Bombay High Court

Herbertsons Ltd. vs Dy. Cit on 17 August, 2001

Equivalent citations: (2004) 87 TTJ Mumbai 840

ORDER

By The Bench

The assessee- company and the revenue have filed cross-appeals against the order of Commissioner (Appeals), Central-II, Mumbai. Since both these matters arise out of a single order, therefore, these appeals are being disposed of by a common order.

2. The assessee had filed an application for admission of 2 additional grounds as under :

Before we proceed to consider each of the issues involved, it is essential to consider the admission of additional grounds.

"(1) That a sum of Rs. 2,41,89,563 paid by the appellant-company during the assessment year 1995-96 and incurred by the company during assessment year 1994-95 be allowed as accrued liability in assessment year 1994-95.

(2) That a sum of Rs. 1,85,00,000 incurred by the appellant-company towards technical know-how be allowed in entirety under section 37 of the Income Tax Act, in the place of the original claim of 1/6th of Rs. 1,85,00,000 under section 35AB."

3. The authorised representative in support of the additional grounds submitted that admission of these grounds does not involve any fresh investigation into the facts as all the facts relating to this claim are already on record. Further, the necessity for filing additional grounds was to correctly quantify the liability on account of the guarantee obligation. Originally, a claim of Rs. 238.08 lakh was made on payment basis, whereas actual liability on accrual basis was Rs. 479.97 lakh. Hence, the additional claim of Rs. 241.89 lacs. Similarly, on the second issue, though the appellant incurred a sum of Rs. 185 lacs for obtaining the use of the technical information, the appellant had erroneously claimed only 1/6th of this expenditure, i.e., Rs. 30.83 lakh under the belief that the said expenditure would attract the provisions of section 35AB. The additional ground on this issue was to rationalise the claim as per the law. In support, the authorised representative relied on the decision of the Supreme Court in the case of National Thermal Power Corporation v. CIT (1998) 229 ITR 383 (SC) and the decision of the jurisdictional High Court in the case of CIT v. Central Province Manganese Ore Co. Ltd. (1978) 112 ITR 734 (Bom). The CIT (Departmental Representative) had no specific objection for admission of these grounds.

4. We find that the additional grounds basically had the effect of correcting the quantum of claim as expenditure. The relevant material is available on record. Accordingly, these additional grounds are admitted and the appellant was directed to submit its arguments on merit.

5. There are number of issues involved on which various grounds have been taken by the appellant. Each issue is dealt with hereunder

Issue No. 1 : Claim of deduction on account of guarantee obligation.

6. The appellant has debited from its profit and loss account an amount of Rs. 2,38,08,270 under the head 'guarantee invoked'. The appellant claimed this sum on account of discharge of guarantee obligation on the basis of guarantee given to UCO Bank at the instance of UB Elastomers Ltd. (UBEL). The appellant has claimed a further sum of Rs. 2,41,89,363 based on its accrual system of accounting through the first additional ground mentioned above. Thus, the total claim of the appellate on this issue is Rs. 4,79,97,833.

7. The facts relating to the above claim are as under :

8. The appellant and UBEL are companies within the UB group. UB group is, inter alia, involved in the field of petro-chemicals and in the promotion of various companies from 1980 onwards. UB considered the butyl rubber project as one of the most attractive businesses. One company, viz., VBC Chemicals Ltd. had a letter of intent for setting up a butyl rubber plant. The project faced problems of implementation due to lack of technological partner and financial resources. It was on this basis UB group came forward to be a promoter by investing in the shares of VBC Chemicals Ltd., and also extending substantial advances and financial guarantees. The name of VBC Chemicals Ltd. was changed to UB Elastomers Ltd. The appellant, part of the UB group, executed guarantee to UCO Bank on behalf of UBEL for a sum of Rs. 250 lakh plus any interest accrued on the sums borrowed by UBEL on the basis of the guarantee.

9. UB group in its role as promoter obtained requisite Government approvals for the collaboration with Swiss company. The Swiss company was also expected to participate in the equity and supply of critical proprietary equipment to the project. The agreement signed in February, 1989, was effective form 27-12-1989. The project cost was estimated at Rs. 394 crores. The financial arrangements were planned on that basis. The project was hit severely by non-availability of foreign currency. This resulted in withdrawal of financial facilities for the , project by various Banking institutions and ultimately it fell on the shoulders of UB group to pursue the project single-handedly. The Swiss company which did not get paid for its various services invoked the bank guarantee for the final payment. Simultaneously, the economic liberalisation that brought in globalization of companies had the effect of bringing down the import duties on various products substantially and this is how the butyl rubber project became an unviable one. It is the case of appellant that there was a delay in the start up of project of UBEL due to various economic factors like the Kuwait war leading to an oil crisis, the free flotation of rupee and consequential reduction in value, precarious foreign exchange reserve, etc. These factors led to a substantial increase in funding requirements of the project and it become essential to raise considerably the stake of the promoters. The project cost went up from Rs. 394 crores: to Rs. 598 crores. Progress could not be made with regard to arranging of external commercial borrowings due to lowering of the credit rating of the country. On a reappraisal of the project viability, it was felt (after discussions with the financial institutions and banks) that the project, even if implemented, would be unviable. Thus, the Board of Directors of UBEL suspended the implementation of the project during the year 1993-94. The bank invoked the guarantees and the appellant-company was called upon to honour its commitments and the company became liable to pay the principal amount of guarantee of Rs. 2.50 crores which the company had guaranteed to UCO Bank together with accumulated interest till the date. After considerable negotiation, the Vice-Chairman of the UB group vide letter dated 7-2-1994, accepted the liability to settle the guarantee, subject to reduction of interest quantified by the bank . Thereafter, the company agreed for a total liability consisting of principal and interest payable to UCO Bank at Rs. 479.97 lakhs. A part of the agreed liability amounting to Rs. 238.08 lakhs was paid during the year and the balance was paid in the subsequent year. This acceptance was only after loosing the suit filed in Bombay High Court against Pressindustria AG (collaborators) and the Supreme Court dismissing the SLP filed with them. Hence, the appellant claimed the same as business expenditure.

10. The assessing officer (assessing officer) disallowed the claim of the appellant, which has been subsequently confirmed by the Commissioner (Appeals). The summary of the reasons given by the department for disallowing the claim of the appellant mentioned by the assessing officer on pp. 2 to 7 of the assessment order and by the Commissioner (Appeals) in para 7 of his order is as under :

(i) The appellant-company is not authorised by its memorandum of association to extend any guarantee facility to UBEL,

(ii) Though clause (n) of the memorandum of association provides that the company may receive money on deposit or loan upon such terms as it may approve and to guarantee the debts and contracts of the customers and others, this clause is of no help as UBEL does not fall into the category of customer or others.

(iii) The relationship between the appellant and UBEL is not explained properly with evidence though the appellant contends that it is a co-promoter of the project of UBEL.

(iv) Since no commission has been charged for giving the guarantee, the transaction does not amount to a valid contract between the appellant and the bank and hence no expenditure can be allowed.

(v) The guarantee is given not in the course of business of the appellant as the businesses of the appellant and UBEL are different. Appellant is engaged in liquor business, whereas UBEL, though envisaged to carry on a butyl rubber business, no business was actually commenced as the project itself was shelved due to non-viability.

(vi) The appellant does not carry on the business of giving guarantees as the volume of 8 guarantees outstanding during the year is not sufficient to categorise the activity as business.

(vii) The transaction has a character of investment. Hence, the expenditure is a capital loss.

(viii) The expenditure is not incurred wholly and exclusively for the purposes of the business of the appellant.

(ix) There were discrepancies in passing necessary resolutions before provisioning of the guarantee.

11. The claim of the appellant was disallowed relying on decisions in the case of CIT v. Rajendra Prasad Moody (1978) 115 ITR 519 (SC), in Smt. Virmati Ramakrishna v. CIT (1981) 131 ITR 659 (Guj), in CIT v. Abdulabhai Ahdulkadar (1961) 41 ITR 545 (SC), in Madan Gopal Bagla v. CIT (1956) 30 ITR 174 (SC) and in T.S. Krishnan v. CIT (1973) 87 ITR 429 (SC) and other decisions. Accordingly, the authorities below held that the expenditure is not allowable under section 28 or under section 37(1) or under section 57 of the Income Tax Act. The expenditure was held as capital in nature as well as not for the purposes of business.

12. Before us, the learned authorised representative submitted elaborate arguments and also filed written submissions at the direction of the Bench. The gist of the submissions made by the appellant are

12.1 The appellant was in existence since 1936 and from the inception it has carried wide array of business and has never been only a liquor company as made out by the department. The range of business of the appellant includes alcohol spirits, beer, pesticides, insecticides, dry batteries, trading, money lending and provision of guarantees for various commercial considerations and licensing of its various brands and other intellectual properties. The income from each of these different businesses are properly authorised by its memorandum of association and sofar no one has brought any action against the company for acting ultra vires the memorandum of association.

12.2 clause (n) of the memorandum of association of the appellant, extracted herein, authorises the appellant to extend such guarantees :

"To receive money on deposit or loan upon such terms as the company may approve and to guarantee the debts and contracts of customers and others. "

The appellant has also extended similar guarantees to other companies, both within and outside the group and this activity is carried on systematically since its inception in 1936. These guarantees are extended whenever certain business and commercial considerations are involved. In the case of UBEL the guarantee was extended in substitution of loans and advances and this enabled the appellant to deploy the resources within the business more profitably.

12.3 During the year, the appellant has accounted Rs. 11,85,477 as interest and Rs. 1,46,43,462 as other income. This reflects that the appellant is carrying on business of advancing moneys, etc. The entire income has been computed under the head "Income from business" even by the assessing officer. Similar treatment was also given in the earlier years. This goes to establish that appellant is carrying on business of advancing moneys and providing guarantees.

12.4 clause (n) of the memorandum of association clearly authorises the appellant to give guarantees in favour of customers and others. Since the appellant is, inter alia, in money lending business, a person who intends to seek financial assistance from the appellant would fall within the scope of the word "customer" of the appellant. In any case the presence of the word "others" will definitely bring within its fold the transaction with UBEL. It is submitted that memorandum of association should be broadly interpreted in an inclusive sense and not in a narrow sense. In reply, it was submitted that the principle of ejusdem generis is not applicable as there is no ambiguity in the interpretation. In support, the commentary by Justice G.P. Singh in his book "Principle of Statutory Interpretations" 7th Edn., Reprint 2000, Page, para C was relied on.

12.5 The appellant was a co-promoter of butyl rubber project of UBEL and this fact is supported by the loan agreement with the bank board resolution and other records produced. Even by the activity undertaken by the appellant vis-a-vis UBEL, the relationship of promoter is too evident to be missed. In fact, the department though disputed earlier, the Director General in his letter to the Tribunal (enclosed as page 115 of the paper book) clearly admits that the appellant is a promoter. Thus, it is the department's stand which is inconsistent and against the facts.

12.6 The non-charging of the guarantee commission cannot be held against the appellant as furnishing of guarantee was always done for larger business consideration and not merely for earning of guarantee commission. In this regard there is a substantial distinction between a bank carrying on the guarantee business and the appellant carrying on the guarantee business. The apellant extends guarantee only when the interest is substantial and would yield enormous business advantage. Further, guarantee was always used as a substitute for actual provisioning of funds and the funds thus retained by the appellant were used for working capital and other profitable purposes and the yield from the alternative use of the funds was much more than mere guarantee commission.

12.7 The appellant has systematically carried on the provisioning of guarantee over a period of time and has derived substantial business advantage which establishes the existence of business over a period of time. The volume of business is also commensurate with the risk perception of the appellant and the transactions' list submitted supports the volume and regularity.

12.8 The appellant submitted that its case is squarely covered by the decision of the Tribunal, Bangalore, Bench in appellant's own group companies cases, viz., McDowell & Co. Ltd., ITA No. 373/Bang/1998 and United Breweries Ltd., ITA No. 947/Bang/1998. Copies of these two decisions were furnished before us as well as before the Commissioner (Appeals). A chart was furnished comparing the facts and law in the aforesaid decisions of the Tribunal and the appellant's case and contended that they were identical in nature and hence on the basis of these decisions the claim of appellant should be allowed.

12.9 The learned authorised representative submitted that it is not necessary that the business of the guarantor and the guarantee should be similar. He further submitted that normally the business of guarantor and the business of the guarantee will be different and in support cited the example of a bank furnishing guarantee to a steel company and in such cases, it is incorrect to say that the transaction is not valid merely on the ground that the bank is not carrying on steel business.

12.10 It was submitted that the decisions relied on by the assessing officer an Commissioner (Appeals) are not relevant and, in any case, all those decisions were already considered by the Tribunal, Bangalore Bench. Hence, those decisions would not be of any help to the department.

