Dr. S.T.M. Pavalan, Judicial Member - These cross appeals filed by the assessee and Revenue are directed against the order of the Ld.CIT(A)-6, Mumbai dated 31.03.2004 for the assessment year 2000-01. For the sake of convenience, both the appeals are head together and disposed off by this common order.
2. Ground no. 1 of the assessee's appeal and Grounds no. 1 & 2 of the revenue's appeal relate to the disallowance made by the AO in respect of expenditure incurred by the assessee for payment to the employees retiring under Voluntary Retirement Scheme (VRS) amounting to Rs.3,61,34,164/- and the decision of the Ld.CIT(A) directing the AO to recompute the capital gain and adjusting the WDV for allowing depreciation in the current year by bifurcating the VRS payment in the ratio of 1.6 & 6.8.
2.1 The facts leading to the issue as culled out from the assessment/appellate orders are that the assessee company had in the past been rationalizing its manpower costs by way of Voluntary Retirement Schemes. A scheme of VRS was announced by the company during FY 98/99 wherein 43 employees of its Valsad plant were retired by making payment of Rs.1.99 crores. This scheme was approved by the CCIT in terms of section 10(10C) of the Act and full deduction of the outgoing amount was claimed in the return of income and was also allowed to the assessee in the assessment proceedings. During the period under consideration also the assessee announced a VRS which began from 15.06.1999. Approval of the CCIT in terms of section 10(10C) of the Act was taken on 23.09.1999 mentioning the eligibility of 328 employees for the scheme. As part of the scheme of Voluntary Separation, the assessee retired 71 employees of the Valsad plant who opted for the scheme and the total outgo on this account was Rs.3,61,34,164/-including payment on account of ex gratia of Rs.34,08,539/-. In view of the past accounting policy as well as the treatment in the assessment proceedings the assessee debited the entire expense of Rs.3.61 crores to the P/L account as revenue expenditure for the year.
2.1.1 According to the AO, the facts of the case in the year under consideration are however on a very different footing. The VRS announced during the F.Y. 1999-2000 was not really a part of the rationalization of manpower costs. The plant at Valsad was in fact on the selling bloc and the procedure for sale started on 1st Jan, 2000. The negotiations of sale were not by way of a tender and were in fact a closed transaction, which was negotiated on one to one basis by the assessee with the purchaser M/s. Agrimore Industries Ltd. (a subsidiary of M/s. Atul Ltd.) The date of promulgation of the VRS is so close to the date of eventual sale of the plant that it would be native to conclude that the assessee was trimming the manpower to run the business with a lean manpower complement. It is clear that the VRS was part of and perhaps an undocumented precondition of the sale. The assessee was aware of the fact that it was getting rid of the plant as a going concern. It was also aware that the plant shall not be dismantled by the purchaser who shall continue to manufacture the same products using the same machinery and manpower. That is the reason it entered into the non compete agreement with the purchaser. The purchaser M/s. Agrimore did in fact take over the Valsad plant along with 200 odd employees who chose not to use the VRS of the assessee. It would be incorrect to allow the payments made to the outgoing employees as revenue expenditure as the business of the assessee as far as the Valsad plant was concerned came to an end. In fact the assessee entirely withdrew from the business of manufacturing after this sale. The VRS instrument to the task of sale of the plant and perhaps even a precondition. Be that as it may, the benefit derived by the VRS was definitely not revenue in nature as no future revenue payments were avoided by this one time payment. The short question while deliberating the allowability of VRS payments as revenue expenditure is whether the assessee has managed to avoid or reduce its future revenue payments. In the case of the assessee, the assessee was not to have any future revenue liability in relation to the employees working at the Valsad plant which was anyway on the selling bloc. The assessee was aware of this and it can not be said that the events of January 2000 came as a surprise to the assessee who in June, 1999 retired part of its man force in an innocent attempt to reduce its future wage bill. In view of the above stated reasons as recorded in the assessment order, the AO held that it was clear that the payments made as part of the VRS were not allowable as revenue expenditure and should be capitalised.
