Delhi High Court

Delhi Automobiles Ltd. vs Dy. Cit on 22 July, 2001

Equivalent citations: 2001 79 ITD 511 Delhi

ORDER

Phool Singh, J.M.

This appeal, preferred by the assessed, is directed against Commissioner (Appeals)s order dated 25-8-1992 relating to the assessment year 1989-90.

2. So far as ground No. 1 is concerned the same relates to the validity of assessment framed in pursuance of notice under section 143(2) of the Income Tax Act, 1961 (hereinafter referred to as the Act). At the time of hearing the learned counsel did not press this ground. Accordingly ground No. 1 stands rejected as not pressed.

3. Ground No. 2 raised in this appeal reads as under :

2. Action of the Commissioner (Appeals) in upholding following disallowances is unjust, illegal, arbitrary and against the facts and circumstances of the case.

a. Disallowance out of traveling expenses at Rs. 19,467 (Rs. 77,733-58,266).

b. Disallowance out of entertainment expenses not wholly allowed as claimed.

c. Disallowance out of advertisement expenses at Rs. 20,500.

d. Disallowance of Rs. 94,558-Under section 40A(2)(b).

e. Addition of Rs. 1,71,412 for national interest on advance to M/s R.R. Holding Pvt. Ltd.

f. Compensation paid for loss of office to directors at Rs. 1,29,26,601.

Ground No. 2(a)

4. It may be seen that while completing the assessment, the assessing officer noted that as per tax audit report an amount of Rs. 28,266 had been worked out and added under rule 6D. According to assessing officer it was clear from Annexures B1 and B2 that other expenses relating to local conveyance and telephone amounting to Rs. 19,467 had not been considered in the light of rule 6D(2)(b). Accordingly the assessing officer disallowed this amount along with Rs. 58,266. In appeal the Commissioner (Appeals) confirmed the action of the assessing officer.

5. The learned counsel for the assessed submitted that amount on local conveyance and telephone etc. are not subject of disallowance under rule 6D as held by Honble Bombay High Court in the case of CIT v. Chemet (1999) 240 ITR 624 (Bom). The learned counsel also placed reliance on the order of ITAT Special Bench Madras in the case of Sundaram Finance Ltd. v. IAC (1984) 7 ITD 845 (Mad) for this very purpose.

6. The learned Departmental Representative placed reliance on the order of assessing officer.

7. After considering all the facts and going through the case law the issue stands decided in favor of assessed and amount of Rs. 19,467 is held to be not subject of disallowance under rule 6D.

Ground No. 2(b)

8. While completing the assessment, the assessing officer noted that following amounts were claimed by the assessed :

Rs.

(a)

Entertainment expenses

42,360

(b)

Hotel bills for lunch dinner, etc.

74,568

(c)

Club expenses

18,093

(d)

Amount included under sales promotion expenses

46,192

1,81,813

(sic)

9. The assessing officer rejected the claim of the assessed that 50 per cent of the amount of entertainment expenses and hotel bills for lunch, dinner, etc. be allowed for participation of staff members. The assessing officer also did not allow the claim for club expenses and treated the amount of Rs. 46,192 as amount relating to sales promotion and all these amounts were made subject to disallowance under section 37(2A) of the Act.

10. Before the Commissioner (Appeals) it was submitted that 50 per cent of the expenditure out of entertainment expenses and in respect of hotel bills, etc. be allowed for participation of employees and reference was also made to the decision of Jurisdictional High Court in the case of CIT v. Expo Machinery Ltd. (1991) 190 ITR 576 (Del). Considering all these facts the Commissioner (Appeals) allowed 25 per cent of the expenditure for participation of employees. About fees of membership of clubs the Commissioner (Appeals) allowed the claim of the assessed in view of the decision of Honble Bombay High Court in the case of OTIS Elevator Co. (India) Ltd v. CIT (1992) 195 ITR 682 (Bom). About expenses relating to Rs. 46,192, the contention of the assessed was that assessed-company had given articles of presentation, some of which were costing less than Rs. 50 and some were of more than Rs. 50. The Commissioner (Appeals) allowed the claim of the assessed in respect of the amount of those articles of presentation which were costing less than Rs. 50 and confirmed the rest of the amount. Aggrieved, the assessed is in appeal.

11. On the date of hearing, the learned counsel for the assessed pointed out that Honble Jurisdictional High Court in the case of Expo Machinery Ltd. (supra) has confirmed the action of Tribunal in which 35 per cent of the expenses in respect of hotel bills and entertainment expenses was allowed and contention was that same view should have been followed by the Commissioner (Appeals). The learned Departmental Representative conceded to this preposition and respectfully following the same we are directing the assessing officer to allow 35 per cent expenses out of hotel bills for lunch, dinners, etc. and entertainment expenses and rest will be subject of disallowance under section 37(2A) of the Act.

12. So far as amount of Rs. 46,192 claimed by the assessed on account of presentation of articles to customers is concerned, the contention of the learned counsel was that whole of the amount should have been allowed as articles of presentations were not containing the logo of the company and thus it cannot be treated as sale promotion expenses. List of the articles of presentation had been given. It was submitted that the same view be taken now.

13. Learned Departmental Representative placed reliance on the order of assessing officer.

14. We have considered the submissions and gone through the list of articles of presentation which is appearing at page No. 106A and these items are not containing the logos of the assessed-company and will not be treated as articles promoting sales and whole of the amount was allowable and assessing officer is directed to allow whole of the amount.

