Usv Ltd. Vs. Joint Commissioner of Income Tax - Court Judgment

Excerpt:
2. the first and second ground of objection by the assessee is directed against the order of the cit(a) in confirming the disallowance of rs. 3,79,876 in respect of employer's contribution and rs. 4,05,635 in respect of employees' contribution to pf/fpf/esic paid by the assessee beyond the grace period allowed by the central government.3. we heard the rival submissions. the tribunal is constantly taking the view that the employees' contribution if not paid within the due date extended by the grace period, the same is not allowable. as such, we remand the matter back to the file of ao as to verify whether the payments were made within the grace period. if so paid, it may be allowed. coming to the employer's contribution, tribunal is taking the view constantly that if the payment is made within (beyond) the year but before the due date for filing the return, to this extent assessee's claim is to be allowed. ao may verify the date of payment.if it is found that it is paid within (beyond) the year but before the due date for filing the return, to that extent employer's contribution may be allowed. order accordingly.4. the third ground of objection by the assessee is directed against the order of the cit(a) in confirming the disallowance of rs. 32,328 being payment made to clubs for availing the facilities and services of the clubs.5. considering the rival submissions and also the decisions cited, particularly the decision of the jurisdictional high court in the case of otis elevator co. (india) ltd. v. cit ; hon'ble gujarat high court in the case of gujarat state export corporation ltd. v. cit ; and hon'ble madras high court in the case of cit v. sundaram industries ltd. (mad); we are of the view that there is no justification in disallowing the assessee's claim to this extent. hence, the appeal of the assessee on this ground is allowed.6. the next ground (ground no. 4) of objection by the assessee is directed against the order of the cit(a), directing the ao to exclude net marketing receipts, i.e. total marketing receipts as reduced by proportionate salary of field staff and other expenses while computing profits of the eligible undertakings for the purpose of deduction under section 80hh of the it act, 1961.7. while framing the assessment order, ao noticed, assessee claimed deduction under section 80hh on its units at lote parshuram. assessee claimed deduction of rs. 2,73,08,504 at the rate of 20 per cent of the profit of the unit. it was noticed by the ao that the service charges amounting to rs. 2,76,92,459 was connected with the new industrial undertaking. the service charges comprised of rs. 2,42,67,427 received by way of processing charges and rs. 34,25,032 received by way of marketing receipts for marketing of imported injections in india. this amount of rs. 34,25,032 received by way of marketing receipts allocated to the new industrial undertaking while computing the total income of the new undertaking, ao held, is not allowable and such marketing receipts do not qualify for deduction under section 80hh. out of the processing charges of rs. 2,42,67,427, ao held, rs. 2,13,46,380 only pertains to the new industrial undertaking. the amount claimed as processing charges in the return was added back. aggrieved, assessee approached the first appellate authority.8. this issue has been discussed by the cit(a) vide para 9 of his order. it was contended before the cit(a) that the assessee is entitled for deduction under section 80hh in respect of the amount of rs. 34,92,514. alternatively, it was contended that the ao ought to have computed the profits of the new industrial undertaking without reducing expenses incurred on research development unit, which is stated to be an independent unit physically separate from the new industrial undertaking and that he should have reduced the proportionate salary of field staff and other expenses from marketing receipts. it was further submitted, it is neither correct nor logical to reduce the gross amount of marketing receipts allocated to various units as certain expenses have been incurred for earning these receipts and these expenses should be allocated to marketing receipts. in other words, it was contended, only net marketing receipts should be reduced from the profits of the new industrial undertaking. cit(a) directed the ao to consider excluding only the net marketing receipts while computing the profits derived from the new industrial undertakings for the purpose of deduction under section 80hh. aggrieved by the above order assessee is in appeal before the tribunal. assessee had two new industrial undertakings at lote parshuram, taluka khed, district ratnagiri, a backward area in the state of maharashtra. while computing the profits derived from the new industrial undertakings, assessee claimed deduction under section 80hh, including the marketing receipts amounting to rs. 34,25,032 and interest at rs. 67,482. while computing the profits of the new industrial undertakings, ao excluded the gross marketing receipts and interest received and proportionately allocated expenses incurred at research and development unit at govandi at rs. 75,70,059. following his orders for the earlier years, i.e. asst. yrs. 1996-97 and 1997-98, the amounts of marketing receipts and interest were excluded by the cit(a) for the purpose of computing deduction under section 80hh.10. during the year under consideration the assessee received rs. 60,57,715 from alfa wassermann spa of italy for marketing their product fluxum injection in india. the amount was allocated between various segments including the two eligible units. out of the total marketing receipts of rs. 60,57,715 an amount of rs. 34,25,032 was allocated to the new industrial undertakings in proportion of the pharmaceutical sales made by the new industrial undertakings to the total sales of the company. similarly, marketing expenses were also allocated proportionately to the units including the new industrial undertakings.according to the assessee, the business of the assessee company consists of manufacturing and marketing of pharmaceutical bulk drugs and formulations. the marketing receipts are not an independent source of income. the cost incurred by the company for marketing its products includes those of the new industrial undertakings but was reduced by recovering a part of the cost through utilisation of marketing infrastructure of the assessee company to market the products of others as well, like the one marketed viz. fluxum injection of alfa wassermann spa. hence, according to the assessee, the marketing receipts have a direct nexus to the profits earned from the new industrial undertakings. the marketing costs of eligible pharmaceutical unit deducted for computing the profits of the new industrial undertakings were reduced to the extent recovered by way of marketing receipts.therefore, the assessee rightly included these amounts in computing the profits derived from the new industrial undertakings for working out deduction under section 80hh. even assuming that the view of the department is correct, it is the case of the assessee that appropriate proportion of marketing costs allocated by the assessee to arrive at the profit derived from the new industrial undertakings should be excluded for determining the profit.11. it is also the case of the assessee that the departmental authorities failed to appreciate that the new industrial undertakings at lote parshuram and the research and development unit at govandi are independent and separate. the expenditure incurred in the research and development unit does not reduce the profits of the new industrial undertakings in any way. rather, this expenditure is relatable to the business carried on by the assessee in general. in fact, the research and development work is done to develop new products for promoting the future business of the assessee. the results of research activity at the research and development unit cannot be presumed to be automatically utilised in the new industrial undertakings. in any case, no new product was manufactured in the eligible units, which emanated as a result of research and development activities of the assessee company at least during the relevant previous year. relying upon the decision of the hon'ble madras high court in the case of bush boake allen (india) ltd. v. asstt. cit , learned counsel submitted, where there was no research and development expenses pertaining to the new industrial undertaking, apportionment of such expenses to work out profit derived from the said undertaking for the purpose of section 80hh merely on the presumption that the products manufactured therein also benefited out of research made at the research and development unit is not proper. further, relying upon the decision of the hon'ble punjab & haryana high court in the case of cit v. isher dass mahajan & sons , learned counsel submitted that where the receipts are relatable to the running of business and incidental to normal business activity, as in the case of the assessee where marketing a product is also part of regular business, apportionment of such expenses to work out profits derived from the eligible undertaking for the purpose of deduction under section 80hh cannot be done merely on the basis of presumption that the product manufactured therein received the benefit.12. in support of the above claim, learned counsel for the assessee brought our attention to the memorandum of association, clause iii(12), which reads as under: to carry on business as chemists, druggists, chemical dealers, importers, exporters, wholesale or retail dealers and to undertake sales and distribution agencies for the products of other concerns, firms, persons, companies, whether such products are manufactured in the company or otherwise and whether such products are of the description hereinabove specified or other products of whatever nature and kind and to buy, sell, refine, manipulate, import, export or deal in the products or goods herein specified, either as principals or as agents; 13. the learned departmental representative submitted, supporting the orders of the revenue authorities, that there is no finding as to whether this is related to assessee's business. the issue is whether income is derived from new industrial undertakings. in support of the above proposition, learned departmental representative relied upon the decision of the hon'ble supreme court in the case of ito v. induflex products (p) ltd. (sc) and also the decision of the hon'ble madhya pradesh high court in the case of d.p. agrawal v. cit . learned departmental representative, relying upon both the decisions, submitted that there should be a close relation and the receipt must be received from the business carried on by the assessee. he further submitted that the profits should be derived from the business, which would be the subject-matter of exemption and there must be profits out of the business carried on by the assessee and the expression "profits" used in the section connotes positive profit earned from the business alone, which can be the subject-matter of exemption. hence, learned departmental representative submitted, the claim of the assessee is liable to be rejected.14. we have heard the rival submissions and gone through the orders of the revenue authorities and the decisions cited. the deduction under section 80hh is granted to an industrial undertaking on profits and gains derived by an industrial undertaking. the term "derived from" is narrower than the term "attributable to" as settled by the decision of the hon'ble supreme court in the case of cit v. sterling foods (1999) 153 ctr (sc) 439 : (1999) 234 itr 579 (sc), therefore, it is only the profits of an industrial undertaking which are eligible for deduction under section 80hh. the assessee may be engaged in multiple business activities and the profits from such activities cannot become eligible for deduction under section 80hh merely because these are the business profits. the assessee has placed strong reliance on the decision of the jurisdictional high court in the case of cit v. bangalore clothing co., which, in our opinion, does not render any assistance to the cause of the assessee because that is in the context of section 80hhc where the scheme and language deployed is different as compared to section 80hh of the act. further, the marketing activities carried on by the assessee are independent of the activities of the industrial undertaking. thus, the net marketing receipts i.e. gross receipts less expenses incurred/allocable to earning of such marketing receipts have been rightly excluded from the profits and gains of industrial undertaking by the learned cit(a). hence, we confirm the order of the learned cit(a) on this issue. hence, the appeal of the assessee on this ground fails and dismissed.15. the next ground (ground nos. 5 and 6) of objection by the assessee is directed against the order of the cit(a), confirming exclusion of interest of rs. 67,482 while computing profits of the eligible undertakings for the purpose of deduction under section 80hh of the act.16. learned counsel for the assessee submitted, he is under instruction not to press this ground. hence, this ground is dismissed as not pressed.17. the next ground, i.e. ground no. 7 is regarding the allocation of expenses of independent research and development unit while computing the profits of new industrial undertaking for working out deduction under section 80hhc of the act.18. we find that this issue was raised by the assessee before the learned cit(a) vide ground no. 9. the learned cit(a) has dealt the issue under section 80hh vide paras 9 to 15 at pp. 5 to 8 of the appellate order. the findings given by the learned cit(a) in para 15 are reproduced as under: therefore, to sum up ground nos. 5 to 10 are allowed in part to the extent mentioned above and this deduction may be recomputed in accordance with the directions contained in the preceding paras of these grounds of appeal.however, from the perusal of paras 9 to 14 of the appellate order, we find that this issue has not been dealt by the learned cit(a) although he has referred to the issue in para 10 of the appellate order.accordingly, we remand back this issue to learned cit(a) for fresh adjudication as per law. hence, the appeal of the assessee on this ground is allowed for statistical purposes.19. the issue raised in ground no. 8 is regarding cit(a)'s direction to the ao to reduce 90 per cent of marketing receipts as reduced by proportionate salary on field staff and other expenses related thereto while computing profits of business in accordance with clause (baa) of explanation to section 80hhc of the act.20. this issue has been dealt with by the ao vide para 7 of his order, observing as under: the assessee company had not claimed deduction under section 80hhc in the return of income as the business income was less than 90 per cent of interest received. this fact has been stated in the covering letter filed with the return of income. however, on the presumption that after completion of the assessment, the assessed business income would be positive, the assessee company submitted form 10ccac duly certified by the auditor. the auditor has quantified nil deduction on the basis of the returned income. in the note submitted along with the statement of deduction under section 80hhc, the assessee company has stated that on completion of assessment deduction under section 80hhc should be computed on the basis of assessed income. however, it has been noticed that while computing the deduction, the assessee has considered total sales inclusive of excise duty but net of sales-tax and also 90 per cent of service charges (marketing receipts) received has not been reduced from the business income. the deduction has therefore been recomputed after adding back sales-tax of rs. 1,33,25,843 to total sales and after reducing 90 per cent of service charges and 90 per cent of export benefits from business income alongwith 90 per cent of interest received.21. ao further noticed that the assessee has not furnished the report in form 10ccac along with the return of income as provided under section 80hhc(4). as such, he held, assessee is not entitled to claim deduction under section 80hhc. he further held, furnishing of form 10ccac along with the return is mandatory and in the absence of it he disallowed the claim of the assessee.22. when the matter was carried before the cit(a), he held, filing of form 10ccac is procedural and the assessee can file it at any time before the completion of the assessment and this technical objection of the ao was thus negatived. cit(a) further took note of assessee's alternative contention that the ao should have reduced proportionate salary of field staff and other expenses from marketing receipts before reducing the same from profits. cit(a), following his decision in assessee's own case for the asst. yr. 1996-97, held that the marketing receipts are not profits of industrial undertaking and hence the ao was justified in reducing 90 per cent of such receipts from the profits while computing deduction under section 80hhc. however, he agreed with the assessee's submission that for earning marketing receipts, certain expenses are to be incurred and therefore only 90 per cent of the net marketing receipts, which should be reduced from the business profits.accordingly he directed the ao to examine as to what is the proportionate salary of field staff and other expenses, which are to be reduced from the marketing receipts, and to consider only net marketing receipts for computation of deduction under section 80hhc. aggrieved by the above order, assessee is in appeal before the tribunal.23. the arguments advanced by the learned counsel for the assessee in support of ground no. 4, given hereinabove vide paras 11, 12 and 13 of our order, is also part of the arguments in support of ground no. 8. as such, these arguments have not been repeated. learned counsel invited our attention to clause iii, i.e. the object for which the company is established, particularly item (12), which is already reproduced hereinabove vide para 12 of our order. learned counsel submitted, the memorandum of association expressly provides that one of the objects of the company is to undertake sales and distribution agencies for the products of other concerns. thus the marketing receipts are very part of the operational income of the assessee. hence, learned counsel submitted, cit(a) went wrong in directing the ao to reduce the profits of the business by 90 per cent of the net marketing receipts for the purpose of computing deduction under section 80hhc of the act. learned counsel submitted, the order of the cit(a) is to be modified to this extent.24. the learned departmental representative, on the other hand, supported the order of the cit(a).25. we have heard the rival submissions, gone through the orders of the revenue authorities and the decisions cited by the contending parties.the assessee has mainly relied on the decision of the jurisdictional high court in the case of cit v. bangalore clothing company (supra) to contend that the marketing receipts are operational income, hence, the same are liable to be included in the profits of business. in our humble opinion, in that case the hon'ble jurisdictional high court found that the export activities and the labour charges carried by the assessee were identical, hence, the hon'ble court extended the deduction under section 80hhc in a very limited manner; however the court did not overrule the earlier decisions of the hon'ble bombay high court in the case of cit v. kantilal chhotalal (2000) 163 ctr (bom) 476 : (2000) 246 itr 436 (bom) and cit v. ravi ratna exports (p) ltd. . thus, in our opinion, the receipts which can be eligible for deduction under section 80hhc must have a nexus with the export.26. as far as exclusion of marketing receipts from the profits of the business is concerned for the purposes of computation to deduction under section 80hhc, we find that these receipts have been earned by the assessee in respect of products of foreign principal marketed by the assessee in india, therefore, these have got no connection with the export activities of the assessee, especially when no material has been brought on record to show that the assessee's exported products and these products are the same and assessee got these marketing rights only because of export of its own products. as the learned git(a) has directed to exclude only 90 per cent of net marketing receipts i.e.gross receipts as reduced by direct expenditure incurred by the assessee to earn the same as per clause (baa) of explanation to section 80hhc, the same is liable to be upheld. we order accordingly. we further hold that such gross marketing receipts would also not form part of total turnover. thus, the appeal of the assessee on this ground fails and dismissed.27. the next ground (ground nos. 9 to 14) of objection by the assessee is directed against the order of the cit(a), confirming the disallowance of rs. 6 crores being payment to m/s lyka labs ltd. under agreement dt. 20th jan., 1998.28. it is the case of the assessee that the cit(a) went wrong in holding that part of the payment made to m/s lyka labs ltd. was attributable to non-compete condition and was capital in nature, ignoring the fact that the alleged enduring benefit was in the revenue field and that the period of 5 years was long in a company's life. it is also the case of the assessee that the cit(a) erred in holding that part of the payment made to m/s lyka labs ltd. was attributable to parting with the marketing information being in the nature of capital asset and that the expenditure attributable thereto was of capital nature. without prejudice to above, it is the case of the assessee that the cit(a) having held that marketing information was capital asset akin to know-how, he ought to have allowed depreciation on the amount of rs. 6 crores being cost of information. it is also the case of the assessee that the cit(a) went wrong in enhancing the income of the assessee by withdrawing deduction of rs. 1,00,00,000 allowed under section 35ab of the act.29. ao noticed, during the year under consideration, assessee started marketing of formulations based on nitroglycerine. assessee paid an amount of rs. 6 crores to m/s lyka labs ltd. towards supply of marketing information, clinical data, scientific details in respect of formulations based on bulk nitroglycerine. out of total amount of rs. 6 crores, assessee debited rs. 50 lakhs in the p&l a/c with the remark that the amount paid has been deferred and is being charged over 36 months. however, in the computation the assessee claimed deduction of rs. 6 crores as expenditure incurred wholly and exclusively for business of the company. on enquiry, it was submitted before the ao that the payment is primarily for enabling the assessee to efficiently market the formulations based on bulk drug nitroglycerine. assessee obtained information/details such as clinical data, scientific details/reports on clinical trials carried out by m/s lyka labs ltd. in respect of formulations based on bulk drug nitroglycerine (which according to the assessee, required to convince the medical profession about the credibility of the drug and development of marketing strategy), break-up of state-wise list of wholesalers/stockists/dealers of formulations, break-up of sale of formulations for last 5 years, break-up of state-wise list of specialists/doctors/cardiologists and institutions shortlisted by m/s lyka labs ltd. with respect to formulations, visual aid designs, copies of promotional material used, so as to establish itself in the market. copy of agreement between the assessee and m/s lyka labs ltd. dt. 20th jan., 1998 was submitted before the ao. it was further contended that the payment is for a short-term advantage in marketing of nitroglycerine formulations in the initial stages, as such expenditure being revenue in nature is allowable under section 37 of the act. it was also contended that the expenditure does not fall within the ambit of section 35ab as the said section is applicable only in the case of "technical know-how" pertaining to manufacturing/processing.30. however, the ao did not agree with the contentions of the assessee.he held, purpose of this 'know-how' obtained ranges from clinical data, reports on clinical trials, side effect and contra-indications of the drug to information to educate doctors, physicians, etc. which shows that it is technical know-how as such covered under section 35ab.accordingly, ao allowed deduction of l/6th of the total amount for the year under consideration and the balance to be allowed in subsequent five years. aggrieved, assessee approached the first appellate authority.31. it was contended before the cit(a) that the know-how obtained by the assessee is not covered under section 35ab. the know-how covered under section 35ab is industrial information or technique that is likely to assist in manufacture or processing of goods. the information, which assists in the marketing of products in the initial stages, is not know-how contemplated or covered by the provisions of section 35ab. the entire expenditure incurred, it was submitted, is of revenue nature and accordingly to be allowed.32. cit(a) agreed with the assessee that the know-how covered by section 35ab does not cover the information with regard to marketing of product in the initial stage. on going through the agreement entered into with m/s lyka labs ltd., cit(a) observed, the information which is to be passed on to the assessee under the agreement in no way assist the manufacture or processing of goods. cit(a) however held, though allowing deduction to the assessee under section 35ab was not correct, at the same time he held, this expenditure did not appear to be of revenue nature either, particularly in view of clauses 4 and 8 of the agreement between the parties. he held, the expenditure is of capital in nature, which is not eligible for any deduction. assessee's comments were called for on the point by the cit(a).33. cit(a) noticed, as per the agreement, m/s lyka labs ltd. invested substantial resources in obtaining market/product information connected with marketing of formulations made from bulk drug nitroglycerin, which is of vital importance to marketing of products to doctors, institutions, etc. so as to answer their queries related to both bulk drug/formulations of nitroglycerine and also to educate the doctors in the new developments. cit(a) noted, the agreement further states that m/s lyka labs ltd. possessed certain clinical data, scientific details, reports on clinical trials carried on by m/s lyka labs ltd. in the last few years and it also developed substantial expertise in ethical promotion of formulation and in possession of valuable market information pertaining thereto. regarding assessee company, the agreement further stated that it is in the business of manufacturing, marketing and distribution of various cardiac products and desires to expand its market share/activities in the field of nitroglycerine based formulations. while deciding the issue, cit(a) has taken note of the following three important clauses: (3) the obligations undertaken by lyka hereunder shall not be assigned by lyka to any third party without the prior written consent of usv. (4) lyka undertakes not to disclose the data, details and the scientific and marketing know-how referred to herein to any third party for a period of at least three years from the date thereof. (8) for a period of 5 years from the date of this agreement lyka shall not compete with usv directly or indirectly or through its affiliates in the promoting, distribution and selling activities of formulations made from the bulk drug nitroglycerine i.e. formulations whose major ingredient is the bulk drug nitroglycerine.34. considering that m/s lyka labs ltd. was prevented from disclosing the know-how to any third party for a minimum of three years and further it undertook not to compete with the assessee company in this field for five years, which is. in the nature of non-compete agreement and further taking note that this information will not be disclosed to any third party without prior written consent of the assessee, cit(a) came to the conclusion that the payment made by the assessee is in the nature of capital expenditure. he held, firstly, the payment was for passing certain information to the assessee, which cannot be passed on to a third party. cit(a) held, this is of capital nature. assessee contended before the cit(a) that the restriction not to compete or to pass the information for three years or five years cannot be treated as long-term benefit. for the above proposition, assessee relied upon the decision of the hon'ble madras high court in the case of cit v. late g.d. naidu by lrs . assessee further relied upon the decision of the hon'ble supreme court in the case of cit v. british india corporation ltd. , wherein the hon'ble supreme court held, seven years is not a long time and allowed the expenditure as revenue character. assessee also relied upon the decisions of the hon'ble supreme court in the case of cit v. best & co. (p) ltd. and in the case of gillinders abruthnot & co. ltd. v.cit . regarding the nature of expenditure for obtaining the marketing information, assessee relied upon the following decisions:cit v. service station equipment (p) ltd. (1981) 22 ctr (bom) 72 : (1981) 132 itr 130 (bom); it was contended before the cit(a), if the outgoing expenditure is related to carrying on or conduct of business, it may be regarded as an integral part of profit-earning process and not for acquisition of an asset/right of a permanent character. for the above proposition, assessee relied upon the decision of the jurisdictional high court in the case of cit v. service station equipment (p) ltd. (supra). on the basis of the above decisions, assessee contended that no right of any permanent nature has been assigned to the assessee under the said agreement. as such, the expenditure is to be treated as revenue in nature.35. cit(a) held, to avoid competition, the payment made is to be treated as capital expenditure. he got support from the following passages under the heading "expenditure incurred in order to avoid business competition" at p. 1622 of vol. ii of 1991 edition of chaturvedi & pithisaria's income-tax law: payment made to ward off competition in business to a rival would constitute capital expenditure if the object of making that payment is to derive an advantage by eliminating the competition over some length of time; the same result would not follow if there is no certainty of the duration of the advantage and the same could 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 on the circumstances and the facts of each individual case [cit v. coal shipments (p) ltd. , devidas vithaldas & co. v. cit 1972 ctr (sc) 28 : (1972) 94 itr 277, 285 (sc)]. ordinarily, money paid to keep out a potential competitor in business, where the benefit is of an enduring nature, is on expenditure in the nature of capital. [behari lal beni parshad v. cit (1959) 35 itr 576 (punj); assam bengal cement co. ltd v. cit ;.... orissa road transport co. v. cit (1970) 75 itr 126 (ori)]. where, however, the benefit is not of an enduring nature but is to exhaust in a year or a short period the expenditure is of a revenue nature and is allowable. [ma. jabbar v. cit ;.... champion engineering works ltd. v. cit the cit(a) held that the payment made to m/s lyka labs ltd. by way of non-compete fee is capital expenditure and five years is sufficient to hold as long period and the benefit as enduring nature. in support of the view that five years is a long period, cit(a) relied upon the decisions in the case of cit v. hindustan pilkington glass works bengal cement co. ltd. v. cit part of the payment is attributable to non-compete agreement and is capital in nature.36. coming to other part of the payment, such as parting of marketing information, cit(a) held that m/s lyka labs ltd. invested substantial resources for generating the information. the information that m/s lyka labs ltd. parted therefore is capital asset. he further considered the fact that the assessee started marketing formulations based on nitroglycerine during this period. thus the information obtained by the assessee altogether is for new product. he has further taken note that m/s lyka labs ltd. undertook not to disclose information to any third party for three years, which shows the information not to become redundant for three years at least. as such, the assessee becomes the sole user of information at least for three years. this is a benefit of enduring nature as far as the assessee is concerned. he held, the decision of the jurisdictional high court in the case of cit v. service station equipment (p) ltd. (supra) is not relevant and helpful to the assessee as the facts were different. in that case the agreement was to remain in force for a period of ten years. not so in the instant case of the assessee, he held. thus the cit(a) held, the assessee's contention that the payment made to m/s lyka labs ltd. for obtaining marketing information is of revenue nature, is not acceptable. he further held, assessee is not entitled to deduction under section 35ab, which has been allowed to it and therefore the same, he directed, to be withdrawn. however, he accepted the alternative submission of the assessee that it had claimed deduction of only rs. 50 lakhs in the p&l a/c while the ao added rs. 6 crores, need to be rectified. aggrieved by the above order, assessee is in appeal before the tribunal.37. learned counsel for the assessee brought our attention to paper book pp. 5 to 10, agreement dt. 20th jan., 1998, entered into between m/s lyka labs ltd. and the assessee, particularly clause 5, which reads as under: 5. lyka shall not disclose to any third party any information pertaining to business of usv which comes in its possession in the course of discharging its obligations hereunder unless the same is in public domain. (a) clinical data, scientific details and reports on clinical trials carried out by lyka in respect of the formulations based on the bulk drug nitroglycerine. (b) source of manufacture of formulations from the bulk drug nitroglycerine. (c) break up of statewise list of wholesalers, stockists and dealers of the formulations. (e) break up of statewise list of specialists, doctors, cardiologists and institutions as shortlisted by lyka with respect to the formulations referred to in the above agreement.learned counsel submitted, by this the assessee is only trying to increase the business by expanding its existing business. assessee is already in this field. assessee was manufacturing nitroglycerine, which is similar business, for which agreement is also entered into. learned counsel submitted, inviting our attention again to paper book p. 8, clause 1 of the agreement, wherein it is stated that lyka shall supply and provide to the assessee clinical data, scientific details reports on clinical trials carried on by lyka in the past few years, valuable market information more particularly set out in the schedule thereto as 'scientific and marketing know-how. it is for this the assessee paid rs. 6 crores and not for non-compete clause. learned counsel repeated, assessee is already in the field of manufacturing nitroglycerine, in other words, assessee is already in this line of business and is trying to expand the market, for which purpose the payment is made. relying upon the decision of the hon'ble supreme court in the case of alembic chemical works co. ltd. v. cit counsel submitted, the decision of the cit(a) is liable to be reversed, as the facts in the instant case of the assessee are identical with that .38. learned counsel again, through written submission para 6.1, brought our attention to clauses 4 and 8 of the agreement with m/s lyka labs ltd. and submitted, cit(a) held that by virtue of clause 4, which provides that lyka not to disclose the know-how etc. as mentioned in the agreement to any third party for three years, ensures that the benefit derived by the assessee is a long-term benefit. similarly, the stand of the cit(a) is that by virtue of clause 8, which is non-compete clause for five years, the assessee derived long-term benefit. this finding is also assailed by the learned counsel. the finding of the cit(a) that the payments made to m/s lyka labs ltd. are on two counts-one is attributable to passing on information and data to the assessee and nondisclosure of same to any third party for a period of three years; and the other is attributable to non-compete clause in the agreement, which would remain effective for a period of five years, learned counsel submitted, is incorrect. he submitted, the decisions relied upon by the cit(a) to come to the above conclusion cannot be applied strictly. learned counsel submitted, particularly bringing our attention to the decision of the hon'ble supreme court in the case of k.tm.t.m. abdul kayoom and anr. v. cit , what is attributable to capital and what to revenue cannot be decided either exhaustively or universally. each case depends on its own facts. even a single significant detail may alter the entire aspect and the conclusion arrived at cannot be made .applicable in a given case. he particularly stressed the finding of the hon'ble supreme court : "to decide, therefore, on which side of the line a case falls, its broad resemblance to another case is not at all decisive. what is decisive is the nature of the business, the nature of the expenditure, the nature of the right acquired, and their relation inter se, and this is the only key to resolve the issue in the light of the general principles, which are followed in such cases." 