1993 (8) TMI 126 - AT - Income Tax

Tribunal Rules in Favor of Assessee on Deductibility of Know-How and Sister Concern Agreement

VBC. Industries Ltd. Versus Deputy Commissioner Of Income-Tax

VBC. Industries Ltd. Versus Deputy Commissioner Of Income-Tax - ITD 048, 292, TTJ 049, 058, Issues Involved:1. Deductibility of expenditure for acquisition of know-how under Section 35AB.2. Entitlement to deduction under Section 80HHC.Issue-wise Detailed Analysis:1. Deductibility of Expenditure for Acquisition of Know-how under Section 35AB:Facts and Contentions:The assessee claimed a deduction of Rs. 14,83,931 for the acquisition of know-how related to the manufacture of Ammonium Nitrate. The agreements for acquiring the know-how were entered into with various entities, and the payments were made during the relevant previous year. The assessee argued that the expenditure was for the purpose of its business, even though the new plant had not started commercial production.Assessing Officer's Decision:The Assessing Officer disallowed the claim, reasoning that the know-how was not used in the business during the relevant year. The officer held that the new line of business (manufacture of Ammonium Nitrate) was distinct from the existing business (manufacture of soft drinks and aerated water) and had not commenced commercial production.CIT (Appeals) Decision:The CIT (Appeals) upheld the disallowance, stating that the deduction under Section 35AB would be admissible only if the expenditure was laid out in connection with the business carried on during the previous year.Tribunal's Analysis:The Tribunal analyzed Section 35AB, which allows deduction for lump sum consideration paid for acquiring know-how, spread over six years. The essential requirements for the deduction are:1. Payment of lump sum consideration.2. The know-how should be capable of being used for business purposes.3. Actual use of the know-how in the business is not necessary; it is sufficient if it is capable of being used.The Tribunal emphasized that the intention of the Legislature was to encourage scientific methods for industrial use and modernization, and the deduction should be allowed from the year of acquisition. The Tribunal found that the assessee's businesses (manufacture of soft drinks and Ammonium Nitrate) were interconnected, with common management, funds, and consolidated accounts, thus constituting a single business.Decision:The Tribunal held that the assessee was entitled to the deduction under Section 35AB, as the know-how was acquired for business purposes, and both units were considered a single business. The order of the lower authorities was reversed, and the Assessing Officer was directed to grant the deduction of Rs. 14,55,556.2. Entitlement to Deduction under Section 80HHC:Facts and Contentions:The assessee claimed a deduction of Rs. 5,17,695 under Section 80HHC for exporting shrimps and an additional deduction of Rs. 2,24,679 for service charges paid to V.B.C. Exports Ltd., a sister concern. The Assessing Officer denied the claims, alleging that the agreement with V.B.C. Exports Ltd. was a sham intended to evade tax.Assessing Officer's Decision:The Assessing Officer held that the agreement was a device to evade tax and disallowed the deductions. The officer also added the amounts to the total income of the assessee.CIT (Appeals) Decision:The CIT (Appeals) confirmed the disallowance, stating that the agreement did not create a genuine commercial arrangement and was designed to reduce tax liability.Tribunal's Analysis:The Tribunal examined the genuineness of the agreement and the eligibility for deduction under Section 80HHC. The Tribunal found that the agreement was genuine, with substantial documentary evidence supporting the exports and the terms of the agreement. The Tribunal noted that the assessee stood to gain significant benefits, including recognition as an export house, which justified the payment of service charges.The Tribunal also referred to various judicial precedents, including the Supreme Court's caution in McDowell's case, emphasizing that legitimate tax planning within the framework of the law is permissible. The Tribunal concluded that the agreement was not a sham and that the assessee was entitled to the deductions claimed.Decision:The Tribunal held that the assessee was entitled to the deduction under Section 80HHC and the payment of service charges to V.B.C. Exports Ltd. The orders of the lower authorities were reversed, and the deductions of Rs. 5,17,695 and Rs. 2,24,679 were allowed.Conclusion:The appeal was partly allowed, granting the assessee the deductions under Sections 35AB and 80HHC as claimed.