TaxTMI 
TaxTMI 
TaxTMI 
2015 (10) TMI 2385
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..../s. AMCO Power Systems Limited (for short 'APSL'), the former had agreed to transfer the technical know-how and grant of non-exclusive license with effect from 01.03.1998 to the respondent-assessee to manufacture and sell Pocket Plate Nicad Batteries on payment of lumpsum consideration of Rs. 5.00 crores for the licence and right to use the technology. According to the said agreement, the payment was to be made as per the following schedule: 1. Before 31/5/1998 Rs. 10 lakhs 2. Before 31/5/1999 Rs. 25 lakhs 3. Before 31/5/2000 Rs. 25 lakhs 4. Before 31/5/2001 Rs. 25 lakhs 5. Before 31/5/2002 Rs. 25 lakhs 6. Before 31/5/2003 Rs. 100 lakhs 7. Before 31/5/2004 Rs. 100 lakhs 8. Before 31/5/2005 Rs. 100 lakhs 9. Before 31/5/2006 Rs. 90 lakhs 3. However, admittedly the payment for the entire consideration was not made by the assessee-APSL to ABL strictly as per the schedule but according to the details given herein below: i. 31/05/1998 Rs. 10,00,000 ii. 01/09/1999 Rs. 50,00,000 iii. 16/03/2002 Rs. 5,00,000 iv. 31/03/2002 Rs. 40,00,000 v. 25/04/2002 Rs. 5,00,000 vi. 17/01/2003 Rs. 5,00,000 vii. 03/04/2004 Rs. 30,000 viii. 13/04/200....
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....ection 35AB was granted; but respondent-assessee was not found to be entitled to set-off of the brought forward losses, considering the change in beneficial holding of 51% or more, as provided under Section 79 of the Act. 7. Being aggrieved by the order of the Commissioner of Income Tax (Appeals), the assessee as well as Revenue, both filed appeals before the Income Tax Appellate Tribunal, Bangalore, Bench-B. (hereinafter referred to as 'the Tribunal' for short). The assessee challenged disallowance of the benefit claimed regarding set-off of brought forward losses, whereas the Revenue filed an appeal challenging the grant of deduction under Section 35AB of the Act to the assessee. The assessee had also challenged the disallowance of lease rentals paid by it to the extent of Rs. 2,08,080/-. The Tribunal, however dismissed the appeal of the Revenue, and partly allowed the appeal of the respondent-assessee by allowing the benefit of set-off of brought forward losses, but did not give the benefit of lease rentals paid by the assessee. Challenging the said order of the Tribunal, the Revenue has filed this appeal raising two substantial questions of law, which, by consent of le....
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....1-02 2002-03 2003-04 Share holding Pattern a) ABL 100% 100% 55% 6% 6% b) TAFE Nil Nil Nil 49% 49% c) APIL Nil Nil 45% 45% 45% 12. The relevant Section 79 of the Act reads as under: S.79: "Carry forward and set off of losses in the case of certain companies" Notwithstanding anything contained in this Chapter, where a change in shareholding has taken place in a previous year in the case of a company, not being a company in which the public are substantially interested, no loss incurred in any year prior to the previous year shall be carried forward and set off against the income of the previous year unless- (a) on the last day of the previous year the shares of the company carrying not less than fifty-one per cent of the voting power were beneficially held by persons who beneficially held shares of the company carrying not less than fifty-one per cent of the voting power on the last day of the year or years in which the loss was incurred. Provided........ Provided further ......... (b) [omitted w.e.f. 01.04.1989] (emphasis supplied) 13. The said Section provides that where there is a change in shareholding of a Company, no loss incurred in any ye....
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....ing power was beneficially held with the ABL during the assessment years 2002-03 and 2003-04 also, and would thus be entitled to carry forward and set-off of business losses for the previous years. 17. The fact that ABL is the holding Company of APIL, which is the wholly owned subsidiary of ABL and that Board of Directors of APIL are controlled by ABL, is not disputed. The submission of the learned counsel for the respondent-assessee that the shareholding pattern is distinct from voting power of a Company, has force. Section 79 of the Act specifies that "not less than 51% of the voting power were beneficially held by persons who beneficially held shares of the Company carrying not less than 51% of the voting power." Since the ABL was having complete control over the APIL, which is the wholly owned subsidiary of ABL, in our view, even though the shareholding of ABL may have reduced to 6% in the year in question, yet by virtue of being the holding Company, owning 100% shares of APIL, the voting power of ABL cannot be said to have been reduced to less than 51%, because together, both the companies had the voting power of 51% which was controlled by ABL. 17. The purpose of Section 79....
