compete agreement with him, then agreement i s certainly for increasing profitability of his existing business. It is so because, Tribunal held, agreement ensures that first person will be able to carry on business without competition from second and thereby enhance t h e profitability. To come to above conclusion Tribunal relied upon decision of Hon'ble Supreme Court in case of Empire Jute Company Ltd. vs. CIT (supra), wherein one jute mill purchased loom hours from others and claimed deduction of that amount paid as revenue expenditure. Reversing decision of Hon'ble High Court, Hon'ble Supreme Court held that amount paid by assessee for purchase of loom hours was in nature of revenue expenditure. Hon'ble Supreme Court held that by purchase of loom hours from other mills, assessee has not obtained any new asset. There was no addition or expansion of profit-making apparatus. Acquisition of additional loom hours did not add to fixed capital of assessee nor assessee acquired new source of profit or income when it purchased loom hours. Hon'ble Supreme Court held, expenditure incurred for purpose of operating looms for longer working hours primarily and essentially related to operation of working of looms which constituted profit-making apparatus of assessee and this was expenditure laid out for profit increasing. It was part of assessee and this was expenditure laid out for profit increasing. It was part of cost of operating, Hon'ble Supreme Court held. 48. Learned counsel submitted, in instant case of assessee facts are very similar. Prior to entering into agreement with M/s Lyka Labs Ltd., assessee was in pharmaceutical business and was actually manufacturing bulk drug Nitroglycerine. Assessee already had knowledge of manufacture of formulations based on Nitroglycerine. It did not enter into agreement with M/s Lyka Labs Ltd. for venturing into new business. agreement basically provided that M/s Lyka Labs Ltd. would furnish marketing know-how primarily to assessee. non-compete clause for five years was inserted into agreement to enhance profitability of products of assessee because if M/s Lyka Labs Ltd. uses know-how to manufacture identical products, profitability of assessee's products would definitely suffer due to inevitable competition. Learned counsel submitted, it is not fact that by virtue of this agreement assessee would be sole producer of formulations of Nitroglycerine. agreement does not protect assessee from competition from other manufacturers of similar products who may not have anything to do with M/s Lyka labs Ltd. Due to continuous advancement of science and technology, partial safeguard from competition for mere five years can hardly be considered as enduring advantage. Hence, learned counsel submitted, payment should be treated as revenue expenditure. 49. Learned counsel further submitted, in fact decision relied upon by learned CIT(A) in case of Assam Bengal Cement Co. Ltd. vs. CIT (supra), which was affirmed by Hon'ble Supreme Court in Assam Bengal Cement Co. Ltd. vs. CIT (1955) 27 ITR 34 (SC), supports case of assessee because assessee spent money primarily to gain better access to market and augment profitability. It is integral part of profit-earning process. In short, learned counsel summed up his arguments as under : (a) Where know-how is obtained for manufacturing new product in existing line of business of assessee or for purpose of development and/or better exploitation of market, expenditure incurred for obtaining said know-how is revenue expenditure. (b) Where know-how is utilised for improving profitability of existing business and not for starting new business, expenditure for obtaining same would be revenue expenditure. (c) benefit that might endure long in assessee's business may nonetheless be in revenue field, if benefit is in respect of asset which is part of circulating capital. (d) Expenditure to acquire knowledge cannot be disallowed merely because knowledge dies hard. Where expenditure, although enduring in character, has its impact on running of business, there can be no doubt that it is revenue expenditure. (e) period for which know-how, etc. could be used is of little consequence in determining whether expenditure incurred should be considered as revenue or capital expenditure. Even if know-how could be used for indefinite period, expenditure to obtain same could still be of revenue nature. (f) mere fact that person providing know-how is precluded by agreement from divulging same to third party, only for definite period, does not make expenditure one of capital nature. (g) advantage gained by acquiring technical knowledge could not be regarded as of enduring value due to fast changing technology, especially in pharmaceutical field. rapid strides in science and technology in field should make us little slow and circumspect in too readily pigeonholing outlay as capital. (h) products cannot be new for all time to time (come), as novelty attached to new product would wane and tag of newness of products would wear off after some years of production. So just because know-how is utilised for indefinite period for making product hitherto not made by assessee, it cannot be said that expenditure incurred for said know-how is capital expenditure. (i) limitations placed in agreement on right of appellant in (i) limitations placed in agreement on right of appellant in dealing with know-how and conditions as to non-disclosure of know- how, pertains more to use of know-how than to its exclusive acquisition. (j) expenditure incurred in connection with agreement to ward off competition, irrespective of duration of enforceability of such agreement, would be revenue expenditure, if it is for purpose of enhancement of profitability. 50. Learned counsel submitted, even otherwise, in case of M/s Lyka Labs Ltd. AO treated impugned receipt of Rs. 6 crores as revenue receipt for following reasons and same was confirmed by CIT(A) : (a) marketing and clinical data and allied rights had been generated/ acquired by M/s Lyka Labs Ltd. during normal course of its business and, hence, could not be treated as its capital asset. (b) Clauses 4 to 8 of agreement clearly show that it was not one time complete transfer of know-how to USV. restrictions placed were only for period of three years and five years regarding non-disclosure and non- competition respectively. (c) amount received by M/s Lyka Labs Ltd on transfer of marketing know-how is only Rs. 6 crores, which is negligible as compared to its total turnover. (d) compensation received for transfer of know-how did not affect or alter capital structure of M/s Lyka Labs Ltd. M/s Lyka Labs Ltd. did not dispose of any capital asset by entering into agreement with USV. (e) M/s Lyka Labs Ltd. earned consideration for granting know-how not b y parting with any capital asset but merely by applying technical data generated by it differently in its trade. In view of above, learned counsel submitted, orders of Revenue authorities are liable to be reversed. 51. Replying to above, learned Departmental Representative supported orders of Revenue authorities and submitted, first of all assessee capitalised receipt. Secondly, learned Departmental Representative submitted, whatever data received by assessee is permanent and this gives assessee enduring benefit. Learned Departmental Representative further submitted, there is non-compete clause and payment is made for this. He relied upon decision of Hon'ble Delhi High Court in case of Triveni Engineering Works Ltd. vs. CIT (1999) 152 CTR (Del) 433 : (1998) 232 ITR 639 (Del) and submitted, in this case assessee paid Rs. 5,000 to company for preparing project report on manufacturing insecticide formulation. Assessee was not manufacturing insecticide formulations. Thus payment was for project report only. AO held that this is capital expenditure. Assessee paid further Rs. 11,000 and Rs. 3,000 for survey report on extra melkral alcohol. Assessee wanted these reports to put to better use its by-products, viz., molasses. Assessee was not producing any alcohol during period. AO treated this also as capital expenditure. Tribunal confirmed view of Revenue authorities. Hon'ble High Court on further appeal confirmed decision of Tribunal. 