ACIT LTU-2 , CHENNAI vs. CHEMPLAST SANMAR LIMITED, CHENNAI

आदेश / O R D E R PER BENCH: ITA Nos.2807, 2808, 2809 & 2810/Chny/2017 are appeals filed by the Assessee for the Assessment Years 2010-11, 2011-12, 2012-13 and 2013-14

ITA Nos. 2807, 2808, 2809 & 2810/Chny/2017 & ITA Nos.2957, 2958, 2959, 2960, 2961, 2962 & 2963/Chny/2017 :- 2 -: respectively and ITA Nos.2957, 2958, 2959, 2960, 2961, 2962 & 2963/Chny/2017 are appeals filed by the Revenue for the Assessment Years 2008-09, 2009-10, 2010-11, 2011-12, 2012-13, 2013-14 and 2014-15 respectively against the consolidated orders of the learned Commissioner of Income Tax (Appeals)-17, Chennai dated 28.09.2017 in ITA Nos.55/2009-10, 32/2010-11, 72/2011-12, 43/2012-13, 7/2014-15, 20/2015-16, 30/2016-17 and 96/2016-17/(A)-17 for assessment years 2002-03,2008-09 to 2014-15. As the issues raised in all these appeals are interconnected, these are disposed of by this common order.

ITA Nos. 2807, 2808, 2809 & 2810/Chny/2017 & ITA Nos.2957, 2958, 2959, 2960, 2961, 2962 & 2963/Chny/2017 :- 3 -: the said order in paragraphs 16 to 16.7, the Co-ordinate Bench of this Tribunal

has held as follows:

“16. The next common issue raised in the appeals of the Revenue for the assessment years 2006-07 and 2007-08 is that the ld. CIT(A) is erred in holding that the non compete fees paid by the assessee is allowable as deferred revenue expenditure. 16.1 During the assessment year 2006-07, the appellant company entered into a non-compete agreement with Mr. B.H. Kothari in relation to caustic soda business and paid ₹.15 crores to secure B.H. Kothari not to carry on the business of caustic soda business directly or through another person acting as his nominee or agent or representative for a period of 10 years. The appellant has claimed in the books of accounts, this amount as deferred revenue expenditure. For income-tax purposes, the appellant claimed ₹.1.5 crores, being 1/10th of the total income as deduction in the return of income over a period of 10 years because Mr. B.H. Kothari was prohibited from taking off this business for a period of 10 years. The Assessing Officer has denied this payment as not admissible. 16.2 On appeal, the ld. CIT(A) allowed the ground raised by the assessee for both assessment years 2006-07 and 2007-08. 16.3 The Revenue is in appeal before the Tribunal. The ld. DR strongly relied on the decisions in the case of Tamilnadu Diary Development Corporation 239 ITR 142 (Mad) and Chelpark Company Ltd. 191 ITR 249 and supported the order passed by the Assessing Officer. 16.4 Per contra, by relying the recent judgement of the Hon’ble Madras High Court in the case of Carborandum Universal Limited v. JCIT in T.C.(A) No. 244 of 2006 dated 10.09.2012, the ld. Counsel for the assessee strongly supported the order passed by the ld. CIT(A). 16.5. We have heard both sides, perused the materials on record and gone through the orders of authorities below. The non-compete fees paid by the assessee has been claimed as deferred revenue expenditure was disallowed by the Assessing Officer. By considering the decisions of the Chennai Benches of the Tribunal in the case of Orchid Chemicals & Pharmaceuticals v. ACIT 137 TTJ 373 and also in the case of ITO v. Seafil Leasing 124 TTJ 531, the ld. CIT(A) directed the Assessing Officer to treat the non-compete fees paid as deferred revenue expenditure and allow 1/10th of the expenditure as deduction for every year by observing as under: “4.2 I have considered various submissions made by the appellant during the appeal proceedings. In similar circumstances, there is a decision of Hon'ble Chennai ITAT in the case of Orchid Chemicals & Pharmaceuticals Vs ACIT 137 TTJ 373 and also one more decision of Hon'ble ITAT Chennai in the case of ITO Vs Seafil Leasing 124 TTJ 531 ITAT, Chennai. I am of the considered opinion that these decisions have similarities to the facts and circumstances of the present case and hence this expenditure may be allowed as deferred revenue expenditure for a period of 10 years. This decision of mine is in commensurate with the method adopted by the appellant himself for the purposes of maintenance of books of accounts by the appellant. In other words, the Assessing Officer is directed to treat the non-compete fees paid as deferred revenue expenditure and allow 1/l0th of the expenditure as deduction for every year. Since this issue is there for both the assessment years, this decision is applicable for both the assessment years in question.” 16.6 Over and above, the Hon’ble Jurisdictional High Court in the case of Carborandum Universal Limited v. JCIT (supra) has held as under:

ITA Nos. 2807, 2808, 2809 & 2810/Chny/2017 & ITA Nos.2957, 2958, 2959, 2960, 2961, 2962 & 2963/Chny/2017 :- 4 -:

