9911796707
TMI Blog1989 (12) TMI 79X X X X Extracts X X X X X X X X Extracts X X X X ..... its entire holding to the assessee and thereby Indopol became a hundred percent subsidiary of the assessee. During the years under consideration, Indopol had no staff of its own and stated to have worked with the staff lent by the assessee or put by the assessee at their disposal. It had also no equipments of its own. The details of the work for which the payments are stated to have been made are as under: Sl. No. Particulars Assessment year . . 1976-77 1977-78 (i) Preparation of market survey report for hydrolic presses. 47500 — (ii) Preparation of the study report on optimum production scheduling for clear space and friction drop hammers 75000 — (iii) Preparation of market survey for Lesone Textile Machinery 25000 — (iv) Preparation of market survey report for rubber processing machinery 65000 — (v) Preparation of Procedure Manual for materials and planning functions 75000 — (vi) Preparation of report for manufacture of Chilled Rolls for rubber machinery — 470000 . . 287500 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al, confirmed the disallowance, by observing as under: "4. I have considered the matter carefully in the light of the submissions of the appellant's counsel. The facts mentioned by the IAC in the assessment order clearly show that M/s Indopol Ltd. did not have any staff of its own either during the relevant previous year or in the immediately preceding year and, therefore, it was not in a position to execute the various jobs which are stated to have been entrusted to it by the appellant company. Out of the 5 jobs, three related to the preparation of market survey reports. These reports could not have been prepared unless some staff was deployed for the survey of the market of the items for which the reports were to be prepared. As Shri S.G. Patel, director of the appellant company, was also the chairman of the Board of Directors of M/s Indopol Ltd., he must be aware of the fact that M/s Indopol did not have any staff on its pay rolls and, therefore, it was not in a position to carry out the market survey. Similarly, the other two reports could not have been prepared unless some staff was deputed for studying and analysing the existing procedure and programme of the appellant com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as rejected by the CIT(A) on the ground that Indopol had received fees of Rs. 1,13,000 from other companies which were not assessed in the assessee's hands covering salary and other expenditure of that company. In asst. yr. 1977-78, he, however, directed the IAC to delete the receipts of salary because there were no receipts in that year from outside parties. 5. Sri S.E. Dastur, the learned counsel for the assessee, submitted that Indopol was a consultancy engineering company with fifty per cent share holding by Polish Government as a result of whose participation Indopol had access to a wide range of data, information, technology, etc., available in Poland. He further submitted that, in fact, a great deal of technology was provided to Indopol which included copies of project reports on many items; copies of market surveys including market surveys on hydraulic presses, textile machinery, rubber processing machinery, report on management and organisation including materials and planning control, etc. besides supplying data, information and project reports from their existing resources, the Polish Government also debuted one of their senior most persons, Mr. J. Gorski, who was in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s done by the assessee's own staff. The fact that travelling expenses of the staff deputed were made by the assessee, he submitted, proves the fact beyond doubt that the staff, though shown to have been deputed to Indopol Ltd. had worked for and only on behalf of the assessee. It was his further contention that every thing was done under a device to evade tax inasmuch as by making these payments, the assessee had reduced its tax liability; and the income to that extent was also not subjected to tax in the hands of Indopol in view of the past losses suffered by it. To support the revenue's appeal against the relief granted by the CIT(A), he relied upon the order of the IAC (Asst). 7. We have heard the parties and considered their rival submissions. It is true that Indopol might have access to a wide range of data, information, technology, etc., and the availability of the services of a seniormost person of the Polish Government, namely, Mr. Gorski as a technical director of that company, but that ceased to have existence by the selling of the shareholding by the Polish Government in 1970 and the reduction of Indopol's staff to 'nil' in the year before the years under consideratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Rs. 3,90,007 in asst. yr. 1977-78 and only that payment alone could be disallowed as non-genuine or having been incurred for non-business purposes. So far as the payment to the employees was concerned, it could not be said that they had not rendered any services. Services were rendered by them but on assessee's account. We, accordingly, direct the IAC to reduce the disallowance by Rs. 71,646 in asst. yr. 1976-77 also. Since in the asst. yr. 1977-78 the CIT(A) himself has directed not to assess the receipts representing salary of Rs. 79,993, we confirm his order for that year. 9. The next ground in assessee's appeal for the asst. yr. 1976-77 is against the disallowance of Rs. 7,10,528 which, according to the assessee, was payable to M/s B. S. Massy Ltd. (hereinafter referred to as 'B SM' in short). From the auditor's report, the IAC found that a sum of Rs. 7,45,000 was debited in the profit loss account on account of royalty payable to B SM as abundant caution due to difference of opinion on the period of validity of the collaboration agreement. The assessee explained that it had entered into agreement dt. 1st Oct., 1959 and 4th April, 1961 with B SM for the manufac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es and considered their rival submissions. The first agreement was entered on 1st Oct., 1959. By cl. 1 thereof, the assessee was appointed as the sole licensee for the manufacture of electrically driven "Clear Space" Pneumatic Power Hammers not larger than five hundred weight falling weight to B SM's designs. By cl. 2, B SM agreed, at the request, to the licence to cover the manufacture of such hammers of a falling weight of extent seven hundred weight and ten hundred weight. It further provides that any such further hammers included in the licence by agreement with B SM shall thenceforth be deemed to be included in the expression 'hammers" wherever used in the agreement. Cl. 15 of the agreement provides for the period of the agreement and it reads as under: "15. This agreement shall remain in force for a period of fifteen years from the first day of October One thousand nine hundred and fifty nine unless terminated by one year's notice in writing given by either party to the other but such notice shall not be given to expire before the end of the eleventh year. Provided that should N.S.E. undertake the manufacture of any further hammer or hammers other than those included ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear, the Tribunal had confirmed the order of the CIT(A) allowing such expenditure as revenue in ITA No. 2789/Bom/1975-76, dt. 2nd June, 1977. The order of the CIT(A) on this point, for the year under consideration, does not, therefore, call for any interference. Both the assessee and the Revenue fail on this ground. 