ORDER
Sunil Kumar Yadav, Judicial Member
1. These appeals are preferred on behalf of the assessee against the order of the Commissioner (Appeals) on common ground. We, therefore, heard these appeals together and are being disposed off by this consolidated order.
2. Brief facts borne out from the record are that the assessee-company was originally registered in the name of M/s. Sea Tech Services Ltd. Lateron the name of the company was changed to M/s. Adsteam Agency (India)Ltd., the present assessee. It has acquired the shipping agency business of Shaw Wallace & Co. Ltd. and Cruickshank & Co. Ltd. through agreement dated 2-4-1998. The assessee-company has filed its return of income on 30-11-1997 declaring a net loss of Rs. 9,20,056. While declaring the net loss the assessee-company claimed 20 per cent depreciation on the amount paid for non-competition covenant of Rs. 38,47,000 as per the agreement dated 2-4-1998 and amount of Goodwill paid Rs. 5 lakhs. The assessing officer disallowed the claim of the assessee against which the assessee filed a petition under Section 254 of the Income Tax Act before the CIT who set aside the order of the assessing officer wherein the assessing officer disallowed the non-competition fees considering the same as Goodwill paid for acquisition of the business.
3. During the course of fresh assessment proceedings the assessee has submitted that it has paid a sum of Rs. 38,47,000 for non-competition covenant for a period of 5 years and a sum of Rs. 5 lakhs was paid for Goodwill. The assessee claimed that the sum of Rs. 38,47,000 be allowed as revenue expenditure in the year of payment or in the alternative the same should be spread over a period of 5 years as non-competition covenant was only for 5 years. The assessing officer disallowed the claim of the assessee by holding that the purchase price paid for non-competition covenant is in the nature of Goodwill and cannot be allowed as revenue expenditure.
4. The assessee preferred an appeal before the Commissioner (Appeals) with the submissions that the assessee has paid a sum of Rs. 38,47,000 for non-competition covenant for a period of 5 years and no capital asset of any enduring A nature has been acquired by the assessee. Therefore the whole amount paid should be allowed as revenue expenditure in the year in which it is paid. The learned Counsel for the assessee also argued in the alternative that as the benefit of non-competition covenant is for a period of 5 years the same could be allowed at 1/5 every year. The assessing officer without appreciating the difference between the payment of Goodwill and non-competition covenant considered the whole payment was paid for b acquiring Goodwill and disallowed the claim of the assessee.
5. The Commissioner (Appeals) re-examined the issue in the light of the agreement of purchase of shipping business from M/s. Shaw Wallace & Co. Ltd. and Cruickshank & Co. Ltd. but was not convinced with the submissions of the assessee. The Commissioner (Appeals) accordingly confirmed the disallowance after holding that the expenditure made by the company was for acquisition of an advantage which was certainly of enduring nature and therefore the expenditure incurred for the purpose of acquiring such an advantage is to be in the nature of capital expenditure.
6. Now the assessee is in appeal before us against the order of the Commissioner (Appeals) for assessment year 1997-98.
7. In 1998-99, 1999-2000 and 2000-01 during the course of assessment proceedings the assessee has filed a letter raising a claim of 1 /5 of the noncompetition covenant payment of Rs. 38,47,000 on the ground that non- competition covenant is for a limited period of 5 years and as such the total expenditure be spread over in 5 years, if the total expenditure is not allowed in assessment year 1997-98. Relying upon the order for assessment year 1997-98 the assessing officer has disallowed the claim of the assessee. The Commissioner (Appeals) also confirmed the same following his order in assessment year 1997-98 and the assessee has preferred an appeal before the Tribunal for those years also.
8. Now the sole issue raised before us is whether the payment on account of non-competition covenant is revenue expenditure and if yes whether it should be allowed in the assessment year 1997-98 or it may be spread over in 5 years, the period of non-competition covenant.
9. The learned Counsel for the assessee has invited our attention to Clause 18 of the agreement dated 2-4-1996 with the submission that the above clause stipulates that for a period of 5 years, the vendors, i.e. Shaw Wallace& Co. Ltd. and Cruickshank & Co. Ltd. will not be engaged or involved in any capacity in any business activity in India, which is same or similar to the business acquired by the assessee from the vendors. The said clause will safeguard the assessee from competition only from the vend or companies and that too in India alone. It does not protect the assessee from competition in the same field from other companies and even from the vendor companies outside India. So it cannot be said that object of making the payment was to eliminate competition altogether over any length of time as observed by the Commissioner (Appeals). By making the payment the assessee did not derive any right to carry on business unfettered so that the advantage can be regarded as of enduring nature. In support of his plea he placed reliance on the judgment of Calcutta High Court in the case of CIT v. Avery India Ltd. in which it has been held that a benefit that might endure long in assessee business be nonetheless be in the revenue field, if the benefit is in respect of an asset which is part of the circulating capital. In the instant case it cannot be said that the benefit obtained by the assessee for non-competition covenant is part of its fixed capital.
