THE ACIT RG-3(2) vs. M/S. LML LTD,

2 M/s LML Ltd ITA No. :3668/Mum/2004 ITA No. : 3540/Mum/2004 ITA No. : 3666/Mum/2011 �ी अिमत शु�ला, �या स: PER AMIT SHUKLA, JM:

In pursuance of the said agreement, the assessee received a payment of USD $5.5 million which in terms of INR was Rs.2388.65 lakhs (Rs.23.89 crores approx) towards termination of Joint Venture Agreement and consequential termination of other Engineering and License Agreement as well as cessation of non-compete obligation of Joint Venture partner. In the financial statement for the year ending 31st

Before the AO, the assessee in response to the show cause notice as to why it shall not be treated as revenue receipts, highlighted the main features of ‘Settlement Agreement’ and also the approval of the said agreement by the Board of Directors (which has been incorporated by AO in pages 5 and 6 of the assessment order) and contented that the amount received as compensation was for loss on account of imposition of several negative covenants qua the assessee, hence it was a capital receipts. The Ld. AO after considering the assessee’s arguments and material on record observed that the collaboration with Piaggio by the assessee has immensely helped the assessee in diversifying its operation from its traditional business of dealing in yarn to highly technical field of manufacturing of scooters and two wheelers and spare parts in India. This agreement had given assessee good amount of business in India and abroad resulting into huge profits. In fact, at the relevant point of time, this collaboration has put the assessee company in number 2 position of two wheeler manufacturing in India after Bajaj Auto Limited. Had this collaboration continued assessee would have reaped huge dividend. He also noted that, post settlement and clean break agreement (SCB) dated 15.11.1999, various restrictions and embargos were imposed upon the assessee wherein; The assessee was not allowed to use Brand names i) of Piaggio henceforth; ii) The up gradation of new technology from Piaggio was stopped;

Before the CIT(A), assessee again placed all the relevant material facts to highlight the terms and conditions of the agreement and the settlement in which assessee had received compensation of Rs.23.88 crores. The restrictive covenants attached to the receipts flowing from SCB was highlighted before the CIT(A) in the following manner:-

Before us, the Ld. Counsel for the assessee after explaining the entire facts which has been succinctly discussed above by us, he submitted that here in this case, by virtue of termination of the JV agreement the entire business of the assessee has been impaired and the adverse affect of such termination can be seen in the profits of the LML for year 31st March, 2000 itself and in later years the assessee ran into heavy losses. The production of the assessee fell down almost by 45% in this year as compared to the previous period and also the installed capacity used was only 61% which earlier was 110%. This effect was there in the 19 M/s LML Ltd ITA No. :3668/Mum/2004 ITA No. : 3540/Mum/2004 ITA No. : 3666/Mum/2011 immediately first year of the dispute and later on the position had become worst in later years in as much as LML became sick company in the assessment year 2006-07 and is before the BIFR for its revival till date. It is solely because of this termination of Joint Venture, the entire brand value and business of LML has been finished. Thus, the whole profit making apparatus and business has been paralyzed post this termination of agreement, therefore compensation awarded is to be treated as capital receipt. On the various allegation of the AO, he gave point-wise rebuttal and reiterated that the restricted covenant put in ‘SCB’ has caused huge loss to assessee from which assessee could not revive till date. He submitted that, not only the LML was barred from manufacturing of Piaggio two wheelers but also export was restricted for the period of 7 years and it could not use Piaggio trademark. Not only that, Piaggio was given right to compete in India, which impaired assessee’s business. Thus, the whole profit making apparatus was sterilized due to various negative covenants. He also distinguished the decisions relied upon by the AO, that is, CIT v Shamsher Printing Press, reported in [1960] 39 ITR 90, in the case of Blue Star Ltd vs CIT, reported in [1995] 217 ITR 514 on the ground that, in the first decision the compensation was paid for compulsory vacation of premise and assessee had shifted its business place without impairing the business at all because assessee continued its business later on and there was no loss of actual profit making apparatus. In the second decision, the compensation was paid for loss of agency during the course of normal course of business. It did not affect the trading, structure nor deprived assessee from its source of income. Here in this case he submitted that whole profit

On the other hand, Ld. DR strongly relied upon the order of the AO and submitted that the assessee was in the business prior to Piaggio agreement and also continued to do the same business post-termination of the agreement. There is no loss on account of source of revenue, which continued albeit on a lesser scale. The compensation paid was on breach of an agreement during the normal course of the business, hence is on revenue account. Even otherwise also, any sum received under an agreement either for not carrying out any activity or for not sharing of any technical know-how etc, such an amount is to be treated as business income only. In support he strongly referred to section 28(v)(a) which though has come in the statute w.e.f. AY 2003-04 however, he submitted that the same spirit of the law should be applied for the earlier years also. He further submitted that, here it is not a case of losing the source of income but a termination of an agreement by which certain restrictions were put to the assessee, therefore, any compensation received in lieu of such 21 M/s LML Ltd ITA No. :3668/Mum/2004 ITA No. : 3540/Mum/2004 ITA No. : 3666/Mum/2011 restrictions is nothing but on revenue account and not on account of any capital field. Thus, he submitted that the entire compensation received was rightly taxed as business income by the AO.

We have heard the rival submissions and perused the relevant facts and material discussed in the impugned orders. It is a trite law that under the Income Tax Act all the receipts in the hands of an assessee would not necessarily be income or deemed to be income for the purpose of income tax, because it will depend upon the nature of the receipt and the true scope and effect of the relevant taxing provisions. The Hon’ble Supreme Court in Kettlewell Bullen & Co. Ltd (supra) have laid down that, where on a consideration of the circumstances, payment is made to compensate a person for cancellation of a contract which does not affect the trading structure of his business, nor deprive him of what is substance of his source of income, termination of the contract being a normal incident of the business, and such cancellation leaves him free to carry on his trade the receipt is revenue. However, whereby the cancellation results into loss of what may be regarded as the source of the assessee’s income, the payment made to compensate for cancellation of the agency agreement is normally a capital receipt. This fundamental principle needs to be examined on case to case basis depending upon the facts of each case. A distinction has to be drawn, where a payment is made for a breach of any agreement during the course of a business and a compensation for termination of income producing assets or impairing the profit making apparatus. The former may not lose its revenue nature but later being a payment on account

