TaxTMI 
TaxTMI 
2009 (10) TMI 639
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.... that the disallowance under rule 6D had to be worked out on the basis of per trip undertaken by the employees. Since the assessee did not furnish detailed working under rule 6D on the basis of per trip, the Assessing Officer estimated the disallowance at Rs. 3 lakhs. The CIT(A) directed Assessing Officer to compute the disallowance on the basis of per trip as similar direction given in assessment years 1991-92 and 1992-93. 4. At the outset, the learned AR submitted that this issue is covered by the decision of the ITAT in assessee's own case for assessment years 1995-96 and 1996-97. The learned AR further submitted that this is an old matter; therefore, the issue may be decided in the light of decisions of ITAT in the earlier years in assessee's own case. 5. The learned DR, on the other hand, placed reliance on the orders of the revenue authorities in support of revenue's case. 6. We have heard the learned representatives of the parties and record perused. We find that the ITAT in assessee's own case for assessment year 1996-97, ITA No. 3173/Mum./2001 (Assessee's appeal) and ITA No. 3829/Mum./2001 vide order dated 30-6-2009 dealt the similar issue and held as under:- "....
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....aising the ground for Rs. 89,40,289. The CIT(A) noted the details in this respect, which are as under:- (1) Rent Rs. 8,71,821 (2) Depreciation Rs. 5,69,150 (3) Rates, taxes and repairs Rs. 31,30,635 (4) Occupancy charges of the Nature of power Rs. 23,53,267 Total Rs. 89,40,389 7.2 Before the CIT(A), the assessee relied upon the Third Member decision of ITAT in assessee's own case for assessment year 1986-87 regarding rent, rates and repairs. The CIT(A) directed the Assessing Officer to recompute the disallowance by following the decision in the case of Eicher Tractors Ltd. v. Dy. CIT [2003] 84 ITD 49 (Delhi) (SB). 8. At the outset, the learned AR submitted that the issue is covered against the assessee by the decision of ITAT in assessee's own cases for assessment years 1995-96 and 1996-97. However, the learned AR submitted that Guest House expenses, particularly, occupancy charges are allowable expenses. The learned AR in support of his contention, relied upon the decision of ITAT in the case of Glaxo India Ltd. v. Joint CIT [IT Appeal No. 1420/M of 2009, dated 21-10-2008]. The relevant finding pointed out by the learned AR is reproduced below:-....
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....nditures relates to a capital asset and, therefore, is in capital nature. As regards the legal fee paid to M/s. Little & Co. in connection with joint venture with Mahindra Ford India Ltd. and Owens Corning India Ltd., the Assessing Officer held that these expenses were incurred for obtaining legal services for entering into a joint venture agreement with these companies. The activity intended to be taken in the proposed joint venture company was no business activity of the company and therefore, these expenses were capital in nature. 13. The learned AR, at the outset, submitted that in identical set of facts, this issue has been set aside to the file of the CIT(A) by the ITAT in earlier years for assessment years 1996-97 and 1995-96. 14. The learned DR on the other hand relied upon the orders of the revenue authorities. 15. We have heard the learned representatives of the parties and perused the record. We find that the ITAT in assessee's own case in assessment year 1996-97 decided the similar issue by holding as under:- "15. Ground 7 relates to expenses treated as capital expenditure involving the expenses such as Consultancy fee paid to Mukund Joshi (Rs. 25,000) and t....
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.... be used for capital expenditure and general corporate purposes. The Assessing Officer held that the expenditure incurred on issue of FCCB mainly relates to shares and such expenses have to be treated as capital expenditure as it led to enhancement of the capital structure of the company. He also observed that though the assessee had claimed the deduction under section 37(1), this is an issue on which provisions of section 35D are applicable. Since the assessee had not made claim under section 35D, the Assessing Officer disallowed the entire expenditure holding it to be not revenue expenditure. The CIT(A) confirmed the disallowance. 18. The learned AR submitted that the act of borrowing money was incidental to the carrying of the business. The loan obtained was not an asset or an advantage of enduring nature. The expenditure was made for securing the use of money for a certain period. He further submitted that when there is no express prohibition, an outgoing, by means of which an assessee procures the use of a thing by which he makes a profit, is deductible from the receipts of the business to ascertain the taxable income. Reliance as placed upon Supreme Court judgment in the c....
