Full Text
HIGH COURT OF DELHI
Date of Decision: 23.08.2016
PR. COMMISSIONER OF INCOME TAX-06 ..... Appellant
Through: Mr. Rahul Chaudhary, Advocate.
Through: Mr. Ved Jain, Advocate along with Mr. Pranjal Srivastava, Advocate.
And
And
HON'BLE MS. JUSTICE DEEPA SHARMA MR. JUSTICE S. RAVINDRA BHAT (OPEN COURT)
JUDGMENT
1. The revenue is aggrieved by a common order of the Income Tax Appellate Tribunal (ITAT) pertaining to five assessment years i.e. 2005-2006, 2006-2007, 2007-2008, 2008- 2009 and 2009-2010.
2. It is urged that several questions of law arose, chiefly on the following issues:-
1. Whether payments made by the assessee to its holding company Nitrex Chemicals India Ltd for the use of its trademark and for the purpose of obtaining expertise in commerce, finance, manufacturing etc. amounted to revenue expenditure instead of capital expenditure?
2. Whether the finding with respect to additions being disallowances of excessive commission on exports in the circumstances of the case is tenable?
3. Whether the computation of capital gains in respect of slump sale of trading businesses on ITA 247/2016, ITA No. 248/2016, ITA No. 249/2016, ITA No. 318/2016, ITA No. 319/2016 Page 3 account of purchase of shares by ESOP Trust, could be deducted from capital gain under Section 48 of Income Tax Act?
4. Is the finding on disallowance under Section 14A sound in law? And
5. Whether in the circumstances of the case, foreign exchange fluctuation in respect of amounts held by the assessee, could be treated as capital losses rather than as revenue expenditure?
3. Re: Question No. 1: Whether the payment towards trade mark and use of expertise in the field of commerce, finance etc amounted to capital or revenue expenditure?
4. The assessee acquired an undertaking/ unit of ICI Ltd. The assessee in 2006-2007 had debited amounts under the head “Techno Commercial Agreement” and a further sum was paid towards Brand Licensing Agreement, executed on 14.03.2005. The Assessing Officer “AO” was of the opinion that these expenditures were of an enduring kind and held that they were capital in nature. The assessee, on the other hand, contended that these were revenue expenditure. The CIT (A) accepted the assessee’s contention; the ITAT affirmed the order.
5. The revenue’s counsel argues that the findings of the CIT (A) and ITAT are erroneous having regard to the nature of the agreement. It was highlighted that even though the agreement was entered into on 14.03.2005, it was sought to be made effective from 01.04.2004. The agreement itself was cancelled ITA 247/2016, ITA No. 248/2016, ITA No. 249/2016, ITA No. 318/2016, ITA No. 319/2016 Page 4 on 30.04.2005. It was therefore submitted that the real nature of the transaction was transfer of ownership rights vested in the “Nitrex” brand as well as technology and commercial information, to the assessee. As to whether the expenditure under the circumstances of the case could have led to creation of an asset of enduring nature or not would have assumed some importance if it had considerable impact. In the present case, there is no dispute that the undertaking itself was sold subsequently in 2005. So far as the use of the trade mark is concerned, the ITAT’s reasoning is as follows:- “After considering the submission of both the parties and perusing the material on record, it is noticed that the AO did not doubt the genuineness of the expenses. He only doubted the nature of expenses which were claimed by the assessee as revnue in nature but the AO was of the view that it was capital in nature. In the present case, by incurring the impugned expenses, the assesse had not acquires any tangible/intangible asset which had any lasting and enduring benefit to the assesee’s business. The payments were made for using the trade mark of Mis Nitrex Mauritius and to obtain expertise in the field of commerce, finance and manufacturing etc. which were needed for smooth running of the business as the assessee was new in this business and the expenses were paid only for one year. Therefore, we are of the view that the ld. CIT (A) was fully justified in directing the AO to treat those expenses as revnue in nature, we do not see ITA 247/2016, ITA No. 248/2016, ITA No. 249/2016, ITA No. 318/2016, ITA No. 319/2016 Page 5 any infirmity in order of the ld. CIT(A) on this issue.”
6. This court is of the opinion that the finding with respect to tangible or non-tangible asset vesting in the assesee and whether it had or not any lasting or enduring advantage to it is more in the nature of a finding of fact. The findings are also that to use the Nitrex brand, payments were made and it was essential for the assessee to make such payments on account of nature of its business and on account of procuring knowledge for setting up the systems as well as other procedures. In the circumstances, we are of the opinion that no question of law arises on this aspect.
