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TMI Blog2003 (11) TMI 277X X X X Extracts X X X X X X X X Extracts X X X X ..... of the words in lump sum consideration for acquiring know-how and the absence of words like expenditure of a capital nature in the provisions which have been used in ss. 35A and 35ABB give prima facie impression that the view of the JM, i.e., that s. 35AB is applicable to both capital or revenue expenditure, was correct but the issue is not that simple. The provisions of s. 35AB have to be understood in the light of the scheme of the IT Act and other relevant provisions. No non obstance clause like notwithstanding contrary contained in any other provisions of the Act or notwithstanding anything contained in sub-s. (1) of s. 37 has been used in s. 35AB which would mean that it does not override sub-s. (1) of s. 37, under which the revenue expenditure is allowable as deduction in full. Sec. 35AB is an enabling as well as incentive section, which allows deduction of lump sum payment for technical know-how in six equal instalments, i.e., 1/6th for six years. How can it be said to be an enabling and incentive section, if it brings within its mischief a revenue expenditure also, which is allowable in full in the relevant year u/s 37(1) of the Act. Therefore, the interpretation that s. 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppellant on bridge loan. (3) The entire public issue expenditure of Rs. 12,31,961 be treated allowed for amortisation under s. 35D of the Act instead of only Rs. 3,00,000 as held by the learned CIT(A). (4) The disallowance of alleged penal interest on sales-tax amounting to Rs. 2,75,610 be deleted, the same being of compensatory nature under s. 47(4A) of the Gujarat Sales-tax Act. (5) The claim of preliminary expenses under s. 35D of the Act at Rs. 1,83,385 be allowed in full. (6) The sales promotion expenses of Rs. 34,82,241 being conclusively held to be of revenue nature by the learned CIT(A) be allowed in full in the year in which the said expenses have been incurred. (7) The drawings and design expenses of Rs. 65,44,703 be treated as of revenue nature under s. 37 of the Act and not under s. 35AB of the Act. 3. The first ground relates to disallowance of expenditure incurred in relation to increase in authorised share capital amounting to Rs. 1,35,000. The learned counsel appearing for the assessee was fair enough to admit that the aforesaid issue is covered against the assessee by the judgments of the Hon'ble Supreme Court in the cases of Punjab State Industrial Development ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counsel thus strongly urged that the interest income of Rs. 5,24,596 earned by the assessee on fixed deposits made out of money received from public issue should be treated as business income or it should be set off against the interest expenditure incurred by the assessee on bridge loan taken on the security of such deposits. 4.1 The learned CIT Departmental Representative strongly supported the order of the CIT(A) and relied upon the elaborate reasons mentioned in the assessment order. He also relied upon the judgment of the Hon'ble Madras High Court in the case of South India Shipping Corpn. Ltd. vs. CIT (2000) 163 CTR (Mad) 617 : (1999) 240 ITR 24 (Mad) in which the judgment of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals Fertilisers Ltd. was followed. It was held by the Hon'ble Madras High Court that the interest paid on overdraft obtained for the purpose of business cannot be deducted from the interest earned on monies kept in fixed deposits as such income derived by way of interest on fixed deposits has to be taxed under the head Income from other sources . 4.2 We have considered the submissions made by the learned representatives of the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tuticorin Alkali Chemicals Fertilisers Ltd., as the said judgment was delivered on 8th July, 1997, by the Hon'ble apex Court. This judgment of the Hon'ble Supreme Court has been applied and distinguished in subsequent judgments such as in CIT vs. Bokaro Steel Ltd. (1999) 151 CTR (SC) 276 : (1999) 236 ITR 315 (SC) and Bongaigaon Refinery Petrochemicals Ltd. vs. CIT (2001) 170 CTR (SC) 257 : (2002) 251 ITR 329 (SC). It is also necessary to examine the nexus between the interest income derived by the assessee on fixed deposits made out of deposits of share application money and the interest paid on bridge loan taken from the bank in order to properly decide the assessee's claim for grant of benefit of netting of interest and also in order to properly ascertain the correct head of assessability of such interest income. Since the relevant facts have not been properly and fully brought on records by the learned AO nor by the learned CIT(A), we consider it just and proper to set aside the orders of the CIT(A) and the AO in relation to this common ground raised by the assessee as well as by the Revenue in their appeals. The point relating to assessability of interest income amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;ble Madhya Pradesh High Court in the case of Shree Synthetics Ltd. has clearly observed that the words used in s. 35D(2)(c) containing description of specific expenditure qualifying for amortisation are only illustrative and not restrictive. He, therefore, urged that the entire expenditure incurred for issue of shares for public subscription by a company will be entitled to deduction in accordance with s. 35D. 5.3 The learned CIT Departmental Representative simply relied upon the reasons mentioned in the assessment order and the order of the CIT(A). 