ORDER
N.L. Kalra, Accountant Member
1. The assessee has filed this appeal against the order of the Commissioner of Income-tax (Appeals), dated dated 31.3.2003.
2. The first grievance of the assesse is that the learned CIT(A) has erred in confirming the addition of Rs. 3,76,00,000/- by holding that such expenditure is capital in nature and hence not allowable.
3. The order of the Assessing Officer on this issue is as under:
The assessee as per note on accounts given in schedule 13 filed along with the return has submitted that other expenses in schedule 12 included compensation paid to the party to withdraw from the manufacturing and supply of some telecom equipments. The sum so paid is Rs. 3,76,00,000/-. The assesse was asked as to why compensation aid to parry Rs. 3,76,00,000A should’ not be treated as capital expenditure. The assessee has submitted vide reply dtd. 25.2.2000 that during the year the assessee has paid Rs. 3.76 cr. to NELCO in consideration of the negative covenants agreed to by NELCO not to manufacture and supply some Telecom equipment. By expending the above amount, the assessee did not acquire or bring into existence any asset, but it was incurred for successful running of business and with a view to produce the profits. Therefore, it is a revenue expenditure and is filly allowable and it cannot be treated as capital expenditure.
The assessee has also filed the copy of the agreement: It says subject to the provisions of Clause 2 below, NELCO shall cease and desist from directly or indirectly carrying on engaging in India whether in the brand name – of NELCO or any other brand the manufacture and or supply, marketing of telecommunications equipment for India. In this agreement at point 5, the consideration for encashment covalent as agreed to by NELCO will be paid in the following manner :
a. 15%by June30,97
b. 35% by Oct 31,97
c. 25% by Dec. 31,98
As perused from the details submitted by the assessee and explanation given by the assessee in this regard, NELCO will not manufacture and supply the same telecom equipment. In other words, NELCO will not enter into the competition by manufacturing the same telecom equipments which the assessee is producing. Thus, by this negative covenant the assessee’s rival in the market has ceased to exist There can be no doubt that the payment to NELCO is for the purpose of setting the profit earning machinery in motion, is an expenditure wholly and exclusively for the purpose of business of the assessee company. But an expenditure for the purpose of business may be of a capital nature, and if it is of that nature then it cannot be claimed as deduction under Section 3 7 of the Act.
Assessee has made payment to NELCO once and for al for procuring an enduring benefit to the business. Enduring does not mean an advantage which will last for ever. Further, it is not confined to something material The advantage may be of an incalculable in nature. Thus, there is no doubt that the expenses incurred by the assessee was to procure an advantage for the enduring benefit of its business. The payment made by the assessee was a price which it paid to NELCO once for all for securing for its exclusive benefit. The market for supply of goods which it manufactured without any competition with other producer of same goods. Therefore assesse cannot claim any deduction under Section 37 of the I. T Act for this amount.
4. The learned CIT(A) after considering arguments of the assessee upheld the finding of Assessing Officer that expenditure is capital in nature. The learned CIT(A) has discussed this issue in his order as under:
Disallowance of payment made to NELCO : Rs. 3,76,00,000/- : This payment was treated as capital expenditure while the assessee had claimed it as revenue expenditure. It is seen from the copy of the agreement between the assessee and NELCO that both the assessee and NELCO are engaged in the manufacture and supply of telecommunication equipment As per terms of the agreement, ‘NELCO shall cease to manufacture, market, lease or sell any wireless, local loop equipment or systems”. The disallowance has been made since NELCO ceases to manufacture equipment which the assessee and therefore the expenditure was in the capital field. The first argument taken by the AR is tat thee are other manufacturers who manufacture Telecom equipment and still the assessee is operating in a competitive environment. It is therefore argued that the assessee has not secured an enduring benefit. This argument is clearly fallacious. The agreement has certainly given the assessee an enduring advantage and the fact that other manufacturers were already there or have entered the filed subsequently is not a relevant consideration in deciding whether the assessee’s arrangement with ‘NELCO gave the assessee an enduring benefit or not. The assesse has further relied upon certain decisions particularly Karnataka high court decision in 223 ITR 112 and is in the case of CIT v. Motor Industries Co. Ltd. was in the context of compensation agreement paid by MICO (which was engaged in the manufacture and sale of its products) to a sole distributor appointed for a specific region. In terms of the agreement, MICO paid compensation for taking over the distributorship. It is clear that the advantage in that case operated in a revenue filed i. e in the area of marketing only. in the present case, the agreement provides for cessation of manufacture activities and therefore the expenditure is in the capital field. the decision of Supreme Court aforesaid cited is on general principles of revenue expenditure and does not address the controversy in hand. The facts of that case are also totally different.