Ground No. 2(c)

15. The assessing officer noted that assessed had claimed an amount of Rs. 20,500 as amount incurred towards advertisement outside India. The assessing officer disallowed the same. In appeal, the Commissioner (Appeals) confirmed the action of the assessing officer.

16. The submission of the learned counsel is that there was a conference in Kathmandu convened by Ashok Leyland (P) Ltd., principal company of the assessed and assessed was supposed to participate in that conference. The principal allocated a sum of Rs. 20,500 as share of the assessed which assessed remitted to Ashok Leyland (P) Ltd. and claimed the same as business expenditure and the same was wrongly treated as advertisement expenses. Our attention was invited to page No. 109 which is copy of transfer voucher and page No. 11 OB is copy of letter of Ashok Leyland dated 30-3-1989 in which it was mentioned that Rs. 20,500 was share of the assessed for taking part in conference at Kathmandu. On the basis of this it was submitted that this expense was purely a business expenses and should have been allowed.

17. The learned Departmental Representative placed reliance on the order of assessing officer. After considering all the facts and circumstances as mentioned above the assessing officer and Commissioner (Appeals) were not justified in treating the amount as incurred on account of foreign advertisements but it was the amount incurred by the assessed for participation in the conference held by its principal company Ashok Leyland (P) Ltd. and expenses incurred to attend conference/seminars is held to be allowable expenses by different Bench of the Tribunal and we direct the assessing officer to allow the same.

Ground No. 2(d)

18. While completing the assessment, the assessing officer made disallowance of Rs. 94,558 under section 40A(2)(b) of the Act after observing that assessed had paid remuneration to its chairman, managing director and directors which contained salary, HRA, other allowances and expenses regarding car and telephones. In the earlier years disallowances were made under section 40A(5) but from this assessment year provisions of section 40A(5) were no more on statute but after going through the expenses incurred by the assessed-company towards vehicle and telephones in respect of chairman, managing director and director it was noted by the assessing officer that no doubt some recoveries had been made from managing director and chairman but still 20 per cent of the remaining amount on car expenses and 25 per cent on telephone expenses were disallowed totalling Rs. 94,668. Before the Commissioner (Appeals) it was contested by the assessed that there was no justification for disallowance of 25 per cent of the expenses of the car and telephone for personal use of managing director/directors, etc. The Commissioner (Appeals) noted that assessing officer disallowed the claim under section 40A(5)/40(c) and not under section 40A(2)(b) of the Act and following the earlier order he confirmed the action of the assessing officer.

19. The learned counsel submitted that assessing officer has not disallowed the amount under section 40A(5)/40(c) but he has simply made disallowance without referring any particular section of the Act and it was submitted that no disallowance for personal use of the cars and telephone by managing director/directors, etc. can be effected particularly when the amount was being recovered from their salary for use of the vehicle and telephones. The learned Departmental Representative placed reliance on the order of assessing officer.

20. We have considered the rival submissions and perused the record. It is to be noted that undisputedly amount for personal use of vehicle were being recovered from managing director/directors and chairman as noted by assessing officer and still he further disallowed 25 per cent of the remaining amount on vehicle expenses and telephones for personal use of vehicles and telephones by chairman, managing director/directors. It is admittedly case of company and ITAT Delhi Benches have been taking the view that such disallowances are not called form the case of company. Reference is further made to the decisions in the cases of Asstt. CIT v. Bumpy Shoe Co. (P) Ltd. (1998) 100 Taxman 285 (Del) (Mag) and D.S. Construction (P) Ltd. v. ITO (1987) 29 TTJ (Del) 22.

Accordingly we direct the assessing officer to delete the disallowance.

Ground No. 2(e)

21. At the time of hearing the learned counsel mentioned that in the last year the Commissioner (Appeals) had restored this issue to the file of assessing officer for further verification as is evident from page No. 11 of order of Commissioner (Appeals) for assessment year 1988-89 appearing in the paper book of the assessed and submission was that same view be taken. The learned Departmental Representative was fair enough to concede the aforesaid preposition. Accordingly matter stands restored to the file of assessing officer who will decide the issue afresh keeping in view the guidelines given by the Commissioner (Appeals) for assessment year 1988-89 in the case of assessed itself.

Ground No. 2(f)

