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TMI Blog2021 (12) TMI 1502X X X X Extracts X X X X X X X X Extracts X X X X ..... isturbing the decision in the initial year. The balance of claim in succeeding 5 years should be allowed as deduction without adjudicating on admissibility of the law. Therefore, we remand this ground of appeal no.1 to the file of the Assessing Officer with direction to allow claim of deduction u/s 35AB of the Act after due verification, if it is found claim u/s 35AB was allowed in the initial year of payment of lump-sum consideration. We held that the claim for deduction u/s 35AB should be allowed in the year under consideration, once the claim was allowed as deduction in the initial assessment year, in the circumstances, it is not necessary to deal with the additional evidence filed before us as the claim for deduction u/s 35AB for the year under consideration does not relate to the initial year payment of lump-sum consideration. Thus, the first ground of appeal raised by the assessee stands partly allowed for statistical purposes. Disallowance of royalty expenses - CIT(A) holding that incremental running royalty expenditure of 2.25% is capital in nature - HELD THAT:- Royalty is paid in the case of running business and in terms of number of vehicles sold there is no increase in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n. Similarly, the ld. CIT(A) also held that the sales tax claim written off can be allowed as deduction considering the orders of the sales tax authorities passed during the year under consideration. Therefore, we find that the decision of the ld. CIT(A) is based on the proper appreciation of evidence filed in support of both the claims. - SHRI INTURI RAMA RAO, AM AND SHRI S. S. VISWANETHRA RAVI, JM For the Assessee : Shri Percy Pardiwala (Sr. Adv.) Shri Darpan Kirpalani For the Revenue : Shri Abhivay S. Kumbhar ORDER PER BENCH : These are the cross appeals filed by the assessee as well as by the Revenue directed against the common orders of ld. Commissioner of Income Tax (Appeals)-6, Pune [ CIT(A) for short] dated 30.01.2015 for the assessment years 2000-01 and 2001-02 respectively. 2. Since the identical facts and issues are involved in these four appeals, we proceed to dispose of the same vide this common order. 3. For the sake of convenience and clarity, the facts relevant to the cross appeals in ITA No. 378/PUN/2015 filed by the assessee and ITA No. 484/PUN/2015 filed by the Revenue are stated herein. 4. Briefly, the facts of the case are as under : The appellant is a compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gross of taxes for a period of seven years ... Out of the above, instalments (iii) and (iv) were subsequently waived off when the Amended and Restated Agreement on the Transfer of Technical Know- how was signed (in December 1999). 5. The above-said agreement also provides that Mercedez Benz AG shall discharge consideration in the form of allotment of shares to Daimler Benz AG, which is asunder :- 1.4. The first instalment of the lump sum consideration for the technical know-how acquired was booked as payable in MB India's books in FY 1994-95 (ie AY 1995-96) as per the agreement (ie this was expenditure that MB India incurred on technical know-how in FY 1994-95). In accordance with the above JV and Contribution agreements, DBAG opted to contribute this sum payable by MB India to MBAG as its capital contribution and accordingly, was allotted 3,72,42,800 equity shares on 27 November 1995 after obtaining No Objection Certificate from the AO and also after deducting applicable taxes at source. TDS certificate was issued in the name of MBAG, being the entity from whom the technical know-how was acquired (refer page 102 and 107 of Paper Book for No Objection Certificate issued by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the Commissioner of Income Tax u/s 263 of the Act. However, on appeal before the Tribunal, the revision proceedings were quashed by the Tribunal and it was stated at bar that, as on today, the appeals filed by the Revenue against the order of the Tribunal are pending for disposal before the Hon ble High Court. Thus, as on today, the claim for deduction u/s 35AB of the Act stands allowed for the assessment years 1996- 97 and 1997-98. 8. The claim of deduction u/s 35AB of the Act for the assessment year 1998-99 was not allowed by the Assessing Officer. Even on appeal before the ld. CIT(A) as well as the Tribunal, the claim came to be rejected as the issue is pending for disposal before the Hon ble High Court. 9. For the assessment year 1999-2000, the claim for deduction u/s 35AB of the Act was disallowed by the Assessing Officer and upheld by the ld. CIT(A). However, on appeal before the Tribunal, the Tribunal remanded the matter to the Assessing Officer with a direction that the adjudication of claim u/s 35AB can be made only in the initial year, in the subsequent 5 years the claim of deduction u/s 35AB should be allowed without adjudicating on admissibility of said claim. Even ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... art of running royalty expenditure as a capital expenditure and the Revenue is in cross appeal in ITA No. 484/PUN/2015 being aggrieved by the decision of the ld. CIT(A) holding part of running royalty expenditure as revenue expenditure . ITA No.378/PUN/2015, A.Y. 2000-01 By Assessee : 14. Now, we shall take up the assessee s appeal in ITA No. 378/PUN/2015 for the assessment year 2000-01. 