39. relying upon the special bench decision of the tribunal in the case of peerless securities ltd. v. jt. cit , learned counsel submitted that the tribunal laid down certain general principles for determining whether an expenditure should be considered as capital or revenue nature, fairly comprehensively. to stress the point, learned counsel particularly brought our attention to the following observation of the tribunal: what is relevant in determining whether an expenditure is of capital or revenue nature is the purpose of the outlay and its intended object and effect, considered in a common sense way having regard to business realities. the test of enduring benefit is not a certain or conclusive test and cannot be applied mechanically without regard to the particular facts and circumstances of a given case. it is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in the enduring benefit test; what matters is the nature of the advantage in a commercial sense, and it is only where the advantage is in the capital field that the expenditure would be on capital account. if the advantage consists of merely facilitating the assessee's trading operations or enabling the management or conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for the indefinite future. by 'enduring' is meant enduring in the way that fixed capital endures and it does not connote a benefit that endures in the sense that for a good number of years it relieves the assessee of a revenue payment or a disadvantage. a payment made by the assessee to free himself from a capital liability, is capital expenditure, while a payment which frees an assessee from the liability to make recurring revenue payments or annual revenue payments is revenue expenditure. where the assessee has an existing right to carry on a business, any expenditure made by it during the course of business for the purpose of removal of any restriction or obstruction or disability, would be on revenue account, provided the expenditure does not acquire any capital asset. the expression 'once and for all' is used to denote an expenditure which is made once and for all for procuring an enduring benefit to business as distinguished from a recurring expenditure in the nature of operational expenses. if the expenditure is for the initial outlay or for acquiring or bringing into existence an asset or advantage of an enduring benefit to the business that is being carried on, or for extension of the business that is going on, or for a substantial replacement of an existing business asset, it would be capital expenditure. if, on the other hand, the expenditure, although for the purpose of acquiring an asset or advantage, is for running of the business or for working out that asset with a view to produce profit, it would be revenue expenditure. if the outgoing is so related to the carrying on or the conduct of the business that it may be regarded as an integral part of the profit-earning process or operation, and not for the acquisition of an asset of a permanent character, the possession of which is a condition precedent for the running of the business, then it would be expenditure of revenue nature. if it is intrinsically a capital asset, it is immaterial whether the price for it is paid once and for all, or periodically, or whether it is paid out of capital, or income, or linked up with net sales, the outgoing, in such a case, would be of the nature of capital expenditure. a lump sum amount for liquidating recurring claims would not cease to be revenue expenditure or get converted into capital expenditure merely because its payment is spread over a number of years. it is the intention and object with which the asset is acquired, that determines the nature of the expenditure incurred over it, and not the method or the manner in which the payment is made, or the source of such payment. if the expenditure is recurring and is incurred during the course of business or manufacture, it would be revenue expenditure. simply because the payment in the hands of the recipient has been considered a capital receipt, it is not necessary that in all cases it will have the same character in the hands of the person who has made the payment and vice versa. it is the true nature of the expenditure that is relevant and not the name or description or treatment given to it by the assessee in his books of account or other documents.40. learned counsel submitted, assessee was having the knowledge of manufacturing of products, i.e. to say, formulations based on bulk drug nitroglycerine. as per the agreement, m/s lyka labs ltd. was only to supply to the assessee the clinical data, reports on clinical trials, other scientific details in respect of formulations, source of manufacture of formulations, statewise list of wholesalers, stockists and dealers, statewise sales for last five years, statewise list of specialists, doctors, cardiologists and institutions as shortlisted by m/s lyka labs ltd., visual aid designs and copies of promotional materials used. assessee also had the option to obtain assistance from m/s lyka labs ltd in planning campaigns with doctors, medical institutions, etc. for conducting continuous medical education for doctors, devising sampling strategies and promotional schemes, market surveys and training medical representatives and other field force of the company. m/s lyka labs ltd. would provide the above for the sole benefit of the assessee for a period of at least three years from the date of the agreement. in consideration, assessee agreed to pay rs. 6 crores. basically the know-how that was obtained by the assessee was for developing the market for the product, viz. formulations of nitroglycerine, which was already very much within the existing line of assessee's business. agreement with m/s lyka labs ltd. was not for venturing into any new line of business. it was only for developing the market intrinsically linked with running of existing business. it is true, assessee entered into agreement with m/s lyka labs ltd with the sole intention of getting scientific and commercial know-how with a view to increase the profit. hence, learned counsel submitted, in view of the special bench decision of the tribunal in the case of peerless securities ltd. v. jt. cit (supra), the expenditure partakes the character of revenue expenditure and thus it is to be allowed.41. learned counsel assailed the view taken by the learned cit(a) that the assessee acquired the know-how from m/s lyka labs ltd. and it is an enduring benefit. he submitted, assessee has not obtained any benefit or advantage except the advantage of enabling to conduct assessee's business more profitably by adopting techniques of manufacturing and marketing formulations of existing basic product, while keeping the fixed capital unaltered and intact. assessee's expenditure was not at all in the capital field.42. coming to the decision of the jurisdictional high court in the case of cit v. service station equipment (p) ltd. (supra), learned counsel submitted, the distinction made by the learned cit(a) is not at all correct. in that case the agreement was to remain in force for ten years; whereas in the instant case of the assessee it is less than 1/3 of the period with regard to disclosure of information. relying upon the decision of the hon'ble gujarat high court in the case of cit v.power build ltd. , learned counsel submitted, even if the assessee obtained an advantage of enduring nature, since the assessee is already in the same line of business and not ventured into any new unit engaged in manufacturing and the advantage or benefit even if acquired is for facilitating the existing business, the expenditure cannot be treated as capital but it is only revenue expenditure. he particularly relied upon the following observation of the hon'ble high court: the assessee, carrying on business of manufacturing various types of motors and weighing machines, was assessed for the asst. yr. 1979-80. before the ao, the copy of the agreement, dt. 31st march, 1976, was filed. the said agreement was thereafter amended on 3rd march, 1977. in view of the original agreement, the assessee company was under obligation to return the books, technical data papers, drawings relating to the products authorised to be manufactured by the foreign collaborators. however, in view of the amended agreement, the assessee was entitled to retain all these documents, technical data, design, documentation, etc. in view of the earlier agreement, the assessee was allowed to manufacture for a period of five years. however, later on, there was no such restriction. it is in view of this the ao has not considered the amount of rs. 79,916 as revenue expenditure. the tribunal on the facts found that in the original agreement there was no renewal clause and the documents, that is to say, the technical know-how was required to be returned to the collaborators. however, in view of the later agreement for which no extra payment was to be made, the assessee was entitled to retain the technical know-how. the tribunal held that if it had any value, the assessee might have been expected to pay for it. the tribunal further held that it cannot be inferred that there was no particular value in the retention of the know-how documentation. therefore, it can hardly be said that the assessee obtained an advantage of, an enduring nature. it is required to be noted that the assessee was not a new unit engaged in manufacturing various types, of motors and weighing machines and this advantage or benefit even if acquired to facilitate to run the existing business, it should be treated as revenue expenditure.43. again learned counsel brought our attention to the decision of the hon'ble calcutta high court in the case of cit v. avery india ltd. is in tune with the decision of the hon'ble supreme court in the case of empire jute co. ltd. v. cit (supra), wherein their lordships observed : "a benefit that might endure long in the assessee's business may nonetheless be in the revenue field, if the benefit is in respect of asset which is part of the circulating capital". learned counsel submitted, in the instant case of the assessee, the know-how obtained by the assessee from m/s lyka labs ltd. does not form part of its fixed capital. possession of the know-how is intrinsically linked with running of the existing business of the assessee. assessee merely wanted to take advantage of the fast developing market for formulations of nitroglycerine. know-how is utilised for improving the profitability of existing business and not for starting a new business. hence, learned counsel submitted, expenditure is for expanding the already existing field and it is therefore revenue expenditure.44. further, relying upon the decision of the hon'ble madras high court in the case of cit v. simpson & co. ltd. , learned counsel submitted, this was a case wherein the assessee claimed a sum of rs. 20,56,956 representing a lump sum payment to its foreign collaborator towards import of technical know-how documentation relating to a new three cylinder diesel engine. ao held that the amount paid was capital as the assessee had the benefit of technical know-how indefinitely for the reason that for the first ten years this technical know-how will be assessee's exclusive domain and there was no restriction even for the use of know-how beyond the period of ten years. cit(a) accepted assessee's claim. learned counsel submitted, in this case the hon'ble high court held that the agreement is entered into for the purpose of running the business more profitably and effectively and with a view to yield profit to the assessee in the already existing field; as such the payment should be regarded as revenue in nature. coming to the instance case, learned counsel submitted, ever changing market demand necessitated the assessee to diversify its products by marketing formulations of bulk drug nitroglycerine. for this reason only the assessee entered into the agreement. it is for the benefit of the existing business and to run it more profitably and effectively to yield better profit. learned counsel submitted, as a matter of fact as per clause 7 of the agreement, assessee undertakes to use the data details and scientific and marketing know-how furnished by m/s lyka labs ltd. only for its own business and/or business of its affiliates with respect to business activities relating to formulations and not to disclose or divulge the same to any other person without the prior consent of m/s lyka labs ltd. there is no time frame mentioned in the agreement unlike in the case of cit v. simpson & co. ltd. (supra). hence, in the case of the assessee, the benefit/ advantage derived by virtue of impugned agreement is not unfettered and would remain so even after ten years, learned counsel submitted, assessee has not derived any enduring benefit from the know-how obtained by this agreement.45. learned counsel again relied upon the decision of the hon'ble delhi high court in the case of cit v. goodyear india ltd. .in this case the hon'ble high court held that the consideration was paid for betterment of the product and to enlarge the range of its existing products and the expenditure was an outlay of business in order to carry it on to earn better profit; as such this is to be treated as revenue expenditure. learned counsel submitted, in the instant case the assessee acquired the right to use technical knowledge and information to manufacture/ market the product already in the existing line of business. agreement with m/s lyka labs ltd. was for enlarging the range of existing products by marketing formulations based on bulk drug nitroglycerine. assessee basically obtained scientific and marketing information. this has not been disputed at any stage. hence, learned counsel submitted, this is revenue expenditure.for the same proposition he relied upon the decision of the hon'ble madras high court in the case of s.r.p. tools ltd. v. cit . this was a case wherein the assessee was already in the business of manufacture of motor vehicle accessories. assessee entered into a technical collaboration agreement with the japanese company for obtaining technical know-how for the manufacture of precision tools such as hobs, gear shaper cutters, broaches, shaving cutters, etc. assessee's claim of revenue expenditure was disallowed by the ao. hon'ble high court held that the collaboration was in the field of existing business; as such the payment to be treated as revenue expenditure. learned counsel also relied upon the decision of the hon'ble andhra pradesh high court in the case of cit v. venkateswara hatchery (p) ltd. for the same proposition. in this case the hon'ble high court held : "what is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowed. if the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of assessee's business more efficiently or more profitably, leaving the fixed capital untouched, the expenditure would be treated under revenue account and not otherwise". learned counsel also relied upon the decision of the hon'ble madras high court in the case of cit v.aquapump industries (1996) 132 ctr (mad) 506 : (1996) 218 itr 427 (mad).46. learned counsel again relied upon the decision of the hon'ble supreme court in the case of alembic chemical works ltd. v. cit (supra). he particularly stressed the following observation of the hon'ble supreme court: on 8th june, 1961, the appellant, a company engaged in the manufacture of antibiotics and pharmaceuticals, was granted a licence for the manufacture of penicillin. by the year 1963, it had already made an outlay of more than rs. 66 lakhs for setting up a plant for the production of penicillin. in the initial years, the appellant was able to achieve only moderate yields of penicillin with a view to increasing the yield, the appellant started negotiations in 1963, with meiji, a reputed japanese enterprise engaged in the manufacture of antibiotics, which culminated in an agreement dt. 9th oct., 1963, whereunder meiji, in consideration of a 'once for all payment' of us $ 50,000 (equivalent then to rs. 2,39,625), agreed to supply to the appellant the 'subcultures of meiji's most suitable penicillin producing strains' in a pilot plant, the technical information, know-how and written description of meiji's process for fermentation of penicillin along with a flowsheet of the process in the pilot plant, and the design and specifications of the main equipment in such pilot plant, and to arrange for the training of the appellant's representatives in meiji's plant in japan at the appellant's expense and advise the appellant in large scale manufacture of penicillin for a period of two years. the appellant was to keep the technical know-how confidential and secret and was not to seek any patent for the process. for the asst. yr. 1964-65, the appellant claimed deduction of the sum of rs. 2,39,625 as a revenue expenditure. both the department and the tribunal rejected the claim holding that the expenditure was capital in nature.in support of assessee's claim and submitted that in the instant case of the assessee the facts are identical. learned counsel further brought our attention to the observation of the hon'ble supreme court in the case of alembic chemical works ltd. v. cit (supra), which reads as under: that the improvisation in the process and technology in some areas of the enterprise was supplemental to the existing business and there was no material to hold that it amounted to a new or fresh venture. the further circumstance that the agreement pertained to a product already in the line of the appellant's established business and not to a new product indicated that what was stipulated was an improvement in the operations of the existing business and its efficiency and profitability not removed from the area of the day-to-day business of the appellant's established enterprise. the financial outlay under the agreement was for the better conduct and improvement of the existing business and was revenue in nature and was allowable as a deduction in computing the business profits of the appellant. it would be unrealistic to ignore the rapid advances in research in antibiotic medical microbiology and to attribute a degree of endurability and permanence to the technical know-how at any particular stage in this fast changing area of medical science. the state of the art in some of these areas of high priority research is constantly updated so that the know-how could not be said to bear the element of the requisite degree of durability and non-ephemerality to share the requirements and qualifications of an enduring capital asset. the rapid strides in science and technology in the field should make us a little slow and circumspect in too readily pigeonholing an outlay, such as this, as capital. the idea of 'once for all' payment and 'enduring benefit' are not to be treated as something akin to statutory conditions; nor are the notions of 'capital' or 'revenue' a judicial fetish. what is capital expenditure and what is revenue are not eternal verities but must needs be flexible so as to respond to the changing economic realities of business. the expression 'asset or advantage of an enduring nature' was evolved to emphasise the element of a sufficient degree of durability appropriate to the context.47. learned counsel also brought our attention to the decision of the ahmedabad bench of the tribunal in the case of smartchem technologies ltd. v. ito in ita nos. 3955/ahd/2003 and 654/ahd/2005 [reported at (2005) 97 ttj (ahd) 818-ed.]. in this case, the tribunal held, after discussing the issue in great detail, that if a person starting absolutely a new business, comprehends that another known person may compete with him in future, and to ward off such competition enters into a non-compete agreement with him, then the agreement is certainly for increasing the profitability of his existing business. it is so because, tribunal held, the agreement ensures that the first person will be able to carry on business without competition from the second and thereby enhance the profitability. to come to the above conclusion tribunal relied upon the decision of the hon'ble supreme court in the case of empire jute company ltd. v. cit (supra), wherein one jute mill purchased the loom hours from others and claimed deduction of that amount paid as revenue expenditure. reversing the decision of the hon'ble high court, hon'ble supreme court held that the amount paid by the assessee for purchase of loom hours was in the nature of revenue expenditure. the hon'ble supreme court held that by purchase of loom hours from the other mills, assessee has not obtained any new asset.there was no addition or expansion of profit-making apparatus.acquisition of additional loom hours did not add to the fixed capital of the assessee nor the assessee acquired a new source of profit or income when it purchased the loom hours. the hon'ble supreme court held, the expenditure incurred for the purpose of operating the looms for longer working hours primarily and essentially related to the operation of working of the looms which constituted the profit-making apparatus of the assessee and this was expenditure laid out for profit increasing. it was part of the cost of operating, hon'ble supreme court held.48. learned counsel submitted, in the instant case of the assessee the facts are very similar. prior to entering into agreement with m/s lyka labs ltd., assessee was in the pharmaceutical business and was actually manufacturing the bulk drug nitroglycerine. assessee already had the knowledge of manufacture of formulations based on nitroglycerine. it did not enter into the agreement with m/s lyka labs ltd. for venturing into a new business. the agreement basically provided that m/s lyka labs ltd. would furnish marketing know-how primarily to the assessee.the non-compete clause for five years was inserted into the agreement to enhance profitability of the products of the assessee because if m/s lyka labs ltd. uses the know-how to manufacture identical products, the profitability of the assessee's products would definitely suffer due to inevitable competition. learned counsel submitted, it is not a fact that by virtue of this agreement the assessee would be the sole producer of the formulations of nitroglycerine. the agreement does not protect the assessee from competition from other manufacturers of similar products who may not have anything to do with m/s lyka labs ltd. due to continuous advancement of science and technology, partial safeguard from competition for mere five years can hardly be considered as an enduring advantage. hence, learned counsel submitted, the payment should be treated as revenue expenditure.49. learned counsel further submitted, in fact the decision relied upon by the learned cit(a) in the case of assam bengal cement co. ltd. v.cit (supra), which was affirmed by the hon'ble supreme court in assam bengal cement co. ltd. v. cit , supports the case of the assessee because the assessee spent the money primarily to gain better access to the market and augment profitability. it is an integral part of profit-earning process. in short, learned counsel summed up his arguments as under: (a) where the know-how is obtained for manufacturing a new product in the existing line of business of the assessee or for the purpose of development and/or better exploitation of the market, the expenditure incurred for obtaining the said know-how is revenue expenditure. (b) where the know-how is utilised for improving the profitability of an existing business and not for starting a new business, the expenditure for obtaining the same would be revenue expenditure. (c) a benefit that might endure long in the assessee's business may nonetheless be in the revenue field, if the benefit is in respect of an asset which is part of circulating capital. (d) expenditure to acquire knowledge cannot be disallowed merely because knowledge dies hard. where the expenditure, although enduring in character, has its impact on the running of the business, there can be no doubt that it is revenue expenditure. (e) the period for which the know-how, etc. could be used is of little consequence in determining whether the expenditure incurred should be considered as revenue or capital expenditure. even if the know-how could be used for an indefinite period, the expenditure to obtain the same could still be of revenue nature. (f) the mere fact that the person providing the know-how is precluded by the agreement from divulging the same to a third party, only for a definite period, does not make the expenditure one of capital nature. (g) the advantage gained by acquiring technical knowledge could not be regarded as of enduring value due to fast changing technology, especially in the pharmaceutical field. the rapid strides in science and technology in the field should make us a little slow and circumspect in too readily pigeonholing an outlay as capital. (h) the products cannot be new for all time to time (come), as the novelty attached to the new product would wane and the tag of newness of the products would wear off after some years of production. so just because the know-how is utilised for an indefinite period for making a product hitherto not made by the assessee, it cannot be said that the expenditure incurred for the said know-how is capital expenditure. (i) the limitations placed in an agreement on the right of the appellant in dealing with the know-how and the conditions as to non-disclosure of the know-how, pertains more to the use of the know-how than to its exclusive acquisition. (j) the expenditure incurred in connection with an agreement to ward off competition, irrespective of the duration of enforceability of such an agreement, would be a revenue expenditure, if it is for the purpose of enhancement of profitability.50. learned counsel submitted, even otherwise, in the case of m/s lyka labs ltd. the ao treated the impugned receipt of rs. 6 crores as revenue receipt for the following reasons and the same was confirmed by the cit(a): (a) the marketing and clinical data and allied rights had been generated/ acquired by m/s lyka labs ltd. during the normal course of its business and, hence, could not be treated as its capital asset. (b) clauses 4 to 8 of the agreement clearly show that it was not a one time complete transfer of know-how to usv. the restrictions placed were only for a period of three years and five years regarding non-disclosure and noncompetition respectively. (c) the amount received by m/s lyka labs ltd on transfer of marketing know-how is only rs. 6 crores, which is negligible as compared to its total turnover. (d) the compensation received for transfer of know-how did not affect or alter the capital structure of m/s lyka labs ltd. m/s lyka labs ltd. did not dispose of any capital asset by entering into the agreement with usv. (e) m/s lyka labs ltd. earned consideration for granting the know-how not by parting with any capital asset but merely by applying the technical data generated by it differently in its trade.in view of the above, learned counsel submitted, the orders of the revenue authorities are liable to be reversed.51. replying to the above, learned departmental representative supported the orders of the revenue authorities and submitted, first of all the assessee capitalised receipt. secondly, the learned departmental representative submitted, whatever data received by the assessee is permanent and this gives the assessee an enduring benefit.learned departmental representative further submitted, there is a non-compete clause and the payment is made for this. he relied upon the decision of the hon'ble delhi high court in the case of triveni engineering works ltd. v. cit and submitted, in this case the assessee paid rs. 5,000 to a company for preparing a project report on manufacturing insecticide formulation. assessee was not manufacturing insecticide formulations. thus the payment was for project report only. ao held that this is a capital expenditure.assessee paid further rs. 11,000 and rs. 3,000 for survey report on extra melkral alcohol. assessee wanted these reports to put to a better use its by-products, viz., molasses. assessee was not producing any alcohol during the period. ao treated this also as capital expenditure.tribunal confirmed the view of the revenue authorities. the hon'ble high court on further appeal confirmed the decision of the tribunal.52. in reply, learned counsel distinguished the facts and contended that the assessee had the knowledge of manufacturing the products, i.e.formulations based on bulk drug nitroglycerine and the assessee was only at the most trying to obtain the latest technology and was trying to expand its market viability. learned counsel submitted, this in fact supports assessee's case.53. who have heard the rival submissions, gone through the orders of the revenue authorities and the decisions cited by the contending parties. we are of the view that the appeal by the assessee on this ground is liable to be allowed. from the facts narrated above, it is seen that the assessee was already in the field of producing bulk drugs and pharmaceutical products. assessee entered into agreement with m/s lyka labs ltd. to improve the market viability and to obtain new technology in the fast changing field of bulk drug formulations. thus, the decision of the hon'ble supreme court in the case of alembic chemical works ltd. v. cit (supra) is clearly applicable. this was a case wherein the assessee was already manufacturing penicillin. with a view to increasing its yield, the assessee negotiated and entered into an agreement with japanese company to supply the assessee the subcultures of meiji's most suitable penicillin producing strains in a pilot plant, technical information and know-how.hon'ble supreme court held : "that the improvisation in the process and technology in some areas of the enterprise was supplemental to the existing business and there was no material to hold that it amounted to a new or fresh venture. the further circumstance that the agreement pertained to a product already in the line of the appellant's established business and not to a new product indicated that what was stipulated was an improvement in the operations of the existing business and its efficiency and profitability not removed from the area of the day-to-day business of the appellant's established enterprise.the financial outlay under the agreement was for the better conduct and improvement of the existing business and was revenue in nature and was allowable as a deduction in computing the business profits of the appellant." 54. we also find that the view canvassed by the learned counsel gets support from the decision of the hon'ble supreme court in the case of empire jute company ltd. v. cit (supra), wherein the hon'ble-supreme court held, purchase of loom hours paying an aggregate sum does not go to the capital expenditure but it only facilitates the looms to work its full capacity and therefore the expenditure incurred for purchase of loom hours by a mill could only be treated as revenue expenditure.55. it is an undisputed fact that the assessee is engaged in the manufacturing and marketing of various pharmaceutical products and also have the knowledge of manufacturing products made from the bulk drug nitroglycerine. however, with a view to expand its market and, to increase and expand its activities in the field of nitroglycerine based formulations, the assessee has entered into an agreement for supply of scientific and marketing know-how possessed by m/s lyka labs ltd vide agreement dt. 20th jan., 1998. the scientific and marketing know-how to be provided by m/s lyka labs ltd. consists of the following: 5. lyka shall not disclose to any third party any information pertaining to business of usv which comes in its possession in the course of discharging its obligations hereunder unless the same is in public domain. (a) clinical data, scientific details and reports on clinical trials carried out by lyka in respect of the formulations based on the bulk drug nitroglycerine. (b) source of manufacture of formulations from the bulk drug nitroglycerine. (c) break-up of statewise list of wholesalers, stockists and dealers of the formulations. (e) break-up of statewise list of specialists, doctors, cardiologists and institutions as shortlisted by lyka with respect to the formulations referred to in the above agreement.the assessee and m/s lyka labs ltd. have also agreed that m/s lyka labs ltd. would not supply data, details and scientific and marketing know-how relating to formulations made from bulk drug nitroglycerine to any third party for a period of at least three years from the date of the agreement and the assessee would not disclose any information in respect of nitroglycerine based formulations to any other person without the prior written consent of m/s lyka labs ltd. in addition to it m/s lyka labs ltd. has also agreed not to compete with the assessee directly or indirectly for a period of five years from the date of the agreement. the total consideration paid by the assessee in pursuance of this agreement stands at rs. 6 crores. the ao has treated the same as know-how and allowed l/6th thereof under the provisions of section 35ab of the act; whereas the learned cit(a) has held that it could not be construed as know-how and based upon various clauses of the agreement has held that assessee derived a benefit of enduring nature; hence it was of a capital nature and disallowed the same accordingly.56. learned counsel has vehemently argued that the impugned payment is of revenue nature because it has resulted in increasing the market share, higher revenues and carrying of manufacturing/marketing operations more efficiently. it has also been contended that the assessee by obtaining this information has curtailed the period which could have been consumed in generating these informations by the assessee, on its own, therefore, the revenue expenditure which would have been incurred by the assessee if the same informations were generated on its own has been incurred in this form and also the assessee has been able to generate revenue without wasting time, hence, the expenditure so incurred is nothing more than the recurring of revenue expenditure in one go and is allowable as such. both these contentions of the assessee have sufficient force in view of the judicial decisions relied on by the assessee, particularly in the light of the decision of the hon'ble supreme court in the case of empire jute company ltd. v. cit (supra), which is clearly applicable.57. having stated so, we consider it pertinent to look at the terms of the agreement and the finding of the learned cit(a) that m/s lyka labs ltd. invested substantial resources in generating market information, therefore, it was of capital nature. in this regard, we would like to first mention that nature of expenditure has to be looked in the hands of the party who is incurring it and not the party who is receiving it.it is not in dispute that the information generated by m/s lyka labs ltd. by investing substantial resources is connected with the marketing of the products (as mentioned in the agreement), which necessarily implies the incurrence of expenditures of revenue nature such as salaries, travelling, collection of statistical data through various government/business associations, trade associations, etc. all these expenses are basically of revenue nature and incurred in a regular course and as such are allowable. hence, one time payment made by the assessee company to m/s lyka labs ltd. does not alter the basic nature of these expenses particularly in the context of present business environment where various activities are being outsourced and various entities undertake such activities on contract basis or on its own and sell such informations and data like any other goods which can be used by other business entities as raw material or support services to carry out it's operations or expand it's activities. to further elaborate some entities work like knowledge centres like m/s lyka labs ltd. in the present case and derive revenue by selling knowledge to the other party who, in turn, by purchasing the same attains it's objective of becoming bigger faster. thus, the information, if looked upon in an integrated manner, is no more than the facilitation of profit-earning process.58. the other aspect involved is that the agreement also provides for noncompetition by m/s lyka labs ltd. further, there has not been any bifurcation of the total consideration towards both the things and the learned cit(a) also held that part of the consideration can be attributed towards non-competition as well. however, on perusal of the complete agreement, we find that both the parties have not provided any recourse or provision for indemnification or compensation in case of breach of terms of the agreement by any of the parties. further, if we go through the contents of the scientific and marketing know-how obtained by the assessee company, it becomes amply clear that the emphasis of the assessee company is on getting the information/data created by m/s lyka labs ltd. in a readymade manner so as to reduce the gestation period and to enter into the activities at a rapid pace and it is because of this reason only and having regard to the nature of information, no judicial remedy has been provided for future obligations to be observed by both the parties. in view of such a situation, in our considered view, in substance the agreement though refers to non-disclosure of information by the assessee and m/s lyka labs ltd. and non-competition by m/s lyka labs ltd. for specified period, payment is for of information regarding clinical data, scientific details and valuable market information only. further, even if some of the consideration is attributed towards non-competition, the assessee's case finds support from the decision of the ahmedabad bench of the tribunal in the case of smartchem technologies ltd. v. ito, cited supra, wherein the tribunal followed the decision of the hon'ble supreme court in the case of empire jute co. ltd. v. cit (supra) in concluding that the expenditure to avoid competition was dictated by the business necessity and commercial expediency and the benefit derived out of it was directly related to enhancement of its profitability; hence, the said expenditure was of revenue nature.59. the deductibility of the payment made by the assessee company can be viewed with another perspective. the scientific and market information has been generated by m/s lyka labs ltd. by carrying out the scientific research and market research. had this been carried out in-house, the amount excluding the amount spent on land and building and marketing information, the assessee would have been eligible for one and one-half times deduction thereon as per the provisions of section 35(2ab) of the act. as per provision of this section, whatever amount the assessee would have spent on scientific research including clinical trials and approvals from competent authorities including the capital expenditure on plant and machinery would have been eligible for weighted deduction and the expenditure relating to marketing information and statistics would have been allowed under the normal provisions of the act as such.60. in view of the foregoing discussion, we are of the view that the decision of the learned cit(a) is not correct in law and reverse the same and direct the ao to allow the expenditure as revenue expenditure.61. coming to the next ground (ground nos. 15 and 16) of objection by the assessee it is directed against the order of the cit(a) in confirming the disallowance of rs. 12.50 crores paid under the orders of the company law board (clb). according to the assessee cit(a) failed to appreciate the voluminous material placed before him that the payment was made to escape the adversely affected business of the assessee. assessee was facing enquiries/ proceedings on account of complaints made by disputing parties, which adversely affected assessee's business. it is also the case of the assessee that the cit(a) failed to note that the subsequent events and progress in the business confirmed assessee's claim that the payment was made to avoid adverse impact on the business of the assessee company.62. facts are discussed by the ao vide paras 9.1 to 15, pp. 8 to 32 of his order. while framing the assessment order, ao noticed, assessee debited an amount of rs. 12,06,53,113 under the head "miscellaneous expenses". it was submitted that the assessee company and its promoters had several disputes. there were various proceedings on different issues. had the litigation allowed to continue, it would damage assessee's reputation and hence assessee made the payment. it was submitted, in fact assessee's business stagnated between the accounting year ended on 31st march, 1997 and 31st march, 1998 with paltry increase of rs. 7 crores in the turnover. there were many enquiries from excise authorities, sales-tax authorities and regional director under the companies act. all this affected assessee's business and to avoid unnecessary litigation and to ensure a stable and peaceful existence, assessee made the impugned payment of rs. 12.5 crores. the payment was made under the order dt. 10th march, 1998 of the clb. clb found that the pendency of litigation adversely affected the reputation, triggered false signals in the pharmaceutical industry and seriously affected the business growth of the assessee and therefore clb held that we are satisfied that the money paid by usv and to be paid by usv is for the legitimate and genuine business reasons of usv.shri a.v. gandhi was in the management and control of several companies including assessee company and m/s vital pharmacal (p) ltd. family of shri a.v. gandhi, huf and the family trust owned almost the entire share capital of these companies. on the death of shri a.v. gandhi, bitter quarrels ensued between the family members for acquiring/retaining the controlling interest of all the companies, including assessee company. after narrating the disputes between the parties, clb passed an order dt. 3rd april, 1998 and directed that both the orders dt. 10th march, 1998 and 3rd april, 1998 should be read together. para 8 of clb's order dt. 3rd april, 1998 has been reproduced by the ao, which reads as under: the family arrangement, the principal terms of which have been recorded by us effectively put to an end the extensive litigation between the parties/companies involved. the pendency of the litigation, adversely affected the reputation, inter alia, of usv, triggered false signals in the pharmaceutical industry, and, serious affected the business growth and prosperity of usv. we are satisfied that the money paid by usv and to be paid by usv is for the legitimate and genuine business reasons of usv.63. on the basis of the above, ao found that the finding of the clb "the legitimate and genuine business reasons of usv" for parting with rs. 12.06 crores (approximately) was the outcome of family arrangement that was the culmination of extensive litigation between the family members of late shri a.v. gandhi, such litigation arising from mutual distrust among them coupled with the intention to acquire and/or retain