TaxTMI 
TaxTMI 
2019 (3) TMI 693
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....se was processed under section 143(1) of the Income Tax Act, 1961 (the Act) and subsequently selected for scrutiny. Accordingly notice under section 143(2) of the Act was issued. In response to statutory notices, representative of assessee appeared before Ld. AO and case was discussed. 2.1.Ld.AO observed that assessee is engaged in business of manufacturing and sale of tractors, shockers, railway equipment etc. and other trading activity. 2.2.After calling for various details and information and considering the same, Ld. AO made following additions in hands of assessee: Sl. No. Additions made Amount-Rs. Amount-Rs. 1. Premium on SPNs 22,54,277/- 2. Upfront fee 3,69,25,000/- 3. Prototype development 78,56,810/- 4. Cost of software Less: Depreciation 699,38,000/- 41,62,800/- 27,75,200/- 5. Prior Period expenses 4,89,44,610/- 6. Unutilised MODVAT credit 1,75,00,000/- 7. Commission & discount 1,18,94,891/- 8. Interest expenses 16,55,00,000/- 9. Expenses attributable u/s 14A 2,19,36,390/- 10. Interest f....
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....und(s) of appeal at or before the time of hearing." 3.1. Ld.Counsel submitted that Ground No.1 is general in nature and therefore do not require any adjudication. 3.2. He also submitted that Ground No.2 has been directed by assessee to be 'not pressed', and accordingly said ground stands dismissed as 'not pressed'. 4. Ground No. 3 raised by assessee is in respect of disallowance of prior period expenses amounting to Rs. 4,59,928/-. 4.1.Ld.Counsel submitted that Ld.Assessing Officer (Ld.A.O.) disallowed a sum of Rs. 21,51,466/- on account of prepaid expenses incurred for purposes of business. He submitted that Ld.A.O. computed expenses disallowed under the head 'prior period expenses'. It has been submitted that these are routine business expenses which are allowable. He submitted that Ld.CIT(A) restricted disallowance to Rs. 4,59,928/-, which was crystallised during year under consideration and therefore deserves to be allowed. 4.2. On the contrary Ld.Sr.DR submitted that Ld.CIT(A) upon verifying supporting documents like bills etc. had allowed claim of assessee partly. He submitted that assessee had not filed any supporting documents regarding remaining payments to ....
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....tted that Ld.A.O during course of assessment proceedings computed disallowance at Rs. 2,19,36,390/-, and Rs. 16,55,00,000/- attributable to earning of dividend and interest income respectively. It has been submitted that assessee had given interest-bearing loan of Rs. 45.9 crores to Escotel a subsidiary of assessee during Financial Year 1997-98 and interest as per agreed terms were charged on such loans. He submitted that since Escotel is an infrastructure capital company as per provisions of section 10 (23G) of the Act, and approved by Government of India for said purposes, interest income earned by assessee on said loan was claimed exempt under the provisions. He submitted that no expenses could be attributed towards earning of this interest income from Escotel and like dividend income. He further submitted that, dividend has been earned from investment in shares, which were made in earlier years, and not during year under consideration. He submitted that Ld. AO was not right in estimating the proportionate disallowance at 25% of administrative expenses to be attributable to earning of such income. 6.2. On the contrary Ld.Sr.DR submitted that assessee has made investments duri....
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.... exempt income claimed by assessee amounts to Rs. 19,26,10,503/-, against which disallowance restricted by Ld.CIT(A) is Rs. 34,32,239/-. It is observed that Ld.CIT(A) records that proportionate expenses being considered for disallowance, has been incurred mainly for employees of manufacturing unit which cannot be related to earning of exempt income. Under such circumstances allocation of personal expenses towards earning of exempt income should not have been made. We therefore grant further relief to assessee by excluding personal expenses amounting to Rs. 16,85,000/-, from disallowance computed under section 14 A. We thus direct Ld.AO to restrict the disallowance at Rs. 17,47,239/-. Accordingly this ground raised by assessee stands allowed partly. 9. Ground No. 5 is regarding disallowance of Rs. 4,73,69,355/- being amount of inventory written off during the year. 10. Ld.Counsel submitted that assessee had telecommunication division which was acquired from Escort Communication Ltd. It was submitted that telecommunication division of assessee company was hived off and was taken over by a 100% subsidiary of assessee company i.e. Escorts Communication Ltd. w.e.f. 01/10/1994. ....