5. During the course of proceedings before us, the learned AR has filed a paper book containing copy of the non-competition agreement and copies of the following judgments:
a. Empire Jute Co. Ltd. v. CIT 124 ITR 1 (SC)
b. CIT v. Motor Industries Co. Ltd. 223 ITR 112 (Kar)
c. W. Sasson J David & Co. (P) Ltd. v. CIT 118 ITR 261 (SC)
6. The learned AR drew our attention towards the agreement between the essessee & NELCO. Adequate compensation was agreed to be paid to Nelco in consideration of NELCO withdrawing from the business of manufacture and supply of telecommunication equipments, more particularly described in Annexure A to the agreement for the territory of India only (other item V – SAT and datacom products and services and RAX/MAX to DOT). A sum of Rs. 3,76,00,000/- was agreed to be paid in 4 installments in consideration of NELCO ceasing to manufacture, market, lease or sell any wireless local loop (WLL) equipment or system except that the product designs available with NELCO currently may be sold or licenced by NELCO to other providers of WLL service. As per learned AR the Assessing Officer has treated this expenditure as capital as the consideration has been paid to NELCO for not competing with the assesse in. manufacture and sale of telecom equipments. As per AO, the assessee got an advantage of enduring benefit and the entire competition was warded off. The leaned AR submitted that it is not correct to say that entire competition: was warded off. In fact there are other manufactures, who manufacture telecom equipment and still the assessee is operating in a competitive environment. As a matter of fact, after NELCO ceased to manufacture WLL equipment many new manufactures have entered the filed. Hence it was argued that the assesse has not secured an enduring benefit. Without prejudice to the claim of not getting advantage of enduring benefit, it is argued that advantage is in the revenue filed. The assesse has attempted to increase its market share and therefore expenditure is allowable as per decision of Supreme Court in Empire Jute Ltd. case. It was further argued that expenditure is allowable as per the principles laid down in the following cases:
a. CIT v. Motor Industries (Kar)
b. W. Sasson J David & Co. (P) Ltd., (SC)
c. CIT v. G.D Naidu and Ors. 165 ITR 63 (Mad)
d. CIT v. Nchanga Consolidated Copper Mines Ltd. 581 ITR 241
e. Damodaran v. CIT 64 ITR 26 (Ker)
7. On the other hand, the learned DR submitted that the decisions of the Supreme Court as referred to by the learned AR are not applicable as the facts are distinguishable. The leaned DR supported the order of authorities below and also relied on the decision of CIT v. Travancore Sugar and Chemicals Ltd. 88 ITR 1 (SC).
8. The learned AR in his counter reply submitted that no asset has been acquired by paying the compensation. The entire business of NELCO has not been taken and NELCO is authorized to continue to do business except in WLL. The entire competition has not been warded off.
9. We have heard both the parties. It will be relevant to reproduce the relevant clause from the agreement:
Where as NELCO is engaged in the activity and supply of telecommunication equipment, data communication equipment and systems, V-SAT equipment and systems, drives, automation and SC ADA systems; And where as SSIL (assessee) is engaged in the manufacture and supply of telecommunication equipment And whereas SSIL and NELCO are affiliated with the TATA group of companies.
And whereas SSIL has proposed to NELCO to withdraw from the manufacture and supply of some of the telecommunication equipment in order to facilitate the re-organisation of the telecommunication business within the TATA group of companies And whereas detailed negotiations were held between the parties on the aforesaid proposal of SSIL.
And whereas as a result of the said protracted negotiations and subject to SSIL making adequate compensation to NELCO, NELCO has agreed to withdraw from the business and supply of telecommunication equipment, more particularly described in Annexure for the territory of India only
1. With effect from the date of this agreement and subject: to provisions of Clause 2 below, NELCO shall cease and desist from directly or indirectly carrying on or engaging in India, whether the brand name of NELCO or any other brand name, the manufacture and for supply, marketing of telecommunication equipment for the territory of India, particularly the activities described in Annexure A.
4. NELCO acknowledges and agrees that if any of the provisions of this agreement are not performed in accordance wit their specific terms or are otherwise breached or violated, SSIL is likely to be irreparably damaged thereby and that momentary damages are likely to be in adequate.
9. NELCO acknowledge that the compensation it received herein under is full, fair and complete compensation for the business which it has agreed to forgo under.
10(b) If this agreement or any of the activities undertaken under it are subsequently found by a competent body to be in violation of any such law or regulations this agreement will be terminated. In that event NELCO will return all compensation received hereunder less expenses and costs actually paid out or incurred in the implementation of this agreement, provided that NELCO decides to recommence the business of manufacture and supply of telecommunication equipment for the territory of India.
10. In any agreement, the purpose for which the agreement is being made is mentioned in the beginning. Such purpose throws the light on the object of the agreement. In the instant case, it is clear that both the companies belong to the same group. The negotiations were held for facilitating the reorganization of the telecommunication business within TATA group of companies. As per Clause 9 of the agreement the compensation was paid in consideration of NELCO foregoing business of manufacture, supply and marketing of WLL equipments. Hence the primary objectify behind the agreement was aimed at re-organization of the business in the same group.