As a result of these restrictive covenants, as pointed out by the Ld. Counsel not only the production and sales went down but also entire business of the assessee got impaired and later on the assessee company became insignificant player and non entity in the field of two wheelers as a result of this ‘SCB’. In the first year itself, the production as well as the sales went down by half and later on, the assessee got wiped out from the market completely. Thus, the entire profit making apparatus and business which was in the form of technical-collaboration, brand and various arrangements with Piaggio got severely paralyzed. From the terms of the settlement agreement and the restrictive covenants as highlighted above, it is seen that the compensation was purely for restraining the assessee to carry out its business without any aid of license or brand from Piaggio. The exports were restricted and Piaggio itself was empowered to compete with LML in India in two wheelers. Thus, the entire trading

Now coming to the argument of Ld. DR that provision of section 28(v)(a) which had been brought in the statute w.e.f. 2003-04 should be held to be applicable in the present assessment year also, we find that such an argument cannot be accepted, because, the provision of section 28(v)(a) was brought specifically into the Act to treat the payment received on non-compete fee under a negative covenant to be taxable as business income under section 28 and such a provision was brought by the Finance Act, 2002 w.e.f. 01.04.2003, therefore it cannot be applied retrospectively for the assessment year 2000-01. This precise issue had come up for consideration before the Hon’ble Supreme Court in the case of Guffichem vs. CIT, reported in [2011] 332 ITR 602, wherein,

Before us, the Ld. DR submitted that, first of all, it can be seen that, assessee in the Balance-sheet for the year ending 31st March, 1999 and 31st March, 2000 has itself treated it as ‘unsecured loans’. The amount was received in the year 1995 and till 1999, the assessee’s had not allotted the shares and it was never capitalized by the assessee company. Had it been the capital share application money, the assessee would have allotted the shares within the timeframe which is the requirement as per the SEBI as held by the AO; Secondly, the forfeiture of an advance from the foreign collaborator which assessee itself has treated in the form of loans and advance therefore, forfeiture of this amount is nothing but revenue receipt. The Ld. DR also relied upon the decision Hon’ble Supreme Court in the case of T. V. Sundram Iyengar & Sons Ltd, reported in [1996] 88 Taxman 429 (SC) and Bombay High Court decision in the case of Solid Containers Limited. Vs. Deputy vs DCIT, reported in [2009] 308 ITR 417.

Before us, the Ld. Counsel submitted that, it cannot be disputed that the money was received as share application money to finance the expansion of the project. This is evident from the inward remittance certificate by the bank and approval of the RBI. The treatment of the amount in the books of account cannot be the determinative factor for taxability under the Act. The amount was forfeited in 32 M/s LML Ltd ITA No. :3668/Mum/2004 ITA No. : 3540/Mum/2004 ITA No. : 3666/Mum/2011 pursuance of “SCB” and was never claimed as expenditure either in this year or in the earlier year; therefore, same cannot be taxed as relinquishment of business liability under section 41(1) as held by the AO. In support, he strongly relied upon the decision of Hon’ble Delhi High Court in the case of CIT vs. Shivali Constructions P Ltd, reported in [2013] 355 ITR 218. He further relied upon the decision of ITAT, Mumbai in the case of Impsat (P) Ltd v ITO, reported in [2004] 91 ITD 254 wherein, the application money for issue of share to a foreign collaborator could not be refunded due to heavy financial losses was held to be in capital field. Thus, he submitted that the receipt in question was for share application money and not for any kind of advance during the course of any trading or business. Further, disclosure as unsecured loan cannot be the decisive factor for treating it as capital or revenue receipt. Relying upon the decision of Hon’ble Supreme Court in the case of Chowringhee Sales Bureau P Ltd v CIT, reported in [1973] 87 ITR 542, he submitted that true nature and quality of receipts is to be looked into and not under which head it has entered in the book of accounts.

We have heard the rival submissions and perused the relevant finding given in the impugned orders. The assessee had undertaken expansion-cum-diversification of its scooter business and for that purpose financial institution agreed to grant loan on a condition that promoters LML and Piaggio will contribute or infuse 20% of funds. In pursuance thereof, on 1st December, 1995, Piaggio confirmed that it shall remit the sum of Rs.8.8 crores by 7th January, 1996 as advanced share application money. On 8th January, 1996, LML

First of all, it is quite trite that nature and quality of receipt is the substratum of taxing an income under the Income-tax Act and not the head under which it has entered into the books of account. Entry in the books of account is not a decisive and determinative factor of income, albeit the nature and source of receipts. This proposition is well settled by the Hon’ble apex Court in several cases, including as referred to above by the ld. counsel. At the time of receiving of 34 M/s LML Ltd ITA No. :3668/Mum/2004 ITA No. : 3540/Mum/2004 ITA No. : 3666/Mum/2011 the receipt in the year 1996 from Piaggio, the same was on account of capital, that is, towards share application money. The receipt received as share application towards equity which is capital in nature cannot be treated as loan or advance simply because one of the parties agreed that it is to be treated as an advance or loan in his books. Even otherwise the capital receipt cannot be converted into revenue receipt by efflux of time because the quality and nature of the receipt should be adjudged at the time of its receipt and such quality cannot be affected or altered subsequently by act of the parties, of course when both the parties clearly mandate or agree to the same for such a conversion. Once, the money which has come from foreign collaborator towards share application money duly approved by Regulatory Authority, then same cannot be treated as a “loan” even though it was recorded as loan by assessee in its books of account or can be in any manner reckoned as revenue receipt at the time of forfeiture; Secondly, the allegation of the AO that non- allotment of share was in violation of SEBI guidelines and under the Company’s Act, the same is not relevant and also it has not been shown to us which provision has been violated. In our opinion, what is required to be looked into is, whether under the provisions of the Income-tax Act, if a receipt which was on account of a capital can be treated as on revenue account or not; and lastly, the addition has been made finally by the AO after invoking provision of section 41(1). The first and foremost condition which needs to be examined before invoking the provisions of section 41(1) is that, whether an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee or not; which is clearly absent in the 35 M/s LML Ltd ITA No. :3668/Mum/2004 ITA No. : 3540/Mum/2004 ITA No. : 3666/Mum/2011 present case. Thus, the share application money received by the assessee, in any manner does not fall within the ambit and scope of section 41(1). The decision of Hon’ble Supreme Court in the case of T V Sundram Iyengar & Sons Ltd (supra) as relied upon by the ld. DR is not applicable because in that case it was a case of a trade deposit received in the course of carrying on the business and such unclaimed deposits were written back by the assessee and transferred to the P&L Account. It was in this background that the Hon’ble Apex Court held that it was income of the assessee. In the case of Solid Containers (supra) the relevant fact was that the money was received by the assessee in course of carrying on his business. Although it was treated as deposit and was of capital nature at the point of time it was received, however by efflux of time the money has become the assessee's own money, because of unclaimed by the customers. What remains after adjustment of the deposits has not been claimed by the customers; hence the claims of the customers have become barred by limitation. The assessee itself has treated the money as its own money and taken the amount to its profit and loss account. There was no explanation from the assessee why the surplus money was taken to its profit and loss account even if it was somebody else's money. It was in light of these facts and background the Hon’ble Bombay High Court held that it was the income of the assessee. Here in present case no deposits have received from customers nor it is a loan taken for trading activity and neither has it been transferred to P&L Account, albeit here the share application money has been forfeited due to settlement by the share applicant and the assessee and the money has been transferred to capital reserve fund. Thus, such an amount

In ground no.3, the revenue has challenged the deletion of disallowance of Rs.574.96 lakhs incurred by the assessee as legal expenses to defend itself in legal suits filed by M/s Piaggio CSpa.