“5. This leaves us with the third question as regards the nature of expenditure on the non- compete fee paid to U.Mohanrao. It is seen from the facts narrated in the order dated 17.07.1998 that this Court granted the scheme of amalgamation of the following companies with M/s.Carborandum universal Limited (CUMI), the assessee company: (i) M/s.Cutfast Abrasives (ii) M/s.Cutfast Polymers (iii) M/s.Eastern Abrasives Ltd. (previously a subsidiary of the assessee) and (iv) M/s.Carborandum Universal Investments Ltd. 6. The scheme of amalgamation was effective from 01.04.1997. Consequent on the amalgamation, the assessee entered into a non-compete agreement with U.Mohanrao, formerly Chairman and Managing Director of Cutfast Abrasive Tools Limited and who also happened to be the Chairman and Managing Director of M/s.Cutfast Polymers Private Limited. The non- compete agreement dated 29.04.1996 stated that the said U.Mohanrao, associated with M/s.Cutfast Polymers Private Limited (hereinafter called as CPPL), had access to all information on process, knowhow, clientele of the products dealt with by CPPL and pricing and marketing of all the products relating to CPPL and was in a position to influence the business of manufacture, sale and distribution of the products held by the said company. In the circumstances, in order that the said Mohanrao's expertise in that field did not, in any manner, prejudice the good prospects of the business of the assessee company in future, the parties agreed that in respect of the products, namely, phenol formaldehyde resin (in liquid and powder forms), saturated polyester resin, unsaturated polyester resin, modified alkalyd and any other resin, all having application in coated and bonded abrasives manufacture, shall not be dealt with by the said U.Mohanrao. In consideration of the same, the said U.Mohanrao would be paid a sum of Rs.50,00,000/- as a non-compete fee. The agreement laid down the restrictive covenants that the said U.Mohanrao shall not manufacture directly or indirectly any of the products mentioned above and shall not deal with the said products in any manner or advise, assist, aid, either directly or indirectly, any competitor or any other person in either establishing, managing, promoting or developing the business of the said products or any product similar thereto; he shall not act as a Consultant or use any knowhow, design or drawings directly or indirectly and refrain from disclosing or divulging any information relating to the knowhow, trade practices, etc. The agreement was to be effective for a period of five years from the date of the agreement. 7. On 29.04.1996, yet another agreement was entered into between the assessee and the said U.Mohanrao, former Chairman and Managing Director of Cutfast Abrasive Tools Limited, as by way of a non-compete agreement that the said U.Mohanrao shall not, in any manner, assist any third party, or sell or render advise or act as a Consultant in respect of the products, namely, coated and bonded abrasives, current range of products of the Electrominerals Division of CATL and cloth processing for coated abrasives. In consideration of the said agreement, the said U.Mohanrao was paid a sum of Rs.1,75,00,000/- towards non-compete fee. On 14.10.1996, there was a supplementary agreement between the assessee and the said U.Mohanrao, which contemplated inclusion of other products, namely, coated and bonded abrasives, current range of products of the Electrominerals Division of CATL and also all other electromineral products, used or capable of being used in the manufacture of abrasive products (both bonded and coated), and cloth processing for coated abrasives. The agreement was to be effective for a period of five years and a further sum of Rs.35,00,000/- was agreed to be paid to the said U.Mohanrao. Thus, in all, the assessee had a sum of Rs.2.6 crores to the said U.Mohanrao as by way of non-compete fee. The assessee claimed this amount as a revenue expenditure. It is a fact that the assessee did not write off this amount in the books of accounts. However, placing reliance on the decision reported in [1987] 165 ITR 63 (Commissioner of Income Tax Vs. Late G.D.Naidu and others) (Mad.) and 87 ITD 541 (Sri Annapurna Gowri Shankar Hotel Pvt. Ltd. Vs. CIT), the assessee contended that it was entitled to deduction. The claim of the assessee was rejected by the Assessing Officer on the ground that the said U.Mohanrao was the erstwhile Chairman and Managing Director of the company and such non-compete agreement had increased the assessee's market presence and improved its potential to have better results in the