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....Revenue, and confirm the finding of the Tribunal in this regard. 20. Question No.2: This question relates to the entitlement of the assessee for grant of deduction under Section 35AB of the Act, in respect of payment of Rs. 5 Crores for transfer of technical know-how, which was transferred on 01.03.1998, and as per the agreement, the amount was payable between 31.5.1998 and 31.05.2006; and had actually been paid within time though not strictly as per the instalments provided in the agreement, the details of which have already been given earlier in this order. 21. The submission of learned counsel for the appellant-Revenue is that the benefit can be claimed only when the actual payment is made, and since no payment was made on the date of transfer of the technical know-how (which was 01.03.1998), as the first payment was made only on 31.05.1998, which was in the financial year 1998-99, the benefit of Section 35AB of the Act could not be availed by the assessee-respondent. It is contended that "paid" for the purpose of Section 35AB of the Act would be as per the definition of "paid" provided in sub-section (2) of Section 43 of the Act, according to which, it would be actual payme....
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....ing 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) xxxx (3) xxxx Definitions of certain terms relevant to income from profits and gains of business or profession S.43(2): In sections 28 to 41 and in this section, unless the context otherwise requires- (1) xxxx (2) "paid" means actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under the head "profits and gains of business or profession" (3) xxxxx (4) xxxxx (5) xxxxx (6) xxxxx Certain deductions to be only on actual payment S.43B- Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of - (a) any sum payable ........... (b) any sum payable .......... (c) any sum referred ......... (d) any sum payable.......... (e) any sum payable......... (f) any sum payable.......... shall be allowed (irrespectiv....
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....ction(2) of Section 43 of the Act defines "paid" to mean as 'actually paid' or 'incurred'. 'Actually paid' would be as per the cash system of accounting, and 'incurred' would be for the mercantile system of accounting. Admittedly, the assessee was following the mercantile system of accounting. The crucial word thus would be "incurred". According to the appellant- Revenue, the assessee would incur such liability to pay only as per the schedule given in the agreement, which was between 31.05.1998 and 31.05.2006. It is contended that the dates given in the schedule would be the relevant dates, as it was only when payment was not made (as per the schedule) that the assessee could be said to have become liable for making payment. According to the Revenue, the liability to pay would occur or arise on such date due for payment, as per the schedule, and not earlier. 27. Learned counsel for the respondentassessee has however submitted that the liability to pay would arise on the date when the technical know-how was transferred, which was 01.03.1998; and merely because the payment had been deferred, it cannot be said that the liability had not incurred on suc....
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....2 ITR 835 iii) Commissioner of Income Tax -vs- Gajapathy Naidu (1964) 53 ITR 114 32. In the case of Keshav Mills (supra), in paragraph-13, the Apex Court has held as under: "The mercantile system of accounting or what is otherwise known as the double entry system is opposed to the cash system of book keeping under which a record is kept of actual cash receipts and actual cash payments, entries being made only when money is actually collected or disbursed. That system brings into credit what is due, immediately it becomes legally due and before it is actually received and it brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed. The profits or gains of the business which are thus credited are not realised but having been earned are treated as received though in fact there is nothing more than an accrual or arising of the profits at that stage. They are book profits. Receipt being not the sole test of chargeability and profits and gains that have accrued or arisen or are deemed to have accrued or arisen being also liable to be charged for income-tax the assessability of these profits which are thus credited ....
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....rises when the assessee acquires right to receive the same" and it is further held that the mercantile system of accounting "brings into credit what is due immediately it becomes legally due and before it is actually received; and it brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed". 37. In the present case, the assessee, following the mercantile system of accounting, had in its books of account shown the amount of Rs. 5 crores as liable to be paid, or as liability to pay on the date on which it acquired the technical know-how, which was 01.03.1998, as the legal liability had been incurred even before it was actually disbursed. 38. Much emphasis has been laid by learned counsel for the Revenue on the phrase 'lumpsum consideration' in Section 35AB of the Act. It is contended that the payment, or the incurred liability to pay, should be in lumpsum and if the payment is not made in lumpsum, but in instalments, as in the present case, the benefit of Section 35AB would not be given to the assessee. The said issue was considered by the Jharkand High Court in the case of Tata Yodogawa Ltd., -vs- Commissioner o....
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....it was an admitted position that the assessee kept its accounts on the basis of the mercantile accounting system, and if the terms of the agreement were construed it would have to be held that the assessee had incurred the entire liability for the payment of Rs. 1,00,000/- in the assessment year under consideration though the actual payment was spread over five years. The judgment of the Division Bench also followed a decision of the Supreme Court in Kedarnath Jute Mfg. Co. Ltd. Vs. CIT (1971) 82 ITR 363 (SC) in holding that the issue as to whether the assessee is entitled to a deduction will depend on the provisions under which it is claimed and not on the existence or absence of entries in the books of account which would not be conclusive or decisive. In the present case, there is a finding that though the payment of the consideration under the agreement dated 1st October 1993 was to take place by installments it would still constitute a lump sum consideration since the amount was fixed and was not variable on the basis of other unforeseen eventualities. The assessee had evidently incurred the liability to pay the entire amount under the agreement dated 1st October 1993. In that....