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TMI Blog1989 (12) TMI 89X X X X Extracts X X X X X X X X Extracts X X X X ..... t. The assessee approached the court for stay of the payment, which was granted. However, in the books, a provision was made towards the disputed demand. The amount of provision for this accounting year is Rs. 83,936 in the Nylon Division, and Rs. 63,793 in the Rayon Division. 11. Both the assessing authority and the CIT (Appeals) had rejected the claim. The CIT (Appeals) pointed out that the liability arose out of a contract. Therefore, the legal position was that the liability would be admissible only when it was settled. Since that did not happen during this year, he held that the assessee was not entitled to the deduction. 12. Before us also, Shri Sharma had raised the same point. According to him, this was a statutory liability. Even the demand notice received from the Electricity Board refers to section 24(1) of the Indian Electricity Act, 1910. We are unable to accept this submission. The CIT (Appeals) is correct in his finding that the liability is only contractual. Before the assessee, or for that matter any consumer, gets supply of power from the Electricity Board, they have to enter into an agreement. The supply of power is regulated as per the terms of this agreement. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... new cabinet has been made. Rs. 57,000 have been spent on addition on cupboards. This is also in addition to the assets. However, in respect of the rest of the expenditure, we are of opinion that no disallowance is called for. We are discussing them below : (i) Park Shed for new school bus Rs. 23,003. The school bus clearly is not an asset of the assessee. On the other hand, the assessee has merely provided certain facilities for the running of a school. It is in connection with the provision of such facilities that a new shed has been constructed for the bus. The assessee-company does not derive any benefit from such construction, except that it is an expenditure incurred for providing facilities for the employees' children. It is a business expenditure, but that expenditure does not create for the assessee any advantage of an enduring nature. The advantage is for the 3rd parties. The amount spent by the assessee may be debitable as revenue expenditure even if it results in the acquisition of a capital asset by a third party. In this connection, we may refer to the decision of the Madras High Court in the case of CIT v. T. V. Sundaram Iyengar & Sons (P.) Ltd. [1974] 95 ITR 428. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment proceedings accepted that a part of the expenditure would be admissible and he directed allowance of Rs. 60,000. The balance, i.e., Rs. 3,89,167 was disallowed. The CIT (Appeals) found that the expenditure was in the nature of guest house expenditure. The expenses were for the maintenance of those guest houses at Kota and Jaipur and relate to the purchase of provisions, maintenance of premises, payment to the employees etc. It was submitted before the CIT (Appeals) that though this expenditure was on the guest house, the employees had paid for a part of the expenditure. The CIT (Appeals) found that the guest houses were used by persons other than employees also. They were clearly expenditure for the maintenance of guest house and, therefore, inadmissible. 34. It was submitted before us that, for the assessment years 1976-77 to 1978-79, similar expenditure had been allowed by the Tribunal. However, in respect of the assessment year 1980-81, the Tribunal had upheld the department's contentions and disallowed the expenditure. It was further submitted that the expenditure should be considered for disallowance only under section 37(4), but it was submitted that, what can be dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e which could be called maintenance expenses. Undoubtedly, those expenses which are incurred in preserving the building in good repair, would definitely be maintenance expenditure. Further salary on the staff required to look after the building, such as the watchman, would definitely be part of such expenditure. If the guest house has a garden appurtenant to it, the maintenance of the garden and therefore salary of the gardner would also be a part of the expenditure. We may take some assistance from the authorities who had occasion to consider similar expressions. In Law Lexicon Vol. 2 of Venkatramaiya, at page 1389, the expression " maintain an airport " has been considered. It is reproduced below :-- " To maintain an airport is to keep it in state of efficiency for the furnishing of those facilities and the rendition of those services which air transportation and communication demand (Concordia Arrow Flying Service Corp. v. City of Concordia, 131 Kan 247 : 289 p. 955 at p. 957: Satiya v. SDO, PWD Building and Works (1974) ACJ 431 at p. 434). The word 'maintain' only means 'to keep up, to preserve'. It does not include reclamation of the lands. (Md. Hussain Rowther v. Kasaiyyo S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is part of their maintenance of a guest house. Besides, we are also impressed by the submission of Shri Sharma that, where meals are provided in the office, the expenses would be admissible and when provided in the guest house, it would not be admissible. Such inference would be bordering on absurdity and should not be the basis for the interpretation to be given of this section. We will, therefore, agree that the expenditure incurred in merely providing refreshments, meals, etc., to the employees, even though it may be at the guest house or from the guest house, they would be admissible as business expenditure. 