ITA Nos. 2807, 2808, 2809 & 2810/Chny/2017 & ITA Nos.2957, 2958, 2959, 2960, 2961, 2962 & 2963/Chny/2017 :- 5 -: market; the payment made over a period of more than five years once was for procuring an enduring benefit to the business. Consequently, the Officer held that the expenditure was in the capital field and not as revenue. 8. Aggrieved by this, the assessee went on appeal before the Commissioner of Income Tax (Appeals), who upheld the decision of the Assessing Authority. Aggrieved by this, the assessee went on further appeal before the Income Tax Appellate Tribunal. Referring to the decision reported in [1991] 191 ITR 249 (Chelpark Company Ltd. Vs. Commissioner of Income Tax) and [1999] 239 ITR 142 (Tamilnadu Dairy Development Corpn. Ltd. Vs. Commissioner Of Income- Tax), the Tribunal, by a cryptic order, rejected the assessee's claim. There is hardly any discussion in the order, particularly with reference to the non-compete fee agreements, referred to above. Aggrieved by this, the assessee is on appeal before this Court. 9. Learned counsel appearing for the assessee placed reliance on the decision of the Apex Court reported in [1971] 82 ITR 902 (CIT Vs. Coal Shipments P. Ltd (S.C.)), [1980] 124 ITR 1 (Empire Jute Co. Ltd. Vs. Commissioner of Income Tax (S.C.)) and [1989] 177 ITR 377 (Alembic Chemical Works Co. Ltd.) and pointed out to the guiding factor in the matter of considering the claim as to whether the expenditure would fall under the capital or revenue head. Making particular emphasis on the fact that the expenditure incurred was more in the field of indefinite income earning operation and not in the context of strengthening the income earning structure, he submitted that the Tribunal and the Authorities below committed a serious error in looking at the enduring benefit concept for the purpose of rejecting the assessee's case. 10. Referring to the decision reported in [1980] 124 ITR 1 (Empire Jute Co. Ltd. Vs. Commissioner of Income Tax (S.C.)), he submitted that the expenditure incurred was for the exploitation of a commercial asset; hence was revenue in character. Even where an expenditure is incurred by obtaining an advantage of enduring benefit, it may, nonetheless, be on revenue account and the test of enduring benefit may break down. He further submitted that what is material herein is to consider the nature of advantage in a commercial sense. If the advantage is in the field of facilitating the assessee's business operation more effectively or more profitably leaving the fixed capital untouched, the expenditure would be on revenue account. 11. Referring to the decision reported in [1991] 191 ITR 249 (Chelpark Company Ltd. Vs. Commissioner of Income Tax), learned counsel pointed out that the decision has to be understood in the light of the facts found herein. So too [1987] 165 ITR 63 (Commissioner of Income Tax Vs. Late G.D.Naidu and others) (Mad.). Thus, reiterating the principles laid down in [1980] 124 ITR 1 (Empire Jute Co. Ltd. Vs. Commissioner of Income Tax (S.C.)) and [1989] 177 ITR 377 (Alembic Chemical Works Co. Ltd.), learned counsel further made reference to [1999] 239 ITR 142 (Tamilnadu Dairy Development Corpn. Ltd. Vs. Commissioner Of Income- Tax) and [2008] 302 ITR 249 (CIT Vs. Eicher Ltd. (Delhi)) to submit that the agreement entered into between the assessee company with U.Mohanrao would clearly show that the expenditure was only on the revenue account. 12. Countering the claim of the assessee, learned Standing Counsel appearing for the Revenue supported the order of the Tribunal and placed reliance on the decision reported in [1971] 82 ITR 902 (CIT Vs. Coal Shipments P. Ltd (S.C.)) and [1991] 191 ITR 249 (Chelpark Company Ltd. Vs. Commissioner of Income Tax) that when the assessee had not written off the said expenditure in its accounts and the amount paid was to ward off any competition in the business of the assessee, the expenditure made was only a capital expenditure; hence, not entitled to deduction. 13. Heard learned counsel appearing for both sides and perused the materials placed on record. 14. As far as the question as to whether an expenditure could be a capital expenditure or revenue expenditure is concerned, the concept that the expenditure yielding an advantage of an enduring nature would be only a capital expenditure, has been fine-tuned, that even when expenditure was incurred for obtaining advantage of enduring benefit, nonetheless, the same

ITA Nos. 2807, 2808, 2809 & 2810/Chny/2017 & ITA Nos.2957, 2958, 2959, 2960, 2961, 2962 & 2963/Chny/2017 :- 6 -: can be taken as one of revenue account. In the decision reported in [1980] 124 ITR 1 (Empire Jute Co. Ltd. Vs. Commissioner of Income Tax (S.C.)), the Apex Court pointed out that the test of enduring benefit is not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case. In a transaction of transfer of allotment of loom hours, on the question as to whether it is a revenue expenditure or a capital expenditure, the Apex Court pointed out that a payment may be a revenue payment from the point of view of the payer and a capital payment from the point of view of the receiver and vice versa. Thus whether an expenditure is capital or revenue has to be determined with regard to the nature of the transaction and other relevant factors. Referring to the decision reported in [1965] 58 ITR 241 (PC) (Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd.), the Apex Court pointed out that "there may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, nonetheless, be on revenue account and the test of enduring benefit may break down. ... 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 disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and 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 an indefinite future." 15. Referring to the decision reported in [1965] 56 ITR 52 (SC) (Bombay Steam Navigation Co. [1953] P. Ltd. v. CIT) as well as [1924] 8 TC 671 at 676, (Robert Addie and Sons' Collieries Ltd. v. IRC), the Apex Court referred to the words of Lord Sumner, which may usefully be extracted herein too: " If the outgoing expenditure 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 and not for acquisition of an asset or a right of a permanent character, the possession of which is a condition of the carrying on of the business, the expenditure may be regarded as revenue expenditure. See Bombay Steam Navigation Co. (1953) P. Ltd. v. CIT [1965] 56 ITR 52 (SC). The same test was formulated by Lord Clyde in Robert Addie and Sons' Collieries Ltd. v. IRC [1924] 8 TC 671, 676 (C Sess) in these words: "Is it a part of the company's working expenses?-- is it expenditure laid out as part of the process of profit earning?-- or, on the other hand, is it a capital outlay?-- is it expenditure necessary for the acquisition of property or of rights of a permanent character, the possession of which is a condition of carrying on its trade at all?" It is clear from the above discussion that the payment made by the assessee for purchase of loom hours was expenditure laid out as part of the process of profit earning. It was, to use Lord Sumner's words, an outlay of a business "in order to carry it on and to earn a profit out of this expense as an expense of carrying it on". [John Smith and Son v. Moore [1921] 12 TC 266, 296 (HL)]. It was part of the cost of operating the profit- earning apparatus and was clearly in the nature of revenue expenditure. " 16. Thus the question as to whether an expenditure is revenue or not has to be seen from the context of an expenditure forming "part of the cost of the income-earning machine or structure" as opposed to part of "the cost of performing the income-earning operations". -- [1971] 82 ITR 902 (CIT Vs. Coal Shipments P. Ltd. (S.C.). 17. Thus, the consistent guiding principles in matters of understanding an expenditure as a capital or revenue, as held by the Apex Court, is to find out the aim and object of the expenditure and the commercial necessities of making such an expenditure. The question has to be considered in the background of the facts of each case, that "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. " - [1989] 177 ITR 377 (Alembic Chemical Works Co. Ltd.). 18. Going by the above-said principle, if one looks at the decision reported in [1991] 191 ITR 249 (Chelpark Company Ltd. Vs. Commissioner of Income Tax), one may find that the