The assessee has debited a sum of Rs.574.96 lakhs towards legal expenses to defend itself in legal suits and arbitrations filed by M/s Piaggio Companies. The assessee’s case before the AO was that, it was one of the defendants in the suits filed by Piaggio in India and further the Piaggio Company had applied to International Chamber of Commerce for arbitration where they have made claims against the company for damages for alleged breach of agreements. They had also filed a petition before the Company Law Board under section 397 and 398 of the Companies Act against the assessee, its promoters and its management for alleged oppression and mismanagement. The Indian promoters have incurred significant expenses on litigation which was far more than the amount spent by the assessee in such disputes. The AO held that the dispute was between the two promoters of the company and not with the assessee company. In sum and substance, the AO’s reasoning for rejecting the claim was that:

The Ld. CIT (A), allowed the claim on the ground that, though the dispute and the entire litigation was between the promoters, however, it would be hazardous for the corporate citizen not to defend the said suit in which it is made party and not to spent any money on such kind of litigation, only because it does not generate any revenue. It may not be for earning of income but it has certainly been incurred wholly and exclusively for the purpose of business. A corporate body has to consider the interest of the company as a whole that is, of its stake holders namely, shareholders. When Financial institutions and banks who have lent the money to a assessee company will expect that it will defend any action initiated against it by its shareholders, who have dual capacity as a 38 M/s LML Ltd ITA No. :3668/Mum/2004 ITA No. : 3540/Mum/2004 ITA No. : 3666/Mum/2011 shareholders as well as Principal Technology Provider or in- charge of day-to-day management of the company and also for various business relationship with them other than as a shareholders. Thus, he held that the legal expenses incurred by the assessee were for its business purpose and the same needs to be allowed.

Before us, the Ld. DR strongly relied upon the order of the AO and submitted that, once there is litigation between the promoters amongst themselves, then company has no business to spend the amount for litigation and secondly, the expenditure incurred does not relate to business of the company.

On the other hand, the Ld. Counsel submitted that, the litigation between the promoters had a wide impact on the LML, as the arbitration proceedings were in the nature of claim for damages for breach of contracts and if not defended, LML would have jeopardized its interest. Further, he clarified that, LML has incurred expenditure only its own part of the legal expenditure and Indian promoters have incurred there part of the litigation cost. Thus, it cannot be held that entire expenditure was incurred by the assessee only. LML had several stake shareholders and Indian public own more than 51% of the capital including its lenders, banks and financial institutions, employees and ancillaries whose stake and existence is dependent on the assessee. In support, various decisions have been relied upon by Ld. Counsel which for the sake of convenience is reproduced herein below:

We have heard the rival submissions and perused the relevant finding given in the impugned orders. The main reason for not allowing the assessee’s claim for legal expenses debited to the P&L account by the AO is that, firstly, these legal expenses pertain to dispute between Indian Promoters and foreign promoters and the suits/arbitration proceedings filed amongst them cannot be said to be related to the business activity of the LML; secondly, it did not contribute to any revenue generation to the assessee; and lastly, the assessee was compelled to incur the expenditure to enable the existing promoters to continue their hold and control of management affairs of the LML so that, the management does not slip to Piaggio. It is an undisputed fact that, the assessee was also one of the defendants in the suit and also in the arbitration proceedings initiated by the Piaggio. Certain claims for damages were also made against the assessee for alleged breach of agreements. A petition was also filed against the assessee company and its promoters before Company Law Board for winding off. Thus, the assessee company was directly affected by such legal proceedings. Once the Joint Venture Agreement (JVA) between the Indian promoters and Piaggio was jeopardized, various triggering events followed which lead to many proceedings against the promoters including that of the assessee company. It is not disputed by the AO that, assessee was made party in several proceedings

In ground No.4, revenue has challenged the deletion of disallowance of interest of Rs.2.03 crores attributable to the interest free advance to the associated concern, VCCL Ltd.

The facts in brief are that there were outstanding debt and advances due form VCCL Ltd. which stood at Rs.1514.65 lakhs as on 31st March, 2000, as against the due amount of Rs.2,785.71 lakhs as on 31st March, 1999. It was declared in the notes to the account in the financial statement that net worth of VCCL Ltd. is negative and company’s manufacturing operations continued to be suspended as in the past. The management is pursuing for recovery of above due amount from VCCL Ltd by way of acquisition or disposal of its assets. Adjustment for loss which might arise in respect of the said outstanding will be made on its determination. Admittedly on the said dues, LML did not receive any interest income. The AO noted that pursuant to “SCB”, VCCL had received sum of Rs.1355 lakhs form Piaggio. The LML could not recover the said amount from VCCL and if recovery from VCCL of Rs.1355 lakhs would have been made, then assessee would have saved the interest component on that amount. He further noted that the amount advanced to VCCL Ltd is 14% of the total amount borrowed by the LML, on which it is paying interest. Thus, the AO imputed interest rate of 15% of Rs.13.55 crores and held that it should be disallowed, which worked out to Rs.2,03,25,000/-.

After hearing the parties and on perusal of the material placed on record, we find that the entire premise of the AO for disallowing the interest is that, on one hand, assessee had shown amount due from VCCL Ltd as on 31st March, 2000 at Rs.1,514.65 lakhs, which it finds it difficult to recover and on the other hand when the VCCL had received an amount of Rs.1355 lakhs from the Piaggio under the “SCB”, assessee is not recovering the amount from VCCL. If this amount would have been given to the LML then due amount could have been reduced and also the consequent interest to LML. On this premise he has made the disallowance of interest on the amount of Rs.13.55 crores. Now, admittedly, it has been shown by the assessee before the CIT(A), which has not been disputed by the revenue before us that, VCCL Ltd has paid the amount of Rs.13.55 crores to the assessee for which the necessary evidences were also filed before the CIT(A) and Xerox copy of the cheque is also appearing in the paper book. Thus, the entire premise on which the disallowance was made by the AO has no legs to stand. Hence, the ground raised by the revenue has been rendered baseless and without any basis or support from any material on record and accordingly, the same is dismissed.

