2008 (2) TMI 411 - HC - Income Tax

Payment related to advice on business strategy marketing and sales planning possibilities of joint venture and acquisition etc. etc. the assessee has already commenced its business and therefore the first part of section 35D of the Act would not be applicable the assessee has already commenced its business and therefore the first part of section 35D of the Act would not be applicable - the assessee does not have any industrial undertaking and therefore the second part of section 35D would also not be applicable - the expenses incurred towards consultancy charges are for the purposes of carrying out the existing business more efficiently. - Regarding the applicability of section 43A of the Act with regard to additional liability incurred on account of fluctuations in the foreign exchange rate - held that the additional liability was for the purpose of the business of the assessee and not in relation to a capital expense. On this basis the Tribunal allowed a deduction of the enhanced liability of the assessee. Revenue appeal dismissed.

Summary

Issues:
1. Applicability of section 35D of the Income-tax Act, 1961 on consultancy charges paid to Pradeep Pant.
2. Applicability of section 43A of the Income-tax Act on additional liability due to fluctuations in foreign exchange rates.

Issue 1: Applicability of section 35D of the Income-tax Act, 1961 on consultancy charges paid to Pradeep Pant:

The first issue raised in the judgment pertains to the payment of consultancy charges amounting to Rs. 8,80,500 to Pradeep Pant by the assessee. The Tribunal noted an agreement dated January 10, 1995, between the assessee and Pradeep Pant, focusing on business strategy, marketing, sales planning, and joint venture possibilities. The Tribunal observed that the assessee, involved in the business of the Gillette group, primarily provided advisory services without engaging in manufacturing or industrial activities. The key question was whether these consultancy charges fell under the purview of section 35D of the Income-tax Act, 1961. The Tribunal concluded that since the assessee had already commenced its business and did not operate an industrial undertaking, the provisions of section 35D were not applicable. The expenses towards consultancy were deemed essential for enhancing the existing business efficiency, leading to the Tribunal's decision being upheld without any error found.

Issue 2: Applicability of section 43A of the Income-tax Act on additional liability due to fluctuations in foreign exchange rates:

The second issue revolved around the applicability of section 43A of the Income-tax Act concerning the additional liability incurred due to fluctuations in foreign exchange rates. The Tribunal determined that the increased liability was directly linked to the business operations of the assessee and did not constitute a capital expense. Consequently, the Tribunal allowed a deduction for the enhanced liability. This decision was based on factual findings, which were deemed sound without any evident flaw. The judgment referenced a similar stance taken in a previous case, CIT v. Woodward Governor India P. Ltd. [2007] 294 ITR 451, to support the conclusion. Additionally, the court highlighted its reliance on the same precedent in a prior case involving the same assessee, further reinforcing the validity of the decision. Ultimately, the court found no substantial question of law warranting consideration, leading to the dismissal of the appeal.

In conclusion, the judgment addressed the issues concerning the applicability of sections 35D and 43A of the Income-tax Act, 1961, providing detailed analyses and referencing relevant legal precedents to support the decisions made.