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....and in the light of that the claim of the assessee is allowed. 21. Ground No. 5 is against the disallowance of development expenses of Rs. 5,82,15,305 paid to M/s. Hawtal Whiting & Engineering Company Ltd. and ground No. 6 is pertaining to the amount of Rs. 3,72,04,754 paid to the said party. Since the facts of the both the grounds are identical, the same are to be decided together. 22. Briefly, the facts of both the grounds are that the assessee claimed both the expenditure as revenue expenditure under section 37(1) of the Act. The submission of the assessee is that during the year under consideration, the assessee-company paid the amount of Rs. 5,82,15,305 to M/s. Hawtal Whiting & Engineering Company Ltd., UK for improving the ride and handling comforts of its existing 2 wheel drive/4 wheel drive utility vehicles. These expenses are in the nature of development expenses for improving the performance of existing product i.e., utility vehicle. Similarly, the assessee-company paid Rs. 3,72,04,754 to Hawtal Whiting & Engineering Company Ltd. for the following purpose:- (Rs.) (a) Development of concept clay model for 2/4 wheel drive vehicle 1,50,9....
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.... the purposes of the business or profession shall be allowed in computing the income chargeable under the head 'Profits and gains of business or profession'. Explanation.-For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure." 25.2 Expenditure on know-how. "35AB (1) Subject to the provisions of sub-section (2), where the assessee has paid in any previous year relevant to the assessment year commencing on or before 1-4-1998 any lump sum consideration for acquiring any know-how for use for the purposes of his business, one-sixth of the amount so paid shall be deducted 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 ....
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....nd to have been proved then, provision of section 35AB(1) gets attracted thereby entitling an assessee to deduct 1/6th of the amount in computing the profits and gains of business for that previous year and remaining to be deducted in equal instalment for each of the five immediately succeeding previous years. This is subject to condition that the payment is made against acquiring of know-how as defined in Explanation appended to section. In other words, it must be proved that payment is made by an assessee for acquiring that know-how which satisfies the requirement contained in Explanation appended to section 35AB. 25.5 The CBDT Circular No. 421, dated 12th June, 1985, explanatory notes on the provisions of the Finance Act, 1985 reads as under: "Business Expenditure: sections 35AB, 35CC, 36(1)(vii ), 36(1)(viia), 36(1)(viii) Deduction in respect of expenditure on 'know-how' 15.1 With a view to providing further encouragement for indigenous scientific research, the Finance Act has inserted a new section 35AB in the IT Act. The section provides that any lump sum consideration paid by the taxpayer for acquiring any know-how for use for the purposes of his business will be....
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....td. (supra) while dealing with the issue related to section 35AB of the Act, held as under: "4. Two questions arise for determination in this civil appeal. Firstly, whether the question regarding applicability of section 35AB of Income-tax Act, 1961 was ever raised by the Assessing Officer in this case ? The second question which arises for determination in this case is whether the expenditure incurred is revenue expenditure or whether it is an expenditure which is capital in nature and depending on the answer to the said question, the applicability of section 35AB of the Income-tax Act needs to be considered. 5. On the first question, it has been vehemently urged by Shri Iyer, learned senior counsel on behalf of the respondent assessee, that the High Court was right in dismissing the Department's appeal in limine following its earlier judgment in the case of CIT v. JCT Electronics Ltd. [2006] 154 Taxman 234 (Punj. & Har.). On the first question, there is considerable amount of confusion. It appears that prior to assessment year 1995-96, the Department has been contending that the royalty expenditure comes within the ambit of section 35AB. However, there is some doubt as to w....
