Full Judgment
2. The assessee had raised various grounds which were of argumentative nature and therefore, the Bench had directed the Id. counsel for the assessee on 1^st March, 2006 (i.e. previous hearing) to file concise grounds of appeal which have been duly filed and are as under: (1) The CIT(A) erred in sustaining wrong computation of short term capital gain of Rs. 1,88,47,376 by the Assessing Officer by adding notional breakage and deducted from WDV on an estimated basis without considering the provisions of Section 50 of the Act.
(2) The CIT(A) ought to have appreciated and held that the lease compensation charges of Rs. 1,84,63,0297- is in the nature of allowable loss or expenditure based on the principles laid down by the Courts.
(3) The CIT(A) is not correct in holding that the goodwill of Rs. 3,00,00,000/- was assessable in the assessment year 1999-2000 on the mere fact that the money was received and the agreement signed in this year. The CIT(A) failed to appreciate that goodwill, being an intangible asset ordinarily passes along with transference of the whole business as decided by the Supreme Court in the case of Alapath Venkataramiah v. CIT (Hybd) 57 ITR 185 and the principles of right to receive the amount accrued to the appellant in the subsequent periods. The CIT(A) failed to note that the goodwill of Rs. 3 crore was assessed by the Assessing Officer in the assessment year 2002-03.
3. In addition to above, permission of the Bench has been sought to raise the following additional ground which is as under: On the facts and circumstances of the case the CIT(A) ought to have considered the carry forward unabsorbed depreciation of Rs. 7,84,18,940/- as current depreciation in view of the amendments to Section 32(2) as amended by Finance (No. 2) Act, 1996 and also in view of the Board's circular No. 762 dated 18.2.1998 and that such depreciation was available for set off against capital gains.
5. Ground No. 1 : The facts of the case are that the assessee-company was manufacturing and marketing soft drinks under the brand names of "Coke", "Fanta", "Sprite", "Limca" and "Thumsup" at its factory at Chennai. During the year, the assessee stopped manufacturing the soft drinks on its own with effect from 28.2.99 and started doing contract work for Hindustan Coco Cola Bottling South West Pvt. Ltd. It sold bottles and crates to Hindustan Coco Cola Bottling South West Pvt. Ltd. ("HCC" for short)and the short term capital gain amounting to Rs. 8,28,97,258/- was computed as under: 6. However, the Assessing Officer did not agree with the above calculation. The Assessing Officer observed that the assessee-company has been accounting in breakage of bottles in the financial accounts at the rate of 33.33% in the earlier years which was changed to 15% in the present year. He further observed that the assessee-company was realising some monies on account of sale of broken bottles and crates and the same were declared as income also. In the light of this breakage, the assessee-company was required to show why such breakage should not be deducted from Written Down Value (WDV) of bottles and crates. In response to this query, it was submitted that the assessee-company has itself disallowed the breakage shown in the financial accounts in the computation sheet. After considering this submission, the Assessing Officer observed that the assessee-company must have sold bottles and crates on 28.2.99 which were physically present on that date. According to the Assessing Officer, this also means that bottles and crates which got broken in the meantime did not form part of the assets sold on 28.2.99, this is particularly so because a separate sum of Rs. 9,12,078/- on the sale of said broken pieces was accounted for separately. According to the Assessing Officer, therefore, the value of breakage of bottles and crates should be deducted from the opening WDV plus the additions for the purpose of calculating the short term capital gain on the sale of bottles and crates. Further, according to him, this conclusion was quite logical in spite of it is being not statutorily recognized because one cannot sell an asset which is non existent on the date of transfer, and in this regard, he relied on the decision of Supreme Court in the case of Vania Silk Mills Pvt. Ltd. v. CIT reported in 191 ITR 647. In view of these observations, the breakages of bottles and crates were estimated at 15% and reduced from WDV declared by the assessee and thus short term capital gain computed to Rs. 8,28,97,258/- by the assessee was determined at Rs. 10,54,18,206/-. The addition was confirmed by the Id.
CIT(A).
