2007 (11) TMI 446 - AT - Income Tax

Issues Involved:
1. Allowance for employees' participation in entertainment expenditure.
2. Nature of technical know-how fees (capital or revenue).
3. Exclusion of commission, excise duty, and molasses storage fund from total turnover for section 80HHC deduction.
4. Set-off of unabsorbed depreciation from the amalgamated company.
5. Deduction of issue expenses on non-convertible debentures.
6. Deduction of payments under the Voluntary Retirement Scheme (VRS).
7. Inclusion of molasses storage fund in business income.

Issue-wise Detailed Analysis:

1. Allowance for Employees' Participation in Entertainment Expenditure:
The Tribunal upheld the orders of the departmental authorities, restricting the allowance to 25% of the total expenditure, following the precedent set in the earlier assessment year 1994-95.

2. Nature of Technical Know-How Fees:
The Tribunal examined the technical collaboration agreement between the assessee and the Austrian company, Plansee Tizit. The agreement granted the assessee an "exclusive licence" to use the technical know-how and Industrial Property Rights (IPRs) for manufacturing hard metal tools. The Tribunal concluded that the assessee only obtained the right to use the technical know-how without acquiring ownership rights. The payment was for the use of know-how during the agreement period, and no enduring benefit was obtained. Therefore, the technical know-how fees were considered revenue expenditure, and the disallowance of Rs. 2,71,55,312 was deleted.

3. Exclusion of Commission, Excise Duty, and Molasses Storage Fund from Total Turnover for Section 80HHC Deduction:
- Commission: The Tribunal found no reason to exclude the commission from the total turnover.
- Excise Duty: Following the Supreme Court judgment in CIT v. Lakshmi Machine Works, the Tribunal directed the Assessing Officer not to include excise duty in the total turnover.
- Molasses Storage Fund: The Tribunal referred to the Madras High Court's judgment in CIT v. Salem Co-operative Sugar Mills Ltd. and concluded that the amount collected for the molasses storage fund was diverted by an overriding title and did not form part of the assessee's income or turnover. Therefore, it was directed to be excluded from the total turnover.

4. Set-Off of Unabsorbed Depreciation from the Amalgamated Company:
The Tribunal noted that the assessee did not furnish the required certificate from the specified authority along with the return of income for the assessment year 1995-96, as mandated by section 72A(2) of the Income-tax Act. Consequently, the set-off of unabsorbed depreciation of Rs. 1,26,79,125 was not allowed, and the ground was dismissed.

5. Deduction of Issue Expenses on Non-Convertible Debentures:
The Tribunal upheld the CIT (Appeals) decision, allowing the deduction of Rs. 2,13,71,410 incurred on non-convertible debentures. The Tribunal relied on the Supreme Court judgment in India Cements Ltd. v. CIT, which held that expenses incurred for borrowing through debentures are allowable as revenue expenditure. The Tribunal also noted that the manner of accounting entries does not affect the allowability of the claim.

6. Deduction of Payments under the Voluntary Retirement Scheme (VRS):
The Tribunal upheld the CIT (Appeals) decision, allowing the deduction of Rs. 2,75,32,254 paid under the VRS. The Tribunal referred to the Supreme Court judgment in Sassoon J. David & Co. Ltd. v. CIT, which held that payments made for retrenchment or termination of service are allowable business expenditure. The Tribunal emphasized that the payment under VRS was to save future expenses and did not result in an enduring benefit.

7. Inclusion of Molasses Storage Fund in Business Income:
The Tribunal affirmed the CIT (Appeals) decision, holding that the molasses storage fund collected under the U.P. Sheera Niyantran Act, 1964, was diverted by an overriding title and did not form part of the assessee's business income. The ground was dismissed.

Conclusion:
The assessee's appeal was partly allowed, and the department's appeal was dismissed. The Tribunal provided a detailed analysis of each issue, applying relevant legal principles and precedents to reach its conclusions.

← Previous Next →