controlling interest in the companies promoted and built up by late shri a.v. gandhi, to the exclusion of those who were on the other side of a particular dispute. basically, the opponent camps consisted of mrs. pramila gandhi and her two daughters, viz., sheela gandhi rao and sunita arvind gandhi on the one hand, and on the other hand, the other daughter, leena gandhi tewari and her husband, prashant tewari.64. after discussing the issue, ao came to the conclusion that the payment of rs. 12.6 crores (approximately) was for consolidating the interest of majority of shareholders. he held, it is difficult to put at par business protection and development of the corporate entity with the personal interest of the majority shareholders. apparently, such expenses could be paid out of the accounts of the assessee company, not only because it was closely held but also because the majority shareholding of mrs. leena gandhi tewari and her husband was supremely dominant having 46,391 shares whereas other shareholders having 1,641 shares. he held, it act is a self-contained code and taxability of receipts or allowance of an expenditure are to be determined only within the scheme of the act itself. the provisions of a statute which is not cognate or pan materia to the it act, cannot be taken into aid to judge the taxability or otherwise of a receipt or allowance or otherwise of an expenditure.65. after discussing the issue in detail and placing reliance on the decisions of the hon'ble supreme court in the case of cit v. malayalam plantations ltd. and bombay steam navigation co. (p) ltd. v. cit (1965) 56 itr 52 (sc); and also the decision of the jurisdictional high court in the case of adarsha dugdhalaya v. cit , ao decided the issue against the assessee.particularly taking note of the decision in the case of adarsha dugdhalaya v. cit (supra), where the issue was with regard to a dispute as to what is the quantum of the claim of an outgoing partner as on the date of retirement, hon'ble high court held, the expenditure cannot be treated as incurred for the purpose of protection of business of the assessee; as such this is not revenue expenditure but is one that need to be characterized as capital expenditure. ao also relied upon the decision of the hon'ble punjab & haryana high court in the case of cit v. shiwalik talkies ltd. (1967) 63 itr 83 (p&h), wherein the hon'ble high court held, the expenses incurred by the company to resist application to court by shareholders under the relevant provisions of companies act questioning the appointment of the directors of the assessee company could not be considered as an expenditure laid out or expended wholly and exclusively for the purpose of business of the assessee company. he also relied upon the decision of the jurisdictional high court in the case of premier construction co. ltd. v. cit . in that case the tussle was between the shareholders against the board of directors. the shareholder filed a suit praying for declaration that the ruling of the president was illegal and invalid and subsequent resolutions passed at the meeting were also invalid and asked for relief by way of several injunctions restraining the company and its board of directors from giving effect to and acting in accordance with the resolutions passed at the said meeting. in this case the hon'ble high court held that an expense may in some indirect way be conducive to the benefit of the business or to better management of the business but that would not make an expenditure wholly and exclusively for the purpose of business. so also, ao relied upon the decision of the hon'ble calcutta high. court in the case of albert david ltd. v. cit .66. in short, ao held that to allow the claim under section 37(1), the following points are necessarily to be considered: (1) whether the expenditure was incurred by the assessee in his character as a trader. (2) expenditure incurred on litigation purely relating to domestic quarrel between the shareholders, though it had some indirect connection with the business or management of the company, but that would not amount to the fact that such expenditure was laid out wholly and exclusively for the purpose of carrying on the business of the assessee. (3) what must be considered is the purpose for and the object of expenses at the time when it was incurred. (4) the company may well become a pawn in the hands of different persons at different times having very little say in the course of conduct of litigation or of its business and incurring expenditure in the circumstances created by others, the company may well act outside its character.67. on the basis of the chart given at para 14(a), ao held that the dispute never affected the assessee adversely. assessee disclosed fast moving upward curve of turnover. it did not affect assessee's reserve and surplus. on the other hand, it multiplied many times. he rejected assessee's contention that the domestic disputes debilitated business of the assessee and its smooth running. he held, this is against the evidence on record. thus he rejected assessee's claim vide para 15 of his order, observing as under: 15. to sum up, for the purpose of section 37(1) of the it act, the cumulative effect of the evidence as discussed above when distilled through the judicial rulings also referred above, is that there was no business or commercial justification for assessee company to incur an expenditure of rs. 12.06 crores (approx.) because the business was all through carried on and carried on very well in spite of whatever disputes among the shareholders. the facts of the case do not display any cause and effect, relationship between the disputes and the business of the company as has been contended by the assessee. the inference therefore, cannot be avoided that the payment was made for purposes other than being laid out wholly and exclusively for the purpose of carrying on the business as mentioned under section 37(1) of the act. the payment of rs. 12,06,53,113 was by the family members to the family members with objectives to which the assessee company and its business were total strangers. the companies having been family companies, (ii) the parties to the disputes being cognates (excepting one), leena gandhi tewari and her husband having owned dominant shareholding in the assessee company through their dominance in the shareholding of the american products (p) ltd. [(see para 10(c)(l) and (ii)] before as well as subsequent to the orders of the clb, (iii) the assessee company having recorded incremental growth during the subsistence of the disputes and, (iv) as concluded above, the facts of the case not disclosing any nexus between the impugned expenditure and the business of the assessee company, the inference is inescapable that the 'family arrangement' arrived at by the disputants was a sequel to a change of heart that was legitimatised by praying to the clb for formal concurrence. a family arrangement is a most convenient legal solution where the properties are not amenable to partition, whether on grounds of law or on grounds of feasibility. but, there must be consideration for the same [m.n. aryamurthi v. m.i. subbaraya shetty case of the disputants. the legal effect of the "family arrangement" in the facts of the case was therefore, strictly confined to the disputes inter se among the family members in the case under consideration. realistically speaking, the orders of clb were the off-shoot of a family arrangement sanctifying the understanding arrived at in respect of the shareholdings of the family members in the gandhi group of companies. the impugned expenditure consequently sprang from the terms of settlement as the consideration for clinching the arrangement. the consideration so paid had nothing to do with the ongoing business activities of the assessee company or for that matter other family companies. the expenditure of rs. 12,06,53,113 debited in the books of the assessee company had therefore, the character of personal expenditure.aggrieved by the above order, assessee approached the first appellate authority.68. it was contended before the cit(a), in addition to the facts brought on record before the ao that the assessee company's business was adversely affected and that the payments were made to keep the interest of the assessee company or otherwise assessee would have been adversely affected. it was further submitted that the holding company, viz., apgo has large number of shareholders who are not in any way connected with the promoter family. out of total shares of 48,032 in apco 46,391 shares were held by leena and her husband prashant, noticed the cit(a). both these companies are closely held and practically no other shareholder could influence decision making in these companies.hence, the contention of the assessee that there were other shareholders, etc. was rejected. coming to the contention of the assessee that it heavily relied upon the finding of the clb, cit(a) held, he could not appreciate the contention raised by the assessee. he held, in fact the litigations were for the division of family assets as apparently leena and her husband prashant could gain control over apco and assessee company while the other family members, viz., mother and two daughters felt aggrieved that they were not given their due share in the family property. he held, this was pure and simply division of family assets, that is why the clb order says that this was a family arrangement providing for distribution of assets. in regard to reliance placed by the assessee for claiming deduction under section 37(1), cit(a) held, ao rightly referred to the decision in the case reported in madurai district central co-operative bank ltd. v. ito to argue that it is settled law that it act is a permanent enactment and outside the it law the decision does not affect the taxability or otherwise. for the above proposition, he also referred to the decision of the hon'ble allahabad high court in the case of shailendra kumar v. union of india . cit(a) held that the ao was right in relying upon the decision of the jurisdictional high court . he rejected assessee's reliance on the decision in the case of d.w. noble ltd. v.mitchell. he also distinguished the decision relied upon by the assessee in the case of irc v. carom co. (1968) 45 rdc 18 (el). he held, this decision is not applicable. that was a case wherein amounts were spent for the objects of new charter, which aimed for removing obstacles to profitable trading and removal of such restriction was for the purpose of well management of the assessee company. cit(a) rejected assessee's contention that the expenditure was incurred on grounds of commercial expediency to facilitate carrying on the business to protect business assets, reputation, fair name and goodwill and that the expenditure incurred satisfied all the ingredients of section 37 of the act. he held it was incurred solely to give share in the assets to three family members and the assessee is unfairly trying to claim this expenditure as business expenditure. he agreed with the ao's finding that there is no relationship between the disputes and the business of the assessee. the payments were made for settlement of the family disputes between the two groups. hence, he confirmed the order of the ao. aggrieved by the above order, assessee is in appeal before the tribunal.69. the brief facts, narrated in para 7 of the written submission, are as under: assessee is a 98 per cent subsidiary of american products company ltd. (for short 'apco'). assessee as well apco; and also other two companies, viz. m/s vital pharmacal (p) ltd. (for short 'vp') and m/s vital organics (p) ltd. (for short 'vo') belonged to erstwhile gandhi family group. the family of shri a.v. gandhi, his family trust and huf owned almost entire shares, of these companies. management and control of these companies was with shri a.v. gandhi. he died on 15th jan., 1986, leaving his widow dr. pramila gandhi and three daughters, viz. leena gandhi tewari, sheela gandhi rao and sunita gandhi. mrs. leena gandhi tewari and her husband prashant tewari were controlling and managing these companies after the death of shri a.v. gandhi. disputes arose among the shareholders of these companies. proceedings were filed before the principal bench of the clb at new delhi. the business of the company was seriously affected and restricted its growth. settlement was arrived at between the parties. payment of rs. 12.5 crores was ordered. termination of tenancies in respect of certain premises occupied by the assessee and cancellation of 900 shares of the assessee company held by sheila gandhi rao and sunita gandhi was also ordered. it was further ordered by clb that the disputing parties will not have any further claim of any sort against the assessee company. settlement was claimed as deduction from the business income inasmuch as it was for the development of business of the assessee and the dispute inevitably causing some adverse publicity in the market was settled sooner than later. clb observed vide its order dt. 3rd april, 1998 : "the pendency of the litigation, adversely affected the reputation, inter alia, of usv, triggered false signals in the pharmaceutical industry, and seriously affected the business, growth and prosperity of usv. we are satisfied that the money paid by usv and to be paid by usv is for legitimate and genuine business reasons of usv". however, ao disallowed the claim of the assessee mainly for the reasons stated below: (a) the payment was really the outcome of a family dispute that culminated in litigation between the family members due to mutual distrust and/or the intention to retain the controlling interest of the companies. (b) the payment as per the direction of clb is an integral and inseparable part of total package that the clb handed down for restructuring the shareholdings of the assessee as only solution to the long standing family feud. (c) observation of the clb that the money paid by the assessee is for legitimate and genuine business reasons only contextual in nature and content of the dispute. (d) persons having control over the assessee company also control apco. leena gandhi tewari and her husband, prashant tewari also control apco along with the assessee company. in other words, they consolidated the interest. (e) the expenditure was therefore for consolidating the interest of majority shareholders. there was no business exigency for this payment. it is not wholly and exclusively expended for the purpose of business of the company. (f) during the intervening period of shri a.v. gandhi's death and the final settlement, while the disputes were going on, it never adversely affected. (g) the payment was by family members to family members with objectives to which the assessee and its business were total strangers. the coffers of the assessee were used for clinching absolute control.70. this finding of the ao was approved by the cit(a) almost for the same reasons. to come to the above conclusion, cit(a) also relied upon the following decisions:bombay steam navigation company (p) ltd. v. cit 71. it is the submission of the learned counsel for the assessee that the revenue authorities failed to appreciate the facts. firstly, the department went wrong solely relying upon the allegation made in the plaint in suit no. 606 of 1995 filed by the plaintiffs, i.e. dr.pramila gandhi and her two daughters, viz., sheela gandhi rao and sunita gandhi. it is only one sided story and does not necessarily state the entire facts. the defendants side of the story never finds place in such plaints. normally, in such circumstances only distorted picture far away from the reality is reflected. unless the other side of the story is also recorded, the truth cannot be arrived at. the same happened in the instant case of the assessee as well and the department appreciated only one side.72. vide para 7.6 of the assessee's written submission, it is submitted that around 1993-94, some of the shareholders of the assessee company, its holding company (apgo) and some other associate companies (vp and vo) commenced various legal proceedings before various legal forums like city civil court, hon'ble bombay high court and clb. there were also litigations before the clb, principal bench, new delhi in petition nos. 63 and 64 of 1993, no. 3 of 1994 and no. 43 of 1996. it is in petition nos. 63 of 1993 that the assessee was impleaded in the proceedings before the clb by the petitioners by filing an application dt. 4th feb., 1998 under regulation 44 of clb (regulation) procedure, 1988, making various unsubstantiated allegations against the assessee, in order to bring its name into disrepute, like the earlier suit filed before the hon'ble bombay high court in suit no. 606 of 1995, which went to the extent of seeking injunction from the hon'ble high court, restraining the assessee from passing any resolutions or taking any steps to sell, alienate, encumber, transfer or create third party rights with regard to shares and assets. assessee was unable to start any new scheme, project or collaboration agreement to expand its business and to augment the profitability. during the period 1994 to 1998, assessee was under constant attack through misconceived litigations, frivolous complaints to various authorities and unwarranted hindrances caused to regular day-to-day functioning of the assessee company, thereby causing distractions/irritations. by the orders of clb dt. 10th march, 1998 and 3rd april, 1998, put an end to all these hassles assessee was passing through. clb appreciated that the assessee's business was adversely affected by these litigations.that is why the clb made the above quoted observation in its order dt.3rd april, 1998. no doubt the observation is contextual in nature and content, but there is no manner of saying that this is out of context.the business of the assessee company was affected adversely by plethora of unwarranted litigations and baseless allegations against its management. had the assessee not incurred the impugned expenditure to extricate itself from stifling conundrum, its potential growth would have been lost and the development would have been jeopardised. thus, the payment was made for the very survival of the assessee company. the assessee, like any other prudent businessman, could have scarcely afforded such a possibility. there is no doubt that the impugned amount was laid out and expended wholly and exclusively for the purpose of business. assessee also relied upon the decision of the hon'ble supreme court in the case of cit v. malayalam plantations ltd. (supra).73. learned counsel further submitted, in order to appreciate the facts leading to the dispute, the background of the management is also necessary to be submitted briefly. he submitted, after the death of shri a.v. gandhi, his eldest daughter, leena gandhi tewari, who came back to india on completion of her studies abroad, and her husband prashant tewari took over the management of the gandhi group of companies, including the assessee. dr. pramila gandhi, a practising doctor, neither had time nor inclination or expertise to dabble into company management and the younger two daughters were still students.the elder daughter and her husband were well qualified company managers possessing foreign qualifications and knowledge in their chosen field.after their joining, the companies prospered like never before, till the litigations in 1993. ao states that even after the death of shri a.v. gandhi and before settlement of the dispute, the company was not adversely affected. but what he probably meant is that the profit-making capacity of the company did not diminish inspite of the litigations. what the revenue failed to appreciate is that during this intervening period the growth and development of the company had come to a standstill. between 1994 and 1998 the assessee company could not take up any ambitious plans to expand its business and increase profitability, except routine growth plans.74. learned counsel submitted, prior to commencement of litigation, two plants at lote parshuram near chiplun, maharashtra; one for manufacture of formulations and the other for manufacture of bulk drugs were set up by the assessee. during this period of litigations, precious little could be done in these plants. after the litigations came to an end, assessee could again go ahead with these ambitious plans for manufacturing and marketing of formulations based on nitroglycerine. in fact, between 1994 and 1998, assessee had to give up a number of plans for collaboration with multinationals, which would have substantially expanded its business and augmented its profitability. in september, 1994, assessee was approached by lipha, which is part of merk group and originator of bulk drug metformin for alliance to manufacture/market/source for international generic market, the bulk drug. representatives of lipha visited india and held discussions with the assessee for collaboration. but when they came to know of the litigations, interest waned and they dropped the plan. again in january, 1997, assessee was engaged in talks with "lanocare" of australia and new zealand for launching of skin care products based on "lanolin". the foreign party withdrew after they came to know of the litigations and the difficulties. in 1997 the assessee negotiated with alfa wassermann for marketing their skin care products' of well known international brand "pikenze". negotiations suspended in midway as they suddenly hesitated to enter into an agreement, with the disputes going on in the company. hence, learned counsel submitted, in these circumstances, putting an end to the deteriorating circumstances of the company was a must and that is what the assessee achieved by this payment and the payment was incurred out of commercial expediency is borne out by following subsequent events: (a) after the assessee freed itself form the shackles of litigations, the profit before tax for the period ended 31st march, 2000 jumped to rs. 34.46 crores from rs. 15.67 crores in the preceding year. (b) assessee established a subsidiary in the year ended 31st march, 2000 for marketing paediatric range of pharmaceutical specialities. (c) assessee's international business including exports through orders with developed nations increased about 50 per cent during the year ended 31st march, 2000. (d) assessee increased its export of metformin during the year 1999-2000, an opportunity that it lost in 1994 by not having been able to have alliance with lipha. (e) after the litigations ended, assessee was able to set up four major r&d labs at govandi, viz., analytical research laboratory, molecular medicine research laboratory, drug delivery research laboratory and chemical process research laboratory.75. learned counsel further submitted, since the order of clb in 1998, assessee has been able to successfully expand and get international recognition as well as enter into new contracts/collaborations. for example: (b) assessee entered into agreement for procurement of sap user license, which is internationally acclaimed business software. the agreement was signed on 15 day of december, 1997 and implemented the said agreement from financial year 1998-99 onwards. assessee was ranked 3rd in the pharmaceutical industry to implement sap. (c) assessee set up a state of the art formulations plant at daman in october, 2001. (e) assessee obtained following certificates from various foreign authorities regarding manufacturing facilities at chiplun: (i) european directorate for the quality of medicines regarding metformin hydrochloride, glibenclamide and ticlopidine hydrochloride, (ii) therapeutic goods administration of australia for metformin, (iii) german medical and drug control authorities for metformin, (iv) us fda approval for metformin and glipizide. (ii) lyka - amlopin and nitroglycerine (marketing and scientific data only).76. learned counsel submitted that it shows the veracity of the claim of the assessee that the impugned expenditure was incurred for the purpose of protection and development of its business. this fact is further fortified by the figures of org marg rankings of the pharmaceutical industries achieved by the assessee company during the period december, 1994 to april, 2000, which are as under: thus the facts narrated above speak for itself eloquently and credibly.hence, learned counsel submitted, the orders of the revenue authorities are liable to be reversed.77. learned counsel further submitted, the opinion of the clb is not a mere opinion. it is not merely a forum of arbitration between the disputing parties. the truth is far from the above notion of the revenue authorities. clb is a creature of section 10e of the companies act, 1956. sub-section (4c) of section 10e vests in the clb the same powers as are vested in a court under the code of civil procedure, 1908. sub-section (4d) provides that every proceeding before the clb shall be deemed to be a judicial proceeding within the meaning of sections 193 and 228 of the indian penal code and for the purpose of section 196 of cpc.the decision of the clb is appealable before the respective high court.learned counsel further objected the finding of the revenue that the disputants were before the clb for securing a way out of pending litigations to the satisfaction of each of them. clb cannot have any agenda to find solution to a dispute that is acceptable to each of the disputants. the powers of clb are well defined in the companies act, 1956. clb adjudicated upon the petitions filed before it and passed appropriate orders in its wisdom to meet the ends of justice. the parties affected are free to move the higher forum (high court). in view of the above, learned counsel submitted, the orders of the revenue authorities are liable to be set aside.78. in support of assessee's contention that the litigation expenses incurred to protect the business of the assessee is revenue expenditure as against the litigation expenses incurred for the purpose of creating, curing or completing assessee's title to the capital is capital expenditure, reliance was placed upon the decision of the hon'ble supreme court in the case of dalmia jain & co. ltd. v. cit . learned counsel, again brought our attention to the decision of the tribunal, mumbai bench in the case of echjay industries ltd. v. dy. cit . in this case the tribunal held that the expenditure incurred out of business expediency like settling the feud between the majority and minority shareholders does not increase the capital of the assessee and such expenditure could only be treated as wholly and exclusively incurred in the course of carrying on of the business and therefore it was deductible. learned counsel further relied upon the decision of the hon'ble delhi high court in the case of south asia industries (p) ltd. v. cit (1981) 132 ttr 144 (del), wherein the hon'ble high court held that the expenditure incurred to protect the business and reputation of the company is an amount spent for safeguarding and saving the assets of assessee's business and keeping it on a sound footing. the expenses incurred in its business or trading capacity; for the purpose of business, amounts to allowable expenditure. hence, learned counsel submitted, the orders of the revenue authorities are liable to be reversed.79. replying to the above, learned departmental representative submitted, heavily relying upon the order of the ao as well cit(a), that there was a family dispute between the two warring groups of the family. the matter ultimately reached before the clb. they ordered certain payments to one group. this is nothing but a payment made to keep the interest of the majority shareholders or for controlling power of the company. this has nothing to do with the business of the assessee. even during the litigation was going on, the turnover of the assessee increased, which shows that there was no adverse affect as a result of dispute between the two groups. this is actually nothing but family settlement and not a claim allowable. in support of the above view, learned departmental representative relied upon the decision of the hon'ble kerala high court in the case of s. veeriah reddiar v. cit . in this case the hon'ble high court held, in considering the question whether the amounts were laid out or expended wholly for the purpose of business it will be open to the revenue authorities to consider whether the employees are related to the assessee and whether the payments to them were made entirely on account of business considerations or on account of some extraneous consideration. in the instant case, learned departmental representative submitted, the payments were made because of the family dispute.relying upon the decision of the jurisdictional high court in the case of ramanand sagar v. dy. cit , learned departmental representative submitted that it is for the assessee to establish that the payments were made for the purpose of business. in the instant case of the assessee the burden has not been discharged. hence, learned departmental representative submitted, the orders of the revenue authorities are liable to be confirmed.80. we heard the rival submissions, gone through the orders of the revenue authorities and the decisions cited by the contending parties.first we will take up the contentions of the revenue that the litigations were in fact only division of family assets and for controlling of the business of the assessee. considering the facts and circumstances of the case and the dispute between the contending parties, clb has already given a finding in its order that the pendency definitely affected the reputation and gave false signal in the pharmaceutical industry and seriously affected the growth and prosperity of the assessee company. even if the starting point of the dispute is controlling of the assets, these findings of the clb cannot be discarded out of context;. the facts brought on record clearly show, as we have mentioned in para 70 of the order that the assessee was ranking 23rd in december, 1994. subsequently from december, 1995 to december, 1998 it was lagging somewhere between 30 to 36. in december, 1999, immediately after the settlement, its rank went up to 23 and by april, 2000, it was 19, which itself shows that the settlement has taken the assessee out of the trouble period. the contention of the learned counsel recorded vide para 68 is also relevant in this context.assessee was approached by lipha, part of merk group and originator of bulk drug metformin for alliance but it was to be dropped because of the dispute; so also the talk with "lanocare" of australia and new zealand for launching of skin care products. the negotiation with alfa wassermann was also dropped because of the disputes. these all indicate that the affairs of the company were not running well due to the disputes between the family members. therefore, saying that the settlement is to control the assets of the company itself is oversimplification. had these disputes not been settled, the company would not have revived well. it is not correct to say that reaching such a conclusion is out of context.81. now we come to the decisions relied upon by the contending parties.the decisions relied upon by the learned cit(a), on which reliance has also been placed by learned departmental representative, i.e. madurai district central co-operative bank ltd. v. ito (supra) and shailendra kumar v. union of india (supra), does not further revenue's case. in the case of madurai district central co-operative bank ltd. (supra), hon'ble supreme court held, it act is a permanent enactment and in the case of shailendra kumar v. union of india (supra), hon'ble allahabad high court held that it act is a self-contained code and the taxability or otherwise of receipts to be determined with reference to the provisions of the act. it does not mean that a finding of fact by an authority, though it is not binding as such, cannot be considered and taken note of while corning to a conclusion on facts. in the case of shailendra kumar v. union of india (supra), at p. 508, the hon'ble allahabad high court observed as under: the question for consideration is whether to examine the scheme of act of 1961, aid can be taken from the fundamental rules governing the service conditions of the central government employees or from the provisions of a statute which is not cognate or pan materia to the act of 1961. the it act is a self-contained code and the taxability of house rent allowance, city compensatory allowance and dearness allowance or of any other allowance will have to be seen only within the scheme of the act of 1961.their lordships further relied upon the legal proposition as explained by their lordships of hon'ble supreme court in the case of s. mohan lal v. r. kondiah it is not a sound principle of construction to interpret expressions used in one act with reference to their use in another act, more so if the two acts in which the same word is used are not cognate acts. neither the meaning nor the definition of the term in one statute affords a guide to the construction of the same term in another statute and the sense in which the term has been understood in the several statutes does not necessarily throw any light on the manner in which the term should be understood generally. on the other hand, it is a sound, and indeed, a well known principle of construction that meaning of words and expressions used in an act must take their colour from the context in which they appear.from the above it is clear that their lordships observed that for interpretation of the meaning of the words and expressions used in one act may not have the same meaning in another act. it is not to say that the facts found out by a competent authority cannot be taken at all into consideration to arrive at the conclusion.82. coming to the decision relied upon by the revenue authorities in the case of cit v. malayalam plantations ltd. (supra), the issue before their lordships was whether the estate duty paid by the resident company incorporated outside india on behalf of the principal not domiciled in india is deductible from its profits while computing the assessable income under section 10(2)(xv) of the indian it act, 1922.at p. 149, their lordships discussing the issue on the basis of the decision of the hon'ble supreme court in the case of badridas daga v.cit observed : "this decision, though not direct in point, lays down the principle that an expenditure can be deducted only if it arises out of the carrying on of the business and is incidental to it." in fact, this decision supports the case of the assessee.discussing the issue, their lordships held : "the expenditure incurred by the assessee in his capacity as agent of another is not a deductible item." in other words, the decision went against the assessee because it was a payment made as an agent. assessee paid the estate duty on behalf of another person, which is not wholly and exclusively for the purpose of business, hon'ble supreme court held.83. coming to the decision relied upon by the revenue authorities in the case of adarsha dugdhalaya v. cit (supra), this was a case wherein as directed by the award, payments were made by the assessee towards arbitrators' fees, solicitors' fees and costs on both sides in two suits and this amount was claimed as deduction in the assessment.hon'ble bombay high court held, this was not an expenditure connected with carrying on of business of the assessee but to determine the mutual rights and obligations of the partners on the terms and conditions on which they had agreed to enter into partnership from time to time. hence, their lordships held, this is not expenditure in the nature of revenue but capital expenditure. at p. 61, the hon'ble high court held : "in the present case, however, the expenditure incurred is not for the purpose of protecting the assets but for the purpose of ascertaining what they are on settlement of the disputes between the partners in relation to them. in our opinion, therefore, having regard to the essential nature of the litigation and the purpose for which it was contested, we do not think that the expenses of litigation claimed by the assessee could be allowed to it as expenditure incurred wholly and exclusively for the purpose of carrying on its business." coming to the instant case of the assessee, the facts are distinguishable. had the dispute not settled, the continuance of business of the assessee itself would have jeopardized.84. the decision of the jurisdictional high court, relied upon by the learned cit(a), in the case of premier construction co. ltd. v. cit (supra) is also distinguishable on facts. this was a case wherein a dispute arose between the directors of the company and its shareholders. their lordships held that the company is not justified in claiming the expenses incurred by it in the said litigation as expenses of its business. however, their lordships further held : "in order that the expense of a civil litigation could be permissible as an expense wholly and exclusively laid out for the purpose of the business of the assessee, the expense must have been incurred by the assessee in its character as a trader and the transaction in respect of which the proceedings were taken must have arisen out of, or must have been incidental to, the assessee's business. an assessee could be said to have incurred the expenditure in his character as a trader if the litigation was necessary to be carried on by the assessee or defended by it to protect its trade or business or to avert a danger or threat to its carrying on of its business". in other words, the allowability or non-allowability of expenditure, even if it is incurred for the purpose of litigation, depends on the facts of that particular case.the stand of the revenue authorities in the instant case of the assessee is that this is purely a domestic quarrel between the shareholders. it is further the stand of the revenue authorities, as is clear from the order of the cit(a), that the expenses may, in some indirect way be conducive to the benefit of the business or to the betterment of the business, even then, it cannot be held, it is an expenditure wholly and exclusively for the purpose of business. in the instant case of the assessee we have seen that had the settlement not been taken, the business itself would have jeopardized.85. ao has given a chart of turnover, profit, etc. vide pp. 29 and 30 of his order, para 14(a), to show that assessee's business turnover and profit because of this litigation has never come down. in other words, it has not adversely affected. on the other hand, learned counsel for the assessee has contended that mere increase in the turnover and profit alone is not criteria to decide whether the business adversely affected or not. we have mentioned in para 70 of this order, the ranking given and also the parties who entered into negotiations with the assessee and because of the litigations/dispute between the warring groups of the family, withdrawn from the negotiations. this clearly shows that the business of the assessee or the growth potential of the assessee had definitely been affected. in short, we are of the opinion that the view canvassed by the learned counsel is to be accepted.86. coming to the decision relied upon by the learned counsel, in the case of dalmia jain & co. ltd. v. cit (supra), the hon'ble supreme court held : "where litigation expenses are incurred by the assessee for the purpose of creating, curing or completing the assessee's title to the capital, then the expenses incurred must be considered as capital expenditure. but if the litigation expenses are incurred to protect the business of the assessee they must be considered as a revenue expenditure." in the instant case of the assessee the facts clearly show that the business of the assessee due to infighting between the two groups of the family members, was in a difficult situation and the assessee lost many business opportunities for its growth. even if the payments were to settle this dispute but the determinate character is to protect the business as well and, therefore, this decision of the hon'ble supreme court supports assessee's case. hence, the appeal of the assessee on this ground is allowed.87. however, we make it clear that a proportion of these business protection and development expenses would be allocated to section 80hh units and, therefore, we direct the ao to recompute the deduction under section 80hh as per law, after affording a reasonable opportunity of hearing to the assessee.