52. In reply, learned counsel distinguished facts and contended that assessee had knowledge of manufacturing products, i.e. formulations based on bulk drug Nitroglycerine and assessee was only at most trying to obtain latest technology and was trying to expand its market viability. Learned counsel submitted, this in fact supports assessee's case. 53. Who have heard rival submissions, gone through orders of Revenue authorities and decisions cited by contending parties. We are of view that appeal by assessee on this ground is liable to be allowed. From facts narrated above, it is seen that assessee was already in field of producing bulk drugs and pharmaceutical products. Assessee entered into agreement with M/s Lyka Labs Ltd. to improve market viability and to obtain new technology in fast changing field of bulk drug formulations. Thus, decision of Hon'ble Supreme Court in case of Alembic Chemical Works Ltd. vs. CIT (supra) is clearly applicable. This was case wherein assessee was already manufacturing penicillin. With view to increasing its yield, assessee negotiated and entered into agreement with Japanese yield, assessee negotiated and entered into agreement with Japanese company to supply assessee subcultures of Meiji's most suitable penicillin producing strains in pilot plant, technical information and know-how. Hon'ble Supreme Court held : "that improvisation in process and technology in some areas of enterprise was supplemental to existing business and there was no material to hold that it amounted to new or fresh venture. further circumstance that agreement pertained to product already in line of appellant's established business and not to new product indicated that what was stipulated was improvement in operations of existing business and its efficiency and profitability not removed from area of day-to-day business of appellant's established enterprise. financial outlay under agreement was for better conduct and improvement of existing business and was revenue in nature and was allowable as deduction in computing business profits of appellant." 5 4 . We also find that view canvassed by learned counsel gets support from decision of Hon'ble Supreme Court in case of Empire Jute Company Ltd. vs. CIT (supra), wherein Hon'ble-Supreme Court held, purchase of loom hours paying aggregate sum does not go to capital expenditure but it only facilitates looms to work its full capacity and therefore expenditure incurred for purchase of loom hours by mill could only be treated as revenue expenditure. 5 5 . It is undisputed fact that assessee is engaged in manufacturing and marketing of various pharmaceutical products and also have t h e knowledge of manufacturing products made from bulk drug Nitroglycerine. However, with view to expand its market and, to increase and expand its activities in field of Nitroglycerine based formulations, assessee has entered into agreement for supply of scientific and marketing know-how possessed by M/s Lyka labs Ltd vide agreement dt. 20th Jan., 1998. scientific and marketing know-how to be provided by M/s Lyka Labs Ltd. consists of following : "5. Lyka shall not disclose to any third party any information pertaining to business of USV which comes in its possession in course of discharging its obligations hereunder unless same is in public domain. Schedule referred to above Scientific and marketing know-how (a) Clinical data, scientific details and reports on clinical trials carried out by Lyka in respect of formulations based on bulk drug Nitroglycerine. (b) Source of manufacture of formulations from bulk drug Nitroglycerine. (c) Break-up of statewise list of wholesalers, stockists and dealers of formulations. (d) Break-up of statewise sales of formulations for last 5 years. (e) Break-up of statewise list of specialists, doctors, cardiologists and institutions as shortlisted by Lyka with respect to formulations referred to in above agreement. (f) Visual aid designs, copies of promotional material used." assessee and M/s Lyka Labs Ltd. have also agreed that M/s Lyka Labs Ltd. would not supply data, details and scientific and marketing know-how relating to formulations made from bulk drug Nitroglycerine to any third party for period of at least three years from date of agreement and assessee w o u l d not disclose any information in respect of Nitroglycerine based formulations to any other person without prior written consent of M/s Lyka Labs Ltd. In addition to it M/s Lyka Labs Ltd. has also agreed not to compete with assessee directly or indirectly for period of five years from date of agreement. total consideration paid by assessee in pursuance of this agreement stands at Rs. 6 crores. AO has treated same as know-how and allowed 1/6th thereof under provisions of s. 35AB of Act; whereas learned CIT(A) has held that it could not be construed as know-how and based upon various clauses of agreement has held that assessee derived benefit of enduring nature; hence it was of capital nature and disallowed same accordingly. 56. Learned counsel has vehemently argued that impugned payment is of revenue nature because it has resulted in increasing market share, higher revenues and carrying of manufacturing/marketing operations more efficiently. It has also been contended that assessee by obtaining this information has curtailed period which could have been consumed in generating these informations by assessee, on its own, therefore, revenue expenditure which would have been incurred by assessee if same informations were generated on its own has been incurred in this form and also assessee has been able to generate revenue without wasting time, hence, expenditure so incurred is nothing more than recurring of revenue expenditure in one go and is allowable as such. Both these contentions of assessee have sufficient force in view of judicial decisions relied on by assessee, particularly in light of decision of Hon'ble Supreme Court in case of Empire Jute Company Ltd. vs. CIT (supra), which is clearly applicable. 57. Having stated so, we consider it pertinent to look at terms of agreement and finding of learned CIT(A) that M/s Lyka Labs Ltd. invested substantial resources in generating market information, therefore, it was of capital nature. In this regard, we would like to first mention that nature of expenditure has to be looked in hands of party who is incurring it and not party who is receiving it. It is not in dispute that information generated by M/s Lyka Labs Ltd. by investing substantial resources is connected with marketing of products (as mentioned in agreement), which necessarily implies incurrence of expenditures of revenue nature such as salaries, travelling, collection of statistical data through various Government/business associations, trade associations, etc. All these expenses are basically of revenue nature and incurred in regular course and as such are allowable. Hence, one time payment made by assessee company to M/s Lyka Labs Ltd. does not alter basic nature of these expenses particularly in context of present business environment where various activities are being outsourced and various entities undertake such activities on contract basis or on its own and sell such informations and data like any other goods which can be used by other business entities as raw material or support services to carry out it's operations or expand entities as raw material or support services to carry out it's operations or expand it's activities. To further elaborate some entities work like knowledge centres like M/s Lyka Labs Ltd. in present case and derive revenue by selling knowledge to other party who, in turn, by purchasing same attains it's objective of becoming bigger faster. Thus, information, if looked upon in integrated manner, is no more than facilitation of profit-earning process. 