M/S. GUJARAT GLASS LTD. vs. THE ADDL CIT RG 6(3),

Rival contentions have been heard and record perused. Facts in brief are that the assessee company is a subsidiary company of Nicholas Piramal India Limited (NPIL) and NPIL holds 53.76% of Equity Shares of the assessee company. Three foreign parties have subscribed the remaining 46.24% of equity shares of the assessee company. The company has two manufacturing divisions at Kosamba and Jambusar, both in Gujarat.

3. With regard to disallowance of depreciation on non-compete fee, the AO observed that the assessee paid Rs.18 crores towards non- compete fees during assessment Year 1999-2000. The amount was paid in connection with the acquisition of glass division from Nicholas Piramal India Limited. The same has been capitalized over various fixed assets in the ratio of their values estimated on a fair basis arrived at by the technical experts. Depending upon the value allocated to the respective block of assets, depreciation at the applicable rate had been claimed alongwith the depreciation on that block of assets. The Assessing Officer disallowed the claim of the assessee the above depreciation, following his order of assessment for the assessment year 1999-2000, holding that the expenditure was in no way connected with the acquisition of various assets. Accordingly, the claim of the depreciation on such allocation was declined. 4. We found that similar issue was decided by the Tribunal in preceding year in favour of the revenue. It was contended by ld. AR that the Tribunal has decided the issue against the assessee by relying on 3 Third Member’s decision of the Tribunal, however, thereafter there was decision of Hon’ble Madras High Court in the case of Pentasoft Technologies Ltd., 41 taxmann.com 120 and Hon’ble Karnataka High Court in the case of Ingersoll Rand International Ind. Ltd., 48 taxmann.com 349, wherein the Courts have allowed the claim of depreciation on the non-compete fees paid by the assessee.

We have considered rival contentions and carefully gone through the orders of the authorities below and found that the Hon’ble Madras High Court and Hon’ble Karnataka High Court have clearly held that non- compete fee in the nature of commercial rights, therefore, eligible for claim of depreciation. This issue has also been dealt by the coordinate bench in the case of Shreya Life Science Private Limited, ITA No.7071/Mum/2010, order dated 14-1-2016, wherein the Tribunal after relying various judicial pronouncements as well as the decision of Hon’ble Supreme Court in the case of Smifs Securities Pvt. Ltd., 327 ITR 323, allowed the depreciation on non-compete fees after having the following observations :- “19. Now coming to the claim for depreciation on non compete fee, we found that after paying the non compete fee the assessee has acquired commercial rights. Commercial right comes into existence whenever the assessee makes payment for non compete fee and after obtaining non compete right, the assessee can develop and run his business without bothering about the competition and therefore non compete right is intangible asset eligible for depreciation. Generally, non-compete fee is paid for a definite period which in this case is four years. The idea is that by that time, the business would stand firmly on its own footing and can sustain later on. This clearly shows that the commercial right comes into existence whenever the assessee makes payment for non-compete fee. Now, the second question is whether such right can be termed as "or any other business or commercial rights of similar nature" for construing the same as "intangible asset". Here, the doctrine of ejusdem generis would come into operation. The term "or any other business or commercial rights of similar nature"

The other assets mentioned are know-how, patents, copyrights, trade marks, licences, franchises, etc. In all these cases no physical asset comes into possession of the assessee. What comes in is only a right to carry on the business smoothly and successfully and therefore even the right obtained by way of non-compete fee would also be covered by the term "or any other business or commercial rights of similar nature" because after obtaining non-compete right, the assessee can develop and run his business without bothering about the competition. The right acquired by payment of non- compete fee is definitely intangible asset. Moreover, this right (asset) will evaporate over a period of time of four years in this case because after that the protection of non-competition will not be available to the assessee. This means, this right is subject to wear and tear by the passage of time, in the sense, that after the lapse of a definite period of four years, this asset will not be available to the assessee and, therefore, this asset must be held to be subject to depreciation. Assessee would be entitled to depreciation in respect of non- compete fee which is in the nature of intangible asset.

In a recent ruling, the Hon‟ble Madras High Court in the case of Pentasoft Technologies Ltd. held that non-compete fee paid to a transferor under a composite agreement for restraining him from entering a similar business for ten years was eligible for depreciation.

Recently, the Mumbai Bench of the Income-tax Appellate Tribunal in the case of Ind. Global Corporate Finance Pvt. Ltd. held that the non compete fee is not a deductible expenditure since it is capital in nature. However, the non compete right is an „intangible asset‟ eligible for depreciation under the Income-tax Act, 1961. Further, the decision of Real Image Tech (P) Ltd. has been followed by the Mumbai Tribunal in the case of Schott Glass India Pvt. Ltd. and therefore, the depreciation claim is allowed on non compete fees.

In view of the above discussion, we conclude that so long as the non compete fee in question is capital expenditure, the same is entitled for deprecation. Accordingly, we direct the AO to allow the 5 claim of depreciation on the amount of non compete fee paid, treating the same as intangible assets. We direct accordingly. Respectfully following the decisions as referred above, we direct the AO to allow the claim of depreciation thereon.