40 to 53. [These paras are not reproduced here, as they involved minor issues.] 54. In ground No. 21, the claim of the assessee is for weighted deduction under section 35B in respect of certain expenditure which have been listed in the assessment order at para 26. Several claims were made, which were rejected by the ITO and the CIT (Appeals). Before us, Shri Sharma submitted that it would press only for deduction in respect of two amounts, i.e., Rs. 7,71,902 and Rs. 14,828. These expenses have been incurred by the assessee in the travel of their employees to Kenya. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tive of the managing agent such monthly salary and other benefits as shall be agreed between the two and as per the provisions of clause 4(c) of the contract. This clause 4(c) stated that the assessee would replace a suitably qualified and experienced representative of the managing agent to act on behalf of the managing agent and be responsible to ASFL to ensure the proper discharge of duties of the managing agent. It is common ground that the assessee had, during the accounting year, received consideration as per clause 7 of the agreement. The consideration received during the year was Rs. 15.36 lakhs. The assessee's claim is that the expenditure in travel abroad was in connection with the earning of this technical fees from ASFL and, therefore, the claim would be admissible under section 35B(2)(vii). The Department's case, on the other hand, is that the travel was in connection with the acquisition of the part ownership of ASFL to the extent of 49%. Therefore, the expenditure was not in connection with any export development. 57. We have considered the submissions. It is difficult to accept the Department's contention that the entire travel is in connection with the capital asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e transfer of services or facilities outside India for the purpose of section 35B(2)(vii). On the admitted finding that the assessee is to provide technical know-how and the assessee is to receive fees thereof, it will be very difficult to say that the assessee was not in the business of promotion of the sale outside India of services or facilities. It may be, as the Department says, there is only one such institution for which the assessee had received technical fees. But that has, in itself, all the elements of business. The technical know-how the assessee had acquired is a by-product of the assessee's business in Synthetic fibres. Thus, it arises directly from the business. It is a business or commercial asset. The assessee was able to find at least one buyer for this asset abroad. So it is certainly part of the business of providing technical know-how. 59. The next objection to be considered is, whether the transfer would be part of the cost of providing the technical assistance. If it were to be a part of the cost, then certainly the assessee would not be eligible for the deduction. What can be considered for the purpose of section 35B is the expenditure on a product which is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n still remains, whether the transfer expenses would be a part of the cost. A close reading of the section would show that the travelling expenses considered therein is for travelling for promotion of the sale outside India of the services, i.e., the object should be the promotion of sales and not the provision of sales. A tour outside India by which the assessee could bring to the notice of the potential customers outside of the assessee's expertise and technical know-how would be covered by this section. But a tour taken in connection with the provision of such technical know-how, cannot come under this section. We think there is force in the Department's contention on this part of their objection, i.e., the expenses involved are part of the cost of providing the services. 61 to 72. [These paras are not reproduced here, as they involve minor issues.] 