5.4 We have carefully considered the submissions made by the learned representatives of the parties and have gone through the orders of the learned Departmental authorities. The aforesaid expenditure aggregating to Rs. 12,31,969 have been incurred in connection with the issue for public subscription of shares. The Hon'ble Madhya Pradesh High Court in the case of Shree Synthetics Ltd. Clause (c) of sub-s. (2) of s. 35D starts with the words 'where the assessee is a company, also 'expenditure', which if read with sub-cl. (iv) in connection with the issue for public subscription of shares in or debentures of the company, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fresh in accordance with the directions given by him in paras 11 and 12 of his order. Hence, this ground is rejected, as not pressed. 7. Ground No. (5) relates to reduction in claim of preliminary expenses under s. 35D of the Act by a sum of Rs. 66,484 (Rs. 1,83,385 - Rs. 1,16,901). The learned CIT(A) in paras 14 and 15 of his order has confirmed the action of the AO that the debenture application money did not constitute the appellant's capital till such time the allotment of debentures was made to the applicants. Until then the money was lying with the appellant in trust and the right of the appellant to employ this money for the purposes of business accrued only on allotment of debentures. He, therefore, confirmed the action of the AO of excluding the amount of debenture application money received by the appellant from computation of capital employed for purpose of determining the ceiling/ deduction under s. 35D. 7.1 We have considered the submissions made by the learned representatives of the parties and have gone through the relevant provisions. Explanation (b) given below s. 35D(3), inter alia, defines capital employed as under : Explanation In this sub-section (a) (b) Ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 24. The AO has treated the expenditure as capital expenditure on the ground that the expenditure pertains to launch of new product and the advantage derived by the appellant from the expenditure was of long term benefit. At the same time, as has been rightly pointed out by the learned counsel of the appellant, the AO has not been able to allocate this expenditure to any of the fixed assets of the appellant-company. In the circumstances, the expenditure cannot be treated to be in the capital field as it has left the fixed capital of the company untouched. I, therefore, agree with the appellant that within the ratio of Hon'ble Supreme Court judgment in the case of Empire Jute Co. Ltd. vs. CIT (1980) 17 CTR (SC) 113 : (1980) 124 ITR 1 (SC), the expenditure cannot be disallowed on the ground that it is capital expenditure. 8.2 The learned CIT(A), however, further observed in paras 25 to 30 that the appellant-company cannot validly contend that irrespective of the treatment given by them in their books of account of spreading over such expenditure in five years, they should be allowed deduction of the entire sum of Rs. 34,82,241 in the assessment year under consideration. The CIT(A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h perception cannot result in denial of deduction of the entire amount of expenditure which has been accepted by the CIT(A) as expenditure of revenue nature. The Bench required the learned counsel to explain as to why the principles of law laid down by the Hon'ble Supreme Court in the case of Madras Industrial Investment Corpn. Ltd. vs. CIT (1997) 139 CTR (SC) 555 : (1997) 225 ITR 802 (SC) be not applied to the present case. The learned counsel replied that discount on issue of debentures resulted in continued benefit to the business of the company for a specified period. It was a contractual obligation. The number of years after which the debentures were to be redeemed were also fixed and certain and, therefore, spread over of such discount on issue of debentures over the period of debentures was held to be valid by the Hon'ble Supreme Court. The same formula of spreading over the expenditure in question over a period of five years cannot be applied as there is no contractual or statutory obligation nor there is any certainty about the benefit of such expenditure over a period of five years. The accounting entries made by the appellant-company spreading over such