15. The appellant raised the following grounds of appeal :- Based on the facts and circumstances of the case and in law, the Appellant respectfully craves to prefer an appeal against the order dated 30 January 2015 (received by the Appellant on 18 February 2015) passed by the learned Commissioner of Income tax (Appeals) Pune - 6 [hereinafter referred as the learned CIT(A) ] under section 250 of the Income-tax Act, 1961 ( the Act ) on the following grounds which are independent of and without prejudice to each other: On the facts and circumstances of the case and in law the learned Assessing Officer: Ground No. 1: Disallowance of deduction under section 35AB of the Act of Rs. 13,25,71,334 Erred in upholding the action of the Assessing Officer of not granting deduction under section 35AB of the Act i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cted 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) Where the know-how referred to in sub-section (1) is developed in a laboratory, university or institution referred to in sub-section (2B) of section 32A, one-third of the said lump sum consideration paid in the previous year by the assessee 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 two immediately succeeding previous years. (3) Where there is a transfer of an undertaking under a scheme of amalgamation or demerger and the amalgamating or the demerged company is entitled to a deduction under this section, then, the amalgamated company or the resulting company, as the case may be, shall be entitled to claim deduction under this section in respect of such undertaking to the same extent and in respect of the residual period as it would have been allowable to the amalgamating company or the demerged company, as the case may be, had such amalgamation or demerger not ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AB of the Act after due verification, if it is found claim u/s 35AB was allowed in the initial year of payment of lump-sum consideration. 20. In the preceding paragraphs, we held that the claim for deduction u/s 35AB should be allowed in the year under consideration, once the claim was allowed as deduction in the initial assessment year, in the circumstances, it is not necessary to deal with the additional evidence filed before us as the claim for deduction u/s 35AB for the year under consideration does not relate to the initial year payment of lump-sum consideration. Thus, the first ground of appeal raised by the assessee stands partly allowed for statistical purposes. 21. By the second ground of appeal, the assessee challenges the decision of the ld. CIT(A) holding the part of running royalty expenditure as capital . This second ground of appeal was not pressed by the assessee during the course of hearing of the appeal. Hence, this second ground of appeal is dismissed as not pressed. 22. In the result, the appeal of the assessee in ITA No.378/PUN/2015 for the assessment year 2000-01 stands partly allowed for statistical purposes. ITA No.484/PUN/2015, A.Y. 2000-01 By Revenue : 23. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cally on the ground that the first agreement covered engineering services which were relevant for creating setting up of factory building, manufacturing set up, plants etc. While second agreement does not have such features, as manufacturing set up was already created and no expansion/increase in the capacity was to take place and only requirement was to incorporate new models to remain competitive in the business. There is no denying the fact that the introduction of new models is a must to remain competitive in the business. However, in this case the appellant through internal arrangement has waived off the lumpsum payment which was capital in nature and instead of that running royalty was increased from 2.75% to 5%. This arrangement is nothing but an afterthought and therefore the capital element can be very well said to be embedded in the second agreement. In this case the amount of capital expenditure on account of 2.25% excess royalty comes to Rs.97,24,022/- while for A.Y. 2001-02, the same comes to Rs. 1,09,77,372/-. The reasons for increase in running royalty is also on account of the fact that the appellant could not have claimed deduction u/s. 35AB of Income-tax Act as pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al expenditure. In addition, royalty was also paid by the assessee at a particular percentage of the sales. Holding that, the said payment would be in the nature of revenue expenditure. This Court dealt with the issue in the following manner : 3. Insofar as lump sum payment against transfer of technical know- how provided by the Korean company is concerned, the assessee had admittedly shown these expenses as capital expenditure. It was the royalty paid during the year in question which was treated as revenue expenditure by the assessee. The CIT(A) found that as per the agreement, this royalty was running royalty payable every year, which depended upon the number of pieces produced of the aforesaid products, namely, catalytic converter and exhaust muffler. 