10. The learned Counsel for the assessee further contended that in order to determine whether the expenditure is revenue or capital nature one has to traverse a tight path. In the case of K.T.M.T.M. Abdul Kayoom v. CIT the Lordship of the Apex Court has held that what is decisive is the nature of the business, the nature of the expenditure, the nature of the right acquired, and their relation inter se, and this is the only key to resolve the issue in the light of the general principles, which are followed in such cases. In the case of Peerless Securities Ltd. v. Joint CIT (2005) 94 ITD 89 (Kol.), the Special Bench of the Tribunal has enunciated the general principles for determining whether an expenditure should be considered as of capital or revenue in nature. The learned Counsel for the assessee further placed reliance upon the orders of the Ahmedabad Bench of the Tribunal in the case Smartchem Technologies Ltd. v. ITO (2005) 97 TTJ (Ahd.) 818 in which the Tribunal has held that the payment of noncompetition fees for a period of 5 years is a revenue expenditure in the light of the fact that the benefit is available to the assessee only for a period of 5 years. Reliance was also placed upon the judgment of the Tribunal in the case of USV Ltd. v. Joint CIT (2007) 106 TTJ (Mum.) 535 in which it has been held that one time payment made by the assessee cannot alter the nature of these expenses, particularly in the 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 information and data like any goods which can be used for other business entities as raw material or support services to carry out different operations or expand its activities. Heavy reliance was also placed upon the judgment of the Apex Court in the case of Empire Jute Co. Ltd. v. CIT (1980) 124 ITR l.
11.The learned Counsel for the assessee further invited our attention to the following judgments which were considered by the Tribunal in the case of Smartchem Technologies Ltd. (supra) while holding that the expenditure to avoid competition was dictated by business necessity and A commercial expediency and the benefit derived out of it by STL is directly related to enhancing of its profitability and as such the expenditure was of revenue nature and are allowed as business expenditure:
(i) Empire Jute Co. Ltd.’s case (supra).
(ii) Praga Tools Ltd v. CIT (1980) 123 ITR 7731 (AP) (FB).
(iii) Sarabhai M. Chemicals (P.) Ltd v. CIT (1981 ) 127 ITR 742 (Guj.)
(iv) B. W. Noble Ltd. v. Mitchel 11 Tax Case 372.
(v) R.S. Radha Kishan Kapoor v. CIT .
12.The learned Counsel for the assessee has also commented on the various judgments relied on by the Commissioner (Appeals) while confirming the disallowance. The learned Counsel for the assessee further urged that the judgment of the Apex Court in the case of CIT v. Coal Shipments (P.) Ltd. is in fact in favour of the assessee. In that case it has been held that the payment made to ward off competition in business to a rival would constitute capital expenditure if the object of making that payment is to derive an advantage by eliminating the competition over some length of time; the same result would not follow if there is no certainty of the duration of the advantage and the same can be put an end at any time. How long the period of contemplated advantage should be, in order to constitute enduring benefit, would depend on the circumstances and the facts of each individual case. In the instant case non-competition agreement was executed only for 5 years and that too only in India and not in abroad. So through this agreement the competition in business was not completely warded off. The recipient was entitled to carry on similar business beyond the territory of India. In these circumstances the noncompetition fees paid by the assessee is a revenue expenditure. The judgment of the Apex Court in the case of Devidas Vithaldas & Co. v. CIT relied upon by the Commissioner (Appeals) was rendered with regard to acquisition of Goodwill of business. In that judgment the nature of noncompetition fees payment was not an issue. As such the judgment cannot be applied in the present circumstances. A similar argument was raised with regard to other judgments relied upon by the Commissioner (Appeals).
13. In contra, the learned DR placed heavy reliance upon the orders of thelower authorities. He has submitted that the assessee has purchased the shipping business for a consideration of Rs. 43,47,000 out of which Rs. 5lakhs was paid for Goodwill and Re. 1 was paid of Principals’ Contracts,Property Leases, Records and Confidential Information. The major amount of Rs. 38,47,000 was paid for non-competition covenant for a period of 5 years. The bifurcation of these expenditure was purposely done to claim a substantial amount as revenue expenditure on account of non-competition covenant whereas as per the agreement assessee was allowed to use the office premises of the vendor and their employees also. The bifurcation was not proper and more so by making non-competition covenant fees assessee has acquired the shipping business. The major amount was shown as non-competition covenant fees only with an intention to claim it as revenue expenditure whereas this amount was paid to acquire the business asset and the assessee has derived enduring benefit by preventing vender from doing same business for a considerable time. As such the Commissioner (Appeals) was justified in treating the same as capital expenditure.