expenditu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere followed by the Tribunal in the decisions in the cases of Core Health Care Ltd. vs. Dy. CIT, Bombay Housing Corporation vs. Asstt. CIT and by the Hon'ble Gujarat High Court in the case of Dy. CIT vs. Core Health Care Ltd. There is no dispute about the aforesaid principles of law laid down by the Hon'ble Supreme Court that the accounting practice for ascertainment of profits adopted by a company cannot override the specific provisions contained in the IT Act relating to taxability of any income or relating to grant of deduction. These principles can be applied only in cases where there is a conflict between accounting practice adopted by the assessee and a clear and specific provisions relating to grant of deductions contained in the IT Act. The assessee treated the expenditure of Rs. 24,82,133 and Rs. 10,00,053 as deferred revenue expenditure and has written off the said amount as expenditure over a period of five years. Such a decision of the company has been approved by the board of directors as well as by the shareholders in their annual general meeting. Such a decision of treating the said expenditure as deferred revenue expenditure and spreading the same over a per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of five years with a view to avoid presentation of distorted picture of the profits to its shareholders. Such spreading over of the said expenditure over a period of five years was made by the assessee in accordance with the accepted accounting practice which is in no way contrary to any specific provisions contained in the IT Act. On the other hand, such spreading over of the expenditure resulting in enduring benefit is in conformity with the aforesaid principles laid down by the Hon'ble Supreme Court in the case of Madras Industrial Investment Corpn. We, therefore, do not find any infirmity in the order passed by the CIT(A) directing the AO to allow deduction in respect of the aforesaid amount in the same manner as has been adopted by the assessee for purpose of debiting the said expenditure in its P L a/c prepared as per the books of account regularly maintained by the appellant-company. 8.9 It may be relevant here to mention that the matter relates to asst. yr. 1992-93. The assessment for four subsequent years, viz., asst. yrs. 1993-94 to 1996-97 must have already been completed by now and the assessee must also have been granted deduction in respect of 1/5th amount of afor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... drawings from Hitachi which is to be subsequently utilised for manufacturing of the Shizuka range of room air-conditioner. Pursuant to this memorandum of understanding the assessee-company has paid a sum of Rs. 59,69,885 till March, 1991, i.e., asst. yr. 1991-92, to Hitachi Ltd., Japan, and has acquired drawings and designs in asst. yr. 1991-92 (refer statement of account of drawings and designs for asst. yr. 1991-92 as filed by the assessee-company vide written submission dt. 10th Jan., 1995). In the year under consideration, that is, asst. yr. 1992-93, the assessee-company has paid and imported few drawings and designs amounting to Rs. 5,74,818 (refer drawings and design account for asst. yr. 1991-92 as filed along with the written submission dt. 10th Jan., 1995). 9.1 The AO rejected the assessee's claim for grant of deduction of the entire sum of Rs. 65,44,703 as revenue expenditure by observing as under in para 6.5 of his order : 6.5 I have examined the abovementioned contentions of the assessee-company with reference to the facts of the case and has observed as under : (i) As stated above, in the audited books of account the assessee-company has claimed 1/6th of the total ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e year under consideration of Rs. 59,69,885 which is debited in accounts of asst. yr. 1991-92 as lump sum technical know-how fees for imported drawings and design. Since the liability to incur such expenditure and payment in respect of such imported drawing and design worth Rs. 59,49,885 is made in asst. yr. 1991-92 and the assessee-company is not entitled to reopen its account, the claim of assessee for deduction of Rs. 59,49,885 during the year under consideration, i.e., 1992-93 is rejected and the assessee-company will not be entitled for any deduction including deduction under s. 35AB in respect of aforesaid amount, which pertains to asst. yr. 1991-92. (b) In view of the discussion as mentioned in above paras, it is held that payment of lump sum technical know-how fees of Rs. 5,74,818 during the year under consideration is squarely covered under the provisions of s. 35AB and the assessee-company is entitled for deduction of 1/6th of the amount as paid during the year under consideration, i.e., an amount of Rs. 95,803 will be allowed as deduction during the year under consideration instead of claim of deduction of Rs. 65,44,703 by the assessee-company. 