Tax Tribunal: Appeals partly allowed, issues remanded. Duty drawback untaxed. Know-how purchase capitalized. Disallowance under Section 43B set aside.

The Tribunal partly allowed both appeals, remanding several issues for re-examination by the Assessing Officer. The duty drawback was not taxed as the right to receive it had not accrued. The purchase of know-how was to be capitalized for depreciation. Disallowance of interest under Section 43B was set aside. Depreciation and maintenance expenses on a guest house were allowed. The claim for investment allowance on exchange rate fluctuation was dismissed but could be raised in the next assessment year. Depreciation on technical know-how was remanded for re-examination. Software development charges were treated as revenue expenditure. Entertainment expenditure was adjusted to 35%. An additional ground on investment allowance for foreign exchange fluctuation was admitted for verification.

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Issues Involved:
1. Taxation of Duty Drawback
2. Treatment of Purchase of Know-How
3. Disallowance under Section 43B
4. Depreciation and Maintenance Expenses on Guest House
5. Investment Allowance on Exchange Rate Fluctuation
6. Depreciation on Technical Know-How
7. Software Development Charges
8. Entertainment Expenditure
9. Additional Ground on Investment Allowance for Foreign Exchange Fluctuation

Detailed Analysis:

1. Taxation of Duty Drawback
The primary issue was whether the duty drawback amounting to Rs. 2,09,46,100 should be taxed in the assessment year 1990-91. The Assessing Officer included this amount as income, arguing that the assessee followed the mercantile system of accounting and had lodged the claim with the government. However, the assessee contended that the duty drawback was not finally determined by the government and should not be taxed until verified and accepted. The CIT(A) upheld the addition, but the Tribunal found that the right to receive the duty drawback did not accrue until the government accepted the claim. Therefore, the addition was deleted, and the appeal was allowed.

2. Treatment of Purchase of Know-How
The issue was whether the purchase of know-how for Rs. 4,48,69,509 should be treated under Section 35AB or capitalized and depreciated. The Assessing Officer and CIT(A) treated it under Section 35AB, allowing only 1/6th as deferred revenue expenditure. The Tribunal noted that the know-how was acquired for setting up a plant and should be capitalized, allowing depreciation under Section 32. The matter was remanded to the Assessing Officer for re-examination, and the appeal was allowed for statistical purposes.

3. Disallowance under Section 43B
The Assessing Officer disallowed Rs. 3,31,300 as interest accrued but not paid under Section 43B. The assessee argued that the interest was not due as per the loan agreement with IDBI until December 21, 1990. The Tribunal agreed, noting that the interest was not payable within the financial year 1989-90, and set aside the disallowance for re-examination by the Assessing Officer.

4. Depreciation and Maintenance Expenses on Guest House
The CIT(A) upheld the disallowance of Rs. 2,62,923 for depreciation and maintenance expenses on a guest house. The Tribunal dismissed this ground, referencing the Special Bench decision in Eicher Tractors Ltd. v. Dy. CIT, which ruled against the assessee on similar grounds.

5. Investment Allowance on Exchange Rate Fluctuation
The CIT(A) disallowed the claim for investment allowance on exchange rate fluctuation, stating it fell beyond the previous year. The Tribunal dismissed the ground but allowed the assessee to agitate the issue in the subsequent assessment year 1991-92.

6. Depreciation on Technical Know-How
For the assessment year 1991-92, the CIT(A) followed the previous year's decision and disallowed depreciation on technical know-how, treating it under Section 35AB. The Tribunal remanded the issue to the Assessing Officer for re-examination, following the directions given for the assessment year 1990-91.

7. Software Development Charges
The Assessing Officer disallowed Rs. 8,08,234 for software development, treating it as capital expenditure. The Tribunal found that the expenditure was for increasing operational efficiency and did not result in a capital asset. Thus, the disallowance was deleted, and the expenditure was treated as revenue in nature.

8. Entertainment Expenditure
The CIT(A) allowed only 1/4th of the entertainment expenditure towards employee participation, while the assessee claimed 1/3rd. The Tribunal modified the order, directing the Assessing Officer to allow 35% of the expenditure in line with consistent ITAT decisions.

9. Additional Ground on Investment Allowance for Foreign Exchange Fluctuation
The Tribunal admitted an additional ground for investment allowance on foreign exchange fluctuation, which had taken place in the assessment year 1991-92. The Tribunal directed the Assessing Officer to allow the deduction, verifying the amount in question.

Conclusion:
Both appeals were partly allowed, with several issues remanded for re-examination by the Assessing Officer. The Tribunal provided detailed directions for each issue, ensuring compliance with relevant legal provisions and precedents.

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