14. Having given a thoughtful consideration to the rival submissions andfrom a careful perusal of records we find that the assessee has purchased the shipping business for a consideration of Rs. 43,47,000, comprising of cost of Goodwill at Rs. 5 lakhs and non-competition covenant fees of Rs. 38,47,000. The revenue has claimed that the bifurcation of this cost of shipping business is not proper and major amount was claimed under the head of non-competition covenant fees but this issue was never raised before the lower authorities. The assessing officer did not disallow the claim of non-competition covenant fees for these reasons. He has treated these payment/expenditure as a capital expenditure for the reasons that the assessee has acquired enduring benefit by restraining the vendor from doing shipping or similar business. This view was also approved by the Commissioner (Appeals). Though the Commissioner (Appeals) has made an observation in his order that the Principal Contracts Property Lease Records and Confidential Information were valued at Re. 1 and the non-competition fees at Rs. 38.47 lakhs but he has not disturbed the bifurcation made by the assessee. The Commissioner (Appeals) has disallowed the claim of the assessee only for the reasons that the payment was made to carry on its business unfettered by any competition from outsiders. He accordingly held that the expenditure made by the company was for acquisition of an advantage which was certainly of enduring nature and therefore this expenditure is of capital nature.
15. In the light of the findings of the lower authorities the main controversy before us is, whether by making the payment of non-competition fees by the assessee to the vendors, assessee has acquired the enduring benefit and the expenditure incurred is of capital nature. Before adjudicating the nature of payment we have to examine the relevant clause in order to understand how much benefit was acquired by the assessee by making the payment of non-competition fees. For the sake of reference we extract Clause 18 of the agreement as under:
18. NON-COMPETITION
18.1 In consideration for the Purchaser paying to the Vendors the sum of Rs. 38,47,000 as part of the Purchase Price in accordance with Clause 3.1(6), each of the Vendors undertakes to the Purchaser that it will not and will procure that its Affiliated Entities will not:
(a) subject to Clause 18.2 for a period of 5 years after the Completion Date be engaged or involved in any capacity in any business or activity in India which is the same as or similar to the Business or any material part of it at the date of this agreement. For the purpose of this clause, “engaged or involved in” includes direct or indirect involvement as a principal, agent, partner, employee, shareholder, unit holder, director, trustee, beneficiary, manager, consultant, adviser or financier;
(b) for a period of 5 years after the Completion Date:
(i) solicit the custom of any person who was a customer of the Business at any time within the 12 months before the Completion Date; or
(ii) entice away or endeavour to entice away any employees of the Business.
18.2 If any of the prohibitions or restrictions contained in Clause 18.1 is judged to go beyond what is reasonable in the circumstances, but would be judged reasonable and necessary if any activity were deleted or a period or area were reduced, then the prohibitions or restrictions apply with that activity deleted or period or area reduced by the minimum amount necessary.
18.3. The Vendors acknowledge that all the prohibitions and restrictions contained in this Clause 18 are reasonable in the circumstances and confer on the Purchaser a benefit which is no more reasonable than that which is reasonably and necessarily required to protect the goodwill of the Business.
16. From a careful perusal of this clause we find that this clause restrains the vender Shaw Wallace & Co. Ltd. and Cruickshank & Co. Ltd. from doing any business or activity in India which is same as or similar to the business or any material part of it on the date of this agreement. It has been clarified by this clause that the vendor will not to be engaged or involved directly or indirectly in any form in this type of business for a period of 5 years in India. Through this covenant no condition was to put on the vendor from doing this type of business outside India. It is not the case of revenue that the vendors were only person engaged in shipping business and once the vendors are refrained from carrying on such business the assessee would not face any competition from other business constituents who were engaged in the same business. By this non-competition covenant only the venders are restrained from doing the same business but it does not mean that this payment was made to ward off the competition in the business or the rival worlearned Assessee has to face the business competition from other business constituents who are actively engaged in this business. It is also an important factor that in the instant case the period of non-competition was only up to 5 years, meaning thereby after 5 years the vendors can again start similar shipping business in India. The assessee did not acquire a monopoly in this line of business for ever by making the payment of non-competitions fees. These non-competition fees are paid for a limited period to avoid a major competition and to settle down his business.