11. The leaned AR has relied on the following observation of the Supreme Court in the case of Empire Jute Co. (Supra):
This test, as the parenthetical clause shows, must yield where there are special circumstances leading to a contrary conclusion and, as pointed out by Lord Radcliffe in Commr. of Taxes v. Nchanga Consolidated Copper Mines Ltd. (1965) 58 ITR 241 (PC) : TC 16R 991, it would-be misleading to suppose that in all cases, securing a benefit for the business would be, prima facie, capital expenditure “so long as the benefit is not so transitory as to have no endurance at all”. There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee’s trading operations or enabling the management and conduct of the assessee’s business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future.
12. In the above referred case, the expenditure related to the purchase of form hours. Loom hours were not transferable from one week, to another and the advantage obtained was for six months. Hence it was observed that no enduring benefit was derived from purchase of loom hours.
13. The learned Supreme Court also pointed out that there are always cases felling indisputable on the one or the other side of the line and it is familiar argument in tax courts that the case under review bears close analogy to a case falling on the right side of the line and must, therefore, be decided in the same manner. If we see the observation of Supreme Court that by purchase of loom hours, no enduring benefit was derived then the case of the assessee can not be decided on analogy of the Empire Jute case.
14. In this judgment the worthy Supreme Court also referred to the following question to be posed for deciding as to whether the expenditure is on revenue account or capital account:
Whether the outgoing expenditure is related to the carrying on or conduct of the business. If yes then it is on integral part of profit earning process and not for acquisition of an asset or a right of a permanent character.
15. In the instant case, if such question is put then expenditure has resulted into a right of permanent character. Such right of permanent character is in the capital field. It cannot be said profit making apparatus has not been enlarged. The marketing of equipments has become less competitive when one considers that equipment being made is from a group company of TATA while other group company is not competing at all. In present day marketing, brand name is very important
16. CIT v. Motor Industries Co. Ltd. 223 ITR 112 (Kar)
Company G was marketing products of Mico in the region comprising Delhi and portions of states around it. The arrangement worked on the basis of an unwritten understanding between the parties till Feb 10, 67 when a written agreement was executed between them valid for a period of 5 years. Before the expiry of this agreement in Feb 10, 72, MICO vide letter dt. Jan 28,1972 specified the pattern of proposed take over in phases. Shortly after the aforesaid protocol, an agreement was made on March 18, 1972 made effective from Feb 10, 72 and such agreement was to run for five years. Instead of renewing the agreement any further, Mico decided to take over the remaining territories at once without going through the phased programme of take over as was originally contemplated under the protocol. Negotiations were held with G by Mico and after discussions and deliberations G agreed to the premature termination of the agreement upon payment to it of a compensation of Rs. 99 lakhs. The issue before the learned Karnataka high court was as to whether the expenditure is capital or revenue.
17. The leaned high court observed that protocol which permitted phased take over of territories was not mentioned in agreement dt. Feb 10, 1972. It also held that agreement dt. Feb 10, 1972 has superseded protocol. There was no clause in agreement dated Feb 10, 1972 which gave right to G for its renewal. If agreement was to be consistent with protocol, then the same should have recognized right of G to continue with the distribution ship business at least in respect of third phase territories till the year 1992. The learned high court further observed that tribunal had returned a finding that continuation of G as Mico’s sole distributor was commercially disadvantageous (or the latter and the termination of the distributorship would benefit the assessee.
18. The learned AR during the course of arguments has drawn our attention to the following observation of the learned high court: 23…
In the said judgment this Court took the view that construction of roads by the assessee under the scheme sponsored by the State Government was revenue in nature as it facilitated the assessee’s business, and enabled the assessee to carry on the same with greater efficiency and profitability. It was held that even though the construction of the road had conferred upon the assessee an enduring advantage for its business, it did not secure any tangible or intangible asset. Further because the advantage gained by the assessee was chiefly to facilitate the assessee’s business operation with greater efficiency and profitability without touching the fixed capital of the assessee, the expenditure could only be treated to be revenue in nature. Two other judgments relied upon by Mr. Dattu, namely Empire Jute.Co. Ltd. v. CIT and Alembic Chemical Works Ltd. v. CIT , may also be noticed at this stage. In the former, the Supreme Court was considering the question as to whether the expenditure incurred by the assessee on the purchase of loom hours for working of the looms constituted a capital expenditure. Repelling the contention that the expenditure had acquired for the assessee an advantage of an enduring nature in the capital field, their Lordships held that the assessee had at best acquired only an advantage in the nature of a relaxation of a restriction on working hours imposed by the working time agreement thereby enabling the assessee to operate its profit earning structure for a longer number of hours. A distinction was drawn between profit earning structure of the assessee on the one hand and the operation of the profit earning structure for longer hours on the other. Acquisition of more working hours was held to befalling in the second category and, therefore, did not amount to acquisition of a capital asset Seen from the point of view of the Revenue, the answer given by their Lordships in the Supreme Court in Empire Jute Company’s case (supra) ought to have gone in its favour, for, according to the Revenue it could be said that the expenditure made by the assessee had acquired for the assessee an enduring benefit. This was not, however, so and the distinction made between the profit earning structure of the assessee and its utilisation was invoked to hold that the acquisition of the advantage notwithstanding the same was not in the capital field. Similarly, in the Alembic Chemical Works case (supra) the distinction between revenue and capital expenditure was stated in the following terms :
the distinction between revenue and capital corresponds with the distinction berween the business entity, structure or organisation set up or established for the earning of profit on the one hand and ‘the process by which an organisation operates to obtain regular returns’ on the other hand…
Applying the rationable of the aforesaid two judgments, to the facts of the instant case, it is fairly obvious that the payment made by the assessee to GEC did not make any augmentation in the profit making structure but simply brought about a change in the process by which the organisation operated or faciliated such operations.