22. Relevant facts giving rise to this ground of assessed are that assessed-company had claimed Rs. 1,29,26,601 as allowable revenue expenditure which was paid to Ramesh Suri (Rs. 1,29,26,500) and Lalit Suri (Rs. 101) erstwhile directors of the assessed-company on account of compensation for loss of their office as directors. It was submitted by the assessed that Mr. Ramesh Suri was the managing director of his company for last several years, looking after the over all business of the company, particularly the "bus-body building division" located at Faridabad, Haryana. Bus body building division was contributing substantially to the profits of company every year and Ramesh Suri who was looking after day to day affairs, developed intimate knowledge and expertise in the bus body building. As per submissions of the assessed, there was dispute in respect of assessed-company and Ramesh Suri filed a suit before the Honble Delhi High Court and was able to bring, the business activities of the assessed-company to a halt. The assessed-company got the matter settled through negotiations and agreed to pay a sum of Rs. 1,29,26,500 to Ramesh Suri as amount in consideration of the past services rendered by him to the assessed-company and for his agreeing not to indulge in future for a period of twenty years in the business of ordinary bus body building in which line he was an expert so that assessed-company may be allowed to retain its monopoly in that business and to avoid jeopardise to its resources. The contention of the assessed was that had assessed-company had not paid the amount, the assessed-company would not have survived as main source of its income was profits from bus body building division and by making payment company was going to continue its monopoly among its constituents without any interruption. The assessed also placed reliance on the decision of Bombay High Court in the case of Champion Engineering Works Ltd. v. CIT (1971) 81 ITR 273 (Bom) and the ratio of decision in the cases of V. Damodaran v. CIT (1967) 64 ITR 26 (Ker) and CIT v. Bowrisankara Steam Ferry Co. (1973) 87 ITR 650 (AP) and other cases. The assessing officer noted that Ramesh Suri was managing director of the assessed-company and there were three more companies managed and controlled by Ramesh Suri as well as by his brothers G. Sagar Suri, Roshan Lal Suri and Lalit Suri. According to assessing officer there was some settlement in between Ramesh Suri and his three brothers by which Ramesh Suri gave a cheque of Rs. 1 crore which was dishonoured and again fresh cheque also bounced. Other brothers mainly G. Sagar Suri called an extraordinary general meeting of the company and removed Ramesh Suri from the directorship as well as he was denied the right to sign the cheques etc. Ramesh Suri filed a Suit before the Honble High Court on 7-3-1988 in his individual capacity and as Karta of HUF against G. Sagar Suri and his family members, Roshan Lal Suri, Lalit Suri and four companies including assessed-company and also sought ad interim injunction to restrain the defendants from operating different bank accounts of different companies of Suri Companies. Main relief sought by Ramesh Suri was for equalisation of his shareholding in four companies arrayed as defendant Nos. 8 to 11 including assessed-company. A declaration was also sought to the effect that Board Meeting held after 4-12-1987 wore null and void. It appears further as noted by assessing officer that application of settlement moved under order 23 rule 3 of the Civil Procedure Code was moved by Ramesh Suri and defendants on 24-3-1988 giving out the terms of settlement and as per settlement Ramesh Suri and his group handed over their shareholdings in other group after receiving the amount including that of Rajdhani Cold Storage Pvt. Ltd. and para No. 6 of Settlement application provided that Ramesh Suri was to be given an amount of Rs. 1,29,26,500 for his past services as well as his undertaking not to indulge in the business of "ordinary bus body building" for a period of twenty years so that defendant No. 8 viz., the assessed-company may be able to retain its monopoly in that business. This settlement was verified by the Honble High Court and decree was passed accordingly.

23. The assessing officer then proceeded to examine the case of the assessed about allowability of the claim of this amount of Rs. 1,29,26,500 and concluded that the amount in question was payment to Mr. Ramesh Suri and Lalit Suri for settling family dispute, inter alia, involving different business concerns. In this connection assessing officer noted that there was dispute between the two groups to the suit, viz., Ramesh Suri and his group consisting of himself as individual, as HUF, his wife and daughter as well as Mr. Lalit Suri and his wife. The other group was consisted of G. Sagar Suri, his HUF, his wife, three sons and HUFs of two sons and one Roshan Lal Suri. This family dispute not only involved the assessed-company but three other companies as well as Rajdhani Cold Storage Pvt. Ltd. According to assessing officer the object of this payment was settlement of dispute between these two groups. He noted that every payment does not spell expenditure as laid down in the case of Indian Traders (P) Ltd. v. CIT (1994) 97 ITR 601 (SC). The assessing officer was of the view that payment was not made by assessed-company in its character as a trader but for and on behalf of G. Sagar Suri group. The said expenditure was not incurred in the course of business of the assessed-company but in the proceedings that arose as a result of disruption or the possible stoppage of the business and cannot be allowed as business expenditure.

24. The assessing officer examined the case of the assessed which was based on para 6 of the compromise application as assessed claimed that disputed amount was paid by the assessed-company to Ramesh Suri to avoid the competition in coming twenty years. For this the assessing officer noted that Honble Apex Court in the case of Swadeshi Cotton Mills Co. Ltd. v. CIT (1967) 63 ITR 57 (SC) has observed that there might be an agreement under which the assessed had paid amount to the other parties but assessing officer had powers to examine the relevant circumstances and to determine himself whether the amount so paid has been laid out for purposes of business of the assessed. Keeping in view the above ratio, the assessing officer examined the sequence of the events under which Ramesh Suri filed the suit against G. Sagar Suri and his family members impleading assessed-company and three other companies as defendants and concluded that irresistible conclusion was that payment was not made for purpose of business of the assessed but for the settlement of the family dispute. In this connection the assessing officer also noted that the objection filed by G. Sagar Suri against the application moved by Ramesh Suri for compromise go to show that G. Sagar Suri opposed the same on the ground that compromise was not going to adjust the suit and ultimately new compromise application was filed to decide the whole of the controversy involved in that suit and that goes to reveal that amount paid to Ramesh Suri was for settling of the issues involved in the suit of Ramesh Suri. He also noted that after verification of compromise Ramesh Suri stands satisfied and got the amount in question. Further Ramesh Suri had not claimed any other right in the remaining business concerns of the group. Not only this assessing officer gave out two tables in the assessment order at pages 47 and 48 by which he brought on record that Ramesh Suri, who was claiming 25 per cent share in all the businesses of the family lost all the shares in all the businesses after getting the disputed amount. Not only Ramesh Suri transferred his shareholding but other members of his group also transferred the same and their liabilities also stand discharged. Ramesh Suri claimed his reinstatement in the Board of Directors of all the four companies but in compromise he not only lost that right but he did not remain even an ordinary member of these companies after the compromise and also lost all the powers to sign documents etc. of these four companies while G. Sagar Suri who did not make any claim against Ramesh Suri group in the suit got all the shareholdings of Ramesh Suri and other members of his group and they got Rs. 30 lakhs due from the members of Ramesh Suri group to different companies as well as absolute control in all the five companies. All these facts go to show that this was the amount paid to settle the claim made by Ramesh Suri and was not for any business activities.