2.1.2 On appeal, the Ld.CIT(A) while holding the payment of VRS to the employees in the current year had only been made in order to obtain maximum capital receipt for the sale of the plant and this out going is required to be considered for working out the capital gain as well as reduction in WDV from the block of assets consequent to the sale of plant. According to the Ld.CIT(A), as the impugned expenditure had been incurred to make the Valsad plant more marketable, it would be in the fitness of thing if the said VRS payment is bifurcated in the ratio of 1.6 & 6.8 and necessary re-computation of capital gain and adjustment of the WDV is made after reducing the resultant sum from the consideration receipt. In the result, the Ld.CIT(A) directed the AO to reduce the consideration receipt on account of sale of plant in the said ratio and re-compute the capital again and the WDV for allowing the depreciation in the current year in respect of plant and machinery. Aggrieved by the impugned decision, the assessee and the revenue have raised these grounds in their respective appeals before us.
2.3 Having heard both the sides and perused the material on record, the first issue to be decided on the respective grounds raised by the assessee and Revenue is whether the expenditure by way of payments made under the VRS for retirement of employees is revenue expenditure or a capital expenditure. It is pertinent to mention that before the introduction of section 35DDA, the legal dictum is very clear that the assessee can claim the expenditure incurred on account payment made for the VRS which are in the nature of business expenditure and are deductible u/s.37. Therefore, till the introduction of new provisions under section 35 DDA, the assessee can claim such expenditure as revenue expenditure. This proposition is supported by various decisions of the Tribunal and High Courts. It is pertinent to mention that the decision of the Tribunal in the case of G.E. Medical Systems India (P) Ltd (ITA No 1073/PN/2003) is directly applicable to the facts of the assessee in the context of similar facts involved in both the cases wherein the Tribunal has allowed the claim of the assessee that the impugned expenditure is for the purpose of the business and deductible u/s.37 of the Act. The Tribunal, in the said case has taken note of the decisions of the Bombay High Court in the case of CIT v. Bhor Industries Ltd. [2003] 264 ITR 180/128 Taxman 626 and Madras High Court in the case of Madura Coats v. Dy. CIT [2005] 273 ITR 32/145 Taxman 226. Moreover, the reasons of the lower authorities that the assessee was not to have any future revenue liability in relation to the employees working at the Valsad plant which has been anyway on the selling bloc, in our view is a wagering future event during the period when the payment for VRS has been incurred by the assessee and the same cannot be a factor which will change the nature of the payment from revenue to capital. In view of the aforementioned discussion, the entire expense of Rs.3.61 crores is allowed as revenue expenditure eligible for deduction u/s 37(1) of the Act as claimed by the assessee. We order and direct accordingly. Resultantly, Ground No 1 of the assessee is allowed and Grounds No 1 & 2 of the revenue are dismissed.
3. Ground no. 2 raised by the assessee relates to the decision of the Ld.CIT(A) confirming the disallowance made by the AO on account of non compete fees amounting to Rs.36.75 crores paid to M/s Agrimore Ltd.
3.1 The relevant facts culled out from the assessment/appellate orders are that the assessee company sold its insecticides plant at Atul, Valsad to M/s Agrimore Limited close to December 1999 vide Agreement dated 31st December, 1999. The assessee company entered into an agreement with Agrimore Limited restricting it from selling and distribution of the three fast selling major products i.e. THIMET, MALATHION AND ABATE and also from parting with the specialized knowledge and expertise in relation to these products for seven/fourteen years. In consideration thereto the assessee company agreed to pay a lump sum fee of Rs.36.75 crores payable in accordance with the agreed schedule of payment. For its book purpose, the assessee company had shown the said fee of Rs.36.75 crores as deferred revenue expenditure to be amortised over a period of five years. Accordingly, the assessee company debited Rs.1,83,75,000/- to the profit and loss account of the previous year.