19. The learned jurisdictional high court in the above referred case has also observed that there is no universally applicable test and broad principles evolved are at best only helpful in arriving at the correct conclusion without any one single test or principle being conclusive in nature.
20. Sassoon J David and Company P. Ltd. v. CIT 118 ITR 261.
In this case compensation was paid on the termination of the directors. Directors sold their shares to TATAs for the takeover of the company by the TATA’s and the compensation paid by the company to the Directors was deductible from amount to be paid by the TATAs. The learned SC in this judgment was required to decide as to whether the expenditure was incurred wholly and exclusively for the purpose of business. The learned Supreme Court held that the company continued functioning even after its control passed on to the TATAs and the expenditure in question was laidd for the purpose of company’s own trade and not for the trade of TATAs who were only its shareholders. This case law is of no help to the assessee.
21. CIT v. Late G.D Naidu and Ors. 165 ITR 63
In this case assessee and son were partners with others and were carrying on transport business. New partners took over firms in stages. There were payment by firms to assessee and son for not carrying bus business for 5 years. The learned Madras high court held that payment towards restrictive covenants is revenue in nature and is allowable. The leaned Madras high court while giving the above referred finding observed that no separate business of the old partner was acquired or any competition was eliminated by such acquisition. Since there is no acquisition of any business by payment of the amount referable to the restrictive covenant and there is no benefit of an enduring nature being acquired, the payment can only be treated as revenue out going and not capital in nature.
22. Commercial of Taxes v. Nchanga Consolidated Copper Mines Ltd. 58 ITR 241.
In this case, payment was made by one company of group to another to cease production for one year in order to check the fall in price of copper. The issue before the privy council was as to whether such expenditure is capital or revenue. In that judgment it was held that such payment was operating cost of payer company. In this case payment was made to another company for stopping production only for one year and hence it was not a case of enduring benefit.
23. V. Damodaran v. CIT 64 ITR 26
In this case, assessee paid amounts to rival forest contractors to persuade them not to bid at auction of forest coupe.
The learned Kerala high court allowed the expenditure as revenue as it was incurred to obtain the raw material by the assessee.
24. Tamilmdu Dairy Development Corporation v. CIT 239 ITR 142 (Mad)
In this case compensation was paid to Madras Co-operative Milk Supply Union as the vendor i.e Madras Co-operative Milk Supply Union under took not to market the milk in Madras city. The learned Madras high court held that the compensation was clearly an expenditure of capital nature. The learned Madras high court relied on the decision of the same high court in the case of Chelprak Company Ltd. v. CIT, 191 ITR 249 in which, it was held that the amount paid to ward off competition from a potential competitor resulting in the acquisition by the assesses of a right as well as protection to carry on its business activity as a whole so long as the assessee carried on such business was in the nature of capital expenditure and not revenue expenditure.
25. Commissioner of Income-tax West Bengal v. Coal Shipments P. Ltd. 82 ITR 902(SC)
In this payment was made to competitor as per the agreement but the agreement was terminable at will. The Hon’ble Supreme Court observed (head note)
Payment 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 to 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. Although an enduring benefit need not be of an everlasting character it should not be so transitory and ephemeral that it can be terminated at any time at the violation of any of the parties.
26. Gujarat Mineral Development Corporation Ltd. v. CIT 143 ITR 822
The assessee with a view to expanding its business and avoiding competition on the adjacent land with a view to getting the required raw material for the desired number of years, paid a sum of Rs. 3 lakhs to the Madras Company on condition that the Madras Company agreed to give up its claim for a mining lease in respect of the said adjacent land. The Madras Company withdrew the suit as well as writ petition and vacated the land with a view to facilitating the assessee to obtain a mining lease in respect of the land. The Madras company as per the law was having a preferential right to get mining lease in respect of adjacent land. Payment thus not only avoided competition but facilitated the allotment of mining lease to the assessee. Expenditure was held as capital. Since in the instant case the learned AR has heavily relied on the judgment of Supreme Court in’ Empire Jute Companies case, it will be relevant to reproduce the following paras from the judgment of the learned Gujarat high court in which it is said that Supreme Court judgment do not suggest that if expenditure is capital as per the tests laid down, the revenue must show that a capital asset has come into existence.