Judgment:
2. The first and second ground of objection by the assessee is directed against the order of the CIT(A) in confirming the disallowance of Rs. 3,79,876 in respect of employer's contribution and Rs. 4,05,635 in respect of employees' contribution to PF/FPF/ESIC paid by the assessee beyond the grace period allowed by the Central Government.

3. We heard the rival submissions. The Tribunal is constantly taking the view that the employees' contribution if not paid within the due date extended by the grace period, the same is not allowable. As such, we remand the matter back to the file of AO as to verify whether the payments were made within the grace period. If so paid, it may be allowed. Coming to the employer's contribution, Tribunal is taking the view constantly that if the payment is made within (beyond) the year but before the due date for filing the return, to this extent assessee's claim is to be allowed. AO may verify the date of payment.

If it is found that it is paid within (beyond) the year but before the due date for filing the return, to that extent employer's contribution may be allowed. Order accordingly.

4. The third ground of objection by the assessee is directed against the order of the CIT(A) in confirming the disallowance of Rs. 32,328 being payment made to clubs for availing the facilities and services of the clubs.

5. Considering the rival submissions and also the decisions cited, particularly the decision of the jurisdictional High Court in the case of Otis Elevator Co. (India) Ltd. v. CIT ; Hon'ble Gujarat High Court in the case of Gujarat State Export Corporation Ltd. v. CIT ; and Hon'ble Madras High Court in the case of CIT v. Sundaram Industries Ltd. (Mad); we are of the view that there is no justification in disallowing the assessee's claim to this extent. Hence, the appeal of the assessee on this ground is allowed.

6. The next ground (ground No. 4) of objection by the assessee is directed against the order of the CIT(A), directing the AO to exclude net marketing receipts, i.e. total marketing receipts as reduced by proportionate salary of field staff and other expenses while computing profits of the eligible undertakings for the purpose of deduction under Section 80HH of the IT Act, 1961.