25. The other observation of the learned assessing officer is that no payment could have been made to Ramesh Suri for his past services as noted in para 6 of the compromise application as already G. Sagar Suri group had removed him from the Board of Directors and he was not allowed to operate any of the bank account of these four concerns. Next important observation of the learned assessing officer was that assessed had failed to prove on record that Ramesh Suri had acquired special and invaluable expertise and experience in bus body building activities, as assessed did not bring any material to prove that fact. He further noted that assessed-company was incurring loss in business from year to year and contribution of Mr. Ramesh Suri to bus body building division was not established. On the basis of these facts and circumstances, the assessing officer was of the view that payment under consideration was not made for the purpose of assesseds business.

26. He further examined that the amount was not wholly and exclusively incurred for the purpose of business and for that he had taken into consideration the decision of Jurisdictional High Court in the case of Siddho Mal & Sons v. ITO (1980) 122 ITR 839 (Del) in which Their Lordships have laid down that in the phrase "wholly and exclusively" referred to two different situations "wholly" refers to quantum and second adverb "exclusive" has reference to the motive or object behind the expenditure. Unless such motive or object is exclusively i.e., solely for promoting the business, the expenditure will not qualify for deduction. On the basis of facts and circumstances discussed earlier, assessing officer was of the view that the plea of the assessed that amount in question was exclusively for promoting the business was not convincing but the amount was for settlement of the family dispute.

27. In the end, the assessing officer after examining the law on the point concluded that expenditure was capital in nature. For this assessing officer discussed the case laws referred to by the learned counsel for the assessed. The first case was Bowrisankara Steam Ferry Co. (supra) other cases were R.S. Munshi Gulab Singh & Sons v. CIT (1946) 14 ITR 66 (Lahore); V. Damodaran (supra) and Champion Engineering Works Ltd. (supra) and distinguished the same.

28.On the other hand the assessing officer placed reliance on the decision of Madras High Court in the case of Chelpark Co. Ltd v. CIT (1991) 191 ITR 249 (Mad) in which an amount of Rs. 1 lakh was paid as compensation to the erstwhile managing director on his undertaking to dissolve the partnership firm by him and not to commence the business as of the assessed within a period of five years. The amount was claimed as revenue expenditure and Their Lordships after examining the case law on the point concluded that it was the capital expenditure. The other case relied upon by the assessing officer was that of Associated Portland Cement Manufacturing Ltd. v. Kerr (HM Inspector of Tax) (1943) 27 TC 103 (CA) and that of Assam Bengal Cement Co. Ltd. v. CIT (1955) 27 ITR 34 (SC) and that of Honble Allahabad High Court decision in the case of Neel Kamal Talkies v. CIT (1973) 87 ITR 691 (All) and ultimately the decision of Honble Supreme Court in the case of CIT v. Coal Shipments (P) Ltd. (1971) 82 ITR 902 (SC) and concluded that amount in question was a capital expenditure and not allowable. The assessing officer accordingly rejected the claim against which assessed came in appeal before the Commissioner (Appeals).

29. The submissions of the assessed before the Commissioner (Appeals) were identical as were agitated before the assessing officer and reliance was placed on different case laws. The Commissioner (Appeals) confirmed the view taken by the assessing officer for the reasons recorded by him. Aggrieved, the assessed is in second appeal before the Tribunal.

30. The learned counsel for the assessed, assailing the findings of the learned assessing officer submitted that assessing officer while deciding the issue involved had mixed up the facts of the present case. The learned counsel pointed out that Ramesh Suri was managing director of the assessed-company for last several years and acquired special expertise and experience in business of bus body building. It is wrong on the part of assessing officer to note that "Bus Body Building Division" of assessed company was not earning profit. For this the learned counsel for the assessed pointed out to page No. 202 of the paper book in which net profit/loss of the assessed-company as well as profit in bus body building division since assessment years 1982-83 to 1992-93 had been given which showed that profit in bus body building division was always substantial and except that profit assessed-company was running in over all losses in these years. It was also pointed out that there was no dispute in between the two groups but the real dispute was in respect of assessed-company between Ramesh Suri and his brothers and suit was filed in respect of this. Apart from it, it was submitted that Ramesh Suri effectively stopped the business of the assessed-company by filing a suit and obtained ad-interim injunction. Through negotiations the matter was settled and assessed-company paid Rs. 1,29,26,500 in view of para 6 of compromise application in which it was specifically mentioned and agreed to by the parties to the suit that the amount was in consideration of the past services rendered by Ramesh Suri to defendant No. 8 (assessed-company) and for his agreeing not to indulge in future for a period of twenty years, in the business of ordinary bus body building in which line Shri Ramesh Suri is an expert so as to enable the assessed-company to retain its monopoly in that business and to avert jeopardy to its resources. The contention was that running of the business of assessed was stopped by Ramesh Suri who was in a position to take away substantial business of the company if came into same business that is why this sum was paid to avoid any adverse impact on the business of the assessed. The submission is that payment in question was made to enable the assessed-company to carry on its business smoothly and not to jeopardies its income earning apparatus in any manner.