7. Before us, the Id. counsel for the assessee submitted that both the lower authorities have misdirected themselves in reaching conclusion that breakage in bottles and crates is required to be deducted from WDV. He argued that after introduction of the concept of block of assets, the calculation of short term capital gain has been separately provided in the Act under Section 50. This Section clearly provides that in the case of depreciable assets, the short term capital gain shall be calculated by deducting from the sale value of the consideration (a) expenditure incurred wholly and exclusively in connection with such transfer; (b) the WDV of the block of assets at the beginning of the previous year; and (c) the actual cost of any asset falling within the block of assets acquired during the previous year. He submitted that there is no dispute regarding the sale consideration of assets acquired during the year. Though there is some dispute regarding opening WDV (this we shall deal later on in the Revenue's appeal), but that is not relevant for adjudicating this issue. On the basis of this provision, the short term capital gain was calculated by the assessee as under: 8. He further submitted that the assessee in the earlier years was providing for 1/3 of the value of bottles as breakage in its financial accounts. However, while calculating the depreciation for income tax purpose, such breakage was always added back in the computation and the depreciation was claimed as per income tax rules which was allowed accordingly in all the previous years and this practice was being followed for almost last thirty years. In this regard, he referred to page No. 9 of the paper-book Vol. II. He also referred to page Nos. 61 to 64 which is a copy of the computation of returned income and at page No. 61 bottle breakages amounting to Rs. 2,97,04,234/- has been clearly added back in inadmissible items, which means such loss was never claimed under the Income-tax Act. He further submitted that computation of depreciation on bottles and crates will be only on WDV and addition in the year and the same had nothing to do with bottle breakages. He also referred to the observation made by the Assessing Officer in the assessment order whereby it is admitted that notional breakage is only logical and not statutorily recognized. He further submitted that the Assessing Officer has accepted the income declared separately amounting to Rs. 9,12,078/- on account of sale of broken bottles and crates. He further submitted that two decisions relied by the Assessing Officer are not relevant because in both the cases, the issue was related to treatment of claim received from insurance company on goods damaged and destroyed by fire and it was held that the compensation received from the insurance company cannot be held to be capital gain since there was no transfer. He pointed out that the CIT(A) has further relied on the decision of Bombay High Court in the case of CIT v. Hindustan Petroleum Corporation Ltd. reported in 187 ITR 1, but the same is distinguishable because the facts are totally different. In this regard he referred to the question raised before the High Court and submitted that this would make it clear that the Revenue was agitating to the allowance of depreciation on the assets after amalgamation in the hands of the amalgamated company. He submitted that there was no dispute regarding transfer of assets as the same was evidenced by Delivery and Possession Receipt wherein even quantitative details of assets had been identified and verified. These assets were movable assets and transferred by Possession and Delivery and the assessee-company had paid sales tax amounting to Rs. 2,57,17,133/-. He then submitted that CBDT circular No. 469 dated 23.9.86 (copy of which had been filed at page Nos. 6 to 8 of the paper-book Vol.11) and the same should have been considered by the lower authorities.
9. On the other hand, the Id. Departmental Representative (D.R.), while supporting the orders of the lower authorities submitted that the Assessing Officer has correctly relied on the decision of the Supreme Court in the case of Vania Silk Mills Pvt. Ltd. (supra) wherein it was held that the assessee could sell only those assets which were already in its possession. Since the broken bottles would not be in the possession of the assessee and therefore, could not have been sold and the same were required to be reduced from the WDV for the purpose of calculating the short term capital gain.
10. We have considered the rival submissions carefully and have gone through the relevant material on record as well as the decisions cited by the parties. We are unable to find any justification for making the addition by the lower authorities. It is well known that the rates of depreciation are different under the Companies Act, 1956 and the Income-tax Act, 1961. In fact companies were claiming more depreciation under the Income-tax Act which was permitted and that is why the concept of MAT was introduced through Sections 115J, 115JA and 115JB.In the case before us, the assessee had adopted an altogether different system of claiming depreciation by way of writing off the breakages in the bottles @ 3333%, which was changed to 15% later on. However, under the Income-tax Act, depreciation was claimed on the basis of WDV as per the rates permitted under the Income-tax provisions. In fact, there is no dispute regarding this issue and the Assessing Officer has himself observed in the assessment order "this calculation is quite logical inspite of this being not statutorily recognized." He still wanted to reduce the value of breakages from the WDV because one could not sell an asset which was non-existent on the date of transfer. We think at this point, the AO has confused himself. There is no doubt that some breakages of bottles must have taken place and that is why the assessee was claiming breakages @ 33.33% earlier and then 15% in its financial accounts. But the breakages were not accounted for under the Income-tax proceedings, because same was claimed in the form of depreciation. Such breakages were never claimed and therefore never allowed by the income-tax authorities separately. Therefore, there is, no question of taxing the same again by way of reduction from the WDV. We are also not impressed by the contention that the assessee had realized separate sum of Rs. 9,12,078 on some of the broken pieces of bottles and crates because the same has been accounted for separately and accepted also.
As far as reliance on the case in the case of Vania Silk Mills Pvt.
Ltd. v. CIT (supra) is concerned, the Id. counsel of the assessee has very correctly distinguished the same. There, the issue was whether insurance claimed against an asset which has been destroyed in fire, is taxable or not and the Hon'ble Apex Court held in case of Vania Silk Mills Pvt. Ltd. v. CIT (supra) that such claim was not taxable because there was no transfer of the asset and that is not the issue before us.
