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From the Courts »
  Vatsala Shenoy vs. JCIT (Supreme Court)
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 ITO vs. Vikram A. Pradhan (ITAT Mumbai)

Pr. Commissioner Of Income Tax-06 Vs. Nitrex Chemicals India Ltd.
September, 27th 2016
$~14-18
*         IN THE HIGH COURT OF DELHI AT NEW DELHI

                                              Decided on: 23.08.2016
 +        ITA 247/2016
          PR. COMMISSIONER OF INCOME TAX-06 ..... Appellant
                     Through: Mr. Rahul Chaudhary, Advocate.
                          versus
          NITREX CHEMICALS INDIA LTD.                ..... Respondent
                     Through: Mr. Ved Jain, Advocate along with
                                 Mr. Pranjal Srivastava, Advocate.
                          And
+         ITA 248/2016
          PR. COMMISSIONER OF INCOME TAX-06                                            ..... Appellant
                     Through: Mr. Rahul Chaudhary, Advocate.
                          versus
          NITREX CHEMICALS INDIA LTD.                  ..... Respondent
                     Through: Mr. Ved Jain, Advocate along with
                                 Mr. Pranjal Srivastava, Advocate.
                          And
+         ITA 249/2016
          PR. COMMISSIONER OF INCOME TAX-06 ..... Appellant
                     Through: Mr. Rahul Chaudhary, Advocate.
                          versus
          NITREX CHEMICALS INDIA LTD.                  ..... Respondent
                          Through: Mr. Ved Jain, Advocate along
                                       with Mr. Pranjal Srivastava,
                                       Advocate.
                          And
+         ITA 318/2016
          PR. COMMISSIONER OF INCOME TAX-06 ..... Appellant
                     Through: Mr. Rahul Chaudhary, Advocate.
                          versus
          NITREX CHEMICALS INDIA LTD.                  ..... Respondent




ITA 247/2016, ITA No. 248/2016, ITA No. 249/2016, ITA No. 318/2016, ITA No. 319/2016            Page 1
                               Through:             Mr. Ved Jain, Advocate along with
                                                    Mr. Pranjal Srivastava, Advocate.
                                                    And
+         ITA 319/2016
          PR. COMMISSIONER OF INCOME TAX-06 ..... Appellant
                     Through: Mr. Rahul Chaudhary, Advocate.
                          versus
          NITREX CHEMICALS INDIA LTD.                 ..... Respondent
                     Through: Mr. Ved Jain, Advocate along with
                                 Mr. Pranjal Srivastava, Advocate.
          CORAM:
          HON'BLE MR. JUSTICE S. RAVINDRA BHAT
          HON'BLE MS. JUSTICE DEEPA SHARMA

          MR. JUSTICE S. RAVINDRA BHAT (OPEN COURT)

          1.        The revenue is aggrieved by a common order of the
          Income Tax Appellate Tribunal (ITAT) pertaining to five
          assessment years i.e. 2005-2006, 2006-2007, 2007-2008, 2008-
          2009 and 2009-2010.
          2.        It is urged that several questions of law arose, chiefly on
          the following issues:-
                    1. Whether payments made by the assessee to its
                       holding company Nitrex Chemicals India Ltd
                       for the use of its trademark and for the purpose
                       of obtaining expertise in commerce, finance,
                       manufacturing etc. amounted to revenue
                       expenditure instead of capital expenditure?
                    2. Whether the finding with respect to additions
                       being disallowances of excessive commission on
                       exports in the circumstances of the case is
                       tenable?
                    3. Whether the computation of capital gains in
                       respect of slump sale of trading businesses on







ITA 247/2016, ITA No. 248/2016, ITA No. 249/2016, ITA No. 318/2016, ITA No. 319/2016   Page 2
                       account of purchase of shares by ESOP Trust,
                       could be deducted from capital gain under
                       Section 48 of Income Tax Act?
                    4. Is the finding on disallowance under Section
                       14A sound in law? And
                    5. Whether in the circumstances of the case,
                       foreign exchange fluctuation in respect of
                       amounts held by the assessee, could be treated
                       as capital losses rather than as revenue
                       expenditure?