73. In Ground No. 28, the assessee-company is claiming deduction under section 80-O, which has been denied by the ITO and the CIT (Appeals) both. In the earlier paragraph, while dealing with the claim of the assessee for deduction under section 35B, in respect of travelling expenditure of Rs. 7,71,902, we have referred to an agreem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is for these services and it must be only technical fee. He further submitted that the two agreements, the assessee had entered into, have already been approved by the CBDT vide their letter dated 6-12-1978. With regard to the quantum, he submitted that, in view of the decision of the Supreme Court in the case of Distributors (Baroda) (P.) Ltd. v. Union of India [1985] 155 ITR 120, some expenditure will have to be set off against the receipts and they could be estimated at 1/10th of the receipts. Shri Aggarwal for the Department, submitted that, in deciding the issue, certain observations of the Supreme Court in the case of Petron Engg. Construction (P.) Ltd. v. CBDT [1989] 175 ITR 523 should be kept in mind. They were given on page 527. Therein, the Supreme Court has listed 6 conditions and unless these were satisfied the assessee would not be eligible for the deduction. In this case, it is the submission of Shri Aggarwal, that these 6 conditions which are cumulative, are not satisfied. Regarding the finding of the CIT (Appeals), he submitted that the assessee had not rendered any technical services. What was paid is only salary. Referring to the earlier assessments, where this w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 4 is also satisfied. 79. The assessee had been paid for the services in convertible foreign exchange. So this condition is also satisfied. 80. Before we come to the last condition, i.e., whether the money is brought to India or not, we must refer to the reasoning given by the CIT (Appeals). He opined that the assessee had sent only a few masons and carpenters and, therefore, what was received, was only in the shape of salaries for these persons. It did not represent technical services. Such a finding overlooks the assessee's responsibilities given in clause 4 of the agreement. The assessee being an incorporate body has necessarily to work out their part of the agreement through the employees. Therefore, it is necessary for them to send their employees and executives. We, therefore, do not find much merit in this objection. 81. The last objection is that the money has not been brought into India. It may be recalled that the assessee had, in their agreement with Industrial and Commercial Development Corporation of Kenya, agreed to subscribe to 49% of the equity capital. It involved remitting money from India to Kenya. The Reserve Bank had suggested to the assessee that they shou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had stated that these expenses were reimbursable by the African Company. If it is reimbursable, then the assessee is not incurring any expenditure on travel. But this matter should be verified by the ITO. If the travelling expenditure is reimbursable, then the assessee's contention must be accepted. The deduction of expenditure to earn the income may be roughly estimated at 1/10th. The assessee will be eligible for the exemption under 80-O in respect of the balance. 82 and 83. [These paras are not reproduced here, as they involve minor issues.] 84. At the time of hearing, the assessee had raised one additional ground. The ground reads as follows :-- "On the facts and in the circumstances of the case, the ITO should have allowed deduction of Rs. 1,86,49,403, being the expenditure incurred on acquisition of capital assets used for scientific research carried on by the assessee in its research division at Kota, the expenditure having been claimed in assessment year 1982-83 and found by the learned ITO as pertaining to the assessment year 1981-82. " 85. The Departmental Representative objected to the admission of the additional ground. The reason for raising of the additional grou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision of the Madras High Court in the case of Shree Rajgopal Transports Ltd., 144 ITR 573. In that case a deduction of Rs. 37,132 had been claimed by the assessee. But in the appeal proceedings, they enlarged the claim to Rs. 1,02,605. The High Court held that the claim in the original stage, related to a part of the larger amount of Rs. 1,02,605 and, consequently, the Tribunal was right in entertaining the fresh ground. Here also, the original claim of about Rs. 22 lakhs had been enlarged into a claim of Rs. 1.86 crores and the Tribunal would be justified in entertaining this ground. 90. A similar decision has been given by the Calcutta High Court in the case of Madhu Jayantii (P.) Ltd. v. CIT [1985] 154 ITR 277. Therein, the assessee had made claim under section 35B in respect of some expenditure, but before the Tribunal, for the first time, they enlarged the claim and the High Court held that the assessee could be allowed to make such enlarged claim by way of additional ground. 91. Having held that the claim could be entertained at this stage, it is necessary now to go into the merits. Section 35(iv) reads as follows :-- " 35. Expenditure on scientific research -- In respe ..... 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