7. While framing the assessment order, AO noticed, assessee claimed deduction under Section 80HH on its units at Lote Parshuram. Assessee claimed deduction of Rs. 2,73,08,504 at the rate of 20 per cent of the profit of the unit. It was noticed by the AO that the service charges amounting to Rs. 2,76,92,459 was connected with the new industrial undertaking. The service charges comprised of Rs. 2,42,67,427 received by way of processing charges and Rs. 34,25,032 received by way of marketing receipts for marketing of imported injections in India. This amount of Rs. 34,25,032 received by way of marketing receipts allocated to the new industrial undertaking while computing the total income of the new undertaking, AO held, is not allowable and such marketing receipts do not qualify for deduction under Section 80HH. Out of the processing charges of Rs. 2,42,67,427, AO held, Rs. 2,13,46,380 only pertains to the new industrial undertaking. The amount claimed as processing charges in the return was added back. Aggrieved, assessee approached the first appellate authority.

8. This issue has been discussed by the CIT(A) vide para 9 of his order. It was contended before the CIT(A) that the assessee is entitled for deduction under Section 80HH in respect of the amount of Rs. 34,92,514. Alternatively, it was contended that the AO ought to have computed the profits of the new industrial undertaking without reducing expenses incurred on research development unit, which is stated to be an independent unit physically separate from the new industrial undertaking and that he should have reduced the proportionate salary of field staff and other expenses from marketing receipts. It was further submitted, it is neither correct nor logical to reduce the gross amount of marketing receipts allocated to various units as certain expenses have been incurred for earning these receipts and these expenses should be allocated to marketing receipts. In other words, it was contended, only net marketing receipts should be reduced from the profits of the new industrial undertaking. CIT(A) directed the AO to consider excluding only the net marketing receipts while computing the profits derived from the new industrial undertakings for the purpose of deduction under Section 80HH. Aggrieved by the above order assessee is in appeal before the Tribunal.

Assessee had two new industrial undertakings at Lote Parshuram, Taluka Khed, District Ratnagiri, a backward area in the State of Maharashtra. While computing the profits derived from the new industrial undertakings, assessee claimed deduction under Section 80HH, including the marketing receipts amounting to Rs. 34,25,032 and interest at Rs. 67,482. While computing the profits of the new industrial undertakings, AO excluded the gross marketing receipts and interest received and proportionately allocated expenses incurred at research and development unit at Govandi at Rs. 75,70,059. Following his orders for the earlier years, i.e. asst.

yrs. 1996-97 and 1997-98, the amounts of marketing receipts and interest were excluded by the CIT(A) for the purpose of computing deduction under Section 80HH.10. During the year under consideration the assessee received Rs. 60,57,715 from Alfa Wassermann SpA of Italy for marketing their product Fluxum injection in India. The amount was allocated between various segments including the two eligible units. Out of the total marketing receipts of Rs. 60,57,715 an amount of Rs. 34,25,032 was allocated to the new industrial undertakings in proportion of the pharmaceutical sales made by the new industrial undertakings to the total sales of the company. Similarly, marketing expenses were also allocated proportionately to the units including the new industrial undertakings.

According to the assessee, the business of the assessee company consists of manufacturing and marketing of pharmaceutical bulk drugs and formulations. The marketing receipts are not an independent source of income. The cost incurred by the company for marketing its products includes those of the new industrial undertakings but was reduced by recovering a part of the cost through utilisation of marketing infrastructure of the assessee company to market the products of others as well, like the one marketed viz. Fluxum injection of Alfa Wassermann SpA. Hence, according to the assessee, the marketing receipts have a direct nexus to the profits earned from the new industrial undertakings. The marketing costs of eligible pharmaceutical unit deducted for computing the profits of the new industrial undertakings were reduced to the extent recovered by way of marketing receipts.

Therefore, the assessee rightly included these amounts in computing the profits derived from the new industrial undertakings for working out deduction under Section 80HH. Even assuming that the view of the Department is correct, it is the case of the assessee that appropriate proportion of marketing costs allocated by the assessee to arrive at the profit derived from the new industrial undertakings should be excluded for determining the profit.

11. It is also the case of the assessee that the Departmental authorities failed to appreciate that the new industrial undertakings at Lote Parshuram and the research and development unit at Govandi are independent and separate. The expenditure incurred in the research and development unit does not reduce the profits of the new industrial undertakings in any way. Rather, this expenditure is relatable to the business carried on by the assessee in general. In fact, the research and development work is done to develop new products for promoting the future business of the assessee. The results of research activity at the research and development unit cannot be presumed to be automatically utilised in the new industrial undertakings. In any case, no new product was manufactured in the eligible units, which emanated as a result of research and development activities of the assessee company at least during the relevant previous year. Relying upon the decision of the Hon'ble Madras High Court in the case of Bush Boake Allen (India) Ltd. v. Asstt. CIT , learned Counsel submitted, where there was no research and development expenses pertaining to the new industrial undertaking, apportionment of such expenses to work out profit derived from the said undertaking for the purpose of Section 80HH merely on the presumption that the products manufactured therein also benefited out of research made at the research and development unit is not proper. Further, relying upon the decision of the Hon'ble Punjab & Haryana High Court in the case of CIT v. Isher Dass Mahajan & Sons , learned Counsel submitted that where the receipts are relatable to the running of business and incidental to normal business activity, as in the case of the assessee where marketing a product is also part of regular business, apportionment of such expenses to work out profits derived from the eligible undertaking for the purpose of deduction under Section 80HH cannot be done merely on the basis of presumption that the product manufactured therein received the benefit.

12. In support of the above claim, learned Counsel for the assessee brought our attention to the memorandum of association, Clause III(12), which reads as under: To carry on business as chemists, druggists, chemical dealers, importers, exporters, wholesale or retail dealers and to undertake sales and distribution agencies for the products of other concerns, firms, persons, companies, whether such products are manufactured in the company or otherwise and whether such products are of the description hereinabove specified or other products of whatever nature and kind and to buy, sell, refine, manipulate, import, export or deal in the products or goods herein specified, either as principals or as agents; 13. The learned Departmental Representative submitted, supporting the orders of the Revenue authorities, that there is no finding as to whether this is related to assessee's business. The issue is whether income is derived from new industrial undertakings. In support of the above proposition, learned Departmental Representative relied upon the decision of the Hon'ble Supreme Court in the case of ITO v. Induflex Products (P) Ltd. (SC) and also the decision of the Hon'ble Madhya Pradesh High Court in the case of D.P. Agrawal v. CIT . Learned Departmental Representative, relying upon both the decisions, submitted that there should be a close relation and the receipt must be received from the business carried on by the assessee. He further submitted that the profits should be derived from the business, which would be the subject-matter of exemption and there must be profits out of the business carried on by the assessee and the expression "profits" used in the section connotes positive profit earned from the business alone, which can be the subject-matter of exemption. Hence, learned Departmental Representative submitted, the claim of the assessee is liable to be rejected.

14. We have heard the rival submissions and gone through the orders of the Revenue authorities and the decisions cited. The deduction under Section 80HH is granted to an industrial undertaking on profits and gains derived by an industrial undertaking. The term "derived from" is narrower than the term "attributable to" as settled by the decision of the Hon'ble Supreme Court in the case of CIT v. Sterling Foods (1999) 153 CTR (SC) 439 : (1999) 234 ITR 579 (SC), therefore, it is only the profits of an industrial undertaking which are eligible for deduction under Section 80HH. The assessee may be engaged in multiple business activities and the profits from such activities cannot become eligible for deduction under Section 80HH merely because these are the business profits. The assessee has placed strong reliance on the decision of the jurisdictional High Court in the case of CIT v. Bangalore Clothing Co.

, which, in our opinion, does not render any assistance to the cause of the assessee because that is in the context of Section 80HHC where the scheme and language deployed is different as compared to Section 80HH of the Act. Further, the marketing activities carried on by the assessee are independent of the activities of the industrial undertaking. Thus, the net marketing receipts i.e. gross receipts less expenses incurred/allocable to earning of such marketing receipts have been rightly excluded from the profits and gains of industrial undertaking by the learned CIT(A). Hence, we confirm the order of the learned CIT(A) on this issue. Hence, the appeal of the assessee on this ground fails and dismissed.

15. The next ground (ground Nos. 5 and 6) of objection by the assessee is directed against the order of the CIT(A), confirming exclusion of interest of Rs. 67,482 while computing profits of the eligible undertakings for the purpose of deduction under Section 80HH of the Act.

16. Learned Counsel for the assessee submitted, he is under instruction not to press this ground. Hence, this ground is dismissed as not pressed.

17. The next ground, i.e. ground No. 7 is regarding the allocation of expenses of independent research and development unit while computing the profits of new industrial undertaking for working out deduction under Section 80HHC of the Act.

18. We find that this issue was raised by the assessee before the learned CIT(A) vide ground No. 9. The learned CIT(A) has dealt the issue under Section 80HH vide paras 9 to 15 at pp. 5 to 8 of the appellate order. The findings given by the learned CIT(A) in para 15 are reproduced as under: Therefore, to sum up ground Nos. 5 to 10 are allowed in part to the extent mentioned above and this deduction may be recomputed in accordance with the directions contained in the preceding paras of these grounds of appeal.

However, from the perusal of paras 9 to 14 of the appellate order, we find that this issue has not been dealt by the learned CIT(A) although he has referred to the issue in para 10 of the appellate order.

Accordingly, we remand back this issue to learned CIT(A) for fresh adjudication as per law. Hence, the appeal of the assessee on this ground is allowed for statistical purposes.

19. The issue raised in ground No. 8 is regarding CIT(A)'s direction to the AO to reduce 90 per cent of marketing receipts as reduced by proportionate salary on field staff and other expenses related thereto while computing profits of business in accordance with Clause (baa) of Explanation to Section 80HHC of the Act.

20. This issue has been dealt with by the AO vide para 7 of his order, observing as under: The assessee company had not claimed deduction under Section 80HHC in the return of income as the business income was less than 90 per cent of interest received. This fact has been stated in the covering letter filed with the return of income. However, on the presumption that after completion of the assessment, the assessed business income would be positive, the assessee company submitted Form 10CCAC duly certified by the auditor. The auditor has quantified NIL deduction on the basis of the returned income. In the note submitted along with the statement of deduction under Section 80HHC, the assessee company has stated that on completion of assessment deduction under Section 80HHC should be computed on the basis of assessed income. However, it has been noticed that while computing the deduction, the assessee has considered total sales inclusive of excise duty but net of sales-tax and also 90 per cent of service charges (marketing receipts) received has not been reduced from the business income. The deduction has therefore been recomputed after adding back sales-tax of Rs. 1,33,25,843 to total sales and after reducing 90 per cent of service charges and 90 per cent of export benefits from business income alongwith 90 per cent of interest received.

21. AO further noticed that the assessee has not furnished the report in Form 10CCAC along with the return of income as provided under Section 80HHC(4). As such, he held, assessee is not entitled to claim deduction under Section 80HHC. He further held, furnishing of Form 10CCAC along with the return is mandatory and in the absence of it he disallowed the claim of the assessee.

22. When the matter was carried before the CIT(A), he held, filing of Form 10CCAC is procedural and the assessee can file it at any time before the completion of the assessment and this technical objection of the AO was thus negatived. CIT(A) further took note of assessee's alternative contention that the AO should have reduced proportionate salary of field staff and other expenses from marketing receipts before reducing the same from profits. CIT(A), following his decision in assessee's own case for the asst. yr. 1996-97, held that the marketing receipts are not profits of industrial undertaking and hence the AO was justified in reducing 90 per cent of such receipts from the profits while computing deduction under Section 80HHC. However, he agreed with the assessee's submission that for earning marketing receipts, certain expenses are to be incurred and therefore only 90 per cent of the net marketing receipts, which should be reduced from the business profits.

Accordingly he directed the AO to examine as to what is the proportionate salary of field staff and other expenses, which are to be reduced from the marketing receipts, and to consider only net marketing receipts for computation of deduction under Section 80HHC. Aggrieved by the above order, assessee is in appeal before the Tribunal.

23. The arguments advanced by the learned Counsel for the assessee in support of ground No. 4, given hereinabove vide paras 11, 12 and 13 of our order, is also part of the arguments in support of ground No. 8. As such, these arguments have not been repeated. Learned Counsel invited our attention to Clause III, i.e. the object for which the company is established, particularly item (12), which is already reproduced hereinabove vide para 12 of our order. Learned Counsel submitted, the memorandum of association expressly provides that one of the objects of the company is to undertake sales and distribution agencies for the products of other concerns. Thus the marketing receipts are very part of the operational income of the assessee. Hence, learned Counsel submitted, CIT(A) went wrong in directing the AO to reduce the profits of the business by 90 per cent of the net marketing receipts for the purpose of computing deduction under Section 80HHC of the Act. Learned Counsel submitted, the order of the CIT(A) is to be modified to this extent.

24. The learned Departmental Representative, on the other hand, supported the order of the CIT(A).

25. We have heard the rival submissions, gone through the orders of the Revenue authorities and the decisions cited by the contending parties.

The assessee has mainly relied on the decision of the jurisdictional High Court in the case of CIT v. Bangalore Clothing Company (supra) to contend that the marketing receipts are operational income, hence, the same are liable to be included in the profits of business. In our humble opinion, in that case the Hon'ble jurisdictional High Court found that the export activities and the labour charges carried by the assessee were identical, hence, the Hon'ble Court extended the deduction under Section 80HHC in a very limited manner; however the Court did not overrule the earlier decisions of the Hon'ble Bombay High Court in the case of CIT v. Kantilal Chhotalal (2000) 163 CTR (Bom) 476 : (2000) 246 ITR 436 (Bom) and CIT v. Ravi Ratna Exports (P) Ltd. . Thus, in our opinion, the receipts which can be eligible for deduction under Section 80HHC must have a nexus with the export.

26. As far as exclusion of marketing receipts from the profits of the business is concerned for the purposes of computation to deduction under Section 80HHC, we find that these receipts have been earned by the assessee in respect of products of foreign principal marketed by the assessee in India, therefore, these have got no connection with the export activities of the assessee, especially when no material has been brought on record to show that the assessee's exported products and these products are the same and assessee got these marketing rights only because of export of its own products. As the learned GIT(A) has directed to exclude only 90 per cent of net marketing receipts i.e.

gross receipts as reduced by direct expenditure incurred by the assessee to earn the same as per Clause (baa) of Explanation to Section 80HHC, the same is liable to be upheld. We order accordingly. We further hold that such gross marketing receipts would also not form part of total turnover. Thus, the appeal of the assessee on this ground fails and dismissed.

27. The next ground (Ground Nos. 9 to 14) of objection by the assessee is directed against the order of the CIT(A), confirming the disallowance of Rs. 6 crores being payment to M/s Lyka Labs Ltd. under agreement dt. 20th Jan., 1998.

28. It is the case of the assessee that the CIT(A) went wrong in holding that part of the payment made to M/s Lyka Labs Ltd. was attributable to non-compete condition and was capital in nature, ignoring the fact that the alleged enduring benefit was in the revenue field and that the period of 5 years was long in a company's life. It is also the case of the assessee that the CIT(A) erred in holding that part of the payment made to M/s Lyka Labs Ltd. was attributable to parting with the marketing information being in the nature of capital asset and that the expenditure attributable thereto was of capital nature. Without prejudice to above, it is the case of the assessee that the CIT(A) having held that marketing information was capital asset akin to know-how, he ought to have allowed depreciation on the amount of Rs. 6 crores being cost of information. It is also the case of the assessee that the CIT(A) went wrong in enhancing the income of the assessee by withdrawing deduction of Rs. 1,00,00,000 allowed under Section 35AB of the Act.

29. AO noticed, during the year under consideration, assessee started marketing of formulations based on Nitroglycerine. Assessee paid an amount of Rs. 6 crores to M/s Lyka Labs Ltd. towards supply of marketing information, clinical data, scientific details in respect of formulations based on bulk Nitroglycerine. Out of total amount of Rs. 6 crores, assessee debited Rs. 50 lakhs in the P&L a/c with the remark that the amount paid has been deferred and is being charged over 36 months. However, in the computation the assessee claimed deduction of Rs. 6 crores as expenditure incurred wholly and exclusively for business of the company. On enquiry, it was submitted before the AO that the payment is primarily for enabling the assessee to efficiently market the formulations based on bulk drug Nitroglycerine. Assessee obtained information/details such as clinical data, scientific details/reports on clinical trials carried out by M/s Lyka Labs Ltd. in respect of formulations based on bulk drug Nitroglycerine (which according to the assessee, required to convince the medical profession about the credibility of the drug and development of marketing strategy), break-up of state-wise list of wholesalers/stockists/dealers of formulations, break-up of sale of formulations for last 5 years, break-up of state-wise list of specialists/doctors/cardiologists and institutions shortlisted by M/s Lyka Labs Ltd. with respect to formulations, visual aid designs, copies of promotional material used, so as to establish itself in the market. Copy of agreement between the assessee and M/s Lyka Labs Ltd. dt. 20th Jan., 1998 was submitted before the AO. It was further contended that the payment is for a short-term advantage in marketing of Nitroglycerine formulations in the initial stages, as such expenditure being revenue in nature is allowable under Section 37 of the Act. It was also contended that the expenditure does not fall within the ambit of Section 35AB as the said section is applicable only in the case of "technical know-how" pertaining to manufacturing/processing.

30. However, the AO did not agree with the contentions of the assessee.

He held, purpose of this 'know-how' obtained ranges from clinical data, reports on clinical trials, side effect and contra-indications of the drug to information to educate doctors, physicians, etc. which shows that it is technical know-how as such covered under Section 35AB.Accordingly, AO allowed deduction of l/6th of the total amount for the year under consideration and the balance to be allowed in subsequent five years. Aggrieved, assessee approached the first appellate authority.

31. It was contended before the CIT(A) that the know-how obtained by the assessee is not covered under Section 35AB. The know-how covered under Section 35AB is industrial information or technique that is likely to assist in manufacture or processing of goods. The information, which assists in the marketing of products in the initial stages, is not know-how contemplated or covered by the provisions of Section 35AB. The entire expenditure incurred, it was submitted, is of revenue nature and accordingly to be allowed.

32. CIT(A) agreed with the assessee that the know-how covered by Section 35AB does not cover the information with regard to marketing of product in the initial stage. On going through the agreement entered into with M/s Lyka Labs Ltd., CIT(A) observed, the information which is to be passed on to the assessee under the agreement in no way assist the manufacture or processing of goods. CIT(A) however held, though allowing deduction to the assessee under Section 35AB was not correct, at the same time he held, this expenditure did not appear to be of revenue nature either, particularly in view of Clauses 4 and 8 of the agreement between the parties. He held, the expenditure is of capital in nature, which is not eligible for any deduction. Assessee's comments were called for on the point by the CIT(A).

33. CIT(A) noticed, as per the agreement, M/s Lyka Labs Ltd. invested substantial resources in obtaining market/product information connected with marketing of formulations made from bulk drug Nitroglycerin, which is of vital importance to marketing of products to doctors, institutions, etc. so as to answer their queries related to both bulk drug/formulations of Nitroglycerine and also to educate the doctors in the new developments. CIT(A) noted, the agreement further states that M/s Lyka Labs Ltd. possessed certain clinical data, scientific details, reports on clinical trials carried on by M/s Lyka Labs Ltd. in the last few years and it also developed substantial expertise in ethical promotion of formulation and in possession of valuable market information pertaining thereto. Regarding assessee company, the agreement further stated that it is in the business of manufacturing, marketing and distribution of various cardiac products and desires to expand its market share/activities in the field of Nitroglycerine based formulations. While deciding the issue, CIT(A) has taken note of the following three important clauses: (3) The obligations undertaken by Lyka hereunder shall not be assigned by Lyka to any third party without the prior written consent of USV. (4) Lyka undertakes not to disclose the data, details and the scientific and marketing know-how referred to herein to any third party for a period of at least three years from the date thereof.

(8) For a period of 5 years from the date of this agreement Lyka shall not compete with USV directly or indirectly or through its affiliates in the promoting, distribution and selling activities of formulations made from the bulk drug Nitroglycerine i.e.

formulations whose major ingredient is the bulk drug Nitroglycerine.

34. Considering that M/s Lyka Labs Ltd. was prevented from disclosing the know-how to any third party for a minimum of three years and further it undertook not to compete with the assessee company in this field for five years, which is. in the nature of non-compete agreement and further taking note that this information will not be disclosed to any third party without prior written consent of the assessee, CIT(A) came to the conclusion that the payment made by the assessee is in the nature of capital expenditure. He held, firstly, the payment was for passing certain information to the assessee, which cannot be passed on to a third party. CIT(A) held, this is of capital nature. Assessee contended before the CIT(A) that the restriction not to compete or to pass the information for three years or five years cannot be treated as long-term benefit. For the above proposition, assessee relied upon the decision of the Hon'ble Madras High Court in the case of CIT v. Late G.D. Naidu by LRs . Assessee further relied upon the decision of the Hon'ble Supreme Court in the case of CIT v. British India Corporation Ltd. , wherein the Hon'ble Supreme Court held, seven years is not a long time and allowed the expenditure as revenue character. Assessee also relied upon the decisions of the Hon'ble Supreme Court in the case of CIT v. Best & Co. (P) Ltd. and in the case of Gillinders Abruthnot & Co. Ltd. v.CIT . Regarding the nature of expenditure for obtaining the marketing information, assessee relied upon the following decisions:CIT v. Service Station Equipment (P) Ltd. (1981) 22 CTR (Bom) 72 : (1981) 132 ITR 130 (Bom); It was contended before the CIT(A), if the outgoing expenditure is related to carrying on or conduct of business, it may be regarded as an integral part of profit-earning process and not for acquisition of an asset/right of a permanent character. For the above proposition, assessee relied upon the decision of the jurisdictional High Court in the case of CIT v. Service Station Equipment (P) Ltd. (supra). On the basis of the above decisions, assessee contended that no right of any permanent nature has been assigned to the assessee under the said agreement. As such, the expenditure is to be treated as revenue in nature.

35. CIT(A) held, to avoid competition, the payment made is to be treated as capital expenditure. He got support from the following passages under the heading "Expenditure incurred in order to avoid business competition" at p. 1622 of Vol. II of 1991 Edition of Chaturvedi & Pithisaria's Income-tax Law: Payment made to ward off competition in business to a rival would constitute capital expenditure if the object of making that payment is to derive an advantage by eliminating the competition over some length of time; the same result would not follow if there is no certainty of the duration of the advantage and the same could 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 on the circumstances and the facts of each individual case [CIT v. Coal Shipments (P) Ltd. , Devidas Vithaldas & Co. v. CIT 1972 CTR (SC) 28 : (1972) 94 ITR 277, 285 (SC)].

Ordinarily, money paid to keep out a potential competitor in business, where the benefit is of an enduring nature, is on expenditure in the nature of capital. [Behari Lal Beni Parshad v. CIT (1959) 35 ITR 576 (Punj); Assam Bengal Cement Co. Ltd v. CIT ;.... Orissa Road Transport Co. v. CIT (1970) 75 ITR 126 (Ori)]. Where, however, the benefit is not of an enduring nature but is to exhaust in a year or a short period the expenditure is of a revenue nature and is allowable. [MA. Jabbar v. CIT ;.... Champion Engineering Works Ltd. v. CIT The CIT(A) held that the payment made to M/s Lyka Labs Ltd. by way of non-compete fee is capital expenditure and five years is sufficient to hold as long period and the benefit as enduring nature. In support of the view that five years is a long period, CIT(A) relied upon the decisions in the case of CIT v. Hindustan Pilkington Glass Works Bengal Cement Co. Ltd. v. CIT part of the payment is attributable to non-compete agreement and is capital in nature.

