TaxTMI 
TaxTMI 
2011 (6) TMI 792
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....ontention of the appellant that individual instances of expenditure on entertainment in excess of Rs. 10,000/- alone fell within the ambit of section 37(2) of the I.T. Act, 1961. The learned CIT (Appeals) accordingly ought to have directed inclusion of only such individual instances of expenses on entertainment, as were in excess of Rs. 10,000/- for the purposes of computing disallowance u/s 37(2)." 4. At the time of hearing, the learned Counsel for the assessee did not press the above Ground, and, therefore, the said Ground stands dismissed. 5. Ground No. 2 raised by the assessee is as follows: "Without prejudice to the above, the learned CIT (Appeals) erred in not accepting the contention of the appellant that at least 60% of the total expenditure on entertainment related to employees participating in the extension of hospitality and instead confirming exclusion of only 15% thereof while computing disallowance u/s 37(2)." 6. At the time of hearing, it was a common ground between the parties that similar issue had come up for consideration before our coordinate Bench in the assessee's own case for the assessment year 1994-95 and the Tribunal vide order dated 29.1....
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....e reads as under: "The learned CIT (Appeals) further erred in confirming rejection of the appellant's claim for deduction for the full amount of Rs. 1,84,28,945/- claimed by the appellant, being process know-how fees. The learned CIT (Appeals) ought to have held that the amount in question was `not covered by the provisions of section 35AB of the Income-tax Act 1961 and, being of revenue nature, the whole of it was allowable under sec.37." 12. The facts, in brief, are that as per the computation of the income, the assessee claimed deduction of Rs. 1,84,28,945/- being fees towards process know-how, though in the books of account, such cost was treated as deferred revenue expenditure and amortized in equal installments over a period of six years. As per the assessee, the entire expenditure of Rs. 1,84,28,945 was revenue in nature since it had only obtained use of process know-how and the expenditure was therefore not governed by the provisions of section 35AB of the Act, but was allowable u/s 37(1) of the Act. However, the Assessing Officer as well as the Commissioner of Income-tax (Appeals) by following their stand in the earlier assessment years, held that the ....
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....ay also be mentioned that even on the basis of statutory language it cannot be said that if the amount is held to be payment of royalty, it follows automatically that the expenditure would be revenue in nature. There is corresponding section for royalty a section 35AB in respect of amortization of the consideration paid for acquiring technical know-how. The learned counsel has also not stated his case as to how the amount would be admissible in full if it is held to be payment of royalty. Thus, we are of the view that looking to past history, the payment was in the nature of the payment of technical know-how fees. We have already referred to the case laws in respect of treatment to be given to such payments after insertion of section 35AB in the IT Act, namely, that all High Court decisions till now have held that the amount has to be treated only u/s. 35AB. Thus, we are of the view that in respect of payment pertaining to this year, the assessee is entitled to deduction of 1/6fn of the amount only. Accordingly, this ground is dismissed." 7.4 Since the respected Co-ordinate Bench has held that the payment pertaining to the year under consideration is entitled for deduction....
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....e Supreme court in the case of Swaraj Engines Ltd. (supra). According to the assessee, process know how fees paid under agreements entered into in earlier years may continue to be governed by section 35AB as held by the Tribunal in assessment years 1993-94 and AY 1994-95. 15. However, the learned Departmental Representative has opposed the above plea of the assessee by pointing out that no different facts have been noticed by the lower authorities in this year and, therefore, following the precedent in the assessee's own case, the matter does not require any re-examination, even for the new process know-how agreements. 16. We have carefully considered the rival submissions. Before adjudicating on the dispute raised by the assessee, a brief reference to the background is necessary. In the impugned assessment year, the Assessing Officer noticed that in the computation of income annexed to the return of income, the assessee had claimed a deduction of Rs. 1,84,28,945/- on account of fees paid towards process know-how. However, in the books of account such expenditure incurred on imported technical know-how (including process know-how) was treated as a deferred revenue expenditure....