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....or the High Court to decide, after construing the agreement between the parties, whether the expenditure is revenue or capital in nature and, depending on the answer to that question, the High Court will have to decide the applicability of section 35AB of the Income-tax Act. On this aspect we keep all contentions on both sides expressly open." 25.8 The Hon'ble jurisdictional High Court in the case of CIT v. Tata Engineering & Locomotive Co. (P.) Ltd. [1980] 123 ITR 538 (Bom.) has decided the similar issue. The facts, question and finding thereon by the Hon'ble jurisdiction High Court are as under:- "This reference raises a question relating to the nature of payments made by the assessee-company to two foreign companies in accordance with two agreements dated 3rd October, 1955, and 11th April, 1956. The assessee-company, M/s. Tata Locomotive and Engineering Co. Ltd. (hereinafter referred to as "Telco") had entered into an agreement with M/s. Daimler Benz, according to which, the assessee was to establish a factory for the manufacture in India of Daimler Benz trucks and other automotive products upon the terms and conditions mentioned in the agreement. The assessee-company was ....
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....ion for training facilities. The period of the agreement was to run out after 15 years. Telco was, however, not going to stop manufacturing after that and if production of quality trucks was to continue, Telco was bound to see that its own personnel were properly trained with the know-how and possessed all the technical information necessary for the manufacture of a quality product. If the transaction embodied in the agreement is looked at commercially it looks to us as nothing more than obtaining the services of a consultancy so far as the supply of know-how is concerned, and in the nature of a licence to use the trade name so far as permission to use the trade name of M/s. Daimler Benz was concerned. The payment was not, therefore, for acquisition of any capital asset. Though the production of trucks was to be continued by Telco even after the expiry of agreement, the use of the trade mark of M/s. Daimler Benz could not be used by Telco as the licence to use the name had come to an end. So far as the payments made under the agreement were concerned, they were to be made partly in the nature of royalty and partly in the nature of share in the profit but they were only intended to ....
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....that technical know-how is acquired under a collaboration agreement. The fact that the same information is continuously used whether in the same form or in improved form will, therefore, not be relevant in deciding whether technical know-how obtained under such an agreement is a capital asset. Technical know-how made available by a party to such an agreement does not stand on the same footing as protected rights under a registered patent. There is no property right in a know-how which can be transferred just as it is, in a limited sense, in a patent. In any case, a party making the know-how available can hardly make any attempt to retrieve all the information supplied after the other party to the agreement has fully equipped itself and made itself familiar with the technical information and know-how supplied. The fact that the production can still be continued after the expiry of the agreement is, therefore, in our view, wholly immaterial for deciding whether such know-how can be treated as a capital asset. In our view, the present case will be governed by the law laid down by the Supreme Court in the case of CIT v. Ciba of India Ltd. [1968] 69 ITR 692 . In that case, the Suprem....
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....e the collaboration agreement, in the form of travelling expenses, will also have to be treated as revenue expenditure. We may refer to the decision of the Calcutta High Court in CIT v. Hindusthan General Electrical Corporation Ltd. [1971] 81 ITR 243 , where the Calcutta High Court has taken the view that there is no property right in "know-how" that can be transferred, even in the limited sense that there is a legally protected property interest in a secret process. It was pointed out in that case that special knowledge or skill can indeed ripen into a form of property in the fields of commerce and industry, as in copyright, trade marks and designs and patents and where such property is parted with for money, what is received can be, but will not necessarily be, a receipt on capital account. It was also pointed out in that case that royalties, usually are periodical payments for continuous enjoyment of certain benefits under a contract, but in every case payment of royalty is not a capital expenditure. It was held in that case that the payments were intimately linked up with the manufacturing activities of the assessee and not with the capital values of the assets that the asse....