12.11 The appellant follows mercantile system of accounting and, accordingly, all liabilities and outgoings should be accounted on accrual basis. However, the liability on account of guarantee obligation was accounted on payment basis. To bring about its claim in line with the method of accounting followed, additional ground was taken. The assessment order also gives the finding that the appellant is following mercantile system of accounting. It was submitted that "no entry in the books of account" does not militate against the assessee and in support, the appellant relied on the decision of Supreme Court in the case of Kedar Nath Jute Mfg. Co. Ltd. v. CIT (1971) 82 ITR 363 (SC), wherein the Supreme Court held that existence or absence of entry in the books of account cannot be decisive or conclusive in a matter and allowability or otherwise of a particular deduction will depend on the provision of law and not how an appellant makes entry in the books. The appellant also relied on the decision in the case of CIT v. C.R. Narayan Rao (1984) 146 ITR 310 (Mad) and in the case of Sutlez Cotton Mill Ltd. v. CIT (1979) 116 ITR 1 (SC).

13. In reply, the learned Departmental Representative supported the decisions of the assessing officer and Commissioner (Appeals) and the Departmental Representative also furnished a written submission.

14. The learned Departmental Representative submitted that the entire case is factual and hence though the decisions given in the cases of McDowell & Co. Ltd. and UB Ltd. (supra) are identical and similar, yet they cannot be relied on as facts involved in these cases are different from the facts of present case. The learned Departmental Representative strongly contended that the appeal under consideration involves appreciation of facts and the question involved in this appeal is entirely factual, and unless the Tribunal goes through all the facts, no decision can be arrived at, and the decision given by the Bangalore Bench is inapplicable given the facts of the case.

15. The learned Departmental Representative contended that it is not clear from the facts whether the appellant is a promoter or co-promoter or minor promoter or principal to UBEL and the facts of the case do not bring about any relationship let alone business relationship between the appellant-company and UBEL. Mere authority in memorandum of association cannot ipso facto lead to the conclusion that in fact business was actually carried on and, unless the appellant establishes the fact, no presumption should be made that business actually exists. Learned Departmental Representative relied on the commentary on pp. 574 and 575 of, A Ramaiya's Companies Act, 14th Edn. 1998, to say that unless a person originates and controls the formation of a company, he cannot be construed as a promoter. In this case, UBEL was originally incorporated by others and the appellant never became a shareholder nor was it involved in formation of the company to call itself as a promoter. Further, the learned Departmental Representative submitted that mere claim for guarantee cannot be treated as an allowable expenditure unless the reason behind furnishing of such guarantee is gone through and established that it was for business purpose. In support, he relied on the decision in CIT v. Birla Bros. (P) Ltd. (1970) 77 ITR 751 (SC). In CIT v. L.K. Dalmiya (1994) 207 ITR 89 (Cal) and in Mining Machinery Explosive (P) Ltd. v. CIT (1993) 202 ITR 710 (Cal). The learned Departmental Representative contended that furnishing of 8 guarantees over a period of time would not bring about sufficient volume and regularity so as to construe the activity as carrying on a business. He further submitted that the decision of Bangalore Bench in the case of United Breweries Ltd. (supra) would not be applicable as in that case there was actual carrying on of business and this fact is peculiar only to that case and is absent in appellant's case, Further, the memorandum of association of UB Ltd., authorised carrying on of such business, whereas in the appellant's case no such authority can be found.

16. He also submitted that the decision of the Bangalore Bench in the case of McDowell & Co. Ltd. (supra) was not applicable as the decision given earlier under section 143 (1)(a) was implicitly relied on in the decision against the order under section 143(3) and there was no finding on the absence of profit motive in giving guarantees.

17. The learned Departmental Representative further submitted that the decision of Madras High Court in CIT v. Amalgamation Ltd. (1977) 108 ITR 895 (Mad), relied on by the Bangalore Bench in the aforesaid decisions is not applicable to the appellant's case. The learned Departmental Representative further contended that the activity of the appellant has a character of investment and when such investment is written off the same amounts to capital loss and in support he relied on the decision in A. V. Thomas & Co. Ltd. v. CIT (1963) 48 ITR 67 (SC) at p. 74, in CIT v. Moon Mills Ltd. (1966) 59 ITR 574 (SC) in CIT v. Amritlal & Co. Ltd. (1995) 212 ITR 540 (Bom) and in Swadeshi Cotton Mills Co. Ltd. v. CIT (1967) 63 ITR 57 (SC). These decisions we find are not relevant to the facts of the case inasmuch as these cases deal with whether dividend income is business income or other income and further deals with interpretation of section 104 and section 109 to judge whether the company is an investment company or not and further deals with the transaction wherein share application money was not recoverable and at the outset we mention that these decisions cannot be relied on.

18. The other decisions relied on by the learned Departmental Representative in the case of Swadesh Cotton Mills Co. Ltd. v. CIT (supra), in Chamundi Hotels (P) Ltd. v. CIT (1987) 166 ITR 683 (Kar) and in Mining Machinery Explosive Ltd. v. CIT (supra) are general in nature and neither in favour nor against the department.

19. The learned Departmental Representative contended that words "customers and others" in clause (n) of the memorandum of association refer to those parties with whom the appellant has already had commercial dealings. It the word "others" relates to totally unrelated party then that word would not have been combined with the word "customers". The fact that the words "customers and others" are mentioned together presumes a relationship like that of the existing customers. If the words "others" refers to world at large, then there was no need to mention even "customers and others". It would have been sufficient to stop at "and to guarantee the debts and contracts". The mention of the words "customers and others" brings about a qualification and restriction in dealing with a category of persons.

20. In summary, the contention of the Departmental Representative was that the expenditure is capital in nature and has no connection with the business of the appellant.

21. In reply, the learned authorised representative, in addition to oral submissions, also filed elaborate counter-reply wherein the objections of the Departmental Representative were dealt with issue wise and para wise. Since the counter-reply is very elaborate and covers all objections we are not reproducing the same as it would amount to repeating many of the points already dealt hereinabove.

22. Firstly, learned authorised representative contends that the decision of the Supreme Court in Birla Bros. (P) Ltd. v. CIT (supra) cannot be relied on as the Supreme Court in this case was handicapped by insufficient findings by the Tribunal and has clearly expressed that it was not in a position to give a clear finding in the absence of sufficient facts. The relevant portion of the decision of the Supreme Court in para 2 is". In our judgment the facts relied upon by the appellate Tribunal and the High Court are barely sufficient for bringing the allowance claimed under section 10(2)(xi)" ......... No attempt was made nor indeed could it be usefully made to claim any allowance under section 10(2)(xv) of the Act." Section 10(2)(xv) of the 1922 Act is the present section 37(1) of the Act. Evidently, the decision is not applicable to a claim under section 37(1) . Hence, this decision does not support the department.

23. Secondly, the decision of the Madras High Court in Amalgamation Ltd. (supra) which is subsequently affirmed by the, Supreme Court in CIT v. Amalgamation (P) Ltd. (1997) 226 ITR 188 (SC) and relied on by the Tribunal, Bangalore Bench in appellant's group companies cases are very much applicable as the appellant's group has more subsidiaries and associates than the Amalgamation Ltd. The subsidiaries and associates of the UB group enjoy common management, inter-linked in business, marketing and finance, etc. Even the affairs of UBEL were closely managed by the group and the shareholders of UBEL were none other than the group companies. Thus the level of activity existing in the appellant's group case were far higher than the level of activity in the Amalgamation Ltd. case and thus the rulings of Madras High Court and the Supreme Court apply to the case on hand.

24. Thirdly, a detailed compilation was made wherein it is submitted that the decisions relied on by the department are not applicable.

25. Fourthly, it is contended that the rule of ejusdem generis does not apply as it applies only to a statute and memorandum of association is a contract between the company and the shareholders. Moreover, the said rule applies only when there is ambiguity and not when the clause in the memorandum is clear. The learned authorised representative finds no difficulty in outlining the scope of the words "customers and others" as these are words very well-known and hardly require any interpretation.

26. Fifthly, the learned authorised representative reiterated his submission that the volume and regularity in furnishing guarantees supports the existence of business and the commercial consideration involved in the transaction with UBEL has not been found fault with.

27. Sixthly, the learned authorised representative contended that the department has not discharged the onus to establish its contention that the expenditure is for non-business purpose. The department does not have any evidence to show the transaction as a non-business transaction.

28. The payment to UCO Bank had to be made as the appellant was contractually bound by it and UBEL's lack of financial resources made it unable to meet the liability to the banker.

29. The learned authorised representative contended that the non-charging of guarantee commission cannot be held against the appellant as it is not essential that in every transaction profits should be earned, as long as the transaction or expenditure is for the purposes of business which is wider in connotation than for the purposes of earning profits. In support decisions in CIT v. Malyalam Plantation Ltd. (1964) 53 ITR 140 (SC) and in Shree Meenakshi Mills Ltd. v. CIT (1967) 63 ITR 207 (SC) were relied on.

30. The learned authorised representative contended that even the department accepts that the issues and facts of the two cases of the group companies decided by the Tribunal, Bangalore Bench, are similar and identical to that of appellant's case and hence these decisions are totally applicable.

31. The learned authorised representative contended that the department has confused itself on facts and has relied on irrelevant facts to reach its conclusion. According to the learned authorised representative, the dual nature of the transactions, i.e., one set of transactions involving contribution as advance towards share capital has been mixed up by the department with the claim of the appellant involving discharge of guarantee obligation. The issue under consideration is the latter one and not the former one and the department is in error and is under wrong impression that the appellant has written off advance towards share capital. The confusion of department is evident from the findings of the Commissioner (Appeals) in page Nos. 22 to 26, paras (ix) to (xi). He also submitted that the department had relied on board resolutions which deal with contribution towards the share capital and ignored the board resolutions which dealt with the furnishing of guarantee. There are several points on which detailed reply has been submitted which is too elaborate and it is not necessary to repeat every single point.

32. In summary, the appellant submits that the claim for expenditure on account of guarantee obligation should be allowed, as it is incurred wholly and exclusively for the purposes of business. Further, such expenditure has been incurred in the course of carrying on of an existing business and that the company is authorised by its memorandum of association for extending the guarantee. Further, not charging of guarantee commission does not militate against the appellant, as wider business considerations are overwhelming and relevant. Hence, the claim of the appellant, including that of in the additional ground, be allowed.

33. Rival submissions have been considered. There are various questions in this case which require finding and accordingly we deal.

34. Firstly, it is essential to see whether the appellant is empowered through its memorandum of association to carry on the business of advancing moneys and furnishing of guarantees. In this regard, clause (n) of the memorandum of association mentioned supra is relevant. A perusal of clause (n) clearly establishes that the company may receive money on deposits or loan upon such terms as the company may approve and to guarantee the debts and contracts of the customers and others. This clause clearly and unambiguously empowers the company to carry on the business of provision of loans and guarantees.

34A. Secondly, the question is what is the scope of phrase "customers and others" in this context. On going through the various arguments we find that there is no difficulty at all in understanding the scope of "customers and others". While the word "customer" would include all those who are customers of the company, including the new customers. and the past customers, the word "others" would bring within its meaning other categories, such as suppliers, bankers and others who are having dealing with the company or intend to deal with the company. It is only this construction which can give a proper meaning to the clause. There is no requirement to look into the principle of ejusdem generis as there is no ambiguity in clause (n). If restricted meaning is given to the word "others" as contended by the department, it would lead to an unnatural and incorrect interpretation as it would restrict the company from dealing with any new person or pursuing any new opportunity. The clause in the memorandum should be construed in its proper sense and the construction leading to absurdity should be avoided. Accordingly, we do not see any difficulty in understanding the scope of the word "others" so as to include the company's bankers, its group companies and associates, suppliers and other categories. Use of the word "others" also renders clause (n) expressly inclusive in nature and as such no construction should be placed to restrict its meaning. Hence, we find guarantee given in favour of UCO Bank on behalf of UBEL was within the object clause of the company's Memorandum of Association.

35. Thirdly, the department's contention that the appellant was not a promoter is incorrect. The appellant was very much a promoter of the project executed by UBEL. To ascertain the exact scope and meaning of "Promoter" we have perused the Commentary on Companies Act by A. Ramaiya. We find that the term "Promoter" encompasses wide array of activities beginning with the conceiving of an idea, formation of a company stretching up to raising of capital and execution of project. Learned author is also of the categorical opinion that if a person does something less than the full activity mentioned above or carries out a few of the activities and not all would nevertheless be a promoter. It is the case of appellant that company is involved along with its group companies in promoting the butyl rubber project and was totally involved in execution of the project. The fact that it has invested substantial sum in excess of Rs. 237 lakh towards the share capital of UBEL bears testimony to this fact. Further, there are no other shareholders other than the appellant and its group companies. The banks and other financial institutions have recognised the appellant and its group companies as promoters. The technical collaborator and others concerned have also recognised this fact. The evidence in support of the contention that appellant is a co-promoter is overwhelming. It may not be out of place to mention that the department itself has accepted this status of co-promoter on certain occasions and even during submissions UBEL is described as a group company, yet the department is disputing this fact. The stand of the department on this issue is not entirely consistent. However, whether or not the appellant- company is a promoter of UBEL is not vital to the issue on hand.