31. The learned counsel also submitted that after the said compromise, the bus body building division of the assessed-company had improved as it entered into agreement with Eicher Motors Ltd. and Eicher Good Earth Ltd. for the fabrication of bus/truck body for Ashok Leyland Ltd. and also entered into various agreements with Ministry of defense for manufacture of Army vehicles.

32. The learned counsel also submitted that assessing officer was not justified to ignore the above referred to compromise deed which was unambiguous and clear in terms and to conclude that amount in question was paid for settlement of the dispute between the two groups. For this the learned counsel submitted that no doubt Ramesh Suri made different allegations in the plaint filed before Honble High Court covering all the family members of both the groups and companies belonging to them but it was due to strategies evolved by lawyers who made baseless allegations to show that Ramesh Suri was having grievances against all the members of the families and of the companies. The allegations of Ramesh Suri were never agreed to by the assessed-company or by G. Sagar Suri and his family members as is apparent from their written submissions, copy of which is appearing in the paper book. The record shall show that complicated situation arose with regard to the assessed-company as transaction of this company could not proceed as Ramesh Suri effectively stopped operation of the bank account of the company. The assessed-company was going to suffer due to action of Ramesh Suri and it forced the assessed-company to part with huge amount to check Ramesh Suri from coming in competition for twenty years. It was not justified view of the assessing officer that the amount in question was in any way related to settling of the family dispute but it was for restraining Ramesh Suri to come in competition with the assesseds business for a period of twenty years and partly for past services rendered by him.

33. The learned counsel also submitted that no such amount paid by assessed are to be treated as incidental to the assesseds business and for this reference was made. The learned counsel referred to the decision of Honble Jurisdictional High Court in the case of B.K. Khanna & Co. (P) Ltd. v. CIT (2001) 247 ITR 705 (Del) in which amount paid by assessed to its two directors for agreeing not to carry on any similar business was held as incidental to the assesseds business and concluded that it was laid wholly and exclusively for the purpose of business. Another case relied upon by the learned counsel is that of CIT v. Raja Ram Bandekar (1994) 208 ITR 503 (Bom).

34. About legal preposition, the learned counsel was fair enough to admit that each case is to be decided on its own facts and merits inspite of the fact that different courts including Apex Court had been seized with such controversy from time to time. It was also submitted that there are definite tests to arrive at the conclusion whether any expenditure is revenue or capital. If no new asset was acquired or no new business was acquired nor any enhancement of profit generating apparatus then it will be revenue expenditure. The learned counsel submitted that amount in question was revenue expenditure and for that he has placed reliance on different case laws including the case law referred to before assessing officer and Commissioner (Appeals). The first case cited by the learned counsel is Bowrisankara Steam Ferry Co.s case (supra). Other decisions relied upon were R.S. Munshi Gulab Singh & Sons case (supra); V. Damodarans case (supra); as referred to before the assessing officer and further invited our attention to the decision of Honble Calcutta High Court in the case of CIT v. Superintendence & Co. of India (P) Ltd. (1980) 125 ITR 327 (Cal) and that of CIT v. Late G.D. Naidu (1987) 165 ITR 63 (Mad).

35. The learned counsel also referred to the decision of Honble Supreme Court in the case of Bikaner Gypsums Ltd. v. CIT (1991) 187 ITR 39 (SC) and submitted that amount paid for purpose of removal of disability was to be treated as revenue expenditure. Taking help from this ratio the learned counsel submitted that in the case in hand Ramesh Suri was creating problems to the assessed and he would have brought a tough competition in the business of the assessed particularly bus body building activities and by making payment the assessed-company has removed such disability and the amount is to be treated as revenue expenditure. Same was the view laid down in the case of CIT v. Associated Cement Co. Ltd. (1988) 172 ITR 257 (SC).

36. The learned counsel also submitted that, if any amount is for termination of agreement/arrangement to avoid future commercial inconvenience then it is to be treated as revenue expenditure and for that reliance was placed on the decision in the case of CIT v. Ashok Leyland Ltd. (1972) 86 ITR 549 (SC).

37. In the end the learned counsel submitted that the amount in question was for the purpose of business and that too smoothly and incidental to business. The very purpose for payment was to keep the trade going and if it is so then reasoning in the case of Haji Aziz & Abdul Shakoor Bros. v. CIT (1961) 41 ITR 350 (SC) followed by CIT v. Shahibag Entrepreneurs (P) Ltd. (1995) 215 ITR 810 (Guj) shall be applicable. This is also settled preposition of law that connection between expenditure and object must be real and not remote and illusory and in this case, the very purpose of payment is real one, as Ramesh Suri was creating problem.

38. Next contention of the learned counsel is that said payment also qualifies the test of commercial expediency. The learned counsel referred to the decision of CIT v. Panipat Woollen & General Mills Co. Ltd. (1976) 103 ITR 66 (SC) and submitted that test of commercial expediency cannot be reduced in the shape of ritualistic formula nor can it be put in a water tight compartment so as to confine in a straight jacket. The test merely means that the court will place itself in the position of businessman and find out whether the expenses incurred could be said to have been laid out for the purpose of business or the transaction was merely a subterfuge for the purpose of sharing or dividing the profits. The learned counsel pointed out that in this case if court put itself to the position of a businessman then there can be no other conclusion except that the amount in question was for purpose of business.