58. other aspect involved is that agreement also provides for non- competition by M/s Lyka Labs Ltd. Further, there has not been any bifurcation of total consideration towards both things and learned CIT(A) also held that part of consideration can be attributed towards non-competition as well. However, on perusal of complete agreement, we find that both parties have not provided any recourse or provision for indemnification or compensation in case of breach of terms of agreement by any of parties. Further, if we go through contents of scientific and marketing know-how obtained by assessee company, it becomes amply clear that emphasis of assessee company is on getting information/data created by M/s Lyka Labs Ltd. in readymade manner so as to reduce gestation period and to enter into activities at rapid pace and it is because of this reason only and having regard to nature of information, no judicial remedy has been provided for future obligations to be observed by both parties. In view of such situation, in our considered view, in substance agreement though refers to non- disclosure of information by assessee and M/s Lyka Labs Ltd. and non- competition by M/s Lyka Labs Ltd. for specified period, payment is for of information regarding clinical data, scientific details and valuable market information only. Further, even if some of consideration is attributed towards non-competition, assessee's case finds support from decision of Ahmedabad Bench of Tribunal in case of Smartchem Technologies Ltd. vs. ITO, cited supra, wherein Tribunal followed decision of Hon'ble Supreme Court in case of Empire Jute Co. Ltd. vs. CIT (supra) in concluding that expenditure to avoid competition was dictated by business necessity and commercial expediency and benefit derived out of it was directly related to enhancement of its profitability; hence, said expenditure was of revenue nature. 59. deductibility of payment made by assessee company can be viewed with another perspective. scientific and market information has been generated by M/s Lyka Labs Ltd. by carrying out scientific research and market research. Had this been carried out in-house, amount excluding amount spent on land and building and marketing information, assessee would have been eligible for one and one-half times deduction thereon as per provisions of s. 35(2AB) of Act. As per provision of this section, whatever amount assessee would have spent on scientific research including clinical trials and approvals from competent authorities including capital expenditure on plant and machinery would have been eligible for weighted deduction and expenditure relating to marketing information and statistics would have been allowed under normal provisions of Act as such. 60. In view of foregoing discussion, we are of view that decision of learned CIT(A) is not correct in law and reverse same and direct AO to allow expenditure as revenue expenditure. 61. Coming to next ground (ground Nos. 15 and 16) of objection by assessee, it is directed against order of CIT(A) in confirming disallowance of Rs. 12.50 crores paid under orders of Company Law B o r d (CLB). According to assessee, CIT(A) failed to appreciate voluminous material placed before him that payment was made to escape adversely affected business of assessee. Assessee was facing enquiries/ proceedings on account of complaints made by disputing parties, which adversely affected assessee's business. It is also case of assessee that CIT(A) failed to note that subsequent events and progress in business confirmed assessee's claim that payment was made to avoid adverse impact on business of assessee company. 62. Facts are discussed by AO vide paras 9.1 to 15, pp. 8 to 32 of his order. While framing assessment order, AO noticed, assessee debited amount of Rs. 12,06,53,113 under head "Miscellaneous expenses". It was submitted that assessee company and its promoters had several disputes. There were various proceedings on different issues. Had litigation allowed to continue, it would damage assessee's reputation and hence assessee made payment. It was submitted, in fact assessee's business stagnated between accounting year ended on 31st March, 1997 and 31st March, 1998 with paltry increase of Rs. 7 crores in turnover. There were many enquiries from excise authorities, sales-tax authorities and regional director under Companies Act. All this affected assessee's business and to avoid unnecessary litigation and to ensure stable and peaceful existence, assessee made impugned payment of Rs. 12.5 crores. payment was made under order dt. 10th March, 1998 of CLB. CLB found that pendency of litigation adversely affected reputation, triggered false signals in pharmaceutical industry and seriously affected business growth of assessee and therefore CLB held that we are satisfied that money paid by USV and to be paid by USV is for legitimate and genuine business reasons of USV. Shri A.V. Gandhi was in management and control of several companies including assessee company and M/s Vital Pharmacal (P) Ltd. Family of Shri A.V. Gandhi, HUF and family trust owned almost entire share capital of these companies. On death of S h r i A.V. Gandhi, bitter quarrels ensued between family members for acquiring/retaining controlling interest of all companies, including assessee company. After narrating disputes between parties, CLB passed order dt. 3rd April, 1998 and directed that both orders dt. 10th March, 1998 and 3rd April, 1998 should be read together. Para 8 of CLB's order dt. 3rd April, 1998 has been reproduced by AO, which reads as under : "The family arrangement, principal terms of which have been recorded b y us effectively put to end extensive litigation between parties/companies involved. pendency of litigation, adversely affected reputation, inter alia, of USV, triggered false signals in pharmaceutical industry, and, serious affected business growth and prosperity of USV. We are satisfied that money paid by USV and to be paid by USV is for legitimate and genuine business reasons of USV." 63. On basis of above, AO found that finding of CLB "the legitimate and genuine business reasons of USV" for parting with Rs. 12.06 crores (approximately) was outcome of family arrangement that was culmination of extensive litigation between family members of late Shri A.V. Gandhi, such litigation arising from mutual distrust among them coupled with Gandhi, such litigation arising from mutual distrust among them coupled with intention to acquire and/or retain controlling interest in companies promoted and built up by late Shri A.V. Gandhi, to exclusion of those who were on other side of particular dispute. Basically, opponent camps consisted of Mrs. Pramila Gandhi and her two daughters, viz., Sheela Gandhi Rao and Sunita Arvind Gandhi on one hand, and on other hand, other daughter, Leena Gandhi Tewari and her husband, Prashant Tewari. 