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....rned Counsel for the assessee does not dispute this position, but it is submitted that the said precedent is applicable to such payments which have been made in terms of process know-how agreements examined and considered in the course of the proceedings for the assessment years 1993-94 and 1994-95. It is sought to be made out that in so far as the expenditure incurred in terms of the agreements entered during the year under consideration, the claim be revisited in terms of the decision of the Hon'ble Supreme Court in the case of Swaraj Engines Ltd. (supra). 18. In this context, we have carefully examined the rival stands. In the case before the Hon'ble Supreme court, the assessee Swaraj Engines Ltd. had entered into an agreement of transfer of technology know-how and trade mark in terms of which royalty was payable by it as a percentage of net selling price of the licensed products. The said expenditure was claimed as a revenue expenditure by the assessee. A question also arose as to whether such expenditure was liable to be considered in terms of section 35AB of the Act or not? As per the Hon'ble Supreme court before deciding the applicability of section 35AB of the Act, it wa....
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....all govern the efficacy of assessee's claim for deduction and it shall have to be decided, having regard to its terms and conditions whether the same are different than the earlier agreements and as to whether the expenditure is revenue or capital in nature, and depending on the answer to the said question, the applicability of section 35AB of the Act shall be decided. In nutshell in so far as process know-how fee paid in terms of the agreement entered into earlier years, the deduction thereon shall be governed by the provisions of section 35AB, as held by the Tribunal in assessment years 1993-94 and 1994-95 (supra). In so far as the fees paid under the process know-how agreements entered during the year under consideration is concerned, in order to test the efficacy of section 35AB on such claim, it would be imperative to examine as to whether the expenditure is revenue or capital in nature and depending on that answer, the Assessing Officer shall decide the applicability of section 35AB of the Act. On this limited aspect, we deem it fit and proper to restore the matter back to the file of the Assessing Officer to be adjudicated afresh, of-course after allowing assessee reasonable....
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....rtment in the past, the learned CIT (Appeals) ought not to have held that the liability in question was of a contingent nature which did not accrue at the time when the appellant made a provision for it. The learned CIT (Appeals) further erred in confirming the view taken by the Assessing Officer that the liability on account of warranty obligation accrued only when a claim is made by the customer and accepted by the appellant." 22. The assessee had made a provision of an amount of Rs. 1,20,73,791/- towards warranty obligations in respect of products/projects sold/executed by it, which formed part of Rs. 2,61,82,607/- debited in the Profit & Loss Account towards FOC expenses. Both the Assessing Officer as well as the Commissioner of Income-tax (Appeals), following their orders for assessment years 1993- 94 and 1994-95, decided the issue against the assessee holding the said provision to be contingent in nature. 23. It is now submitted by the assessee that since in Para 8 of the assessment order for the assessment year 1995-96 the Assessing Officer himself has recorded a finding on write back of earlier year's provision by stating that "However, the addition made in a....
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....te bench has already taken a view in the assessee's favour and there is no change as far as the facts of that year and also the facts in the following years thereafter, then in such a situation a consistency has to be maintained in deciding this appeal as well. Moreover, learned A.R. has made a statement at Bar that revenue department has all along accepted the accounting method of this assessee and the matter never traveled further in appeal. Further, as is clear fro the para reproduced hereinabove, the reservation of learned CIT(A) has also been dealt with by the '-respect co-ordinate bench in respect of the marginal difference a ,Expressed by the learned CIT(A) and authentically observed that\it may be that there was marginal difference in respect of the estimate and actuals. But the accounting method followed by th'e assessee ensures that such excess or shortfall be made good in subsequent year. It was thus, concluded that there was no loss for the department either in disallowing the amount this year or taxing the excess next year. As far as this issue of allowability of deduction is concerned, the same." has been settled by the Hon'ble Delhi High Court in the ....
