2003 (3) TMI 666 - AT - Income Tax

Summary

Issues Involved:

1. Disallowance of technical know-how fees.
2. Disallowance of engineering services fees.
3. Deduction under section 32AB.
4. Disallowance of foreign education expenses.

Issue-wise Detailed Analysis:

1. Disallowance of Technical Know-How Fees:

The first common issue in both the assessee's appeal for the assessment year 1989-90 and the Revenue's appeal for the assessment year 1990-91 is the disallowance of technical know-how fees paid to Bierrum and Partners Ltd., U.K. The assessee claimed this expenditure as revenue expenditure, but the Assessing Officer (AO) applied Section 35AB of the Income-tax Act, which mandates amortization of such expenses over six years. The AO allowed only 1/6th of the amount claimed, disallowing the remaining 5/6ths. The Commissioner of Income-tax (Appeals) [CIT(A)] upheld this decision for the assessment year 1989-90 but reversed it for the assessment year 1990-91, citing the Supreme Court's decision in CIT v. N.C. Budharaja and Co. [1993] 204 ITR 412, which held that the construction activity does not fall under the definition of manufacturing or processing of goods. The Tribunal concluded that Section 35AB does not apply to the assessee's business of construction, and the entire amount of Rs. 5,24,474 for the assessment year 1989-90 and Rs. 2,82,307 for the assessment year 1990-91 should be allowed as revenue expenditure.

2. Disallowance of Engineering Services Fees:

For the assessment year 1990-91, the assessee also claimed Rs. 8,19,364 towards engineering services fees paid to Bierrum and Partners Ltd., U.K. The AO treated this as capital expenditure and allowed depreciation on it. The CIT(A) upheld this decision, distinguishing it from the lump-sum payment. The Tribunal, however, found that the engineering services fees were also intended to improve the techniques of construction, making the business more efficient and profitable, and thus should be treated as revenue expenditure. The Tribunal allowed the entire amount of Rs. 8,19,364 as revenue expenditure.

3. Deduction Under Section 32AB:

The next common issue in the assessee's appeals for the assessment years 1989-90 and 1990-91 relates to the deduction under Section 32AB. The AO restricted the deduction by excluding income from interest and dividends, treating them as "Income from other sources." The CIT(A) upheld this decision. The Tribunal, however, referred to its earlier decision in the case of Maharashtra Scooters Ltd., where it was held that profits of eligible business should be computed as per the provisions of the Companies Act, which includes income from investments. The Tribunal allowed the assessee's claim for deduction under Section 32AB in full.

4. Disallowance of Foreign Education Expenses:

In the assessment year 1989-90, the assessee claimed Rs. 1,88,934 as expenses for the foreign education of Shri K.P. Vora, who was related to one of the partners. The AO disallowed this expense, citing a lack of evidence of an employer-employee relationship and questioning the necessity of the expense for the business. The CIT(A) upheld this disallowance. The Tribunal was divided on this issue. The Accountant Member allowed the expense, citing the Bombay High Court's decision in Sakal Papers Pvt. Ltd. v. CIT [1978] 114 ITR 256, which allowed similar expenses. However, the Judicial Member disagreed, citing the Bombay High Court's decision in CIT v. Hindustan Hosiery Industries [1994] 209 ITR 383, which disallowed similar expenses. The Third Member agreed with the Judicial Member, finding no nexus between the expenditure and the business of the assessee-firm. Thus, the disallowance of Rs. 1,88,934 was upheld.