2006 (7) TMI 258 - AT - Income Tax

Power Of the Appellate Assistant Commissioner - disallowance of technical know-how fee and royalty payment - expenses related to testing and research of car (TRC) - Nature of expenditure - capital or revenue - HELD THAT - The ld. CIT(A) has not recorded any finding on the issue raised before him as to whether the impugned expenditure was capital in nature. However, he has held that the impugned payments represented diversion of profits to HMCL. It is clear from the approval letters issued by the Ministry of Industries and Reserve Bank of India. These letters have already been referred to while discussing the facts of the case and submissions of both the parties. We also do not find any merit in the submissions of the ld. CIT(DR) that had these approval letters been placed before the CIT(A), the CIT(A) would have not recorded in the impugned order that increase in equity shareholding meant flouting the conditions imposed by the Government of India while granting approval to the proposal of joint venture. We find that the increase in shareholding has been duly brought to the knowledge of the CIT(A) and the same is also noted on page 22 of the impugned order for the assessment year 2001-02, and page 24 of the impugned order for the assessment year 2002-03. Thus, here also, the assessee has not violated any conditions laid down by the Government of India while according approval. In case, the tax was not deducted at source or the same was not paid, the revenue was free to take appropriate action under the relevant sections of the Act. However, there was due compliance on these conditions by the assessee. Therefore, the revenue did not feel any need to take such action against the assessee. Now once the Government had accorded approval after due consideration, it is not for the revenue to sit in judgment over such decisions. Such course of action by the revenue authorities would only discourage the foreign investments which are badly needed for the overall economic development of the country. Therefore, the approval granted by one wing of the Government i.e., Ministry of Industry and RBI, cannot be treated lightly. Thus, taking into account these facts, we are of the considered opinion that the ld. CIT(A) was not justified in holding that TCA agreement was void because of increased shareholding of HMCL and foreign exchange had exercised any undue influence. Thus, we are of the considered opinion that the ld. CIT(A) was not justified in treating the payment of lump sum technical fee and royalty as diversion of profit to HMCL, Japan. Accordingly, we set aside the orders of the CIT(A) and allow this ground of appeal of the assessee for both the assessment years. Expenses incurred on payment to TRC - Considering the fact that the nature of expenses incurred by the assessee is revenue and the TRC looks after customers care for improvement and change with a view to cut the repetitive cost it cannot be said that the assessee has derived any benefit of enduring in nature. It also does not result in creation of new assets or advantage in the capital field. We are, therefore, of the opinion that the ld. CIT(A) was not justified in treating the impugned expenditure as capital in nature. The factum that assessee has incurred such expenditure for the purpose of assessee's business is not in doubt. Accordingly, we set aside the orders of the CIT(A) and allow the deduction of the impugned expenditure as revenue in nature. Since we have already allowed such expenditure as revenue in nature, the ground relating to the claim of depreciation has become redundant. Therefore, the same is dismissed as such. Disallowance - expenditure incurred in connection with the launch of new model of car manufactured - There is no doubt about the fact that the assessee is already engaged in the business of manufacture of cars and the production had commenced about three years before. The new model of the car relates to the same line of business which the assessee has been carrying on. The assessee has not set up a separate and independent unit to manufacture new model of the car. From the details of the expenses given, it is clear that the expenses related to travelling, training seminar and advertisement, technical guidance fee etc. of the on going business. It is common knowledge and there is a cut through competition in the automobile market and the assessee is required to bring new models in the market in order to retain/capture market. Therefore, the expenditure incurred by the assessee in respect of on going business is a revenue expenditure. Thus, we are of the considered opinion that the ld. CIT(A) was not justified in sustaining the disallowance of the impugned expenditure. Accordingly, we set aside the order of the CIT(A) and direct