36. The next question is whether the appellant-company has carried on the business of furnishing guarantee. In this regard we find that clause (n) is part of the memorandum of association since the inception of the company in 1936. The company has carried on the activity of issuing guarantees in past so many years. We find from the records produced before us that there are several instances wherein the company has furnished guarantees. The income therefrom has been accounted for and taxed year after year. During the year itself the total guarantee obligation at the beginning of the year was Rs. 5,74,09,163 and the closing balance was Rs. 3,44,09,163. Fresh guarantees were given during the year and some were discharged and cancelled. Besides, there is also guarantee invoked by UCO Bank and Union Bank of India. From the records it is seen that similar activity of the company is carried on in the earlier years and subsequent years. Thus, there is a consistent frequency in issue and discharge of guarantees and the said activity has been carried on for a long period of time. Hence, we find that the company is in the business of furnishing guarantees. We also find that guarantees have been given in favour of other companies other than group companies. Two specific instances, viz., Maneckji Aviation (P) Ltd. and Indrani Agro Industries (P) Ltd. Hence, we find the contention of the department is factually incorrect. It is pleaded by the appellant that where guarantee was issued on behalf of UB Distrilleries Ltd., substantial income has been accounted for by the appellant. Thus, these activities will establish that the appellant- company is carrying the business of furnishing guarantees. The contention of the department that 8 guarantees were given in 7 years and the volume of transactions would not justify it to be called as a business is incorrect. A systematic activity carried on over a period of time, even with low volumes, would nevertheless amount to carrying on of business. Thus, we find no merit in the contention of the department.

37. The next argument of the department is that there was no profit motive in issuing of guarantees and hence these transactions are not for the purpose of business. This argument is also incorrect inasmuch as we find that issue of guarantees has substantial business purpose. We find substance in the arguments of appellant-company. We also find that the appellant has contended that the issuance of guarantee has substantial business purpose. It is pleaded that the furnishing of guarantee would enable the company to retain its liquid funds and profitably deploy the same to earn better profits, while furnishing of guarantee still meets its business obligations. We have gone through the list of guarantees furnished and plea of assessee. The fact that no guarantee commission was charged would not render the purpose a non-business. We should understand the business purpose from the point of view a businessman and commercial considerations. Therefore, looking from that angle, we find that there were commercial reasons behind issue of guarantee. Even in the case of guarantee on behalf of UBEL we find merit in the contention of the appellant that it was as a part of business activity. The appellant- company would have substantially gained by this guarantee. The funds retained by the company were deployed for other business purposes. There is no need to see any more purpose than the fact that guarantee given to UBEL was as a part of overall business activity of the appellant. We further find that "for the purpose of business" has wider connotation than merely profit motive. This view finds support from the decisions of the Supreme Court in CIT v. Malyalarn Plantation Ltd. (supra) and Shree Meenakshi Mills Ltd. (supra). Further, the Madras High Court in the case of CIT v. C.K. Narayan Rao (supra) held that there is no precondition for allowance of an expenditure that the outlay should have yielded any income receipts. The case law cited by the department bring out general principles which are compatible with the findings given herein. Further, we find that the issues involved in this appeal and the issues involved in the appellant-group companies' cases, viz., McDowell & Co. Ltd. and UB Ltd. decided by the Tribunal, Bangalore Bench, are exactly similar. There is no difference at all. The attempts made by the department to distinguish these cases are superficial. In fact, that clauses in the memorandum of association of all the 3 companies, though worded differently, mean the same. The role of the 3 companies is furnishing the guarantees and the background factual position is the same. All of them have suffered uniformly and from the same cause. Hence, we hold that the issues are covered in favour of the appellant based on these decisions and findings recorded herein. The claim of the appellant deserves to be allowed as revenue expenditure. The department though has advanced argument that the expenditure is capital in nature and in support has relied on the decisions in A.V. Thomas & Co. Ltd. v. CIT (supra), in CIT v. Moon Mills Ltd. (supra) and CIT v. Amrit Lal & Co. (supra), we find that these decisions are distinguishable on facts and not applicable to the facts of this case. Adverting to the Commissioner (Appeals)'s reasons and findings in point Nos. (ix), (x) and (d) mentioned in pp. 22 to 26 of his order which the learned Departmental Representative relied heavily, the counsel for the assessee brought out that Commissioner (Appeals) got confused and relied on the transaction of advance towards the share capital to reach his findings which is not relevant for the issue on hand. The appellant had two types of transactions with UBEL-(a) contribution towards share capital amounting to Rs. 237 lakhs and (b) furnishing of guarantee. Learned Commissioner (Appeals) got himself confused with the transaction of advance towards share capital with that of guarantee obligation. Commissioner (Appeals) has been under the impression that issue involved was write off of money advanced towards share capital, whereas the question is claiming of expenditure on account of guarantee obligation. The confusion is perhaps on account of similar sums involved in both the transactions and when this was brought out, the learned Departmental Representative did not disbelieve that the Commissioner (Appeals) indeed made an error. Thus, the department's argument that impugned claim is a capital expenditure does not find support. Moreover, the Supreme Court in the case of CIT v. Amalgamation Ltd. (supra) has held that this type of expenditure is revenue in nature. The argument of the department that the decision of the Supreme Court in CIT v. Amalgamation Ltd. (supra) is not applicable is incorrect. We have gone through the decision and have also compared the decision with the facts, of the appellant's case and we find the decision is applicable. Similar view was also taken by the Tribunal, Bangalore Bench in the case of other two companies of the appellant's group, cited above.

38. The reliance of the department on the decision of the Supreme Court in the case of Birla Bros. (supra) is misplaced. The claim of the appellant in this case is under section 37, whereas the Supreme Court in the case of Birla Bros. (supra) considered the applicability of section 10(2)(xi) and since no argument was adduced on the applicability of section 10(2)(xv), the Supreme Court had no occasion to consider the allowability under this section. Section 10(2)(xv) and the present section 37 of the Income Tax Act is similar in provision. Hence, a decision involving the question which is neither argued nor considered can be relied on as a precedent. Further, in this case Supreme Court was also handicapped by insufficient findings by the Tribunal and the High Court. For these reasons, the decision in Birla Bros. (supra) would not support the department's contention.

39. Regarding the discrepancy in the dates of the resolutions discussed by the Commissioner (Appeals) in his reasons Nos. (x) and (xi) in page Nos. 24 and 25 of his order, it was clarified by the counsel for the appellant that Commissioner (Appeals) has relied on resolution pertaining to the investment in share capital which does not deal with the issue on hand, whereas the board resolution on this issue enclosed in page Nos. 10 and 11 of the paper book are relevant. Copies of these were also available with the authorities below. When this was pointed out to the learned Departmental Representative, he conceded that the mistake by the Commissioner (Appeals) in relying on a wrong resolution was by oversight and agreed that proper resolutions had been passed.

40. The department has been vehemently contending that the issue of guarantee on behalf of UBEL was not for the business purpose, but is unable to explain with what other purpose could the guarantee has been extended. Persistent query by the Bench from the learned Departmental Representative evoked no answer. Consequently, we find that the department's argument that the guarantee was extended for a non-business purpose is based on suspicion and surmises and not on material or evidence on record.

41. We also find it strange to notice that in the entire proceeding the department has been taking alternative pleas on facts. In certain paragraphs it contends that the expenditure is capital in nature. Elsewhere it argues that it is not for business purpose. Yet again it argues that there is no business in existence. And further argues that even if it is for business, it is not authorised by its memorandum. In the light of these arguments, we find that the department's stand was inconsistent.

42. The confusion is further evident from the findings that at certain places serious dispute has been raised that the appellant is not a promoter of UBEL. Yet again, the department itself contends that UBEL is a group company. Further, the letter filed by the Director General in p. 115 of the paper book, the department accepts that appellant- company is a co-promoter. When this letter was pointed out to the Departmental Representative, he sought to explain away saying that the letter was written without making any detailed analysis of the facts of the case or issues involved.

43. Adverting to the additional grounds taken by the appellant, we find that the claim has to be allowed as the appellant is following mercantile system and, consistent with its method of accounting, the claim appears to be correct and reasonable. There is no objection by the department to allow this claim. Thus, the entire claim should be allowed as revenue expenditure. Hence, we direct the assessing officer to allow Rs. 4,79,97,833 as revenue expenditure.

Issue No. 2 : Payments for trade-mark license fee, non-competition fees and license fee for use of technical information.

44. The appellant claimed a sum of Rs. 6,80,83,334 as revenue expenditure in the computation of total income submitted for the purposes of income-tax. The break-up of the expenditure as provided by the appellant is as under :

Rs. Lacs

Trade mark license fee paid

200.00

Towards covenants for non-competition

450.00

Towards license for use of technical information (1/6th of Rs. 185 lakh)

30.83

The said sum claimed by the appellant has been disallowed by the assessing officer in entirety, whereas the Commissioner (Appeals) confirmed the additions on account of item Nos. (1) and (2) and gave relief in item No. (3). Thus, the appellant is in appeal seeking relief on items (1) and (2) and the department has filed a counterappeal against the allowance of Rs. 30.83 lakh (Item No. 3) by Commissioner (Appeals).

45. In addition, the appellant has filed additional ground seeking relief of Rs. 185 lacs spent towards licence for use of technical information. This relief is sought in the place of claim of Rs. 30.83 lakh shown above.

46. The brief facts regarding the additional ground is that the assessee has spent Rs. 185 lakh towards the licence for use of technical information whereas, before the assessing officer 1/6th of the said Rs. 185 lakh was claimed under section 35AB. The appellant submits that the claim under section 35AB was incorrect as the sum spent for the technical information is towards license for use and not acquisition. Section 35AB would be applicable only when the technical know-how is acquired. The appellant's case is that the expenditure is revenue in nature as a it is spent for use and not for acquisition and hence the entire expenditure is allowable in this year under section 37 of the Income Tax Act. Appellant further submitted similar claims have been fully allowed by the Tribunal in United Breweries Ltd. (supra) and in the case of Wellman Incandescent India Ltd. v. Dy. CIT (1995) 55 ITD 338 (Cal).

47. As stated earlier additional ground of the appellant is admitted. Since the department has filed an appeal against Commissioner (Appeals) allowing of Rs. 30.83 lakh, they are dealt with together. There are 3 components of this issue and basic facts are same. Hence, facts are outlined first and thereafter each component is dealt with separately.

48. The facts of the case are that the appellant entered into 3 separate agreements with Chhabria Marketing Ltd. ("CML") on 14-12-1993, and following payments were made under each agreement :

Rs. Lakh

Trade mark use license fee paid

Towards covenants for non-competition

Towards license for use of technical information

49. Copies of these agreements are enclosed as page Nos. 39 to 52 of the paper book. Specific mention was made to clauses 1, 4, 6, 11, 12, 14 of trade-mark license agreement; clauses 1, 2, 4 and 5 of covenants of non- competition; and clauses 1, 4 and 5 of license for use of technical information.

50. The said agreements were entered into with CML for obtaining sole and exclusive use of trade-mark of Lord & Master and also use of technical information for manufacture of the alcohol beverages. The appellant- company is in the alcohol beverages trade for more than 6 decades. It has in its portfolio, 19 brands, the details of which are furnished in p. 49 of the paper book. These brands are used to market the appellant's products in various segments. It is the case of appellant that alcohol market itself is highly competitive and is also highly regulated. There are various segments in the market such as scotch and IMFL. Even in IMFL, there are segments like super deluxe, deluxe, premium, semi-premium, regular and local. The companies involved in this business priced the product composition and packing depending on the segment in which the brand is positioned. It is alleged that positioning of the brand is the single most important factor in marketing of alcohol beverages. The company had made an attempt to develop its own brand in semi-premium segment under the brand name Herbertsons Indian Salute and had spent considerable sum and also time period of 3-5 years in developing the same. It is the case of appellant that the company could not successfully position this brand and was losing business in the segment to the competitors, whereas, the brand developed by CML under the title 'Lord & Master' was largely accepted by the public and due to its participation in major sporting events, etc., the brand attracted good business and posed a challenge to the other brands which are in the semi-premium segment. Noticing Lord & Master's, quick capture of market share, besides the strong growth, the appellant and the owner of the brand CLM entered into the aforesaid three agreements, wherein, under the first agreement the appellant- company is entitled to use the brand for a period of 15 years initially, extendable by another 5 years later. Whereas, this agreement allowed the appellant-company exclusive use of the brand name, in the second agreement, titled as 'Covenant for non- competition' CML agreed not to use the said brand in its business for the duration that the brand is in use by the appellant. The combined reading of these two agreements is such that the brand can be used solely by the appellant-company during the subsistence of the agreement even to the exclusion of CML. The agreement itself is capable of early termination for the reasons provided in the agreement and extracted supra. In consideration of these user rights, CML is paid a lump-sum consideration outlined above. Under the third agreement on the same day, CML furnished technical data and other information relevant for the manufacture of Lord and Master whisky, for which again, lump-sum consideration was paid. Here again, the appellant is entitled only for the use of technical information and the same cannot be parted with in view of the secrecy or confidentiality clause in the agreement. Thus, the appellant has spent an aggregate sum of Rs. 835 lakh towards the use of this brand and use of the technical know-how.

