Ita/410/2012 Of The Commissioner Of Income Tax v. M/S Ge Medical Systems (I) (P) Ltd

IN THE HIGH COURT OF KARNATAKA AT BENGALURUDATED THIS THE 18 DAY OF NOVEMBER 2070. PRESENT| THE HON’BLE MR. JUSTICE ALOK ARADHE AND| THE HON’BLE MR. JUSTICE H.T.NARENDRA PRASADLT.A. NCO.410 OF 2012 BETWEEN: 1.|THE COMMISSIONER OF INCOME-TA® C.R. BUILDING, QUEENS ROAD BANGALORE. 2.|THE DEPUTY COMMISSIONER OF INCOME-TAX. CIRCLE-1(1), PUNE. 3.THE DY. COMMISSIONER OF INCOME-TAX CIRCLE-11(3), BANGALORE. (BY SRI. K.V. ARAVIND, ADV.,) .., APPELLANTS~ AND" M/S. GE MEDICAL SYSTEMS (I) (P) LTD., NO.122, (PART-1), EPIP.WHITE FIELD ROAD, BANGALORE-560066. (BY SRI. PERCY PARDIWALA, SR. COUNSEL FORSRI. PAI DHUNGAL ANKUR, ADV.) ~. RESPONDENT THIS ITA IS FILED UNDER SECTION 260-A OF I.T. ACT,|1961L ARISING OUT OF ORDER DATED 13.0/7.20L2 PASSED IN ITNO. 769/BANG/2010 FOR THE ASSESSMENT YEAR 2000-01,PRAYING TQ: (I) FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW.STATED THEREIN.» (11) ALLOW THE APPEAL AND SET ASIDE THE ORDERS.PASSED BY THE ITAT, BANGALORE IN ITA NO.769/BANG/2010DATED 13-0O0/7-20O0L2 CONFIRMING THE ORDER OF THE APPELCOMMISSIONER AND CONFIRM THE ORDER PASSED BY THEDEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-1(1), PUNE, IN.THE INTEREST OF JUSTICE AND EQUITY. THIS|LIACOMING|ONFOR.HEARING,THISALOK ARADHE J.,DELIVERED THE FOLLOWING: | DAY, | JUDGMENT This appeal under Section 260A of the Income TaxAct, 1961 (nereinafter referred to as the Act for short)nas been preferred by the revenue. The subject matterof the appeal pertains to the Assessment year 2000-01..The appeal was admitted by a bench of this Court videorder dated 21.02.2013 on the following substantial|questions of law:| (1)Wnetner the Appellate Authoritieswere correct in holaing tnat the assessee Is entitled to claim deduction in respect of.expenditure incurred toward payment of.voluntary retirement compensation of the|employeestakenOVeTfromM/s.Elpro-International when the same was not [Incurred solely and exclusively for the purpose of.bDUSINeESS (11)Whether Appellate Authorities werecorrect in failing to take into consideration|that the business of M/s. Elpro Internationalcontinue and taking over of the employees|eligible for voluntary retirement was a deviceto avoid tax and recorded a perverse finding? 2 |Facts leading to filing of this appeal brieflystated are that the assessee is in the business of.manufacture and|marketingOf X-Taymedicalequipments and other allied activities. The assessee filedits return of Income for the Assessment Year 2000-01.In tne profit and loss account, the assessee had writtenoff an amount of Rs.7,41,13,368/- being compensation.paid towards voluntary retirement scheme (hereinafterreferred to as the scheme for short). The Assessing|Officer by an order dated 24.03.2005 inter alia held thatassessee was a joint venture company of M/s G.E.PacificSingapore and M/s. Elpro International#whicn Is ans Indian company. It was further held that 51% of shares.in the joint venture company were held by M/sG.E.Pacific Singapore, whereas, 49% of the shares were|held by M/s. Elpro International and as per theagreement, the assessee took over the employees ofM/s. Elpro International and thereafter, immediatelyintroduced the scheme and huge amount was paid.towards retirement benefits and the employees taken.over by the assessee never rendered services to theassessee. The Assessing Officer, therefore, disallowedthe entire compensation paid towards the scheme of.Rs.7,41,13,368/- as the same was not incurred whollyand exclusively for the purpose of business of theaSSesSsSsee 3The assessee thereupon filed an appealbefore the Commissioner of Income Tax (Appeals) who.by an order dated 18.02.2010 allowed the appealpreferred by the assessee and held that the assessee isentitled to deduction in respect of payments made to. 3The assessee thereupon filed an appealbefore the Commissioner of Income Tax (Appeals) who.by an order dated 18.02.2010 allowed the appealpreferred by the assessee and held that the assessee isentitled to deduction in respect of payments made to. the employees under the scheme. Thereupon therevenue approached the Income Tax Appellate Tribunal(hereinafter referred to as ‘the tribunal’ for short) byfiling an appeal. The tribunal by an order dated13.07.2012 by placing reliance on its earlier orderupheld the order passed by the Commissioner of IncomeTax (Appeals). In the aforesaid factual background, thisappeal has been filed. 