In ground No.5, the revenue has challenged the deletion of Rs.4,05,75,000/- on account of disallowance of interest on dues from M/s Esslon Synthetics Ltd.

The brief facts are that, in the notes of the accounts in 43 M/s LML Ltd ITA No. :3668/Mum/2004 ITA No. : 3540/Mum/2004 ITA No. : 3666/Mum/2011 the Balance-sheet, vide note No.11, the assessee has reported that, sum of Rs.2709 lakhs out of total sum of Rs.7103 lakhs was recoverable from M/s Esslon Synthetics Ltd (ESL) against the sale consideration for transfer of undertakings and other debts for which no payment has been received by the assessee. This amount represents the unpaid sale consideration in respect of its ‘Fibre Business’ transferred to M/s ESL in the year 1987. In the year 1990, the relevant approval of financial institutions/banks were received and the price was reworked and in terms of the agreement the purchase consideration of Rs.71.03 crores was paid by ESL, by taking over liability of the institutions/banks to the extent of Rs.29.99 crores and down payment of Rs.14 crores. The amount of Rs.9.45 crores was payable on or before 31st March 1992 and a sum of Rs.17.59 crores was payable in 28 equal installments beginning from 1st April, 1991. In respect of Rs. 9.45 crores, there was no provision for payment of interest in case of delay and the said amount was guaranteed by Saraswat Trading Co. Ltd who was holding equity shares of LML Ltd. To enforce the above referred payment, suit was filed in Hon’ble Delhi High Court and pending disposal, the said amount of Rs.9.45 crores has been shown by the assessee as recoverable. In respect of sum of Rs.17.59 crores which was unsecured, the provision was made in the books of account for the year ending 31st March, 1997. Since the company was ordered to be wound up by Hon’ble Allahabad High Court and there was no possibility of realizing anything. However, later on the said sum was finally assigned to its subsidiary company, M/s Perfect Polycons Ltd. for token consideration of Re 1/-. Simultaneously, the assessee has also written off the bad debts in its books of account by 44 M/s LML Ltd ITA No. :3668/Mum/2004 ITA No. : 3540/Mum/2004 ITA No. : 3666/Mum/2011 debiting the provision for doubtful debts and crediting to the parties account. The AO, in his show cause notice to the assessee required as to why interest rate of 18% on the amount of Rs.27.05 crores (17.59 + 9.45) should not be made, which comes to Rs.4.87 crores and add the same by way of interest accrued on outstanding amount. In response, the assessee after stating the entire background of the transaction stated that, ESL has been declared sick unit by BIFR and there was no possibility of realizing anything from the assessee company and, therefore, there is no scope for addition on account of notional interest. The AO observed in his order that the assessee was not keen to recover the amount of Rs.27.04 crores from its sister concern ESL and as per the terms of sale of business, the assessee was to recover the total consideration in a phased manner over a period time. It could recover only a part amount and balance amount of Rs.27.05 crores is still outstanding. He further observed that, M/s Saraswat Trading Co. was guarantor for these dues which held the major chunk of shares of LML and, therefore, assessee could have easily recovered its dues from the guarantor. Instead, it had assigned the entire amount of loan to M/s Perfect Polycon Co. Ltd. for a consideration of Re. 1/-. Thus, the entire nature of transaction shows that assessee did not had any intention to recover its amount due inspite that amount was shown as recoverable. The assessee has chosen to assign the entire amount of loan for a consideration of Re 1/- to another sister concern, which is not justified under normal business prudence but it is a case of generous charity towards its sister concern. Accordingly, he held that 15% disallowance should be made on the amount recoverable, that is on Rs.27.05 crores which works out to 45 M/s LML Ltd ITA No. :3668/Mum/2004 ITA No. : 3540/Mum/2004 ITA No. : 3666/Mum/2011 Rs.4,05,75,000/-.

Before the CIT(A), the assessee submitted that, out of the said amount of Rs.27.05 crores, Rs.17.59 crores represents the surplus of undertaking which was credited to the profit and loss account and for tax purpose the said amount was partly offered as long-term-capital-gain whereas part of the amount was credited to the various block of assets and thereby reduce the written down value of those assets. Thus, no addition was required to be made on sum of Rs.17.59 crores so much so that there could be any notional disallowance of interest in respect of sum receivable from the company. It was further pointed out that, even the relevant sum has been written off in the books of account and as such there is no question of disallowing any notional interest since there is nothing receivable from the said party. As regards the balance sum of Rs.9.45 crores, it was submitted that the sale agreement does not contain any provision with regard to the charging of interest in case of delay, therefore, no interest could be disallowed on this amount also. Lastly, it was submitted that AO has not established any nexus between the amount receivable and amount borrowed while computing the disallowance.

The Ld. CIT(A) after appreciating the facts in the light of the submissions made and materials placed on record, held that, no case has been made out by the AO for disallowance and accordingly he directed the AO to delete the said disallowance.

Before us, the Ld. DR submitted that, AO had given a 46 M/s LML Ltd ITA No. :3668/Mum/2004 ITA No. : 3540/Mum/2004 ITA No. : 3666/Mum/2011 detailed reason as to why the interest should be disallowed on the amount which was recoverable from ESL. AO has also brought out how the said amount of loan has been assigned to another sister concern Re 1/-, therefore, the finding of the AO for making the disallowance needs to be upheld. The Ld. CIT(A) has not given any reasoning for deleting the said disallowance.

Before us, the Ld. Counsel submitted that the amount outstanding of Rs.27.05 crores was part of sale consideration receivable from ESL for transfer of Fabric business and was in the nature of any sum or money advanced, therefore, there is no question of any interest bearing funds diverted for non- business purposes. No notional disallowance can be made any such case, because AO has not made out any case for the interest bearing funds have been diverted for advancing interest free loans for non-genuine or non-business purpose. Otherwise also, it is an admitted fact that ESL has been ordered to be wound up by Hon’ble Allahabad High Court and LML could not have recovered anything. Thus, there is no real income which can be said to have been brought to tax.