Otherwise also, the short term capital gain in the case of depreciable assets has to be computed Under Section 50, which is as under: 50. Notwithstanding anything contained in Clause (42A) of Section 2, where the capital asset is an asset forming part of a block of assets in respect of which depreciation has been allowed under this Act or under the Indian Income-tax Act, 1922 (11 of 1922), the provisions of Sections 48 and 49 shall be subject to the following modifications: (1) where the full value of the consideration received or accruing as a result of the transfer of the asset together with the full value of such consideration received or accruing as a result of the transfer of any other capital asset falling within the block of the assets during the previous year, exceeds the aggregate of the following amounts, namely: (i) expenditure incurred wholly and exclusively in connection with such transfer or transfers; (ii) the written down value of the block of assets at the beginning of the previous year; and (iii) the actual cost of any asset falling within the block of assets acquired during the previous year, such excess shall be deemed to be the capital gains arising from the transfer of short-term capital assets; (2) where any block of assets ceases to exist as such, for the reason that all the assets in that block are transferred during the previous year, the cost of acquisition of the block of assets shall be the written down value of the block of assets at the beginning of the previous year, as increased by the actual cost of any asset falling within that block of assets, acquired by the assessee during the previous year and the income received or accruing as a result of such transfer or transfers shall be deemed to be the capital gains arising from the transfer of short-term capital assets.
11. When depreciation was already allowed and WDV reduced, there is no question of further reducing the WDV in respect of the sums on account of breakages which were never claimed and never allowed in income-tax assessments. In these circumstances, we find no justification in the addition by way of enhancing the short term capital gain by reducing the WDV. In these circumstances, we set aside the order of the Id.
CIT(Appeals) and delete the addition.
12. Ground (2): The brief facts regarding this ground are that during the assessment proceedings, the AO noticed that the assessee has shown an amount of Rs. 1,84,63,029 with the narration "deferred revenue expenditure written off' under the head Interest to others. Upon enquiry, it was explained that the assessee has set up a new plant at Nemam in which production was started in March, 1997. The main plant and machinery for this plant was imported and same was basically taken on lease from Sundaram Finance Ltd. ("SFL" for short). It was further explained that at the request of assessee, SFL purchased the machinery from Italy. It seems the interest payable during the installation was capitalized by the assessee and the total amount of interest amounting to Rs. 2,25,80,072 was added as deferred revenue expenditure to be claimed in seven years. The same was written off in the accounts as under: 13. It was further explained that the assessee intended to claim the same for a period of seven years i.e. during the lease period, but lease agreement was terminated because the assessee sold plant and machinery during the year under consideration and therefore the balance of deferred revenue expenditure was claimed during the year. The AO observed that the assessee never borrowed any money and therefore interest could not be claimed Under Section 36(l)(iii). Since there was no deduction possible Under Section 36(1)(iii) the claim was considered Under Section 37(1). The AO further observed that this expenditure was in the nature of capital expenditure because same was relating to plant and machinery and therefore the same was not allowable. The addition was confirmed by the Id. CIT(Appeals).
14. Before us, the Id. AR submitted that this amount pertains to lease compensation charges. He argued that the assessee company wanted to put up a new plant and an arrangement was entered into SFL to give the plant on lease basis to the assessee company. However, the plant and machinery had to be imported and therefore advances etc. were required I to be paid and therefore the assessee company entered into a separate agreement for providing separate finance for the purpose of making advances to the suppliers. In this regard, he referred to page 63 to 66, which is copy of the agreement to enter into lease and page 74 to 89, which is copy of the lease agreement. "The agreement to enter into lease" was executed on 23.2.95 whereas the lease agreement was executed on 25.3.97. This clearly shows that these are two separate agreements and actual lease agreement was executed when plant and machinery was ready for use. The lease charges would commence only when the machinery is provided to the assessee and therefore the lease compensation charges related to finance provided to arrange for the machinery. The assessee company had arranged for the finance from the lessor i.e. SFL only. Had the assessee company borrowed this money from some outsider, then the revenue authorities would have clearly held the same to be in the nature of interest. It was submitted that starting of the new plant was only an expansion of the existing business of manufacturing of soft drinks to cater the increased market share in soft drinks. The new plant was established in the same line of activity and therefore it should be considered as expansion of business only. He further pointed out that the machineries were taken on lease and lease charges were separately payable and they should not be confused with case equalization charges, because lease would commence only from the date when the machinery was installed, whereas the lease compensation charges related to the interest cost which was agreed @ 21% per annum for giving advances etc. to the suppliers. He submitted that in the commercial world, expenditure incurred before the installation of assets are normally provided as deferred expenditure or capital expenditure so that the same can be allocated over the life span of the particular asset. This principle has been recognized under various case laws particularly in the case of Madras Industrial Investment Corporation Ltd. v. CIT (225 ITR 802)(SC), where the Hon'ble Apex Court had held that ordinarily the revenue expenditure which was incurred wholly and exclusively for the purpose of the business must be allowed in its entirety in the year in which it was incurred or it may be allowed over a period of years, depending on the facts of the case, more so, when such allowance will produce a very distorting picture of income of a particular year. He argued that the assessee also treated this expenditure as deferred revenue expenditure with the intention to claim the same over a period of seven years and accordingly 1/7^th of the expenditure was claimed as revenue expenditure for the year ending 31.3.1998 and same was allowed by the AO after verification in the assessment completed Under Section 143(3).