51. CML is a company-engaged in the business of developing various brands, developing manufacturing process, introducing the newly developed products and brands. It is the case of appellant that it spends considerable sums to establish and commercially scale up the brands. CML has no own manufacturing base and is engage solely in the aforesaid activities. It has to its credit, successful development of number of products, brands and market. It acts as an incubator or a nursery for development of brands. Once the brands are successful, it licenses the same to other largely established companies like the appellant. During the licensing tenure of the brand, CML reserves right to and have a responsibility to monitor the quality content and market presence. It also has the responsibility to protect the brand image and also has the right to notify the user for any use, which has the prospect of damaging the brand. It is in line with this activity that CML had entered into agreement with the appellant for issuing the licence to use the branch.

52. During the course of assessment proceedings, with a view to elicit information the managing director of the appellant was summoned and a statement was recorded. The summary of the statement is that the appellant-company negotiated the consideration for these agreements and no valuation was made. Valuation is possible only in the case of old and established brands. For a brand such as Lord & Master the proper method is by negotiation. The appellant had great expectation of sale out of this brand. It had projected sale of 1,00,000 cases per annum and at the rate of Rs. 7,000 per case the total sale annually would have been in excess of Rs. 70 crores: with good profit margin. The licence for the brand was obtained as the brand had made strong impact in the market in the semi-premium segment. The appellant's own effort in establishing a brand under this segment had not borne fruits despite spending several crores of rupees and that too after 3 to 5 years of efforts. To enable it to grow it was necessary to obtain the licence for this brand. The price agreed was reasonable as CML had incurred substantial sums for the development of the brand and technical know-how and the appellant itself spends more than Rs. 30 crores annually towards advertising and sales promotion expenses.

(A) Agreement for hcense for use of trade-mark

53. The appellant's claim towards payment for use of trade-mark amounting to Rs. 200 lakh has been disallowed by the assessing officer on the grounds that the expenditure is for non-business purpose and also capital in nature. He is of the view that the above 3 agreements should be read together. The agreement for use of trade-mark though provides for a tenure of 15 years extendable by another 5 years, when read with the other two agreements renders the agreement perpetual. Consequently, the appellant has acquired the trade-mark, though stated as for use. He further held that consideration paid was excessive and not reasonable. The third point is that the consideration is paid in a lump-sum and the benefit of the agreement is enduring in nature and consequently the expenditure is capital. Fourth point is that the trade-mark was not put to use during the previous year. Fifth point is that the appellant has shown the trade-mark as fixed asset in the balance sheet. Going by the accounting treatment given by the appellant he is of the view that it should be held as capital asset and consequently the expenditure should not be allowed as revenue. Sixth point is that the appellant has not supported the payment of consideration by a prior valuation and despite repeated opportunities the appellant did not explain the rationale behind payment of such a huge sum. Seventh point was that the expenditure is unnecessary as the appellate itself has more than 19 brands and there was no justification for paying such a sum to a new brand and that too to CML which is a small company considering the size of the appellant and hence the expenditure is for non-business purpose. Eighth point was that the agreements were entered into on the same day on which the Board of Directors of the appellant-company had authorised and, accordingly, assessing officer's view is that the appellant had not spent sufficient time in negotiating the price and this leads to suspicion as to the nature of transaction. Ninth point was that Lord and Master was not a great brand and sold only 11,000 cases during the period of 13 months from the date of its introduction. Tenth point was that the director who signed the agreements was not an employee of the appellant- company.

54. The assessing officer while rejecting the claim of the appellant relied on the decision of Supreme Court in Swadeshi Cotton Mill Co. Ltd. (supra), wherein it was held that it is an erroneous proposition that as soon as assessee has established two facts, viz., the existence of an agreement between the employer and the employee and the fact of actual payment, no discretion was left to the Income Tax Officer except to hold that the payment was made wholly and exclusively for the purpose of business. Although the payment might have been made and there might be an agreement in existence, it would still be open to the Income Tax Officer to take into consideration all the relevant factors which will go to show whether the amount was paid as required by section 10(2)(xi) of the 1922 Act.

55. CML has lost all its rights and consequently the agreement has to be read as fees being paid not for merely use of the brand but for acquisition of the brand. Assessing Officer is of the view that any expenditure incurred to acquire assets, in the instant case the brand, is capital in nature. In support, he relied on the decision of the jurisdictional High Court in the case of CIT v. J.K. Chemical Ltd. (1994) 207 ITR 985 (Bom). The facts in this decision are that J.K. Chemicals Ltd. which was carrying on the business of manufacturing fertilizers had incurred certain expenditure to obtain a project report to set up a new unit at Rajasthan. This expenditure for setting of new unit was held by the High Court as capital in nature. The High Court held".. It was clearly an expenditure incurred for ascertaining whether to acquire new assets of some durability for the purpose of earning profits. The expenditure of Rs. 2,50,000 incurred for the preparation of the project report constituted capital, expenditure." We are unable to understand as to how this case has any relevance to the issue on hand.

56. On appeal, Commissioner (Appeals) upheld the disallowance after rejecting the submissions of the appellant. Reasons given by the Commissioner (Appeals) are found in para Nos. 36 to 46 of his order and are similar to that of assessing officer.

57. Before us, the counsel for the appellant submitted that the Commissioner (Appeals) erred in refusing to rely on the decisions of the Supreme Court and other High Courts, including that of jurisdictional High Court, though it was mandatory for him to do so. The counsel for the appellant submitted that there is overwhelming judicial opinion in favour of allowing the claim of the appellant. He submitted that the authorities below had erred in not appreciating the position of facts as well as law. As directed by the Bench, he made written submissions and the relevant portion of his submissions are as under :

57.1 The above three agreements read together give a view that the agreements are perpetual in nature.

Appellant's reply:

The agreements are clear in specifying the tenure and there is no doubt as to the period of agreements which is 15 years extendable by another 5 years. In fact, the early termination clause 14 of this agreement and clause 4 of the other two agreements render the agreement as one at will rather than a perpetual. Clause 4 of other two agreements reads "this agreement shall remain in full force and effect notwithstanding the expiry/termination of the said agreement by efflux of time or otherwise. " Interpretation of this clause gives the position that the word expiry" and "efflux of time" should be read together which means termination of the agreement on expiry of tenure. The word "termination" should be read with "otherwise" which clearly indicates that the agreements can be terminated even before the expiry of the tenure. If the intention of the parties is to render the agreement perpetual in nature. then nothing prevented them from mentioning so in clear terms. No effort should be made to assume something which is not apparent in the agreements. The agreements should be read in a manner in which the parties to the agreements have understood. There is no allegation by the department that the agreements are collusive in nature. In the absence of such an allegation, there is no need to suspect and assume something which is not real. Thus, there is a total misunderstanding of the agreement inspite of its clear covenants. Further, clause 12 of the agreement clearly provides for early termination by the appellant without assigning any reason. There is no presumptionin law that long tenure agreements will be construed as perpetual agreements. Even if there is no agreement on the specific tenure, those agreements are liable for termination at will of both the parties. Hence, there is no material available on record for the department to come to the conclusion that the agreements are perpetual in nature.

57.2 The appellant-company acquired the asset consisting of brand name on ownership basis and hence acquisition of trade-mark expenditure is capital in nature.

Appellant's reply :

The agreement is categorical in stating that the appellant has only a right to use and for all times CML continues to be the owner of the brand. Other covenants in the agreement make it amply clear that even during the existence of the user agreement, CML reserves many a right in the trade-mark in enforcing the same against the appellant such as in the case of wrong use of the trade-mark by the appellant the same can be restrained by the CML as evidence from clause 6 of the agreement. "HL shall on receiving adequate prior notice in writing in that behalf permit the duly authorised representatives or representative of CML to examine and inspect all books, records, inventories and manufacturing facilities and the said goods of HL for the purpose of determining whether or not the terms and conditions herein contained are being complied with." The essential ingredients of ownership of any property are acquisition, possession and dis-possession. In the present case these ingredients are totally missing. The brand is not acquired, possession is for a limited period that too for use with restrictions. Selling or dis-possession does not arise in the absence of ownership. No agreement can be read as meaning more than what is specifically provided. Agreement for tenancy cannot be read as conferring ownership even in a case where there is a law protecting the tenancy. Such being the case, there is no prescription in law which converts agreement for use into ownership.

57.3 The appellant has shown trade-mark as fixed asset in the balance sheet.

Appellant's submission :

This is factually incorrect as the expenditure on trade-mark is shown under the head 'Other expenses' in the balance sheet and treated as deferred revenue expenditure. Further, in similar circumstances where the tenure agreement was for 15 years and extendable, the jurisdictional High Court in CIT v. Tata Engineering & Locomotive Co. (P) Ltd. (1980) 123 ITR 538 (Bom) held :

"....... Technical know-how cannot be called a tangible asset. Technical know-how and technical advice for the time being cannot in these days of technological and scientific development and consequent change in production techniques, be treated as a capital asset. The length of the period of agreement is not of much consequence, if the nature of the advice made available is such that it cannot be called a capital asset ........"

The appellant submitted that facts in this appeal and the facts appearing in the case of Telco mentioned supra are similar and the finding of the jurisdictional High Court is binding and Commissioner (Appeals) was incorrect in refusing to rely on this decision.

57.4 Trade mark has not been put to use during the year.

Appellant's reply :

It is true that trade-mark did not generate any sale during the year. This does not mean it was not used. It was used for launch. Further the appellant had to give certain time gap as earlier it was known as CML brand. Further, the liquor needed to mature before it is bottled and introduced in the market for sale under this brand. The appellant had initiated the process of manufacture on the basis of technical know-how. However, this does not render the expenditure as inadmissible inasmuch as the trade-mark was ready for use by the appellant during the year. It is not essential that it must be put to use. The license to use was obtained during the year for the purposes of business and consequently, the same is allowable. Moreover the claim for expenditure is under section 37 and the section does not specify use during the year as a pre-condition for allowing of expenditure. Only section 32 makes it mandatory that use must be during the year and such a condition is not prescribed in section 37. Further, the appellant relied on the decision of the jurisdictional High Court in the case of Mysore Spinning and Manufacturing Co. Ltd. v. CIT (1966) 61 ITR 572 (Bom).

In order that an expenditure may be allowable under section 10(2)(xv) in a particular year, it is not necessary that the expenditure must be one required for the purposes of carrying on the business or earning of the profits of that year. An expenditure incurred to meet a liability of the business accruing in that year is allowable under section 10(2)(xv).

57.5 The sum paid being lump-sum in nature, and the benefit by the appellant is enduring in nature the expenditure incurred is capital expenditure and not revenue. The claim of the appellant that the expenditure is revenue in nature is supported by plethora of decisions

(1) CIT v. Avery India Ltd. (1994) 207 ITR 813 (Cal)

(2) CIT v. Aqua Pump Industries (1996) 218 ITR 427 (Mad)

(3) CIT v. Ashoka Mills (1996) 218 ITR 526 (Guj)

(4) CIT v. M.M. Umbrella (1984) 145 ITR 292 UP)

(5) Tata Raxin Frazer Ltd. v. CIT (1987) 165 ITR 347 (Pat)

(6) CIT v. Kirloskar Tractor Ltd. (1998) 231 ITR 849 (Bom)

(7) CIT v. HMT Ltd. (1993) 203 ITR 820 (Kar)

(8) CIT v. Tata Engineering & Locomotive Co. (P) Ltd. (supra)

(9) CIT v. T. Maneklal Mfg. Co. (1978) 115 ITR 725 (Bom)

(10) Walchandnagar Industries India Ltd. v. CIT (supra)

The learned Commissioner (Appeals) erred in not considering the true effect of these decisions. He also erred in relying on the decision in (1967) 63 ITR 57 (SC) (supra) and in CIT v. J.K. Chemicals Ltd. (supra) to hold against the appellant. Whereas (1967) 63 ITR 57 (SC) (supra) far from supporting the department, supports the appellant. The decision in CIT v. J.K. Chemicals Ltd. (supra) is irrelevant to the facts of the appellant's case.

