2012 (7) TMI 988 - HC - Income Tax

Deduction of expenses u/s 37(4) in respect of guest house expenses - Held that - Such question is squarely covered in favour of the revenue by virtue of the decision of the Apex Court in case of Britannia Industries Ltd. v. Commissioner of Income Tax and another (2005 (10) TMI 30 - SUPREME Court), wherein held that section 37(4) of the Act provides for only specific items of expenditure allowable towards guest house expenses. Assessee was unable to dispute this position. In that view of the matter, we answer the question in the negative, that is, in favour of the revenue and against the assessee

Issues Involved:
1. Deduction of guest house expenses under section 37(4) of the Income Tax Act.
2. Disallowance of expenses under section 37(3) read with rule 6D of the Income Tax Rules.
3. Application of section 35AB for technical know-how fees.

Detailed Analysis:

Issue 1: Deduction of Guest House Expenses
The first issue concerns whether the Tribunal was correct in directing the assessing officer to allow a deduction of Rs. 1,64,512/- under section 37(4) for guest house expenses. The Tribunal had deleted the disallowance confirmed by CIT (Appeals) for expenses incurred on guest house charges, including rent, food, beverages, depreciation on furniture and fixtures, salary of staff, and electricity expenses. The CIT (Appeals) had allowed depreciation on furniture and fixtures but confirmed the disallowance of the remaining expenses.

The revenue argued that this issue is covered by the Supreme Court's decision in Britannia Industries Ltd. v. Commissioner of Income Tax, which held that section 37(4) allows only specific items of expenditure towards guest house expenses. The respondent's counsel could not dispute this position. Consequently, the court answered the question in the negative, favoring the revenue and reversing the Tribunal's decision.

Issue 2: Disallowance of Expenses under Section 37(3) Read with Rule 6D
The second issue pertains to the disallowance of Rs. 1,16,219/- made under section 37(3) read with rule 6D of the Income Tax Rules. The assessee had claimed reimbursement for expenses incurred by employees on conveyance, telephone, trunk call charges, laundry, and typing charges during outstation tours. The Assessing Officer disallowed a portion of this expenditure, which was confirmed by the CIT (Appeals). The Tribunal, however, relying on the Calcutta High Court's decision in Commissioner of Income Tax v. Vidyutt Metallics Ltd., held that such statutory provisions limit only the expenditure on hotel stays and not other business-related expenses.

The revenue's counsel argued that the Tribunal erred in its decision, citing the Delhi High Court's ruling in Bharat Commerce & Industries Ltd. v. Commissioner of Income Tax, which held that rule 6D covers all expenses incurred during travel, including hotel stays. The respondent's counsel maintained that the Tribunal correctly applied the statutory provisions and that the expenses were wholly and exclusively for business purposes.

After considering the arguments, the court found that the Tribunal correctly held that other business expenses, as long as they were wholly and exclusively for business purposes, would not be governed by the limiting provisions of section 37(3) read with rule 6D. The court answered the question in the affirmative, favoring the assessee.

Issue 3: Application of Section 35AB for Technical Know-How Fees
The third issue involves the application of section 35AB for technical know-how fees. The assessee, engaged in manufacturing starch and similar products, paid a total of Rs. 23,23,880/- for technical know-how and service fees, claiming it as revenue expenditure. The Assessing Officer, while agreeing that the expenditure was revenue in nature, held that it fell under section 35AB, requiring amortization over six years. The CIT (Appeals) upheld this view, stating that section 35AB covers such expenditure even if it is revenue in nature, thereby excluding it from section 37(1).

The Tribunal reversed this decision, noting that the assessee did not acquire ownership of the know-how but only a license to use it temporarily. The Tribunal concluded that section 35AB did not apply, and the expenditure could be deducted under section 37(1).

The revenue's counsel argued that section 35AB is broadly worded to include any expenditure for acquiring technical know-how, regardless of ownership. He cited decisions from the Madras and M.P. High Courts supporting this view. The respondent's counsel countered that section 35AB was intended to encourage scientific research and should not limit existing deductions for revenue expenditure.

The court, referring to the Supreme Court's decision in Commissioner of Income Tax v. Swaraj Engines Ltd., held that section 35AB applies only to capital expenditure. Since the expenditure in question was revenue in nature, section 35AB did not apply. The court disagreed with the Madras High Court's view in Commissioner of Income Tax v. Tamil Nadu Chemical Products Ltd. and concluded that section 35AB could not limit deductions under section 37(1) for revenue expenditure.

The court answered the third question in the negative, favoring the assessee, and disposed of the appeal accordingly.

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