3.1.1 During the assessment proceeding, the assessee company, relying on the decision of Supreme Court in the case of CIT v. Empire Jute Co. Ltd. [1980] 124 ITR 1/3 Taxman 69 and the decision of the Madras High Court in the case of CIT v. G.D. Naidu [1987] 165 ITR 63/[1986] 24 Taxman 255 had claimed the entire payment as a business expenditure deductible under section 37(1) of the Act during the current year. This issue has been discussed in paras 11 to 19 spread over from pages 6 to 10 the assessment order. The AO held that the payment of non-compete fee was a colourable device deployed by the assessee company since according to him this payment was not at all warranted on account of commercial expediency, etc and thereby disallowed the impugned expenditure treating the same as capital expenditure.
3.1.2 On appeal the Ld.CIT(A) confirmed the action of the AO for the reasons stated from paras 9 to 14 of his order. According to the Ld.CIT(A), the payment made to ward off competition in business would constitute capital expenditure if the object of making that payment is to derive an advantage by eliminating the competition over some length of time. For the said proposition, the Ld.CIT(A) relied on the decision of the Hon'ble Apex Court in the case of CIT v. Coal Shipment (P.) Ltd. [1971] 82 ITR 902. Aggrieved by the impugned decision the assessee has raised this ground in the appeal before us.
3.2 Before us, the Ld.Counsel for the assessee has vehemently argued that the said expenditure has been incurred by the assessee company with an intention of avoiding manufacture of hazardous substance and the commercial prudence/expediency of the assessee could not have been doubted by the lower authorities to treat the impugned expenditure as capital in nature. Further, reliance has been placed on various decisions including the decision of the Delhi High Court in the case of CIT v. Eicher Ltd [2008] 302 ITR 249/173 Taxman 251 in support of the proposition that the said expenditure is deductible u/s 37(1) of the Act. On the other hand, the Ld.AR by drawing our attention to the facts has vehemently argued that the chronology of events and the valuations adopted by the assessee for the various components of the sale of the Valsad plant give away the contumacious conduct of the assessee. No judicial authority has ever justified the adoption of non-commercial, colorable devices which encumber the P/L account with payments which are so blatantly excessive and un-necessary. The assessee has made feeble attempts during the assessment/appellate proceedings to explain to the inordinately large financial outgo on the grounds of reorganization of the group at a global level. The explanations do not address the obvious non commercial considerations at play in the process. Further, the Ld.DR has stated that the Ld.CIT(A) correctly relied on the decision of the Hon'ble Apex Court in the case of Coal Shipment (P.) Ltd. (supra) for confirming the said disallowance and thus the same is justified.
3.3 We have heard both the sides and perused the material on record on this ground. It is pertinent to mention that the supply agreement has been entered on 3rd January, 2000 wherein it is stipulated that Cyanamid Agro would purchase its actual requirements of thimet, malathion and abate. The company would give forecasting in respect of every quarter of the desired quantity manufactured and all the material produced subject to there being passing the quality control test would be purchased by Cyanamid Agro Ltd. It is also mentioned in the agreement that Cyanamid Agro Ltd is not required to purchase any fix minimum quantity of any product. Accordingly, it may be noted that Agromore Ltd has to produce the basic chemicals and concentrate in the Valsad plant on the basis of forecast made which would be wholly purchased by Cyanamid Agro Ltd. For above purchase, Cyanamid Agro Ltd would give sufficient advance to the Agrimore Ltd in order to build up sufficient inventory of the product to enable the Agrimore Ltd to make the supply. The above advance has to be adjusted against the invoice to be raised. The price of the product is to be fixed over Calendar year based on base manufacturing cost plus 7% as margin. The above agreement is to be valid for five years only and the same could be extended for a further period of two years on the mutual convenience and in any case would lapse after seven years. There is no restriction on the Agrimore Ltd to produce any other chemicals that do not compete with the above mentioned products and Cyanamid Agro Ltd. had right of first refusal in respect of other product manufactured. The price for such produce would be manufactured cost plus 15% or the market value whichever is less. After the refusal, Agrimore Ltd is free to sell these products to