ITA Nos. 2807, 2808, 2809 & 2810/Chny/2017 & ITA Nos.2957, 2958, 2959, 2960, 2961, 2962 & 2963/Chny/2017 :- 7 -: decision that the expenditure was a capital expenditure and hence not deductible, rested in the context of the peculiar facts of the case; the partnership with which the assessee had the non- compete agreement got dissolved immediately after the payment of the non-compete fee and the potential competitor had vanished. On these facts, this Court observed that, whatever the assessee had paid for was of permanent or enduring quality, in the sense that competition had been totally eliminated and protection had been acquired for the business of the assessee as a whole. We do not find that the Revenue could draw any support from the said decision of this Court, it being one based on the facts of the said decision. The question herein as to whether non-compete fee paid to the ex-Managing Director was a revenue or a capital expenditure, has to be seen in the context of the facts of this case and the circumstances in which the payments were made. 19. It is not denied by the Revenue that U.Mohanrao was the Chairman and Managing Director of some of the companies which got merged with the assessee company. The said U.Mohanrao had access to all information starting from manufacturing process, knowhow to the clientele and the products, including the pricing of the products. By a process of amalgamation, the assessee had acquired the business of the amalgamating companies. However, for the fruitful exercise of its business as a business proposition, the assessee thought it fit to enter into a non-compete agreement with a person who had the knowledge of the entire operations, so as to get the full yield of the amalgamated company's business. In that context, rightly, the assessee took a commercial decision to pay non-compete fee to U.Mohanrao and going by the decision of the Apex Court, particularly the decision reported in [1971] 82 ITR 902 (CIT Vs. Coal Shipments P. Ltd (S.C.)), that the payment was in respect of the performing of the business of the assessee, we have no hesitation in holding that the expenditure is only on revenue account and not on capital account. In the circumstances, we accept the case of the assessee, set aside the order of the Tribunal and allow the Tax Case.” 16.7 As the case law relied on by the ld. DR, the Department has also relied on both the decisions in the case of Tamilnadu Diary Development Corporation (supra) and Chelpark Company Ltd. (supra) before the Hon’ble Jurisdictional High Court in the case of Carborandum Universal Limited v. JCIT (supra). However, by considering the judgement of the Hon’ble Apex Court in the case of CIT v. Coal Shipments P. Ltd. (supra), the Hon’ble High Court has observed that the payment was in respect of the performing of the business of the assessee, held that the expenditure is only on revenue account and not on capital account. Respectfully following the above decision of the Hon’ble Jurisdictional High Court in the case of Carborandum Universal Limited v. JCIT (supra), we find no infirmity in the order passed by the ld. CIT(A) for both assessment years 2006-07 and 2007-08 and thus, the ground raised by the Revenue is dismissed.”

ITA Nos. 2807, 2808, 2809 & 2810/Chny/2017 & ITA Nos.2957, 2958, 2959, 2960, 2961, 2962 & 2963/Chny/2017 :- 8 -: Assessment Years referred to supra and it is noticed that the learned CIT(A) has followed judicial discipline in following the decision of the Co-ordinate Bench of this Tribunal, we find no reason to interfere in the order of the learned CIT(A) on this issue. Consequently, Ground No.2.1 to 2.3 of the Revenue’s appeal stands dismissed. In respect of Ground No.3.1 and 3.2, it was submitted that the ground was against the action of the learned CIT(A) in deleting the disallowance made u/s.40A(9) in respect of the assessee’s contribution to the benevolent fund. It was fairly agreed by both the sides that the issue was squarely covered by the decision of the Co-ordinate Bench of this Tribunal in the assessee’s own case referred to supra, wherein in page 25, paragraphs 12 to 12.4 it has been held as follows: “12. The first common ground raised in the appeals of the Revenue is that the ld. CIT(A) has erred in directing the Assessing Officer to allow the contribution to benevolent fund under section 40A(9) of the Act. 12.1 In the assessment year 2003-04, the assessee has contributed an amount of ₹.1,14,114/- to a benevolent fund for the welfare of the employees. In the assessment order, the Assessing Officer has observed that as per provisions of section 40A(9) of the Act, no deduction should be allowed in respect of any sum paid by the assessee as an employer except in the case of recognized Provident Fund/Superannuation Fund or approved Gratuity Fund. As the assessee has contributed to a benevolent fund for the welfare of the employees which is neither a recognized provident fund nor an approved gratuity fund, the claim is not in accordance with the law. During the course of assessment proceedings, the assessee contended that an identical issue has been allowed in its favour in the appellate forum in its own case. However, the Assessing Officer has not accepted the submissions of the assessee since the fact remains that the issue has not reached finality. 12.2 On appeal, the ld. CIT(A) has observed that in assessee’s own case for the assessment years 1998-99, 1999-2000 & 2001-02, the ld. CIT(A) in his order in ITA Nos. 152 to 154/2004-05 decided the issue in favour of the assessee. Accordingly, by following his own order for the earlier assessment years, for the year under appeal also, the ld. CIT(A)