But before we apply these tests, we must deal with the submission of Mr. J. P. Shah, the learned Counsel for the assessee, who vehemently contended before us that as pointed out by the Supreme Court in Empire Jute Co. ‘s case (supra), these, tests are not conclusive and are found to have broken down. According to the learned Counsel, the Supreme Court, therefore, sidetracked these tests and evolved a new test to the effect that in order that an expenditure can be said to have been incurred on capital account, it must be shown that a capital asset has come into existence otherwise, the expenditure must be taken to be of revenue nature. Bhagwati J., who spoke for the Supreme Court, after reproducing the test laid down by Lord Cave in Atherton ‘s case (supra), observed as under (p. 10 of 124 ITR):
This test, as the parenthetical clause shows, must yield where there are special circumstances leading to a contrary conclusion and, as pointed out by Lord Radcliffe in Commissioner of taxes v. Nchanga Consolidated Copper Mines Ltd. (1965)58 ITR 241 (PC), it would be misleading to suppose that in all cases, securing a benefit for the business would be, prima facie, capital expenditure, ‘so long as the benefit is not so transitory as to have no endurance at all’. There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is, material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee’s trading operations or enabling the management and conduct of the assessee’s business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account even though the advantage may endure for an indefinite future. The test of enduring benefit is therefore, not a certain: or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case.
21. These observations, in our opinion, do not say that the test evolved by Lord Cave cannot be applied even if the facts for its application are laid before the Court. The Supreme Court has merely stated that the test of enduring benefit is not a conclusive test and ought not to be applied blindly and mechanically without regard to the particular facts and circumstances of the given case. It has at the same time stated that where the expenditure is in the capital field, the expenditure would be disallowable on an application of this test. Therefore, the submission of Mr. Shah that the Supreme Court in the decision of Empire Jute Co. Ltd. (supra), sidetracked all the earlier tests and new evolved a new test of universal application cannot be accepted. Dealing with the second test applied by Lord Haldane by drawing the distinction between fixed capital and circulating capital, the Supreme Court observed as under (p. 11 of 124 ITR):
But this test also sometimes breaks down because there are many forms of expenditure which do not fall easily within these two categories and not infrequently, as pointed as by Lord Radcliffe in Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd. (supra), the line of demarcation is difficult to draw and leads to subtle distinctions between profit that is made ‘out of assets and profits that is made ‘upon’ assets or ‘with’ assets. Moreover, there may be cases where expenditure, though reliable to or in connection with fixed capital, is nevertheless allowable as revenue expenditure. An illustrated example would be of expenditure incurred in preserving or maintaining capital assets. This test is therefore, clearly not one of the universal application.
22. These observations do not lay down, as urged by Mr. J. P Shah for the assessee, that the said test evolved by Lord Haldane is outdated and cannot be applied even if the facts of a given case
attract its application.
23. At this stage we may also refer observations of N. H. Bhagwati, J. in Assam Bengal Cement Co. ‘s case, (supra), where he pointed out that this test can be applied only if the test evolved by Lord Cave is not
attracted. The learned Judge, speaking for the Supreme Court stated (p. 45):
It is only in those cases where this test is of no avail that one may go to the test of fixed or circulating capital and consider whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. If it was part of the fixed capital of the business it would of the nature of capital expenditure and if it was part of its circulating capital it would be of the nature of revenue expenditure. These tests are thus mutually exclusive and have to be applied to the facts of each particular case in the manner above indicated…. One has therefore got to apply these criteria one after the other from the business point of view and come to the conclusion whether on a fair appreciation of the whole situation the expenditure incurred in a particular case is of the nature of capital expenditure or revenue expenditure in which latter event only it would be a deductible allowance under Section 10(2)(xv) of the IT Act.
24. It would, therefore, appear from the above observations of the Supreme Court that the test of fixed capital or circulating capital could be invoked only if the test of acquisition of an asset or an advantage for the enduring benefit of a trade, has no application to the facts of a given case. in the Empire Jute Co.’s case (supra), the Supreme Court has not stated that these tests are no more relevant and that an expenditure would be on revenue account even if it was incured for the acquisition of a capital asset or advantage of an enduring nature if the assessee’s fixed capital remains untouched, meaning thereby, remains unaugmented. It must be remembered that their Lordships had come to the conclusion that the allotment of loom hours, under the working time agreement, to different mills constituted not a right conferred but merely a contractual restriction on the right of every mill to work its looms to their full capacity, and purchase of loom hours by a mill had, therefore, the effect of relaxing the restriction on the operation of looms to the extent of the number of working hours per week transferred to it, so that the transferee-mill could work its looms for longer hours than permitted tinder the working time agreement and increase its profitability. It was held that by the purchase of loom hours no new asset was created and there was no addition to or expansion of the profit-making apparatus of the assessee. In other words, acquisition of additional loom hours did not add to the fixed capital of the assessee, the permanent structure of which the income was the product or fruit, remained the same, that is umenlarged. It is in the special facts of that case that the Supreme Court came to the conclusion that the profit-making apparatus of the assessee remained untouched and unaltered; there was no enlargement of the permanent structure and what the assessee acquired was merely an advantage in the nature of relaxation of restriction on working hours imposed by the working time agreement so that it could operate its profit-earning structure for a longer number of hours. It was in the backdrop of these facts that the Supreme Court came to the conclusion that the payment made for the acquisition of additional loom hours could not be said to be in the direction of acquiring a capital asset because no capital asset was in fact acquired as the profit-making apparatus of the assessee was not enlarged and, therefore, the expenditure must be taken to be on revenue account. That, however, does not mean that even if an expenditure is made with a view to acquiring a capital asset or an advantage of an enduring nature and the case falls directly within the test laid dawn by Lord Cave and there are no circumstances pointing to the contrary, the expenditure would still be on revenue account if no fixed asset or advantage for the enduring benefit of trade is ultimately acquired. We are, therefore, of the view that the decision of the Supreme Court does not go so far as to say that the tests evolved by the Courts earlier are not relevant and in order that an expenditure could be branded as on capital account, the Revenue must show that the assessee has acquired a fixed asset or an advantage of an enduring nature by the expenditure so incurred.