14. The next ground in assessee's appeal for the asst. yr. 1976-77 is against the disallowance of Rs. 4,80,000 being provision for royalty to M/s Trustzscheler Machinen Gmbh of West Germany. The disallowance was made by the ITO on the ground that it was an excess provision. The amount was reversed by the assessee in the asst. yr. 1977-78 and was directed to be not assessable by the CIT(A) in that year against which the Department is also in appeal. After hearing the parties, we confirm the orders of the CIT(A) for both the years. The payment being the excess of the actual liability of the assessee could not be allowed in the asst. yr. 1976-77. Similarly, if it was not allowed in the year in which the provision was made, its reversion in the asst. yr. 1977-78 would not be subjected to tax in that year as well. 15. In assessee's appeal for asst. yr. 1977-78 disallow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y on account of salary of the staff working in the export Department. On the balance expenditure, we do not find any merit in the claim of the assessee and the order of the CIT(A) thereon is confirmed. 19. The next dispute in both the years is against the disallowance under s. 80VV of Rs. 15,275 and Rs. 250 respectively. After going through the details, we find that in the asst. yr. 1976-77 a sum of Rs. 2,500 was incurred in connection with the filing of the return of income. In our opinion, this amount would not be subjected to 80VV and, therefore, has to be excluded from the disallowance. Similarly, in asst. yr. 1977-78, the payment of Rs. 250 made in connection with the sur-tax matters would not be an expenditure in connection with the proceedings under the IT Act which can be subjected to disallowance under s. 80VV. We, accordingly, direct the IAC to exclude the aforesaid two items from the disallowance under s. 80VV. The assessee succeeds partially in both the years on this ground. 20. Ground Nos. 7 to 10 in asst. yr. 1976-77 and ground Nos. 2 and 5 in asst. yr. 1977-78 are not pressed. They are, therefore, rejected. 21. Ground No. 11 in asst. yr. 1976-77 and 10 in as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her protocol dated 2nd Jan., 1979. According to the protocol instead of returning the machineries listed in Group B of the original Protocol, KED agreed to accept the machineries at a discount of 60 per cent of the total value. As the assessee was not a party to the protocol dt. 2nd Jan., 1979, it disputed the terms of the protocol and filed suits against STC which, in turn, filed suits against it. It is stated that a final settlement was reached on 26th Sept., 1984 according to which the assessee had agreed to give a discount of 60 per cent in respect of the machineries under Group B. 23. The claim for deduction of Rs. 23,73,157 (Rs. 28,73,157 minus Rs. 5,00,000) was not accepted by both the authorities on the ground that no liability did occur in the year under consideration because the negotiations between the STC and the foreign buyer resulted in a fresh protocol dt. 2nd Jan., 1979 and in that too the assessee was not a party. We are not here to determine whether any liability had occurred or not. In terms of the protocol dt. 13th Feb., 1977, the assessee had undertaken to take back the machineries and, therefore, the question is whether the valuation made of such machinerie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture as it was for protecting the title of the assessee's business asset. We, accordingly, direct that the sum of Rs. 575 be allowed to the assessee as business expenditure. 26. Grount No.9 in assessee's appeal for asst. yr, 1977-78 in against the dis-allowance of water charges of Rs. 16,448. A similar disallowance was confirmed by the Tribunal in assessee's appeal for 1980-81 in ITA No. 423/Bom/1985, dt. 27th April, 1988. For the reasons stated therein that water charges are not allowable, we hold that the departmental authorities were justified in rejecting the claim of the assessee. The assessee fails on this ground. 27. In Revenue's appeal for asst. yr. 1976-77, ground No. 2 is concerning valuation of the closing stock. A similar matter came up before the Tribunal in the appeals for 1974-75 and 1975-76 and vide order dt. 30th March, 1989 in ITA Nos. 1525-6 and 2530-31/Bom/1981, the matter was restored back to the file of the first appellate authority. Facts and circumstances being similar, we set aside the order of the CIT(A) for this year as well on this point and restore the same to his file with a direction to dispose of the issued fresh in terms of the directions give ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filed a writ petition under Art. 226 of the Constitution of India challenging the retrospective amendment of s, 35 and the High Court has issued an Interim Order restraining the IAC from giving effect to the retrospective amendment of s. 35(2)(iv) of the Act. In support of his contention, he has filed extracts of the writ petition and a copy of the Interim Order passed by the High Court. I have gone trough the interim order passed by the High Court and his contention in the matter is correct, However, the interim order is subject to the condition that after the question of the validity of the amendment is decided, the IAC will be at liberty to reassess or rectify the order on the basis of the amended section if it is held to be valid. The IAC is, therefore, directed to follow the High Court's interim order and allow depreciation accordingly." 31. After hearing the parties, we find that similar directions given by the CIT(A) in asst. yr. 1980-81 in were confirmed by the Tribunal in ITA No. 423 534/Bom/1985, dt. 27th April, 1988. Fact-situation being similar, we do not find any merit in the ground raised by the Revenue on this point, and hence it is rejected. 32. In the cros ..... X X X X Extracts X X X X X X X X Extracts X X X X
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