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....r the amount of Rs. 1,32,751/-, received in terms of an out of Court settlement in respect of lease premises occupied by an ex-employee of the company was in the nature of Mesne Profits and hence a capital receipt, has been decided against the assessee by the Tribunal in the assessment year 1994-95 (supra). Similar claim has been made by the assessee for the year under appeal. Following the precedent in the assessee's own case, this Ground is decided against the assessee and is accordingly dismissed. 28. Ground No. 9 reads as follows: "The learned CIT (Appeals) further erred in confirming rejection of the appellant's claim for deduction of an amount of Rs. 25,55,407/- representing additional payment made to the Income-tax Department on account of tax allegedly short deducted at source from payment of salaries etc. to its employees. The learned CIT (Appeals) ought to have held that the amount in question was either allowable as a business expenditure under sec.37 of the Act or alternately as a business loss under sec.28 of the Act. 29. The relevant facts in relation to this are that the Income tax Department had carried out a survey and recovered Rs. 25,55,407/- from ....
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.... the parties and have gone through the orders of the authorities below. There is no dispute in the proposition that if the expenditure is really incidental to the carrying on of assessee's business and has been laid out by the assessee in his capacity as a trader, it is allowable. In each case, it will depend on the nature of the business and the nature of the deduction. In the present case, it was the statutory duty of the assessee to deduct tax at source from the employees from the salary or wages or remuneration or any other benefits paid to the employees and that statutory obligation of the assessee was not complied with by the assessee and as such, the assessee was ultimately required to pay the amount deductible at source along with the interest thereupon. In the case of Indian Aluminium Co Ltd (supra), the Hon'ble Supreme Court has held that the payment made under a statutory obligation because the assessee was in default could not constitute expenditure laid out for the purpose of the assessee's business within the meaning of sec. 10 (2) (xv) of the Income-tax Act, 1922, corresponding to sec. 37 (1) of the Income-tax-Acv, 1961. In the case before us, the amount ....
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.... deduction of expenses on public issue of equity share, the learned CIT (Appeals) erred in confirming - a) rejection of the contention of the appellant that the entire expenditure of Rs. 4,44,46,017/- was allowable as a business expenditure under sec.37(1) of the Act. b) rejection of the appellant's alternate claim that at least Rs. 23,45,301/- be allowed as a revenue expenditure. c) rejection of the appellant's other alternate claim that a sum of Rs. 21,55,462/-should be allowed as an expenditure under sec.35 of the Act. d) & e) that only expenditure of Rs. 1,92,33,047/- and Rs. 56,83,300/-will qualify for deduction under sec.35D, rejecting the contention of the appellant that the remaining expenditure out of Rs. 4,44,46,017/-, if it was not allowable under the provisions of any other section of the Act, was allowable u/s 35D of the Act. f) that the ceiling of 2.5% of capital employed as provided for in sec.35D was to be calculated with reference to the share application money relatable to the utilization of funds considered by him to be eligible for deduction under sec.35D, rejecting the contention of the appellant that the sa....
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....expenditure is allowable in the year of incurrence, proportionate expenditure is allowable under section 35 of the Act. For this proposition, reliance was placed on the decision of the Hon'ble Bombay High Court in the case of Sandoz (I) Ltd. 206 ITR 385 (Bom), where the expenditure incurred on approach road to research laboratory was held entitled to deduction under section 35 of the Act. The learned Counsel also placed reliance on the decision of the Hon'ble Delhi High Court in the case of Bharat Ram Charat Ram (P) Ltd 157 ITR 199(Del) where rent paid for R & D building was held allowable under section 35 of the Act. 35. On the other hand, the learned Departmental Representative has opposed the plea of the assessee by pointing out that the expenditure on public issue cannot be construed as an expenditure on scientific research so as to qualify for deduction under section 35 of the Act. 36. We have carefully considered the rival submissions. The short controversy before us is whether the expenditure on public issue of equity shares, which has been held to be a capital expenditure, can it be said to be incurred on scientific research so as to be eligible for deduction under se....
