2003 (3) TMI 314 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of technical know-how fees and engineering services fees.
2. Deduction u/s 32AB.
3. Disallowance of expenses on foreign education of Shri K.P. Vora.

Summary:

1. Disallowance of Technical Know-How Fees and Engineering Services Fees:
The first common issue in the assessee's appeal for AY 1989-90 and the Revenue's appeal for AY 1990-91 relates to the disallowance of technical know-how fees paid to Bierrum & Partners Ltd., U.K. The assessee claimed this amount as revenue expenditure, but the Assessing Officer (AO) treated it u/s 35AB, allowing only 1/6th of the amount and disallowing the balance. The CIT(A) upheld the AO's decision for AY 1989-90 but allowed the full amount for AY 1990-91, citing the Supreme Court decision in N.C. Budhiraja & Co., which stated that construction activities do not fall under manufacturing or processing of goods. The Tribunal agreed with the CIT(A) for AY 1990-91 and allowed the assessee's appeal for AY 1989-90, directing the AO to allow the entire amount as revenue expenditure.

For AY 1990-91, the issue of Rs. 8,19,364 paid towards engineering services was also contested. The AO treated this as capital expenditure, allowing depreciation instead. The CIT(A) upheld this view, but the Tribunal disagreed, stating that the payment was for improving construction techniques and should be treated as revenue expenditure.

2. Deduction u/s 32AB:
The assessee claimed deductions u/s 32AB for both AY 1989-90 and 1990-91, which the AO restricted by excluding interest and dividend income, treating them as income from other sources. The CIT(A) upheld the AO's decision. The Tribunal, however, allowed the assessee's claim, referencing its own decision in Maharashtra Scooters Ltd. and other supporting judgments, stating that profits of eligible business should be computed as per the Companies Act, including interest and dividend income.

3. Disallowance of Expenses on Foreign Education of Shri K.P. Vora:
The assessee claimed Rs. 1,88,934 as expenses for the foreign education of Shri K.P. Vora, which the AO disallowed, stating there was no employer-employee relationship and no direct benefit to the business. The CIT(A) upheld this disallowance. The Tribunal was divided on this issue, with the Judicial Member supporting the disallowance and the Accountant Member disagreeing. The Third Member concurred with the Judicial Member, leading to the final decision that the CIT(A) was justified in confirming the disallowance, citing the lack of evidence of an employer-employee relationship and no direct nexus between the expenditure and the business.

Conclusion:
- The Tribunal allowed the assessee's appeals regarding the disallowance of technical know-how fees and engineering services fees, treating them as revenue expenditure.
- The Tribunal also allowed the assessee's claims for deductions u/s 32AB, including interest and dividend income in the computation of eligible business profits.
- The Tribunal upheld the disallowance of expenses on foreign education of Shri K.P. Vora, confirming the CIT(A)'s decision.