2002 (8) TMI 79 - HC - Income Tax

Depreciation - Technical Know-how Fees - Investment Allowance - Bad Debt - (i) Whether on the facts and in the circumstances of the case the Tribunal was right in law in confirming the order of the Commissioner of Income-tax (Appeals) allowing investment allowance on technical know-how fees when as per the provisions of section 35AB technical know-fee is allowable as revenue expenditure in six yearly equal instalments? - (ii) Whether on the facts and in the circumstances of the case the Tribunal was right in law in confirming the order of the Commissioner of Income-tax (Appeals) allowing the assessee s claim in respect of the provision for bad and doubtful debts and interest thereon even though the same was not written off and no debit was made to the profit and loss account and no credit to the debtors account and the provisions of section 36(1)(vii) were not attracted?

Summary

Issues Involved:
1. Interpretation of technical know-how fees for investment allowance.
2. Treatment of provision for bad and doubtful debts as a write-off.

Issue 1: Interpretation of technical know-how fees for investment allowance:

The case involved an appeal concerning the allowance of investment allowance on technical know-how fees. The assessee claimed depreciation and investment allowance for incurring expenditure on technical know-how fees for setting up a new factory. The Assessing Officer initially rejected the claim but granted deduction of 1/6th of the fees under section 35AB. The Commissioner of Income-tax (Appeals) allowed the claim, stating that the expenditure was for setting up the plant and not for business purposes. The Revenue appealed, but the Tribunal upheld the decision. The court referred to the case of Scientific Engineering House P. Ltd. where technical know-how was considered a depreciable asset. Applying this precedent, the court found that the expenditure on technical know-how fees for setting up a plant qualified for depreciation and investment allowance. The court left open the question of applying section 35AB for product improvement, as the assessee did not appeal against its disallowance.

Issue 2: Treatment of provision for bad and doubtful debts as a write-off:

The second issue concerned the treatment of provision for bad and doubtful debts as a write-off. The Assessing Officer disallowed bad debts, stating that the provision made was not equivalent to a write-off. The Commissioner of Income-tax (Appeals) and the Tribunal, following a precedent, held that even a provision for bad debt could be treated as a write-off. The court noted that an amendment to section 36(1)(vii) post the relevant year clarified that a provision for bad debt could be considered a write-off. Referring to the case of Vithaldas H. Dhanjibhai Bardanwala, the court rejected the Department's argument that a provision did not constitute a write-off. The court held in favor of the assessee, stating that the provision for bad and doubtful debts could be treated as a write-off before the amendment came into effect. Consequently, both appeals were dismissed with no order as to costs.

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