9911796707
TMI Blog2022 (1) TMI 44X X X X Extracts X X X X X X X X Extracts X X X X ..... order on the following grounds of appeal before us: "1. That on the facts and in law the CIT(A) erred in not accepting the disallowance of Rs. 32,268 offered by the appellant u/s 14A of the Income Tax Act, 1961 (hereinafter the 'Act') and instead enhancing the disallowance of Rs. 30,97,000/- made by the AO to Rs. 1,04,16,000/- by relying upon the order dt. 31-01-2007 of the Hon'ble ITAT in ITA No. 4106/Del/2004 for the Assessment Year 2001-02 in the assessee's own case. 1.1. That on facts and in law the CIT(A) erred in assuming jurisdiction to enhance when the conditions precedent thereto were not met. 1.2. That further, without prejudice and in the alternative, even on the basis of the order dt. 31-1-2007 of the Hon'ble ITAT as modified by the order dt. 14-3-2008 in MA No. 23/Del/2008 the disallowance works out to Rs. 12.14 lacs only. 1.3. That without prejudice the CIT(A) erred in determining the disallowance u/s 14A of the Act at Rs. 1,04,16,000/- instead of Rs. 78,43,000/- as relevant to the year under consideration which was correctly proposed by him as per notice u/s 251(2) of the Act dt. 2-1- 2008. 2. That on the facts and circumstances of the case and in law t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act, dated 26.12.2006 after making the following additions/disallowances: Disallowance u/s 14A Rs. 30,97,000/- Disallowance of technical know how fee Rs. 62,05,360/- Disallowance of Intt. On corporate deposit Rs. 35,76,000/- Additions of account of refund from Excise Deptt. Rs. 1,00,00,000/- 2.2. Aggrieved, the assessee assailed the aforesaid Assessment Order before the CIT(A). The CIT(A) not finding favor with the contentions advanced by the assessee with respect to the aforesaid additions/disallowances not only upheld the same, but also enhanced the income of the assessee qua two issues, viz. (i). addition as regards dividend stripping u/s 94(7) of the Act of Rs. 1,38,131/-; and (ii). disallowance u/s 14A of Rs. 1,04,16,000/- as against that computed by the A.O at Rs. 30,97,000/-. 3. The assessee being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. We shall hereinafter deal with the issues qua the additions/ disallowances made by the A.O, as well as the enhancements carried out by the CIT(A), as under: (A). Re; disallowance u/s 14A of the Act : 3.1 As is discernible from the records, the assessee company had during the ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resaid claim the Ld. AR had drawn our attention to the order passed by the tribunal in M.A. No. 23/Del/2008 dated 14.03.2008. It was further submitted by the Ld. AR that the aforesaid order passed by the tribunal had thereafter attained finality as the revenue has not carried the matter any further in appeal. It was submitted by the Ld. AR that following the aforesaid order of the tribunal for A.Y 2001-02, the tribunal had thereafter while disposing off the assessee's appeal for A.Y 2005-06 in ITA No. 4902/Del/2010 and 4622/Del/2010, dated 03.02.2012 had followed the said order and after taking cognizance of the fact that the disallowance u/s 14A of the Act was to be restricted to 10% of the amount of dividend income, had restored the matter to the file of the AO for deciding the issue afresh after giving the assessee a reasonable opportunity of being heard. 3.5 Per contra, the learned Senior Departmental Representative ("Ld. Sr. DR", for short) relied on the orders of the lower authorities. 3.6 We have heard the Ld. Authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record qua the aforesaid issue in question ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. by filing a complaint with Hon'ble High Court of Delhi. As the unpaid amount totalling to Rs. 1,49,00,000/- was not received by the assessee from the abovementioned three parties, therefore, the same was shown by it as doubtful of recovery and no interest was provided on the same. However, the AO did not accept the explanation of the assessee company, and was of the view that the assessee's company had not yet given up its claim as it had initiated criminal proceedings a/w launching of recovery suits against the aforesaid defaulting parties, therefore, it was required to account for the interest income on the said amounts as per the mercantile system of accounting that was followed by it. Accordingly, the AO backed by his aforesaid conviction therein worked out an addition of Rs. 35,76,000/- towards interest income i.e. @ 21% of the impugned deposits in question. 4.1 On appeal, the Ld. CIT(A) finding no infirmity in the view taken by the AO, therein upheld the aforesaid addition. 4.2 We have heard the Ld. Authorized Representatives for both the parties qua the aforesaid issue i.e. addition of interest on ICD's which were doubtful of recovery. Admittedly, it is a matter of f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inance Ltd. & against whom outstanding loans was Rs. 12,00,000/- as on 31.03.06. The fact that the appellant in the instant case has not given up his claim and was hopeful of its recovery as he had not written off the amount in the books, may accordingly not be the determinant factor to hold that the interest income has accrued to the appellant. The reason being that the appellant having taken recovery proceedings cannot possibly take the risk of writing off the amount till the case is over as it could amount to giving up the claim and may hold in favour of the defaulting loanees. It is thus noted that the facts of the appellant's case are similar to that of Goyal M.G. Gases P. Ltd.