2006 (7) TMI 244 - AT - Income Tax

Summary

Issues Involved:
1. Taxability of the amount of Rs. 50,11,297 received by the assessee.
2. Year of taxability of the amount.
3. Deduction for guest house expenditure.
4. Deduction for business promotion expenses.
5. Addition to closing stock on account of unutilized MODVAT credit.
6. Allowance of royalty payment.
7. Deduction of bad debts written off.

Issue-wise Detailed Analysis:

1. Taxability of the amount of Rs. 50,11,297 received by the assessee:
The major issue was whether the amount of Rs. 50,11,297 received by the assessee was assessable as capital gain or income under section 28(iv) of the Income-tax Act, 1961. The assessee argued that the amount was a notional gain due to revaluation of a remittance in Japanese Yen for technical know-how fees and thus credited it to the "Capital Reserve" account. The Assessing Officer (AO) contended that the gain was actual and arose due to the cancellation of the original agreement, thus chargeable as business income under section 28(iv). The CIT(A) held that the amount was a capital receipt arising from the surrender of rights and thus taxable as long-term capital gains. However, the Tribunal concluded that the payment was on capital account and the gain was a capital receipt not chargeable to tax. The Tribunal also noted that the amount received in cash would not fall within the ambit of section 28(iv) as per the Supreme Court's ruling in Mafatlal Gangabhai & Co. (P.) Ltd.

2. Year of taxability of the amount:
The CIT(A) had held that the capital gain was chargeable in the assessment year 1994-95, as the tripartite agreement was approved by the Indian Government in May 1993. The Tribunal, however, determined that the original agreement was effectively cancelled on 3-4-1992, making the year of taxability assessment year 1993-94. Nonetheless, since the amount was deemed a capital receipt not chargeable to tax, the question of the year of taxability became academic.

3. Deduction for guest house expenditure:
The CIT(A) had directed the AO to allow deduction for guest house expenditure amounting to Rs. 48,000. The Tribunal, following the Supreme Court judgment in Britannia Industries Ltd. v. CIT, set aside the CIT(A)'s order on this issue and restored the AO's decision.

4. Deduction for business promotion expenses:
The CIT(A) had directed the AO to allow business promotion expenses of Rs. 3,55,468 in full without restricting them to the limit prescribed under section 37(2A). The Tribunal upheld the CIT(A)'s decision, noting that similar issues had been decided in favor of the assessee in previous years.

5. Addition to closing stock on account of unutilized MODVAT credit:
The CIT(A) had deleted the addition of Rs. 7,83,013 made to the closing stock on account of unutilized MODVAT credit. The Tribunal upheld the CIT(A)'s decision, consistent with its rulings in the assessee's previous assessment years.

6. Allowance of royalty payment:
The CIT(A) allowed the assessee's claim of royalty of Rs. 29,79,784 for the assessment year 1993-94, as the TDS was deposited in December 1992. The Tribunal upheld the CIT(A)'s decision, noting that the proviso to section 40(a)(i) allows such deduction in the subsequent year when the tax is paid.

7. Deduction of bad debts written off:
The CIT(A) allowed the deduction of bad debt of Rs. 3,34,915, despite a substantial part being recovered in the next assessment year. The Tribunal upheld the CIT(A)'s decision, following the Special Bench decision in Dy. CIT v. Oman International Bank SAOG, which held that it is sufficient if the bad debt is written off in the books of account.

Conclusion:
The Tribunal concluded that the amount of Rs. 50,11,297 was a capital receipt not chargeable to tax, setting aside the CIT(A)'s order on this issue. The Tribunal also upheld the CIT(A)'s decisions on the other grounds, except for the guest house expenditure, which was decided against the assessee following the Supreme Court's ruling. The revenue's appeal for assessment year 1993-94 was partly allowed, and the appeal for assessment year 1994-95 was dismissed. The cross-objection filed by the assessee for assessment year 1993-94 was allowed.