15. He submitted that the circumstances changed when the assessee company sold bottles and crates along with the vehicles, which virtually ended the manufacturing activity of the assessee and therefore the assessee entered into contract packing arrangement with HCC. The assessee company was negotiating with this company for sale of undertaking and process of valuation and other formalities had commenced in April, 98 and were completed in October, 98. He submitted that upon sale of such assets, the lease agreement with SFL was terminated and in fact such machineries were taken over by the new company. In such circumstances, the assessee had no option but to claim the balance of deferred revenue expenditure as revenue expenditure.
Since the assessee company was not owner of such machineries, the same could not be allocated to such capital asset. He submitted that the Supreme Court in the case of CIT v. Madras Auto Services (P) Ltd. 233 ITR 468(SC) has held that when even a new building was constructed by the assessee on leased land which belonged to the lessor and the assessee had only a right to use the building, then it cannot be said that the assessee had acquired a capital asset and therefore the amount spent on construction of building was allowable as revenue expenditure.
In the case before us also, the assessee was never the owner of the machinery, and whatever expenditure was incurred for bringing the machinery on lease has to be allowed as revenue expenditure only. He argued that it was totally wrong on the part of the AO to treat this expenditure as capital asset, because no capital asset or enduring benefit was obtained by the assessee and in fact the expenditure was incurred in connection with bringing the plant and machinery on lease basis. He also relied on the following decisions:M.P. Financial Corporation Ltd. v. CIT 16. On the other hand, the Id. DR while supporting the orders of the lower authorities submitted that the assessee himself has treated this expenditure as deferred revenue expenditure and in earlier year only 1/7 of the expenditure was claimed, which clearly shows that the expenditure was in the nature of capital expenditure. He further submitted that applying the ratio of Madras Industrial Investment Corporation Ltd. v. CITCIT v. Madras Auto Services (P) Ltd., what is required is that expenditure should have been incurred during the previous year. Since no expenditure was incurred during the previous year, the same could not be allowed as revenue expenditure and at best, the assessee could have captialised the same against the assets.
17. In the rejoinder, the Id. AR submitted that since the assessee was not the owner of the assets and the same were taken on lease basis, therefore there was no question of capitalizing the same.
18. We have considered the rival submissions carefully and have gone .
through the relevant material on record as well as the judgments cited by the parties. Perusal of paperbook at pages 65-66 and 74 to 89 clearly shows that the assessee entered into two separate agreements and the first agreement was titled as "agreement to enter into lease" and was executed on 23.2.95; whereas pages 74 to 89 clearly shows that lease agreement was executed on 25.3.97 for leasing the equipment described in the agreement. This means that when assessee company approached the lessor and it was understood by both the parties that some money needs to be advanced to the foreign suppliers and other suppliers for bringing the assets into existence, the lessor agreed to give such money on interest @ 21% and such interest was designated as compensation charges. In fact, it seems to be a case where machinery was not readily available off the shelf and same had to be imported and then installed and therefore some interest was required to be paid during such period. It is not disputed that such plant and machinery was installed for manufacturing of soft drinks and which was only expansion of the existing business of the assessee. This also becomes clear from the fact that 1/7^th of such compensation charges were actually claimed in the previous year and were allowed also.
19. Though deferred revenue expenditure as such is neither defined nor recognized under the Income-tax Act, but the concept is very much prevalent in the commercial world and has also been recognized by various courts of law. The Hon'ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. v. CIT (supra) observed at page 812 as under: The Tribunal, however, held that since the entire liability to pay the discount had been incurred in the accounting year in question, the assessee was entitled to deduct the entire amount of Rs. 3,00,000 in that accounting year. This conclusion does not appear to be justified looking to the nature of the liability. It is true that the liability has been incurred in the accounting year. But the liability is a continuing liability which stretches over a period of 12 years. It is, therefore, a liability spread over a period of 12 years. Ordinarily, revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred. It cannot be spread over a number of years even if the assessee has written it off in his books over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year.