36. Coming to other part of the payment, such as parting of marketing information, CIT(A) held that M/s Lyka Labs Ltd. invested substantial resources for generating the information. The information that M/s Lyka Labs Ltd. parted therefore is capital asset. He further considered the fact that the assessee started marketing formulations based on Nitroglycerine during this period. Thus the information obtained by the assessee altogether is for new product. He has further taken note that M/s Lyka Labs Ltd. undertook not to disclose information to any third party for three years, which shows the information not to become redundant for three years at least. As such, the assessee becomes the sole user of information at least for three years. This is a benefit of enduring nature as far as the assessee is concerned. He held, the decision of the jurisdictional High Court in the case of CIT v. Service Station Equipment (P) Ltd. (supra) is not relevant and helpful to the assessee as the facts were different. In that case the agreement was to remain in force for a period of ten years. Not so in the instant case of the assessee, he held. Thus the CIT(A) held, the assessee's contention that the payment made to M/s Lyka Labs Ltd. for obtaining marketing information is of revenue nature, is not acceptable. He further held, assessee is not entitled to deduction under Section 35AB, which has been allowed to it and therefore the same, he directed, to be withdrawn. However, he accepted the alternative submission of the assessee that it had claimed deduction of only Rs. 50 lakhs in the P&L a/c while the AO added Rs. 6 crores, need to be rectified. Aggrieved by the above order, assessee is in appeal before the Tribunal.

37. Learned Counsel for the assessee brought our attention to paper book pp. 5 to 10, agreement dt. 20th Jan., 1998, entered into between M/s Lyka Labs Ltd. and the assessee, particularly Clause 5, which reads as under: 5. Lyka shall not disclose to any third party any information pertaining to business of USV which comes in its possession in the course of discharging its obligations hereunder unless the same is in public domain.

(a) Clinical data, scientific details and reports on clinical trials carried out by Lyka in respect of the formulations based on the bulk drug Nitroglycerine.

(b) Source of manufacture of formulations from the bulk drug Nitroglycerine.

(c) Break up of statewise list of wholesalers, stockists and dealers of the formulations.

(e) Break up of statewise list of specialists, doctors, cardiologists and institutions as shortlisted by Lyka with respect to the formulations referred to in the above agreement.

Learned counsel submitted, by this the assessee is only trying to increase the business by expanding its existing business. Assessee is already in this field. Assessee was manufacturing Nitroglycerine, which is similar business, for which agreement is also entered into. Learned Counsel submitted, inviting our attention again to paper book p. 8, Clause 1 of the agreement, wherein it is stated that Lyka shall supply and provide to the assessee clinical data, scientific details reports on clinical trials carried on by Lyka in the past few years, valuable market information more particularly set out in the schedule thereto as 'scientific and marketing know-how. It is for this the assessee paid Rs. 6 crores and not for non-compete clause. Learned Counsel repeated, assessee is already in the field of manufacturing Nitroglycerine, in other words, assessee is already in this line of business and is trying to expand the market, for which purpose the payment is made. Relying upon the decision of the Hon'ble Supreme Court in the case of Alembic Chemical Works Co. Ltd. v. CIT Counsel submitted, the decision of the CIT(A) is liable to be reversed, as the facts in the instant case of the assessee are identical with that .

38. Learned Counsel again, through written submission para 6.1, brought our attention to Clauses 4 and 8 of the agreement with M/s Lyka Labs Ltd. and submitted, CIT(A) held that by virtue of Clause 4, which provides that Lyka not to disclose the know-how etc. as mentioned in the agreement to any third party for three years, ensures that the benefit derived by the assessee is a long-term benefit. Similarly, the stand of the CIT(A) is that by virtue of Clause 8, which is non-compete clause for five years, the assessee derived long-term benefit. This finding is also assailed by the learned Counsel. The finding of the CIT(A) that the payments made to M/s Lyka Labs Ltd. are on two counts-one is attributable to passing on information and data to the assessee and nondisclosure of same to any third party for a period of three years; and the other is attributable to non-compete clause in the agreement, which would remain effective for a period of five years, learned Counsel submitted, is incorrect. He submitted, the decisions relied upon by the CIT(A) to come to the above conclusion cannot be applied strictly. Learned Counsel submitted, particularly bringing our attention to the decision of the Hon'ble Supreme Court in the case of K.TM.T.M. Abdul Kayoom and Anr. v. CIT , what is attributable to capital and what to revenue cannot be decided either exhaustively or universally. Each case depends on its own facts. Even a single significant detail may alter the entire aspect and the conclusion arrived at cannot be made .applicable in a given case. He particularly stressed the finding of the Hon'ble Supreme Court : "to decide, therefore, on which side of the line a case falls, its broad resemblance to another case is not at all decisive. What is decisive is the nature of the business, the nature of the expenditure, the nature of the right acquired, and their relation inter se, and this is the only key to resolve the issue in the light of the general principles, which are followed in such cases." 39. Relying upon the Special Bench decision of the Tribunal in the case of Peerless Securities Ltd. v. Jt. CIT , learned Counsel submitted that the Tribunal laid down certain general principles for determining whether an expenditure should be considered as capital or revenue nature, fairly comprehensively. To stress the point, learned Counsel particularly brought our attention to the following observation of the Tribunal: What is relevant in determining whether an expenditure is of capital or revenue nature is the purpose of the outlay and its intended object and effect, considered in a common sense way having regard to business realities. The test of enduring benefit is not a certain or conclusive test and cannot be applied mechanically without regard to the particular facts and circumstances of a given case. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in the enduring benefit test; what matters is the nature of the advantage in a commercial sense, and it is only where the advantage is in the capital field that the expenditure would be on capital account. If the advantage consists of merely facilitating the assessee's trading operations or enabling the management or conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for the indefinite future. By 'enduring' is meant enduring in the way that fixed capital endures and it does not connote a benefit that endures in the sense that for a good number of years it relieves the assessee of a revenue payment or a disadvantage. A payment made by the assessee to free himself from a capital liability, is capital expenditure, while a payment which frees an assessee from the liability to make recurring revenue payments or annual revenue payments is revenue expenditure. Where the assessee has an existing right to carry on a business, any expenditure made by it during the course of business for the purpose of removal of any restriction or obstruction or disability, would be on revenue account, provided the expenditure does not acquire any capital asset.

The expression 'once and for all' is used to denote an expenditure which is made once and for all for procuring an enduring benefit to business as distinguished from a recurring expenditure in the nature of operational expenses. If the expenditure is for the initial outlay or for acquiring or bringing into existence an asset or advantage of an enduring benefit to the business that is being carried on, or for extension of the business that is going on, or for a substantial replacement of an existing business asset, it would be capital expenditure. If, on the other hand, the expenditure, although for the purpose of acquiring an asset or advantage, is for running of the business or for working out that asset with a view to produce profit, it would be revenue expenditure. If the outgoing is so related to the carrying on or the conduct of the business that it may be regarded as an integral part of the profit-earning process or operation, and not for the acquisition of an asset of a permanent character, the possession of which is a condition precedent for the running of the business, then it would be expenditure of revenue nature. If it is intrinsically a capital asset, it is immaterial whether the price for it is paid once and for all, or periodically, or whether it is paid out of capital, or income, or linked up with net sales, the outgoing, in such a case, would be of the nature of capital expenditure. A lump sum amount for liquidating recurring claims would not cease to be revenue expenditure or get converted into capital expenditure merely because its payment is spread over a number of years. It is the intention and object with which the asset is acquired, that determines the nature of the expenditure incurred over it, and not the method or the manner in which the payment is made, or the source of such payment. If the expenditure is recurring and is incurred during the course of business or manufacture, it would be revenue expenditure. Simply because the payment in the hands of the recipient has been considered a capital receipt, it is not necessary that in all cases it will have the same character in the hands of the person who has made the payment and vice versa. It is the true nature of the expenditure that is relevant and not the name or description or treatment given to it by the assessee in his books of account or other documents.

40. Learned Counsel submitted, assessee was having the knowledge of manufacturing of products, i.e. to say, formulations based on bulk drug Nitroglycerine. As per the agreement, M/s Lyka Labs Ltd. was only to supply to the assessee the clinical data, reports on clinical trials, other scientific details in respect of formulations, source of manufacture of formulations, statewise list of wholesalers, stockists and dealers, statewise sales for last five years, statewise list of specialists, doctors, cardiologists and institutions as shortlisted by M/s Lyka Labs Ltd., visual aid designs and copies of promotional materials used. Assessee also had the option to obtain assistance from M/s Lyka Labs Ltd in planning campaigns with doctors, medical institutions, etc. for conducting continuous medical education for doctors, devising sampling strategies and promotional schemes, market surveys and training medical representatives and other field force of the company. M/s Lyka Labs Ltd. would provide the above for the sole benefit of the assessee for a period of at least three years from the date of the agreement. In consideration, assessee agreed to pay Rs. 6 crores. Basically the know-how that was obtained by the assessee was for developing the market for the product, viz. formulations of Nitroglycerine, which was already very much within the existing line of assessee's business. Agreement with M/s Lyka Labs Ltd. was not for venturing into any new line of business. It was only for developing the market intrinsically linked with running of existing business. It is true, assessee entered into agreement with M/s Lyka Labs Ltd with the sole intention of getting scientific and commercial know-how with a view to increase the profit. Hence, learned Counsel submitted, in view of the Special Bench decision of the Tribunal in the case of Peerless Securities Ltd. v. Jt. CIT (supra), the expenditure partakes the character of revenue expenditure and thus it is to be allowed.

41. Learned Counsel assailed the view taken by the learned CIT(A) that the assessee acquired the know-how from M/s Lyka Labs Ltd. and it is an enduring benefit. He submitted, assessee has not obtained any benefit or advantage except the advantage of enabling to conduct assessee's business more profitably by adopting techniques of manufacturing and marketing formulations of existing basic product, while keeping the fixed capital unaltered and intact. Assessee's expenditure was not at all in the capital field.42. Coming to the decision of the jurisdictional High Court in the case of CIT v. Service Station Equipment (P) Ltd. (supra), learned Counsel submitted, the distinction made by the learned CIT(A) is not at all correct. In that case the agreement was to remain in force for ten years; whereas in the instant case of the assessee it is less than 1/3 of the period with regard to disclosure of information. Relying upon the decision of the Hon'ble Gujarat High Court in the case of CIT v.Power Build Ltd. , learned Counsel submitted, even if the assessee obtained an advantage of enduring nature, since the assessee is already in the same line of business and not ventured into any new unit engaged in manufacturing and the advantage or benefit even if acquired is for facilitating the existing business, the expenditure cannot be treated as capital but it is only revenue expenditure. He particularly relied upon the following observation of the Hon'ble High Court: The assessee, carrying on business of manufacturing various types of motors and weighing machines, was assessed for the asst. yr.

1979-80. Before the AO, the copy of the agreement, dt. 31st March, 1976, was filed. The said agreement was thereafter amended on 3rd March, 1977. In view of the original agreement, the assessee company was under obligation to return the books, technical data papers, drawings relating to the products authorised to be manufactured by the foreign collaborators. However, in view of the amended agreement, the assessee was entitled to retain all these documents, technical data, design, documentation, etc. In view of the earlier agreement, the assessee was allowed to manufacture for a period of five years. However, later on, there was no such restriction. It is in view of this the AO has not considered the amount of Rs. 79,916 as revenue expenditure. The Tribunal on the facts found that in the original agreement there was no renewal clause and the documents, that is to say, the technical know-how was required to be returned to the collaborators. However, in view of the later agreement for which no extra payment was to be made, the assessee was entitled to retain the technical know-how. The Tribunal held that if it had any value, the assessee might have been expected to pay for it. The Tribunal further held that it cannot be inferred that there was no particular value in the retention of the know-how documentation.

Therefore, it can hardly be said that the assessee obtained an advantage of, an enduring nature. It is required to be noted that the assessee was not a new unit engaged in manufacturing various types, of motors and weighing machines and this advantage or benefit even if acquired to facilitate to run the existing business, it should be treated as revenue expenditure.

43. Again learned Counsel brought our attention to the decision of the Hon'ble Calcutta High Court in the case of CIT v. Avery India Ltd. is in tune with the decision of the Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. v. CIT (supra), wherein their Lordships observed : "a benefit that might endure long in the assessee's business may nonetheless be in the revenue field, if the benefit is in respect of asset which is part of the circulating capital". Learned Counsel submitted, in the instant case of the assessee, the know-how obtained by the assessee from M/s Lyka Labs Ltd. does not form part of its fixed capital. Possession of the know-how is intrinsically linked with running of the existing business of the assessee. Assessee merely wanted to take advantage of the fast developing market for formulations of Nitroglycerine. Know-how is utilised for improving the profitability of existing business and not for starting a new business. Hence, learned Counsel submitted, expenditure is for expanding the already existing field and it is therefore revenue expenditure.

44. Further, relying upon the decision of the Hon'ble Madras High Court in the case of CIT v. Simpson & Co. Ltd. , learned Counsel submitted, this was a case wherein the assessee claimed a sum of Rs. 20,56,956 representing a lump sum payment to its foreign collaborator towards import of technical know-how documentation relating to a new three cylinder diesel engine. AO held that the amount paid was capital as the assessee had the benefit of technical know-how indefinitely for the reason that for the first ten years this technical know-how will be assessee's exclusive domain and there was no restriction even for the use of know-how beyond the period of ten years. CIT(A) accepted assessee's claim. Learned Counsel submitted, in this case the Hon'ble High Court held that the agreement is entered into for the purpose of running the business more profitably and effectively and with a view to yield profit to the assessee in the already existing field; as such the payment should be regarded as revenue in nature. Coming to the instance case, learned Counsel submitted, ever changing market demand necessitated the assessee to diversify its products by marketing formulations of bulk drug Nitroglycerine. For this reason only the assessee entered into the agreement. It is for the benefit of the existing business and to run it more profitably and effectively to yield better profit. Learned Counsel submitted, as a matter of fact as per Clause 7 of the agreement, assessee undertakes to use the data details and scientific and marketing know-how furnished by M/s Lyka Labs Ltd. only for its own business and/or business of its affiliates with respect to business activities relating to formulations and not to disclose or divulge the same to any other person without the prior consent of M/s Lyka Labs Ltd. There is no time frame mentioned in the agreement unlike in the case of CIT v. Simpson & Co. Ltd. (supra). Hence, in the case of the assessee, the benefit/ advantage derived by virtue of impugned agreement is not unfettered and would remain so even after ten years, learned Counsel submitted, assessee has not derived any enduring benefit from the know-how obtained by this agreement.

45. Learned Counsel again relied upon the decision of the Hon'ble Delhi High Court in the case of CIT v. Goodyear India Ltd. .

In this case the Hon'ble High Court held that the consideration was paid for betterment of the product and to enlarge the range of its existing products and the expenditure was an outlay of business in order to carry it on to earn better profit; as such this is to be treated as revenue expenditure. Learned Counsel submitted, in the instant case the assessee acquired the right to use technical knowledge and information to manufacture/ market the product already in the existing line of business. Agreement with M/s Lyka Labs Ltd. was for enlarging the range of existing products by marketing formulations based on bulk drug Nitroglycerine. Assessee basically obtained scientific and marketing information. This has not been disputed at any stage. Hence, learned Counsel submitted, this is revenue expenditure.

For the same proposition he relied upon the decision of the Hon'ble Madras High Court in the case of S.R.P. Tools Ltd. v. CIT . This was a case wherein the assessee was already in the business of manufacture of motor vehicle accessories. Assessee entered into a technical collaboration agreement with the Japanese company for obtaining technical know-how for the manufacture of precision tools such as hobs, gear shaper cutters, broaches, shaving cutters, etc. Assessee's claim of revenue expenditure was disallowed by the AO. Hon'ble High Court held that the collaboration was in the field of existing business; as such the payment to be treated as revenue expenditure. Learned Counsel also relied upon the decision of the Hon'ble Andhra Pradesh High Court in the case of CIT v. Venkateswara Hatchery (P) Ltd. for the same proposition. In this case the Hon'ble High Court held : "what is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowed. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of assessee's business more efficiently or more profitably, leaving the fixed capital untouched, the expenditure would be treated under revenue account and not otherwise". Learned Counsel also relied upon the decision of the Hon'ble Madras High Court in the case of CIT v.Aquapump Industries (1996) 132 CTR (Mad) 506 : (1996) 218 ITR 427 (Mad).

46. Learned Counsel again relied upon the decision of the Hon'ble Supreme Court in the case of Alembic Chemical Works Ltd. v. CIT (supra). He particularly stressed the following observation of the Hon'ble Supreme Court: On 8th June, 1961, the appellant, a company engaged in the manufacture of antibiotics and Pharmaceuticals, was granted a licence for the manufacture of penicillin. By the year 1963, it had already made an outlay of more than Rs. 66 lakhs for setting up a plant for the production of penicillin. In the initial years, the appellant was able to achieve only moderate yields of penicillin With a view to increasing the yield, the appellant started negotiations in 1963, with Meiji, a reputed Japanese enterprise engaged in the manufacture of antibiotics, which culminated in an agreement dt. 9th Oct., 1963, whereunder Meiji, in consideration of a 'once for all payment' of US $ 50,000 (equivalent then to Rs. 2,39,625), agreed to supply to the appellant the 'subcultures of Meiji's most suitable penicillin producing strains' in a pilot plant, the technical information, know-how and written description of Meiji's process for fermentation of penicillin along with a flowsheet of the process in the pilot plant, and the design and specifications of the main equipment in such pilot plant, and to arrange for the training of the appellant's representatives in Meiji's plant in Japan at the appellant's expense and advise the appellant in large scale manufacture of penicillin for a period of two years. The appellant was to keep the technical know-how confidential and secret and was not to seek any patent for the process. For the asst. yr. 1964-65, the appellant claimed deduction of the sum of Rs. 2,39,625 as a revenue expenditure. Both the Department and the Tribunal rejected the claim holding that the expenditure was capital in nature.

in support of assessee's claim and submitted that in the instant case of the assessee the facts are identical. Learned Counsel further brought our attention to the observation of the Hon'ble Supreme Court in the case of Alembic Chemical Works Ltd. v. CIT (supra), which reads as under: That the improvisation in the process and technology in some areas of the enterprise was supplemental to the existing business and there was no material to hold that it amounted to a new or fresh venture. The further circumstance that the agreement pertained to a product already in the line of the appellant's established business and not to a new product indicated that what was stipulated was an improvement in the operations of the existing business and its efficiency and profitability not removed from the area of the day-to-day business of the appellant's established enterprise. The financial outlay under the agreement was for the better conduct and improvement of the existing business and was revenue in nature and was allowable as a deduction in computing the business profits of the appellant.

It would be unrealistic to ignore the rapid advances in research in antibiotic medical microbiology and to attribute a degree of endurability and permanence to the technical know-how at any particular stage in this fast changing area of medical science. The state of the art in some of these areas of high priority research is constantly updated so that the know-how could not be said to bear the element of the requisite degree of durability and non-ephemerality to share the requirements and qualifications of an enduring capital asset. The rapid strides in science and technology in the field should make us a little slow and circumspect in too readily pigeonholing an outlay, such as this, as capital.

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

47. Learned Counsel also brought our attention to the decision of the Ahmedabad Bench of the Tribunal in the case of Smartchem Technologies Ltd. v. ITO in ITA Nos. 3955/Ahd/2003 and 654/Ahd/2005 [reported at (2005) 97 TTJ (Ahd) 818-Ed.]. In this case, the Tribunal held, after discussing the issue in great detail, that if a person starting absolutely a new business, comprehends that another known person may compete with him in future, and to ward off such competition enters into a non-compete agreement with him, then the agreement is certainly for increasing the profitability of his existing business. It is so because, Tribunal held, the agreement ensures that the first person will be able to carry on business without competition from the second and thereby enhance the profitability. To come to the above conclusion Tribunal relied upon the decision of the Hon'ble Supreme Court in the case of Empire Jute Company Ltd. v. CIT (supra), wherein one jute mill purchased the loom hours from others and claimed deduction of that amount paid as revenue expenditure. Reversing the decision of the Hon'ble High Court, Hon'ble Supreme Court held that the amount paid by the assessee for purchase of loom hours was in the nature of revenue expenditure. The Hon'ble Supreme Court held that by purchase of loom hours from the other mills, assessee has not obtained any new asset.

There was no addition or expansion of profit-making apparatus.

Acquisition of additional loom hours did not add to the fixed capital of the assessee nor the assessee acquired a new source of profit or income when it purchased the loom hours. The Hon'ble Supreme Court held, the expenditure incurred for the purpose of operating the looms for longer working hours primarily and essentially related to the operation of working of the looms which constituted the profit-making apparatus of the assessee and this was expenditure laid out for profit increasing. It was part of the cost of operating, Hon'ble Supreme Court held.48. Learned Counsel submitted, in the instant case of the assessee the facts are very similar. Prior to entering into agreement with M/s Lyka Labs Ltd., assessee was in the pharmaceutical business and was actually manufacturing the bulk drug Nitroglycerine. Assessee already had the knowledge of manufacture of formulations based on Nitroglycerine. It did not enter into the agreement with M/s Lyka Labs Ltd. for venturing into a new business. The agreement basically provided that M/s Lyka Labs Ltd. would furnish marketing know-how primarily to the assessee.

The non-compete clause for five years was inserted into the agreement to enhance profitability of the products of the assessee because if M/s Lyka Labs Ltd. uses the know-how to manufacture identical products, the profitability of the assessee's products would definitely suffer due to inevitable competition. Learned Counsel submitted, it is not a fact that by virtue of this agreement the assessee would be the sole producer of the formulations of Nitroglycerine. The agreement does not protect the assessee from competition from other manufacturers of similar products who may not have anything to do with M/s Lyka labs Ltd. Due to continuous advancement of science and technology, partial safeguard from competition for mere five years can hardly be considered as an enduring advantage. Hence, learned Counsel submitted, the payment should be treated as revenue expenditure.

49. Learned Counsel further submitted, in fact the decision relied upon by the learned CIT(A) in the case of Assam Bengal Cement Co. Ltd. v.CIT (supra), which was affirmed by the Hon'ble Supreme Court in Assam Bengal Cement Co. Ltd. v. CIT , supports the case of the assessee because the assessee spent the money primarily to gain better access to the market and augment profitability. It is an integral part of profit-earning process. In short, learned Counsel summed up his arguments as under: (a) Where the know-how is obtained for manufacturing a new product in the existing line of business of the assessee or for the purpose of development and/or better exploitation of the market, the expenditure incurred for obtaining the said know-how is revenue expenditure.

(b) Where the know-how is utilised for improving the profitability of an existing business and not for starting a new business, the expenditure for obtaining the same would be revenue expenditure.

(c) A benefit that might endure long in the assessee's business may nonetheless be in the revenue field, if the benefit is in respect of an asset which is part of circulating capital.

(d) Expenditure to acquire knowledge cannot be disallowed merely because knowledge dies hard. Where the expenditure, although enduring in character, has its impact on the running of the business, there can be no doubt that it is revenue expenditure.