ITA Nos. 2807, 2808, 2809 & 2810/Chny/2017 & ITA Nos.2957, 2958, 2959, 2960, 2961, 2962 & 2963/Chny/2017 :- 9 -: decided the issue in favour of the assessee and the addition of ₹.1,14,115/- made by the Assessing Officer was deleted. 12.3 Aggrieved, the Revenue is in appeal before the Tribunal. Against the above deletion of addition under section 40A(9) of the Act, the Revenue has filed appeals for the assessment years 2004-05, 2005- 06, 2006-07 and 2007-08. 12.4 We have heard rival contentions and perused the materials available on record. Against the claim of the assessee towards contribution to benevolent fund, the Assessing Officer has made addition under section 40A(9) of the Act in the assessment year 1998- 99. By following the decision of Coordinate Bench of the Tribunal in the case of India Pistons Repco v. IAC 26 ITD 413), the ld. CIT(A) directed the Assessing Officer to allow contribution made by the assessee to benevolent fund by observing as under: “5. I have carefully considered the facts of the case, case laws and the submissions of the Id. AR. It is clear that Memorandum of Settlement was executed in terms of section 18(1) of the Industrial Dispute Act, 1947 and is binding on both the parties i.e. the employer and the workmen. The contribution to the benevolent fund was made in terms of clause 3 of the said Memorandum of Settlement. Thus the fund was not created suo- mote by the appellant but was based on the Memorandum of Settlement between the employer and the workmen in terms of section 18(1) of the Industrial Dispute Act, 1947. The case relied by the Ld. AO supra is also not applicable to the case in hand as it pertained to payment of commission to managing agent. It was held in the said case by the Hon'ble Supreme Court that in view of section 326 of the Companies Act, 1956, which contained an absolute prohibition against the appointment or reappointment of a managing agent before approval of the Central Government was obtained, the appellant company's liability to pay the remuneration of the managing agents arose only when the Government conveyed its approval and not prior to that date. The facts of the appellant's case are different. In the present case the payment has been made pursuant to the Memorandum of Settlement u/s 18(1) of the Industrial Dispute Act, 1947. Further section 29 of the Industrial Dispute Act, 1947 prescribes penalty for any person breaching the settlement. Further, the Chennai Tribunal, in the case of India Pistons Repco Ltd v. lAC (Mad) (26 ITD 413), held that contribution made by the assessee towards the Death Relief Fund constituted under a memorandum of settlement u/s 18(1) of the Industrial Dispute Act between the assessee and the workmen was an allowable deduction inspite of Provisions of section 40A(9). I n view of the above reasons, the contention of the appellant that contribution made by it to the Benevolent Fund constituted under a memorandum of settlement u/s 18(1) of the Industrial Act is statutory in nature and hence covered by exception provided under section 40A(9) is acceptable. Accordingly, I direct the AO to allow contribution of Rs.97,335/- made by the appellant to the Benevolent Fund. The appellant, therefore, succeeds on this ground.”

ITA Nos. 2807, 2808, 2809 & 2810/Chny/2017 & ITA Nos.2957, 2958, 2959, 2960, 2961, 2962 & 2963/Chny/2017 :- 10 -:

By following the above order of the ld. CIT(A) and also by following his own order for earlier assessment years, the ld. CIT(A) has deleted the addition made by the Assessing Officer for the assessment year 2003-04 and for the assessment years 2004-05, 2005-06, 2006-07 and 2007-08 also the ld. CIT(A) deleted the addition made by the Assessing Officer. The only contention of the Department is that the earlier order of the ld. CIT(A) in assessee’s own case in ITA Nos. 152 to 154/2004-05 has not become final cannot be accepted since the Department has not filed any order of higher forum having modified or reversed the above decision of the Coordinate Bench of the Tribunal. Under the above facts and circumstances, we sustain the order of the ld. CIT(A) on this issue for all the above assessment years under appeal and dismiss the ground raised by the Revenue.

It was further submitted by the learned Departmental Representative that the Revenue has not accepted the order of the Tribunal and the appeals are pending before the Hon’ble Jurisdictional High Court.

