Case Law Details
Questions of Law Raised By ITAT:
a) 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?
b) Whether the finding with respect to additions being disallowances of excessive commission on exports in the circumstances of the case is tenable?
c) Whether the computation of capital gains in respect of slump sale of trading businesses on account of purchase of shares by ESOP Trust, could be deducted from capital gain under Section 48?
d) Is the finding on disallowance under Section 14A sound in law?
e) 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? [RELEVANT EXTRACT FROM HIGH COURT ORDER]
In relation to Question of Law (a):
Brief Facts
The assessee acquired a unit of ICI Limited and debited the amounts under the heads “Techno Commercial Agreement” and “Brand Licensing Agreement” for the Assessment Year 2006-07, treating them both as revenue expenses.
Assessee’s Contentions
The aforementioned treatment is correct as the expenses incurred were revenue in nature.
Revenue’s Contentions
The Assessing Officer contended that these expenditures were of enduring kind and held that they were capital in nature. Further, the findings of CIT(Appeals) and ITAT are erroneous having regard to nature of agreement. The real nature of transaction was transfer of ownership rights vested in the “Nitrex” brand as well as technology and commercial information, to the assessee.
CIT(Appeals) & ITAT Findings
The asssessee does not acquire 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 M/s 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.
High Court Judgment
The High Court held that the question involved was more in the nature of finding of a fact and thus, no question of law arises as the findings are already made by Hon’ble ITAT in this case.
In relation to Question of Law (b):
Brief Facts
The addition was made by the Assessing Officer to the total income of the assessee on account of excessive commission paid by the assessee. Thus, on account of the same being excessive, the commission was disallowed.
Assessee’s Contentions
The assessee contended that the commission could not be characterized as excessive as they were more customary in nature having regard to the historic relationship with M/s Asha export, its export agent.
Revenue’s Contentions
In Assessing Officer’s view, the commission expenses are to be disallowed on the same being excessive.
CIT(Appeals) & ITAT Findings
The CIT(Appeals) as well as ITAT accepted the contentions of the assessee and deleted the additions on account of excessive commission.
High Court Judgment
The High Court held 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 intoaccount in making a decision and contend that certain percentage or quantum of commission is “excessive”. Therefore, no question of law arises.
In relation to Question of Law (c):
Brief Facts
The assessee sold a part of its unit as a going concern, in the process of which the transferee took over the undertaking with management and employees. Subsequently, ESOP Trust Fund was created and modified at two different stages. 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. Thus, the same was adjusted by the assesses with the capital loss arising out of the slump sale u/s 48 of the Income Tax Act, 1961.
Assessee’s Contentions
The aforementioned expenditure was an essential and integral part of sale transaction itself and thus should be an allowable business expenditure.
Revenue’s Contentions
The Assessing Officer was of the view that the sum of Rs. 1,39,76,352/- spent by the assessee at the time of business transfer to fund the ESOP trust cannot be said to be permissible expenditure. The expenditure was not integrally connected with the transfer and thus, not adjustable from the capital loss reported in that regard.
CIT(Appeals) & ITAT Findings
Both Business Transfer Agreement (BTA) as well as Employees Transfer Agreement (ETA) were considered by CIT(Appeals and thoroughly studied. On deep study of terms and conditions mentioned in both ETA as well as BTA, the situations became such that it became necessary for the company to ensure that the management staff accepts to part with their employment with the company and accept employment with the new company. As a result of this, the company was able to transfer its business to M/s EAC without any hindrance. Thus, the amount so used for buy back of shares by the Trust has to be allowed as a deduction while computing capital gain in respect of the slump sale of trading business.
High Court Judgment
Section 48 [RELEVANT EXTRACT]:The income chargeable under the head”Capital gains” shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely :—
(i) expenditure incurred wholly and exclusively in connection with such transfer;
(ii) the cost of acquisition of the asset and the cost of any improvement thereto:
The High Court held that as ESOP was an essential term of employment for the assessee’s workforce & ESOP Trust Fund has been created for a specified purpose, upon the transfer, the transferee disclaimed to honor any ESOP condition due to which the same became an integral part of the transfer.
Further, the expression “expenditure incurred wholly and exclusively in connection with such transfer” itself clearly includes the kind of expenditure for determining the issue. Thus, the mode of computation of capital gains has to take ESOP funding into consideration
In relation to Question of Law (d):
Brief Facts
The Revenue’s grievance that is the dis allowance u/s 14A of the Act sound in law is confined to three Assessment Years 2007-08, 2008-09 and 2009-10
High Court Judgment
The High Court held that the decision of Delhi High Court in the case of Maxopp Investment Ltd.Vs CIT, New Delhi (2012) 347 ITR 172 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 permissibly of the deduction, which is the per-condition for exercise of the power, persuaded us to hold that no question of law arise.
In relation to Question of Law (e):
Brief Facts
The Assessing Officer held that the loss on account of foreign exchange fluctuations to the tune of Rs. 2,77,72,900/- could not be claimed as revenue loss and disallowed the same on the aforementioned ground.
Assessee’s Contentions
The assessee contended that foreign exchange fluctuations loss is allowable as an expense in Profit & Loss Account on the grounds of Section 43A of the Income Tax Act, 1961 read with Accounting Standard-11.
Revenue’s Contentions
The Assessing Officer relied upon the Apex Court judgment in case of CIT Vs Woodward Governor India (P) Ltd. 312 ITR 254.
CIT(Appeals) & ITAT Findings
The CIT(Appeals) 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 and that the Assessing Officer’s reasoning was flawed.
However, ITAT held that 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, which necessarily implies that the revenue accepted that the foreign exchange amounts amounted to income and proceeded to deal with it as such.
High Court Judgment
This court is of the opinion that in view of the past revenue treatment, the revenue’s submissions by the appellant are unmerited. Therefore, no question of law arises.
Thus, the appeal of the revenue is dismissed.