17. Similar type of issue was raised before the Ahmedabad Bench of the Tribunal in the case of Smartchem Technologies Ltd. (supra) in which the Tribunal has held that the benefit is available to the assessee for a period of 5 years and hence it cannot be said to be an enduring nature in the light of the facts that business of other manufactures in the same area was potential threat to assessee’s business and thus it cannot be said that there was no fear of competition after making the said payment. The Tribunal accordingly held that non-competition fees paid by the assessee was deductible as revenue expenditure. In that case the assessee S.T.L. entered into an agreement with one VBC for acquisition of chemical business of the latter. The VBC has two main businesses, Le., Coco Cola bottling and chemical business. In 1998 the VBC sold off its bottling business and with the proceeds paid off all its debts. It also choose to sell the chemical business of manufacturing and trading in nitric acid and ammonium nitrate to the assessee. In its chemical plant, VBC was using technical information, documentation and know-how provided by some Indian/ foreign companies. While transferring the chemical business to STL, VBC obtained the permission of the technology providers so that STL could continue using the same technologies. The acquisition of chemical business of VBC was spearheaded by one SCM, a Director of STL, who was also Deputy Managing Director of DFPCL, a company engaged in the same line of chemical business. Assessee entered into the non-compete agreement with the VBC, which provides for restriction on VBC and its top person MSM to engage in manufacturing, trading or dealing in any manner with Nitric Acid and Ammonium Nitrate directly or indirectly for a period of 5 years for a consideration of Rs. 6 crores. Since the VBC possessed necessary technical knowledge for manufacturing and supply of the aforementioned chemicals, it was a business necessity for the assessee to stop VBC and its founder promoter from again commencing the same business. In the absence of such an agreement VBC could have given competition to the assessee directly or indirectly. So it was out of commercial expediency that assessee agreed to pay a sum of Rs. 6 crores to VBC. The assessing officer, however, held that since STL, the assessee, was not doing any business in the same line prior to acquiring VBC’s chemical business, non-competition agreement was associated with acquiring a new business. He accordingly held that payment of Rs. 6 crores for non-competition agreement should not be considered to be revenue expenditure. The Commissioner (Appeals) approved the decision of the assessing officer. The A matter was travelled to the Tribunal. Tribunal found that even though the assessee was not directly engaged in chemical business its Director (SCM) was also Deputy Managing Director of DFPCL which happens to be the largest private sector manufacturer of nitric acid and ammonium nitrate. It was DFPCL which negotiated with VBC for acquisition of its chemical business and actually carried out due diligence enquiry prior to the acquisition. The Tribunal finally held that payment made by the assessee under the non-competition agreement to the vendor company after purchasing its chemical plant: was revenue expenditure irrespective of the fact whether the assessee was carrying on same business before entering into the said agreement or not as the expenditure was made for enhancing the future profitability of the assessee’s business and benefit of the agreement is to endure to the assessee for a period of five years which cannot be said to be of enduring nature. In this case the Tribunal has ‘ examined various aspects under which the expenditure can be called to be revenue expenditure or capital expenditure. They also enumerated certain guidelines which would help in deciding the nature of expenditure. For the sake of reference we extract the relevant portion of the decision of the Tribunal as under:
Carrying on of the same business prior to entering into a non-compete agreement is not necessary to appreciate as to whether the non-compete agreement is to enhance the assessee’s profitability or not, because the stage when increase in profitability is to be seen has to be subsequent to entering into such an agreement and not before that. What is relevant, for appreciating that such an agreement has been entered for keeping in view that assessee’s profitability will increase, is the carrying on of business with respect to which the agreement has been arrived at in future. Increase in profitability may not happen from the very first day. It is to happen only after the agreement in question has been acted upon and, therefore, even if a person, while starting absolutely a new business, comprehends that another known person may compete him in future and, therefore, to avoid such a competition in the assessee’s line of business to be carried on, he enters into a non-competition agreement with such person, then the agreement is certainly for increasing the assessee’s profitability-it is so because the assessee will be able to carry on the business definitely without any competition and may be with enhanced profitability which he otherwise may have not done during the persistence of competition. Without prejudice to the above, the factual position as stated by the revenue authorities was not correct. The observations of the assessing officer himself are contrary. The assessing officer himself has, in first para at page No. 1 of the assessment order, accepted that the assessee-company was engaged in business of manufacturing and trading of weak nitric acid and ammonium nitrate. In the assessment order, the assessing officer had taken a plea that the assessee was not carrying on the business of same chemicals, whereas in the remand report he takes a stand that the assessee was not in the manufacturing of nitric acid or ammonium nitrate. In the same breadth, the assessing officer has stated to have been admitted that “some trade of chemicals on a small scale in some year does not make the appellant as engaged in chemical business”. The Commissioner (Appeals) on appreciation of facts also admits that the assessee-company as well as DFPCL were under the control of the director, CS and that the assessee was doing some trade business in the chemicals earlier, but according to him, it was not much. In view of above facts and circumstances of the case, one fact, which has been duly accepted by both the authorities is that the assessee was doing at least trade business in the chemicals under reference. In view of factum that the assessee was, prior to entering into this agreement, carrying on the trading business in the same chemicals, the findings of revenue authorities that he was not carrying on such business get dismantled and, consequently, the very basis for rejecting the assessee’s claim that the non-competition agreement was for the purpose of enhancement of his profitability ceased to exist, meaning thereby that if this reason is omitted, then assessee’s claim stands accepted. The assessee’s claim that the expenditure in question was of revenue expenditure is allowable on the basis of aforesaid discussion only.