          3.        Re: Question No. 1: Whether the payment towards trade
          mark and use of expertise in the field of commerce, finance etc
          amounted to capital or revenue expenditure?

          4.        The assessee acquired an undertaking/ unit of ICI Ltd.
          The assessee in 2006-2007 had debited amounts under the head
          "Techno Commercial Agreement" and a further sum was paid
          towards Brand Licensing Agreement, executed on 14.03.2005.
          The Assessing Officer "AO" was of the opinion that these
          expenditures were of an enduring kind and held that they were
          capital in nature. The assessee, on the other hand, contended
          that these were revenue expenditure. The CIT (A) accepted the
          assessee's contention; the ITAT affirmed the order.

          5.        The revenue's counsel argues that the findings of the CIT
          (A) and ITAT are erroneous having regard to the nature of the
          agreement. It was highlighted that even though the agreement
          was entered into on 14.03.2005, it was sought to be made
          effective from 01.04.2004. The agreement itself was cancelled




ITA 247/2016, ITA No. 248/2016, ITA No. 249/2016, ITA No. 318/2016, ITA No. 319/2016   Page 3
          on 30.04.2005. It was therefore submitted that the real nature of
          the transaction was transfer of ownership rights vested in the
          "Nitrex" brand as well as technology and commercial
          information, to the assessee. As to whether the expenditure
          under the circumstances of the case could have led to creation
          of an asset of enduring nature or not would have assumed some
          importance if it had considerable impact. In the present case,
          there is no dispute that the undertaking itself was sold
          subsequently in 2005. So far as the use of the trade mark is
          concerned, the ITAT's reasoning is as follows:-

                            "After considering the submission of both
                      the parties and perusing the material on record, it
                      is noticed that the AO did not doubt the
                      genuineness of the expenses. He only doubted the
                      nature of expenses which were claimed by the
                      assessee as revnue in nature but the AO was of
                      the view that it was capital in nature. In the
                      present case, by incurring the impugned expenses,
                      the     assesse    had     not    acquires    any
                      tangible/intangible asset which had any lasting
                      and enduring benefit to the assesee's business.
                      The payments were made for using the trade mark
                      of Mis Nitrex Mauritius and to obtain expertise in
                      the field of commerce, finance and manufacturing
                      etc. which were needed for smooth running of the
                      business as the assessee was new in this business
                      and the expenses were paid only for one year.
                      Therefore, we are of the view that the ld. CIT (A)
                      was fully justified in directing the AO to treat
                      those expenses as revnue in nature, we do not see




ITA 247/2016, ITA No. 248/2016, ITA No. 249/2016, ITA No. 318/2016, ITA No. 319/2016   Page 4
                      any infirmity in order of the ld. CIT(A) on this
                      issue."

          6.        This court is of the opinion that the finding with respect
          to tangible or non-tangible asset vesting in the assesee and
          whether it had or not any lasting or enduring advantage to it is
          more in the nature of a finding of fact. The findings are also
          that to use the Nitrex brand, payments were made and it was
          essential for the assessee to make such payments on account of
          nature of its business and on account of procuring knowledge
          for setting up the systems as well as other procedures. In the
          circumstances, we are of the opinion that no question of law
          arises on this aspect.

          7.        Re Question No.2: The issue of excessive commission,
          was consistently ruled against the assessee, for all the five
          years.        However, in both the CIT (A) and the ITAT, the
          revenue's contentions were not accepted. Here, the assessee's
          argument was that the commission could not be characterised as
          excessive because they were more customary in nature having
          regard to the historic relationship with M/S Asha export, its
          export agent. This court is of the opinion that such decisions as
          to the nature and quantum of commission may differ having
          regard to the uniqueness of each business and the relationship
          that it may possess with those associated with it. Unless, the
          revenue is able to pinpoint extraordinary features, it cannot
          scrutinize the commercial terms that a business takes into




ITA 247/2016, ITA No. 248/2016, ITA No. 249/2016, ITA No. 318/2016, ITA No. 319/2016   Page 5
          account in making a decision and contend that certain
          percentage or quantum of commission is "excessive".
          Therefore, we are of the opinion that no question of law arises.