Next grievance of the assessee relates to disallowance on interest. This is against the AO's action in estimating the cost of borrowing at 13 % and thereby disallowing interest on borrowed fund claimed under section 36(1) (iii) of Rs.3,36,32,300/- on the ground that it was capital expenditure. From the perusal of Schedule 6 of the Balance sheet of the assessee company, it was noticed that the appellant had invested Rs.2587.10 lakhs in shares of the subsidiary company, namely, M/s. Ceylon Glass Company Ltd. Sri Lanka. At the same time, he found that there are interest bearing borrowings of Rs 3267.41 Crores and interest of Rs 38.22 Crores had been debited to profit and loss account. Not satisfied with the explanation of the assessee, the AO disallowed the interest payment to the extent of Rs.3,36,32,300/-.

By the impugned order, the CIT(A) confirmed the disallowance, against which the assessee is in further appeal before us.

We have considered rival contentions and found that the assessee has claimed interest on borrowed funds u/s.36(1)(iii), which was realized for investment in Ceylon Glass Company Limited, Sri Lanka, which is an associate concern. The investment was made for controlling interest in the associate concern, therefore, in view of the decision of Hon’ble Bombay High Court in the cases of Phil Corporation Ltd., 244 CTR 266, Pstabai Rikhabchand Kothar, 30 taxmann.com 346, Shristi Securities, 321 ITR 6 498 and decision of Hon’ble Kolkata High Court in the case of Jardine Henderson Ltd., 210 ITR 981, the assessee is entitled for claim of interest on the funds acquired for controlling interest. We also found that investment was made in the share of company with a similar line of business and for commercial expediency, therefore, no disallowance was warranted u/s.36(1)(iii), in view of the decision of Hon’ble Supreme Court in the case of S.A.Builders, 288 ITR 1. Accordingly, the AO is directed to allow the claim of the assessee for depreciation.

The assessee is also aggrieved for disallowance of interest at estimated cost of borrowing on the amount given to sister concerns and directors amounting to Rs.99,49,264/-. This ground relates to the action of the AO in estimating the cost of borrowing at 13% and thereby disallowing the interest of Rs.99,49,264/- on amount outstanding of Rs.7,65,32,802/. From Para 4 of Part B of Notes forming part of accounts, it was seen by the AO that Rs 3 lakhs was outstanding from a Director of the assessee and Rs.346.433 lakhs was due from companies where Directors of the assessee company were interested as Director. On the other hand, he found that the assessee had claimed huge financial charges towards cash credit, non-convertible debentures, term loans, foreign currency loans, and unsecured loans. He accordingly, asked the assessee to furnish the details of loans and advances recoverable in cash or in kind, and to explain whether any interest has been charged on those advances or not. Assessee was also asked to show cause, if no interest was charged, why proportionate interest calculated at 13 % should not be disallowed , as the 7 interest bearing loans have not been used for business purposes-After examining the details filed by the appellant vide letter dated 15.12.2003, in the light of further explanation of the assessee vide letter dated 30/1/2004, the AO made disallowance of an amount of Rs.99,49,264/-.

We have considered rival contentions and found that the purpose for which advance were made is covered by the principle of commercial expediency, therefore, following the decision of Hon’ble Supreme Court in the case of S.A.Builders (supra), we direct the AO to allow the same.

With regard to disallowance of foreign travel expenses, the AO observed that on a perusal of the details furnished the AO noticed that it consists of the following foreign travelling expenses. a. For visit to subsidiary company in SriLanka - Rs. 3,85,477/- b. For machinery inspection for purchase of machinery- Rs. 46,538/- c. For USA where the appellant has not done any export- Rs. 1,50,510/- Total Rs. 5,82,525/- The AO was however not convinced with the explanation of the assessee. He found that the subsidiary company, being an independent legal entity, the travelling expenses incurred for visiting the same is non-business expense. He further held that travelling for machinery inspection purchase of machinery is definitely a capital expenditure. He also included that in the absence of any exports made to USA , the foreign availing to USA is nothing but a pleasure trip, and as such expenses towards foreign traveling to USA is not a legitimate business expenses.

By the impugned order the CIT(A) deleted the disallowance in respect of visit to subsidiary company in Sri Lanka and expenditure incurred on travelling for machinery inspection, however, the CIT(A)

In the appeal of the revenue, the revenue is aggrieved for write off of payments of non-compete fees made to PEL over a period of 18 years. As we have already directed the AO to allow depreciation on the non- compete fees, the ground taken by the revenue has become infructuous.

The next grievance of the revenue relates to considering fair market value for depreciation assets acquired on slump sale from NPIL as the actual cost for the purpose of calculating depreciation. This issue is also covered in favour of the assessee by the order of the Tribunal in assessee’s own case for the assessment year 1999-2000, wherein the issue has been set aside to the CIT(A) for deciding afresh. Respectfully following the order of the Tribunal for the assessment year 1999-2000, this issue is restored back to the file of AO.