Though, there are no set principles or tests or rules which can be said to be universally applicable to decide as to whether a particular expenditure is capital expenditure or revenue expenditure because whatever principles have been laid down by various Courts can be applied only with reference to facts of a particular case, but still, some of the tests which play a dominant role and should be kept in mind while deciding as to whether the expenditure in question is capital expenditure or revenue expenditure are as under: (i) the question must be viewed in the larger context of business necessity or business expediency; (ii) if a payment is found to have been made for augmenting the productivity of the profit-making structure, that payment would be revenue expenditure and not capital expenditure; (iii) if the benefit procured in consequence upon incurring of an expenditure consists merely in facilitating or enabling the management and conduct of assessee’s business to be carried on more efficiently or more profitably, the expenditure would be on revenue account, even though the benefit may endure for an indefinite future; (iv) it is the totality or the cumulative effect of all the facts and circumstances that would be the prime guiding factor to decide the aim and object of the expenditure, be it capital or revenue; (v) where the expenditure has a direct nexus, connection or relation to the carrying on or conducting the business of the assessee, it must be regarded as integral part of the profit-making process and in such a case, it must be held to be a revenue expenditure; (vi) the period for which a right or benefit is available is not relevant because if the expenditure is found to have direct nexus with the profitability, then this test must fail. (Para 23)
If the expenditure is considered in the light of assessee’s necessity or A commercial expediency, it will be found that it satisfies both the tests because as admitted by the revenue authorities, the non-competition agreement was to enhance the assessee’s sales of relevant two chemicals in central and eastern parts of India without any competition. Even otherwise, the benefit to be procured by the assessee for a period of five years could not be said to be of “enduring nature” and since the revenue authorities have rejected the assessee’s claim solely on the ground that the benefit procured by the assessee was of “enduring nature”, the orders of the revenue authorities cannot be uphelearned Even otherwise, the effect of the agreement in question being directly related to the sale-production capacity of two chemicals, which in turn had effect of carrying on assessee’s business efficiently and profitably in central and eastern parts of India, the test of enduring nature fails and the expenditure has to be held as revenue expenditure. Empire Jute Co. India Ltd v. CIT followed; Praga Tools Ltd v. CIT and Sarabhai M. Chemicals (P.) Ltd v. CIT relied on; CIT v. Hindustan Pilkington Glass Works not followed. (Paras 24 to 26)
The assessing officer’s another observation made for holding the expenditure in question to be capital expenditure, that there was no fear of competition from “VBC” or that VBC would not have been able to compete within a period of 5 years and that assessee was to continue to get the benefit, even after 5 years, which were of ‘enduring nature’ is also not tenable. The assessing officer/CIT(A) have considered the threat for competition only with reference to “VBC” and not with reference to its founder in his individual capacity and, therefore, the conclusion arrived at by them cannot be sustained in law. Secondly, the chemicals produced by “VBC” before sale of the manufacturing plant to assessee, were being sold in a particular area, is, in the central and eastern parts of India and probably without any brand which means that whatever market the VBC and its founder’ had captured was only because of their personal rapport with the consumers of these two chemicals and, therefore, in the presence of other manufacturers of these two chemicals situated in that area VBC as well as its founder could enter into market for selling the chemicals produced by those two manufacturers and were definitely a potential threat at least in central and eastern parts of India. Consequently, the revenue authorities’ observations that the benefit to be derived by the assessee was of ‘enduring nature’ because VBC was not in a position to compete during the period of 5 years because it could not start manufacturing these chemicals within 5 years and by that assessee would get established itself so well in the market that it will be difficult to dislodge it, was misplaced, without any basis or reasoning and devoid of any merit. (Para 28)
The expenditure has to be seen from the angle of the business or the businessman and not from the revenue’s attitude and it is so because had the assessee any mala fide intention to reduce its tax burden, it could have easily included this payment of Rs. 6 crores in purchase price of the manufacturing plant itself, and could have purchased the plant for Rs. 35 crores instead of Rs. 29 crores. In that case, the assessee would have got depreciation on whole of the amount, Le., including payment of Rs. 6 crores, and in that situation, nobody was going to question the assessee’s bona fide and, therefore, to term the expenditure as of capital nature, only because the assessee has claimed the payments separately was not justified. (Para 28)
It is difficult to see as to how the incurrence of the impugned expenditure would add to the profit-making apparatus assumed by the assessee through the sale agreement. It may, by incurring this expenditure, ensure, at least insofar as the vendor is concerned, that the profit-making apparatus continues to yield returns, as envisaged, or in other words, continues to be as effective, and nothing more, i.e., is akin to a ‘maintenance’ expenditure. Such expenditure, as would be readily agreed, is incurred only to ensure the operational efficiency of the underlying subject or the income-yielding source. In marketing parlance, one may draw comparison (to the extent such comparisons can be validly drawn) to the profit of one’s understanding, with the expenditure on advertisement. One would easily recall a decline in the market share of a number of products in the public eye, consequent to a sudden or phased withdrawal of advertisement support. In fact, the advertisement also enables an ‘increase’ in the market share – without doubt – a prized capital asset/advantage; though, however, no firm or definite relationship can be established, in the nature of things, between the two; the success (including its level) or otherwise of an advertisement campaign depending upon a variety of disparate and subjective factors, including the intensity and appeal of that of the rival product(s). By incurring this expenditure, the assessee only maintains itsprofit-making apparatus, as acquired, at its assumed level (and that too, only by cutting off only one of the possible sources of competition), and which, in result, may or may not obtain. Therefore, under the given facts and circumstances of the case, the nature of the non-compete fee incurred by the assessee is revenue. (Para 37)
