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TMI Blog2015 (10) TMI 2385X X X X Extracts X X X X X X X X Extracts X X X X ..... trol remained with the ABL as the voting power of ABL, along with its subsidiary Company APIL, remained at 51%. The Supreme Court further observed that the object of enacting Section 79 appears to be to discourage persons claiming a reduction of their tax liability on the profits earned in the Companies which had sustained losses in earlier years. In the present case, the control over the Company, with 51% voting power, remained with ABL and, as such, in our view, the provisions of Section 79 of the Act would not be attracted. - Decided in favour of assessee. Entitlement to claim deduction in accordance with Section 35AB - transfer of technical knowhow, which amount was payable in installments between 31.5.1998 to 31.5.2006 - Held that:- The assessee would be entitled to claim deduction in accordance with Section 35AB of the Act in respect of sum of ₹ 5 Crores for transfer of technical know-how, even though the amount was payable and paid in instalments on subsequent dates. This we say so, also because the law is well settled that while interpreting the provisions of taxing statutes, where two views are possible, the one which is in favour of the assessee should be adopted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e schedule but according to the details given herein below: i. 31/05/1998 ₹ 10,00,000 ii. 01/09/1999 ₹ 50,00,000 iii. 16/03/2002 ₹ 5,00,000 iv. 31/03/2002 ₹ 40,00,000 v. 25/04/2002 ₹ 5,00,000 vi. 17/01/2003 ₹ 5,00,000 vii. 03/04/2004 ₹ 30,000 viii. 13/04/2004 ₹ 1,60,000 ix. 13/07/2004 ₹ 1,00,000 x. 27/07/2004 ₹ 2,00,000 xi. 06/09/2004 ₹ 3,00,000 xii. 10/12/2004 ₹ 5,00,000 xiii. 09/03/2005 ₹ 10,000 xiv. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... titled to set-off of the brought forward losses, considering the change in beneficial holding of 51% or more, as provided under Section 79 of the Act. 7. Being aggrieved by the order of the Commissioner of Income Tax (Appeals), the assessee as well as Revenue, both filed appeals before the Income Tax Appellate Tribunal, Bangalore, Bench-B. (hereinafter referred to as 'the Tribunal' for short). The assessee challenged disallowance of the benefit claimed regarding set-off of brought forward losses, whereas the Revenue filed an appeal challenging the grant of deduction under Section 35AB of the Act to the assessee. The assessee had also challenged the disallowance of lease rentals paid by it to the extent of ₹ 2,08,080/-. The Tribunal, however dismissed the appeal of the Revenue, and partly allowed the appeal of the respondent-assessee by allowing the benefit of set-off of brought forward losses, but did not give the benefit of lease rentals paid by the assessee. Challenging the said order of the Tribunal, the Revenue has filed this appeal raising two substantial questions of law, which, by consent of learned counsel for the parties are re-framed as under: 1. Whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 03 Assessment Year 1999-2000 2000-01 2001-02 2002-03 2003-04 Share holding Pattern a) ABL 100% 100% 55% 6% 6% b) TAFE Nil Nil Nil 49% 49% c) APIL Nil Nil 45% 45% 45% 12. The relevant Section 79 of the Act reads as under: S.79: Carry forward and set off of losses in the case of certain companies Notwithstanding anything contained in this Chapter, where a change in shareholding has taken place in a previous year in the case of a company, not being a company in which the public are substantially interested, no loss incurred in any year prior to the previous year shall be carried forward and set off against the income of the previous year unless- (a) on the last day of the previous year the shares of the company carrying not less than fifty-one ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held shares of the Company, and has thus contended that because the ABL was holding 100% shares of APIL, which was a wholly owned subsidiary of ABL and fully controlled by ABL, even though the shareholding of ABL had been reduced to 6%, yet the voting power of ABL remained 51% and as such, the provisions of Section 79 of the Act would not be attracted in the present case. 16. The Tribunal, after accepting the submission of the assessee, held that 51% of the voting power was beneficially held with the ABL during the assessment years 2002-03 and 2003-04 also, and would thus be entitled to carry forward and set-off of business losses for the previous years. 17. The fact that ABL is the holding Company of APIL, which is the wholly owned subsidiary of ABL and that Board of Directors of APIL are controlled by ABL, is not disputed. The submission of the learned counsel for the respondent-assessee that the shareholding pattern is distinct from voting power of a Company, has force. Section 79 of the Act specifies that not less than 51% of the voting power were beneficially held by persons who beneficially held shares of the Company carrying not less than 51% of the voting power. Si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the object of enacting Section 79 appears to be to discourage persons claiming a reduction of their tax liability on the profits earned in the Companies which had sustained losses in earlier years. In the present case, the control over the Company, with 51% voting power, remained with ABL and, as such, in our view, the provisions of Section 79 of the Act would not be attracted. 19. Accordingly, we answer the first question in favour of the assessee and against the Revenue, and confirm the finding of the Tribunal in this regard. 20. Question No.2: This question relates to the entitlement of the assessee for grant of deduction under Section 35AB of the Act, in respect of payment of ₹ 5 Crores for transfer of technical know-how, which was transferred on 01.03.1998, and as per the agreement, the amount was payable between 31.5.1998 and 31.05.2006; and had actually been paid within time though not strictly as per the instalments provided in the agreement, the details of which have already been given earlier in this order. 