27. Coromandel Fertilizes Ltd. v. GIT 148 ITR 546 (A.P.)
The assessee entered into an agreement with EID parry whereby party agreed to impart to the assessee its know-how regarding agronomical research, soil formation and chemical compositions, cropping patterns particularly applicable to South India as also its know-how for promoting sale of fertilizes manufactured by it. EID parry agreed not to sell its products in AP and other areas adjacent thereto. In this case, the amount paid was held as revenue as according to the learned high court acquisition of sales know-how, market conditions and soil compositions were not of a lasting and enduring nature. The learned high court held that no tangible benefit of an enduring nature was acquired by the assessee.
28. CIT v. Hindustan Pilkinton Glass Works 139 ITR 581 (Cal)
The assessee entered into a tripartite agreement with two other concerns which produced the same type of commodity as was produced by the assessee. The object of the agreement was the elimination of competition in order to prevent possible annihilation of the business of the assessee. Under the term of the agreement one of the concerns agreed not to produce particular commodity and in consideration “thereof the other two concerns agreed to pay to it a stipulated sum every year. The agreement was for a period of 5 years but it could be brought to an end earlier only if there was mutual consent in writing by all the parties. The learned high court held that expenditure would in ail probability secure a good will for the assessee in its field by sterilizing the operation of competitor for 5 years and the benefit would last beyond the period of 5 years. The profit making apparatus of the assessee was thereby vastly improved. The expenditure in question was therefore of a capital nature. The Calcutta high court has also discussed the decision of Supreme Court in the case of Empire Jute Company Ltd. The learned Calcutta high court was of the opinion that facts in the case before them were entirely different from the case before the worthy Supreme Court but the principles laid down by the SC would be applicable. The learned high court further observed that if competition can be eliminated for 5 years, the goodwill that would generate in those 5 years could be considered to be from a practical and business point of view – a point of view which enjoined the SC to look into the question – an advantage of sufficient enduring not only beyond one year, not even for 5 years, but even for longer years, because the good will thus acquired would linger beyond the period of 5 years.
29. Neekamal Talkies v. CIT 87 ITR 691
The assessee owned a cinema house at Bijnore. There was another cinema house at Bijnore run by Delhi firm. The assessee entered into an agreement with the Delhi firm under which it was agreed that in consideration of the assessee paying a sum of Rs. 600 per month for a period of 5 years to the Delhi firm, latter would not exhibit any film at his theatre. The learned Allahabad high court held that payment was made under the asreement which extended for 5 years and resulted in the elimination of competition. The payment was therefore of capital nature and was not deductible.
30. Chelpark Company Ltd. v. CIT 191 ITR 241
The assessee entered into an agreement with the firm consisting of M.D of the assessee company, his wife and 2 daughters and as per that asreement the company paid sum of Rs. 1 lakh as compensation to. its erstwhile managing director of his undertaking to discontinue and not recommence at any time within a period of 5 years, the manufacture of writing ink and sale thereof or any other business similar or competitive to the business carried on by the company. The leaned high court held that such expenditure is capital in nature.
31. The learned Madras high court in the above judgment at pg. 255 has discussed judgment of the SC in the case of Empire Jute Company Ltd. The learned high court observed that:
It is true that, in that case also, there is a reference to be test of enduring benefit breaking down in some cases but, as pointed out earlier, it is not been laid down that this test should not be considered for application even if the facts and circumstances of the case warranted it.
32. The learned Madras high court also distinguished its own judgment reported at 165 ITR 63 as according to the judgment, the decision in that case was given on the basis of the finding that no benefit or advantage of enduring nature was acquired. Such finding was accepted in that judgment. At pg. 260 of the judgment, the learned high court has observed that decision in Empire Jute Company Ltd. cannot. be read as lying down a universal test that if capital asset is not ultimately acquired the expenditure initially inclined for acquisition of that capital asset would be on revenue account.