          8.        Re Question No. 3: The revenue's contention here is that
          sum of ` 1,39,76,352/- spent by the assessee at the time of
          transfer of its business undertaking to fund the ESOP Trust,
          cannot be characterized as permissible expenditure but rather
          has to be added back for the purposes of income calculations.
          The assessee's contention, on the other hand, is that this
          expenditure was essential and integral part of the sale
          transaction itself.

          9.        The necessary facts for appreciation of the question are
          that the assessee sold a part of its unit as a going concern. In
          the process the transferee took over the undertaking with the
          management and employees. The assessee had created and
          subsequently modified at two different stages, an ESOP
          (Employees Stock Option Plan) Trust Fund. Apparently, the
          transferee expressed its inclination to continue the fund and
          insisted that as a pre-condition for the transfer, the assessee
          ought to fund it to the extent of the value of the shares that were
          to be allotted to the employees. According to the revenue, this
          expenditure was not integrally connected with the transfer and
          therefore not adjustable from the capital loss as reported in that
          regard.




ITA 247/2016, ITA No. 248/2016, ITA No. 249/2016, ITA No. 318/2016, ITA No. 319/2016   Page 6
                    The findings of the ITAT on this aspect are as follows:-

                            "72. The Id. CIT(A) after considering the
                            submissions of the assessee deleted the
                            addition by observing as under:
                            "1 have gone through the observations of the
                            Assessing Officer as contained in the
                            Assessment Order, submissions of the
                            appellant filed during the course of appellate
                            proceedings       and      various     judicial
                            pronouncements relied upon by the appellant
                            on the issue. I have also examined the
                            contents of Business Transfer Agreement
                            (BTA) entered between Nitrex Chemicals
                            India Ltd. and EAC, Industrial Ingredients Pte
                            Ltd., the Employees Transfer Agreement(ETA)
                            and the Employees Stock Option Plan, 2004
                            (ESOP,2004). It is seen that the appellant
                            company entered into an agreement to sell the
                            Trading Division of the company which was
                            engaged in the business of whole sales trading
                            in chemicals and whole sale trading business
                            with M/s EAC Industrial Ingredients Pte. Ltd.
                            on 14.10.2005 for a       consideration of Rs.
                            22,15,00,0001- subject to the adjustment
                            regarding net liquid assets and movable assets
                            which are given in Schedule 'J' of BTA. On the
                            same date, the appellant signed an ETA
                            Agreement with M/s EAC also for employees
                            transfer. As per clause 2 of this agreement, it
                            was decided that-

                            "2. Pre-completion matter-




ITA 247/2016, ITA No. 248/2016, ITA No. 249/2016, ITA No. 318/2016, ITA No. 319/2016   Page 7
                            Prior to completion, the employees shall be
                            jointly approached by EAC and or Newco and
                            Nitrex for the purpose of obtaining their
                            acceptance to becoming employees than their
                            current terms and conditions but which shall
                            not include any stock holding and share
                            holding option in Nitrex India Ltd.