64. After discussing issue, AO came to conclusion that payment of Rs. 12.6 crores (approximately) was for consolidating interest of majority of shareholders. He held, it is difficult to put at par business protection and development of corporate entity with personal interest of majority shareholders. Apparently, such expenses could be paid out of accounts of assessee company, not only because it was closely held but also because majority shareholding of Mrs. Leena Gandhi Tewari and her husband was supremely dominant having 46,391 shares whereas other shareholders having 1,641 shares. He held, IT Act is self-contained code and taxability of receipts or allowance of expenditure are to be determined only within scheme of Act itself. provisions of statute which is not cognate or pari materia to IT Act, cannot be taken into aid to judge taxability or otherwise of receipt or allowance or otherwise of expenditure. 6 5 . After discussing issue in detail and placing reliance on decisions of Hon'ble Supreme Court in case of CIT vs. Malayalam Plantations Ltd. (1964) 53 ITR 140 (SC) and Bombay Steam Navigation Co. (P) Ltd. vs. CIT (1965) 56 ITR 52 (SC); and also decision of jurisdictional High Court in case of Adarsha Dugdhalaya vs. CIT (1971) 80 ITR 49 (Bom), O decided issue against assessee. Particularly taking note of decision in case of Adarsha Dugdhalaya vs. CIT (supra), where issue was with regard to dispute as to what is quantum of claim of outgoing partner as on date of retirement, Hon'ble High Court held, expenditure cannot be treated as incurred for purpose of protection of business of assessee; as such this is not revenue expenditure but is one that need to be characterized as capital expenditure. AO also relied upon decision of Hon'ble Punjab & Haryana High Court in case of CIT vs. Shiwalik Talkies Ltd. (1967) 63 ITR 83 (P&H), wherein Hon'ble High Court held, expenses incurred by company to resist application to Court by shareholders under relevant provisions of Companies Act questioning appointment of directors of assessee company could not be considered as expenditure laid out or expended wholly and exclusively for purpose of business of assessee company. He also relied upon decision of jurisdictional High Court in case of Premier Construction Co. Ltd. vs. CIT (1966) 62 ITR 176 (Bom). In that case tussle was between shareholders against Board of Directors. shareholder filed suit praying for declaration that ruling of President was illegal and invalid and subsequent resolutions passed at meeting were also invalid and asked for relief by way of several injunctions restraining company and its Board of Directors from giving effect to and acting in accordance with resolutions passed at said meeting. In this case Hon'ble High Court held that expense may in some indirect way be conducive to benefit of business or to better management of business but that would not make expenditure wholly and exclusively for purpose of business. So also, AO relied upon decision of Hon'ble Calcutta high. Court in case of Albert David Ltd. vs. CIT (1981) 131 ITR 192 (Cal). 66. In short, AO held that to allow claim under s. 37(1), following points are necessarily to be considered : (1) Whether expenditure was incurred by assessee in his character as trader. (2) Expenditure incurred on litigation purely relating to domestic quarrel between shareholders, though it had some indirect connection with business or management of company, but that would not amount to fact that such expenditure was laid out wholly and exclusively for purpose of carrying on business of assessee. (3) What must be considered is purpose for and object of expenses at time when it was incurred. (4) company may well become pawn in hands of different persons at different times having very little say in course of conduct of litigation or of its business and incurring expenditure in circumstances created by others, company may well act outside its character. 67. On basis of chart given at para 14(a), AO held that dispute never affected assessee adversely. Assessee disclosed fast moving upward curve of turnover. It did not affect assessee's reserve and surplus. On other hand, it multiplied many times. He rejected assessee's contention that domestic disputes debilitated business of assessee and its smooth running. He held, this is against evidence on record. Thus he rejected assessee's claim vide para 15 of his order, observing as under : "15. To sum up, for purpose of s. 37(1) of IT Act, cumulative effect of evidence as discussed above when distilled through judicial rulings also referred above, is that there was no business or commercial justification for assessee company to incur expenditure of Rs. 12.06 crores (approx.) because business was all through carried on and carried on very well in spite of whatever disputes among shareholders. facts of case do not display any cause and effect, relationship between disputes and business of company as has been contended by assessee. inference therefore, cannot be avoided that payment was made for purposes other than being laid out wholly and exclusively for purpose of carrying on t h e business as mentioned under s. 37(1) of Act. payment of Rs. 12,06,53,113 was by family members to family members with objectives to which assessee company and its business were total strangers. companies having been family companies, (ii) parties to disputes being cognates (excepting one), Leena Gandhi Tewari and her husband having owned dominant shareholding in assessee company through their dominance in shareholding of American Products (P) Ltd. [(see para 10(c)(1) and (ii)] before as well as subsequent to orders of CLB, (iii) assessee company having recorded incremental growth during subsistence of disputes and, (iv) as concluded above, facts of case not disclosing any nexus between impugned expenditure and business of assessee company, inference is inescapable that 'family arrangement' arrived at by disputants was sequel to change of heart that was legitimatised by disputants was sequel to change of heart that was legitimatised by praying to CLB for formal concurrence. family arrangement is most convenient legal solution where properties are not amenable to partition, whether on grounds of law or on grounds of feasibility. But, there must be consideration for same [M.N. Aryamurthi vs. M.I. Subbaraya Shetty AIR 1972 SC 1279, 1285]. It also facilitated transfer of shares in case of disputants. legal effect of "family arrangement" in facts of case was therefore, strictly confined to disputes inter se among family members in case under consideration. Realistically speaking, orders of CLB were off-shoot of family arrangement sanctifying understanding arrived at in respect of shareholdings of family members in Gandhi Group of companies. impugned expenditure consequently sprang from terms of settlement as consideration for clinching arrangement. consideration so paid had nothing to do with ongoing business activities of assessee company or for that matter other family companies. expenditure of Rs. 12,06,53,113 debited in books of assessee company had therefore, character of personal expenditure." Aggrieved by above order, assessee approached first appellate authority. 