We have considered the relevant facts as culled out in the impugned orders as well as submissions made by the parties. As discussed above, a sum of Rs.27.05 crores was receivable to the assessee as part of sale consideration from ESL for transfer of Fibre Business in the year 1987. The assessee was to receive Rs.9.45 crores up till March, 1992 and balance amount of Rs.17.59 crores in 28 equal installments starting from 1st April, 1991. As brought out by the assessee before the CIT(A), Rs.17.59 crores represent the 47 M/s LML Ltd ITA No. :3668/Mum/2004 ITA No. : 3540/Mum/2004 ITA No. : 3666/Mum/2011 surplus on sale of undertaking which was credited to the P&L Account and was offered as long-term-capital gain/loss whereas, the part of the amount was credited to the various block-of-assets and thereby reduce the WDV of those assets. Thus, there was no occasion for disallowance of any interest on the amount of Rs.17.51 crores. Further, it is undisputed that the sum of Rs.9.45 crores is a part of a sale consideration receivable from ESL from the transfer of Fiber Business, then how it can be reckoned as money advanced by the assessee to its AE or sister concern out of interest bearing funds. A disallowance of interest in such cases can only be when the department/revenue makes out a case that interest bearing funds have been diverted to the sister concerns without any business purpose and without charging any interest. Ostensibly it is not the case here that any interest bearing funds have been diverted to the sister concern albeit certain sum was to be received by the assessee as part of sale consideration and in such a case how the interest component can be imputed for making any disallowance is not understandable. Not only that, it has been brought on record that ESL has been ordered to be wound up by the Hon’ble Allahabad High Court and once the amount itself is doubtful of recovery then how any amount of interest and that to be on the notional basis can be imputed for making the disallowance. The entire exercise done by the AO is very arbitrarily and we do not find any reason to deviate from the conclusion of the CIT(A) in deleting the said disallowance. Accordingly, the ground No.5 as raised by the revenue is dismissed.

In ground No.6, the revenue has challenged the deletion

The brief facts of the case, as discussed in the impugned order are that, in the return of income, the assessee has claimed the deduction of Rs.2,83,44,224/- in respect of technical know-how fees which included an amount of Rs.3,80,20,015/- paid to M/s AVL Austria towards technical know-how fees. The AO held that, since assessee has not deducted TDS in respect of such a payment, therefore, the same is disallowable under section 40(a)(i) and accordingly, he made the disallowance. The assessee’s case before the CIT(A) was that, it relate to the payment of services rendered outside India and according to Article 7 of India- Austria DTAA, the same cannot be subject to withholding of tax in India and in support, the assessee had relied upon the decision of ITAT Chennai Bench in the case of TVS Suzuki Ltd. vs ITO, reported in 73 ITD 91 which rendered on similar kind of facts. Thus, it was contended that in the terms of said Article 7, the technical know-how fees paid on technical services rendered outside India and money was paid in Austria, then withholding tax is not applicable. The Ld. CIT(A) following the decision of the Chennai ITAT held that there cannot be any disallowance under section 40(a)(i).

After hearing both the parties and on perusal on relevant finding given in the impugned orders, we find that, the disallowance had been made by the AO on the ground and on the footing that the payment of technical know-how fees to AVL Austria is taxable in India even if it has been rendered outside India and since, assessee has not deducted

In ground No.7, the revenue has challenged the disallowance u/s 40A(9) in respect of following expenditures:-

The AO has disallowed the said amounts on the ground that, similar disallowance was made in the earlier years. The Ld. CIT(A) has also deleted the said addition after following the appellate orders for the earlier years. Before us, it has been admitted by both the parties that the Tribunal in assessee’s own case for the AYs 1997-98, 1998-99 and 1999-00 in the appeal filed by the revenue has confirmed the similar disallowance made under section 40A(9). Accordingly, following the earlier year precedence which is applicable in this year also, this issue is decided against the assessee and in favour of the revenue. Thus, ground No.7 raised by the Department is allowed.

In ground No.8, the revenue has challenged the deletion of disallowance on account of pre-operative expenses amounting to Rs.3,76,81,000/- claimed as revenue expenditure.

The AO noted that, assessee has reduced the pre-

Before us, the contention of the Ld. Counsel has been that, these pre-operative expenditure was part of ongoing expansion and in any case, there is no requirement to go on to the merits because the amount of Rs.376.81 lakhs, which has been taxed by the AO amounts to double taxation, because the said amount was already reduced by the assessee from the profit and loss account as the same was netted off. He pointed out that the pre-operative expenditure was Rs.1038.20 lakhs which included the 52 M/s LML Ltd ITA No. :3668/Mum/2004 ITA No. : 3540/Mum/2004 ITA No. : 3666/Mum/2011 interest and other income of Rs.376.81 lakhs was already reduced and net operative expenditure was claimed, that is, Rs.661.39 lakhs. Thus, the disallowance made by the AO was an arithmetical fallacy. Ld. DR submitted that AO may verify and give consequential relief.

After considering the aforesaid submission of the Ld. Counsel, we agree with him that we need not to go into merits of the issue, because already assessee had reduced the said amount of Rs.376.18 lakhs from the pre-operative expenditure which has been added by the AO separately. This is evident from the fact that total pre-operative expenditure was Rs.1038.20 lakhs, out of which interest and other income of Rs.376.81 lakhs has already been reduced and only Rs.661.39 lakhs have been claimed in the P&L A/c. Thus, there was no requirement by the AO to disallow once again the interest and other income of Rs.376.81 lakhs. AO is accordingly is directed to rectify this mistake after verification that if the assessee has already reduced the said amount from the total pre-operative expenditure as stated before us, then no addition should be made. In the result, ground No.8 is treated as allowed in the manner indicated above.

In ground No.9, the revenue has challenged the order of the CIT(A) in not treating the expenditure incurred on obtaining “ISO 9002” and “World Class Manufacture Certificate” of Rs.11,30,912/- and Rs.6,23,380/- as capital expenditure. LML had obtained the certificate of “ISO 9002” for which it has paid Rs.11,30,912/- and has also paid Rs.6,23,380/- for obtaining certificate for “world class

After hearing both the parties and on perusal of the impugned order, we find that the payment for obtaining certificate of “ISO 9002”, and “World Class Manufacture Facility”; only conveys that the LML products were manufactured by adhering the international quality and best manufacturing practices. It does not give any vested right to the assessee or assign any special or exclusive right in the nature of trademark as held by the AO, because, it only gives recognition of the product that it was made of good quality and standard. There is no enduring benefit to the assessee giving any impetus to its profit making apparatus. These certificates give value to the products and help the assessee to fairly compete in the market and boost its sale. The benefit if at all is on revenue account. The Ld. Counsel before us has relied upon the decision of Hon’ble P&H High Court in the case of CIT vs Upper India Steel Mfg. and Engineering Co Ltd, reported in [2014] 50 taxman.com 345, wherein the Hon’ble High Court has allowed the expenditure incurred for “ISO 9002” certificate as revenue expenditure. Thus, we do not find any merits in the contention of the AO that payment for getting such certificates for quality products or World Class

In ground No.10, the revenue has challenged the allowance of Rs.17.59 crores as bad debt by ld. CIT(A).