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....t" to research laboratory and, therefore, the expenditure incurred on the construction thereof had to be treated at par with the expenditure on construction of research laboratories themselves. Clearly, the functionality test applied by the Hon'ble Bombay High Court demonstrated the efficacy of the expenditure on construction of approach road as being treated at par with the expenditure on construction of research laboratories so as to qualify for deduction under section 35 of the Act. In the present case, the expenditure incurred on raising of public issue of shares is in no way "adjunct" to the construction of the research and development centre of the assessee. Therefore, the parity of reasoning enunciated by the Hon'ble Bombay High Court in the case of Sandoz India Ltd. (supra) does not help the case of the assessee. Similarly, the judgment of the Hon'ble Delhi High Court in the case of Bharat Ram Charat Ram (supra) relied upon by the assessee also does not help in the present case, as it is on different facts. In the case before the Hon'ble Delhi High Court, the issue pertained to the rent paid by the assessee on behalf of an institution carrying on research and the same was h....
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.... concerned industrial undertakings so as to be eligible for deduction under sec.80-I. i) Chiller / Heat Pump Rs. 1.52 lacs ii) Combimax / Fluidised Bed Boiler Rs. 20.79 lacs b. in confirming denial of deduction under sec.80-I in respect or profits derived from industrial undertaking styled "Water Mission". 43. It was a common point between the parties that the issues involved in Ground 12(a)(i) of fluctuation in exchange rate (Rs. 1.52 lacs) and in Ground No. 12(a)(ii) relating to interest under IDBI Scheme Rs. 91 lakhs had been subject-matter of consideration by the Tribunal in assessment year 1994-95 (supra) and the Tribunal has restored the matters to the file of the Assessing Officer to follow the directions given therein. Following the same, we hold so and restore the issues to the file of the Assessing Officer to adjudicate the issues afresh in the light of precedent referred to above. 44. In so far as the issue relating to Warehousing charges recovered of Rs. 1,85,000/- contained in Ground No 12(a)(ii) is concerned, the same is decided against the assessee by following the findings in the order of the Tribunal for the assessment year 1994-95 ....
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....ax collected 12,85,72,320 iii)Insurance claim 10,34,195 iv)Bad debts recovered 18,83,822 v)Amount written back 44,59,146 vi)Claim from Custom 10,08,137 vii)Claims & Refund - Excise 3,18,029 viii)Sales Tax Refund 12,77,939 ix)Order Cancellation 2,50,000 x)Fluctuation in Rate of Exchange 8,41,888 xi)Credit balance app. 60,82,491 xii)Sale of scrap 1,38,95,629 xiii)Export Receipts u/s 80(O) 66,16,279 The learned CIT (Appeals) ought to have accepted the contention of the appellant that none of the aforesaid items had the character of turnover in the context of section 80-HHC. c) Exclusion of 90% of the following items for the purposes of computing 'profits of the business' in terms of section 80HHC: Discount received Rs. 1,61,312 Lease rental receipt Rs. 69,600 Warehousing charges recovered Rs. 1,85,810 Misc. receipts Rs. 81,78,420 Misc. income Rs. 29,94,255 Mesne profit Rs. 1,32,751 Franchisee Fees Rs. 1,500 Rs. 1,17,23,648 d) That Rs. 8,03,716/- and Rs. 48,46,188 were not eligible for inclusion in 'profits of business' f....
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....ngly. 55. In so far as the issues involved in Ground No. 14(c) are concerned, the same relate to exclusions from the "profits of the business" as per Explanation (baa) for the purposes of section 80HHC of the Act. The plea set-up by the assessee is that the aforesaid items of income are not excludible in terms of Explanation (baa), inasmuch as the same are not independent incomes, but are otherwise inextricably related to the main business of the assessee. Quite fairly the learned Counsel pointed out that at best income by way of lease rental - Rs. 69,600/-, Mesne profit - Rs. 1,32,751/- and Franchisee fees - 1,500/- may constitute independent incomes excludible in terms of Explanation (baa) of section 80HHC of the Act. Apart therefrom, it has also been pointed out that the issue may be decided in the light of the recent judgment of the Hon'ble jurisdictional High Court in the case of CIT v. Pfizer Ltd. 233 CTR 521 (Bom). 56. On the other hand, the learned Departmental Representative has defended the orders of the authorities below. 57. Having considered the rival submissions, we deem it fit and proper to set aside the issue to the file of the Assessing Officer to be adjud....