ITA Nos. 2807, 2808, 2809 & 2810/Chny/2017 & ITA Nos.2957, 2958, 2959, 2960, 2961, 2962 & 2963/Chny/2017 :- 11 -: favour of the assessee by following the decision of the Co-ordinate Bench of this Tribunal in the assessee’s own case referred to supra, wherein in page 15 to 20 of the said order in paragraphs 9 to 10 it has been held as follows: “9. With regard to the assessment year 2005-06, the only effective ground raised in the appeal of the assessee is with regard to confirmation of disallowance of provisions for gratuity. 9.1 The assessee has made a provision of ₹.7,50,23,640/- towards Gratuity Fund with Life Insurance Corporation of India, which was also approved by the Commissioner of Income Tax, Chennai. The assessee claimed the same as per the provisions of section 40A(7)(b) of the Act. However, the Assessing Officer negated the claim of the assessee on the ground that the assessee had only made the provision and not made actual payment, and therefore, the same cannot be allowed as per the provisions of section 43B of the Act. 9.2 On appeal, by following the decision in the case of CIT v. Sree Makakahya Tea Co. (P) Ltd. 199 ITR 714, the ld. CIT(A) has observed that even if any sum is allowable as per section 40A(7) if it does not satisfy the payment criterion of section 43B of the Act that will not be allowed. Had it not been so there was no need for the legislature to bring in section 43B(b) of the Act which covers any sum payable to a gratuity fund. Therefore, in view of the decision of the Hon’ble Calcutta High Court in the case of CIT v. Sree Makakahya Tea Co. (P) Ltd. (supra), the ld. CIT(A) confirmed the disallowance made by the Assessing Officer. 9.3 Aggrieved, the assessee is in appeal before the Tribunal. The ld. Counsel for the assessee has submitted that the issue is squarely covered by the decision of the Coordinate Bench of the Tribunal in the case of ACIT v. Tyco Sanmar Ltd. in I.T.A. No. 1551/Mds/2014 dated 12.12.2014. On the other hand, the ld. DR supported the order of the authorities below. 9.4 We have considered the rival submissions and gone through the orders of authorities below. On similar facts and circumstances in an identical issue, after considering various case law, the Coordinate Bench of the Tribunal has observed and held as under: “2. The Assessing Officer while completing the assessment found that assessee made provision for gratuity of ₹.32,54,120/- and this was not added back while computing taxable income in its computation. The Assessing Officer required the assessee to explain as to why this provision made for gratuity should not be disallowed. The assessee contended that during the previous year relevant to the assessment year 2007-08, it made provision towards gratuity with LIC of India which was approved by the Commissioner of Income Tax . The assessee submitted that the said amount is allowable as deduction as per provisions of section 40A(7)(b) of the Act. It was the submission of the assessee that claim should be allowed under the provisions of section 40A(7)(b) which is a specific provision and

ITA Nos. 2807, 2808, 2809 & 2810/Chny/2017 & ITA Nos.2957, 2958, 2959, 2960, 2961, 2962 & 2963/Chny/2017 :- 12 -: hence the same overrides section 43B of the Act, as section 43B is only general provision. The Assessing Officer rejected the contentions of the assessee and disallowed the provision for gratuity holding that unless the said provision is paid, it is not allowable in view of the provisions of section 43B of the Act. On appeal, the Commissioner of Income Tax (Appeals) allowed the claim of the assessee and deleted the disallowance observing that similar issue has been allowed in assessee’s own case for the assessment years 2005-06 and 2006-07. 3. Departmental Representative vehemently supports the order of the Assessing Officer in disallowing the provision for gratuity submitting that since the said amount is only a provision and not paid is hit by the provisions of section 43B of the Act. 4. Counsel for the assessee relied on the order of the Commissioner of Income Tax (Appeals). He further submits that the Revenue in earlier years accepted the decision of the Commissioner of Income Tax (Appeals) in deleting the provision for gratuity for the assessment years 2005-06 and 2006-07 and no further appeal was filed by the Revenue on similar issue. Counsel relied on the following decisions in support of his contentions that provision made for approved gratuity fund is allowable as deduction under section 40A(7)(b) of the Act and such provision for gratuity is not hit by the provisions of section 43B of the Act:- i) CIT Vs. Bechtel India (P) Ltd. (2 DTR (Del) 145) ii) CIT Vs. Common Wealth Trust (P) Ltd & Anr (269 ITR 290)(Ker) (iii) CIT Vs. Easwaran & Sons Engineers Ltd.[Tax Appeal No.596 of 2005 dated 26.09.2011(Madras) (iv) Mewar Suga Mills Ltd. Vs. DCIT (Third Member) (65 ITD 163)(Jaipur Bench) 5. Heard both sides. Perused orders of lower authorities and the decisions relied on. The assessee during the relevant assessment year 2007-08 created provision of ₹.32,54,120/- towards gratuity with LIC of India. This fund was approved by the Commissioner of Income Tax. The Assessing Officer disallowed the said provision for gratuity for the reason that assessee did not pay the said gratuity during the assessment year 2007-08. The Assessing Officer was of the view that since the assessee has made only a provision the same is not allowable in view of the specific provisions of section 43B of the Act. The Commissioner of Income Tax (Appeals) deleted the disallowance following the orders passed in assessee’s own case for the assessment years 2005-06 & 2006-07 by orders dated 01.12.2011 & 01.02.2013 respectively. It was the submission of the counsel that no further appeal was preferred by the Revenue and the order of the Commissioner of Income Tax (Appeals) was accepted. On a perusal of the decisions relied on by the assessee, we find that this issue has been considered by various High Courts and held that the provision made by the assessee towards contribution to approved gratuity fund is an ascertained liability and is allowable as deduction under section 40A(7)(b)of the Act. It was further held that the provisions of section

