2009 (1) TMI 339 - AT - Income Tax

Business expenditure, Losses - Carry forward and set-off of in case of certain companies, Double taxation relief, Additional Ground

Issues Involved:
1. Disentitlement to carry forward and set off accumulated business losses under Section 79 of the IT Act.
2. Applicability of Article 24(4) of the Indo-German Tax Treaty.
3. Disallowance of technical know-how expenses under Section 35AB.
4. Disallowance of project assistance fees as capital expenditure.
5. Disallowance of health club membership fees for the managing director.

Issue-wise Detailed Analysis:

1. Disentitlement to Carry Forward and Set Off Accumulated Business Losses under Section 79 of the IT Act:

The main grievance raised by the taxpayer was against the CIT(A)'s decision that the assessee was not entitled to carry forward and set off accumulated business losses due to the provisions of Section 79 of the IT Act. This was in light of the merger of the assessee's parent company, Daimler Benz AG, into DaimlerChrysler AG. The CIT(A) held that due to the change in shareholding, the provisions of Section 79 were attracted, thereby disentitling the assessee from carrying forward the losses.

2. Applicability of Article 24(4) of the Indo-German Tax Treaty:

The assessee raised an additional ground of appeal, arguing that under Article 24(4) of the DTAA between India and Germany, the appellant should be considered a company in which the public are substantially interested, and thus, Section 79 should not apply. The Tribunal admitted this additional ground, noting that the Indo-German tax treaty provisions could override domestic law provisions if they were more beneficial to the assessee. The Tribunal emphasized that treaty provisions are enforceable law and cannot be viewed as optional benefits.

The Tribunal found that the provisions of Section 79, as they stood at the relevant time, were incompatible with the ownership non-discrimination provision set out in Article 24(4) of the Indo-German tax treaty. The Tribunal held that the disability on carry forward and set off of accumulated losses under Section 79 could not be extended to Indian subsidiaries of German parent companies if the German parent companies were listed on a recognized German stock exchange.

3. Disallowance of Technical Know-How Expenses under Section 35AB:

The assessee was aggrieved by the CIT(A)'s disallowance of Rs. 13,25,71,334 towards technical know-how expenses claimed under Section 35AB. The Tribunal noted that the admissibility of the claim under Section 35AB could only be addressed in the first year in which the deduction was claimed. Since the adjudication on admissibility in the first year was still pending before the Tribunal, the issue was remitted to the AO for fresh adjudication.

4. Disallowance of Project Assistance Fees as Capital Expenditure:

The assessee claimed a deduction of Rs. 4,77,19,411 as project assistance fees for designing a factory layout and setting up an engine manufacturing unit. The AO and CIT(A) disallowed the claim, treating it as capital expenditure. The Tribunal noted that the expenses were inherently capital in nature and could only be examined as a business loss if written off. Since the factual contentions were not adequately addressed by the authorities below, the issue was remitted to the AO for fresh adjudication.

5. Disallowance of Health Club Membership Fees for the Managing Director:

The assessee's grievance regarding the disallowance of Rs. 8,250 towards health club membership fees for the managing director was dismissed as not pressed due to the smallness of the amount involved.

Conclusion:

The Tribunal allowed the appeal partly for statistical purposes. The issues regarding the carry forward and set off of accumulated losses and the disallowance of technical know-how expenses and project assistance fees were remitted to the AO for fresh adjudication. The issue of health club membership fees was dismissed as not pressed.

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