(e) The period for which the know-how, etc. could be used is of little consequence in determining whether the expenditure incurred should be considered as revenue or capital expenditure. Even if the know-how could be used for an indefinite period, the expenditure to obtain the same could still be of revenue nature.

(f) The mere fact that the person providing the know-how is precluded by the agreement from divulging the same to a third party, only for a definite period, does not make the expenditure one of capital nature.

(g) The advantage gained by acquiring technical knowledge could not be regarded as of enduring value due to fast changing technology, especially in the pharmaceutical field. The rapid strides in science and technology in the field should make us a little slow and circumspect in too readily pigeonholing an outlay as capital.

(h) The products cannot be new for all time to time (come), as the novelty attached to the new product would wane and the tag of newness of the products would wear off after some years of production. So just because the know-how is utilised for an indefinite period for making a product hitherto not made by the assessee, it cannot be said that the expenditure incurred for the said know-how is capital expenditure.

(i) The limitations placed in an agreement on the right of the appellant in dealing with the know-how and the conditions as to non-disclosure of the know-how, pertains more to the use of the know-how than to its exclusive acquisition.

(j) The expenditure incurred in connection with an agreement to ward off competition, irrespective of the duration of enforceability of such an agreement, would be a revenue expenditure, if it is for the purpose of enhancement of profitability.

50. Learned Counsel submitted, even otherwise, in the case of M/s Lyka Labs Ltd. the AO treated the impugned receipt of Rs. 6 crores as revenue receipt for the following reasons and the same was confirmed by the CIT(A): (a) The marketing and clinical data and allied rights had been generated/ acquired by M/s Lyka Labs Ltd. during the normal course of its business and, hence, could not be treated as its capital asset.

(b) Clauses 4 to 8 of the agreement clearly show that it was not a one time complete transfer of know-how to USV. The restrictions placed were only for a period of three years and five years regarding non-disclosure and noncompetition respectively.

(c) The amount received by M/s Lyka Labs Ltd on transfer of marketing know-how is only Rs. 6 crores, which is negligible as compared to its total turnover.

(d) The compensation received for transfer of know-how did not affect or alter the capital structure of M/s Lyka Labs Ltd. M/s Lyka Labs Ltd. did not dispose of any capital asset by entering into the agreement with USV. (e) M/s Lyka Labs Ltd. earned consideration for granting the know-how not by parting with any capital asset but merely by applying the technical data generated by it differently in its trade.

In view of the above, learned Counsel submitted, the orders of the Revenue authorities are liable to be reversed.

51. Replying to the above, learned Departmental Representative supported the orders of the Revenue authorities and submitted, first of all the assessee capitalised receipt. Secondly, the learned Departmental Representative submitted, whatever data received by the assessee is permanent and this gives the assessee an enduring benefit.

Learned Departmental Representative further submitted, there is a non-compete clause and the payment is made for this. He relied upon the decision of the Hon'ble Delhi High Court in the case of Triveni Engineering Works Ltd. v. CIT and submitted, in this case the assessee paid Rs. 5,000 to a company for preparing a project report on manufacturing insecticide formulation. Assessee was not manufacturing insecticide formulations. Thus the payment was for project report only. AO held that this is a capital expenditure.

Assessee paid further Rs. 11,000 and Rs. 3,000 for survey report on extra melkral alcohol. Assessee wanted these reports to put to a better use its by-products, viz., molasses. Assessee was not producing any alcohol during the period. AO treated this also as capital expenditure.

Tribunal confirmed the view of the Revenue authorities. The Hon'ble High Court on further appeal confirmed the decision of the Tribunal.

52. In reply, learned Counsel distinguished the facts and contended that the assessee had the knowledge of manufacturing the products, i.e.

formulations based on bulk drug Nitroglycerine and the assessee was only at the most trying to obtain the latest technology and was trying to expand its market viability. Learned Counsel submitted, this in fact supports assessee's case.

53. Who have heard the rival submissions, gone through the orders of the Revenue authorities and the decisions cited by the contending parties. We are of the view that the appeal by the assessee on this ground is liable to be allowed. From the facts narrated above, it is seen that the assessee was already in the field of producing bulk drugs and pharmaceutical products. Assessee entered into agreement with M/s Lyka Labs Ltd. to improve the market viability and to obtain new technology in the fast changing field of bulk drug formulations. Thus, the decision of the Hon'ble Supreme Court in the case of Alembic Chemical Works Ltd. v. CIT (supra) is clearly applicable. This was a case wherein the assessee was already manufacturing penicillin. With a view to increasing its yield, the assessee negotiated and entered into an agreement with Japanese company to supply the assessee the subcultures of Meiji's most suitable penicillin producing strains in a pilot plant, technical information and know-how.

Hon'ble Supreme Court held : "that the improvisation in the process and technology in some areas of the enterprise was supplemental to the existing business and there was no material to hold that it amounted to a new or fresh venture. The further circumstance that the agreement pertained to a product already in the line of the appellant's established business and not to a new product indicated that what was stipulated was an improvement in the operations of the existing business and its efficiency and profitability not removed from the area of the day-to-day business of the appellant's established enterprise.

The financial outlay under the agreement was for the better conduct and improvement of the existing business and was revenue in nature and was allowable as a deduction in computing the business profits of the appellant." 54. We also find that the view canvassed by the learned Counsel gets support from the decision of the Hon'ble Supreme Court in the case of Empire Jute Company Ltd. v. CIT (supra), wherein the Hon'ble-Supreme Court held, purchase of loom hours paying an aggregate sum does not go to the capital expenditure but it only facilitates the looms to work its full capacity and therefore the expenditure incurred for purchase of loom hours by a mill could only be treated as revenue expenditure.

55. It is an undisputed fact that the assessee is engaged in the manufacturing and marketing of various pharmaceutical products and also have the knowledge of manufacturing products made from the bulk drug Nitroglycerine. However, with a view to expand its market and, to increase and expand its activities in the field of Nitroglycerine based formulations, the assessee has entered into an agreement for supply of scientific and marketing know-how possessed by M/s Lyka labs Ltd vide agreement dt. 20th Jan., 1998. The scientific and marketing know-how to be provided by M/s Lyka Labs Ltd. consists of the following: 5. Lyka shall not disclose to any third party any information pertaining to business of USV which comes in its possession in the course of discharging its obligations hereunder unless the same is in public domain.

(a) Clinical data, scientific details and reports on clinical trials carried out by Lyka in respect of the formulations based on the bulk drug Nitroglycerine.

(b) Source of manufacture of formulations from the bulk drug Nitroglycerine.

(c) Break-up of statewise list of wholesalers, stockists and dealers of the formulations.

(e) Break-up of statewise list of specialists, doctors, cardiologists and institutions as shortlisted by Lyka with respect to the formulations referred to in the above agreement.

The assessee and M/s Lyka Labs Ltd. have also agreed that M/s Lyka Labs Ltd. would not supply data, details and scientific and marketing know-how relating to formulations made from bulk drug Nitroglycerine to any third party for a period of at least three years from the date of the agreement and the assessee would not disclose any information in respect of Nitroglycerine based formulations to any other person without the prior written consent of M/s Lyka Labs Ltd. In addition to it M/s Lyka Labs Ltd. has also agreed not to compete with the assessee directly or indirectly for a period of five years from the date of the agreement. The total consideration paid by the assessee in pursuance of this agreement stands at Rs. 6 crores. The AO has treated the same as know-how and allowed l/6th thereof under the provisions of Section 35AB of the Act; whereas the learned CIT(A) has held that it could not be construed as know-how and based upon various clauses of the agreement has held that assessee derived a benefit of enduring nature; hence it was of a capital nature and disallowed the same accordingly.

56. Learned Counsel has vehemently argued that the impugned payment is of revenue nature because it has resulted in increasing the market share, higher revenues and carrying of manufacturing/marketing operations more efficiently. It has also been contended that the assessee by obtaining this information has curtailed the period which could have been consumed in generating these informations by the assessee, on its own, therefore, the revenue expenditure which would have been incurred by the assessee if the same informations were generated on its own has been incurred in this form and also the assessee has been able to generate revenue without wasting time, hence, the expenditure so incurred is nothing more than the recurring of revenue expenditure in one go and is allowable as such. Both these contentions of the assessee have sufficient force in view of the judicial decisions relied on by the assessee, particularly in the light of the decision of the Hon'ble Supreme Court in the case of Empire Jute Company Ltd. v. CIT (supra), which is clearly applicable.

57. Having stated so, we consider it pertinent to look at the terms of the agreement and the finding of the learned CIT(A) that M/s Lyka Labs Ltd. invested substantial resources in generating market information, therefore, it was of capital nature. In this regard, we would like to first mention that nature of expenditure has to be looked in the hands of the party who is incurring it and not the party who is receiving it.

It is not in dispute that the information generated by M/s Lyka Labs Ltd. by investing substantial resources is connected with the marketing of the products (as mentioned in the agreement), which necessarily implies the incurrence of expenditures of revenue nature such as salaries, travelling, collection of statistical data through various Government/business associations, trade associations, etc. All these expenses are basically of revenue nature and incurred in a regular course and as such are allowable. Hence, one time payment made by the assessee company to M/s Lyka Labs Ltd. does not alter the basic nature of these expenses particularly in the context of present business environment where various activities are being outsourced and various entities undertake such activities on contract basis or on its own and sell such informations and data like any other goods which can be used by other business entities as raw material or support services to carry out it's operations or expand it's activities. To further elaborate some entities work like knowledge centres like M/s Lyka Labs Ltd. in the present case and derive revenue by selling knowledge to the other party who, in turn, by purchasing the same attains it's objective of becoming bigger faster. Thus, the information, if looked upon in an integrated manner, is no more than the facilitation of profit-earning process.

58. The other aspect involved is that the agreement also provides for noncompetition by M/s Lyka Labs Ltd. Further, there has not been any bifurcation of the total consideration towards both the things and the learned CIT(A) also held that part of the consideration can be attributed towards non-competition as well. However, on perusal of the complete agreement, we find that both the parties have not provided any recourse or provision for indemnification or compensation in case of breach of terms of the agreement by any of the parties. Further, if we go through the contents of the scientific and marketing know-how obtained by the assessee company, it becomes amply clear that the emphasis of the assessee company is on getting the information/data created by M/s Lyka Labs Ltd. in a readymade manner so as to reduce the gestation period and to enter into the activities at a rapid pace and it is because of this reason only and having regard to the nature of information, no judicial remedy has been provided for future obligations to be observed by both the parties. In view of such a situation, in our considered view, in substance the agreement though refers to non-disclosure of information by the assessee and M/s Lyka Labs Ltd. and non-competition by M/s Lyka Labs Ltd. for specified period, payment is for of information regarding clinical data, scientific details and valuable market information only. Further, even if some of the consideration is attributed towards non-competition, the assessee's case finds support from the decision of the Ahmedabad Bench of the Tribunal in the case of Smartchem Technologies Ltd. v. ITO, cited supra, wherein the Tribunal followed the decision of the Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. v. CIT (supra) in concluding that the expenditure to avoid competition was dictated by the business necessity and commercial expediency and the benefit derived out of it was directly related to enhancement of its profitability; hence, the said expenditure was of revenue nature.

59. The deductibility of the payment made by the assessee company can be viewed with another perspective. The scientific and market information has been generated by M/s Lyka Labs Ltd. by carrying out the scientific research and market research. Had this been carried out in-house, the amount excluding the amount spent on land and building and marketing information, the assessee would have been eligible for one and one-half times deduction thereon as per the provisions of Section 35(2AB) of the Act. As per provision of this section, whatever amount the assessee would have spent on scientific research including clinical trials and approvals from competent authorities including the capital expenditure on plant and machinery would have been eligible for weighted deduction and the expenditure relating to marketing information and statistics would have been allowed under the normal provisions of the Act as such.

60. In view of the foregoing discussion, we are of the view that the decision of the learned CIT(A) is not correct in law and reverse the same and direct the AO to allow the expenditure as revenue expenditure.

61. Coming to the next ground (ground Nos. 15 and 16) of objection by the assessee it is directed against the order of the CIT(A) in confirming the disallowance of Rs. 12.50 crores paid under the orders of the Company Law Board (CLB). According to the assessee CIT(A) failed to appreciate the voluminous material placed before him that the payment was made to escape the adversely affected business of the assessee. Assessee was facing enquiries/ proceedings on account of complaints made by disputing parties, which adversely affected assessee's business. It is also the case of the assessee that the CIT(A) failed to note that the subsequent events and progress in the business confirmed assessee's claim that the payment was made to avoid adverse impact on the business of the assessee company.

62. Facts are discussed by the AO vide paras 9.1 to 15, pp. 8 to 32 of his order. While framing the assessment order, AO noticed, assessee debited an amount of Rs. 12,06,53,113 under the head "Miscellaneous expenses". It was submitted that the assessee company and its promoters had several disputes. There were various proceedings on different issues. Had the litigation allowed to continue, it would damage assessee's reputation and hence assessee made the payment. It was submitted, in fact assessee's business stagnated between the accounting year ended on 31st March, 1997 and 31st March, 1998 with paltry increase of Rs. 7 crores in the turnover. There were many enquiries from excise authorities, sales-tax authorities and regional director under the Companies Act. All this affected assessee's business and to avoid unnecessary litigation and to ensure a stable and peaceful existence, assessee made the impugned payment of Rs. 12.5 crores. The payment was made under the order dt. 10th March, 1998 of the CLB. CLB found that the pendency of litigation adversely affected the reputation, triggered false signals in the pharmaceutical industry and seriously affected the business growth of the assessee and therefore CLB held that we are satisfied that the money paid by USV and to be paid by USV is for the legitimate and genuine business reasons of USV.Shri A.V. Gandhi was in the management and control of several companies including assessee company and M/s Vital Pharmacal (P) Ltd. Family of Shri A.V. Gandhi, HUF and the family trust owned almost the entire share capital of these companies. On the death of Shri A.V. Gandhi, bitter quarrels ensued between the family members for acquiring/retaining the controlling interest of all the companies, including assessee company. After narrating the disputes between the parties, CLB passed an order dt. 3rd April, 1998 and directed that both the orders dt. 10th March, 1998 and 3rd April, 1998 should be read together. Para 8 of CLB's order dt. 3rd April, 1998 has been reproduced by the AO, which reads as under: The family arrangement, the principal terms of which have been recorded by us effectively put to an end the extensive litigation between the parties/companies involved. The pendency of the litigation, adversely affected the reputation, inter alia, of USV, triggered false signals in the pharmaceutical industry, and, serious affected the business growth and prosperity of USV. We are satisfied that the money paid by USV and to be paid by USV is for the legitimate and genuine business reasons of USV.63. On the basis of the above, AO found that the finding of the CLB "the legitimate and genuine business reasons of USV" for parting with Rs. 12.06 crores (approximately) was the outcome of family arrangement that was the culmination of extensive litigation between the family members of late Shri A.V. Gandhi, such litigation arising from mutual distrust among them coupled with the intention to acquire and/or retain controlling interest in the companies promoted and built up by late Shri A.V. Gandhi, to the exclusion of those who were on the other side of a particular dispute. Basically, the opponent camps consisted of Mrs. Pramila Gandhi and her two daughters, viz., Sheela Gandhi Rao and Sunita Arvind Gandhi on the one hand, and on the other hand, the other daughter, Leena Gandhi Tewari and her husband, Prashant Tewari.

64. After discussing the issue, AO came to the conclusion that the payment of Rs. 12.6 crores (approximately) was for consolidating the interest of majority of shareholders. He held, it is difficult to put at par business protection and development of the corporate entity with the personal interest of the majority shareholders. Apparently, such expenses could be paid out of the accounts of the assessee company, not only because it was closely held but also because the majority shareholding of Mrs. Leena Gandhi Tewari and her husband was supremely dominant having 46,391 shares whereas other shareholders having 1,641 shares. He held, IT Act is a self-contained code and taxability of receipts or allowance of an expenditure are to be determined only within the scheme of the Act itself. The provisions of a statute which is not cognate or pan materia to the IT Act, cannot be taken into aid to judge the taxability or otherwise of a receipt or allowance or otherwise of an expenditure.

65. After discussing the issue in detail and placing reliance on the decisions of the Hon'ble Supreme Court in the case of CIT v. Malayalam Plantations Ltd. and Bombay Steam Navigation Co. (P) Ltd. v. CIT (1965) 56 ITR 52 (SC); and also the decision of the jurisdictional High Court in the case of Adarsha Dugdhalaya v. CIT , AO decided the issue against the assessee.

Particularly taking note of the decision in the case of Adarsha Dugdhalaya v. CIT (supra), where the issue was with regard to a dispute as to what is the quantum of the claim of an outgoing partner as on the date of retirement, Hon'ble High Court held, the expenditure cannot be treated as incurred for the purpose of protection of business of the assessee; as such this is not revenue expenditure but is one that need to be characterized as capital expenditure. AO also relied upon the decision of the Hon'ble Punjab & Haryana High Court in the case of CIT v. Shiwalik Talkies Ltd. (1967) 63 ITR 83 (P&H), wherein the Hon'ble High Court held, the expenses incurred by the company to resist application to Court by shareholders under the relevant provisions of Companies Act questioning the appointment of the directors of the assessee company could not be considered as an expenditure laid out or expended wholly and exclusively for the purpose of business of the assessee company. He also relied upon the decision of the jurisdictional High Court in the case of Premier Construction Co. Ltd. v. CIT . In that case the tussle was between the shareholders against the Board of Directors. The shareholder filed a suit praying for declaration that the ruling of the President was illegal and invalid and subsequent resolutions passed at the meeting were also invalid and asked for relief by way of several injunctions restraining the company and its Board of Directors from giving effect to and acting in accordance with the resolutions passed at the said meeting. In this case the Hon'ble High Court held that an expense may in some indirect way be conducive to the benefit of the business or to better management of the business but that would not make an expenditure wholly and exclusively for the purpose of business. So also, AO relied upon the decision of the Hon'ble Calcutta high. Court in the case of Albert David Ltd. v. CIT .

66. In short, AO held that to allow the claim under Section 37(1), the following points are necessarily to be considered: (1) Whether the expenditure was incurred by the assessee in his character as a trader.

(2) Expenditure incurred on litigation purely relating to domestic quarrel between the shareholders, though it had some indirect connection with the business or management of the company, but that would not amount to the fact that such expenditure was laid out wholly and exclusively for the purpose of carrying on the business of the assessee.

(3) What must be considered is the purpose for and the object of expenses at the time when it was incurred.

(4) The company may well become a pawn in the hands of different persons at different times having very little say in the course of conduct of litigation or of its business and incurring expenditure in the circumstances created by others, the company may well act outside its character.

67. On the basis of the chart given at para 14(a), AO held that the dispute never affected the assessee adversely. Assessee disclosed fast moving upward curve of turnover. It did not affect assessee's reserve and surplus. On the other hand, it multiplied many times. He rejected assessee's contention that the domestic disputes debilitated business of the assessee and its smooth running. He held, this is against the evidence on record. Thus he rejected assessee's claim vide para 15 of his order, observing as under: 15. To sum up, for the purpose of Section 37(1) of the IT Act, the cumulative effect of the evidence as discussed above when distilled through the judicial rulings also referred above, is that there was no business or commercial justification for assessee company to incur an expenditure of Rs. 12.06 crores (approx.) because the business was all through carried on and carried on very well in spite of whatever disputes among the shareholders. The facts of the case do not display any cause and effect, relationship between the disputes and the business of the company as has been contended by the assessee. The inference therefore, cannot be avoided that the payment was made for purposes other than being laid out wholly and exclusively for the purpose of carrying on the business as mentioned under Section 37(1) of the Act. The payment of Rs. 12,06,53,113 was by the family members to the family members with objectives to which the assessee company and its business were total strangers. The companies having been family companies, (ii) the parties to the disputes being cognates (excepting one), Leena Gandhi Tewari and her husband having owned dominant shareholding in the assessee company through their dominance in the shareholding of the American Products (P) Ltd. [(see para 10(c)(l) and (ii)] before as well as subsequent to the orders of the CLB, (iii) the assessee company having recorded incremental growth during the subsistence of the disputes and, (iv) as concluded above, the facts of the case not disclosing any nexus between the impugned expenditure and the business of the assessee company, the inference is inescapable that the 'family arrangement' arrived at by the disputants was a sequel to a change of heart that was legitimatised by praying to the CLB for formal concurrence. A family arrangement is a most convenient legal solution where the properties are not amenable to partition, whether on grounds of law or on grounds of feasibility. But, there must be consideration for the same [M.N. Aryamurthi v. M.I. Subbaraya Shetty case of the disputants. The legal effect of the "family arrangement" in the facts of the case was therefore, strictly confined to the disputes inter se among the family members in the case under consideration. Realistically speaking, the orders of CLB were the off-shoot of a family arrangement sanctifying the understanding arrived at in respect of the shareholdings of the family members in the Gandhi Group of companies. The impugned expenditure consequently sprang from the terms of settlement as the consideration for clinching the arrangement. The consideration so paid had nothing to do with the ongoing business activities of the assessee company or for that matter other family companies. The expenditure of Rs. 12,06,53,113 debited in the books of the assessee company had therefore, the character of personal expenditure.

Aggrieved by the above order, assessee approached the first appellate authority.

68. It was contended before the CIT(A), in addition to the facts brought on record before the AO that the assessee company's business was adversely affected and that the payments were made to keep the interest of the assessee company or otherwise assessee would have been adversely affected. It was further submitted that the holding company, viz., APGO has large number of shareholders who are not in any way connected with the promoter family. Out of total shares of 48,032 in APCO 46,391 shares were held by Leena and her husband Prashant, noticed the CIT(A). Both these companies are closely held and practically no other shareholder could influence decision making in these companies.

Hence, the contention of the assessee that there were other shareholders, etc. was rejected. Coming to the contention of the assessee that it heavily relied upon the finding of the CLB, CIT(A) held, he could not appreciate the contention raised by the assessee. He held, in fact the litigations were for the division of family assets as apparently Leena and her husband Prashant could gain control over APCO and assessee company while the other family members, viz., mother and two daughters felt aggrieved that they were not given their due share in the family property. He held, this was pure and simply division of family assets, that is why the CLB order says that this was a family arrangement providing for distribution of assets. In regard to reliance placed by the assessee for claiming deduction under Section 37(1), CIT(A) held, AO rightly referred to the decision in the case reported in Madurai District Central Co-operative Bank Ltd. v. ITO to argue that it is settled law that IT Act is a permanent enactment and outside the IT law the decision does not affect the taxability or otherwise. For the above proposition, he also referred to the decision of the Hon'ble Allahabad High Court in the case of Shailendra Kumar v. Union of India . CIT(A) held that the AO was right in relying upon the decision of the jurisdictional High Court . He rejected assessee's reliance on the decision in the case of D.W. Noble Ltd. v.Mitchell. He also distinguished the decision relied upon by the assessee in the case of IRC v. Carom Co. (1968) 45 RDC 18 (EL). He held, this decision is not applicable. That was a case wherein amounts were spent for the objects of new charter, which aimed for removing obstacles to profitable trading and removal of such restriction was for the purpose of well management of the assessee company. CIT(A) rejected assessee's contention that the expenditure was incurred on grounds of commercial expediency to facilitate carrying on the business to protect business assets, reputation, fair name and goodwill and that the expenditure incurred satisfied all the ingredients of Section 37 of the Act. He held it was incurred solely to give share in the assets to three family members and the assessee is unfairly trying to claim this expenditure as business expenditure. He agreed with the AO's finding that there is no relationship between the disputes and the business of the assessee. The payments were made for settlement of the family disputes between the two groups. Hence, he confirmed the order of the AO. Aggrieved by the above order, assessee is in appeal before the Tribunal.