ITA Nos. 2807, 2808, 2809 & 2810/Chny/2017 & ITA Nos.2957, 2958, 2959, 2960, 2961, 2962 & 2963/Chny/2017 :- 13 -: 40A(7)(b) overrides section 43B of the Act. Similar view was also taken by the Third Member of Jaipur bench of this Tribunal in the case of Mewar Sugar Mills Ltd. Vs. DCIT (supra). 6. The Hon’ble Kerala High Court in the case of CIT Vs. Common Wealth Trust (P) Ltd & Anr. (supra) held as under:- “Section 40A(7) of the Income-tax Act, 1961, was introduced by the Finance Act, 1975, with retrospective effect from April 1, 1973, and section 43B was introduced by the Finance Act, 1983, with effect from April 1, 1984. Section 40A says that the provisions of this section shall have effect notwithstanding anything to the contrary contained in any other provision of the Act relating to the computation of income under the head "Profits and gains of business or profession". Similarly, section 43B opens with a non obstante clause. Section 40A(7) provides that in cases covered by the provisions of clause (a) no deduction shall be allowed in respect of any provision whether called as such or by any other name made by the assessee for the payment of gratuity of his employees on their retirement or on termination of their employment for any reason. However, clause (b) of section 40A(7) clearly provides that to any provision made by the assessee for the purpose of payment of a sum by way of any contribution towards an approved gratuity fund, or for the purpose of payment of any gratuity, that has become payable during the previous year clause (a) will not apply. This means exception has been carved out in respect of payment of sums by way of any contribution towards an approved gratuity fund. Thus the Legislature wanted to give a special treatment to provision made by an assessee for the purpose of payment by way of any contribution towards an approved gratuity fund. This has to be treated as a special provision. The marginal note to section 43B clearly says "certain deductions to be only on actual payment". It deals with various items. Section 43B(b) deals generally with any sum payable by the assessee as an employer by way of contribution to any provident fund at superannuation fund or gratuity fund or any other fund for the welfare of the employees. Of course, the gratuity fund is also referred to. Section'40A(7), clause (b), particularly sub-clause (i), thereof is a special provision in regard to a claim for deduction based on a provision made for payment towards unapproved gratuity fund. There is no clear inconsistency between the two provisions, viz., sections 40A(7) and 43B. Section 40A(7) is in negative terms and section 43B is in positive terms, the effect of both these provisions is that in order to claim deduction in respect of payment to a gratuity fund there must be actual payment and that deduction cannot be allowed on the basis of any provision. The only exception to the above rule is with regard to the provision for payment to an approved gratuity fund. It cannot be interpreted that the later pro vision in section 43B by introducing the non obstante clause would abrogate the special provision with regard to the provision made for payment to an approved gratuity fund contained in section 40A(7)(b)(i). This is all the more so since no patent conflict or inconsistency can be spelt out. Both the provisions can co-exist. A harmonious construction of the two provisions would clearly indicate that the Legislature never intended to take away the benefit conferred under clause (b) of section 40A(7) by the provisions of section 43B(b).”

ITA Nos. 2807, 2808, 2809 & 2810/Chny/2017 & ITA Nos.2957, 2958, 2959, 2960, 2961, 2962 & 2963/Chny/2017 :- 14 -:

ITA Nos. 2807, 2808, 2809 & 2810/Chny/2017 & ITA Nos.2957, 2958, 2959, 2960, 2961, 2962 & 2963/Chny/2017 :- 15 -: 10. Ground Nos.4.1 and 4.2 are against the action of the learned CIT(A) in holding that the provisions towards gratuity is an eligible deduction u/s.40A(7) of the Income Tax Act, 1961 and the provision of Section 43B would not come in the way. It was further a submission that the issue was restored to the file of the Assessing Officer for verification as to whether the fund is an approved one or not? It was further a submission that the Assessing Officer has subsequently passed revision order in respect of the said Assessment Years allowing the issue in favour of the assessee. It was a submission that consequently the ground no more survives.

ITA Nos. 2807, 2808, 2809 & 2810/Chny/2017 & ITA Nos.2957, 2958, 2959, 2960, 2961, 2962 & 2963/Chny/2017 :- 16 -:

ITA Nos. 2807, 2808, 2809 & 2810/Chny/2017 & ITA Nos.2957, 2958, 2959, 2960, 2961, 2962 & 2963/Chny/2017 :- 17 -: ITAT, Mumbai (supra), I hold that the Provision for Gratuity of Rs.61,71,603/- should not be added back to book profits. The appellant succeeds on this ground.” 15.3 The learned DR could not controvert the above findings of the learned CIT(A), wherein the learned CIT(A) by following the decisions of the Indore and Mumbai Benches of the Tribunal, held that the provision for gratuity of Rs.61,71,603/- should be added back to the book profits and allowed the ground raised by the assessee. Thus, we find no infirmity in the order passed by the learned CIT(A) and the ground raised for the assessment years 2004-05 and 2005-06 is dismissed.” It was further submitted by the learned Departmental Representative that the Revenue has not accepted the orders of the Co-ordinate Bench of this Tribunal and consequently, vehemently supported the order of the Assessing Officer.