4Learned counsel for the revenue submittedthat the tribunal ought to have appreciated that thetransaction between the assessee and M/s. ElproInternational was only purchase of shares and therefore,expenditure incurred by the assessee under the schemewas not in tne course of Dusiness of tne assessee. It Is.further submitted that liability of payment of the amount.under the scheme was of M/s. Elpro International, whichamounts to third party liability in the nature of personalexpenditure. It is also argued that the scneme wasfloated in view of services rendered by the employees to M/s. Elpro International and not to the assessee andtherefore, the expenditure is not the liability of theassessee and was not incurred for the purpose ofbusiness of the assessee. It is urged that taking over of.the employees of M/s. Elpro International was notrequired for the assessee and the same was anarrangement to discharge the liability of M/s. Elpro)International. It is also urged that expenditure incurredunder the scheme was not incurred for the purposes of.business of the assessee so as to constitute expenditureunder Section 37(1) of the Act and the transactionbetween the assessee and the M/s. Elpro Internationalwas not transfer of the entire business. It is contendedthat liability under the scheme is not attached to theShares but to M/s. Elpro International and the aforesaidcompany continued its business. Therefore, expenditureincurred under the scheme is of M/s. Elpro International.It is also pointed out that judgments relied on behalf ofthe assessee and referred to by the tribunal deal with. the issue viz., whether the expenditure incurred underthe scheme is capital or revenue in nature andtherefore, is of no assistance to the assessee.5On the other hand, learned Senior counsel forthe assessee submitted that in case of the assessee|itself, the Pune Bench of Income Tax Appellate Tribunalby an order dated 22.06.2007, had answered the issues.involved in this appeal in favour of the assessee and.againsttheaforesaiddecision,therevenuehacpreferred an appeal before the High Court of Bombay|viz., I.T.A.No.904/2009, which has been dismissed by.the High Court of Bombay vide order dated 16.08.2018for want of prosecution. It is urged that an inference can.be drawn that the revenue has accepted the view taken.by the Pune Bench of the tribunal in case of theassessee. Learned Senior counsel for the assessee has|also invited our attention to the facts mentioned in/paragraphs 2.1, 3, 4 and 5 of the order passed by thePune Bench of tne tribunal. It is further submitted tnat. after the introduction of the scheme, 153 employees had.opted for the scheme, out of which 119 employees were.the employees of erstwhile M/s. Elpro International and.rest of the employees were original employees of assessee. It is pointed out that the scheme was.formulated for all the original employees and the|compensation, which was paid under the scheme was.not only for past services but for remaining years of|service witn the assessee and tnerefore, the same was.rightly treated to the revenue expenditure incurred on|the ground of commercial expediency and was incurred|wholly and exclusively for the purposes of business ofthe company. It is also urged that expenses under thescheme were incurred by the company to save tneexpenses and were incurred by the assessee on tneground of commercial expediency in order to facilitate|carrying on the business and the same was allowable as expenditure under Section 37(1) of the Act. In supportof aforesaid submissions, reliance has been placed on. the decisions in'SENATRAM DOONGARMALL VS,COMMISSIONER OF INCOME-TAX, (1961) 42 ITR392 (SC), ‘COMMISSIONER OF INCOME-TAX VS.BHOR INDUSTRIES LTD.', (2003) 128 TAXMAN 626.(BOMBAY), ‘EMPLOYERS IN RELATION TO THE.MANAGMEENTOFINDI ANNCABLECO.VS,WORKMEN’, (1974) 3 SCC 11, ‘SASSOON J. DAVID|AND CO. P. LTD. VS. COMMISSIONER OF INCOME-TAX, BOMBAY, 118 ITR 261 (SC) COMMISSIONEROF INCOME-TAX, CENTRAL CIRCLE VS. NOVELLSOFTWARE DEVELOPMENT (1) (P.) LTD.', (2013)35TAXMANN.COM|414(KARNATAKA),‘COMMISSIONER OF INCOME-TAX AND ANOTHERVS. INFOSYS TECHNOLOGIES LTD. (2012) 349 ITR|606 (KARN), THE COMMISSIONER OF INCOME.TAX,BANGALORE-]1VS.M/SG.E.MEDICALSYSTEMS INDIA PVT. LTD., ITA NO.904/2009and|‘THE G.E.MEDICAL SYSTEMS INDIA (P) LTD. PUNE: VS. DCIT, CIR 1(1), PUNE, ITA NO.1073 &)1074/PN/2003. 6.