39. The learned counsel also pointed out that assessing officer and Commissioner (Appeals) were swayed by the quantum of expenditure while quantum is not the relevant factor to decide as to whether the money paid was a revenue expenditure or a capital expenditure. It is also the legal preposition that mere fact that payment was capital receipt in payees hands will not be a relevant factor. It was also submitted that payment made in lump sum does not necessarily make the payment a capital one. As per counsel of the assessed, no doubt, the assessed was going to get benefit out of this payment for a period of twenty years but term "advantage of enduring nature" was purely descriptive rather than definite and no rule of universal application can be laid down and each case is to be decided on the facts and circumstances of that case. Here facts go to prove only one fact that amount was wholly and exclusively laid out for business purposes and was revenue in nature and allowable.

40. As against it, the learned Departmental Representative pointed out that issue in question had been dealt at length by the assessing officer and he relied upon the same. The learned Departmental Representative basically placed reliance on the decision of Apex Court in the case of Coal Shipments (P) Ltd. (supra) which had since been followed by Honble Madhya Pradesh High Court in the case of Grover Soap (P) Ltd. v. CIT (1996) 221 ITR 299 (MP). Facts of Grover Soap (P) Ltd.s case (supra) were that assessed-company become partner of the firm in which originally there were two partners. Before assessed-company joined partners on 31-7-1976 created goodwill of the firm to the extent of Rs. 2,10,000 and two partners created their capital amount for Rs. 1,05,000 each. Later on, the said firm was dissolved on 31-12-1976. It was mentioned in the dissolution deed that original partners shall be paid Rs. 10 per ton each on the soap manufactured by the continuing partners provided minimum payment to each of the retiring partners shall not be less than Rs. 1,000 p.m. This payment was made in lieu of their undertaking, not to carry on a similar business for a period of fifteen years under a similar trade and name. The amount of royalty payable to two partners was claimed as deduction which was rejected by the assessing officer and by the Tribunal. Their Lordships concluded that expenditure was incurred to ward off the competition and it was a capital expenditure. Another decision of same pattern was referred by the learned Departmental Representative in the case of G.D. Naidu (supra) and further relied on the case law of Chelpark Co. Ltd.s case (supra) relied upon by the learned assessing officer. The contention of the learned Departmental Representative is that amount in question was paid by assessed-company in a settlement of family dispute. Apart from it, it is not a revenue expenditure as it was not laid out wholly and exclusively for the business purposes but was to ward off competition and thus a capital expenditure.

41. The learned counsel for the assessed in rejoinder has tried to distinguish the case law referred to by the learned Departmental Representative and relied upon by the learned assessing officer. In this connection the learned counsel pointed out that in the case of Coal Shipments (P) Ltd. (supra) facts were quite different. The same is in respect of the decision of Chelpark Co. Ltd.s case (supra) as their existing business was discontinued and another business was taken up while in the case in hand, the same business was going on. A decision in the case of Patna High Court in the case of Indian Copper Corporation Ltd. v. CIT (1977) 110 ITR 434 (Pat) was also referred to in which Their Lordships concluded that Tribunal was justified in holding that there was a capital element in 50 per cent of the litigation expenses referable to the suit filed by the company and 50 per cent of the litigation expenses was not admissible deduction. The contention is that 50 per cent was allowed and Their Lordships allowed the litigation expenses as business expenditure in case of Dalmia Jain & Co. Ltd. v. CIT (1971) 81 ITR 754 (SC). The contention is that this amount was incurred by the assessed out of settlement of the suit and is allowable.

42. We have considered the rival submissions and perused the record carefully and gone through the case laws referred to before us. It is to be noted that facts are not in dispute. The assessed-company and three other companies viz. Delhi Auto & General Finance (P) Ltd.; Sequoia Construction (P) Ltd. and Ganga Automobiles (P) Ltd. were the four companies managed by four brothers of Suri Family viz. G. Sagar Suri, Ramesh Suri, Roshan Lal Suri and Lalit Suri along with their HUFs and family members. It is also on record that there appears to be two groups in Suri Brothers and on account of some family dispute, Ramesh Suri and Lalit Suri with their family members were on one side while G. Sagar Suri and his family members with Roshan Lal Suri were on the other. Some dispute arose in the middle of 1987 with Lalit Suri who was looking after Bharat Hotels. The shareholding of assessed-company in the Bharat Hotel was sold on 13-11-1987 and Ramesh Suri paid a sum of Rs. 1 crore towards the said amount by a post dated cheque which was dishonoured. Again a fresh cheque was issued and the same again stands dishonoured resulting into calling of extraordinary general meeting of the assessed-company by G. Sagar Suri and others for removal of Ramesh Suri as director/managing director of assessed-company along with Lalit Suri. Meeting was held on 3-3-1988 and after taking note of dishonoured cheque of Rs. 1 crore issued by Ramesh Suri and on refusal of Ramesh Suri and Lalit Suri for renewal of the document for continuance of their personal guarantee given to the creditors of assessed-company and for non-payment of Rs. 30 lakhs by Ramesh Suri to assessed-company, the Board of Directors removed Ramesh Suri and restrained him from operating the bank accounts of different companies of the Suri Group. Necessary information was sent to bankers. Ramesh Suri approached the Honble High Court where a plaint was filed seeking declaration to the effect that all the resolutions passed by Board of Directors after 4-12-1987 were null and void. Another relief was that defendants viz. G. Sagar Suri, Lalit Suri and Roshan Lal Suri be directed to equalise shareholding of Ramesh Suri in all the four companies to 25 per cent and defendants may be restrained from interfering in the joint management and control of all the four companies and it is also on record that said suit stood decided in compromise which was filed by all the four parties and para No. 6 which was relied upon by the assessed to claim Rs. 1,29,26,500 as payment to Ramesh Suri as revenue expenditure is relevant which is reproduced as below :