18. Again a similar issue was also raised before the Tribunal in the case of USV Ltd. (supra) and while adjudicating the issuer Tribunal (in which one of us, the Hon’ble Accountant Member, is the party to the order) has expressed the similar view. In that case the assessee was engaged in the manufacturing and marketing of various Pharmaceutical products and also has the knowledge of manufacturing products from the bulk drug Nitroglycerine. However, with a view to explain its market and to increase and expand its activities, the assessee has entered into an agreement for supply of scientific and marketing know-how possessed by ‘L’ Limited. A This agreement also refers to non-disclosure of information by the assessee and ‘L’ Limited to any third party and non-competition by ‘L’ Limited for a specified period. The payment is made by the assessee only for information regarding clinical data, scientific details and valuable market information and no part of consideration is attributed towards the non-competition. The nature of expenses has to be looked in the hands of the parties who has incurring it and not the party who is receiving it. Having examined the nature of expenses, the Tribunal has held that one time payment made by the assessee-company to ‘L’ Limited does not alter the basic nature of these expenses particularly in the 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 information and data like any other goods which can be used by other business entities as a raw material or support service to carry out its operation or expand its activities. To further elaborate some entities work like a knowledge centre like ‘L’ Limited in the present case and derived revenue by selling knowledge to other parties who in turn by purchasing the same attains its objective of becoming bigger fast. Thus the information if we looked upon in an integrated manner is no more than the facilitation of profit earning process. Therefore, the amount paid by the assessee-company to another company for supply of scientific and marketing know-how with a view to expand its market and increase its activities being a payment only for obtaining information regarding clinical data the scientific details and valuable market information, the same is allowable as a revenue expenditure.
19. In the case of Peerless Securities Ltd. (supra), the Tribunal has laid down certain general principles for determining whether an expenditure should be considered as capital or revenue nature. The Tribunal has held what is relevant in determining whether an expenditure of capital or revenue nature, is the purpose of outlay and its intended object and effect considered in a common sense way having regard to business realities. The test of enduring benefit is not a certain or a conclusive test and cannot be applied mechanically without regard to the particular facts and circumstances of a given case. They have also clarified that the nature of expenditure cannot be determined on the basis of its character in the hands of the recipient. In order to appreciate the general principles laid down by the Special Bench we extract the relevant portion as under:
What is relevant in determining whether an expenditure is of capital or revenue nature is the purpose of the outlay and its intended object and effect, considered in a common sense way having regard to business realities. The test of enduring benefit is not a certain or conclusive test and cannot be applied mechanically without regard to the particular facts and circumstances of a given case. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in the enduring benefit test, what matters is the nature of the advantage in a commercial sense, and it is only where the advantage is in the capital field that the expenditure would be on capital account. If the advantage consists of merely facilitating the assessee’s trading operations or enabling the management or conduct of the assessee’s business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for the indefinite future. By ‘enduring’ is meant enduring in the way that fixed capital endures and it does not connote a benefit that endures in the sense that for a good number of years it relieves the assessee of a revenue payment or a disadvantage. A payment made by the assessee to free himself from a capital liability, is capital expenditure, while a payment which frees an assessee from the liability to make recurring revenue payments or annual revenue payments is revenue expenditure. Where the assessee has an existing right to carry on a business, any expenditure made by it during the course of business for the purpose of removal of any restriction or obstruction or disability, would be on revenue account, provided the expenditure does not acquire any capital asset. The expression ‘once and for all’ is used to denote an expenditure which is made once and for all for procuring an enduring benefit to business as distinguished from a recurring expenditure in the nature of operational expenses. If the expenditure is for the initial outlay or for acquiring or bringing into existence an asset or advantage of an enduring benefit to the business that is being carried on, or for extension of the business that is going on, or for a substantial replacement of an existing business asset, it would be capital expenditure. If, on the other hand, the expenditure, although for the purpose of acquiring an asset or advantage, is for running of the business or for working out that asset with a view to produce profit, it would he revenue expenditure. If the outgoing is so related to the carrying on or the conduct of the business that it may be regarded as an integral part of the profit-earning process or operation, and not for the acquisition of an asset of a permanent character, the possession of which is a condition precedent for the running of the business, then it would be expenditure of revenue nature. If it is intrinsically a capital asset, it is immaterial whether the 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, the outgoing, in such a case, would be of the nature of capital expenditure.
A lumpsum 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 a number of years. It is the intention and object with which the asset is acquired, that determines the nature of the expenditure incurred over it, and not the method or the manner in which the payment is made, or the source of such payment. If the expenditure is recurring and is incurred during the course of business or A manufacture, it would be revenue expenditure. Simply because the payment in the hands of the recipient has been considered a capital receipt, it is not necessary that in all cases it will have the same character in the hands of the person who has made the payment and vice versa. It is the true nature of the expenditure that is relevant and not the name or description or treatment given to it by the assessee in his books of account or other documents.