68. It was contended before CIT(A), in addition to facts brought on record before AO, that assessee company's business was adversely affected and that payments were made to keep interest of assessee company or otherwise assessee would have been adversely affected. It was further submitted that holding company, viz., APCO has large number of shareholders who are not in any way connected with promoter family. Out of total shares of 48,032 in APCO, 46,391 shares were held by Leena and her husband Prashant, noticed CIT(A). Both these companies are closely held and practically no other shareholder could influence decision making in these companies. Hence, contention of assessee that there were other shareholders, etc. was rejected. Coming to contention of assessee that it heavily relied upon finding of CLB, CIT(A) held, he could not appreciate contention raised by assessee. He held, in fact litigations were for division of family assets as apparently Leena and her husband Prashant could gain control over APCO and assessee company while other family members, viz., mother and two daughters felt aggrieved that they were not given their due share in family property. He held, this was pure and simply division of family assets, that is why CLB order says that this was family arrangement providing for distribution of assets. In regard to reliance placed by assessee for claiming deduction under s. 37(1), CIT(A) held, AO rightly referred to decision in case reported in Madurai District Central Co-operative Bank Ltd. vs. ITO 1975 CTR (SC) 220 : (1975) 101 ITR 24 (SC) to argue that it is settled law that IT Act is permanent enactment and outside IT law decision does not affect taxability or otherwise. For above proposition, he also referred to decision of Hon'ble Allahabad High Court in case of Shailendra Kumar vs. Union of India (1988) 74 CTR (All) 41 : (1989) 175 ITR 494 (All). CIT(A) held that AO was right in relying upon decision of jurisdictional High Court reported in (1966) 62 ITR 176 (Bom) (supra). He rejected assessee's reliance on decision in case of D.W. Noble Ltd. vs. Mitchell. He also distinguished decision relied upon by assessee in case of IRC vs. Carom Co. (1968) 45 RDC 18 (HL). He held, this decision is not applicable. That was case wherein amounts were spent for objects of new charter, which aimed for removing obstacles to profitable trading and removal of such restriction was for purpose of well management of assessee company. CIT(A) rejected assessee's contention that expenditure was incurred on grounds of commercial expediency to facilitate carrying on business to protect business assets, reputation, fair name and goodwill and that expenditure incurred satisfied all ingredients of s. 37 of Act. He held it was incurred solely to give share in assets to three family members and assessee is unfairly trying to claim this expenditure as business expenditure. He agreed with AO's finding that there is no relationship between disputes and business of assessee. payments were made for settlement of family disputes between two groups. Hence, he confirmed order of AO. Aggrieved by above order, assessee is in appeal before Tribunal. 69. brief facts, narrated in para 7 of written submission, are as under : Assessee is 98 per cent subsidiary of American Products Company Ltd. (for short 'APCO'). Assessee as well APCO; and also other two companies, viz. M/s Vital Pharmacal (P) Ltd. (for short 'VP') and M/s Vital Organics (P) Ltd. (for short 'VO') belonged to erstwhile Gandhi family Group. family of Shri A.V. Gandhi, his family trust and HUF owned almost entire shares, of these companies. Management and control of these companies was with Shri A.V. Gandhi. He died on 15th Jan., 1986, leaving his widow Dr. Pramila Gandhi and three daughters, viz. Leena Gandhi Tewari, Sheela Gandhi Rao and Sunita Gandhi. Mrs. Leena Gandhi Tewari and her husband Prashant Tewari were controlling and managing these companies after death of Shri A.V. Gandhi. Disputes arose among shareholders of these companies. Proceedings were filed before Principal Bench of CLB at New Delhi. business of company was seriously affected and restricted its growth. Settlement was arrived at between parties. Payment of Rs. 12.5 crores was ordered. Termination of tenancies in respect of certain premises occupied by assessee and cancellation of 900 shares of assessee company held by Sheila Gandhi Rao and Sunita Gandhi was also ordered. It was further ordered by CLB that disputing parties will not have any further claim of any sort against assessee company. Settlement was claimed as deduction from business income inasmuch as it was for development of business of assessee and dispute inevitably causing some adverse publicity in market was settled sooner than later. CLB observed vide its order dt. 3rd April, 1998 : "the pendency of litigation, adversely affected reputation, inter alia, of USV, triggered false signals in pharmaceutical industry, and seriously affected business, growth and prosperity of USV. We are satisfied that money paid by USV and to be paid by USV is for legitimate and genuine business reasons of USV". However, AO disallowed claim of assessee mainly for reasons stated below : (a) payment was really outcome of family dispute that culminated i n litigation between family members due to mutual distrust and/or intention to retain controlling interest of companies. (b) payment as per direction of CLB is integral and inseparable part of total package that CLB handed down for restructuring shareholdings of assessee as only solution to long standing family feud. (c) Observation of CLB that money paid by assessee is for legitimate and genuine business reasons only contextual in nature and content of dispute. (d) Persons having control over assessee company also control APCO. Leena Gandhi Tewari and her husband, Prashant Tewari also control APCO along with assessee company. In other words, they consolidated interest. (e) expenditure was therefore for consolidating interest of majority shareholders. There was no business exigency for this payment. It is not wholly and exclusively expended for purpose of business of company. (f) During intervening period of Shri A.V. Gandhi's death and final settlement, while disputes were going on, it never adversely affected. (g) payment was by family members to family members with objectives to which assessee and its business were total strangers. coffers of assessee were used for clinching absolute control. 70. This finding of AO was approved by CIT(A) almost for same reasons. To come to above conclusion, CIT(A) also relied upon following decisions : (i) Premier Construction Co. Ltd. vs. CIT (supra); (ii) CIT vs. Shiwalik Talkies Ltd. (supra); (iii) Adarsha Dugdhalaya vs. CIT (supra); (iv) Madurai District Central Co-operative Bank Ltd. vs. ITO (supra); (v) CIT vs. Malayalam Plantations Ltd. (supra); (vi) Bombay Steam Navigation Company (P) Ltd. vs. CIT (supra). 71. It is submission of learned counsel for assessee that Revenue authorities failed to appreciate facts. Firstly, Department went wrong solely relying upon allegation made in plaint in Suit No. 606 of 1995 filed by plaintiffs, i.e. Dr. Pramila Gandhi and her two daughters, viz., Sheela Gandhi Rao and Sunita Gandhi. It is only one sided story and does not necessarily state entire facts. defendants' side of story never finds place in such plaints. Normally, in such circumstances only distorted picture far away from reality is reflected. Unless other side of story is also recorded, truth cannot be arrived at. same happened in instant case of assessee as well and Department appreciated only one side. 72. Vide para 7.6 of assessee's written submission, it is submitted that around 1993-94, some of shareholders of assessee company, its holding company (APCO) and some other associate companies (VP and VO) commenced various legal proceedings before various legal forums like City Civil Court, Hon'ble Bombay High Court and CLB. There were also litigations before CLB, Principal Bench, New Delhi in petition Nos. 63 and 64 of 1993, No. 3 of 1994 and No. 43 of 1996. It is in petition Nos. 63 of 1993 that assessee was impleaded in proceedings before CLB by petitioners by filing application dt. 4th Feb., 1998 under regulation 44 of CLB (Regulation) Procedure, 1988, making various unsubstantiated allegations against assessee, in order to bring its name into disrepute, like earlier