|We have considered the submissions made.by learned counsel for the parties and have perused therecord. Section 37(1) of the Act provides that anyexpenditure not being expenditure of the nature|described in Sections 30 to 36 and not being in the|nature of capital expenditure or personal expenses ofthe assessee, laid out or expended wholly andexclusively for the purposes of the business orprofession shall be allowed in computing the income|chargeable under the head “Profits and gains of business.Or profession.”M/s G.E.Pacific was incorporated inSingapore and another company viz., M/s. Elpro.International, in India. The aforesaid two companies.entered into a joint venture agreement on 09.12.1993,|as a result of which the assessee came into existence|with an object of carrying on thebusiness ofmanufacturing and distribution of x-ray equipments. In. the aforesaid joint venture company, M/s G.E.Pacific|Singapore and M/s. Elpro International held shares in.the ratio of 51% and 49% respectively. The agreement|dated 09.03.1993 contained a clause that existing|business of the Indian company viz., M/s. Elpro.International would be taken over by the assessee forcertain monetary consideration. A share purchaseagreement was executed on 28.05.1997 and under the|aforesaid agreement, M/s G.E.Pacific Singapore decidedto purchase 49% shares of the assessee for aconsideration of 63,00,00 U.S.Dollars. In the aforesaid.agreement it was also provided that the assessee|company shall take over certain assets of M/s. Elpro.International and 184 employeesof tne aforesaid|company shall also be taken over by the assessee. A.separate agreement termed as Equipments Sales and|Employees Absorption Agreement. The agreement was|alsoexecuted)betweenaSS@SSCECandM/s. ElproInternational. This agreement is part of share purcnase agreement. Under the said agreement, the employees.were given a choice of continuity of service and it wasalso provided that their service shall be considered from.the date they have joined M/s. Elpro International.|Thereafter, in July 1997, the assessee formulated thescheme. Under the scheme, a sum of Rs.4,33,6/7,658/-was paid as retirement benefit to the employees who.availed benefit of the scheme. Under the scheme,compensation was paid not only for past services butalso for remaining years of service with the company. |The employees had also filed a complaint against the|assessee under the Labour Laws and therefore, theassessee had to offer a scheme to avoid any kind offuture problems. JIt is pertinent to mention here that thescheme.was admittedly sanctioned by theChief.Commissioner for the exemption under Section 10(10C).of the Act and it was a contractual! obligation and was anascertained liability. It is also pertinent to mention here. that the genuineness of the scheme was not doubted by any of the authorities, rather the same was approved byChief Commissioner of Income Tax. The Commissioner|of Income Tax (Appeals) as well as the tribunal held thatpayment of compensation under the scheme was to.induce workmen to retire prematurely and the decision.of the assessee was purely on the ground of commercialexpediency to curtail the expenditure in future and tofacilitate for carrying on the business. Thus, theexpenditure incurred under the scheme has been treatedas revenue expenditure. It is pertinent to mention thatSupreme Court In"EMPLOYERS IN RELATION TO THEMANAGEMENT OF INDIAN CABLE CO.Supra Nas also.held that expenditure incurred by the company under.the scheme has to be treated as an item of expenditureincurred by the company on the ground of commercial.expediency and the same is allowable under Section.3/7(1) of the Act. In view of aforesaid enunciation of lawby the Supreme Court, the expenses incurred by the assessee under the scheme have been incurred solely.and exclusively for the purposes of business and are.entitled for deduction under Section 37(1) of the Act. — 8.Similar view has been taken by the PuneBench of the Tribunal in the case of the assessee and.against the aforesaid decision, the revenue has filed an|appeal, which was dismissed for want of prosecution on-16.08.2018. Therefore, an inference can safely be|drawn that the revenue has accepted the decision of thePune Bench of Tribunal taken in the case of assesseeitself. In view of preceding analysis, tne substantial|questions of law framed by a bench of this court areanswered against the revenue and in favour of tneaSSesSsSsee ������������������������������������������������������������������������������������������������ ����������� ��� �����������