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....diture paid in lump sum are allowable in 6 years or 3 years as the case may be. In other words, the expenditure covered under section 35AB should be in the nature of capital expenditure because the scheme of the Act is that all the revenue expenses are allowable while computing income from business or profession under section 37(1) of the Act. Since in the case under consideration, the expenditure claimed by the assessee is revenue in nature, therefore, the same is allowable under section 37(1) of the Act and not under section 35AB of the Act. The above view is supported by the fact that the Finance (No. 2) Act, 1998 introduced from the assessment year 1999-2000 onwards, the concept of allowance of depreciation on intangible assets like know-how, patent rights, copyrights, etc. As a consequence, sub-section (1) was also amended so as to provide that any expenditure of capital nature incurred on or after 1-4-1998 on the acquisition of know-how used for the purposes of business shall not qualify for deduction under the said section 35AB. Such capital expenditure incurred after 31-3-1998 would be eligible for depreciation allowance. We, therefore, set aside the orders of the revenue a....
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....ment year 2002-03. 29. On the other hand, the learned DR has relied upon the orders of the revenue authorities. 30. After hearing the learned representatives of the parties and perusing the record, we find that the ITAT Special Bench of Delhi in the case of Amway India Enterprises (supra) has laid down the detailed guidelines in this regard. Since the facts are required to be examined in the light of the above decision of ITAT Special Bench, we remit the matter back to the file of the Assessing Officer with a direction to decide the issue in accordance with the guidelines laid down in the above decision of ITAT Special Bench after providing reasonable opportunity of hearing to the assessee. 31. Ground No. 8 is against the disallowance of Rs. 1,40,80,000 paid to MSEB. 32. Before the Assessing Officer, the assessee claimed that the payment was made to MSEB for additional power as a non-refundable consumer contribution/service charges and that the property of cable and related accessories was with MSEB. The Assessing Officer, however, observed that the assessee was given an option by the MSEB to either provide the assets at site or make payments to MSEB for them to provide....
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..... CIT [1974] 96 ITR 568 (J&K), the following conditions should be satisfied: (i)The expenditure in question should not be of the nature described under the specific provisions of sections 30 to 36. (ii)The expenditure should not be of the nature of capital expenditure; (iii)It should not be a personal expenditure; (iv)The expenditure should have been laid out or expended wholly and exclusively for the purposes of the business or profession. 35.1 It is thus clear that conditions at (i), (ii ) and (iii) above are negative conditions whereas the conditions at (iv) above is a positive condition. If the expenditure satisfies the negative conditions, it has to satisfy the positive condition in order to be eligible for deduction under section 37(1) of the Act. Thus, section 37(1) allows deduction of any 'expenditure' subject to conditions noticed above. In Indian Molasses Co. (P.) Ltd.'s case (supra), the Supreme Court pointed out that the word "expenditure" is equal to "expense" and "expense" is money laid out by calculation and intention. But the idea of "spending" in the sense of "paying out or away" money is the primary meaning and it is with this meaning that one is co....
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....um to a separate account meant for the employees' welfare of the Tractor Division at Kandivli. He pointed out that the expenditure of Rs. 10,64,258 represents expenditure made by the assessee during the assessment year 1997-98 out of the sum transferred to such account/fund and thus instead of spending directly on the employees the amount is routed through a separate account/fund maintained by the assessee in its books of account. 39. The learned DR, on the other hand, relied upon the orders of the revenue authorities. 40. We have heard the learned representatives of the parties and perused the record. We find that the ITAT in assessee's own case in assessment year 1996-97 cited supra decided similar issue by holding as under:- "12. Ground 6 relates to disallowance under section 40A(9) confirming the disallowance of Rs. 9,20,955 actually incurred by the welfare fund (of Tractor Division) on Staff Welfare. The assessee contends that the contributions to the said fund are already disallowed under section 40A(9) by the assessee itself and as such expenditure out of the said fund ought to have been allowed as a deduction as maintaining such funds is not a legal requirement. As....