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.... learned CIT(A) erred in holding that the expenditure incurred on scientific research in the form of civil work in progress was eligible for deduction u/s 35 although the construction was in progress and was yet to put up for Research and Development purposes." 66 The facts, in brief, relating to this issue are that assessee company was in the process of setting up of a R & D Centre, construction of which was in progress during the year under consideration. The Assessing Officer has denied assessee's claim for deduction under section 35 of the Act, since in his opinion, the building was not complete and therefore not put to use for the purposes of Research & Development. In appeal, the Commissioner of Income-tax (Appeals) held that the expenditure incurred on scientific research in the form of civil work in progress was eligible for deduction under section 35 irrespective of the fact that the construction was in progress, since according to him, the expenditure has been actually incurred towards the part completion of the project for Research and Development. Aggrieved, Revenue is in appeal before us on this aspect. 67. Before us, the learned Departmental Representative place....
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....in all respects, the impugned expenditure cannot be denied deduction under section 35(1)(iv) of the Act. Therefore, on the aforesaid basis, we find no error in the order of the Commissioner of Income-tax (Appeals) deleting the addition. Thus, appeal of the Revenue on this aspect is dismissed, subject to our observations in Ground No. 3 of the appeal of the Revenue in subsequent paragraphs. 69. Ground No. 3 raised by the Revenue is as under: "On the facts and circumstances of the case, the learned CIT(A) while allowing full relief u/s 35 failed to appreciate that the AO has also come to the alternate conclusion that 10% of the building, furniture and office equipment was being used for training and not for Research and Development purpose" 70. We have heard both the sides on this issue. We find that when the claim for deduction under section 35 in respect of the Research & Development Centre was adjudicated by the Assessing Officer in the assessment year 1996-97, wherein he had disallowed 10% of the total expenditure on the ground that a part of the Research & Development Center was used for training of employees which has been accepted by the Assessee in that year. I....
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.... reference was also made to the judgment of the Hon'ble Supreme Court in the case of Hero Exports v. CIT 295 ITR 454(SC). Dwelling further on this aspect, it was pointed out that the issue before the Hon'ble Supreme Court was confined to costs which were not to be attributed to export trade, because such costs were claimed to be attributable to export incentives. While in the case of the assessee the issue extends to costs that were attributable to manufacturing and other similar operations of the assessee so as to have no nexus with the trading exports and thus the same were excludible from the costs attributable to trading exports. It is pointed out that the assessee is a multi-divisional company and maintains independent books of account for each division and in this regard, referred to the following decisions in support of the proposition advanced by the Commissioner of Income-tax (Appeals): (i) Snowcem India Ltd. 12 SOT 333 (Mum); (ii) Khimji Vishram & Sons 1 SOT 618 (Mum); (iii) MMTC Ltd. 112 TTJ 15 (Del); and, (iv) Glaxo Smithkline Asia 6 SOT 113 (Del). 76. We have considered the rival submissions and find that in principle the directio....
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.... been decided by us against the assessee in view of the decision of the Special Bench in the case of Mukund Limited (106 ITD 231)(Bom) and following the same, we dismiss this Ground of appeal raised by the assessee. 83. Ground No. 3 raised by the assessee is as follows: "The learned CIT(A) further erred in confirming rejection of the appellant's claim for deduction for the full amount of Rs. 48,74,315/- claimed by the appellant, being process know-how fees. The learned CIT(A) ought to have held that the amount in question was not covered by the provisions of section 35AB of the Income-tax Act 1961 and being of revenue nature the whole of it was allowable under sec.37." 84. Similar Ground was raised by the assessee for the assessment year 1995-96, wherein we have held as follows: "......in so far as process know-how fee paid in terms of the agreement entered into earlier years, the deduction thereon shall be governed by the provisions of section 35AB, as held by the Tribunal in assessment years 1993-94 and 1994-95 (supra). In so far as the fees paid under the process know-how agreements entered during the year under consideration is concerned, in....