20. This means that whenever circumstances of the case require the revenue expenditure may be treated as deferred revenue expenditure and amortised over a number of years during which such benefit out of such expenditure is going to accrue to the assessee. Now in the case before us, the assessee wanted to install plant & machinery on lease basis which was not readily available and therefore the assessee agreed to pay compensation charges @ 21%, which is nothing but only interest during the installation period of machinery and such machinery was to be leased over a period of seven years. Therefore, the assessee treated such compensation charges as deferred revenue expenditure. The Revenue is not trying to make a case that the assessee is the owner of the machinery and in such a situation applying the ratio of the Hon'ble Apex Court in the case of CIT v. Madras Auto Services (P) Ltd. (supra), the whole of expenditure could have been claimed by the assessee in the very first year. However, when we deeply look at the decision of the Hon'ble Apex Court in the case of Madras Industrial Investment Corporation Ltd. v. CIT (supra), we find that it is not always necessary for the assessee to claim whole of the revenue expenditure in one year in which it is incurred, because if such deduction is permitted as such, it may give distorted picture of the profits of a particular year and that is why the concept of deferred revenue expenditure was recognized. In that case, the assessee company had issued debentures at discount and amount of discount was Rs. 3 lakhs and debentures were to mature over a period of 12 years. Therefore, the discount of Rs. 25,000 per year was determined and a sum of Rs. 12,500 was claimed which was not allowed by the AO. When the matter traveled to the Tribunal, the assessee made additional claim of Rs. 2,87,500 which means for the sale of the discount which was ultimately allowed by the Tribunal. The Hon'ble Supreme Court did not approve the whole deduction and held that discount can be claimed only over a period of time.
21. We are unable to agree with the lower authorities that the lease compensation charges are not in the nature of revenue expenditure and they are in the nature of capital expenditure. As observed by us above, the lease compensation charges are in the nature of interest only and were incurred to bring the leased assets into existence and therefore the same cannot be treated as capital expenditure. It is by now trite law that interest incurred even for bringing the capital assets into existence has to be allowed as revenue expenditure only upto assessment year 2003-04, because after that a proviso was inserted in Clause (iii) of Section 36(1) by which interest paid in respect of capital borrowed for acquisition of assets I was mandated not to be allowed as deduction. We are also unable to agree with the contention of the Id.
DR that at best, the assessee could have allocated such expenditure to the capital assets because clearly the plant & machinery was taken on lease basis and the assessee was clearly not the owner of such assets.
It is plainly clear from the facts that the assessee wanted to claim this expenditure as deferred revenue expenditure over a period of seven years, but the circumstances changed as the assessee sold its bottles and crates, which led to business being . done on contract basis instead of manufacturer basis and such leased assets were also transferred to the other party. In such a situation, the expenditure which was right from the beginning in the nature of revenue expenditure has to be allowed when such lease was required to be terminated. In these circumstances, we set aside the order of the Id. CIT( Appeals) and delete the addition.
22. Ground (3) : The brief facts in respect of this ground are that during the assessment proceedings, the AO noticed that though the assessee has sold its goodwill for a consideration of Rs. 3 crores to HCC, but the same was not offered for taxation and therefore the assessee was asked to show cause why the said amount of Rs. 3 crores should not be assessed as long term capital gain. It was explained that the goodwill was accounted for in the year ending 31.3.2002 and offered to tax accordingly. It was contended that the receipt of sum of Rs. 3 crores received during the year was only an advance and there were so many conditions to be fulfilled by the seller. It was also contended that the company sold its business undertaking only in the year 2000 and 2001 comprising of land, building, plant & machinery and the goodwill can be sold only after that. The company had to give bank guarantee to HCC and execution of this guarantee clearly shows that consideration on account of goodwill was not received. Reference was also made to Accounting Standard (AS-9), where it is provided that the revenue should be recognized only on accrual basis in accordance with the terms of relevant agreement. Since the consideration was received only as advance, the same cannot be said to have been accrued. The AO after considering this contention observed that along with sale of movables like bottles, crates and vehicles, the assessee company entered into a contract packing agreement dated 1.3.99 with HCC. This agreement authorized the assessee company to prepare and package various soft drinks according to the instructions to be issued by Coco Cola India on the charges specified in the agreement. The AO observed that this clearly shows that the assessee has stopped its own manufacturing and it entered into an agreement with HCC for bottling on behalf of HCC for the defined fees, which means, that business of the assessee came to an end on 28.2.99. He further observed that the goodwill was an intangible asset and the assessee was entitled to value its goodwill and sell the same at any time even during the existence or continuation of the business. He then referred to various clauses of the agreement and held that these clauses very clearly show that the goodwill had already been transferred and therefore the assessee was required to pay long term capital gain tax on the goodwill in the year under consideration. The addition was confirmed by the Id.
CIT(Appeals).