69. The brief facts, narrated in para 7 of the written submission, are as under: Assessee is a 98 per cent subsidiary of American Products Company Ltd. (for short 'APCO'). Assessee as well APCO; and also other two companies, viz. M/s Vital Pharmacal (P) Ltd. (for short 'VP') and M/s Vital Organics (P) Ltd. (for short 'VO') belonged to erstwhile Gandhi family Group. The family of Shri A.V. Gandhi, his family trust and HUF owned almost entire shares, of these companies.

Management and control of these companies was with Shri A.V. Gandhi.

He died on 15th Jan., 1986, leaving his widow Dr. Pramila Gandhi and three daughters, viz. Leena Gandhi Tewari, Sheela Gandhi Rao and Sunita Gandhi. Mrs. Leena Gandhi Tewari and her husband Prashant Tewari were controlling and managing these companies after the death of Shri A.V. Gandhi. Disputes arose among the shareholders of these companies. Proceedings were filed before the Principal Bench of the CLB at New Delhi. The business of the company was seriously affected and restricted its growth. Settlement was arrived at between the parties. Payment of Rs. 12.5 crores was ordered. Termination of tenancies in respect of certain premises occupied by the assessee and cancellation of 900 shares of the assessee company held by Sheila Gandhi Rao and Sunita Gandhi was also ordered. It was further ordered by CLB that the disputing parties will not have any further claim of any sort against the assessee company. Settlement was claimed as deduction from the business income inasmuch as it was for the development of business of the assessee and the dispute inevitably causing some adverse publicity in the market was settled sooner than later. CLB observed vide its order dt. 3rd April, 1998 : "the pendency of the litigation, adversely affected the reputation, inter alia, of USV, triggered false signals in the pharmaceutical industry, and seriously affected the business, growth and prosperity of USV. We are satisfied that the money paid by USV and to be paid by USV is for legitimate and genuine business reasons of USV".

However, AO disallowed the claim of the assessee mainly for the reasons stated below: (a) The payment was really the outcome of a family dispute that culminated in litigation between the family members due to mutual distrust and/or the intention to retain the controlling interest of the companies.

(b) The payment as per the direction of CLB is an integral and inseparable part of total package that the CLB handed down for restructuring the shareholdings of the assessee as only solution to the long standing family feud.

(c) Observation of the CLB that the money paid by the assessee is for legitimate and genuine business reasons only contextual in nature and content of the dispute.

(d) Persons having control over the assessee company also control APCO. Leena Gandhi Tewari and her husband, Prashant Tewari also control APCO along with the assessee company. In other words, they consolidated the interest.

(e) The expenditure was therefore for consolidating the interest of majority shareholders. There was no business exigency for this payment. It is not wholly and exclusively expended for the purpose of business of the company.

(f) During the intervening period of Shri A.V. Gandhi's death and the final settlement, while the disputes were going on, it never adversely affected.

(g) The payment was by family members to family members with objectives to which the assessee and its business were total strangers. The coffers of the assessee were used for clinching absolute control.

70. This finding of the AO was approved by the CIT(A) almost for the same reasons. To come to the above conclusion, CIT(A) also relied upon the following decisions:Bombay Steam Navigation Company (P) Ltd. v. CIT 71. It is the submission of the learned Counsel for the assessee that the Revenue authorities failed to appreciate the facts. Firstly, the Department went wrong solely relying upon the allegation made in the plaint in Suit No. 606 of 1995 filed by the plaintiffs, i.e. Dr.

Pramila Gandhi and her two daughters, viz., Sheela Gandhi Rao and Sunita Gandhi. It is only one sided story and does not necessarily state the entire facts. The defendants side of the story never finds place in such plaints. Normally, in such circumstances only distorted picture far away from the reality is reflected. Unless the other side of the story is also recorded, the truth cannot be arrived at. The same happened in the instant case of the assessee as well and the Department appreciated only one side.

72. Vide para 7.6 of the assessee's written submission, it is submitted that around 1993-94, some of the shareholders of the assessee company, its holding company (APGO) and some other associate companies (VP and VO) commenced various legal proceedings before various legal forums like City Civil Court, Hon'ble Bombay High Court and CLB. There were also litigations before the CLB, Principal Bench, New Delhi in petition Nos. 63 and 64 of 1993, No. 3 of 1994 and No. 43 of 1996. It is in petition Nos. 63 of 1993 that the assessee was impleaded in the proceedings before the CLB by the petitioners by filing an application dt. 4th Feb., 1998 under regulation 44 of CLB (Regulation) Procedure, 1988, making various unsubstantiated allegations against the assessee, in order to bring its name into disrepute, like the earlier suit filed before the Hon'ble Bombay High Court in Suit No. 606 of 1995, which went to the extent of seeking injunction from the Hon'ble High Court, restraining the assessee from passing any resolutions or taking any steps to sell, alienate, encumber, transfer or create third party rights with regard to shares and assets. Assessee was unable to start any new scheme, project or collaboration agreement to expand its business and to augment the profitability. During the period 1994 to 1998, assessee was under constant attack through misconceived litigations, frivolous complaints to various authorities and unwarranted hindrances caused to regular day-to-day functioning of the assessee company, thereby causing distractions/irritations. By the orders of CLB dt. 10th March, 1998 and 3rd April, 1998, put an end to all these hassles assessee was passing through. CLB appreciated that the assessee's business was adversely affected by these litigations.

That is why the CLB made the above quoted observation in its order dt.

3rd April, 1998. No doubt the observation is contextual in nature and content, but there is no manner of saying that this is out of context.

The business of the assessee company was affected adversely by plethora of unwarranted litigations and baseless allegations against its management. Had the assessee not incurred the impugned expenditure to extricate itself from stifling conundrum, its potential growth would have been lost and the development would have been jeopardised. Thus, the payment was made for the very survival of the assessee company. The assessee, like any other prudent businessman, could have scarcely afforded such a possibility. There is no doubt that the impugned amount was laid out and expended wholly and exclusively for the purpose of business. Assessee also relied upon the decision of the Hon'ble Supreme Court in the case of CIT v. Malayalam Plantations Ltd. (supra).

73. Learned Counsel further submitted, in order to appreciate the facts leading to the dispute, the background of the management is also necessary to be submitted briefly. He submitted, after the death of Shri A.V. Gandhi, his eldest daughter, Leena Gandhi Tewari, who came back to India on completion of her studies abroad, and her husband Prashant Tewari took over the management of the Gandhi Group of companies, including the assessee. Dr. Pramila Gandhi, a practising doctor, neither had time nor inclination or expertise to dabble into company management and the younger two daughters were still students.

The elder daughter and her husband were well qualified company managers possessing foreign qualifications and knowledge in their chosen field.After their joining, the companies prospered like never before, till the litigations in 1993. AO states that even after the death of Shri A.V. Gandhi and before settlement of the dispute, the company was not adversely affected. But what he probably meant is that the profit-making capacity of the company did not diminish inspite of the litigations. What the Revenue failed to appreciate is that during this intervening period the growth and development of the company had come to a standstill. Between 1994 and 1998 the assessee company could not take up any ambitious plans to expand its business and increase profitability, except routine growth plans.

74. Learned Counsel submitted, prior to commencement of litigation, two plants at Lote Parshuram near Chiplun, Maharashtra; one for manufacture of formulations and the other for manufacture of bulk drugs were set up by the assessee. During this period of litigations, precious little could be done in these plants. After the litigations came to an end, assessee could again go ahead with these ambitious plans for manufacturing and marketing of formulations based on Nitroglycerine. In fact, between 1994 and 1998, assessee had to give up a number of plans for collaboration with multinationals, which would have substantially expanded its business and augmented its profitability. In September, 1994, assessee was approached by LIPHA, which is part of Merk Group and originator of bulk drug metformin for alliance to manufacture/market/source for international generic market, the bulk drug. Representatives of LIPHA visited India and held discussions with the assessee for collaboration. But when they came to know of the litigations, interest waned and they dropped the plan. Again in January, 1997, assessee was engaged in talks with "Lanocare" of Australia and New Zealand for launching of skin care products based on "Lanolin". The foreign party withdrew after they came to know of the litigations and the difficulties. In 1997 the assessee negotiated with Alfa Wassermann for marketing their skin care products' of well known international brand "Pikenze". Negotiations suspended in midway as they suddenly hesitated to enter into an agreement, with the disputes going on in the company. Hence, learned Counsel submitted, in these circumstances, putting an end to the deteriorating circumstances of the company was a must and that is what the assessee achieved by this payment and the payment was incurred out of commercial expediency is borne out by following subsequent events: (a) After the assessee freed itself form the shackles of litigations, the profit before tax for the period ended 31st March, 2000 jumped to Rs. 34.46 crores from Rs. 15.67 crores in the preceding year.

(b) Assessee established a subsidiary in the year ended 31st March, 2000 for marketing paediatric range of pharmaceutical specialities.

(c) Assessee's international business including exports through orders with developed nations increased about 50 per cent during the year ended 31st March, 2000.

(d) Assessee increased its export of metformin during the year 1999-2000, an opportunity that it lost in 1994 by not having been able to have alliance with LIPHA. (e) After the litigations ended, assessee was able to set up four major R&D Labs at Govandi, viz., Analytical Research Laboratory, Molecular Medicine Research Laboratory, Drug Delivery Research Laboratory and Chemical Process Research Laboratory.

75. Learned Counsel further submitted, since the order of CLB in 1998, assessee has been able to successfully expand and get international recognition as well as enter into new contracts/collaborations. For example: (b) Assessee entered into agreement for procurement of SAP user license, which is internationally acclaimed business software. The agreement was signed on 15 day of December, 1997 and implemented the said agreement from financial year 1998-99 onwards. Assessee was ranked 3rd in the pharmaceutical industry to implement SAP. (c) Assessee set up a state of the art formulations plant at Daman in October, 2001.

(e) Assessee obtained following certificates from various foreign authorities regarding manufacturing facilities at Chiplun: (i) European Directorate for the quality of medicines regarding Metformin Hydrochloride, Glibenclamide and Ticlopidine Hydrochloride, (ii) Therapeutic Goods Administration of Australia for Metformin, (iii) German Medical and Drug Control Authorities for Metformin, (iv) US FDA approval for Metformin and Glipizide.

(ii) Lyka - Amlopin and Nitroglycerine (marketing and scientific data only).

76. Learned Counsel submitted that it shows the veracity of the claim of the assessee that the impugned expenditure was incurred for the purpose of protection and development of its business. This fact is further fortified by the figures of ORG Marg rankings of the pharmaceutical industries achieved by the assessee company during the period December, 1994 to April, 2000, which are as under: Thus the facts narrated above speak for itself eloquently and credibly.

Hence, learned Counsel submitted, the orders of the Revenue authorities are liable to be reversed.

77. Learned Counsel further submitted, the opinion of the CLB is not a mere opinion. It is not merely a forum of arbitration between the disputing parties. The truth is far from the above notion of the Revenue authorities. CLB is a creature of Section 10E of the Companies Act, 1956. Sub-section (4C) of Section 10E vests in the CLB the same powers as are vested in a Court under the Code of Civil Procedure, 1908. Sub-section (4D) provides that every proceeding before the CLB shall be deemed to be a judicial proceeding within the meaning of Sections 193 and 228 of the Indian Penal Code and for the purpose of Section 196 of CPC.The decision of the CLB is appealable before the respective High Court.

Learned Counsel further objected the finding of the Revenue that the disputants were before the CLB for securing a way out of pending litigations to the satisfaction of each of them. CLB cannot have any agenda to find solution to a dispute that is acceptable to each of the disputants. The powers of CLB are well defined in the Companies Act, 1956. CLB adjudicated upon the petitions filed before it and passed appropriate orders in its wisdom to meet the ends of justice. The parties affected are free to move the higher forum (High Court). In view of the above, learned Counsel submitted, the orders of the Revenue authorities are liable to be set aside.

78. In support of assessee's contention that the litigation expenses incurred to protect the business of the assessee is revenue expenditure as against the litigation expenses incurred for the purpose of creating, curing or completing assessee's title to the capital is capital expenditure, reliance was placed upon the decision of the Hon'ble Supreme Court in the case of Dalmia Jain & Co. Ltd. v. CIT . Learned Counsel, again brought our attention to the decision of the Tribunal, Mumbai Bench in the case of Echjay Industries Ltd. v. Dy. CIT . In this case the Tribunal held that the expenditure incurred out of business expediency like settling the feud between the majority and minority shareholders does not increase the capital of the assessee and such expenditure could only be treated as wholly and exclusively incurred in the course of carrying on of the business and therefore it was deductible. Learned Counsel further relied upon the decision of the Hon'ble Delhi High Court in the case of South Asia Industries (P) Ltd. v. CIT (1981) 132 TTR 144 (Del), wherein the Hon'ble High Court held that the expenditure incurred to protect the business and reputation of the company is an amount spent for safeguarding and saving the assets of assessee's business and keeping it on a sound footing. The expenses incurred in its business or trading capacity; for the purpose of business, amounts to allowable expenditure. Hence, learned Counsel submitted, the orders of the Revenue authorities are liable to be reversed.

79. Replying to the above, learned Departmental Representative submitted, heavily relying upon the order of the AO as well CIT(A), that there was a family dispute between the two warring groups of the family. The matter ultimately reached before the CLB. They ordered certain payments to one group. This is nothing but a payment made to keep the interest of the majority shareholders or for controlling power of the company. This has nothing to do with the business of the assessee. Even during the litigation was going on, the turnover of the assessee increased, which shows that there was no adverse affect as a result of dispute between the two groups. This is actually nothing but family settlement and not a claim allowable. In support of the above view, learned Departmental Representative relied upon the decision of the Hon'ble Kerala High Court in the case of S. Veeriah Reddiar v. CIT . In this case the Hon'ble High Court held, in considering the question whether the amounts were laid out or expended wholly for the purpose of business it will be open to the Revenue authorities to consider whether the employees are related to the assessee and whether the payments to them were made entirely on account of business considerations or on account of some extraneous consideration. In the instant case, learned Departmental Representative submitted, the payments were made because of the family dispute.

Relying upon the decision of the jurisdictional High Court in the case of Ramanand Sagar v. Dy. CIT , learned Departmental Representative submitted that it is for the assessee to establish that the payments were made for the purpose of business. In the instant case of the assessee the burden has not been discharged. Hence, learned Departmental Representative submitted, the orders of the Revenue authorities are liable to be confirmed.

80. We heard the rival submissions, gone through the orders of the Revenue authorities and the decisions cited by the contending parties.

First we will take up the contentions of the Revenue that the litigations were in fact only division of family assets and for controlling of the business of the assessee. Considering the facts and circumstances of the case and the dispute between the contending parties, CLB has already given a finding in its order that the pendency definitely affected the reputation and gave false signal in the pharmaceutical industry and seriously affected the growth and prosperity of the assessee company. Even if the starting point of the dispute is controlling of the assets, these findings of the CLB cannot be discarded out of context;. The facts brought on record clearly show, as we have mentioned in para 70 of the order that the assessee was ranking 23rd in December, 1994. Subsequently from December, 1995 to December, 1998 it was lagging somewhere between 30 to 36. In December, 1999, immediately after the settlement, its rank went up to 23 and by April, 2000, it was 19, which itself shows that the settlement has taken the assessee out of the trouble period. The contention of the learned Counsel recorded vide para 68 is also relevant in this context.

Assessee was approached by LIPHA, part of Merk Group and originator of bulk drug metformin for alliance but it was to be dropped because of the dispute; so also the talk with "Lanocare" of Australia and New Zealand for launching of skin care products. The negotiation with Alfa Wassermann was also dropped because of the disputes. These all indicate that the affairs of the company were not running well due to the disputes between the family members. Therefore, saying that the settlement is to control the assets of the company itself is oversimplification. Had these disputes not been settled, the company would not have revived well. It is not correct to say that reaching such a conclusion is out of context.

81. Now we come to the decisions relied upon by the contending parties.

The decisions relied upon by the learned CIT(A), on which reliance has also been placed by learned Departmental Representative, i.e. Madurai District Central Co-operative Bank Ltd. v. ITO (supra) and Shailendra Kumar v. Union of India (supra), does not further Revenue's case. In the case of Madurai District Central Co-operative Bank Ltd. (supra), Hon'ble Supreme Court held, IT Act is a permanent enactment and in the case of Shailendra Kumar v. Union of India (supra), Hon'ble Allahabad High Court held that IT Act is a self-contained code and the taxability or otherwise of receipts to be determined with reference to the provisions of the Act. It does not mean that a finding of fact by an authority, though it is not binding as such, cannot be considered and taken note of while corning to a conclusion on facts. In the case of Shailendra Kumar v. Union of India (supra), at p. 508, the Hon'ble Allahabad High Court observed as under: The question for consideration is whether to examine the scheme of Act of 1961, aid can be taken from the Fundamental Rules governing the service conditions of the Central Government employees or from the provisions of a statute which is not cognate or pan materia to the Act of 1961. The IT Act is a self-contained code and the taxability of house rent allowance, city compensatory allowance and dearness allowance or of any other allowance will have to be seen only within the scheme of the Act of 1961.

Their Lordships further relied upon the legal proposition as explained by their Lordships of Hon'ble Supreme Court in the case of S. Mohan Lal v. R. Kondiah It is not a sound principle of construction to interpret expressions used in one Act with reference to their use in another Act, more so if the two Acts in which the same word is used are not cognate Acts.

Neither the meaning nor the definition of the term in one statute affords a guide to the construction of the same term in another statute and the sense in which the term has been understood in the several statutes does not necessarily throw any light on the manner in which the term should be understood generally. On the other hand, it is a sound, and indeed, a well known principle of construction that meaning of words and expressions used in an Act must take their colour from the context in which they appear.

From the above it is clear that their Lordships observed that for interpretation of the meaning of the words and expressions used in one Act may not have the same meaning in another Act. It is not to say that the facts found out by a competent authority cannot be taken at all into consideration to arrive at the conclusion.

82. Coming to the decision relied upon by the Revenue authorities in the case of CIT v. Malayalam Plantations Ltd. (supra), the issue before their Lordships was whether the estate duty paid by the resident company incorporated outside India on behalf of the principal not domiciled in India is deductible from its profits while computing the assessable income under Section 10(2)(xv) of the Indian IT Act, 1922.

At p. 149, their Lordships discussing the issue on the basis of the decision of the Hon'ble Supreme Court in the case of Badridas Daga v.CIT observed : "This decision, though not direct in point, lays down the principle that an expenditure can be deducted only if it arises out of the carrying on of the business and is incidental to it." In fact, this decision supports the case of the assessee.

Discussing the issue, their Lordships held : "the expenditure incurred by the assessee in his capacity as agent of another is not a deductible item." In other words, the decision went against the assessee because it was a payment made as an agent. Assessee paid the estate duty on behalf of another person, which is not wholly and exclusively for the purpose of business, Hon'ble Supreme Court held.83. Coming to the decision relied upon by the Revenue authorities in the case of Adarsha Dugdhalaya v. CIT (supra), this was a case wherein as directed by the award, payments were made by the assessee towards arbitrators' fees, solicitors' fees and costs on both sides in two suits and this amount was claimed as deduction in the assessment.

Hon'ble Bombay High Court held, this was not an expenditure connected with carrying on of business of the assessee but to determine the mutual rights and obligations of the partners on the terms and conditions on which they had agreed to enter into partnership from time to time. Hence, their Lordships held, this is not expenditure in the nature of revenue but capital expenditure. At p. 61, the Hon'ble High Court held : "In the present case, however, the expenditure incurred is not for the purpose of protecting the assets but for the purpose of ascertaining what they are on settlement of the disputes between the partners in relation to them. In our opinion, therefore, having regard to the essential nature of the litigation and the purpose for which it was contested, we do not think that the expenses of litigation claimed by the assessee could be allowed to it as expenditure incurred wholly and exclusively for the purpose of carrying on its business." Coming to the instant case of the assessee, the facts are distinguishable. Had the dispute not settled, the continuance of business of the assessee itself would have jeopardized.

84. The decision of the jurisdictional High Court, relied upon by the learned CIT(A), in the case of Premier Construction Co. Ltd. v. CIT (supra) is also distinguishable on facts. This was a case wherein a dispute arose between the directors of the company and its shareholders. Their Lordships held that the company is not justified in claiming the expenses incurred by it in the said litigation as expenses of its business. However, their Lordships further held : "In order that the expense of a civil litigation could be permissible as an expense wholly and exclusively laid out for the purpose of the business of the assessee, the expense must have been incurred by the assessee in its character as a trader and the transaction in respect of which the proceedings were taken must have arisen out of, or must have been incidental to, the assessee's business. An assessee could be said to have incurred the expenditure in his character as a trader if the litigation was necessary to be carried on by the assessee or defended by it to protect its trade or business or to avert a danger or threat to its carrying on of its business". In other words, the allowability or non-allowability of expenditure, even if it is incurred for the purpose of litigation, depends on the facts of that particular case.

The stand of the Revenue authorities in the instant case of the assessee is that this is purely a domestic quarrel between the shareholders. It is further the stand of the Revenue authorities, as is clear from the order of the CIT(A), that the expenses may, in some indirect way be conducive to the benefit of the business or to the betterment of the business, even then, it cannot be held, it is an expenditure wholly and exclusively for the purpose of business. In the instant case of the assessee we have seen that had the settlement not been taken, the business itself would have jeopardized.

85. AO has given a chart of turnover, profit, etc. vide pp. 29 and 30 of his order, para 14(a), to show that assessee's business turnover and profit because of this litigation has never come down. In other words, it has not adversely affected. On the other hand, learned Counsel for the assessee has contended that mere increase in the turnover and profit alone is not criteria to decide whether the business adversely affected or not. We have mentioned in para 70 of this order, the ranking given and also the parties who entered into negotiations with the assessee and because of the litigations/dispute between the warring groups of the family, withdrawn from the negotiations. This clearly shows that the business of the assessee or the growth potential of the assessee had definitely been affected. In short, we are of the opinion that the view canvassed by the learned Counsel is to be accepted.

86. Coming to the decision relied upon by the learned Counsel, in the case of Dalmia Jain & Co. Ltd. v. CIT (supra), the Hon'ble Supreme Court held : "where litigation expenses are incurred by the assessee for the purpose of creating, curing or completing the assessee's title to the capital, then the expenses incurred must be considered as capital expenditure. But if the litigation expenses are incurred to protect the business of the assessee they must be considered as a revenue expenditure." In the instant case of the assessee the facts clearly show that the business of the assessee due to infighting between the two groups of the family members, was in a difficult situation and the assessee lost many business opportunities for its growth. Even if the payments were to settle this dispute but the determinate character is to protect the business as well and, therefore, this decision of the Hon'ble Supreme Court supports assessee's case. Hence, the appeal of the assessee on this ground is allowed.

87. However, we make it clear that a proportion of these business protection and development expenses would be allocated to Section 80HH units and, therefore, we direct the AO to recompute the deduction under Section 80HH as per law, after affording a reasonable opportunity of hearing to the assessee.