the Assessing Officer to allow deduction of the same. This ground of appeal is allowed. Custom duty - No doubt from the facts discussed above, it is obvious that the assessee had made the payment of the amount on 31-3-1999 as an advance and had claimed deduction for the assessment year 1999-2000. The assessee's appeal for the assessment year 1999-2000 is pending with the Tribunal. In case, the matter is decided by the Tribunal in favour of the assessee by taking notice of the subsequent events that the liability had become final, the assessee would not be entitled to claim deduction for the same in the assessment year under consideration. However, if the disallowance made is upheld by the Tribunal for the reason that the amount paid was only an advance and was not otherwise payable and hence not allowable u/s 43B, the assessee would be entitled to claim deduction in the assessment year under reference because the liability had become final in the assessment year under reference and the advance so paid would be adjusted in the assessment year under reference. Thus, we set aside the order of the CIT(A) and direct the Assessing Officer to allow the claim of the assessee only if the said claim is not allowed for the assessment year 1999-2000. This ground of appeal is treated as allowed for statistical purposes. Provision for warranty - The assessee has been following the same method of accounting and has been making provisions for the same on the basis of actual expenses incurred in the past. It is a fact that in the past such expenses have been allowed by the revenue. Even such claim of the assessee was allowed for the assessment year 2001-02. This is not the case of the revenue that the provisions made far exceeded the actual expenses incurred. In the case of Bharat Earth Movers v. CIT 2000 (8) TMI 4 - SUPREME COURT , the Hon'ble Supreme Court has considered the general principles regarding allowance of business expenditure and the difference between the accrued and contingent liabilities. Thus, the liability was incurred on the date when sales were made. Therefore, this was ascertained and accrued liability of the assessee and accordingly, the same was allowable. We, therefore, set aside the order of the CIT(A) and delete the impugned disallowance. This ground of appeal is allowed. Sales promotion expenses - Considering the fact that the assessee claimed to have made provisions only in respect of expenses already incurred up to 31-3-2002 and in the immediately succeeding assessment year, the bills received indicated expenses incurred of Rs. 2,70,23,000, we are of the opinion that the assessee is entitled to deduction of ascertained liability to the extent of Rs. 2,70,23,000 and not Rs. 2,96,50,000. Therefore, we set aside the order of the CIT(A) and direct the Assessing Officer to allow deduction of expenses of Rs. 2,70,23,000. This ground of appeal is partly allowed. Commission payment - No finding has been recorded by the authorities below that the commission so paid by the assessee was either excessive or unreasonable. Therefore, commission so paid is for promotion of assessee's business and for making exports of its parts and cars outside the country. Therefore, such expenditure was incurred wholly and exclusively for the purpose of business. While dealing with the first two grounds of appeal i.e., lump sum technical fee and royalty payment, we have already rejected the plea of the revenue that payments made to HMCL represented diversion of profit. The same finding would equally hold good to the present issue. Thus, we are of the considered opinion that the impugned expenditure was incurred wholly and exclusively for the purpose of its business for acquiring rights outside the country to export cars/components. Therefore, the ld. CIT(A) was not justified in sustaining the impugned disallowance. The order of the CIT(A) is set aside and the Assessing Officer is directed to allow deduction of the same. This ground of appeal is allowed. Excise Duty refund - The assessee has claimed refund of excise duty on behalf of others and on receipt the same has been passed down to the customers, no income accrues to the assessee and the claim of the assessee deserves to be allowed. However, considering the fact that these details were not furnished before the authorities below and the order of the CIT(A) has been set aside in regard to first-two grounds of appeal, we consider it fair and appropriate also to set aside the order of the CIT(A) on this point and restore the same to his file with a direction to redecide the same as per law and after allowing reasonable opportunity to both the parties. We order accordingly. This ground of appeal is treated as allowed for statistical purposes. In the result, both the appeals of the assessee are partly allowed.