9.3 The learned CIT(A) in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nded that the aforesaid issue is clearly covered in favour of the assessee by the following three decisions : (i) Goodyear India Ltd. vs. ITO (2000) 68 TTJ (Del)(TM) 300 : (2000) 73 ITD 189 (Del)(TM) (ii) Indian Petrochemicals Corpn. Ltd. vs. Dy. CIT (2002) 74 TTJ (Ahd) 281 : (2002) 81 ITD 263 (Ahd) (iii) Sayaji Industries Ltd. vs. Dy. CIT (2000) 68 TTJ (Ahd) 851. 9.5 The Tribunal, Ahmedabad Bench, in the case of Indian Petrochemicals Corpn. Ltd. vs. Dy. CIT has considered various judgments on this point including the judgment of the Hon'ble Supreme Court in the case of Eimco K.C.P. Ltd. vs. CIT (2000) 159 CTR (SC) 137 : (2000) 242 ITR 659 (SC). The issue is fully and squarely covered in favour of the assessee by the above referred decisions. The learned counsel also drew our attention to the facts stated on pp. 21 and 22 of statement of facts submitted before the CIT(A) which are reproduced below : 6. As regards the Dy. CIT's observations that the drawings and designs of Rs. 59,69,885 having been imported during the previous relevant to asst. yr. 1991-92 and the corresponding payment to Hitachi Ltd., Japan, having also been made in asst. yr. 1991-92, the same are to be tre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carefully considered the submissions made by the learned representatives of the parties and have gone through the orders of the learned Departmental authorities. We have also carefully gone through all the decisions cited by the learned representatives and the judgments referred to in the order of the CIT(A). 9.9 The technical agreement for drawings and designs between the assessee and Hitachi Ltd., Japan, inter alia, indicates the following clauses : Article III Grants During the term of this agreement, Hitachi hereby agrees to grant to Acquest a non-exclusive, non-sub-licensable and non-transferable licence to make, use and sell Acquest Products in India under technical information and/or other technical information furnished hereunder, and/or under Hitachi patents. * * * E. Upon expiration or termination of this agreement as provided herein or by operation of law or otherwise, all rights granted or obligations undertaken hereunder shall terminate forthwith except : 1. Acquest's obligations assumed under cl. (C) of art. IV. 2. Acquest's obligations to pay any amounts accrued hereunder upon or prior to the date of termination. 3. If this agreement is terminated by Hitachi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stantly updated so that the know-how cannot be said to be the element of the requisite degree of durability and non-ephemerality to share the requirements and qualifications of an enduring capital asset. The rapid strides in science and technology in the field should make us a little slow and circumspect in too readily pigeon holding an outlay such as this as capital. The circumstances that the agreement insofar as it placed limitations on the right of the assessee in dealing with the know-how and the conditions as to non-partibility, confidentiality and secrecy of the know-how incline towards the inference that the right pertained more to the use of the know-how than to its exclusive acquisition. Thereafter, the Hon'ble Supreme Court, inter alia, relying upon the earlier judgments of the Hon'ble apex Court in the cases CIT vs. Associated Cement Companies Ltd. (1988) 70 CTR (SC) 28 : (1988) 172 ITR 257 (SC), Empire Jute Co. Ltd. vs. CIT (1980) 17 CTR (SC) 113 : (1980) 124 ITR 1 (SC) and CIT vs. CIBA of India Ltd. (1968) 69 ITR 692 (SC) observed as under: The improvisation in the process and technology in some areas of the enterprise was supplemental to the existing business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cture of air-conditioners. The technical know-how was acquired for improvisation of the products. The lump sum payments made by the assessee for acquiring the aforesaid technical know-how, drawings and designs only for purpose of user thereof for manufacture of their products, is therefore clearly an expenditure of revenue nature in view of the aforesaid judgments of the Hon'ble apex Court. 9.13 The AO and the CIT(A) have observed that the expenditure to the tune of Rs. 59,69,885 out of total expenditure of Rs. 65,44,703 was incurred in asst. yr. 1991-92. The same, therefore, cannot be allowed in the year under consideration, viz., in asst. yr. 1992-93. Reliance has been placed by the learned Departmental authorities, inter alia, on the agreement of the Hon'ble apex Court in the case of CIT vs. A. Gajapathy Naidu. It may be relevant here to reproduce the relevant facts of that case : The assessee, who supplied bread to a Government hospital under a contract during the period 1st April, 1948 to 31st March, 1949, made certain representations to the Government after the close of the year that he had incurred loss. The Government directed payment of the sum of Rs. 12,447 to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly implemented. The engineers from your company were trained in the Hitachi plants located in Japan and the engineers from the Hitachi Corporation worked with your company in India while the project was being implemented. It is evident from the abovementioned facts of the case that the expenditure on import of drawings and designs are the part of the new project which is implemented successfully by the assessee-company in asst. yr. 1992-93. 