ITA Nos. 2807, 2808, 2809 & 2810/Chny/2017 & ITA Nos.2957, 2958, 2959, 2960, 2961, 2962 & 2963/Chny/2017 :- 18 -: 18. Coming to the assessee’s appeals, it was submitted by the learned Authorized Representative that the common issue in all the appeals of the assessee was against the action of the learned CIT(A) in confirming the action of the learned Assessing Officer in treating the sale of carbon credits as Revenue receipts based on the decision in the case of Apollo Tyres Limited by ITAT Cochin Bench reported in [2014] 47 Taxmann.com 416. It was a submission by the learned Authorized Representative that the said decision was contrary to the earlier decision in the case of My Home Power Limited passed by ITAT Hyderabad Bench. It was a submission that both the Cochin Bench decision and the Hyderabad Bench decision had been challenged before the respective Hon’ble High Courts and the orders of the Tribunal have been upheld respectively by holding that there was no substantial question of law is involved. It was further a submission that however subsequently the Hon’ble Karnataka High Court in the case of Commissioner of Income Tax-III vs. Subhash Kabini Power Corporation Limited followed the decision of the Hon’ble Hyderabad High Court in the case of My Home Power Limited reported in 365 ITR 82 (AP) and has held the issue in favour of the assessee. It was further a submission that the Hon’ble High Court of Allahabad had also followed the decision in the case of My Home Power Limited referred to supra and had held that the carbon credits was a capital receipt. It was further a submission that the Co-ordinate Bench of this Tribunal in the case of Ambika Cotton Mills Limited reported in I.T.A. No.1836/MDS/2012 vide order dated 16.04.2013 followed the decision of the Co-ordinate Bench of this Tribunal,

ITA Nos. 2807, 2808, 2809 & 2810/Chny/2017 & ITA Nos.2957, 2958, 2959, 2960, 2961, 2962 & 2963/Chny/2017 :- 19 -: Hyderabad Bench in My Home Power Limited held that the receipts on the sale of carbon credits was a capital receipt. Lastly, it was submitted by the learned Authorized Representative that the provision of Section 115 BBG(1) has been brought to the statute w.e.f 01.04.2018, wherein it has been held Section 115 BBG(1) as follows: “(1) Where the total income of an assessee includes any income by way of transfer of carbon credits, the income-tax payable shall be the aggregate of:- (a) The amount of income-tax calculated on the income by way of transfer of carbon credits, at the rate of ten percent; and (b) The amount of income-tax with which the assessee would have been chargeable had his total income been reduced by the amount of income referred to in clause (a).”

It was a submission that in any case till 01.04.2018, the legislation did not wish to tax carbon credits. It was further a submission that provision of Section 115BBG cannot be made retrospective in operation either. It was further a submission that the fact the provision of Section 115BBG is being introduced also shows that the intention of the legislature is not to tax the receipts of the said carbon credits as regular business income at all. It was further a submission that the addition made by the Assessing Officer and as confirmed by the learned CIT(A) treating the receipts on the sale of carbon credits as revenue may be deleted. 19. In reply, the learned Departmental Representative vehemently supported the order of the learned Assessing Officer and the learned CIT(A).

ITA Nos. 2807, 2808, 2809 & 2810/Chny/2017 & ITA Nos.2957, 2958, 2959, 2960, 2961, 2962 & 2963/Chny/2017 :- 20 -: 20. It was a submission that the order of the Tribunal in the case of Apollo Tyres Limited was a right interpretation and the receipts was liable to be treated as revenue receipts only.

ITA Nos. 2807, 2808, 2809 & 2810/Chny/2017 & ITA Nos.2957, 2958, 2959, 2960, 2961, 2962 & 2963/Chny/2017 :- 21 -: for taxing of the receipts from the sale of carbon credits under a special provision of Section 115BBG w.e.f 01.04.2018 and as the appeals relate to the period before this date, the receipts arising to the assessee herein on the sale of carbon credits is held to be capital receipt. Consequently, the order of the learned CIT(A) and that of the learned Assessing Officer on this issue stands reversed. Consequently, the appeals of the assessee for the Assessment Years 2011-12 and 2013-14 stands allowed.

ITA Nos. 2807, 2808, 2809 & 2810/Chny/2017 & ITA Nos.2957, 2958, 2959, 2960, 2961, 2962 & 2963/Chny/2017 :- 22 -: and machinery installed in the second half of the financial year preceding the Assessment Years 2013-14 and 2014-15. It was a submission that the Revenue has not challenged these findings. It was further a submission that the learned CIT(A) had not considered the identical ground for the Assessment Year 2012-13 raised by the assessee. It was a submission that the issue having being held in favour of the assessee by the learned CIT(A) for the Assessment Years 2013-14 and 2014-15, the similar findings may be granted for the Assessment Year 2012-13 also. The learned Authorized Representative drew our attention to the Ground No.14 raised by the assessee before the learned CIT(A) which relates to the claim of additional depreciation.

ITA Nos. 2807, 2808, 2809 & 2810/Chny/2017 & ITA Nos.2957, 2958, 2959, 2960, 2961, 2962 & 2963/Chny/2017 :- 23 -: Officer is directed to grant the assessee additional depreciation on the plant and machinery installed in the second half of the financial year preceding the Assessment Year 2012-13. In the result, the appeal of the assessee in I.T.A. No.2809/Chny/2017 for the Assessment Year 2012-13 stands allowed.

Order pronounced in the open Court on 4th December, 2019 in Chennai.

Sd/- Sd/- (श्री एस. जयरामन) (जॉजज माथन) (S. JAYARAMAN) (GEORGE MATHAN) न्याययक सदस्य/JUDICIAL MEMBER लेखा सदस्य/ACCOUNTANT MEMBER चेन्नई/Chennai, धदनांक/Dated: 4th December, 2019 IA, Sr. PS आदेश की प्रधतधलधप अग्रेधर्त/Copy to: 1. अपीलाथी/Appellant 2. प्रत्यथी/Respondent 3. आयकर आयुक्त (अपील)/CIT(A) 4. आयकर आयुक्त/CIT 5. धवभागीय प्रधतधनधि/DR 6. गाडज फाईल/GF