suit filed before Hon'ble Bombay High Court in Suit No. 606 of 1995, which went to extent of seeking injunction from Hon'ble High Court, restraining assessee from passing any resolutions or taking any steps to sell, alienate, encumber, transfer or create third party rights with regard to shares and assets. Assessee was unable to start any new scheme, project or collaboration agreement to expand its business and to augment profitability. During period 1994 to 1998, assessee was under constant attack through misconceived litigations, frivolous complaints to various authorities and unwarranted hindrances caused to regular day-to-day functioning of assessee company, thereby causing distractions/irritations. By orders of CLB dt. 10th March, 1998 and 3rd April, 1998, put end to all these hassles assessee was passing through. CLB appreciated that assessee's business was adversely affected by these litigations. That is why CLB made above quoted observation in its order dt. 3rd April, 1998. No doubt observation is contextual in nature and content, but there is no manner of saying that this is out of context. business of assessee company was affected adversely by plethora of unwarranted litigations and baseless allegations against its management. Had assessee not incurred impugned expenditure to extricate itself from stifling conundrum, its potential growth would have been lost and development would have been jeopardised. Thus, payment was made for very survival of assessee company. assessee, like any other prudent businessman, could have scarcely afforded such possibility. There is no doubt that impugned amount was laid out and expended wholly and exclusively for purpose of business. Assessee also relied upon decision of Hon'ble Supreme Court in case of CIT vs. Malayalam Plantations Ltd. (supra). 7 3 . Learned counsel further submitted, in order to appreciate facts leading to dispute, background of management is also necessary to be submitted briefly. He submitted, after death of Shri A.V. Gandhi, his eldest daughter, Leena Gandhi Tewari, who came back to India on completion of her studies abroad, and her husband Prashant Tewari took over management of Gandhi Group of companies, including assessee. Dr. Pramila Gandhi, practising doctor, neither had time nor inclination or expertise to dabble into company management and younger two daughters were still students. e l d e r daughter and her husband were well qualified company managers possessing foreign qualifications and knowledge in their chosen field. After their joining, companies prospered like never before, till litigations in 1993. AO states that even after death of Shri A.V. Gandhi and before settlement of dispute, company was not adversely affected. But what he probably meant is that profit-making capacity of company did not diminish inspite of litigations. What Revenue failed to appreciate is that during this intervening period growth and development of company had come to standstill. Between 1994 and 1998 assessee company could not take up any ambitious plans to expand its business and increase profitability, except routine growth plans. 74. Learned counsel submitted, prior to commencement of litigation, two plants at Lote Parshuram near Chiplun, Maharashtra; one for manufacture of plants at Lote Parshuram near Chiplun, Maharashtra; one for manufacture of formulations and other for manufacture of bulk drugs were set up by assessee. During this period of litigations, precious little could be done in these plants. After litigations came to end, assessee could again go ahead with these ambitious plans for manufacturing and marketing of formulations based on Nitroglycerine. In fact, between 1994 and 1998, assessee had to give up number of plans for collaboration with multinationals, which would have substantially expanded its business and augmented its profitability. In September, 1994, assessee was approached by LIPHA, which is part of Merk G r o u p and originator of bulk drug metformin for alliance to manufacture/market/source for international generic market, bulk drug. Representatives of LIPHA visited India and held discussions with assessee for collaboration. But when they came to know of litigations, interest waned and they dropped plan. Again in January, 1997, assessee was engaged in talks with "Lanocare" of Australia and New Zealand for launching of skin care products based on "Lanolin". foreign party withdrew after they came to know of litigations and difficulties. In 1997 assessee negotiated with Alfa Wassermann for marketing their skin care products of well known international brand "Pikenze". Negotiations suspended in midway as they suddenly hesitated to enter into agreement, with disputes going on in company. Hence, learned counsel submitted, in these circumstances, putting end to deteriorating circumstances of company was must and that is what assessee achieved by this payment and payment was incurred out of commercial expediency is borne out by following subsequent events : (a) After assessee freed itself form shackles of litigations, profit before tax for period ended 31st March, 2000 jumped to Rs. 34.46 crores from Rs. 15.67 crores in preceding year. (b) Assessee established subsidiary in year ended 31st March, 2000 for marketing paediatric range of pharmaceutical specialities. (c) Assessee's international business including exports through orders with developed nations increased about 50 per cent during year ended 31st March, 2000. (d) Assessee increased its export of metformin during year 1999-2000, opportunity that it lost in 1994 by not having been able to have alliance with LIPHA. (e) After litigations ended, assessee was able to set up four major R&D Labs at Govandi, viz., Analytical Research Laboratory, Molecular Medicine Research Laboratory, Drug Delivery Research Laboratory and Chemical Process Research Laboratory. 75. Learned counsel further submitted, since order of CLB in 1998, assessee has been able to successfully expand and get international recognition as well as enter into new contracts/collaborations. For example : (b) Assessee entered into agreement for procurement of SAP user license, which is internationally acclaimed business software. agreement was signed on 15 day of December, 1997 and implemented said agreement from financial year 1998-99 onwards. Assessee was ranked 3rd in pharmaceutical industry to implement SAP. (c) Assessee set up state of art formulations plant at Daman in October, 2001. (d) Licencing agreements entered into with B-Brown for Glucometer. (e) Assessee obtained following certificates from various foreign authorities regarding manufacturing facilities at Chiplun : (i) European Directorate for quality of medicines regarding Metformin Hydrochloride, Glibenclamide and Ticlopidine Hydrochloride, (ii) Therapeutic Goods Administration of Australia for Metformin, (iii) German Medical and Drug Control Authorities for Metformin, (iv) US FDA approval for Metformin and Glipizide. (f) Brands/business acquiring agreements were signed with : (i) Glaxo - Derobin and Annovate (i) Glaxo - Derobin and Annovate (ii) Lyka - Amlopin and Nitroglycerine (marketing and scientific data only). 76. Learned counsel submitted that it shows veracity of claim of assessee that impugned expenditure was incurred for purpose of protection and development of its business. This fact is further fortified by figures of ORG Marg rankings of pharmaceutical industries achieved by assessee company during period December, 1994 to April, 2000, which are as under : Period Rank December, 1994 23 December, 1995 36 December, 1996 30 December, 1997 31 December, 1998 31 December, 1999 23 April, 2000 19 Thus facts narrated above speak for itself eloquently and credibly. Hence, learned counsel submitted, orders of Revenue authorities are liable to be reversed. 