57.6 The expenditure incurred is unreasonable and not supported by valuation report and hence, the expenditure incurred is not wholly and exclusively for the purposes of business.

Appellant's reply:

The agreement entered between the parties is after nogotiation and is entered at an arm's length basis. The sum paid is as per the agreement and the same is disclosed by appellant and also CML in their respective books of accounts. The genuinity of payment and the purpose of the payment is undoubted and accepted by the department. There is no material in the possession of the department to suspect the, contents of the agreement. Hence, department cannot question the reasonableness or otherwise of the expenditure. Since the agreement was through negotiation and no valuation report was prepared, there is no point in insisting for valuation report. The reasonableness of the expenditure should be viewed from the point of businessman and assessing officer cannot substitute his views. It is held in CIT v. Dhanrajgirji Raja Narasingirji (1973) 91 ITR 544 (SC), CIT v. Walchand & Co. (P) Ltd. (1967) 65 ITR 381 (SC), CIT v. Vijayalakshmi Mills Ltd. (1974) 94 ITR 173 (Mad), Jamshedpur Motor Accessolies Stores v. CIT (1974) 95 ITR 664 (Pat), Narsingdas Surajmal Properties (P) Ltd. v. CIT (1981) 127 ITR 221 (Gau), CIT v. C.K. Narayan Rao (supra) and CIT v. Bowrisankara Steam Ferry Co. (1973) 87 ITR 650 (AP) that once tbe expenditure is incurred for the purpose of business, the assessing authority cannot disallow the same on the ground of prudency, reasonableness or desirability or need for incurring the expenditure, etc.

57.7 The three agreements entered into should be read together to understand full impact of the transaction. On reading so, it appears that the agreement are for purchase of the trade-mark.

Appellant's reply:

The view of the department that the agreements should be read together is correct and assessee supports such a reading. However, the fact which emerges on combined reading of the agreements remains that the agreement are for use of trade-mark and not for purchase of trade-mark. It is incorrect for the department to decipher a view which is not apparent in the agreements nor inherent in the agreements. The department cannot also substitute its interpretation or views other than what is understood by the parties to the agreements. There is no need to view the agreements suspiciously as even it does not suggest that the agreements are a devise to avoid the tax, etc. Hence, the department's view that the assessee has purchased the trade-mark is incorrect.

57.8 Expenditure incurred is for non-business purpose :

Appellant's reply :

This is the most ludicrous statement of the department. The brand Lord & Master was licensed for use in selling as semi-premium whisky. The appellant is in the business of spirits for the last 6 decades. It has more than 19 established brands. Lord & Master is sought to be used in business of the appellant which is evident from the reading of the agreements. There is no other purpose why appellant would pay user fee to use it for a non-business purpose. It is incomprehensible as to for what other purpose the appellant can use this brand if it is not for its business. The entire effort of the department appears to somehow disallow the expenditure for one reason or other. By giving this finding the department has acted in a totally partisan and unreasonable manner.

57.9 The agreement creates new source of income. Hence, the expenditure is capital in nature.

Appellant's reply:

The license to use the brand does not create a new source of income. The license will be used in the existing business of alcoholic spirits. Every agreement cannot create a new source of income. Hence, it is incorrect to say that the agreement creates a new source of income.

58. It was further submitted that the appellant also earns income from licensing of trade-marks owned by it. Income from this source is treated as revenue in the hands of the assessee and offered for tax consistently all these years. Such being the case, it is incorrect on the part of the department to say that expenditure incurred for licensing of use of trade-mark as capital in nature. The department cannot adopt contradictory and conflictive approach in dealing with this issue. While the receipt has been taxed as revenue, expenditure is disallowed as capital. Thus, the department is adopting shifting and changing views depending on what suits it rather than dealing the issue judiciously.

59. The learned CIT (Departmental Representative) appearing for the department sought to rely on the order of the authorities below. His submissions are :

1. The purpose of the expenditure is not wholly and exclusive for the business as the appellant has not adduced any evidence in the form of valuation report justifying the incurring of the expenditure.

2. The agreements read together and taking note of the long tenure renders the agreements virtually perpetual if not actually perpetual.

3. Inspite of repeated opportunities the appellant never justified the expenditure as needed for business.

4. Considering the fact that Lord & Master was used for a very short tenure that too with only 11, 000 cases sold over a period of 13 months, what was the business necessity for the appellant was not properly explained.

5. The onus of establishing the claim for expenditure is on the appellant which in this case has not been discharged.

6. It is unthinkable that a company of appellant's size would pay such substantial sum to a small company like CML and in this regard he compared the situation to a hypothetical circumstance in which the Mercedes company acquiring the technical know-how for manufacture of Ambassador car from Hindustan Motor, for which the appellant's reply was when company like CocaCola could obtain the technical know-how from Thums Up, it is quite likely that business organizations irrespective of size should deal with each other depending on the business necessities.

7. The potentiality of the brand was never explained and in the absence of valuation report expenditure should not be allowed.

8. Learned Departmental Representative placed reliance on the decision in Swadeshi Cotton Mills Co. Ltd. v. CIT (supra) arld (1994) 207 ITR 988 (Raj).

9. The expenditure is capital in nature as it amounts to acquisition of enduring right.

60. To a specific query from the Bench to Departmental Representative as to if the expenditure is not for the purposes of business, then what could be the other purpose and was there any evidence available to suggest that the expenditure is for non-business purpose, the learned Departmental Representative fairly conceded that there was no evidence against the appellant to suggest for non-business purpose.

61. In reply, the counsel for the appellant submitted that it is incorrect for the authorities to hold that the appellant had not furnished sufficient information. Firstly, it was wrong for the assessing officer to insist for a valuation report when it is already made clear that no valuation was made for the purpose of fixing consideration. The entire transaction was a negotiated transaction. Secondly, the brand valuation on the basis of past sales or performance is made only in the case of long established brands with sufficient data and track record. In the case of new brands and new technology, it is the future potential which should be a guide and as the future presents uncertainty negotiated price is one of the accepted mode. In this case, complete details regarding brand are already available inasmuch as the past sale of the brand was 11,000 cases and potentiality perceived by the appellant as explained by its managing director in the statement recorded by the assessing officer indicates to be 1,00,000 cases per annum with profit margin of Rs. 700 per case. The purpose for which the brand sought to be used has been explained. The business necessity was also explained. At no point of time the assessing officer has sought any further details in this regard. Hence, the appellant has furnished all the details relating to the expenditure.

62. The counsel for the appellant submitted that the learned Departmental Representative offered no reason why the decisions cited by the appellant should not be relied and hence submitted that expenditure should be allowed. The counsel further submitted that the disallowance of the expenditure was on surmise, guess, suspicion and speculation and not on the basis of hard evidence against the appellant.

63. Rival submissions were considered and our findings on the issues are as under :

63.1 Firstly, Commissioner (Appeals) factually erred in giving a finding that the expenditure on licence was shown as fixed asset in the balance sheet. This finding is incorrect. The appellant has shown the payment as revenue expenditure and not as fixed asset.

63.2 Secondly, the appellant's existing business is dealing in alcoholic spirits and licence for Lord & Master is obtained as a part of an on-going business activity. Hence, there is no new source generating income to be construed as a new business. By obtaining the licence the appellant has not started any new business. Hence, the licence is for use in the existing business.

63.3 Thirdly, we find that the agreements entered between the parties are genuine and have been entered during the course of their respective regular business. There is no evidence brought on record that agreements are not genuine and such a contention has never been taken.

63.4 Fourthly, the brand Lord & Master, before it was licensed was used as a brand to sell whisky by CML. The appellant being in the same business desirous of using the said brand in its business entered into agreement. There are no contrary facts urged or available so as to say that the brand Lord & Mgster is used for non-business purpose. Once it is established that the brand is for the business of the appellant, there is no reason to say that the expenditure is for non-business purposes.

63.5 Fifthly, we have gone through the 3 agreements and we feel that to capture the entire gamut of transaction it is essential to read all the 3 agreements together and it is only such an approach which will bring out the true picture of the transaction. Reading all the agreements together, however, does not give rise to any contrary or conflicting view than what is expressly stated in the agreements. We do not find any support to the proposition of the department that by reading the agreements together the subject-matter of the agreement would change from license for use to acquisition of intellectual property. Similarly, the tenure of the agreement also does not change from a specific tenure to perpetual tenure. An agreement involving a perpetual tenure should specifically state so. Drawing an inference that the agreements are perpetual would defeat the rights inter se parties. The Tribunal cannot confer a new right on any one party unless the same has been agreed to between the parties. Hence, we are not impressed with the argument of the department that the agreements are perpetual in nature.

63.6 Sixthly, the agreements are specific in mentioning that the subject-matter is use of the brand for a specific tenure. The payment has been made in a lump-sum for the entire tenure and there is no doubt that benefits of the agreement would be enduring and would be available during the entire tenure of the agreement. This by itself has not rendered the expenditure capital in nature. The expenditure in this case has not given rise to any capital asset and in support we rely on the jurisdictional High Court in the case of Tata Engineering & Locomotive Co. (P) Ltd. (supra). Further, the expenditure has been incurred during the course of carrying on a business in the gamut of circulating capital and incurred for the purposes of earning better profits. In such a circumstance, one cannot say just because the expenditure is incurred on lump-sum basis where the benefit is available over a period of'time, can be held as capital in nature. In support, we rely on the decision of Supreme Court in Empire Jute Co. Ltd. v. CIT (1980) 124 ITR 1 (SC). in CIT v. CIBA India Ltd. (1968) 69 ITR 692 (SC) and in Alembic Chemical Works v. CIT (1989) 177 ITR 377 (SC). In fact, we find it appropriate to extract relevant portion of the judgment of the Supreme Court in the case of Alembic Chemical Works v. CIT (supra) as under :

"The question in each case would necessarily be whether the tests relevant and significant in one set of circumstances are relevant and significant in the case on hand also. Judicial metaphors are narrowly to be watched, for, starting as devices to liberate thought, they end often by enslaving it". -

63.7 The idea of "once for all" payment and "enduring benefit" are not to be treated as something akin to statutory conditions; nor are the notions of "capital" or "revenue" a judicial fetish. What is capital expenditure and what is revenue are not eternal varieties but one must needs be flexible so as to response to the changing economic realities of business. The expression "asset or advantage of an enduring nature" was evolved to emphasise the element of a sufficient degree of durability appropriate to the context. -

63.8 There is also no single definitive criterion which, by itself, is determinative whether a particular outlay is capital or revenue, The "once for all" payment test is also inconclusive. What is relevant is the purpose of the outlay and its intended object and effect, considered in a common-sense way having regard to the business realities. In a given case, the test of "enduring benefit" might break down.

63.9 The appellant has brought to our notice that in number of judgments cited before us, the above test has been applied and even the jurisdictional High Court in the case of CIT v. Kirloskar Tractors Ltd. (supra) has held on the similar facts that the expenditure is revenue in nature. In fact, the department could not cite a single case in support of its contention that the impugned expenditure is capital in nature. The case relied on by them in (1994) 207 ITR 985 (Bom) (supra) is not at all relevant as this case dealt with pre-operative expenditure in respect of a new fertilizer plant which was being set up. We are unable to understand as to how this decision could be relied on especially when decisions which are direct and relevant have been brought to the notice of assessing officer and Commissioner (Appeals).

64. Seventhly, regarding the objection of the assessing officer that the appellant has not submitted valuation report and hence the expenditure is not supported by proper evidence, we find that such an approach is incorrect. It is a fact that appellant has not done any exercise to obtain a valuation report prior to the agreement and as such no valuation report was available. When such a report was not even prepared how could the assessing officer expect the appellant to provide the same. Further, it is not mandatory under law that every transaction of this nature should be supported by valuation report. Wherever the law requires a report from an expert it specifically states so. In the absence of any express provision prescribing submission of valuation report not obtaining such report can be a factor to be considered along with facts, circumstances and evidence in an appeal. In the present case, all the ingredients to evaluate the transaction are already available on record. The details of the recipient of expenditure are available. The identity of the recipient is established. The purpose for which the expenditure incurred was made available. Agreements underlying the transaction are produced. Past performance of the brand is furnished. Further expectation of the brand is available and such expectation was not disputed. Further, it is also not disputed that the appellant would have earned substantial profits at the rate of Rs. 700 per case on an estimated turnover of 1,00,000 cases per annum. When all these facts were available, it is incorrect to say that the appellant has not furnished details. On appreciation of these facts, we do not find that the expenditure is unreasonable and we also find that the expenditure is well supported and explained. When it comes to reasonableness or otherwise of the expenditure, the same should be judged from the angle of a businessman and revenue should not prescribe its own yardstick on the quantum of expenditure. In this regard cases relied on by the appellant mentioned supra are all relevant and supports our finding.