"6. That in consideration of the past services rendered by Shri Ramesh Suri to Defendant No. 8 and for his agreeing not to, in future for a period of 20 years, indulge in the business of "Ordinary Bus Body Building" in which line Shri Ramesh Suri is an expert, so as to enable Defendant No. 8 to retain its monopoly in that business and to avert jeopardy to its resources, the Defendant No. 8 has agreed to and hereby pays to Shri Ramesh Sud a sum of Rs. 1,29,26,500 (Rupees one crore twenty-nine lakhs twenty-six thousand and five hundred only). It is, clarified that this restriction operates only in respect of the future and does not in any way restrict or interfere with any business already being carried on by Mr. Ramesh Suri."

The contention of the learned counsel for the assessed is that amount was given to Ramesh Suri for past services as well as to restrain him from carrying on the business of "Bus Body Building" for twenty years. So far as element of consideration for past services is concerned, the assessing officer has rightly taken note of the fact that it was not possible for G. Sagar Suri group to recognise the past services of Ramesh Suri as already both the groups were having serious disputes and matter was pending before Honble High Court. G. Sagar Suri group had removed Mr. Ramesh Suri from his position in the assessed-company and Board of Directors restrained Ramesh Suri from operating bank accounts of four companies of this group and from attending day to day work. No specific amount has also been earmarked for alleged past services. Further Ramesh Suri being Managing Director of the assessed-company must be getting salaries for the services rendered by him in the past and question of any amount being assigned for such past services does not arise. In view of this we do agree with the finding recorded by the assessing officer that there was no scope for recognising the past services of Ramesh Suri and to allocate any amount out of the impugned amount given to Ramesh Suri.

43. The other alleged relevant consideration for giving the amount in question is that Ramesh Suri being involved in the bus body building division of assessed-company for so many years acquired special and invaluable expertise and experience and he could have been tough competitor in this nature of business for the assessed-company and the amount was given to Ramesh Suri so that he may be restrained from carrying on such business in future for twenty years and assessed-company may run its business smoothly free from any hindrance. In this connection the assessing officer rightly observed that assessed-company had not brought anything on record to show that Ramesh Suri acquired special expertise or experience in the bus body building activities. It is also relevant that it is not the case of the assessed-company that Ramesh Suri had got any special training in India or abroad in the bus body building operation or he himself has made any research or was personally involved in such activities. If these were the facts then this is also again not a ground for giving the amount to Ramesh Suri.

44. Next relevant point in this connection is that amount in question is not commensurate to the business activities of assessed-company. Page 202 of paper book shows that assessed-company was running in losses and even if some salary was being given to Ramesh Suri, a sum of Rs. 1.29 crores shall not be in any manner near to the amounts Ramesh Suri would have earned as profit from assessed-company or would have got emoluments to this extent. Again it is interesting to note as to what is criterion of assessed-company to arrive at this figure of Rs. 1.29 crores is not explained.

45. Next plea of the assessed is that amount in question was given to ward off competition from Ramesh Suri which he may cause in the coming years in the bus body building activities of the assessed. It may be pointed out that legal position on this point is against assessed. First case on the point is that of Apex Court in the case of Coal Shipments (P) Ltd. (supra). The facts of that case were that assessed was one of the company which exported coal to Burma before Second World War. H.V. Low & Co. was another exporter. During Second World War export of coal was suspended. Afterwards it became possible to resume the export of coal to Burma in 1946 and assessed as well as H.V. Low & Co. were two of the major members of an association formed to overcome difficulties in the conduct of the coal trade following the war. When H.V. Low & Co. learnt of the resumption by the assessed of coal export to Burma, they also expressed an intention to export coal resulting into an agreement whereby H.V. Low & Co. agreed not to export coal to Burma during the period of agreement and it would assist the assessed in procuring the coal shipment to Burma. H.V. Low & Co. would get 5 annas per tons of coal shipped to Burma. The assessed paid the amount to H.V. Low & Co. and claimed this payment as admissible business expenditure. The Tribunal concluded that agreement arrived at between the assessed and H.V. Low & Co. was temporary measure liable to be terminated at will and the payments were made by the assessed in pursuance of the agreement in the interest of assesseds trade. The Honble Supreme Court also concluded that payments made by the assessed were not of capital nature and allowable under section 10(2)(xv) of the Income Tax Act, 1922 because arrangement between the assessed and H.V. Low & Co. was not for fixed term but could be terminated at any time at the violation of any of the parties. No doubt Their Lordships have treated the amount as revenue expenditure but observation appearing at page 910 of the report is relevant and is reproduced below :

"Although we agree that payment made to ward off competition in business to a rival dealer would constitute capital expenditure if the object of making that payment is to derive an advantage by eliminating the competition ever some length of time, the same result would not follow if there is no certainty of the duration of the advantage and the same can be put to an end at any time. How long the period of contemplated advantage should be in order to constitute enduring benefit would depend upon the circumstances and the facts of each individual case."