The facts on this issue have already been discussed while adjudicating ground No.5 as above. The Ld. CIT(A) in the impugned order has noted down the following facts:-

The assessee’s case before the CIT(A) to rebut the finding of the AO was that, the part of the amount which is recoverable by virtue of guarantee being written off has no relevance to the issue of allowability of Rs.17.59 crores. The fact that the said amount has been assigned for a price of Re.1/- to a subsidiary company also has no relevance. The impugned issue is to be examined from the angle, whether any outsider would have got more than the sum of Re.1/- on facts of the case when nothing was recoverable. The assessee

Before us, the Ld. Counsel submitted that, this is similar to ground No.12 to the assessee’s appeal, wherein, assessee had contended that, it should be allowed as capital- loss.

After considering the rival submissions and on perusal of the impugned order, it would be relevant to reiterate the fact that, in the year 1987, LML had transferred its Fibre business to its wholly owned subsidiary M/s Esslon Synthetics Ltd. The book value of the assets was Rs.53.56 crores. The business was transferred as a going concern which was subject to approval from the lenders. The approval of lenders was obtained in August, 30th 1990 and the assets of the Fibre business were valued at Rs.71.03 crores. A difference of Rs.17.59 (71.03 – 53.56) was credited to the Profit & Loss Account for the year ending 31st March, 1991. The total sale consideration which was to be charged from the Esslon was as under:-

We agree with the finding of the CIT(A), firstly, that it cannot be a capital asset, because it was money receivable by 58 M/s LML Ltd ITA No. :3668/Mum/2004 ITA No. : 3540/Mum/2004 ITA No. : 3666/Mum/2011 the assessee from ESL towards sale consideration. The assessee had treated as a bad and doubtful debt in its books of account in the earlier year which has been written off in this year by way of adjustment against the parties account, because it was assigned to M/s Perfect Polycon which has been taken on a consideration of Re.1/-. Secondly, the AO himself had admitted that, it is a sundry debt which is outstanding since 1987. Lastly, it is also not disputed that the said amount was receivable and was treated as loans and advances in the books of account which has been written off in the aforesaid manner. Thus, it has rightly been held that the same will be allowable as bad debt. Once the provision for doubtful debt has been debited to the P&L Account and the corresponding provision has been reduced from the debtors account in the Balance-sheet then this would amount to writing off the debt and thus all the conditions laid down in section 36(1)(vii) r.w.s. 36(2) clearly gets fulfilled. This issue has been settled by the Hon’ble Supreme Court in the case of Vijaya Bank Ltd. vs CIT, reported in [2010] 323 ITR 166 which has been followed by the Hon’ble Bombay High Court in the case of CIT vs Tainwalla Chemicals and Plastics LH, reported in [2013] 215 taxman.

Thus the said amount would be allowed as a bad debt written off by the assessee and not as a long-term capital loss. Accordingly, we affirm the order of CIT(A) on this score. In the result ground No.10 as raised by the revenue is dismissed.

In the result, appeal of the revenue stands partly allowed.

At the outset, the Ld. Counsel submitted that, ground no.2, ground No.6, ground No.7, ground No.9 and ground No.10 are not pressed. Accordingly, these grounds are dismissed as not pressed.

Brief facts qua the ground No.1 are that, the assessee used to import certain components free of cost from M/s Piaggio BV, the collaborator for performing job work and thereafter such components were exported. As per the arrangement the assessee had to pay the import duty on behalf of the Piaggio and then same was debited to Piaggio account as and when such components were re-exported and refund of custom duty was credited to the Piaggio account. In the year under consideration, LML had paid custom duty of Rs.71.76 lakhs in respect of components imported from Piaggio which were to be re-exported. However, due to the execution of “settlement and clean break agreement”, LML was not required to re-export these components and as a consequence the components became the property of LML without any cost. The custom duty recoverable was written off and was claimed as such. The components were used in the business of the LML, that is, for manufacturing of its product.

Before us, the Ld. Counsel submitted that, as regards the allowance of excise duty of Rs.71.76 lakhs is concerned, the revenue is not in appeal, therefore, the action of the CIT(A) to this extent stands confirmed. On the issue of Rs.1,20,93,180/- being assessable value of components imported, he submitted that components were imported free of cost, therefore, there was no liability towards Piaggio. Accordingly, there is no question of extinguishment of any liability. Even otherwise also, the said sum was never claimed as deduction either in the earlier year or in the year under consideration; therefore, section 41(1) as invoked by the AO cannot be upheld.

We have considered the rival submissions and also perused the relevant finding given in the impugned order. From the facts as discussed above, it is clear that the assessee used to import certain components free-of-cost from Piaggio BV for performing the job work and re-export the same after completion of the job. As per the arrangement the LML used to pay the import duty on behalf of Piaggio and when such components were re-exported, the refund of custom duty was credited to the Piaggio’s account. The assessee had paid sum of Rs.71.76 lakhs as a custom duty on components imported which was to re-exported to Piaggio. This allowance of excise duty has been deleted by the CIT(A) which has not been challenged by the revenue. In the wake of execution of “Settlement and Clean Break Agreement”, now the LML was not required to re-export the said components and accordingly, the components imported from Piaggio had become the property of the assessee which was used in the manufacturing of the assessee. So far as the assessee is concerned, no cost was incurred by the assessee for such component and it was never claimed as deduction either in this year or in the earlier years. As admitted by the AO, no purchase consideration has been paid by the assessee for the components. If any component has become free of cost which has been used in the manufacturing then it only goes to reduce the cost of the purchase or manufacturing cost and enhance the profit of the manufactured product on sale. We

In ground No.3, the assessee has challenged the disallowance of provision for doubtful debts of Rs.63,96,704/- and provision for Doubtful Advance of Rs.8,86,000/-.

The AO held that the provisions made for doubtful debt are not crystallized liabilities. The amount has not been actually written off in the books of accounts, therefore, assessee could not have claimed these expenses and in the computation of income also such an amount has not been 66 M/s LML Ltd ITA No. :3668/Mum/2004 ITA No. : 3540/Mum/2004 ITA No. : 3666/Mum/2011 added back by the assessee. Accordingly, disallowed and added back the same to the income of the assessee.