23. Before us, the Id. AR submitted that the assessee had already accounted for goodwill and also paid taxes accordingly in the A.Y.2002-03. The sale of goodwill was accounted for in that year because actually transfer took place in that year. He submitted that though the agreement for sale of goodwill was entered on 28.2.99, but the payment against the same was treated as advance and the assessee company was obliged under the agreement to issue a bank guarantee. In this regard, he referred to page 99, paperbook Vol.11, which is copy of the letter written by Coco Cola India, which clearly indicates that the transferee company would be advancing a sum of Rs. 3 crores only as advance and the assessee company was asked to arrange bank guarantee against the same and bank guarantee was accordingly arranged (copy of same is placed at page 133 to 138 of Vol.11 paperbook). It was further argued that the bank guarantee executed by the assessee company was released only in January, 2001 and in this regard he referred to pages 158-159 of Vol.11 paperbook, which is copy of the letter releasing the bank guarantee. This itself shows that the transfer of the goodwill did not take place in the year under consideration. He also referred to the letter dated 28.3.2002 (copy placed at page 164) addressed by Hindustan Coco Cola Breweries Pvt. Ltd. directly to the Assessing Officer, in which the payment of Rs. 3 crores was shown as advance payment. This further fortifies the claim of the assessee. He also referred to Accounting Standard (AS-9), which states that the revenue should be recognized only when there was certainty of receiving the same and the AO was not correct in observing that the Accounting Standard (AS-9) applies only to income and not capital gains, because in the case of capital gains also, unless and until transferee enjoyed the full benefit of transfer, the transfer cannot be said to be completed. He referred to page 111-132 of the paperbook Vol.11, which is contract packing agreement, which clearly shows that the assessee was still using the know-how and other processing procedure. He submitted that the agreement to sell the business was entered only on 27.4.1999, copy of which is placed at pages 139-143 and consent of the shareholders for selling the undertaking Under Section 293 of the Companies Act was obtained only on 27.4.1999. He also submitted that the approval of the appropriate authority Under Section 269 was granted on 7.7.1999, copy of the order filed on pages 144-153 and income-tax clearance certificate Under Section 281(1) was granted on 5.7.2000. All these things clearly show that the goodwill was transferred in later years and not in the year under consideration. He then referred to the decision of the Supreme Court in the case of Alapati Venkataramiah v.CIT (57 ITR 185)(SC), where it was held that the goodwill was an intangible asset and ordinarily passed along with transference of the whole business and since the transference of the business took place on later years, goodwill also passed on in those years.
24. The Id. counsel of the assessee strongly contended that the assessee company itself filed its return disclosing long term capital gain from goodwill in the assessment year 2002-03 and it has been already accepted by the Department, therefore there was no question of taxing the same income in another year.
25. On the other hand, the Id. DR referred to page 16 of the CIT(Appeals) order and brought to our attention the following clause of the goodwill sale agreement.
The seller hereby sells and the buyer hereby purchases the goodwill of the seller as valued by seller for a consideration of Rs 3 crores the receipt and sufficiency whereof is hereby acknowledged by the seller.
This clause itself shows that the transaction regarding the sale of goodwill was completed and there was no question of treating the same as advance. He argued that issuance of bank guarantee is of no consequence and this is only internal arrangement of the parties. He then referred to page 17 of the CIT(Appeals) order whereby it was clearly stated that along with the sale of movables like bottles and vehicles, the assessee company entered into a contract packing agreement with HCC. This company authorizes the assessee to prepare and effect breweries on behalf of HCC on agreed fee basis, which clearly means that the assessee had stopped its own manufacturing and thus goodwill also stood transferred. He also argued that the assessee cannot find any fault with taxation of goodwill in A.Y. 2002-03 because same has been offered by the assessee itself and the Department has no option but to assess the same. However, he was fair enough to acknowledge that double taxation of the same income was not possible and therefore the Tribunal may issue appropriate directions.
26. We have considered the rival submissions carefully and have gone through the relevant material on record as well as decisions cited by the parties. There is no doubt that the goodwill agreement contains the following clause: The seller hereby sells and the buyer hereby purchases the goodwill of the seller as valued by seller for a consideration of Rs 3 crores the receipt and sufficiency whereof is hereby acknowledged by the seller.
