2003 (11) TMI 277 - AT - Income Tax

Interpretation of Statutes - Applicability of s. 35AB - disallowance of drawings and design expenses - Whether the expenditure resulted in acquiring advantage of any asset of enduring benefit to the assessee - HELD THAT - The assessee had not acquired any advantage in capital field. The advantage consisted merely of facilitating the assessee's manufacturing and trading operation to be carried on more profitably while leaving other capital untouched. Moreover, every enduring advantage is not of capital nature. The Supreme Court's decision in Empire Jute Co. Ltd. vs. CIT 1980 (5) TMI 1 - SUPREME COURT makes this position very clear. Again in these days of fast changing world of technology the advantage under the agreement could not be considered as advantage of enduring nature. In view of the above discussions it could be said that the expenditure in question was a revenue expenditure. As regards the applicability of s. 35AB , no doubt, the use of the words in lump sum consideration for acquiring know-how and the absence of words like expenditure of a capital nature in the provisions which have been used in ss. 35A and 35ABB give prima facie impression that the view of the JM, i.e., that s. 35AB is applicable to both capital or revenue expenditure, was correct but the issue is not that simple. The provisions of s. 35AB have to be understood in the light of the scheme of the IT Act and other relevant provisions. No non obstance clause like notwithstanding contrary contained in any other provisions of the Act or notwithstanding anything contained in sub-s. (1) of s. 37 has been used in s. 35AB which would mean that it does not override sub-s. (1) of s. 37, under which the revenue expenditure is allowable as deduction in full. Sec. 35AB is an enabling as well as incentive section, which allows deduction of lump sum payment for technical know-how in six equal instalments, i.e., 1/6th for six years. How can it be said to be an enabling and incentive section, if it brings within its mischief a revenue expenditure also, which is allowable in full in the relevant year u/s 37(1) of the Act. Therefore, the interpretation that s. 35AB is applicable both to capital expenditure and revenue expenditure will defeat the very purpose of s. 35AB and the legislative intent of introducing this section as vividly brought out in Finance Minister's speech and memorandum explaining the said provision. Sec. 35AB is an enabling section and not disabling or prohibitive one and, therefore, it should be held to be applicable to that consideration paid for acquiring technical know-how, which would otherwise be disallowable as being on capital account. On a careful consideration of the entire relevant facts and the principles of law emerging from the above referred decisions, we are of the considered opinion that deduction in respect of expenditure amounting to Rs. 65,44,703 should be allowed as revenue expenditure in the year under consideration, viz., in asst. yr. 1992-93 on the condition that the AO should simultaneously withdraw deduction of 1/6th amount of the aforesaid expenditure allowed to the assessee in asst. yr. 1992-93 and in five subsequent years. In case the withdrawal of such deduction allowed u/s 35AB in the year under consideration or in any of the five subsequent years is objected to by the assessee or is legally found to be not possible, the deduction as revenue expenditure in the year under consideration will not be allowed. This is to ensure that the assessee does not get double deduction in respect of the same amount in more than one year. In the result, both the appeals are treated as allowed for statistical purpose.

Issues Involved:
1. Disallowance of expenditure on increase in authorized share capital.
2. Set off of interest received from deposits against public issue expenses or interest paid on bridge loan.
3. Amortization of public issue expenditure u/s 35D.
4. Disallowance of penal interest on sales-tax.
5. Claim of preliminary expenses u/s 35D.
6. Allowance of sales promotion expenses.
7. Treatment of drawings and design expenses as revenue expenditure u/s 37 or u/s 35AB.

Summary:

1. Disallowance of Expenditure on Increase in Authorized Share Capital:
The assessee's appeal regarding the disallowance of Rs. 1,35,000 incurred for increasing authorized share capital was rejected. The issue was covered against the assessee by the Supreme Court judgments in *Punjab State Industrial Development Corpn. Ltd. vs. CIT* and *Brooke Bond India Ltd. vs. CIT*.

2. Set Off of Interest Received from Deposits:
The assessee contended that interest of Rs. 5,24,596 received from deposits should be set off against public issue expenses or interest paid on bridge loan. The CIT(A) rejected this, citing lack of nexus between the activities. The Tribunal set aside the orders of the CIT(A) and AO, directing the AO to reassess the issue considering relevant judgments and providing reasonable opportunity to the assessee.

3. Amortization of Public Issue Expenditure u/s 35D:
The assessee claimed amortization of public issue expenses totaling Rs. 40,75,476.83, but the AO allowed only Rs. 28,43,507. The CIT(A) granted relief for Rs. 3,00,000 incurred for postage but confirmed the disallowance of Rs. 9,31,969. The Tribunal directed the AO to consider the entire amount for amortization u/s 35D, following the judgment in *CIT vs. Shree Synthetics Ltd.*

4. Disallowance of Penal Interest on Sales-Tax:
The ground regarding disallowance of penal interest on sales-tax amounting to Rs. 2,75,610 was not pressed by the assessee and was thus rejected.

5. Claim of Preliminary Expenses u/s 35D:
The CIT(A) confirmed the AO's action of excluding debenture application money from the computation of capital employed for determining the ceiling/deduction u/s 35D. The Tribunal, however, accepted the assessee's contention that debenture application money should be included for computing total capital employed.

6. Allowance of Sales Promotion Expenses:
The CIT(A) held that sales promotion expenses of Rs. 34,82,241, though of revenue nature, should be spread over five years as per the assessee's accounting practice. The Tribunal upheld this decision, referencing the Supreme Court judgment in *Madras Industrial Investment Corpn. Ltd. vs. CIT*.

7. Treatment of Drawings and Design Expenses:
The AO treated drawings and design expenses of Rs. 65,44,703 as capital expenditure, allowing only 1/6th u/s 35AB. The CIT(A) confirmed this but directed the AO to allow 1/6th of the total expenditure. The Tribunal, however, allowed the entire amount as revenue expenditure for the year under consideration, provided the AO withdraws the 1/6th deduction allowed in subsequent years to prevent double deduction.

Conclusion:
Both appeals were treated as allowed for statistical purposes, with directions for reassessment and consideration of relevant judgments and provisions of law.

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