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....955, the assessee's contribution to Welfare Trust for employees. Assessee relied on the provisions of section 40A(9) in his favour but failed to evidence that his case falls within the meaning of the said section. Assessing Officer also failed to give the basic details required as to how the assessee's case does not fall in the exceptions specified in this regard. He simply mentioned that section 40A(9) applies to the assessee's case and the claim is not allowable. Impugned order also does not contain basic details. Further, an identical issue as mentioned by the CIT(A) came up during the immediately preceding assessment year and issue was set aside to the files of the Assessing Officer as discussed in para 35 of the order of the Tribunal for the assessment year 1995-96. In view of the above position, we are of the considered opinion that the issue must be set aside to the files of the Assessing Officer for bringing relevant facts into consideration and pass a speaking order as to how the claims of the assessee is not proper. He shall also examine if the claims of the assessee fall in the exceptions specified under section 40A(9) of the Act. Thus, the order of the CIT(A) is set asi....
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....sment years 1995-96 and 1996-97, we remit the matter back to the file of the Assessing Officer with a direction to decide the issue in accordance with the final outcome for assessment years 1995-96 and 1996-97, after providing opportunity of hearing to the assessee. 44. Ground No. 11 is against the confirmation of disallowance of development expenses of Rs. 2,02,41,000 paid to M/s. AVL, Austria. 45. The Assessing Officer held that the payment was made for providing know-how to manufacture of engines of specific parameters and that a similar payment made in the previous year relevant to assessment year 1996-97 was held as allowable under section 35AB. Therefore, for the year under consideration also, the Assessing Officer considered the claim of the assessee under section 35AB only and allowed 1/6th of the expenditure as deduction. The CIT(A) confirmed the action of the Assessing Officer. 46. The learned AR submitted that an identical issue came up before the ITAT in assessment year 1996-97 wherein the ITAT has set aside the matter back to the file of the Assessing Officer. However, on merit, the learned AR submitted that the consideration has been paid by the assessee was ....
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....of redesigning or mere improvements only. Revenue authorities and the assessee were mostly on the legality of the issue instead of concentrating on the requisite facts on the actual details of the improvements/upgradation as claimed by the assessee or the details of redesigning as claimed by the revenue. There is no reference to any controlling agreement involving M/s. AVL, Austria for the development of certain engines forming part of its range of tractors as also its two/four wheel-drive vehicles and the enabling clauses if any. In the absence of these basic details, in our considered opinion, it is difficult to decide the issue judiciously. For this purpose, the issue has to go to the files of the Assessing Officer for fresh examination of the issue to pass a speaking order bringing the factual details as detailed above. Assessee shall be given reasonable opportunity of being heard to the assessee. Accordingly, the ground of the assessee is set aside." 48.1 Since facts are identical, we respectfully follow the decision of ITAT in assessment year 1996-97 and in the light of that we remit the matter back to the file of the Assessing Officer with identical directions. 49. Gro....
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....ating to assessment year 1995-96 in the assessee's own case vide ITA No 902/Mum./2001 and Hon'ble Tribunal has discussed the same in Paras 41 to 43 of the said order and finally set aside the said ground. We have perused the same and Para 43 is relevant from the order of the Tribunal is as under:- 43. We have heard the rival submissions and perused the order of the lower authorities in this regard. It is noticed from the orders of the revenue authorities that Rs. 39,27,406 is total claim on account of the entertainment expenditure and it is a composite expenditure incurred both for the guest or clients and the accompanying employees. Assessee treated 50 per cent of the expenditure is relatable to the employees, which is not allowable in view of the provisions of Explanation 2 to section 37(2). We have examined whether the entertainment expenditure attributable to the employees should be allowed when there is no evidence filed by the assessee. In this regard, we have perused the jurisdictional High Court judgment in the case of Indian Plastic Ltd. 240 ITR 528 (Mum.) where the Bombay High Court held in favour of the Revenue stating that the expenditure incurred by the assessee in ....