33. Blaze and Central (P) Ltd. v. CIT 120 ITR 33
The assesse which was carrying on business of arranging exhibition of advertisement and film shorts in licenced theatres in the four southern States, entered into an agreement that ones, who was also carrying on similar business on behalf of two companies in the four states, under which S agreed to part with its business in the four states for a period of 9 years in consideration of sum of Rs. 1,50,000/-. The learned high court held that the paymat was capital in nature as the assessee had warded off competition and derived an advantage by eliminating competition. The learned high court distinguished judgment of the Kerala high court reported at 64 ITR 26 as in that case the expenditure was incurred to secure a portion of stock-in-trade of the asseessee’s timber business at an advantageous prices and therefore the expenditure was in the nature of business expenditure. In the case before the Madras high court, the expenditure was held as capital by following the decision of the Full Bench in the case of Alaganan Chetty v. CIT AIR 1928 Madras 902.
34. CIT v. Bangalore Arrack Company 201 ITR 25 (Kar)
The assessee purchased a rival bidder, so that he would not come forward to participate in the public auction to vend arrack. Such act was contrary to the public interest as well as public welfare and therefore was not valid payment for the purpose of IT Act, moreover expenditure was incurred in the instant case once and for all with a view to bring into existence the asset or the advantage of obtaining the privilege to vend liquor for one year and therefore expenditure was capital in nature. The learned Karnataka high court agreed with the enunciation of the tests laid down by the Gujrat high court in the case reported at 143 ITR 822. The test which is relevant in the instant case is as under:
When expenditure is incurred only once and for all, and with a view to brining into existence an asset or an advantage for the enduring benefit of a trade, ordinarily such expenditure is on capital account.
Applying this test, the learned Karnataka high court in the case under reference held that the assessee got an advantage of obtaining the privilege to vend liquor for one year.
35. Vinod Kothari Consultant Ltd. v. DCIT 91 ITD 153 Cal. (3rd Member)
In this case consideration was paid by the company for taking over the business of another company of conducting training course in that filed of leasing and hire purchase and related areas vide an agreement. The question before the ITAT was as to whether such expenditure is capital or revenue. The leaned Appellate Tribunal observed that no tangible asset had come into existence as a result of takeover of business, yet an enduring benefit had ensured to the assessee by warding off competition in the business for all the times to come. The expenditure was held as capital.
36. Montgomery Watson Consultants India (P) Ltd. v. ACIT 90 ITD 324
The assessee company paid certain sum as consideration for preventing rival management from a competition with the assessee company for a period of 10 years. The question before the Tribunal was whether such expenditure is capital or revenue. The expenditure was held as capital as the assessee company derived benefit of enduring nature by entering into the agreement of business competition of a sufficient long period of 10 yean.
37. Shaw Wallace Company Ltd. v. ACIT 86 ITD 315 (Cal)
The assessee purchased 2 distilleries and paid sum of Rs. 10 crores to the promoter of the 2 distilleries for the restrictive covenant for not competing with the assessee. The learned ITAT also considered the judgment of the SC in the case of Empire Jute, it was observed that this test of enduring benefit cannot be applied blindly and mechanically but it does not mean that this test is not to be applied. The leaned ITAT held that experditure is capital in nature. While holding so, the leaned ITAT has also relied on the judgment of MP high court in the case of Grover Soap (P) Ltd. CIT 221 ITR 299, in which it was held that payment made to ward off competition for business by rival would constitute capital expenditure if the object of making that payment is to derive an advantage by eliminating the computation over some length of time.
38. After considering the ratio of law laid down by the various high courts and the SC, it is clear that test of enduring benefit can be applied. If the enduring benefit is on revenue account, then this test may fail to hold expenditure as capital. It is not necessary that a new capital asset should come into existence as a result of incurring such expenditure. Such expenditure may result into an enduring benefit or may result into enduring right. In the instant case by avoiding of competition by rival company of the same group, the assessee company got an advantage of enduring nature. The consideration was paid for the closure of one particular type of business by another company of TATA group. It is also observed by the Supreme Court in the case of Empire Jute that ratio of law as laid down by a case should be that whose facts are similar to the case of the facts to which such ratio of law is to be applied.
39. Keeping in view the above facts and ratio of law laid down in similar cases, it is clear that that the assessee has secured an advantage of enduring nature and the expenditure has been spent rightly held as capital by the learned CIT(A) This ground of appeal is therefore dismissed.
40.The second grievance of the assessee is that the learned CIT(A) has erred in not allowing foreign exchange loss incurred on reinstatement of foreign exchange liability on account of purchase of raw material and obtaining services as expenditure of the year.
41. The assessee deducted foreign exchange loss of Rs. 4,91,22,842/- in the profit and loss account. Before the Assessing Officer, it was contended that such loss is allowable, as the same is claimed having regard to guidelines prescribed by the institute of Chartered Accountant in accounting standard -11. The assessee also relied on the judgment of Karnataka high court in Mico’s case. However, the Assessing Officer did not allow the loss, as according to him the CIT vide order under Section 263 for the asst year 96-97 has not allowed this loss.