7. Re Question No.2: The issue of excessive commission, was consistently ruled against the assessee, for all the five years. However, in both the CIT (A) and the ITAT, the revenue’s contentions were not accepted. Here, the assessee’s argument was that the commission could not be characterised as excessive because they were more customary in nature having regard to the historic relationship with M/S Asha export, its export agent. This court is of the opinion that such decisions as to the nature and quantum of commission may differ having regard to the uniqueness of each business and the relationship that it may possess with those associated with it. Unless, the revenue is able to pinpoint extraordinary features, it cannot scrutinize the commercial terms that a business takes into ITA 247/2016, ITA No. 248/2016, ITA No. 249/2016, ITA No. 318/2016, ITA No. 319/2016 Page 6 account in making a decision and contend that certain percentage or quantum of commission is “excessive”. Therefore, we are of the opinion that no question of law arises.
8. Re Question No. 3: The revenue’s contention here is that sum of ` 1,39,76,352/- spent by the assessee at the time of transfer of its business undertaking to fund the ESOP Trust, cannot be characterized as permissible expenditure but rather has to be added back for the purposes of income calculations. The assessee’s contention, on the other hand, is that this expenditure was essential and integral part of the sale transaction itself.
9. The necessary facts for appreciation of the question are that the assessee sold a part of its unit as a going concern. In the process the transferee took over the undertaking with the management and employees. The assessee had created and subsequently modified at two different stages, an ESOP (Employees Stock Option Plan) Trust Fund. Apparently, the transferee expressed its inclination to continue the fund and insisted that as a pre-condition for the transfer, the assessee ought to fund it to the extent of the value of the shares that were to be allotted to the employees. According to the revenue, this expenditure was not integrally connected with the transfer and therefore not adjustable from the capital loss as reported in that regard. ITA 247/2016, ITA No. 248/2016, ITA No. 249/2016, ITA No. 318/2016, ITA No. 319/2016 Page 7 The findings of the ITAT on this aspect are as follows:-
12. In these circumstances, the court is of the opinion that the mode of computation of capital gains had to necessarily take into consideration the ESOP funding through the trust fund by the Assessee at the stage of transfer.
13. Therefore, the court holds that there is no infirmity in the findings of the ITAT. No question of law arises.
14. Re: Question of disallowance under Section 14A: On this aspect the revenue’s grievance is confined to three years i.e. 2007-2008, 2008-2009 and 2009-2010. We notice that the decision in the case of Maxopp Investment Ltd.Vs CIT, New Delhi (2012) 347 ITR 172 (Del) would apply in the circumstances. Equally for the last year i.e. year 2009-2010, the AO’s omission to record his satisfaction as to the permissibility of the deduction, which is the pre-condition for exercise of the power, persuaded us to hold that no question of law arise. Re Question No. 5, regarding the treatment of foreign exchange fluctuation- (arising only for AY 2009-2010).
15. The AO had held that loss on account of foreign exchange fluctuation to the tune of ` 2,77,72,900/- could not ITA 247/2016, ITA No. 248/2016, ITA No. 249/2016, ITA No. 318/2016, ITA No. 319/2016 Page 13 be claimed as revenue loss and rather had to be disallowed. This was on the basis of his understanding of the authority in CIT Vs Woodward Governor India (P) Ltd. 312 ITR 254 SC. The CIT(A) was of the opinion that the assessing officer’s reasoning was flawed. He held that Section 43A was applicable in the circumstances of the case and AS-11 (Accounting Standard) was relied upon to indicate that exchange fluctuation gains or losses would have to be shown in the profit and loss account.
16. The revenue urges that both the CIT (A) and ITAT fell into error, it is pointed out, in support of its contention, that foreign exchange fluctuation, particularly, the loss reported during the relevant year, was on account of the ECB loan which the assessee had obtained. We notice that this aspect was considered by the ITAT which observed that the ECB loan/advance was an old one and the treatment of the foreign exchange fluctuation especially in case of increase for all the previous years was taken to be on the revenue side. It is necessarily implied that the revenue accepted that the foreign exchange amounts amounted to income and proceeded to deal with it as such.
17. This court is of the opinion that in view of the past revenue treatment, the revenue’s submissions by the appellant are unmerited. No question of law arises. ITA 247/2016, ITA No. 248/2016, ITA No. 249/2016, ITA No. 318/2016, ITA No. 319/2016 Page 14 In view of the above findings, the questions of law are answered against the revenue and in favour of the assessee. The appeal is consequently dismissed as unmerited.
S. RAVINDRA BHAT, J
DEEPA SHARMA, J AUGUST 23, 2016 sapna