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....nses amounting to Rs. 12,76,93,682 are also in the nature of entertainment expenditure, the Assessing Officer proceeded to disallow 5 per cent of the same. Accordingly, Rs. 63,84,684 being 5 per cent of Rs. 12,76,93,682 was treated as entertainment expenditure in addition to the suo motu disallowance by the assessee. During the first appellate proceedings, the CIT(A) not only deleted the above addition of Rs. 28,24,141 but also restricted the disallowance to 2.5 per cent of Rs. 12,76,93,682 instead of 5 per cent as discussed above. 11. During the appeal proceedings before us, Ld. AR for assessee mentioned that an identical issue was adjudicated by the Hon'ble Tribunal in the above referred assessment years in assessee's own case vide Paras 10 and 11 of the said order, where the Tribunal held that such disallowance is uncalled for as the disallowance were mere estimations. The Ld. DR could not controvert the submissions of the Ld. Counsel for the assessee with any material which was not submitted before the revenue authorities. This is the case where guest register was maintained and assessee made disallowance suo motu based on the entries in the said register. Therefore, further....
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....igh Court in the case of Otis Elevators Co. (India) Ltd. v. CIT 195 ITR 682 that the club membership provides the officers & executives of the company better contact and association with persons in good position and that such expenses should be considered to have been made for promoting the business of the assessee. Further in the case of Gujarat State Export Corporation Ltd. v. CIT 209 ITR 649 , the Hon'ble Gujarat High Court has held that the payment for membership of clubs is not a capital expenditure. Respectfully following these decisions it is held that the expenditure on club membership is an allowable business expenditure. Also the issue has been decided by the ld. CIT(A) in assessee's favour in assessment years 1994-95 to 1996-97. The ground of appeal No. 3 is, therefore, allowed and the disallowance is deleted." 58. We have heard the learned representatives of the parties and perused the record. We find that the ITAT in assessee's own case for assessment year 1996-97 cited supra confirmed the order of CIT(A) in Revenue's appeal by observing as under:- 43. Grounds 7 and 8 relate to the disallowance of corporate membership paid to the clubs holding that the same is ca....
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....ries Ltd. ( 278 ITR 546) (SC) and also the SB decision in the case of Eicher Tractors Ltd. ( 84 ITD 49) (Delhi). We have perused the same and find an identical issue was adjudicated in favour of the revenue in the assessee's own case for the assessment year 1995-96 and the relevant Para from the order of the Tribunal is as under:- '40. Ground 2 relates to guest house expense under section 37(4) of the Income-tax Act. In this regard, the Ld. Counsel for the assessee fairly mentioned that this issue is covered in favour of the revenue vide Tribunal order (for the assessment year 1994-95) in the assessee's own case vide Para 35 of the said order dated 8-12-2006. Para 35 is reproduced as under:- 35. The learned DR submitted that the issue of guest house expenses is covered in favour of the Revenue with the decision of Hon'ble Supreme Court in the case of Britannia Industries Ltd. The learned Counsel for the assessee could not controvert the submission of the learned DR. We have considered the rival submissions. The issue of allowability of guest house expenses is covered in favour of the Revenue with the decision of the Hon'ble Apex Court in the case of Britannia Industries Ltd. ....
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....under consideration. We find that the ITAT in assessment year 1996-97 cited supra, dealt the similar issue and held as under:- "Ground 3 relates to provision for warranty. Ld. Sr. Counsel for the assessee submitted that the issue of provision for warranty is covered in favour of the assessee by the decision of the Mumbai Tribunal in the assessee's own case for the assessment year 1995-96 vide the Tribunal order referred above. We have perused the same as mentioned in Para 8 of the said order that the Tribunal while deciding the same in its favour has relied on the assessee's own case for the assessment year 1991-92 in ITA Nos. 3269 and 3325/Mum./1997 as also in ITA No. 743/M/2001 for assessment year 1995-96. Ld. DR relied on the orders of the Assessing Officer and CIT(A). We have considered the rival submissions and perused the relevant parts of the Tribunal order together with the orders of the revenue authorities. We are of the considered opinion that the issue is being covered in favour of the assessee by the said decisions of the Tribunal. Accordingly, ground 3 is allowed." 64. Since the facts of the case under consideration are identical to that of assessment year 1996-9....