65. Eighthly, the contention of the department that the brand was not used during the year is incorrect. There is no doubt that there was no sale under this brand name. Commissioner (Appeals) himself has allowed expenditure on technical know-how which indicates that even he accepted the fact that the brand was used during the year. The appellant has explained that there were preparations to launch the brand. However, the same was deferred in view of certain business reasons as the other brand of the appellant was launched first in preference to this. It was also explained that alcoholic spirit requires certain level of maturity. Hence, until sufficient quantity is held in stock, the product cannot be launched on a commercial scale. We find that in matters of marketing and use of the brands, it is best left to the businessman, i.e., the appellant to decide the appropriate timing. Non-sale would not defeat the claim of the appellant. Moreover, as pointed out by the appellant's counsel, the pre-condition for use mentioned in section 32 is not applicable to section 37. We find the decision of the jurisdictional High Court in Mysore Spinning & Manufacturing Co. Ltd. v. CIT that to allow an expenditure, it is not necessary that the expenditure must be one required for the purposes of carrying on the business or earning of the profits of that year. It is enough if the expenditure is incurred for the purposes of business.

66. We find that there is ample support in the submissions of the appellant and we have no hesitation in holding that the sum of Rs. 200 lakh incurred by the appellant as licence fee for use of brand Lord & Master is a revenue expenditure incurred during the course of carrying on of its regular business and, accordingly, is entitled for deduction. Accordingly, we direct the assessing officer to allow the claim of the appellant.

(B) Covenants for non-competition fee :

67. The appellant has entered into a separate agreement on 14-12-1903, with CLM and the agreement is titled as "non- competition governants". The agreement was entered into in consideration of'payment of Rs. 4.5 crores by the appellant. The agreement was basically entered into in order to render effective the trade-mark license agreement. The appellant further submitted that this agreement providing non-competition has to be read with the trademark license agreement. If this agreement has not been entered into CML could have subsequently entered the semi-premium range of the IMFL market with another similar sounding brand or another brand, thereby rendering ineffective the license for use of trade-mark which the appellant- company had acquired for use for 15 years and had paid a consideration of Rs. 2 crores. It was further submitted that the appellant-company on the facts of the case has paid CML money not to compete in respect of the Lord & Master brand and similar brands in the semi-premium range of market. By this process the appellant- company did not acquire any monopoly nor did it eliminate competition in this segment of the market. The appellant has relied on the judgment of Madras High Court in the case of CIT v. Late G.D. Naidu By LRs. (1987) 165 ITR 63 (Mad). In that case certain amount was paid to the outgoing partner not to carry on any competing business. The Madras High Court held in the said case that the partner had not acquired any business by payment of the amount and, therefore, there was no benefit of an enduring nature, The appellant has also relied on the Madras Bench of Tribunal in the case of Annapurna Gaurishankar Hotels (P) Ltd. v. Asstt. CIT (1991) 37 ITD 541 (Mad).

68. The amount of Rs. 4.5 crores was disallowed by assessing officer holding the same as capital expenditure. The assessing officer has pointed out in the assessment order that clause 4 of the said agreement which, inter alia, provides that the agreement shall remain in full force and effect notwithstanding the expiry/termination of the said agreement by efflux of time or otherwise. The assessing officer while disallowing the expenditure as capital expenditure has relied on the judgment of Supreme Court in the case of CIT v. Coal Shipment (P) Ltd. (1971) 82 ITR 902 (SC) wherein the Supreme Court held that payment made to rival dealers to ward off competition could constitute capital expenditure if object was to derive on advantage by eliminating competition. Reliance has also been placed by assessing officer on other judgments of Supreme Court mainly, KTM Abdullah Kayum and Assam Bengal Cement Co. v. CIT (1955) 27 ITR 34 (SC) wherein the Supreme Court in similar circumstances held that the payment made to ward off competition for a length of time was capital expenditure.

69. The Commissioner (Appeals) in appeal confirmed the addition by relying on the decision of Madhya Pradesh High Court in Grover Soap (P) Ltd. v. CIT (1996) 221 ITR 299 (MP),

70. Before us, the counsel for the appellant submitted that paras (A), (B) and clause 2 of the covenants of non-competition and para (C) of the agreement for trademark should be read together to understand to scope of the agreements. As per para (C), CML will have authority to monitor and control the operations of the appellant insofar as the use of brand Lord & Master is concerned. It also provides aid and assistance to use the brand. Though the agreement is titled as "Non- compete", to understand the correct scope of the agreement, it is essential to go through the agreement in full. Clause 1 of the agreement clearly covenants between the parties that the scope of the agreement is limited to CML agreeing to allow the appellant to exclusively manufacture and market any product under the brand name "Lord & Master". The agreement, in no way expects CML to be out of business or competition. In fact, combined reading of the three agreements makes it clear that role of CML extends to provision of technical information from time to time, monitoring of quality, prevention of misuse of trade-mark and facilitating the appellant in optimum use of the trademark. Thus, the role of CML consequent to the agreement is one of an association with the appellant to exploit the brand for mutual advantage on a continuous basis during the tenure of the agreement. Thus, the agreement compels CML to remain in business and to play a proactive role in favour of the appellant. This true effect of the agreement has been misunderstood by the department. The department seems to have judged the issue by merely relying on the title of the agreement rather than relying on the contents of the agreement,

71. The appellant submits that the authorities below have not understood the correct factual position and have misplaced the facts. The agreement nowhere stipulates that CML shall be out of liquor business. Factually, CML is carrying on business and has achieved substantial turnover running into several crores every year even after the agreements. In the line with its activity, it has also developed quite a few brands and have also sold the same to others. CML has been earning substantial income from the same activity which it was carrying on prior to entering into the agreement. These facts are within the knowledge of the assessing officer as CML is assessed with the same assessing officer as that the appellant. Thus, the department erred in assuming that non-compete agreement had the effect of keeping the rivals out of the market. As explained earlier, the agreement is for enabling the assessee to exclusively use the trade-mark.

72. The expenditure incurred by the appellant was towards the circulating capital, to improve the profitability and market sliare and to increase the profits of the appellant. The expenditure did not bring about any fixed capital or creation of an asset. Though the expenditure incurred is lump-sum in nature and brings an enduring benefit for a period beyond the assessment year, yet the same is not capital in nature, as any and every enduring benefit cannot be viewed as capital in nature as held in the case of Empire Jute Mill (supra).

73. None of the decisions relied on by the department is of any use as they all deal with the situation which is not comparable to that of the appellant. The appellant in support of its case relies on the decision in Malayalam Plantation Ltd. (supra), Sri Meenakshi Mills Ltd. (supra), in CIT v. Avery India Ltd. (supra), in Annapurna Gauri Shankar Hotel (P) Ltd. (supra), in G.D. Naidu v. CIT (supra) and decision in McDowell & Co. Ltd. (supra).

74. In the above Tribunal decision, the cases relied only the department have been fully considered and after doing so, the Tribunal has held that the expenditure is revenue in nature. Since all the objections of the department are already considered in the Tribunal decision and the decision of the Tribunal supports the contention of the appellant, the appellant begs to submit that the expenditure claimed be allowed in the interest of justice.

75. The counsel further submitted that the decision of Madhya Pradesh High Court in Grover Soap Ltd. v. CIT (supra) and Madras High Court in Chelpark Co. Ltd. v. CIT (1991) 191 ITR 249 (Mad) are not applicable to the facts of the case. Madhya Pradesh High Court in above case relied on the decision of Madras High Court in the case of Chelpark Co. Ltd. v. CIT (supra) and hence it would be enough if the decision of Madras High Court is discussed. The Madras High Court in Chelpark Co. Ltd. v. CIT (supra), based on certain peculiar facts, held :

"That though, under the agreement, the benefit of the restrictive covenant was for a period of five years, from the terms of the dissolution deed as well as from the facts stated in the Tribunal's order that the partnership which was a potential competitor to the assessee had vanished and that the ex-managing director had also left India, it was clear that the assessee paid the amount to the partnership in order to ward off damaging competition from a potential competitor, resulting in the acquisition by the assessee of a right as well as protection to carry on its business activities as a whole for so long as the assessee carried on such business. Consequently, the payment by the assessee was in the nature of a capital expenditure and not revenue expenditure. The question whether a particular item of expenditure incurred by an assessee is of a capital or revenue nature is a vexed question invariably presenting difficulties. Though courts have laid down tests for making a distinction between capital expenditure and revenue expenditure, a caution has also been administered that the tests laid down are not exhaustive and that it is not easy to reconcile the reasoning given therein. Further, it has been uniformly held and emphasised that the character of expenditure will have to be decided on the facts and circumstances of each case not by the application of rigid tests but deriving support from many aspects of the circumstances and the ultimate answer could depend upon a commonsense appreciation of the guiding features."

76. The counsel further submitted that in this case the effect of non competition agreement was that a partnership which was a potential competitor to the assessee was completely vanished and its ex-managing director had also left India thus creating a permanent advantage to the assessee weighed heavily to decide the expenditure as capital in nature which decision is a departure from its own earlier decision in CIT v. Late G.D. Naidu by Lrs (1987) 165 ITR 63 (Mad), Whereas facts in this appeal are that the effect of the agreement is such that it created an association with CML and CML continued to carry on the similar liquor business, while restricting them from the use of trade-mark Lord & Master. In effect, the appellant paid fee for exclusive use of trade-mark and not purchase eliminating competitor in the sense as understood by the Courts in the case of Chelpark Co. Ltd. v. CIT (supra) and Grover Soap Ltd. v. CIT (supra). It was submitted that for these reasons, these two decisions are not applicable to the facts of the case on hand. The learned counsel also brought to our notice the opinion expressed by eminant jurist N.A. Palkhiwala in his book on income-tax, relevant portion in pages nos. 674 and 675 extracted herein :

"....... In CIT v. Coal Shipments Ltd. where one coal exporting company made annual payments to another in consideration of that other agreeing not to export coal during the subsistence of the agreement, and the agreement was terminable at will, the Supreme Court held the payments to be on revenue account. This is a judgment of significance and may well mark the development of the law in the direction of holding-taking into account the fiercely competitive nature of modern business-that expenditure incurred to keep a competitor out of the assessee's field of business should ordinarily be treated as on revenue account, because such expenditure can be appropriately said, generally speaking, to improve the profitability of the assessee's business, in preference to the traditional view that it brings into existence a capital advantage of enduring benefit Expenses on advertisement were once upon a time sought to be disallowed on the same ground that they improved the value of the goodwill and were of enduring benefit,, till the growth of the law through the judicial process made such an argument untenable. If expenditure incurred on facing and conquering competition (through advertisements, etc.) is allowable as being an revenue account, it is difficult to see why expenditure incurred on avoiding competition should not be ....... "For these reasons, it was submitted that the expenditure should be allowed."

77. The learned Departmental Representative appearing for the department submitted that he relies on the findings of the authorities below and his arguments submitted on use of brand should also be considered for this issue. He made a specific reference to the decision of the Supreme Court in CIT v. Coal Shipment (P) Ltd. (supra) and the decision of the Madhya Pradesh High Court referred above. In reply, the counsel for the appellant submitted that the expenditure in this case is payment of fee for association and not for eliminating the competitor.

78. We have heard the arguments at length on both the sides and our findings on this issue are given hereunder.

79. First of all we will look into the purpose of this agreement. On a perusal of various clauses read with other two agreements, we find that the purpose of this agreement is to enable the appellant exclusively to use the trade-mark. After the agreement is signed, CML has given up its right to use the trademark in its business during the tenure of the agreement, thereby ensuring the exclusive use of trade-mark by the appellant. However, CML continues to be the owner of that trade-mark. During the tenure of the agreement, CML has the responsibility of providing all technical know-how and other data. It also controls and monitors the use. It also has the right to stop abuse or wrong use of the trade-mark. Further, CML is not prohibited from carrying on similar business during the tenure of this agreement. It has restricted itself from only using this trade-mark or trade-mark sounding similar name, however, can continue to operate in similar business. From the submissions before us we find that CML continued to carry on similar business. Hence, from the facts obtaining on record, it cannot be said that CML is out of business of alcoholic spirit by virtue of restrictive covenants in the agreement. This situation is different from classic non-competition situation envisaged in this decision of the Madhya Pradesh High Court as well as the decision of the Madras High Court referred above. In these two cases, we find the competitor had dissolved the firm and thus the business entity had vanished, the managing director had left the country, thereby creating a situation wherein the competitor was out of the business. In this appeal, we find CML continued in the similar line of business. Further there is nothing to indicate to the fact that the operations of CML were posing competition to the appellant. The facts indicate that the appellant-company was trying to enter semi-premium segment of the business and had achieved limited success in its efforts. The agreement with CML enabled it to enlarge its market foray and had the effect of enlarging its market share. This situation complements its business rather than eliminating competition.