(Supra), as seen from the following observations made by the Delhi H.C. in the later case : "That both the Commissioner (Appeals) as well as the Tribunal had come to the conclusion that there was no real accrual of interest. It had been noted that the interest had not even recorded by the assessee in its books of account Die assessee had also issued a notice to the parties under section 138 of the Negotiable Instrument Act, 1881 for dishonor of cheques issued by all (except one of the debtor) followed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any from M/s S.R. Dinodia & Co., Chartered Accountants, New Delhi, as per which the aforesaid amount of refund of excise duty so received would not be exigible to income tax, the assessee did not offer the said amount for tax. However, the AO was of the view that as the assessee had claimed the excise duty as a deduction in an early year, therefore, the refund of the same had to be taxed during the year under consideration and it was not necessary for the department to await the final order of the Hon'ble Apex Court. In support of his aforesaid view, the AO, had, inter alia, relied on the judgment of the Hon'ble Supreme Court in the case of Polyflex (India) Pvt. Ltd. vs. CIT (2002)257 ITR 343 (SC) . Accordingly, the AO backed by his aforesaid conviction made an addition of Rs. 1 crore in the hands of the assessee company. 5.1 On appeal, the CIT(A) finding no infirmity of the view taken by the AO, upheld the same. 5.2 Before us, the ld. AR fairly admitted that the issue in question was covered against the assessee by the judgment of Hon'ble High Court of Delhi in the case of CIT vs Bharatpur Nutritional Products Ltd 356 ITR 285 (Del.) it was submitted by the Ld. AR, that the Hon'b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court. The fate of the SLP was not known. The dispute, therefore, was pending before the appellate forum. In the present case also, as per the facts noticed above, the dispute was pending before the appellate forum, i.e., the Division Bench but the excise duty had been refunded and paid to the assessee, subject to furnishing of the bank guarantee. In our view, the furnishing of bank guarantee when payment has been received, will not make any difference as the language of Section 41(1) is clear that the amount should have been received either in cash or in any other manner." We, thus, respectfully following the aforesaid view of the Hon'ble High Court, therein uphold the order of the CIT(A), who had rightly concluded that the refund of the excise duty of Rs. 1 crore was liable to tax during the year under consideration. The Ground of appeal no. 4 is dismissed. 6. We shall now take up the grievance of the assessee that the CIT(A) had grossly erred in law by traversing beyond the scope of his jurisdiction and enhancing the income of the assessee company by an amount of Rs. 1,38,131/- u/s 94(7) of the Act. Shorn of unnecessary details, the CIT(A) while disposing off the appeal had o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r want of jurisdiction. 6.2 Per contra, the ld. Sr. DR relied on the order of the Ld. CIT(A). 6.3 We have heard the ld. Authorized Representatives for both the parties qua the issue in question i.e. assumption of jurisdiction by the CIT (A) for enhancing the income of the assessee company with respect to an issue which was not the subject matter of the original assessment. We find that the aforesaid issue in hand is squarely covered by the order of the Hon'ble Jurisdictional High Court in the case of Gurinder Mohan Singh Nindrajog vs. CIT 348 ITR 170 (Del). In the said order, it was observed by the Hon'ble High Court that the CIT(A) has a power of enhancement in respect of such itemS or items of income which has been dealt with in the body of the order of the assessment, and arose for his consideration as per the grounds of appeal raised before him, being the subject matter of appeal. In sum and substance, it was therein observed that the power of the CIT(A) to enhance the income of the assessee could be validly exerciseD only qua such item or items of income which had been dealt with by the A.O while framing the assessment and arose for the consideration of the first appellate a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 251(l)(a) provides the Commissioner of Income-tax (Appeals) could enhance such an assessment qua the under assessed sum, i.e., where the Assessing Officer had dealt with the issue in the assessment and was the subject-matter of appeal. In category falling in (c) and (e), the Commissioner of Income-tax has been empowered to take an appropriate action under section 263 of the Act In the category of cases falling under clauses (d) and (f), appropriate action under section 147 of the Act can be taken to tax the income which has escaped assessment or had remained to be taxed. There can be situations where an item has been dealt with in the body of the order of assessment and the assessee being aggrieved from the addition or disallowances so made, had preferred an appeal before the Commissioner of Income-tax (Appeals) against the said addition and disallowance, the said disallowance and addition being the subject- matter of appeal before the Commissioner of Income-tax (Appeals) in such cases, the Commissioner of Incometax (Appeals) has been empowered under section 25l(l)(a) of the Act to enhance such an income where the Assessing Officer had proceeded to make addition or disallowance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e enhancement carried out by the CIT(A) qua the issue of dividend striping u/s 94(7) of the Act was never considered by the AO in the course of assessment, therefore, the CIT (A) was not vested with any jurisdiction to have enhanced the income of the assessee company in exercise of the powers vested with him u/s 251(1)(a) of the Act. We, thus, not being able to persuade ourselves to uphold the enhancement of Rs. 1,38,131/- carried out by the CIT(A) qua the issue of dividend striping u/s 94(7) of the Act, vacate the same. The Ground of appeal no. 5 is allowed in terms of our aforesaid observations. 