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2009 (10) TMI 639 - AT - Income TaxDisallowance of development expenses - Expenditure on know-how - Assessee claimed both the expenditure as revenue expenditure u/s 37(1) - whether the claim of the assessee is allowable u/s 37(1) or u/s 35AB of the Act - submission of the assessee is that the he paid the payment to M/s. Hawtal Whiting Engineering Company Ltd., UK for improving the ride and handling comforts of its existing 2 wheel drive/4 wheel drive utility vehicles. These expenses are in the nature of development expenses for improving the performance of existing product i.e., utility vehicle - AO rejected the assessee s contention and held that the payments were made for providing technical know-how services by M/s. Hawtal Whiting Engineering Company Ltd., UK, therefore, the expenditure is covered u/s 35AB - CIT(A) confirmed the order of the AO. HELD THAT - If we consider the fundamental concept of section 35AB and section 37(1), we are of the view that any expenditure not being expenditure in the nature of capital expenditure or personal expenditure laid out or expended wholly and exclusively for the purpose of business is allowable expenses in computing income chargeable under the head Business or profession . Since in the case under consideration, the expenditure claimed by the assessee is revenue in nature, therefore, the same is allowable u/s 37(1) of the Act and not u/s 35AB of the Act. The above view is supported by the fact that the Finance (No. 2) Act, 1998 introduced from the assessment year 1999-2000 onwards, the concept of allowance of depreciation on intangible assets like know-how, patent rights, copyrights, etc. As a consequence, sub-section (1) was also amended so as to provide that any expenditure of capital nature incurred on or after 1-4-1998 on the acquisition of know-how used for the purposes of business shall not qualify for deduction under the said section 35AB. Such capital expenditure incurred after 31-3-1998 would be eligible for depreciation allowance. We, therefore, set aside the orders of the revenue authorities and allow the claim of the assessee. Accordingly, ground Nos. 5 and 6 of the assessee are allowed. Disallowance on payment to MSEB - assessee claimed that the payment was made to MSEB for additional power as a non-refundable consumer contribution/service charges and that the property of cable and related accessories was with MSEB - AO held that since the assets were required for the specific use of the assessee at their own site and their own requirement, the expenditure is capital in nature, on which, the AO allowed depreciation at 25 per cent. - CIT(A) confirmed the action of the AO. HELD THAT - In Indian Molasses Co. (P.) Ltd. s case 1970 (8) TMI 9 - SUPREME COURT , the Supreme Court pointed out that the word expenditure is equal to expense and expense is money laid out by calculation and intention. But the idea of spending in the sense of paying out or away money is the primary meaning and it is with this meaning that one is concerned. Expenditure is thus what is paid out or away and is something which is gone irretrievably. The Apex Court in CIT v. Nainital Bank Ltd. 1966 (9) TMI 46 - SUPREME COURT held that in its normal meaning, the expression expenditure denotes spending or paying out or away , i.e., something that goes out of the coffers of the assessee. A mere liability to satisfy an obligation by an assessee is undoubtedly not expenditure ; it is only when he satisfies the obligation by delivery of cash or property or by the settlement of accounts, that there is expenditure. Further, mere payment by itself would not entitle the assessee to deduction of the said expenditure unless the same was proved to be paid for commercial considerations. Therefore, we find that the expenditure incurred is not capital expenditure nor it is expenditure in the nature of personal. On account of these expenditures, there was no addition to the capital assets of the assessee and there is no change in the capital structure of the assessee. The amount is in respect of availing additional power facilities i.e., commercial consideration, which is in the nature of revenue expenditure laid down and expended wholly and exclusively for the purpose of business; therefore, the same is allowable. We accordingly, allow the claim of the assessee. In the result, both the appeals are partly allowed for statistical purposes.