any other party. It is also mentioned that after the termination of the contract which may be on account of afflux of time or breach of terms and conditions or insolvency of any party, Cyanamid Agro Ltd shall not be liable to pay any damages to the Agrimore Ltd. On the other hand the non-compete fee agreement which has been entered also on 3rd January, 2000 bars the Agrimore Ltd from engaging in the sale and distribution in respect of thimet, malathion and Palathion for seven years and abate for 14 years. It is relevant to state that these names are brand names and the same has not been transferred to Agrimore Ltd. During the appellate proceedings before the Ld.CIT(A), in response to the query to produce the basis on which the impugned amount of Rs.36.75 crores has been worked out, BASF has not been in a position to give basis for arriving at a sum of Rs.36.75 cores except a sketchy working wherein loss and profit in case the Agrimore Ltd is allowed to engage in the production of these chemical products. In this connection, it is relevant to state that in case the supply agreement is terminated, no compensation would be payable but the non-compete agreement would continue and Agrimore Ltd. would not be in a position to produce or market these chemicals although under different brand on account of non-competitive agreement. Therefore, we agree with the observation of the Ld.CIT(A) that the supply agreement has nothing to do with the competition fees agreement as the same has been paid on account of Agrimore not engaging in the production of these four items for seven years and fifteen years. In the context of the facts as aforementioned, the Hon'ble Apex Court in the case of Coal Shipment (P.) Ltd. (supra), which has been relied by the Ld.CIT(A), has held that payment made to ward of competition in the business of arrival would constitute capital expenditure of the object of making that payment is to derive an advantage by eliminating the competition over some length of time; the same result would not follow if there is no uncertainty of the duration of the advantage and the same can be put on an end any time. Although an enduring benefit need not be everlasting character it should not be so transitory and ephemeral that it can be terminated at any time at the volition of any of the parties. In the present case, the three products of the company has advantage for seven years and the 4th product has advantage for fourteen years. The agreement has been entered in order to have the advantage of enduring nature as after these periods, the Cyanamid Agro Ltd. itself may stop using this crop protection chemicals and come out with the new product and there would be no purpose in continuing with the non competitive agreement of these four products. As the life of these products itself in the competition age would be over before the period of seven years and fourteen years is over, we concur with the decision of the Ld.CIT(A) that this payment is required to be considered as capital in nature. Since the Ld.CIT(A) has refrained from making any comment in respect of observation made by the AO on the aspect of financial imprudence as the Cyanamid Agro Ltd and Agrimore Ltd. is not related party and the affair of the business should be left in the hand of businessman and the Department should confine itself to the allowability or otherwise of any expenditure incurred by the company in computing the taxable income of the assessee company, the necessity of dealing with the said issue does not arise. Resultantly, the decision of the Ld.CIT(A) on this count is upheld. Ground No 2 of the assessee's appeal is dismissed.
4. Ground no. 3 of the assessee's appeal and ground no. 5 of the revenue's appeal relate to the disallowance of bad debt written off Rs.54,17,792/- by the AO and the decision of the Ld.CIT(A) partly allowing the claim to the extent of Rs.44,09,800/-.
4.1 During the year under consideration, the assessee had written off bad debts amounting to Rs.54,17,792/-. However, in the assessment framed, the AO disallowed the same as the assessee had not convincingly proved that the debts written off as bad debt on count of financial position of the debtors and assessee had not taken any legal action against the defaulting debtors. On appeal, the Ld.CIT(A) after observing that the details in respect of bad debts pertaining to Sahakari Ganana Vikas Samitis amounting to Rs.44,09,800/- which pertains to 16 samitis had been given, however, no evidence in respect of balance bad debts claim along with the basis on which the decision was made could be produced the Ld.CIT(A), confirmed the remaining bad debt return off claimed by the assessee. Aggrieved by the impugned decision the assessee and the revenue have raised these grounds in their respective appeal before us.