7. We shall now deal with the grievance of the assessee that the CIT(A) had erred in confirming the disallowance of Rs. 82,73,814/- that was made by the A.O of the amount paid by the assessee to M/s Vilter Manufacturing Corporation, USA as fee for user of know-how by treating it as a capital expenditure. 7.1. Briefly stated, the assessee company had entered into an 'agreement', dated 13.12.2002 with M/s Vilter Manufacturing Corporation, 5555, South Packard Avenue, Cudahy, Wisconsin, USA which thereafter was amended vide a Supplementary agreement, dated 05.11.2003. As per the 'agreement' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... products and parts in India; and (ii). to market, sell or otherwise dispose off the products and parts in the specified territory. It was further submitted before the CIT(A) that as per Clause 5 of the 'agreement' M/s Vilter Manufacturing Corporation, USA was the sole and exclusive owner of all rights, title and interest in the technical know-how and nothing contained in the said 'agreement' shall be deemed to convey to the assessee company, viz. M/s Frick India Ltd. any right or legal title to the technical know-how or the improvement thereof. In sum and substance, it was the claim of the assessee that as the object of the 'agreement' entered into by the assessee company with M/s Vilter Manufacturing Corporation, USA was to facilitate running of its existing business in a more profitable and a technically viable manner, therefore, the expenditure therein incurred being in the nature of a revenue expenditure was allowable as a deduction in its hands. Further, it was the claim of the assessee that the A.O had grossly misconstrued the scope and gamut of Clause (ii) to Sec. 32(1) of the Act, as was made available on the statute vide the Finance (No.2) Act, 1998 w.e.f 01.04.1998, and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , that M/s Vilter Manufacturing Corporation, USA had granted a license, dated 13.12.2002 a/w a supplementary agreement, dated 05.11.2003, it was observed by the CIT(A), as under : "As per the agreement, the foreign company also agreed to keep the Indian company posted with the latest and modern developments in the field of air conditioning. Under the said agreement, the appellant company has agreed to pay as consideration fee for the drawings and design aggregating to the sum of US $ 460,500 and the fee shall be payable by way of one lump sum payment of US$ 110,000 on 31-12- 2002 payment of US$ 37, 750 no later than March 31, 2003 one payment of US$ 37, 750 no later than June 30, 2003, one payment of US$ 55,000 no later than December 31, 2003 and the remainder payable in semi-annual payment of US$ 27,500 each commencing June 30, 2004 until the total drawing and design fees have been paid in full. * The agreement has also specifies the territory in which the appellant company can function. The duration of the agreement' is initially fixed for 10 years which can be extended further on mutual agreement and subject to the necessary approvals. Both the parties subsequently enter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ical equipment, components and raw materials shall have to compulsorily conform to the import policy and procedures of government of India; that the assessee company even after expiry of the period especially on account of change of control of M/s Vilter Manufacturing Corporation, USA shall have perpetual, royalty free right to continue to use the methods of production, procedure, experiments, improvements which had been made available to them in pursuance of the agreement; that the assessee company had acquired knowledge of an enduring nature; that apart from the technical know-how supplied by the foreign company, viz. M/s Vilter Manufacturing Corporation, USA, and the grant of IPR's, the said foreign company had also agreed not to manufacture in India any of the scheduled products or to grant or make available to any other person, firm or company any manufacturing information, licenses, rights for any one of the scheduled products in India, thus, conferring an exclusive benefit on the assessee company to manufacture and sell scheduled products in the territories specified as per the terms of the 'agreement'. After referring to the aforesaid terms of the 'agreement', and specifica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation, USA, viz. five (5) percent of internal sales; and eight (8) percent of export sales of products and parts, however, a material aspect that had been lost sight of by the ld. CIT(A) is that the aforesaid royalty was to be paid for a period of 5 (five) years from the date of commencement of commercial production; during the subsistence of Intellectual Property License and Non-Compete Agreement. However, as certified by the auditors in "Note No. 9" of their audit report, Page 25 of the "Annual Report" of the assessee company, which reads as under : "Total amount of License fee for using Technical know-how, Trade mark and Intellectual Property Right to M/s Vilter Manufacturing