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....ingly ground no.5 raised by assessee stands dismissed. 12. Ground No. 6 is in respect of disallowance of Rs. 28,56,250/- on account of investments written off. 12.1. Ld.Counsel submitted that assessee during year under consideration was owning shares worth Rs. 28,56,250/- in Escorts Overseas Pvt. Ltd. It has been submitted that, these were doubtful of recovery, and hence provision was made in the financial year 1999-2000. Ld.Counsel submitted that Registrar of Companies, Singapore dissolved Escorts Overseas Pvt. Ltd., on 23/09/20 01 and therefore the same has been claimed as a loss. 12.2. Ld.Sr.DR submitted that profit and loss on investment are dealt with in accordance with provisions of section 45 to section 55A of the Act. It has been submitted that these sections clarify that loss on investment can be allowed only on sale or transfer of investment. Ld.Sr.DR submitted that assessee in present case has not sold or transferred investments. He placed reliance upon orders of authorities below. 13. We have perused submissions advanced by both sides in light of records placed before us. 13.1. Assessee placed reliance upon page 197 of paper book which is issued by the Re....
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....cts ignoring that such expenditure imparted a benefit of enduring nature and as such was of capital nature. The Ld.CIT(A) also ignored that the assessee had separately claimed deduction of Rs. 2,98,46,839/- as capital R&D expense and treated this expenditure of Rs. 78,56,810/- only as pre-operative expense. 4. On the facts and circumstances of the case and law. the Ld.CIT(A) has erred in deleting disallowance of Rs. 16,91,538/- made by the A.O.. on account of prior period expenses ignoring that the assessee company was following the mercantile system of accounting and as such prior period expenses could not be allowed as deduction in computation of assessee's total income for the instant A.Y. 2002-03. 5. On the facts and circumstances of the case and in law, the CIT(A) has erred in deleting the disallowance of expenses of Rs. 1,18,94,891/- made by the A.O., on account of expenses claimed under the head commission, discount and brokerage on sales made to Government parties ignoring the provisions of Explanation to subsection( T) of section 37 of the I.T. Act. 1961. 6. On the facts and circumstances of the case and law, the Ld.CIT(A) has erred in deleting d....
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....ion, this issue has already been decided in the earlier years by the CIT(A) in favour of the appellant, following the order of the CIT(A) in earlier years, the disallowance made by the AO is deleted and otherwise also even if the stand taken by the AO is considered then also during the year actual payment has been made." 16.3. Ld.Sr.DR placed reliance upon order of Ld. AO but could not controvert findings of Ld.CIT(A). 17. We have perused submissions advanced by both sides in light of records placed before us. 17.1. It is observed that identical issue has been decided by this Tribunal consistently in year 1998-99 as well as assessment year 2001-2002. Copy of the order of this Tribunal in ITA No. 1841/Del/02 for assessment year 1998-99 and ITA No. 567/Del/2005 and 1562/Del/2005 for assessment year 2001-02 has been referred to in the order for assessment year 1999-2000 in ITA No. 3581/Del/02 and CO no. 245/Del/06 in assessee's own case as under: "Having considered the rival stands and the fact situation, the issue, in our view is squarely covered by the decision of the Hon'ble Supreme Court in the case of madras Industrial Corporation Ltd. (supra). The assessee has ....
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....assessee. Respectfully following the decision of the Tribunal referred to above, we uphold the order of the CIT(A) and dismiss the second ground of appeal of Revenue." Respectfully following the same this ground raised by revenue stands dismissed. 19. Ground No.3 has been raised by revenue against deleting disallowance of Rs. 78,56,810/- on account of development of existing products and prototype products. 19.1.Assessee submitted before Ld.AO that, these were in the nature of R&D expenses. Ld.Sr.DR submitted that in P&L account R & D expenses of capital nature has been separately claimed by assessee and expenditure incurred on development of prototype is not part of R&D expenses. He submitted that since these expenses have given rise to increase in knowledge, benefiting assessee. He thus submitted that such expenses should be capitalized, as they gave rise to enduring benefit to assessee. 19.2. On the contrary, Ld.Counsel submitted that on identical facts, Ld.CIT (A) in preceding assessment years allowed claim of assessee. He placed reliance upon observations of Ld. CIT (A) in deleting the addition. 20. We have perused submissions advanced by both sides in light of ....