80. Secondly, we find that CML was obliged to perform certain duties as per the agreement, particularly in para (C) and consequently the agreement brought about an association for mutual advantage and the consideration paid was towards this association.

81. Thirdly, we find the entire expenditure is incurred towards increasing the market share and thereby profitability. It is an expenditure incurred in the realm of circulating capital without bringing about any capital asset. Hence, the expenditure would be revenue in nature.

82. Fourthly, we find CML to be in the business of developing brands and licensing the same during the course of its carrying on business. Such an activity is its main business. Even after the agreement, the main business continued to be carried on.

83. Fifthly, there is nothing in the agreement to indicate any specific tenure. The agreement shall remain in force notwithstanding the expiry/termination of the trade-mark agreement by efflux of time or otherwise read with other clauses empowering determination of the agreement for any reason or cause renders the agreement without a specific tenure. Such agreement can be terminated at will and is in existence for an indefinite or uncertain period of time. In such circumstances, the expenditure becomes revenue in nature as held by the Supreme Court in the case of CIT v. Colal Shipment (P) Ltd. (supra).

84. The decision of the Tribunal, Bangalore Bench in ITA No. 373/Bang/1998 (supra) as well as the decision of the Tribunal, Madras Bench, in Annapurna Gourishankar Hotels (P) Ltd. v. CIT (supra) would support the appellant's case.

85. From the perusal of the reasons given by the authorities below, we find that the agreement in question was not properly appreciated and thereby had applied case law which are not applicable to the facts on hand.

86. Hence, we hold that the expenditure incurred by the appellant amounting to Rs. 450 lakh is revenue in nature and appellant is entitled for deduction in computing the income for the year. Accordingly, we delete the disallowance and direct the assessing officer to allow the above expenditure.

87. The appellant paid a sum of Rs. 185 lakh as fees for use of technical information to be furnished by Chhabria Marketing Ltd,. (CML). Detailed facts relating to this have already been discussed in earlier paragraphs.

88. The appellant erroneously had claimed. 1/6th of Rs. 185 lakh, i.e., Rs. 30,83,334 as deduction under section 35AB while computing its income for the year. This was also disallowed by the assessing officer. However, Commissioner (Appeals) allowed the same. Against this, the department has appealed before us. The appellant has filed additional ground claiming entire Rs. 185 lakh as deduction on the contention that since the expenditure was incurred towards the use of technical information, the expenditure is allowable under section 37, whereas the earlier claim of 1/6th under section 35AB was an error inasmuch as section 35AB would be applicable only in the case of acquisition or purchase. The additional ground has been admitted for the reasons already mentioned above.

89. The appellant in support relied on the decision of Calcutta High Court in Turner Morrison & Co. Ltd. v. CIT (2000) 245 ITR 724 (Cal) as well as the decision of the Tribunal, Calcutta C Bench, in (1995) 55 ITD 338 (Cal) (supra). The relevant portion of the decision of ITAT Calcutta Bench is extracted as under :

"The assessee's right to have the, payments made for obtaining the use of the technical know-how allowed as revenue expenditure remains unaffected by the new section 35AB. Section 35AB comes into play only when the consideration is paid for acquiring the know-how ......"

"...... From the above it was clear that the assessee had not acquired any technical know-how or information on patent once and for all so that the lump-sum consideration could be held to be a capital payment. The assessee had only obtained a right ot use the technical information for the purpose of the specific work order. The expenditure was, therefore, revenue expenditure allowable under section 37(1) .

The provisions of section 35AB do not cover a case where there is only a right to use the technical know-how without any acquisition of the same. The instant case was a case of such type ........"

90. The learned counsel for the appellant contended that the expenditure incurred is for use of the technical know-how. The counsel also relied on the decision of the jurisdictional High Court.

91. The learned CIT Departmental Representative submitted that the findings of the assessing officer on this issue should be relied on, in addition to the submissions made by him on the issue of use of trade-mark. The learned Departmental Representative contended that the expenditure incurred is for non-business purpose and capital in nature.

92. We have gone through the arguments and case law submitted by both the sides. We find the appellant's case is completely covered by the decision of Calcutta C Bench of the Tribunal mentioned supra. Accordingly, we hold that the expenditure incurred amounting to Rs. 185 lakhs is revenue expenditure and we direct the assessing officer to allow the same. The departmental appeal on this issue fails and accordingly the departmental ground on this issue is dismissed and that of appellant is fully allowed.

Issue No. 3: Probt on sale of B handup Division

93. The appellant had sold its food business division at Bhandup for a consideration of Rs. 675 lakhs to Kissan Products Ltd. and claimed the surplus on sale as exempt from tax as the sale was on a slump sale basis. For various reasons, the assessing officer had adopted a sale consideration of Rs. 1,228 lakh and had rejected the argument that the transfer of business undertaking was on slump sale basis and had computed the income as long-term capital gain.

94. The Commissioner (Appeals) granted partial relief by adopting the consideration declared by the appellant, i.e., Rs. 675 lakh. He, however, held that the income was liable to be computed under the head capital gain. .

95. In the appeal before us, the appellant requests that the slump sale basis should be adopted. However, during the course of hearing, the appellant chose not to press the issue and, accordingly, these grounds are dismissed as not pressed. However, the department is in appeal on the relief granted by Commissioner (Appeals) which is discussed in the departmental's appeal.

Issue No. 4 : Royalty fee receivable from BalaJi Distrilleries Ltd. : Addition of Rs. 95,35,760:

96. The appellant is before us against the decision of Commissioner (Appeals) restoring this issue to the assessing officer for further investigation and assessment. Brief facts on the issue are that the appellant had entered into an agreement with Balaji Distrilleries Ltd. and had permitted the latter to use the appellant's trade-marks and devices for manufacturing of Bagpiper whisky and Honey Bee brandy in the State of TamilNadu. The royalty payable was fixed on per case basis and for the year the royalty agreed was Rs. 4 per case. The arrangement with Balaji Distilleries Ltd. was one of its kind and unique. This arrangement is in existence since 1985. In the earlier years, the appellant was getting royalty at Rs. 5 per case. However, the royalty for the year was reduced to Rs. 4 per case on the request of Balaji Distilleries Ltd. Balaji Distilleries Ltd. had pleaded with the appellant that their margins were under severe pressute as the liquor trade in Tamil Nadu was regulated and entire sale in Tamil Nadu has to be through the TASMAC, a Tamil Nadu Government undertaking, at the prices fixed by them. It appears that the Tamil Nadu Government had not given any increase in prices and consequently the margins of Balaji Distilleries was under severe pressure.

97. The assessing officer disbelieved the arrangement with Balaji Distilleries Ltd. He was of the opinion that the appellant was entitled for royalty at a rate higher than agreed between the parties. The assessing officer was of the opinion that the appellant had parted with valuable intellectual property right for a paltry consideration and such a valuable right could not be frittered away for such a meagre consideration. The assessing officer was of the opinion that the appellant was not even covering the marketing expenditure out of the royalties received. On the basis of his own knowledge, he had come to the conclusion that Balaji Distilleries Ltd., in association with GTC Industries Ltd., had indulged in certain purchase and sale transactions which were difficult to be believed. It seems Balaji Distilleries Ltd. had paid a gross profit margin of 180 per cent to GTC Ltd. It is pertinent to mention in what way the transaction of Balaji Distilleries Ltd. with GTC Ltd. has any bearing on the agreement with the appellant has not been brought on record by the assessing officer. Disbelieving the arrangement with the Balaji Distilleries Ltd., the assessing officer called for maze of data from the appellant including details such as manufacturing cost, cost of bottles, sale price, details of taxes, details of overheads, freight, etc. These details were duly furnished by the appellant. The assessing officer summoned the head of marketing of the company, Mr. Ashok Capoor and recorded a statement from him. Based on the details in his possession, he computed what probably could be the cost of manufacture in the hands of Balaji Distilleries Ltd., and the cost computation is extracted hereunder :

Per case Rs.

Spirit + packing material + local levies (if any) + bottling charges (cost of production has been taken as average of cost of production of different distilleries (as given by Mr. D.S. Mathur, VP (Spirits Division-UB group) see Annexure Balaji-5

Freight including loading/uhloading from the manufacturing unit to the depots of TASMAC (This is the average cost of transportation incurred by a liquor company within a State)

Expenses on account of schemes, gifts, given aways to retailers (as per the statement given by Shri A. Gapoor, V.P. (S&M) of H.L, on 20-1-1997)

Service charges payable to Balaji for procuring orders from TASMAC (estimated)

Finance charges payable to Balaji for financing the credit of 15-30 days to TASMAC

While computing the aforesaid cost, maximum possible costs under each head has been taken

Selling price to TASMAC

Net difference per case

98. The assessing officer was of the opinion that minimum royalty of Rs. 20 per case should have been received by the appellant as against Rs. 4 per case received. The balance Rs. 16 per case was added and thus addition of Rs. 95,35,760 was made.

99. Based on the submissions made by the appellant before the Commissioner (Appeals), the Commissioner (Appeals) held as under :

"........... I find that the assessing officer has brought material on record which raises doubts about the genuineness of arrangement of the appellant-company with Balaji Distilleries Ltd. The arrangement prima facie appears suspicious though suspicion cannot take the place of evidence. It is also noted that the material collected at the back of the appellant-company was not put to it to give explanation on the, same and in my view this amounts to violation of natural justice inasmuch as no reasonable "opportunity of being heard is given to appellant- company.

In the above circumstances, I have no other alternative but to restore this matter back to the file of the assessing officer with a direction to give the appellantcompany an opportunity to explain the material collected at its back and after considering the explanation of the appellant-company, pass a speaking order on this issue as per law. The assessing officer is further directed to find out the total marketing expenditure incurred by the appellant-company in the State of Tamilnadu and to make enquiries about the profitability of the appellant-company in respect of the supply of similar goods in the States of Andhra Pradesh and Kerala for arriving at the reasonable profit/royalty for the goods sold in the State of Tamilnadu. The assessing officer is, accordingly, directed to reconsider the issue on the lines enumerated above in addition to other material evidence that he may have and decide this issue after giving reasonable opportunity in the matter to the appellant- company, as per law..."

100. Before us, the learned counsel for the appellant argued that there is no case for setting aside and on our direction has filed the following written submission :

"The appellant is against the setting aside of the issue to the assessing officer. It is submitted that Commissioner (Appeals) erred in setting aside after noting that there was no material on record warranting any addition. Further, in the absence of any appeal on the findings of the Commissioner (Appeals) by the department, it is an admitted position that the addition was made on suspicion and doubt. Against this factual background, it is incorrect for the Commissioner (Appeals) to direct the assessing officer to investigate the matter and to bring further material on record when it is not even known whether any such material really exits. Directing the assessing officer to compare the royalty received in Tamil Nadu with the profit earned in the State of Andhra Pradesh and Kerala is incorrect inasmuch as the admitted position is that the arrangement in Tamil Nadu is one of its kind. Such being the exclusive position in Tamil Nadu it cannot be compared with any other State. Consequently, the direction of the Commissioner (Appeals) in this regard is erroneous and illogical. Further, the direction of the Commissioner (Appeals) to make enquiries also transgresses the power to set aside. Ordering fresh investigation especially when there is no material is outside the jurisdiction to set aside and it usurps the power of investigation available under the other sections. Setting aside also defeats the very purpose of law of limitation inasmuch as it enables the assessing officer to procure material beyond the period of limitation under the guise of setting aside. The setting aside of the order in this case amounts to extension of limitation which is not permitted under the Act. When an addition requires to be deleted for want of evidence the appellant authorities should confine to deleting the addition and setting aside to bring fresh evidence whose existence is not even established at the time of setting aside is incorrect. Accordingly, the appellant prays that the order of the Commissioner (Appeals) insofar as setting aside the issue is concerned, requires to be deleted. It is further submitted that royalty payment earned by the company has been accepted by the department even in the earlier years as well as in later years. It is only during this year that the agreement for royalty is suspected. Further, the appellant has accounted for the entire royalty accrued and received in its favour. The department also does not allege that the appellant was entitled to receive more than what is already accounted. The addition by the assessing officer was on certain notional figures and the addition of income was also a notional amount which was neither accrued in favour of the assessee nor was receivable. In the absence of any evidence to say that the appellant was entitled for more than what is already accounted, it is submitted that the issue should be closed by allowing the prayer of the appellant."