77. Learned counsel further submitted, opinion of CLB is not mere opinion. It is not merely forum of arbitration between disputing parties. truth is far from above notion of Revenue authorities. CLB is creature of s. 10E of Companies Act, 1956. Sub-s. (4C) of s. 10E vests in CLB same powers as are vested in Court under Code of Civil Procedure, 1908. Sub-s. (4D) provides that every proceeding before CLB shall be deemed to be judicial proceeding within meaning of ss. 193 and 228 of Indian Penal Code and for purpose of s. 196 of CPC. decision of CLB is appealable before respective High Court. Learned counsel further objected finding of Revenue that disputants were before CLB for securing way out of pending litigations to satisfaction of each of them. CLB cannot have any agenda to find solution to dispute that is acceptable to each of disputants. powers of CLB are well defined in Companies Act, 1956. CLB adjudicated upon petitions filed before it and passed appropriate orders in its wisdom to meet ends of justice. parties affected are free to move higher forum (High Court). In view of above, learned counsel submitted, orders of Revenue authorities are liable to be set aside. 78. In support of assessee's contention that litigation expenses incurred to protect business of assessee is revenue expenditure as against litigation expenses incurred for purpose of creating, curing or completing assessee's title to capital is capital expenditure, reliance was placed upon decision of Hon'ble Supreme Court in case of Dalmia Jain & Co. Ltd. vs. CIT (1971) 81 ITR 754 (SC). Learned counsel, again brought our attention to decision of Tribunal, Mumbai Bench in case of Echjay Industries Ltd. vs. Dy. CIT (2004) 88 TTJ (Mumbai) 1089 : (2002) 257 ITR 1 (Mumbai)(AT). In this case Tribunal held that expenditure incurred out of business expediency like settling feud between majority and minority shareholders does not increase capital of assessee and such expenditure could only be treated as wholly and exclusively incurred in course of carrying on of business and therefore it was deductible. Learned counsel further relied upon decision of Hon'ble Delhi High Court in case of South Asia Industries (P) Ltd. vs. CIT (1981) 132 ITR 144 (Del), wherein Hon'ble High Court held that expenditure incurred to protect business and reputation of company is amount spent for safeguarding and saving assets of assessee's business and keeping it on sound footing. expenses incurred in its business or trading capacity, for purpose of business, amounts to allowable expenditure. Hence, learned counsel submitted, orders of Revenue authorities are liable to be reversed. 7 9 . Replying to above, learned Departmental Representative submitted, heavily relying upon order of AO as well CIT(A), that there was family dispute between two warring groups of family. matter was family dispute between two warring groups of family. matter ultimately reached before CLB. They ordered certain payments to one group. This is nothing but payment made to keep interest of majority shareholders or for controlling power of company. This has nothing to do with business of assessee. Even during litigation was going on, turnover of assessee increased, which shows that there was no adverse affect as result of dispute between two groups. This is actually nothing but family settlement and not claim allowable. In support of above view, learned Departmental Representative relied upon decision of Hon'ble Kerala High Court in case of S. Veeriah Reddiar vs. CIT (1960) 38 ITR 152 (Ker). In this case Hon'ble High Court held, in considering question whether amounts were laid out or expended wholly for purpose of business it will be open to Revenue authorities to consider whether employees are related to assessee and whether payments to them were made entirely on account of business considerations or on account of some extraneous consideration. In instant case, learned Departmental Representative submitted, payments were made because of family dispute. Relying upon decision of jurisdictional High Court in case of Ramanand Sagar vs. Dy. CIT (2002) 175 CTR (Bom) 220 : (2002) 256 ITR 134 (Bom), learned Departmental Representative submitted that it is for assessee to establish that payments were made for purpose of business. In instant case of assessee, burden has not been discharged. Hence, learned Departmental Representative submitted, orders of Revenue authorities are liable to be confirmed. 8 0 . We heard rival submissions, gone through orders of Revenue authorities and decisions cited by contending parties. First we will take up contentions of Revenue that litigations were in fact only division of family assets and for controlling of business of assessee. Considering facts and circumstances of case and dispute between contending parties, CLB has already given finding in its order that pendency definitely affected reputation and gave false signal in pharmaceutical industry and seriously affected growth and prosperity of assessee company. Even if starting point of dispute is controlling of assets, these findings of CLB cannot be discarded out of context. facts brought on record clearly show, as we have mentioned in para 70 of order that assessee was ranking 23rd in December, 1994. Subsequently from December, 1995 to December, 1998 it was lagging somewhere between 30 to 36. In December, 1999, immediately after settlement, its rank went up to 23 and by April, 2000, it was 19, which itself shows that settlement has taken assessee out of trouble period. contention of learned counsel recorded vide para 68 is also relevant in this context. Assessee was approached by LIPHA, part of Merk Group and originator of bulk drug metformin for alliance but it was to be dropped because of dispute; so also talk with "Lanocare" of Australia and New Zealand for launching of skin care products. negotiation with Alfa Wassermann was also dropped because of disputes. These all indicate that affairs of company were not running well due to disputes between family members. Therefore, saying that settlement is to control assets of company itself is oversimplification. Had these disputes not been settled, company would not have revived well. It is not correct to say that reaching such conclusion is out of context. 81. Now we come to decisions relied upon by contending parties. decisions relied upon by learned CIT(A), on which reliance has also been placed by learned Departmental Representative, i.e. Madurai District Central Co-operative Bank Ltd. vs. ITO (supra) and Shailendra Kumar vs. Union of India (supra), does not further Revenue's case. In case of Madurai District Central Co-operative Bank Ltd. (supra), Hon'ble Supreme Court held, IT Act is permanent enactment and in case of Shailendra Kumar vs. Union of India (supra), Hon'ble Allahabad High Court held that IT Act is self-contained code and taxability or otherwise of receipts to be determined with reference to provisions of Act. It does not mean that finding of fact by authority, though it is not binding as such, cannot be considered and taken note of while coming to conclusion on facts. In case of Shailendra Kumar vs. Union of India (supra), at p. 508, Hon'ble Allahabad High Court observed as under : "The question for consideration is whether to examine scheme of Act of 1961, aid can be taken from Fundamental Rules governing service conditions of Central Government employees or from provisions of statute which is not cognate or pari materia to Act of 1961. IT Act is statute which is not cognate or pari materia to Act of 1961. IT Act is self-contained code and taxability