46. This ratio of Apex Court lays down a law that payment made to ward off competition in business to a rival dealer would constitute capital expenditure. This was subsequently followed by different High Courts and Their Lordships of Madras High Court in the case of Chelpark Co. Ltd. (supra) have decided the same issue in favor of revenue where managing director of assessed-company which was engaged in the manufacture and sale of writing ink after retirement constituted a partnership constituting of his wife and two daughters for the purpose of manufacture and sale of ink as the assessed was doing. assessed entered into an agreement with said partnership and paid Rs. 1 lakh as compensation to former managing director on his undertaking to discontinue and not to recommence at any time within a period of five years, the manufacture of writing ink and sale thereof or any other business similar or competitive to the business carried on by the company and certain other incidental action. Their Lordships discussed the case law and decided that it was a capital expenditure. Their Lordships have also discussed the case law relied upon by the assessed and distinguished the same. Further we may refer the decision of same High Court in the case of Late G.D. Naidu by LRS (supra) in which payment by firms to assessed and son for not carrying on its business for five years was held to be capital expenditure and not allowable.

47. Another case is that of Honble Madhya Pradesh High Court in the case of Grover Soap (P) Ltd. (supra). It is again on the same pattern involving same type of facts as before us and Their Lordships concluded that expenditure to ward off competition for fifteen years was capital expenditure. In arriving at such conclusion that Honble High Court had relied upon the decision of Apex Court in the cases of Coal Shipments (P) Ltd. (supra) and that of Chelpark Co. Ltd. (supra) and distinguished the case laws relied by assessed and most of the cases are the same which had been relied by learned counsel before us.

48. Ratio of the case law referred to above is fully applicable to the facts of the present case as assesseds own case is that amount was paid to Ramesh Suri so that he may not come in competition for twenty years and if the amount is to ward off the competition then as laid down by Apex Court and followed by different High Courts, referred to above, the amount is to be treated as capital in nature.

49. So far as the other pleas of the learned counsel for the assessed, that amount was paid for the purpose of business and allowable on the test of commercial expediency, we are of the view that assessing officer had concluded rightly that this amount was not for business expediency but was actually for settlement of the family dispute in between the two groups of Suri brothers and their family members. It has come on record that these four brothers were running the business of assessed-company and three other companies. Ramesh Suri was removed from the effective management and control of all the four companies including assessed-company. Ramesh Suri filed a suit and got ad-interim injunction in his favor and then matter was amicably settled. The fact noted in the compromise application are relevant. No doubt Ramesh Suri and his group transferred the shares in favor of G. Sagar Suri but as pointed out by assessing officer, Ramesh Suri group lost more and G. Sagar Suri group obtained more in the said settlement. A perusal of table 1, appearing at page 47 of the assessment order shall show that main relief of Ramesh Suri was equalisation of shares in the business of family including the four companies referred in the plaint. He claimed 25 per cent of shares but out of compromise he not only lost that claim but he as well as his family members transferred their shareholding to rival group in all other Companies. Ramesh Suri and his group members discharged their liabilities of sum of Rs. 30 lakhs to the members of G. Sagar Suri group out of Rs. 1.29 crores and he was discharged of his personal guarantee given to the bank. In plaint he claimed his reinstatement on the Board of Directors of all the four companies but after compromise he does not remain even an ordinary members of these companies. Another relief sought by Ramesh Suri was that he be given all powers to operate bank accounts of all the four companies and to remain in effective control but after compromise he lost all those powers. Contrary to it G. Sagar Suri group did not make any counter claim in the suit filed by Ramesh Suri but they got the shareholdings of Ramesh Suri and group members. They got payment of Rs. 30 lakhs from the member of Ramesh Suri group and ultimately total and absolute control over the five companies to the total exclusion of Ramesh Suri group. The amount in question cannot be said that the same was not associated with the terms of the compromise but was particularly in respect of terms and conditions given in para 6 of compromise application. These facts go to show that this amount was paid in lump sum to Ramesh Suri so that G.S. Suri group may get rid off Ramesh Suri and his group from effective control of all the five companies including four mentioned in the plaint. It is also relevant that suit filed by Ramesh Suri was not in respect of assessed-company alone but three other companies were evolved and compromise had taken into consideration another 5th company of this group. It will not be in the fitness of things to conclude that the amount was relevant to assessed-company alone when compromise application read as a whole go to show the very intention of the parties. Mere mentioning that amount was being paid to Ramesh Suri for his past services and to ward off competition from him for twenty years will alone be not sufficient to conclude as the last word but facts and circumstances as discussed in the assessment order and sequence of events which had taken place in between the parties the only irresistible conclusion would be as arrived at by assessing officer that amount was paid by assessed to get the family dispute settled and not for special expertise of Ramesh Suri as mentioned in the agreement deed.

50. On the basis of what has been discussed above, the conclusion is that amount in question was not a revenue expenditure but in view of the case laws referred to above the amount is to be treated as capital expenditure. Apart from it the amount in question was not given for any business expediency nor wholly and exclusively laid out for business purposes as required under section 37 of the Act but was on account of settling the family dispute and thus assessing officer was justified in not allowing the claim of the assessed and the ground of the assessed fails.

51. Ground No. 3 relates to charging of interest under section 234 of the Act. The assessing officer is directed to give consequential relief to the assessed while giving effect to the appellate order.

52. The result is that assesseds appeal is partly allowed.