                            3. Condition precedent ­
                            It shall be a condition precedent to completion
                            of the transaction contemplated by the BTA
                            that the management staff shall have
                            confirmed that subject to the completion they
                            will accept to be employee by Newco instead
                            of Nitrex India Ltd.
                            4.4 EAC and/or Newco shall employ the
                            employees from the completion date on terms
                            and conditions of service which are no less
                            favorable than those which the employees
                            enjoyed immediately prior to the completion
                            date with Nitrex India without any
                            interruption and break in service (but
                            excluding employees stock share holding
                            option).
                            l. As per the terms and conditions listed
                            above, it was the condition precedent to the
                            completion transaction contemplated in the
                            BTA that the management staff shall have
                            confirmed to accept the employment in the
                            new company instead of the appellant
                            company. It was also a condition that on
                            acceptance of employment, the new company
                            shall employ the employees on terms and
                            conditions of service which are no less




ITA 247/2016, ITA No. 248/2016, ITA No. 249/2016, ITA No. 318/2016, ITA No. 319/2016   Page 8
                            favourable than those which the employees
                            were enjoying immediately prior to
                            completion date of business transfer without
                            any interruption or break up of service.
                            However, in the agreement it is clearly
                            mentioned that in the new company they will
                            not be given any employee stock or share
                            holding options. It is seen that the
                            management employee of the Nitrex were
                            having ESOP which was allowed to them by
                            the appellant company in 2004 as per ESOP
                            2004 Scheme. As per this, 5.5% of the shares
                            of the company were subscribed by the
                            management team. The company has also
                            entered into ESOP Scheme under which
                            further shares to be allotted to the employees
                            and an ESOP Trust was created on 20th June,
                            2005 as a custodian of the employees shares.
                            As per the BTA and ETA, certain employees of
                            management team were working with the
                            trading division of the appellant company and
                            in the event of their joining new company, the
                            employees had to divest with their share
                            holding in the company which was in the
                            custody of Trust. As per the ESOP-2004 in the
                            vest of separation of employees for reason
                            other than retirement, the employee had to
                            exercise the option vested on them within
                            three months of the date of resignation. On the
                            joining of the new company, the employee
                            would have lost the benefit of ESOP which
                            would have effected them financially.
                            However, as per the terms and conditions of







ITA 247/2016, ITA No. 248/2016, ITA No. 249/2016, ITA No. 318/2016, ITA No. 319/2016   Page 9
                            BTA, the management team has to agree to
                            join the new company which was a
                            precondition for business transfer agreement.
                            In such a situation, it became necessary for
                            the appellant company to ensure that the
                            management staff accepts to part with their
                            employment with the appellant company and
                            accept the employment of new company.
                            Accordingly, management of team submitted
                            acceptance letter on 09.12.2005 with the
                            agreement of Nitrex Chemicals Stock Option
                            Trust, thereby, the employees agreed to offer
                            the shares held by them to the trust of
                            NITSOP, 2004 and the consideration for such
                            shares was to be determined by applying a
                            price earnings multiple of five to the
                            company's profit after tax for the Financial
                            year 2004-05. However, the management
                            team requested the appellant company to
                            calculate the price of share by suing the profit
                            after tax of the company for F. Y 2005-06
                            adjusted for EAC warranty claim. As a result
                            of acceptance letter from the management
                            team, the appellant company was able to
                            transfer its trading business to M/s EAC
                            without any hindrance. For buy backing, the
                            management shares by the Trust, the
                            appellant company provided the money to
                            Trust. It is claimed by the appellant that said
                            money is not recoverable from the Trust.
                            However, the company has paid said money in
                            pursuance to the BTA and ETA which was a
                            contractual liability of the company. Without




ITA 247/2016, ITA No. 248/2016, ITA No. 249/2016, ITA No. 318/2016, ITA No. 319/2016   Page 10
                            buy back of the shares from the employees, the
                            business transfer of the trading division would
                            not have been possible. It is claimed by the
                            appellant that the amount spent on buy back
                            of shares by the Trust has been incurred
                            wholly and exclusively in connection with the
                            transfer of the capital assets as contemplated
                            in Section 48 of the IT Act. Hence, the same
                            has to be allowed as deduction while
                            computing the capital gain in respect of the
                            slump sale of trading business.

