2011 (5) TMI 50 - HC - Income Tax

Disallowance - Capital or revenue expenditure - cessation of liability - Held that -the Tribunal returned a finding of fact that there were merely liabilities which had been written back to the profit and loss account only to cut down paper work in the books of account. The Tribunal thus concluded that there was no cessation of liability and hence, revenue was not justified in bringing the said amounts to tax. - findings of tribunal upheld. Regarding capital expenditure on scientific research under Section 35(i)(iv) - tribunal in its order for the assessment year 1982-83 simply followed its own order passed in assessment year 1981-1982 and allowed the deduction - Tribunal should have decided on merits the admissibility of the expenditure in terms of the then prevailing provisions of the Act. - matter remanded back to tribunal. Expenditure on providing food and beverages to employees in a guest house - tribunal decision allowing the deduction not disturbed Capital Expenditure - payment made for acquiring technical know-how from a foreign collaborator to set up a new plant - Tribunal came to the conclusion that 50% of the expenditure incurred by the assessee was on in the nature of capital expenditure while the balance was on revenue account - The matter is remanded to the Tribunal to do the needful in this regard - The appeal is disposed of

Summary

Issues:
1. Taxability of written-off liabilities under Section 41(1) of the Income Tax Act, 1961.
2. Deduction of capital expenditure on scientific research under Section 35(i)(iv) for assets acquired in a previous year.
3. Treatment of expenditure on providing food and beverages to employees in a guest house under Section 37(4) of the Income Tax Act, 1961.
4. Allocation of payments made to a foreign collaborator for technical know-how between capital and revenue expenditure.

Issue 1: Taxability of Written-off Liabilities under Section 41(1):
The High Court examined whether the Tribunal was correct in holding that certain liabilities written back to the profit and loss account were not taxable under Section 41(1) of the Income Tax Act. The Court found that the revenue did not challenge the Tribunal's finding that these liabilities were not ceased, and thus, the taxability of these amounts was not justified.

Issue 2: Deduction of Capital Expenditure on Scientific Research:
The Court analyzed the deduction claimed by the assessee for capital expenditure on scientific research under Section 35(i)(iv) for assets acquired in the previous year. It was noted that the Tribunal allowed the deduction based on its previous decision for the assessment year 1981-82. However, the revenue contended that the deduction should be allowed only in the year the expenditure was incurred, not when the asset was used. The Court remanded the matter to the Tribunal for further examination in light of Section 35(2)(ia) of the IT Act.

Issue 3: Treatment of Expenditure on Food and Beverages:
The Court upheld the Tribunal's decision regarding the expenditure incurred by the assessee on providing food and beverages to employees in a guest house, as it followed the Tribunal's decision in the assessment year 1981-82. The revenue did not challenge the previous decision, leading to the Court maintaining the findings of the Tribunal on this issue.

Issue 4: Allocation of Payments to Foreign Collaborator for Technical Know-How:
Regarding the allocation of payments made to a foreign collaborator for technical know-how between capital and revenue expenditure, the Court found that the Tribunal's ad-hoc apportionment without assistance from the parties was not ideal. Both counsels agreed to remand the issue to the Tribunal for a more realistic allocation of expenses towards capital and revenue, allowing both parties an opportunity to present relevant evidence.

In conclusion, the High Court disposed of the reference with specific directions for each issue, emphasizing the need for a thorough examination and realistic allocation of expenses by the Tribunal in certain instances.