With regard to revenue’s ground for deleting the addition of Rs.38,71,638/- invoking provisions of Section 41(1), the AO noted that amounts aggregating to Rs 39,73,399/- due to thirteen parties, were outstanding for more than 3 years. He therefore, proposed disallowance of those outstanding balances invoking the provisions of section 41(1) , and called for the explanation of the assessee against the same. On consideration of the explanation of the assessee, the AO observed that except for an amount of Rs 1,01,7611'~ due to M/s. Morarjee Brembana 9 Limited to whom the outstanding balance was paid in December 2001, the remaining amounts were outstanding either because of some dispute or without any reason. He noted that the appellant has not submitted any proof that it has to yet pay these liabilities, and these liabilities had not ceased during the accounting year 2000-01. He accordingly made an addition of Rs.38,71,638/- representing the amounts due to 12 parties, invoking the provisions of section 41(1) of the Act. By the impugned order the CIT(A) allowed assessee’s claim after having following observations :- “10.4 On a careful consideration of the matter, the undersigned finds merits in the contentions of the appellant on this issue. Remission or cessation of a liability is pre-requisite for invoking the provisions of section 41(1) of the Act. In the absence of any such remission/cessation, the liability on the part of the appellant towards a creditor continues to persist, notwithstanding pendency of any dispute . Merely because a liability is outstanding for more than 3 years, the same cannot be added back as the income of the appellant, invoking the provisions of section 41(1) of the act. In this view of the matter the addition of Rs 38,71,638 made by the AO in this behalf is deleted.”

We do not find any infirmity in the order of CIT(A) in view of the decision of Hon’ble Supreme Court in the case of Sugauli Sugar Works (P) Ltd., 236 ITR 518 and Mumbai bench of the Tribunal in the case of Aasia Business Ventures, 41 taxmann.com 84.

The revenue is also aggrieved for excluding the provisions made for redemption of debentures while calculating book profit u/s.115JB.

This ground is against the action of the CIT(A) in excluding an amount of Rs.2.25 crores being provisions made for redemption of debentures while computing book profit under section 115JB of the Act. It was claimed that the amount transferred to debenture redemption reserve 10 is an ascertained liability deductible under section 115JB(2) of the Act, in computing book profit for the year. The AO holding this amount has been transferred to the reserve as part of the appropriation account, or it is below the line adjustment, and such below line adjustments represent the appropriation of profits and does not effect the book profit of the year. He also did not agree with the contention of the appellant that the debenture redemption reserve is not a reserve as per the definition under part In of the Schedule VI of the companies Act, observing that the assessee is misreading the provisions of the said schedule of the Companies Act. By the impugned order the CIT(A) directed for excluding the amount being provision made for debentures after having the following observations :- “16.4 On a careful consideration of the matter, in the light of the submission of the appellant and the case law noted above, the undersigned finds force in the contentions of the appellant. The Calcutta Bench decision of the Tribunal in the case of IOL Ltd. (supra) , considering identical issue under Income tax Act, following the decisions of the Supreme Court in National Rayon Corporation Ltd. (supra) held as follows:- 16.5 Sum appropriated by the assessee in the P&L account towards @ debentures redemption reserve cannot be held to a reserve within the meaning of clause (b) or amount set apart to meet unascertained liabilities within the meaning of clause (c) of the Explanation to Section 115J(1), and as such the said amount was not to be added to the net profit as computed by the assessee to arrive at the book profit for the purpose of Section 115J." 16.5 So also, the orders of the CIT(A), in the case of Nicholas Piramal Ltd. and Manglaore Refinery & Petrochemicals Ltd. clearly the case of the appellant on the point at issue. In that view of the matter, respectfully following the said decision of the Tribunal , the undersigned accepts the contentions of the assessee on this aspect, and directs the AO to recompute the book profit under section 115JB excluding the amount transferred to Debenture Redemption Reserve.”

We have considered rival contentions and perused the record. In view of the decision of Hon’ble Bombay High Court in the case of 11 Raymond Ltd., 209 Taxmann 65 and decision of Mumbai Tribunal in the case of Manglore Refinery & Petrochemical Ltd, ITA No.5189/Mum/2001, order dated 1-10-2007, we do not find any infirmity in the order of CIT(A).

In the result, appeals are allowed in part, in terms indicated hereinabove. Order pronounced in the open court on this 02/03/2016. Sd/- Sd/- (RAM LAL NEGI) (R.C.SHARMA) न्यानयक सदस्य / JUDICIAL MEMBER ऱेखा सदस्य / ACCOUNTANT MEMBER भुंफई Mumbai; ददनांक Dated 02/03/2016 प्र.कु.मभ/pkm, नन.स/ PS आदेश की प्रनिलऱपप अग्रेपषि/Copy of the Order forwarded to : अऩीराथी / The Appellant 1. प्रत्मथी / The Respondent. 2. आमकय आमुक्त(अऩीर) / The CIT(A), Mumbai. 3. आमकय आमुक्त / CIT 4. ववबागीम प्रनतननधध, आमकय अऩीरीम अधधकयण, भुंफई / DR, ITAT, Mumbai 5. गार्ा पाईर / Guard file. 6. सत्मावऩत प्रनत //True Copy// आदेशाि सार/ BY ORDER,