The Ld. CIT(A) too has confirmed the action of the AO on the ground that in view of amendment made in the provision of the Act, such a provision for doubtful doubts.

Ld. Counsel’s submission before us has been that, LML has debited the individual account of the debtors with the provision for doubtful debts and provisions for doubtful loans and advances. In support, he referred to the relevant pages in paper-book-II at pages 449 to 451. He further submitted that, if a provision for doubtful debt is debited to the profit and loss account with simultaneously reduction from the debtors account is made then; it would be allowable as deduction. In support, he strongly relied upon the decision of Hon’ble Bombay High Court in the case of CIT vs Tainwalla Chemicals and Plastics, reported in [2013] 215 taxman. 153 and catena of other decisions including that of the Hon’ble Supreme Court in the case of Vijaya Bank (supra) and TRF Ltd vs CIT, reported in [2010] 190 taxman.391. On the other hand, Ld. DR strongly relied upon the order of the CIT(A).

After considering the relevant submissions of the assessee and on perusal of the impugned orders, we agree with the contention of the Ld. Counsel that if a provision for doubtful debt is debited to the P&L account and simultaneous reduction from the debtors account is made, then same amounts to writing off in the books of account and should be allowed as deduction under section 36(1)(vii). This principle has been reiterated by the Hon’ble Bombay Court in 67 M/s LML Ltd ITA No. :3668/Mum/2004 ITA No. : 3540/Mum/2004 ITA No. : 3666/Mum/2011 the case Tainwalla Chemicals and Plastics (supra). However neither the AO nor the CIT(A) has discussed this issue in detail, accordingly, we direct the AO to examine the issue on merits and in the light of principle laid down by the Hon’ble Bombay High Court and Hon’ble Apex Court and decide the same after giving opportunity to the assessee to present its case. With this direction, the issue raised by the assessee in ground No.3 is treated as allowed for statistical purposes.

In ground no.4, the assessee has challenged various bad debts written off aggregating to Rs.27,20,806/-, which consists of three amounts, viz., Rs. 21,37,200/- paid to M/s Modern Trading Co.; Rs. 3,48,874/- paid as custom duty for import; and Rs. 2,34,732/- consisting of various debit balances.

The facts in brief are that the assessee has written off sum of Rs.21,32,700/- paid to M/s Modern Trading Company for procurement of license of Rs.4.11 crores for which assessee could not established as to for which purpose licenses were purchased, whether for the capital or revenue and why the desired import on these licenses could not be affected. Further, the assessee has paid custom duty of Rs.3,48,874/- for import of certain scooters for the purpose of exhibiting the same in the Indian market and therafter re- exporting the same. However, in this case, the assessee did not export the scooters since it was used in the Indian market and custom duty paid could not be recovered, which was written off. Regarding write off of debit balances aggregating to Rs.2,34,732/-, the AO noted that the LML could not justify the reason to write off nor could establish the genuineness for 68 M/s LML Ltd ITA No. :3668/Mum/2004 ITA No. : 3540/Mum/2004 ITA No. : 3666/Mum/2011 such write off. The Ld. CIT(A) has confirmed all the disallowance on the ground that nothing has been brought on record with regard to substantiate the write off of debit balances.

Before us, the Ld. Counsel submitted that, details of party-wise write off were submitted during the course of assessment proceedings along with the reasons to why these were written back and under which circumstances. Otherwise also, he submitted that the same can be allowed as business loss.

On the other hand, Ld. DR strongly relied upon the order of the CIT(A) and AO.

After considering the submissions of the parties and the finding given in the impugned orders, we find that, so far as sundry balance written off for the amount of Rs.21,37,200/- receivable from M/s Modern Trading Company, it is not clear for what purpose license of Rs.4.11 crores was procured, whether for trading purpose or for acquisition of capital asset. The assessee could not establish or bring any proof, under what circumstances, the assessee could not use the license and for what purpose it was purchased and why the desired import on these licenses could not be affected. For any claim of business expenditure or claim of write off or a business loss, the onus is on the assessee as to how it related to his business and also has to give genuine reasons with evidence for incurring the expenses and why it has been written off. In our opinion, without there being any material on record and any satisfactory explanation, we agree with the finding of the 69 M/s LML Ltd ITA No. :3668/Mum/2004 ITA No. : 3540/Mum/2004 ITA No. : 3666/Mum/2011 lower authorities that to the extent of amount written off of Rs.21,37,200/- there is no material to substantiate the assessee’s claim and onus cast upon the assessee has not been discharged therefore, it has righty been disallowed.

As regards the various debit balances totaling to Rs.2,34,274/- also, we find that assessee could not establish the reason for writing off and could not establish the genuineness of the entire transaction. Thus, on this score also, the order of the CIT(A) is confirmed.

However, with respect of Rs.3,48,874/- being custom duty written off on export of certain scooters for exhibiting the same in Indian market, we find that assessee could not re- export the scooters as it was used in the Indian market and as such excise duty could not be recovered. Thus, custom duty which was paid by the assessee in the course of its business and once it was not recovered; then the same has to be allowed as deduction or loss while computing the income from profits and gains under section 28. The assessee had taken a business decision for importing of certain scooters for exhibiting the same in the Indian market for which it had to pay the custom duty. Thus, the said amount incurred was during the course of the business and write off of such amount which was not recoverable is to be allowed as deductible expense. Thus, the claim of Rs.3,48,874/- is clearly allowable and we order accordingly. Thus, ground no.4 is partly allowed.

In ground No.5, the assessee has challenged various payment made towards ‘Royalty’ and ‘Technical Know-how’

As regards the payment on account of “fee for technical services” paid to various parties, the AO has disallowed the same on the ground that, assessee has failed to deduct TDS on such amount and same cannot be allowed as deduction. This has been confirmed by the CIT(A) also.

Before us the Ld. Counsel submitted that, as per the terms of certain agreement which has been placed in the paper book, all these services have been rendered by non- residents outside India and, therefore, the payment made to the non- resident entities for services rendered outside India cannot be held to be taxable in India. In support, he referred to the documents placed in the Paper-book-III on pages 508 to 512. Thus, no disallowance can be made on ground that no TDS has been deducted.