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....the precedent in the assessee's own case, the Assessing Officer was directed to give effect to the precedent. On similar parity of reasoning, assessee succeeds on this Ground. 89. Ground No. 6 reads as under: "The learned CIT(A) further erred in confirming the Assessing Officer's action of bringing to tax a sum of Rs. 1,50,375/- treating the same as a casual and non recurring receipt." Similar Ground was subject-matter of consideration before us for the assessment year 1995-96 wherein following the precedent in the assessee's own case, this Ground has been decided against the assessee. On similar parity of reasoning, this Ground is dismissed. 90. Ground No. 7 raised by the assessee is as under: "The learned CIT(A) erred in confirming disallowance of provision for leave encashment of Rs. 48,00,000/- rejecting the contention of the appellant that such actuarially determined liability was a crystallized liability which was allowable in the year under appeal." 91. Before us, the learned counsel for the assessee submitted that the lower authorities have erred in not allowing the claim of the assessee in view of the judgment of the Hon'ble Supreme Court ....
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....arate reserve fund created for this purpose. In the appellant's case admittedly no such separate reserve fund is actually created by setting apart the amount till date. (iii) Thirdly it is NOT contested in that case as to what was the datum point at which the liability by way of leave encashment arose in that case, because the payment was made in the next following year. In the instant case there is NO such actual payment in the next following year or any time thereafter. The liability of leave encashment in the hands of the appellant is at once, the entitlement as a right in the hands of each individual employee - in both cases as 'remuneration to the employees'. Thus if at all there is any expenditure accrued in the hands of the employer, necessarily at the same moment income by way of salary (in the form of leave encashment accrues to each individual employee. The appellant should have therefore credited such amount to each individual employees' account and should have deducted tax therefrom. Admittedly, the appellant company; has NOT deducted any tax on this account. This clearly indicagt3es that even the appellant company itself does NOT consider that any such liabili....
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....me was not allowable as an accrued liability. Accordingly, the disallowance made by the Assessing Officer has been affirmed. In the absence of any specific reasoning advanced to negate the findings of the Commissioner of income-tax (Appeals), we are unable to accept the aforesaid Ground of the assessee and accordingly, the same is dismissed. 95. Ground No. 8 raised by the assessee reads as follows: "In the matter of appellant's claim for deduction of expenses on public issue of equity share, the learned CIT(A) erred in confrming a) rejection of the contention of the appellant that the entire expenditure of Rs. 60,88,700/- was allowable as a business expenditure under sec.37(1) of the Act. b) rejection of the appellant's other alternate claim that the amount should be allowed as an expenditure under sec.35 of the Act." 96. Before us, sub-Ground (a) was not pressed by the learned Counsel for the assessee and, therefore, the same stands dismissed. 97. As regards sub-Ground (b), similar issue was subject-matter of consideration before us for the assessment year 1995-96, wherein the issue has been decided against the assessee. On similar parit....
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....ad debts recovered 2, 86, 297/- e) Amount written back 56,60,864/- f) Claim & Refund - Custom 2,44, 896/- 9) Sales Tax Refund 21, 04, 597/- h) Fluctuation in Rate of Exchange 15,25,779/- i) Credit balance app. 54,37,075/- j) Sale of scrap 2,08,29,743/- The learned CIT(A) ought to have accepted the contention of the appellant that none of the aforesaid items had the character of turnover in the context of section 80-HHC. 102. So far as sub-Ground (a) is concerned, the issue is decided against the assessee in view of the decision of the Hon'ble Supreme Court in the case of Ipca Laboratories Ltd. 266 ITR 521 (SC). 103. The issues relating to exclusion of Excise Duty and Sales tax collected from total turnover contained in sub-Ground b(i) and (ii) respectively are concerned, they are decided in favour of the assessee in view of the decision of the Hon'ble Supreme Court in the case of Lakshmi Machine Works 290 ITR 667 (SC). 104. The issues relating to insurance claim of Rs. 1,65,615/- (sub- Ground (c); Bad debts recovered of Rs. 2,86,297/- sub-Ground (d); Amount written back Rs. 56,60,864/- sub-Ground (e); Claim & Refund....