42. The leaned CIT(A) considered the decision of Karnataka high court According to the learned CIT(A), the learned high court has considered the exchange loss in relation to value of tools consumed and machinery in respect of which depreciation was not admissible. It was held by learned CIT(A) that facts in the instant case are different from the facts considered by the jurisdictional high court. The learned CIT(A) followed the decision of Madras high court in CIT v. Indian Overseas Bank, 151 ITR 446.
43. During the course of proceedings before us, the leaned AR submitted that foreign exchange liability is on account of purchase of raw material and obtaining services. The assessee reinstated the foreign exchange liability as required under the mandatory accounting standard prescribed by Institute of Chartered Accountants of India. Even accounting standard prescribed by CBDT under Section 145 vide SO No. 69 (E) dt. 20.1.96, the assessee is required to follow prudent accounting policies i.e. provisions should be made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information.
44. The learned AR argued that the amount as deductible as per accounting standards and as held by the Supreme Court in the case reported at 225 ITR 703.
45. The leaned AR also relied on the order of Spl. Bench in the case of ONGC Ltd., 77 ITJ 387 and Karnataka high court in Mico case.
46. The leased DR supported the orders of the authorities below:
47. This Bench in the case of M/s Tata Lucent Technologies Ltd. in ITA No. 52/Bang/200 for the asst. year 96-97 has held that the liability of foreign exchange fluctuation is on the trading account and is crystallized on the last date of the fin. year and therefore the same is allowable.
48. While allowing the foreign exchange fluctuation loss, this bench has relied on the decision of Spl. Bench.
49. Keening in view the decision of this Bench in the case of the assessee for the asst year 96-97, it is held that foreign exchange fluctuation loss is an allowable deduction. The assessee gets relief of Rs. 4,99,22,863/-.
50. The third grievances of the assessee is against up holding the addition of new office expenses of Rs. 6,79,119/- and compensation of Rs. 22,19,000/-paid to the lessor for making alteration of lease hold premises for new office.
51. Order of the Assessing Officer in this issue is as under:
On perusal of details of other expenses it is observed that assessee has incurred an expenditure of Rs. 28, 98,119/- on the new office, the details of which are as follows:
Expenses incurred for
proposed new office - 6,79,119/-
Compensation to lessor of
new office premises
For alteration done by the
Company - 22,19,000/-
28,98,119/-
As this is an expenditure on the building which is not owned by the assessee. Therefore as per the provisions of Section 32 Expln (I), assessee will be entitled for depreciation thereon deeming the assessee as the owner thereof Therefore addition of Rs. 28,98,119/- is made. However depreciation at the rate of 10% is allowed on the same which comes to Rs. 2,89,811/-.
52 The order of the learned CIT(A) on this issue is under:
It is seen from the asst. order that the assessee has incurred the aforesaid expenditure for its new office which was a leased premises. The same was treated as capital expenditure and depreciation was allowed as per provisions of Section 32 explanation (1). The assessee has argued that the expenditure was wholly and exclusively for the business purposes. This may be true. However, the expenditure is clearly capital in nature as it is admittedly for new office and therefore the disallowance made by the Assessing Officer is in order. The appeal is therefore dismissed on this point.
53. During the course of proceedings before us, the leaned AR submitted that as a result of expenditure incurred, the assessee has not become owner of new asset. The amount was spent for opening a new office and this facilitated working of the company. The learned AR relied on the following judgment:
i. Rex Theatre 148 ITR 560 (Kar)
ii. Gridhari Das and Sons 105 ITR 339 (All)
iii. KishenchandChallaram 130 ITR 385(Mad)
iv. Madras Auto Services 156 ITR 740 (Mad)
v. Madras Auto Services 233 ITR 468, (SC)
54. The leaned DR supported the order of the authorities below. The learned DR further submitted that in view of explanation-1 to Section 32, the expenditure is to be treated as capital
55. Karnataka high court in the case of Rex talkies (Supra) had an occasion to consider the allowability of expenditure incurred on renovation and repairs to ceiling etc. in respect of Cinema Theatre taken on lease. The leaned Karnataka high court held that amount spent on repairs or of so called renovation cannot be considered as a capital expenditure. They also held Section 32(1A) as it is existed at relevant time was not applicable. The worthy SC in the case of Madras Auto Services had an occasion to consider the expenditure incurred on constructing new building after demolishing the premises, which was taken on lease. The learned SC held that the assessee did not acquire capital asset but obtained only a business advantage. The learned SC held that amount spent on construction was deductible as revenue expenditure. Explanation 1 to Section 32 is akin to 32(IA). Hence in view of the judgment of Karnataka high court, the expenditure incurred cannot be considered to have been covered under explanation-1 to Section 32. It is not the case of the revenue that expenses incurred for new office and amount paid to the lessor in relation to renovation resulted into any new asset belonging to the assessee. Hence, the expenditure of Rs. 28,98,119/- is allowed. On this issue, order of the learned CIT(A) is reversed and the assessee gets corresponding relief.
In the result, the appeal is partly allowed.