101. In reply, CIT (Departmental Representative) supported the findings of Commissioner (Appeals). He contended that the powers of Commissioner (Appeals) to set. aside an issue is absolute and unquestionable and such a power is vested with Commissioner (Appeals) without any fetters. The Commissioner (Appeals) having already set aside the matter, there is no merit in the appellant's contention. In the absence of any legal restriction on the jurisdiction of Commissioner (Appeals) to set aside, he contended that the Tribunal should not interfere with the order of the Commissioner (Appeals).

102. The learned counsel for appellant submitted that the discretion to set aside should be used only for appreciation of evidence already on record. Such a power cannot be used to order fresh investigation or conduct a roving enquiry or to facilitate bringing additional evidence whose existence is not even established. He submitted that the power to set aside should be used judiciously. He further submitted that Commissioner (Appeals) having held that addition was based on suspicion and not on any evidence, ought to have deleted the addition instead of direction for a fresh assessment. Accordingly, he prayed for deletion of the addition made by assessing officer.

103. We have gone through the record and evidence available before us as well as the submissions of both the sides. We find :

(a) The department is not in appeal against the findings of Commissioner (Appeals) that the, addition by assessing officer is on surmises and suspicion. Thus, the finding by the Commissioner (Appeals) is final. When Commissioner (Appeals) has reached such a conclusion, the proper course would have been to delete the addition.

(b) From the records we find that there is no material or evidence against the appellant warranting any addition. In such a circumstance, it is incorrect to set aside with a direction to procure the evidence.

(c) Power to set aside cannot be used for the purpose of making roving enquiry or ordering fresh investigation as these powers are available separately under the Act. Power to investigate under the Act comes with certain responsibilities and cannot be done in a routine fashion.

(d) The assessing officer has given a finding that arrangement with Balaji Distrilleries Ltd. in Tamil Nadu is one of its kind and not comparable to any other arrangement in other States. Such being the factual position it is incorrect for the Commissioner (Appeals) to direct comparison of results in Tamil Nadu with Andhra Pradesh or Kerala. Only the likes can be compared, Hence, the direction of Commissioner (Appeals) in this regard is illogical and incorrect as no useful purpose will be served by such comparison.

(e) We find that the appellant has fully accounted for the income which it was entitled under the agreement with Balaji Distrilleries Ltd.

(f) We also find that the arrangement with Balaji Distilleries Ltd. was in existence since the year 1985 and royalty earned from this source has been accepted as correct by the department in the earlier years as well as later years. We do not understand why such a position should be disturbed especially when no evidences were brought on record.

(g) From the proceedings before Commissioner (Appeals) we find that the case was heard on more than 16 different dates stretching over a period of one year. The Commissioner (Appeals) could have directed the assessing officer to produce whatever evidence in his possession. Moreover, the assessing officer also chose not to submit any further evidence in support of the addition. Perhaps, they do not have any evidence. In such a circumstance it is strange that the issue is set aside. Normally, set aside is done to facilitate appreciation of evidence, not for procuring further evidence by the assessing officer by making further enquires, etc.

(h) The assessing officer had not disclosed the nature of information regarding the transaction between Balaji Distilleries Ltd., Venkatadi Traders and GT insofar as the appellant is concerned. Assessing Officer has not even disclosed the evidence in his possession for making statements such as earning of 180 per cent gross profit by GTC. If he had any authentic information we do not understand what prevented him from presenting such evidence. The Bench during the course of hearing specifically asked the learned Departmental Representative whether he would be interested in presenting any further evidence on this issue, for which the learned Departmental Representative replied that there is no evidence in their possession, Thus, we have to conclude that the department has no evidence in support of the addition and the addition was made on surmise and suspicion.

104. For the above reasons, we hold that the addition should be deleted as no useful purpose would be served by setting aside except causing inconvenience to the appellant. Accordingly, we amend the decision of the Commissioner (Appeals) to restore the issue to assessing officer and we delete the addition made by the assessing officer.

Issue No. 5: Sundry credit balances written back: Rs. 55,815

105. The assessing officer made addition of Rs. 55,815 on account of credit balances written back by the appellant. Commissioner (Appeals) confirmed the addition.

106. Before us, the counsel for the appellant submitted that they do not wish to press the issue and accordingly this ground is dismissed.

Issue No. 6: Office-cum-transit premises: Addition of Rs. 12,21,182

107. The appellant owns certain premises called Niladri at Nepean Sea Road, Mumbai. The said premises consists of rooms, conference hall, reception area, etc. It appears that the appellant has been using this premises both for office and as transit house for visiting executives. The entire premises was furnished separately in such a way that it met the dual purpose. Accordingly, the appellant claimed 50 per cent of the expenditure incurred as office expenses and the balance 50 per cent as guest house expenses, and applied section 37(4), and computed the disallowances and offered for tax.

108. The, assessing officer disbelieved the appellant's version and treated the entire premises as personal residence of Mr. Vijay Mallya and brought the entire expenditure within the scope of section 37(4) of the Income Tax Act.

109. In appeal, the Commissioner (Appeals) disagreed with the findings of the assessing officer but however held that the entire premises as guest house is used by the appellant and accordingly applied section 37(4) to calculate the disallowance of expenditure. However, Commissioner (Appeals) directed that the disallowance should be computed on the basis of the directions given for assessment year 1993-94.

110. Before us, the appellant contended that the premises Niladri was equally used for running office as well as transit accommodation for the visiting directors/executives. In support the appellant produced copy of the assessment order for assessment year 1985-86 wherein the assessing officer for that year had conducted a survey and surprise inspection to establish the veracity of the appellant's contention that the premises was used for dual purpose. A copy of the assessment order for assessment year 1985-86 was furnished which contains the findings of the assessing officer. In line with the findings, the assessing officer had adopted the view that the premises was used both for office as well as transit accommodation. Accordingly in that he had allowed 50 per cent of the expenditure, bringing the balance 50 per cent within the scope of section 37(4). The counsel for appellant contended. that in the absence of any evidence contrary to the findings given by the assessing officer in 1985-86 such a view should be adopted for this year also.

111. The learned CIT (Departmental Representative) in support of his submission relied on the assessment order and the order of Commissioner (Appeals).

112. On a perusal of the records before us and copy of the assessment order for assessment year 1985-86, we find that the contention of the appellant is reasonable. The department's own finding in the earlier year should be relied on in the absence of any contrary evidence. Hence, we hold that the appellant is eligible for 50 per cent of expenditure as incurred for maintenance of office and the balance 50 per cent as relating to transit accommodation may be brought within the scope of section 37(4). Accordingly, we remit the issue to the assessing officer for the purpose of calculation of disallowance based on our findings given above.

113. The appellant succeeds on this issue.

114. Accordingly, the appeal is allowed in part.

ITA No. 3079/Mum/1999

Ground 1(a) :

115. This ground pertains to allowing Rs. 30,83,334 being 1/6th of Rs. 1.85 crores paid towards technical know-how for the manufacture of Lord & Master whisky. This ground has been elaborately discussed by us in the appellant's appeal. For the reasons mentioned therein, this ground is dismissed.

Ground 2(a) :

116. This ground pertains to long-term capital gains on sale of Bhandup unit to Kissan Products Ltd. The department is in appeal against the direction of Commissioner (Appeals) in adopting the sale proceeds on sale of Bhandup unit at Rs. 675 lakhs as against Rs. 1,228 lakh adopted by the assessing officer.

117. The brief facts are that the assessee- company had entered into an agreement for sale of its food division at Bhandup producing Dippy's brands of products. This undertaking was sold with effect from 1-4-1993, to Kissan Products Limited for a lump-sum consideration of Rs. 675 lakhs. Before sale, the appellant had obtained the requisite clearance under Chapter XX-C of the Income Tax Act from the appropriate authority. This division was sold to Kissan Products Ltd., whereas shares in Kissan Products Ltd. held by UB Ltd., appellant's group company, were sold to Brooke Bond India Ltd. for Rs. 23.06 crores. The assessing officer substituted the sale consideration of Rs. 675 lakhs with Rs. 1,228 lakhs which was arrived at by him on the basis of sale price of Kissan Products Ltd. The reasons given by assessing officer in doing so are as under ;

1. That originally there was a letter from Kissan Products Ltd., dated 26-9-1989, wherein Bhandup unit was proposed to be transferred for a sum of Rs. 600 lakhs which on a later date was enhanced to Rs. 675 lakhs.

2. The original transfer to Kissan Products Ltd. was as a result of overall sales of food division to Brooke Bond India Ltd. Originally during 1991, the agreed price between BBIL and UB Ltd. for sale of shares in Kissan Products Ltd. was Rs. 886 lakhs which was subsequently enhanced to Rs. 23.06 crores after protracted litigation between BBIL and UBL.

3. According to assessing officer the appellant is entitled for 71 per cent of Rs. 23.06 crores. However, he intended to be fair and just to the assessee and gave additional credit on account of profits earned by Kissan Food Products in the previous 3 years and certain other factors and thereby worked out two ratios (1)60 : 40 and (2). 45 : 55

4. Finally, a sum of Rs. 1,228 lakhs was adopted on the basis of the following calculation :

Total consideration recd by UBL

Rs. 2,403 lakh

Less on account of non-competition

Rs.430 lakh

Less on account of profit of Kissan

Rs.446 lakh

Less on account of sale of NBFC

Rs. 40 lakh

Rs. 1,487 lakh

71% of this as discussed

Rs. 1,056 lakh

Add on account of non-competition HL's share as discussed

Rs. 172 lakh

Consideration for Bhandup Unit

Rs. 1,228 lakh

Thus, the assessing officer adopted the above Rs. 1,228 lakhs as consideration which the appellant ought to have received. Accordingly, the addition was made.

118. Commissioner (Appeals) on appeal deleted the addition relying on the decisions in K.P. Varghese v. ITO & Anr. (1981) 131 ITR 597 (SC) and D.S. Bist & Sons v. CIT (1984) 149 ITR 276 (Del). The Commissioner (Appeals) held that there is no evidence available to suggest that the appellant has received any consideration other than mentioned in the agreement.

119. The learned Departmental Representative appearing for the department contended that the consideration calculated by the assessing officer was correct and prayed that the same should be adopted. In support of his argument he relied on the assessment order. Learned Departmental, Representative submitted that the assessing officer had taken great pains in calculating the consideration at Rs. 1,228 lakhs and the assessee has not come up with any alternative rationale to upset the findings of the assessing officer. The learned Departmental Representative further submitted that the case law relied by Commissioner (Appeals) were not applicable to the case on hand.

120. The learned counsel for the assessee-company supported the findings of the Commissioner (Appeals) on this issue. It was brought to our notice that the Commissioner (Appeals) has relied on the decision of Supreme Court in the case of K.P. Varghese v. CIT (supra). He further submitted that section 52(2) has been deleted from the Income Tax Act, and consequently, the assessing officer had no choice but to accept the consideration received' by the assessee- company. He further submitted that the consideration received by UB Ltd. cannot be assessed in the hands of the assessee-company as the subject-matter of transfer in the case of UB Ltd. was shares in Kissan Products Ltd. and shares of other, companies, whereas the subject-matter in this case was sale of Bhandup unit to Kissan Products Ltd. He submitted that the transactions are different and hence each transaction should be considered in its own perspective.

121. We have considered the arguments on both the sides and perused the record before us. We find that the assessing officer was wrong in adopting hypothetical consideration of Rs. 1228 lakhs in the place of actual consideration received by the assessee-company. We agree with the findings of Commissioner (Appeals) mentioned supra. We find the issue is covered by the decision of the Supreme Court mentioned supra. Hence, we decline to interfere with the findings of the Commissioner (Appeals) and accordingly this ground is dismissed.

Ground 3(1): Commission paid to non-wholetime directors: Rs. 8,75,141 :

122. The department is before us against the deletion of addition made by the assessing officer amounting to Rs. 8,75,141 by disallowing the commission paid to the non-wholetime directors of the assessee- company.

123. Brief facts are that certain non-wholetime directors of the assessee-company have been paid commission aggregating to Rs. 8,75,141 based on the eligible amount calculated on the net profits of the company as provided under the companies Act, 1956. This payment was disallowed by the assessing officer on the ground that the same was not incurred for the purposes of the business. Similar disallowance was made in the earlier years. On appeal, Commissioner (Appeals) deleted the addition, based on his predecessor's order for the assessment year 1993-94.

124. On verification, we find that the departmental appeal for assessment year 1993-94 is still pending. In view of this, we feel there is no purpose in dealing with this ground unless the appeal pertaining to assessment year 1993-94 is disposed of. Accordingly, we set aside the issue. and restore it to the assessing officer With the direction that he should follow the decision of the Tribunal for the assessment year 1993-94 as and when the Tribunal decides the same. Accordingly, we restore the issue to the files of the assessing officer.

125. In the result, the appeal is partly allowed.

126. To sum up, both ITA No. 2793/Mum/1999 and ITA No. 3079/Mum/1999 are partly allowed.