9.15 The AO has himself arrived at the conclusion that the import of drawings and designs are part of new project which has been successfully implemented, by the assessee-company in asst. yr. 1992-93. Furthermore, once it is held that the expenditure is of a revenue nature and is allowable as deduction for computing taxable income, the year of allowability is not of much significance, as has been aptly explained by the Hon'ble Bombay High Court in the case of CIT vs. Nagri Mills Co. Ltd., the relevant extracts of which have already been reproduced hereinbefore. It may be relevant here to mention that the assessment of assessee's income for asst. yr. 1991-92 was made at loss of Rs. 13,51,830 vide order under s. 143(3) dt. 1st Feb., 1994. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... can be legitimately claimed under s. 10(2)(xv). Here is a case where there is no doubt about the genuineness of the expenditure. There is also the compulsiveness in the sales-tax demand which can be ignored only at the peril of the assessee. This expenditure had never been taken note of in the earlier years for one reason or other. In the absence of any legal bar in the way of the assessee claiming this expenditure in the year of demand for which provision has already been made in his accounting year, deduction under s. 10(2)(xv) is permissible in law and has been rightly allowed by the Tribunal. We are in respectful agreement with the said view expressed by the Gauhati High Court. We, therefore, answer question No. 5 in the negative, i.e., in favour of the assessee and against the Revenue. 9.17 In the present case, the AO has himself observed that the expenditure on technical know-how and drawings and designs acquired by the assessee relate to a new project which was successfully implemented in the year under consideration. Apart from this, the assessee, in the statement of facts, submitted before the CIT(A) that the payments of Rs. 59.69 lakhs made till March, 1991, were in fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 84-85 in the assessee's own case should be treated as applicable for the assessment year in question. Next issue to be considered was whether the expenditure resulted in acquiring advantage of any asset of enduring benefit to the assessee. From the above discussion about the nature and terms of the agreement, it became clear that the assessee had not acquired any asset as such but it had acquired only the right to use for a limited period. There was also no absolute certainty of its continued use for the business for a long period because of existence of the terms of the agreement for its termination even before 8 years. The assessee had not acquired any advantage in capital field. The advantage consisted merely of facilitating the assessee's manufacturing and trading operation to be carried on more profitably while leaving other capital untouched. Moreover, every enduring advantage is not of capital nature. The Supreme Court's decision in Empire Jute Co. Ltd. vs. CIT makes this position very clear. Again in these days of fast changing world of technology the advantage under the agreement could not be considered as advantage of enduring nature. In view of the above disc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dgment of the Hon'ble apex Court in the case reported in (2000) 159 CTR (SC) 137 : (2000) 242 ITR 659 (SC). The relevant extracts from the head note are reproduced below : The assessee was an existing and old undertaking. It was carrying on the business of manufacture and sale of petrochemical items for several years. The technical know-how was acquired for improvisation of the existing products and for widening the range of its products by way of backward integration and forward integration. The new projects commenced by IPCL with the technical know-how were a part of expansion of the existing business. A new unit of existing business is distinct from commencing an altogether new business. The lump sum payment made by the assessee for acquiring technical know-how for improving its existing products and for extending the range of its existing business and/or for expanding the said business was clearly allowable as revenue expenditure. Therefore, the AO was to be directed to allow deduction of the sum incurred by the assessee in respect of payments on account of know-how and technical fees to 'T' as a revenue expenditure. The AO was also to be directed to simultaneously ..... X X X X Extracts X X X X X X X X Extracts X X X X
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