Summary

Issues Involved:
1. Enhancement of assessed income without reasonable opportunity.
2. Disallowance of technical know-how fee and royalty.
3. Disallowance of research and development expenses.
4. Disallowance of expenditure incurred for launching a new model of car.
5. Disallowance of custom duty.
6. Disallowance of provision for warranty.
7. Disallowance of provision for sales promotion expenses.
8. Disallowance of commission paid to HMCL.
9. Addition of excise duty refund receivable.

Issue-wise Detailed Analysis:

1. Enhancement of Assessed Income Without Reasonable Opportunity:
The assessee contended that the CIT(A) enhanced the assessed income without providing a reasonable opportunity of being heard, violating section 251(2) of the Act. The Tribunal noted that the CIT(A) must issue a show-cause notice before enhancing income, which was not done in this case. However, the CIT(A) had made order sheet entries indicating the proposed enhancement, and the assessee had responded. Thus, the Tribunal found no illegality in the CIT(A)'s action and upheld the enhancement, rejecting the additional ground of appeal.

2. Disallowance of Technical Know-how Fee and Royalty:
The assessee claimed deductions for lump sum fees and royalty paid to HMCL. The Assessing Officer disallowed these as capital expenditures. The CIT(A) upheld the disallowance, treating the payments as a diversion of income. The Tribunal found that the CIT(A) erred in not considering the payments as revenue expenditures. The Tribunal noted that the payments were made under a Technical Collaboration Agreement approved by the Government of India and RBI, and there was no undue influence by HMCL. The Tribunal set aside the CIT(A)'s order and allowed the deductions, remanding the issue of whether the expenditure was capital or revenue in nature back to the CIT(A).

3. Disallowance of Research and Development Expenses:
The Assessing Officer disallowed research and development expenses as capital expenditures. The CIT(A) upheld this disallowance. The Tribunal found that the expenses were for day-to-day operations and customer care, not resulting in any enduring benefit. The Tribunal allowed the expenses as revenue expenditures, setting aside the CIT(A)'s order.

4. Disallowance of Expenditure Incurred for Launching a New Model of Car:
The Assessing Officer disallowed expenses related to launching a new car model, treating them as capital expenditures. The CIT(A) upheld this disallowance. The Tribunal found that the expenses were for ongoing business activities and did not result in any enduring benefit. The Tribunal allowed the expenses as revenue expenditures, setting aside the CIT(A)'s order.

5. Disallowance of Custom Duty:
The Assessing Officer disallowed custom duty paid in earlier years but claimed in the current year. The CIT(A) upheld this disallowance, noting the issue was pending before the Tribunal for earlier years. The Tribunal directed the Assessing Officer to allow the claim if not allowed for the earlier years, treating the ground as allowed for statistical purposes.

6. Disallowance of Provision for Warranty:
The Assessing Officer disallowed the provision for warranty as contingent liability. The CIT(A) upheld this disallowance. The Tribunal found that the provision was based on past experience and was an ascertained liability. The Tribunal allowed the provision, setting aside the CIT(A)'s order.

7. Disallowance of Provision for Sales Promotion Expenses:
The Assessing Officer disallowed a provision for sales promotion expenses, treating it as contingent liability. The CIT(A) allowed only 10% of the provision. The Tribunal found that the expenses were incurred but bills were not received by year-end. The Tribunal allowed the expenses to the extent of actual expenditure incurred, setting aside the CIT(A)'s order.

8. Disallowance of Commission Paid to HMCL:
The Assessing Officer disallowed commission paid to HMCL for allowing exports, treating it as diversion of profit. The CIT(A) upheld this disallowance. The Tribunal found that the commission was for business purposes and allowed the deduction, setting aside the CIT(A)'s order.

9. Addition of Excise Duty Refund Receivable:
The Assessing Officer added excise duty refund receivable, treating it as income. The CIT(A) upheld this addition. The Tribunal found that the refund was passed on to customers and did not constitute income. The Tribunal remanded the issue back to the CIT(A) for reconsideration, treating the ground as allowed for statistical purposes.

Conclusion:
The Tribunal allowed the appeals partly, setting aside the CIT(A)'s orders on most grounds and remanding some issues for reconsideration. The Tribunal emphasized the need for proper consideration of facts and adherence to legal provisions in assessing income and allowing deductions.