20. We have also examined the judgment relied on by the Commissioner (Appeals) whiled is allowing the claim of the assessee. In the case of Coal Shipment (P.) Ltd(supra) their Lordship of the Apex Court have categorically held that an item of disbursement can be regarded as; capital expenditure when it is referable to fixed capital. It is revenue when it can be attributed to circulating capital. The contention that as the object of making the payment in question was to eliminate competition of a rival exporter, the benefit which enured to the assessee was of an enduring nature, as such, the payment should be treated as capital expenditure cannot be accepted because the arrangement between the assessee and was not for any fixed term but could be terminated at any time at the volition of any of the parties. No cogent ground or valid reason has been given in support of the contention that even though the benefit from the arrangement to the assessee may not be of a permanent or enduring nature the payments made in pursuance: of that arrangement would still be capital expenditure. “Although payment made to ward off competition in business to rival dealer would constitute capital expenditure if the object of making that payment is to derive an advantage by eliminating the competition over some length of time, the same result would not follow if there is no certainty of the duration of the advantage and the same has to be put an end at any time. How long the period of contemplated advantage should be in order to constitute an enduring benefit would depend upon the circumstances and the fact of each individual case. The payment made to were related to actual shipment of coal in the course of the trading activities of the assessee and had no relation to the capital value of the assets. The payments were not related to or tied up in any way to any fixed sum agreed to between the parties. Their Lordship accordingly considered the payment made by the assessee was a revenue expenditure.
21. Likewise the judgment of the Calcutta High Court in the case of In re Imperial Chemicals Industries (India) Ltd, (1935) 3 ITR 21 was wrongly interpreted by the Commissioner (Appeals). In that case, it has been held that it is not possible to lay down any hard and fast rule or to enunciate a rigid and scientific principle which be applied as a criterion in deciding whether an expenditure is capital or revenue. An expenditure incurred once and for all in a lumpsum, though a material consideration, is not a decisive one in every case. Where an expenditure is incurred with a view to bringing into existence an asset or as an advantage for the enduring benefit of trade, it is a capital expenditure. The term ‘enduring’ means “enduring in the way the fixed capital endures”. Whether an expenditure involves withdrawal of capital or what would be forthcoming in a liquidation as a result of such an expenditure are tests in deciding the nature of an expenditure. Their Lordship accordingly held that the amount paid to agent for loss of agency is deductible revenue expenditure.
22. In the case of Devidas Vithaldas & Co. (supra) their Lordship of the Apex Court again reiterated the same principle by holding that in distinguishing between capital and revenue expenditure, the Courts have applied indifferent cases different tests. Nonetheless it is recognized that none of them by itself is conclusive and the determination one way or the other has to be made on the facts and circumstances of each case. One of the tests so applied is whether the expenditure in question was for bringing into existence an asset or an advantage of “an enduring nature” and is made “once for all”, meaning thereby, an expenditure made once and for all for procuring an enduring benefit. It may be payable not necessarily all at once, but, even by instalment as against the recurrent expenditure in the nature of operational expenses. The question in such cases would be, is the expenditure the assessee’s working expenses laid out as part of the process of profit-earning or a capital outlay necessary for the acquisition of a property or of rights of a permanent character, the possession of which is a condition of carrying on the trade. Their Lordship accordingly held that acquisition of the goodwill of a business is, without doubt acquisition of a capital asset, and therefore, its purchase price would be a capital nature. It would not make any difference whether it has made any lumpsum at one time or in instalment distributed over a definite period. Where, however, the transaction is not one for acquisition of goodwill, but for the right to use it the expenditure would be a revenue expenditure.
23. Having gone through the aforesaid judgments referred to, we are of the view that in order to determine the nature of expenditure one has to examine the facts of the each case independently. No hard and fast rule can be laid down to determine the nature of expenditure. If the assessee acquires any capital asset or enduring benefit for a longer period, the expenditure may be called to be a capital expenditure. Turning to the facts of the case, we find that assessee has purchased the shipping business from Shaw Wallace & Co. Ltd. and Cruik Sana & Co. Ltd. against a lumpsum consideration of Rs. 43,47,000 comprising of cost of goodwill of Rs. 5 lakhs and Rs. 38,47,000 for non-competition covenant fees for a period of 5 years. The main dispute raised before us about the nature of payment of non-competition covenant fees. According to the revenue it was a capital expenditure as the assessee is acquired enduring benefit of carrying on shipping business. From a careful perusal of Clause 18 relating A to non-competition, we find that in lieu of receipt of a non-competition fees, the vendor was debarred from carrying on the same business for a period of 5 years. Sub-clause ‘a’ of Clause 18(1) of the agreement states that subject to Clause 18(2) for a period of 5 years after the completion date, the vendor will not be engaged or involved in any capacity in any business or activity in India which is the same as are similar to the business or any material part of it at the date of this agreement. It was again clarified g that for the purpose of this clause “engaged or involved in” includes direct or indirect involvement as a principal, agent, partner, employee, shareholder, unit holder, Director, Trustee, Beneficiaries, Manager, Consultant, Advisor or Financier; meaning thereby, the vendor was restrained from doing