          10. Section 48 of the Act to the extent it is relevant reads as
          follows:-

                           The income chargeable under the head
                    "Capital gains" shall be computed, by deducting
                    from the full value of the consideration received or
                    accruing as a result of the transfer of the capital
                    asset the following amounts, namely :--
                           (i) expenditure incurred wholly and
                           exclusively in connection with such transfer
                           (ii) the cost of acquisition of the asset and
                           the cost of any improvement thereto:


          11.       As is evident, the expression "expenditure incurred
          wholly and exclusively in connection with such transfers" is in
          plain terms sufficient to encompass the kind of expenditure
          with which this Court has to deal with in respect of determining
          the issue in question. ESOP was an essential term of
          employment for the assessee's workforce; an ESOP Trust Fund
          had been created for this specific purpose. Upon the transfer of




ITA 247/2016, ITA No. 248/2016, ITA No. 249/2016, ITA No. 318/2016, ITA No. 319/2016   Page 11
          the assessee's undertaking, the transferee disclaimed any
          responsibility to honor the ESOP conditions. As consequence,
          the funding of the ESOP became an integral part of the transfer
          itself.

          12.       In these circumstances, the court is of the opinion that the
          mode of computation of capital gains had to necessarily take
          into consideration the ESOP funding through the trust fund by
          the Assessee at the stage of transfer.

          13.       Therefore, the court holds that there is no infirmity in the
          findings of the ITAT. No question of law arises.

          14.       Re: Question of disallowance under Section 14A: On
          this aspect the revenue's grievance is confined to three years i.e.
          2007-2008, 2008-2009 and 2009-2010.                                    We notice that the
          decision in the case of Maxopp Investment Ltd.Vs CIT, New
          Delhi (2012) 347 ITR 172 (Del) would apply in the
          circumstances. Equally for the last year i.e. year 2009-2010, the
          AO's omission to record his satisfaction as to the permissibility
          of the deduction, which is the pre-condition for exercise of the
          power, persuaded us to hold that no question of law arise.

                    Re Question No. 5, regarding the treatment of foreign
          exchange fluctuation- (arising only for AY 2009-2010).

          15.       The AO had held that loss on account of foreign
          exchange fluctuation to the tune of ` 2,77,72,900/- could not




ITA 247/2016, ITA No. 248/2016, ITA No. 249/2016, ITA No. 318/2016, ITA No. 319/2016          Page 12
          be claimed as revenue loss and rather had to be disallowed.
          This was on the basis of his understanding of the authority in
          CIT Vs Woodward Governor India (P) Ltd. 312 ITR 254
          SC. The CIT(A) was of the opinion that the assessing officer's
          reasoning was flawed. He held that Section 43A was applicable
          in the circumstances of the case and AS-11 (Accounting
          Standard) was relied upon to indicate that exchange fluctuation
          gains or losses would have to be shown in the profit and loss
          account.

          16.       The revenue urges that both the CIT (A) and ITAT fell
          into error, it is pointed out, in support of its contention, that
          foreign exchange fluctuation, particularly, the loss reported
          during the relevant year, was on account of the ECB loan which
          the assessee had obtained. We notice that this aspect was
          considered by the ITAT which observed that the ECB
          loan/advance was an old one and the treatment of the foreign
          exchange fluctuation especially in case of increase for all the
          previous years was taken to be on the revenue side.                           It is
          necessarily implied that the revenue accepted that the foreign
          exchange amounts amounted to income and proceeded to deal
          with it as such.

          17.       This court is of the opinion that in view of the past
          revenue treatment, the revenue's submissions by the appellant
          are unmerited. No question of law arises.




ITA 247/2016, ITA No. 248/2016, ITA No. 249/2016, ITA No. 318/2016, ITA No. 319/2016   Page 13
                    In view of the above findings, the questions of law are
          answered against the revenue and in favour of the assessee.

                    The appeal is consequently dismissed as unmerited.



                                                                       S. RAVINDRA BHAT, J



                                                                        DEEPA SHARMA, J

          AUGUST 23, 2016
          sapna




ITA 247/2016, ITA No. 248/2016, ITA No. 249/2016, ITA No. 318/2016, ITA No. 319/2016   Page 14

 
 
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