Corporation, USA...................." , no payment of royalty was made by the assessee company to M/s Vilter Manufacturing Corporation, USA during the year under consideration. On the basis of the aforesaid facts, we are of the considered view, that the observation of the CIT(A) that 25% of the amount of royalty paid to M/s Vilter Manufacturing Corporation, USA is to be taken to the capital account on which depreciation shall be allowed, being based on misconceived and incorrect facts cannot be sustained ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2002 entered into by the assessee company with M/s Vilter Manufacturing Corporation, 5555, South Packard Avenue, Cudahy, Wisconsin, USA a/w those of the Supplementary agreement, dated 05.11.2003. On a perusal of the aforesaid respective "agreements", we are unable to persuade ourselves to concur with the CIT(A) that the A.O was justified in rejecting the claim of the assessee for deduction of the technical know-fees paid to M/s Vilter Manufacturing Corporation, USA as a revenue expenditure, and had correctly held the same as a capital expenditure on which depreciation was to be allowed u/s 32(1)(ii) of the Act. Insofar the reliance placed by the CIT(A) on the judgment of the Hon'ble High Court of Madras in the case of CIT Vs. Southern Switchgear Ltd, 148 ITR 272 (which thereafter had been upheld by the Hon'ble Supreme Court in CIT Vs. Southern Switchgear Ltd 232 ITR 359), which in turn had relied on its earlier judgment in the case of Transformer and Switchgear Ltd. Vs. CIT, 103 ITR 352, we find that the facts involved in the latter case are totally distinguishable as against those involved in the case of the assessee before us. Unlike the present case wherein the fees for technica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n it was observed that the assessee was engaged in the business of manufacturing air-conditioning equipments. Backed by our aforesaid observations, we are of the considered view that as the assessee company had availed the technical know-how from M/s Vilter Manufacturing Corporation, USA for running its ongoing existing business in a more technically viable manner and to facilitate improvements for yielding larger profits, therefore, the facts involved in the case of the assessee are clearly distinguishable as against those relied upon by the CIT(A), as in all the said cases, as observed by us hereinabove, the technical know-how was received from the foreign companies for establishment, setting up of factory/business etc. Accordingly, the support drawn by the CIT(A) on the aforesaid case laws, in our considered view being clearly distinguishable on facts would by no means justify the adverse inferences drawn by him on the said count in the hands of the assessee. 7.6 Insofar the observations of the CIT(A) that as per the terms of the 'agreement' the import of the drawings, technical equipments, components and raw materials by the assessee shall have to necessarily confirm to the im ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the 'agreement' that on expiry or the termination of the agreement, the assessee, viz. Frick India Ltd. shall cease and desist from using the technical know-how, IPR's or any part thereof granted to it by Vilter in any manner whatsoever, as well as desist from manufacturing and assembling the products and parts, as well as marketing and/or selling the products or parts in any manner whatsoever, and also from using the trademark to which it was entitled during the subsistence of the 'agreement'. As the aforesaid clause of the agreement makes it abundantly clear that M/s Vilter Manufacturing Corporation, USA had only made available a non-transferrable and non-exclusive technical know-how to the assessee for carrying out its ongoing business in a more technically viable and profitable manner, therefore, the aforesaid observations of the CIT(A) which had been arrived at by divorcing certain lines from the context in which they were used, and reading them in isolation, can by no means be acted upon. We, thus, in terms of our aforesaid observations vacate the adverse inferences drawn by the CIT(A) on the basis of his aforesaid misconceived, or in fact self-suiting misinterpretation of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on, USA was for the technical know-how services provided by the latter for facilitating carrying out the ongoing/existing business of manufacturing of refrigeration products by the assessee in a more technically viable and profitable manner, therefore, the same was rightly claimed by the assessee as a revenue expenditure for computing its income for the year under consideration and had wrongly been dubbed as a capital expenditure by the lower authorities. Our aforesaid view i.e where an assessee who is engaged in the business of manufacturing and selling certain products had made a payment to a foreign company for merely acquiring a right to use technical know-how, whereas the ownership and intellectual property rights in the said know-how remained with the foreign company, then, the payment in question would be in the nature of a revenue expenditure, is supported by the judgment of the Hon'ble High Court of Delhi in the case of CIT Vs. Hero Honda Motors Ltd., (2015) 372 ITR 481 (Del). We, thus, in the backdrop of our aforesaid observations not finding favour with the view taken by the lower authorities wherein they had rejected the assessee's claim for deduction of the payment mad ..... X X X X Extracts X X X X X X X X Extracts X X X X
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