similar type of business in any capacity for a period of 5 years within India. This condition would not apply to a business carried on by the vendors outside the India. Period of condition was fixed up to 5 years and p thereafter, the vendor is at liberty to enter into similar type of business activity. We have also gone through the other provisions of this agreement, but, from any other provision, it is not borne out that the vendor was permanently refrained from doing the shipping business in future. Meaning thereby, it was a temporary arrangement made with the vendors in order to settle down its new business of shipping. It has been repeatedly held by the Apex Court and various High Courts that an expenditure incurred to avoid competition if dictated by business necessity and commercial exigencies, the benefit derived out of it, is directly related to the enhancement of its profitability and as such, the said expenditure is a revenue expenditure and the same to be allowed as a business expenditure. In the instant case, by avoiding a main competition from the vendors, the assessee has derived the benefits out of it to enhance its profitability only and it is not a case that the competition was eliminated permanently or for a longer period. Moreover, it is not a case of the revenue that the vendors were only competitors in this line of business. There are other business constituents who were engaged in the similar type of business and a threat of competition was also there to be faced by the assessee from those business constituents. This covenant was executed only for a period of 5 years and that to only for Indian territory. If assessee: intends to do its business outside Indian territory, it has to face the competition from the vendors also. Meaning thereby, this covenant was not executed for a p permanent elimination of the competition from the sellers. From any angle if the facts of the case are viewed, one would only find that the benefit was derived for a limited period of 5 years and that to only in Indian territory. Keeping in view of the various principles laid down through the aforesaid judicial pronouncements, we are of the considered opinion that the expenditure incurred in the instant case, cannot be termed to be a capital expenditure as held by the revenue. This covenant was executed on account of business necessity and commercial expediencies in order to settle down the assessee in a new acquired business of shipping and benefit derived out of it was only to enhance its profitability, as such, the expenditure incurred by the assessee is a revenue expenditure and the same be allowed as a business expenditure.
24. Now the question comes whether this entire expenditure be allowed in one year or over a period of 5 years. Besides an alternative plea for its allowance for a period of 5 years is also raised by the assessee. The assessee has also made a claim during the course of assessment proceedings in other succeeding years in this regard. Since the assessee has acquired a benefit over a period of 5 years, this expenditure, to our mind should be spread over for a period of 5 years and the corresponding expenditure be allowed in every year. We, therefore, set aside the order of the Commissioner (Appeals) in this regard and direct the assessing officer to allow the total expenditure over a period of 5 years in which the non-competition covenant remained in force.
25. In ITA. No. 2444/Mum./2004, the other ground relating to disallowance of Rs. 1,25,534 being 10 per cent of total sundry expenses incurred during the assessment year 1998-99 is raised and in this regard we find from the orders of the lower authorities that assessing officer had made the ad hoc disallowance for the failure of the assessee to produce all the vouchers. The Commissioner (Appeals) confirmed the disallowance on the ground that no details were filed before him.
26. During the course of bearing, the learned Counsel for the assessee has submitted that during the course of assessment proceedings assessee vide its letter dated 22-2-2001 requested the assessing officer to allow 15 days’ time for the compliance, but, the assessing officer has allowed three days’ time to produce the vouchers. Since the assessee had to collect the vouchers from the various branches, it could not collect the same and were not filed before the assessing officer. The assessing officer, accordingly made the ad hoc disallowance of 10 per cent of the total sundry expenses. The Commissioner (Appeals) confirmed the disallowance as no evidence was filed before him. Even before us, no details were filed. The learned Counsel for the assessee has however contended that ad hoc addition is not called for as it is not sustainable in the eyes of law.
27. The learned DR on the other hand has placed a heavy reliance upon the order of the lower authorities.
28. Having given a thoughtful consideration to the rival submissions and from perusal of record we find that certain expenses were claimed by the assessee and the assessing officer asked the assessee to produce the details of the expenses and the assessee failed to produce the same. The assessing officer made the disallowance of 10 per cent of total sundry A expenses claimed by the assessee. Since the details were furnished either before the lower authorities or before us, we find no infirmity in the order of the Commissioner (Appeals) who has confirmed the disallowance for want of proper evidence. We, therefore, find no infirmity therein.
IT A Nos. 2445 and 2446/Mum./2004
29. The assessee has raised two more grounds one with regard to the reopening of the assessment and the other with regard to the disallowance at 5 per cent of the expenses claimed under the head “Other Expenses”. With regard to the reopening of the assessment, no argument was raised on behalf of the assessee. We, however, carefully examined the order of the lower authorities in this regard and we find no infirmity therein. We, therefore, uphold the reopening of the assessment in these two appeals.
30. With regard to the disallowance of 5 percent of expenses, the assessing officer did not pointed out a specific defect in the disallowance of these expenditure claimed at Rs. 34.86 lakhs, but, he has rnade the ad hoc disallowance which is not permissible under the law. We, therefore, find no merit in the disallowance. Accordingly, we delete the same.
31. In the result, ITA Nos. 2443, 2445 and 2446/Mum./2004 are allowed and ITA No. 2444/Mum./2004 is partly allowed.