This apparently indicates that the transaction regarding sale of goodwill was complete by way of this agreement. However, it is well settled that it is the substance of the agreement and not the form of agreement which is to be considered for taxation purposes. In this case, the assessee sold bottles, crates and vehicles on 28.2.99 and stopped the manufacturing of beverages and entered into contract packing agreement by which the assessee took the business of packing beverages on the instructions of HCC at an agreed fees. The land, building, etc. were agreed to be sold later on for which the agreement was entered on 27.4.99 and the same was approved by the extra-ordinary general meeting of the company for granting approval Under Section 293 of the Companies Act for sale of the undertaking of the company. It is also seen that the approval for transfer Under Section 269 from the appropriate authority was granted only on 7.7.99, which means, if such approval is not granted, then sale cannot take effect in terms of Section 269UL, which reads as under: 269UL. (1) Notwithstanding anything contained in any other law for the time being in force, no registering officer appointed under the Registration Act, 1908 (16 of 1908), shall register any document which purports to transfer immovable property exceeding the value prescribed under Section 269UC unless a certificate from the appropriate authority that it has no objection to the transfer of such property for an amount equal to the apparent consideration therefor as stated in the agreement for transfer of the immovable property in respect of which it has received a statement under Sub-section (3) of Section 269UC, is furnished along with such document.
(2) Notwithstanding anything contained in any other law for the time being in force, no person shall do anything or omit to do anything which will have the effect of transfer of any immovable property unless the appropriate authority certifies that it has no objection to the transfer of such property for an amount equal to the apparent consideration therefor as stated in the agreement for transfer of the immovable property in respect of which it has received a statement under Sub-section (3) of Section 269UC. (3) In a case where the appropriate authority does not make an order under Sub-section (1) of Section 269UD for the purchase by the Central Government of an immovable property, or where the order made under Sub-section (1) of Section 269UD stands abrogated under Sub-section (1) of Section 269UH, the appropriate authority shall issue a certificate of no objection referred to in Sub-section (1) or, as the case may be, Sub-section (2) and deliver copies thereof to the transferor and the transferee.
27. Now, if the sale of assets is not permitted, it is doubtful whether the buyer would purchase the goodwill alone and perhaps that is why the construction for goodwill was given as advance and the assessee company was required to furnish bank guarantee also. The letter prressed by HCC dated 28.3.02 placed at page 164 of the paperbook has learly mentioned the consideration for goodwill as advance. Again, the letter dated 19.2.99 which is placed at page 99 of paperbook Vol.11 reads as under: Pursuant to our agreement to the sale of your soft drinks business to us, we would be advancing a sum of Rs. 3,00,00,000/- (Rupees Three Crores only) towards Company Goodwill.
As already discussed with you, we would be requiring some form of security to cover this advance of Rs. 3,00,000/- (Rupees Three Crores only) from the total cash consideration. Security by way of a Bank Guarantee for the said amount would be acceptable to us.
28. In pursuance of this letter, the assessee company had furnished bank guarantee also and all these facts have not been disputed by the Revenue. Now the question is if sale of goodwill was completed, then why the consideration was being treated as advance by the transferee company and the simple answer would be that for all practical purposes this transfer was not complete because same was dependent on other facts such as transfer of other assets which was subject to clearance from various authorities. In similar circumstances, the Hon'ble Supreme Court in case of Alapati Venkataramiah (supra) has held that goodwill was an intangible asset and ordinarily passed along with transference of the whole business. In the case before us, the whole business was transferred in the later years, then goodwill shall also be reckoned to be transferred in those later years. In any case, the assessee has itself filed return declaring long term capital gain from the goodwill in the A.Y. 2002-03 and therefore there was no question of taxing the same in the present assessment year, because according to us, the transfer did not take place in the year under consideration. In these circumstances, we set aside the order of the Id. CIT(Appeals) and delete the addition on account of goodwill.
29. Additional ground : After hearing both the parties, the additional ground was admitted by us for adjudication because it was not disputed that the relevant facts are not on records, particularly in view of the . decision of the Hon'ble Apex Court in the case of National Thermal Power Co. Ltd. v. CIT (229 ITR 383)(SC).
30. Before us, the Id. AR referred to page 2 of the CIT(Appeals) order where the CIT(Appeals) has observed that ground 32 has been withdrawn by the assessee and therefore he has not adjudicated the same. He submitted that the ground was withdrawn on the wrong notion as the assessee thought that the short term capital gain would be added as business profits. He submitted that there cannot be any estoppel against the law and even if such ground was withdrawn, the same should have been adjudicated. In any case, now the Tribunal has all the powers to adjudicate this additional ground and issue suitable directions to the CIT(Appeals) for adjudicating the matter. In this regard, he referred to the decision of the Allahabad High Court in the case of J.K. Oil Mills Co. Ltd. v. CIT 105 ITR 53(A11), where it was held that even if a ground was not pressed before the AAC, such ground could be considered by the Tribunal. He also relied on CIT v. Eveline International 1 RSDTD 1196 (P&H-HC) (copy of the decision filed on record). He then referred to the provisions of Section 32(2) and submitted that carry forward depreciation i.e. unabsorbed depreciation partakes the character of current depreciation Under Section 32(2) and could be adjusted against any head of the income and therefore the CIT(Appeals) should have allowed the set off of carry forward depreciation against the income earned by the assessee.