of house rent allowance, city compensatory allowance and dearness allowance or of any other allowance will have to be seen only within scheme of Act of 1961." Their Lordships further relied upon legal proposition as explained by their Lordships of Hon'ble Supreme Court in case of S. Mohan Lal vs. R. Kondiah AIR 1979 SC 1132, which reads as under : "It is not sound principle of construction to interpret expressions used in one Act with reference to their use in another Act, more so if two Acts in which same word is used are not cognate Acts. Neither meaning nor definition of term in one statute affords guide to construction of same term in another statute and sense in which term has been understood in several statutes does not necessarily throw any light on manner in which term should be understood generally. On other hand, it is sound, and indeed, well known principle of construction that meaning of words and expressions used in Act must take their colour from context in which they appear." From above it is clear that their Lordships observed that for interpretation of meaning of words and expressions used in one Act may not have same meaning in another Act. It is not to say that facts found out by competent authority cannot be taken at all into consideration to arrive at conclusion. 82. Coming to decision relied upon by Revenue authorities in case of CIT vs. Malayalam Plantations Ltd. (supra), issue before their Lordships was whether estate duty paid by resident company incorporated outside India on behalf of principal not domiciled in India is deductible from its profits while computing assessable income under s. 10(2)(xv) of Indian IT Act, 1922. At p. 149, their Lordships. discussing issue on basis of decision of Hon'ble Supreme Court in case of Badridas Daga vs. CIT (1958) 34 ITR 10 (SC) observed : "This decision, though not direct in point, lays down principle that expenditure can be deducted only if it arises out of carrying on of business and is incidental to it." In fact, this decision supports case of assessee. Discussing issue, their Lordships held : "the expenditure incurred by assessee in his capacity as agent of another is not deductible item." In other words, decision went against assessee because it was payment made as agent. Assessee paid estate duty on behalf of another person, which is not wholly and exclusively for purpose of business, Hon'ble Supreme Court held. 83. Coming to decision relied upon by Revenue authorities in case of Adarsha Dugdhalaya vs. CIT (supra), this was case wherein as directed by award, payments were made by assessee towards arbitrators' fees, solicitors' fees and costs on both sides in two suits and this amount was claimed as deduction in assessment. Hon'ble Bombay High Court held, this was not expenditure connected with carrying on of business of assessee but to determine mutual rights and obligations of partners on terms and conditions on which they had agreed to enter into partnership from time to time. Hence, their Lordships held, this is not expenditure in nature of revenue but capital expenditure. At p. 61, Hon'ble High Court held : "In present case, however, expenditure incurred is not for purpose of protecting assets but for purpose of ascertaining what they are on settlement of disputes between partners in relation to them. In our opinion, therefore, having regard to essential nature of litigation and purpose for which it was contested, we do not think that expenses of litigation claimed by assessee could be allowed to it as expenditure incurred wholly and exclusively for purpose of carrying on its business." Coming to instant case of assessee, facts are distinguishable. Had dispute not settled, continuance of business of assessee itself would have jeopardized. 84. decision of jurisdictional High Court, relied upon by learned CIT(A), in case of Premier Construction Co. Ltd. vs. CIT (supra) is also distinguishable on facts. This was case wherein dispute arose between directors of company and its shareholders. Their Lordships held that company is not justified in claiming expenses incurred by it in said litigation as expenses of its business. However, their Lordships further held : "In order that expense of civil litigation could be permissible as expense order that expense of civil litigation could be permissible as expense wholly and exclusively laid out for purpose of business of assessee, expense must have been incurred by assessee in its character as trader and transaction in respect of which proceedings were taken must have arisen out of, or must have been incidental to, assessee's business. assessee could be said to have incurred expenditure in his character as trader if litigation was necessary to be carried on by assessee or defended by it to protect its trade or business or to avert danger or threat to its carrying on of its business". In other words, allowability or non-allowability of expenditure, even if it is incurred for purpose of litigation, depends on facts of that particular case. stand of Revenue authorities in instant case of assessee is that this is purely domestic quarrel between shareholders. It is further stand of Revenue authorities, as is clear from order of CIT(A), that expenses may, in some indirect way be conducive to benefit of business or to betterment of business, even then, it cannot be held, it is expenditure wholly and exclusively for purpose of business. In instant case of assessee we have seen that had settlement not been taken, business itself would have jeopardized. 85. AO has given chart of turnover, profit, etc. vide pp. 29 and 30 of his order, para 14(a), to show that assessee's business turnover and profit because of this litigation has never come down. In other words, it has not adversely affected. On other hand, learned counsel for assessee has contended that mere increase in turnover and profit alone is not criteria to decide whether business adversely affected or not. We have mentioned in para 70 of this order, ranking given and also parties who entered into negotiations with assessee and because of litigations/dispute between warring groups of family, withdrawn from negotiations. This clearly shows that business of assessee or growth potential of assessee had definitely been affected. In short, we are of opinion that view canvassed by learned counsel is to be accepted. 86. Coming to decision relied upon by learned counsel, in case of Dalmia Jain & Co. Ltd. vs. CIT (supra), Hon'ble Supreme Court held : "where litigation expenses are incurred by assessee for purpose of creating, curing or completing assessee's title to capital, then expenses incurred must be considered as capital expenditure. But if litigation expenses are incurred to protect business of assessee, they must be considered as revenue expenditure." In instant case of assessee, facts clearly show that business of assessee, due to infighting between two groups of family members, was in difficult situation and assessee lost many business opportunities for its growth. Even if payments were to settle this dispute but determinate character is to protect business as well and, therefore, this decision of Hon'ble Supreme Court supports assessee's case. Hence, appeal of assessee on this ground is allowed. 8 7 . However, we make it clear that proportion of these business protection and development expenses would be allocated to s. 80HH units and, therefore, we direct AO to recompute deduction under s. 80HH as per law, after affording reasonable opportunity of hearing to assessee. 88. In result, appeal of assessee stands allowed in part. *** ASSISTANT COMMISSIONER OF INCOME TAX v. ASEA BROWN BOVERI LTD.
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