4.2 Having heard both the sides and perused the material on record, it is pertinent to note that the Hon'ble Supreme Court in the case of T.R.F. Ltd. v. CIT [2010] 323 ITR 397/190 Taxman 391 has held that after 01.04.1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It has further been laid down that if the bad debt has been written off as irrecoverable in the accounts of the assessee it is enough for claiming deduction u/s.36(1)(vii). Similar view has been canvassed by the Hon'ble jurisdictional High Court in the case of CIT v. Star Chemicals (Bombay) (P.) Ltd. [2009] 313 ITR 126 (Bom.). In this case, the Hon'ble High Court held that once the assessee has written off debt as bad, requirement of section 36(1)(vii) is satisfied and the claim for deduction of bad debt is allowable. From the above discussed two judgments, it becomes manifest that the deduction on account bad debt is to be allowed in the year in which the amount is written off in its books of account provided the conditions of section 36(2) are fulfilled. In the present case, it has not been accused by the authorities below that the assessee did not satisfy the conditions of section 36(2). Thus, in principle it is held that once the amount of debt is written off in the books of account, the condition of section 36(1)(vii) is fulfilled and the deduction has to follow, of course subject to the satisfaction of the conditions of sec. 36(2). There is no requirement to distinctly prove that the debt has, in fact, become irrecoverable as a pre-requisite condition for allowing of deduction. Accordingly, we delete the addition made/sustained by the authorities below on this count. Resultantly, Ground no. 3 of the assessee's appeal is allowed and ground no. 5 of the revenue's appeal is dismissed.
5. Ground no. 3 of the revenue's appeal relate to the decision of the Ld.CIT(A) in deleting the addition made by the AO amounting to Rs.3,44,000/- to the value of closing stock as freight charges are not included in the value of closing stock.
5.1 Having heard both the sides and perused the material on record, it is noted that the Ld.CIT(A) following his own order for the Assessment Year 1997-98, has deleted the said addition on the reason that post manufacturing expenses are not required to be included in the valuation of the closing stock. It has been brought to our notice that the Tribunal, in the assessee's own case for the Assessment Years 1994-95, 1998-99 and 1999-2000 has allowed similar claims of the assessee in respect of freight charges. In the absence of any contradictory facts brought on record by the revenue during the year under consideration, we do not find any justifiable reason to interfere with the decision of the Ld.CIT(A) on this count and the same is upheld. Ground no. 3 of the revenue's appeal is dismissed.
6. Ground no. 4 relates to the decision of the Ld.CIT(A) in deleting the addition of Rs.2,97,992/- to the closing stock in respect of un-utilised Modvat credit made by the AO. At the outset, the learned counsel for the assessee has brought to our attention to order of the Tribunal in the assessee's own case for the Assessment Years 1998-99 and 1999-2000 which is available at pages 114 to 120 of the compilation. The Tribunal, in the said order at paras 15 to 19 has allowed a similar claim of the assessee. In the absence of any distinguishing facts brought on record by the revenue for the year under consideration, we do not find any infirmity in the decision of the Ld.CIT(A) on this count and the same is thus upheld. Ground no 4 of the revenue's appeal is dismissed.
7. Ground no. 6 of the revenue's appeal relates to the decision of the Ld.CIT(A) in deleting the disallowance of the expenditure of Rs.8,48,424/- which have been incurred by the assessee on production of advertisement film. It is observed that the Tribunal in the assessee's own case for the Assessment Year 1998-99 and 1999-2000 has allowed similar expenditure as claimed by the assessee. Since identical facts are involved in this year also, we, by following the said order of the Tribunal accordingly decide this issue against the revenue and in favour of the assessee. Ground no 6 is dismissed.
8. In the result, the appeal filed by the assessee is partly allowed and that of the revenue is dismissed.