4. We are of the opinion that this finding of the CIT(A), as approved by the ITAT, is a finding of fact which is rightly arrived at as expenditure is purely a revenue expenditure, which is annual expenditure depending upon the quantum of production in the relevant year. 5. In CIT v. J.K. Synthetic Ltd. 309 ITR 371, after elaborately discussing the entire case law on the subject, the Court culled out the broad principles to determi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness of manufacturing and sale of cars. The return of income for the assessment year 2001-02 was filed on 31.10.2001. Against the said return of income, the assessment was completed by the Addl. Commissioner of Income Tax, Range-8, Pune ( the Assessing Officer ) vide order dated 19.03.2004 passed u/s 143(3)(ii) of the Act at a total income of Rs.10,40,54,690/- under the regular provisions of the Act and book profits under the provisions of section 115JB of the Act of Rs. 18,46,86,077/- after making following disallowances :- (i) Technical Know-how fees deduction claimed u/s 35AB. (ii) Re-location Expenses. (iii) Travelling Conveyance Expenses. (iv) Telephone Expenses. (v) Royalty (vi) Disallowance of Prior Period Expenses. (vii) Disallowance of Expenses under other heads. 35. Being aggrieved by the above assessment order, an appeal was preferred before the ld. CIT(A), who vide impugned order confirmed the disallowances of deduction u/s 35AB of Rs. 7,04,99,997/- following its order in assessee s own case for the assessment year 1999-2000. As regards to the relocation of expenses of Rs. 8,06,901/-, the same was held to be allowable following the order of the Tribunal in assessee s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he learned Assessing Officer: Ground No. 1: Disallowance of deduction under section 35AB of the Act of Rs. 7,04,99,997 Erred in upholding the action of the Assessing Officer of not granting deduction under section 35AB of the Act in the year under consideration. Ground No. 2: Disallowance of part of the royalty expenditure Erred in upholding the disallowance of royalty expenditure to the extent of Rs 1,09,77,372 by considering the same to be capital in nature. Ground No. 3: Disallowance of certain other expenses on ad-hoc basis Erred in upholding ad hoc disallowance to the extent of Rs 2,50,000 out of miscellaneous expenses, staff welfare expenses, advertisement and sales promotion expenses based on the possibility that the same could have been booked for non-business purposes. The Appellant prays leave to add, alter, vary, omit, amend or delete grounds of appeal at any time before, or at the time of, hearing of the appeal, so as to enable the Hon ble Tribunal to decide this appeal according to the law. 39. The first ground of appeal relates to the disallowance of deduction u/s 35AB of the Act of Rs. 7,04,99,997/-. In the identical facts in assessee s own case for the assessment ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The ld. CIT(A) restricted the disallowance to Rs. 2,25,000/- even without referring to any material on record. The approach of both the Assessing Officer as well as the ld. CIT(A) making ad- hoc disallowance cannot be accepted in the absence of any evidence of bogus payments and the disallowance of part of payment on assumption and conjectures has to be rejected. The lower authorities are not justified in assuming that the deduction was actually incurred for personal/non- business purposes without bringing any evidence on record. Therefore, we direct the Assessing Officer to allow the entire miscellaneous expenses of Rs.25,00,000/-. Thus, the ground of appeal no.3 raised by the assessee stands allowed. 46. In the result, the appeal of the assessee in ITA No.379/PUN/2015 for the assessment year 2001-02 stands partly allowed for statistical purposes. ITA No.485/PUN/2015, A.Y. 2001-02 BY Revenue : 47. Now, we shall take up the Revenue s appeal in ITA No.485/PUN/2015 for the assessment year 2001-02. 48. The Revenue raised the following grounds of appeal :- 1. Whether on the facts and circumstances of the case, the Hon ble CIT(A) was justified in deleting disallowance of travelling expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e cannot be allowed as deduction. Therefore, the ld. CIT-DR submitted that the ld. CIT(A) was not justified in deleting the disallowance of 10% of the travelling expenditure. 52. On the other hand, ld. AR for the assessee placed reliance on the order of the Assessing Officer. 53. We heard the rival submissions and perused material on record. The issue in the present ground of appeal relates to the disallowance of 10% of travelling expenditure on ad-hoc basis. The Assessing Officer was of the opinion that since the vouchers in support of the travelling expenditure were self-made and proper verification of expenditure cannot be made, therefore, made an ad-hoc disallowance of 10% of the total travelling expenditure. However, the ld. CIT(A) following the Tribunal s order in assessee s own case for the assessment year 1999-2000 allowed the same. On careful perusal of the order of the assessment, it would reveal that the Assessing Officer had resorted disallowance of 10% of the travelling expenditure solely on the ground that the vouchers are self-made and there is no allegation by the Assessing Officer that the expenditure is bogus in nature. Therefore, we do not find any infirmity in t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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