After considering the rival submissions and on perusal of the impugned orders, we find that, it has not been disputed that the payment made for “fee for technical services” has been made on the services which has been provided or rendered outside India. These are evident from the service agreements which have been placed in the paper-book. Before us, Ld. DR has heavily relied upon the Explanation inserted by the Finance Act 2010, w.r.e.f. 01.04.1976. However, at the time of making the payment, there was no such provision under the Act by which a non-resident was liable to be taxed in India even when the services were rendered outside India, therefore, it was impossible to hold that assessee should have withhold the tax at the time of making the payments. It is an admitted position that in wake of decision of Hon’ble Supreme Court, in the case of Ishikawajima-Harima Heavy Industries Ltd. v. DIT, reported in [2007] 288 ITR 408 the position of law was that, if the services which are source of income, which is 72 M/s LML Ltd ITA No. :3668/Mum/2004 ITA No. : 3540/Mum/2004 ITA No. : 3666/Mum/2011 sought to be taxed in India have to be rendered in India as well as utilized in India so as to be held to be taxable in India. Both the conditions have to be satisfied, that is, the services that the source of income should be in India and services have been rendered in India. However, if the services have been rendered outside India then same was held to be outside the purview of taxable in India. Once this is the admitted position, then it is very difficult to hold that, assessee should have deducted TDS on such a payment when there was no law that the payment is taxable in India. Here, the maxim of “lex non cogit ad impossplia, that is, the law of the possibly compelling a person to do something which is impossible, that is, when there is no provision for taxing an amount in India then how it can be expected that a tax should be deducted on such a payment. This view has been upheld by in catena of decisions wherein, it has been held that, assessee cannot held to be liable for deducting TDS in view of the retrospective amendment which has come at a much later date. Thus, without going into the aspect of ‘FTS’ clause in DTAAs, we hold that, at the relevant time while making the payment, assessee was not liable to deduct TDS under the domestic law. Accordingly, disallowance under section 40(a)(i) could not have been made by the AO.

In ground No.8, assessee has challenged the disallowance of prior period expenses of Rs.26.27 lacs.

The assessee’s claim before the AO was that, this income has been crystallized in the impugned year; however, the AO disbelieved the contention of the assessee on the ground that assessee could not provide any documentary evidences and could not provide details of prior period expenses and break-up of prior period expenses and also did not establish as to why these expenses were not debited to 73 M/s LML Ltd ITA No. :3668/Mum/2004 ITA No. : 3540/Mum/2004 ITA No. : 3666/Mum/2011 the profit and loss account in the relevant assessment year. Thus in absence of any detail he disallowed the claim. The Ld. CIT(A) too has confirmed the action of the AO on this footing only.

Before us, the Ld. Counsel submitted that, assessee did gave detailed justification as to how the amount of expenses got crystallized during the year and in support of the same referred to the relevant documents placed in the Paper-book- II at pages 453 and 545. He submitted the said expenses crystallized during the year only on the basis of the communication of the parties; therefore, question of claim in the earlier years does not arise. Now, in view of the decision of Hon’ble Supreme Court in the case of Taparia Tools Ltd Vs. JCIT, reported in [2015] 55 taxmann.com 361, the same needs to be allowed. In the said case, the assessee issued debentures and offered the investors an option to get one time upfront discounted interest. The interest so paid was treated as deferred revenue expenditure in the books of account, but it was claimed fully for income tax purposes. The claim of the assessee was held to be allowable by Hon’ble Supreme Court.

After considering the material placed on record it is seen that the details of prior period expenses have given in the paper book at page 453, on perusal of the same it is seen that the expenses are on account of insurance expenses of Rs.70,389/-; raw material components purchase of Rs.7,79,229/-; amount of Rs.12,86,478/- for contract of paint given to the Asian Paints Ltd; amount of Rs.5,07,215/- relating to Modi Rubber Factory; interest to others, etc. The assessee has given the reasons as to why these liabilities have 74 M/s LML Ltd ITA No. :3668/Mum/2004 ITA No. : 3540/Mum/2004 ITA No. : 3666/Mum/2011 been crystallized in this year. However, neither the AO nor the CIT(A) have discussed this issue in proper perspective, therefore, we are of the opinion that matter should be restored back to the AO to examine this issue afresh after considering assessee’s submission and also in the light of the decision laid down by the Hon’ble Supreme Court in the case of Taparia Tools Ltd (supra). Accordingly, ground No.8 is allowed for statistical purposes.

In ground No.11, the assessee has challenged the addition on account of gift to various employees on various occasions. The AO has disallowed 10% of the expenses amounting to Rs.7.46 lakhs which has been confirmed by the AO on ad-hoc basis. The assessee’s submission has been that the same is based on surmises, conjectures and no proper reasoning has been given for adhoc disallowance.

After considering the rival submission it has been seen that, the expenses of Rs.74,61,398/- have been debited to P&L Account towards giving gifts to company’s guests and company’s employees. The AO has made the adhoc disallowance @10% on the ground that these expenses cannot be held to be incurred wholly for the business purpose. Such an addition has been confirmed by the first appellate authority also on estimate basis @10% of Rs.74,61,398/-. Though there is some degree of adhocism in such a disallowance, however, the onus was on the assessee to show that entire expenditure debited is wholly and exclusively for the purpose of business and there is no element of non- business-purpose or for any personal nature expenditure. In case of the company though there cannot be any expenses of 75 M/s LML Ltd ITA No. :3668/Mum/2004 ITA No. : 3540/Mum/2004 ITA No. : 3666/Mum/2011 personal nature, however, in the present case assessee has mainly stated that the gifts have been given to the guests but why such an expensive gifts were given to the guests has not been specified. Thus, the element of non-business purpose is inherent in such an explanation, therefore, we do not find any reason to deviate from the disallowance as confirmed by the CIT(A). Accordingly, ground no.11 is dismissed.

So far as the issue raised in ground No.12, we have already decided this issue while adjudicating ground No.10 of the revenue’s appeal for AY 2000-01, wherein, we have already held that it is not case of Long Term Capital loss albeit it is a case of bad debt written off which has been allowed in favour of the assessee. Accordingly, ground No.12 is dismissed.

In the result, appeal of the assessee is partly allowed.

Now, we shall deal with revenue’s appeal being for AY 2006-07, vide which following grounds have been raised:-

On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the Assessing Officer to delete Rs.113.4 lakhs the disallowance of interest on account of dues from M/s Ession Synthetics Ltd.

It has been admitted by both the parties that, ground no. 1 & 2 are similar to revenue’s grounds No.4 and 5 for the assessment year 2000-01. Accordingly, our finding given therein will apply mutatis mutandis on the impugned issues as similar facts are permeating in this year also, therefore, following the our conclusion in the said appeal both the grounds raised by the revenue are treated as dismissed.

As regards to ground No.3, it has been admitted by both the parties that the same is not arising out of CIT(A)’s order and, therefore, same is dismissed as infructuous.

In the result, appeal of the revenue stands dismissed.