31. On the other hand, the Id. DR submitted that once the ground is withdrawn then normally the assessee will not have any grievance and cannot agitate the matter again before the Tribunal because the order passed on the basis of concession cannot be challenged. He then referred to the decision of the Hon'ble jurisdictional High Court in the case of CIT v. Cherian Leasing Ltd. in TC(Appeal) No. 1029 of 2004 (copy of the order filed), whereby it was held that once the issue is decided on the basis of mutual agreement, then normally there is no grievance to the party who has agreed to such decision. However, if a wrong concession has been made, then the only remedy is to go back to the authority before whom wrong admission has been made. Therefore, at best, the assessee can reagitate the issue only before the CIT(Appeals).
32. On merits, he invited our attention to Section 32(2) and submitted that the section was amended w.e.f. 1.4.1997 and now unabsorbed depreciation can be claimed only against the business income and not under other heads.
33. In the rejoinder, the Id. AR submitted that the Hon'ble Finance Minister has given an assurance in the Parliament that new provision regarding set off of unabsorbed depreciation with this amendment would be of prospective nature and depreciation which has already been allowed upto 31.3.97 could be set off against any head of the income and in this regard he relied on the decision of Indore Bench of the Tribunal in the case of Perfect Pharmacists (P) Ltd. v. JCIT 140 Taxman 49 (Indore).
34. We have considered the rival submissions carefully and have gone through the relevant material on record as well as the decisions cited by the parties. We would like to reproduce the whole of the judgment of the Hon'ble Madras High Court in the case of CIT v. Cherian Leasing Ltd., which is a very small order and make the situation very clear.
This appeal under Section 260A of the Income Tax Act has sought to raise various questions purporting to be questions of law, however paragraph 3 of the impugned order of the Tribunal reads thus: Both the parties fairly conceded that in view of the decision of the Hon'ble Supreme Court in the case of Apollo Tyres Ltd. v. CIT 259 I.T.R. 273, no interference could be made with the accounts duly audited by the Chartered Accountant and, therefore, no adjustment was called for in the audited accounts. In this view of the matter, the Revenue's appeal is dismissed.
2. Thus a perusal of the impugned order of the Tribunal shows that the said order was passed by mutual agreement of counsels for both the parties. We therefore cannot appreciate how an appeal can be filed against this order. The remedy of the Department, if it is of the opinion that a wrong concession was made by its counsel, is to approach the Tribunal under Section 254(2) of the Income Tax Act for rectification and if it does so, the same will be decided in accordance with law expeditiously, after hearing the parties. The appeal is dismissed with this observation.
35. In the above decision, the issue involved is almost identical, the only difference being that concession was granted before the CIT(Appeals) in the case before us, whereas in the case before the High Court, concession was granted before the Tribunal. But the issue remains the same. From the above order, it becomes clear that the only remedy left to the assessee is to go back to the CIT(Appeals), if it is of the opinion that a wrong concession was made by the counsel and move application for rectification, if so advised. Therefore, we would not adjudicate this issue and in our considered opinion, if it is so that a wrong concession was given, then it should move the Id. CIT(Appeals) by way of appropriate proceedings. Thus, this ground is dismissed.
2. The learned CIT(A) erred in holding that the WDV of bottles as on 1.4.98 should be adopted at Rs. 12,01,13,238 as against the sum of Rs. l1,76,09,543.
3. The learned CIT(A) ought to have seen that while the assessee adopted the figure of Rs. 12,02,56,812 in the statement filed along with the return of income, during the course of assessment proceedings the assessee had chosen to file another statement wherein the assessee itself had shown the WDV at Rs. 11,76,09,543 which had been adopted in the assessment.
38. The Id. DR referred to page 4 para 4.3 of the CIT(Appeals) order and submitted that the Id. CIT(Appeals) himself admitted that there was discrepancy in the figure of WDV, but still he gave direction to take the WDV at Rs. 12,01,13,328 without giving any opportunity to the Assessing Officer. He then produced the copy of the WDV chart which was filed by the assessee itself during the assessment proceedings, where the WDV was shown at Rs. 11,76,09,543 and then submitted that how the assessee could claim the CIT(Appeals) could allow the figure of Rs. 12,01,13,238.
39. On the other hand, the Id. AR submitted that all the details were placed before the Id. CIT(Appeals) and he has given his decision after verifying the figures and therefore no fault can be found in the order of the Id. CIT(Appeals).
40. After considering the rival submissions carefully, we find that some contradictory figures have been taken by the AO and the CIT(Appeals). Then the WDV shown by the assessee in his own calculation seems to be different. Therefore, in the interest of justice, we set aside this issue to the file of the Assessing Officer for re-verification of the figures after providing adequate opportunity to the assessee and adopt the correct figure of the WDV.