21. The submission of learned counsel for the appellant-Revenue is that the benefit can be claimed only when the actual payment is made, and sin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd distribution of power, such percentage on the actual cost thereof to the assessee as may be prescribed; (ii) in the case of any block of assets, such percentage on the written down value thereof as may be prescribed. Provided . S.35AB. Expenditure on know- how (1) Subject to the provisions of sub- section (2), where the assessee has paid in any previous year [relevant to the assessment year commencing on or before the 1st day of April, 1998] any lump sum consideration for acquiring any know-how for use for the purposes of his business, one- sixth of the amount so paid shall be deducted in computing the profits and gains of the business for that previous year, and the balance amount shall be deducted in equal instalments for each of the five immediately succeeding previous years. (2) xxxx (3) xxxx Definitions of certain terms relevant to income from profits and gains of business or profession S.43(2): In sections 28 to 41 and in this section, unless the context otherwise requires- (1) xxxx (2) paid means actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he benefit of Section 35AB of the Act would be available to the assessee, which provides that if the assessee has, prior to 01.04.1998, paid any lumpsum consideration for acquiring the know-how, then 1/6th of the amount so paid shall be deducted in computing the profits and gains of the business for that year and the balance amount shall be deducted in equal instalments for each of the five immediately succeeding years. 26. For this, we have to analyze what would the word paid mean in the context of the present case. Sub-section(2) of Section 43 of the Act defines paid to mean as 'actually paid' or 'incurred'. 'Actually paid' would be as per the cash system of accounting, and 'incurred' would be for the mercantile system of accounting. Admittedly, the assessee was following the mercantile system of accounting. The crucial word thus would be incurred . According to the appellant- Revenue, the assessee would incur such liability to pay only as per the schedule given in the agreement, which was between 31.05.1998 and 31.05.2006. It is contended that the dates given in the schedule would be the relevant dates, as it was only when payment was not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2000-01, 2001-02, 2002-03, the cases have been re-opened, and the benefit which was granted by accepting the return under Section 143(1) of the Act has been withdrawn; and for the assessment year 2003-04 the same was denied by the Assessing Officer itself. 31. In support of their submissions, learned counsel for both parties have relied on the following three decisions of the Apex Court: i) Keshav Mills Ltd. -vs- Commissioner of Income Tax (1953) 23 ITR 230 ii) Morvi Industries Ltd., -vs- Commissioner of Income Tax (1971) 82 ITR 835 iii) Commissioner of Income Tax -vs- Gajapathy Naidu (1964) 53 ITR 114 32. In the case of Keshav Mills (supra), in paragraph-13, the Apex Court has held as under: The mercantile system of accounting or what is otherwise known as the double entry system is opposed to the cash system of book keeping under which a record is kept of actual cash receipts and actual cash payments, entries being made only when money is actually collected or disbursed. That system brings into credit what is due, immediately it becomes legally due and before it is actually received and it brings into debit expenditure the amount for which a legal l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us made really show nothing more than an accrual or arising of the said profits at the material time. The same is the position with regard to debits made. 35. As such, accrual of income would be different from receipt of income and the moment the income accrues, the party gets the vested right to claim such amount and conversely the moment the liability to pay arises, such liability is incurred by the assessee. 36. The ratio in the case of Gajapathy Naidu (supra) would also go in favour of the assessee as it has been held that an income accrues or arises when the assessee acquires right to receive the same and it is further held that the mercantile system of accounting brings into credit what is due immediately it becomes legally due and before it is actually received; and it brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed . 37. In the present case, the assessee, following the mercantile system of accounting, had in its books of account shown the amount of ₹ 5 crores as liable to be paid, or as liability to pay on the date on which it acquired the technical know-how, which was 01.03.1998, as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e context of an agreement under which an assessee was to pay an amount of ₹ 1,00,000/- to its German collaborators in annual instalments of ₹ 20,000/- and the question which was referred was whether the entire amount of ₹ 1,00,000/- represented revenue expenditure deductible while computing the total income of the assessee for the Assessment Year 1967-68. The Division Bench noted that the question which was required to be considered was whether there was accrual of liability in the assessment year, though with a facility of a deferred payment. The Court held that it was an admitted position that the assessee kept its accounts on the basis of the mercantile accounting system, and if the terms of the agreement were construed it would have to be held that the assessee had incurred the entire liability for the payment of ₹ 1,00,000/- in the assessment year under consideration though the actual payment was spread over five years. The judgment of the Division Bench also followed a decision of the Supreme Court in Kedarnath Jute Mfg. Co. Ltd. Vs. CIT (1971) 82 ITR 363 (SC) in holding that the issue as to whether the assessee is entitled to a deduction will depend o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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