Issues Involved:
1. Disallowance of travelling expenditure under section 37(3) read with rule 6D. 2. Disallowance of expenditure on maintenance of guest house under section 37(4). 3. Disallowance of capital expenditure debited to the profit & loss account. 4. Disallowance of Foreign Currency Convertible Bonds (FCCB) issue expenses. 5. Disallowance of development expenses paid to M/s. Hawtal Whiting & Engineering Company Ltd. 6. Disallowance of expenditure on implementation of software systems. 7. Disallowance of payment to MSEB. 8. Disallowance under section 40A(9) for actual expenditure incurred during the year. 9. Disallowance of depreciation. 10. Disallowance of development expenses paid to M/s. AVL, Austria. 11. Disallowance of Euro Issue expenses under section 35D. 12. Disallowance of hospitality and canteen expenses under section 37(2). 13. Disallowance of payment to different clubs under section 40A(9). 14. Disallowance of provision for warranties. 15. Disallowance of provision for anticipated liability of pending labour demand. 16. Exclusion of sales tax and excise duty from total turnover for computing deduction under section 80HHC. Detailed Analysis: 1. Disallowance of Travelling Expenditure: The issue pertains to the disallowance of Rs. 3,00,000 under section 37(3) read with rule 6D. The assessee computed disallowance based on aggregate trips, whereas the Assessing Officer (AO) estimated it per trip due to lack of detailed working. The Tribunal sustained 50% of the disallowance based on consistency with previous years. 2. Disallowance of Expenditure on Maintenance of Guest House: The AO disallowed Rs. 89,40,389 incurred on guest house maintenance, which the CIT(A) directed to recompute following the decision in Eicher Tractors Ltd. The Tribunal remitted the matter back to the AO for examination in light of decisions in similar cases. 3. Disallowance of Capital Expenditure: The AO disallowed Rs. 11,57,700 debited to the P&L account for amortization of leasehold land premium and legal fees for joint ventures. The Tribunal remitted the matter back to CIT(A) to decide with similar directions given in earlier years. 4. Disallowance of FCCB Issue Expenses: The AO treated FCCB issue expenses as capital expenditure. The Tribunal allowed the claim as revenue expenditure, following the Rajasthan High Court judgment in Secure Meters Ltd., which considered such expenses as revenue in nature. 5. Disallowance of Development Expenses Paid to M/s. Hawtal Whiting & Engineering Company Ltd.: The AO treated Rs. 5,82,15,305 and Rs. 3,72,04,754 paid for technical know-how under section 35AB. The Tribunal allowed the expenses as revenue expenditure under section 37(1), following judgments that such expenses for improving existing products are revenue in nature. 6. Disallowance of Expenditure on Implementation of Software Systems: The AO treated Rs. 10,73,13,458 spent on software systems as capital expenditure. The Tribunal remitted the matter back to the AO to decide in accordance with guidelines laid down in the Special Bench decision in Amway India Enterprises. 7. Disallowance of Payment to MSEB: The AO treated Rs. 1,40,80,000 paid to MSEB for additional power as capital expenditure. The Tribunal allowed the claim as revenue expenditure, considering it a commercial consideration for availing additional power facilities. 8. Disallowance under Section 40A(9) for Actual Expenditure Incurred During the Year: The AO disallowed Rs. 10,64,258 under section 40A(9). The Tribunal remitted the matter back to the AO to examine if the expenditure falls within exceptions specified under section 40A(9). 9. Disallowance of Depreciation: The AO adjusted sale proceeds against the block of assets under section 50, affecting depreciation calculation. The Tribunal remitted the matter back to the AO to decide based on the final outcome of earlier years. 10. Disallowance of Development Expenses Paid to M/s. AVL, Austria: The AO allowed only 1/6th of Rs. 2,02,41,000 under section 35AB. The Tribunal remitted the matter back to the AO to decide based on detailed examination of the nature of expenses. 11. Disallowance of Euro Issue Expenses under Section 35D: The CIT(A) disallowed the claim based on earlier years' decisions. The Tribunal remitted the matter back to the AO to decide based on the final outcome of assessment year 1994-95. 12. Disallowance of Hospitality and Canteen Expenses under Section 37(2): The AO disallowed various hospitality and canteen expenses. The Tribunal remitted the matter back to the AO for recomputation in accordance with previous ITAT orders and decisions. 13. Disallowance of Payment to Different Clubs under Section 40A(9): The AO treated Rs. 41,13,258 paid for club memberships as capital expenditure. The Tribunal confirmed the CIT(A)'s deletion of the disallowance, following the Bombay High Court judgment in Otis Elevators Co. (India) Ltd. 14. Disallowance of Provision for Warranties: The AO disallowed Rs. 3,06,97,975 as contingent liability. The Tribunal confirmed the CIT(A)'s allowance, following previous ITAT orders in the assessee's own case. 15. Disallowance of Provision for Anticipated Liability of Pending Labour Demand: The AO disallowed Rs. 20,16,84,000 as unascertained liability. The Tribunal confirmed the CIT(A)'s allowance, following previous ITAT orders in the assessee's own case. 16. Exclusion of Sales Tax and Excise Duty from Total Turnover for Computing Deduction under Section 80HHC: The Tribunal directed the exclusion of sales tax and excise duty from total turnover for computing deduction under section 80HHC, following Supreme Court decisions in Lakshmi Machine Works and Catapharma (India) (P.) Ltd. Conclusion: Both appeals were partly allowed for statistical purposes, with several matters remitted back to the AO for recomputation or further examination based on previous ITAT decisions and higher court judgments.
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