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....ore us and therefore we do not find any infirmity in the observations of Ld. CIT (A) and the same is upheld. Accordingly this ground raised by revenue stands dismissed. 22. Ground No.5 relates to expenses of Rs. 1,81,94,891/- on account of commission, discount and brokerage on sales made to government parties. 22.1. Ld.Sr.DR submitted that expenses claimed under the head 'commission, discount and brokerage' amounting to Rs. 1,18,94,891/- has been paid to 3rd parties by assessee related to sales made to government. It has been submitted that Ld.AO rightly disallowed commission, as there is no middlemen and commission agents permitted to operate in purchases or perky procurement made by government. Thus he emphasised that only business expenses can be allowed under section 37 (1) of the Act incurred by assessee. 22.2. On contrary Ld.Counsel placed reliance upon categorical observations by Ld. CIT(A). 23. We have perused submissions advanced by both sides in light of records placed before us. 23.1. Following were factual observations by Ld.CIT(A) regarding disallowance made by Ld. AO: "9.2. During the course of appellate proceedings, the appellant counsel su....
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....ies to whom commission has been paid. Regarding the objection of the AO that the purpose for which commission has been paid not mentioned in the confirmation filed is also of no consequence because the appellant company had filed the copies of appointment orders for which the commission agents have been appointed. If the AO had wanted confirmations in a particular fashion then he should have asked the appellant company to file the confirmations in a particular fashion. Without telling the appellant company what is further required, the AO has wrongly not considered the confirmations filed by the appellant company. 9.3.1. The AO had relied on the judgment of the Hon'ble Supreme Court in the case of Madivenkak Ram & Co. (supra) for disallowing the expenditure. The facts and the reasons for disallowing the expenditure claimed in the above mentioned case are noted below: Facts: The assessee, to start with, was a partnership consisting mostly of family members. In 1965, it was converted into a private limited company to carry on the business of export of tobacco. The first directors appointed at the time of incorporation were to hold office during their lifetime or unt....
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....8-99, the CIT(A) had considered the issue and decided the same in favour of the appellant. In AY 1999-00, the AO himself considered the issue and allowed the entire claim of expenses to the amount of Rs. 40,46,372. The AO while allowing the expenses has himself observed that the authorized representative has filed confirmation in respect of all the cases while in the preceding years they were unable to do so, hence, the entire expenditure is allowable. (ii) The copies of assignment letters/appointment letters of the agents along with confirmation in respect of the entire payment of Rs. 64,95,097 were filed before the AO. (iii) The AO has wrongly observed in the preceding years that the expenses has been disallowed while the fact is that the AO himself in AY 1999-00 have allowed all the expenses and there is no disallowance. 10.3. Taking into consideration the above facts as the appellant has filed full details along with confirmation before the AO, there was no reason with the AO to disallow the expenditure when specifically in earlier years the disallowance has only been made in respect of the confirmations not filed by the appellant company. In fact, in....
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....Ld.Counsel placed reliance upon factual observations made by Ld.CIT (A). He submitted that said loan was given prior to the amalgamation in the year 1995-96. 25.We have perused material placed before us in light of arguments advanced by both sides. 25.1. Admittedly, said loan was advanced by erstwhile company to sister concern in the year 1995-96. Assessing Officer has not been able to establish that said funds have been advanced out of borrowed funds by erstwhile company. Subsequently, company that advanced loan, got amalgamated with assessee. It is for this reason that Ld.CIT (A) deleted addition. Ld.CIT (A) observed that, for assessment year 2001-02, identical addition was deleted on similar facts, which is not challenged by revenue. 25.2. Under such circumstances we uphold the view taken by Ld.CIT (A). Accordingly this ground raised by revenue stands dismissed. 26. Ground No. 7 is on account of partial relief granted by Ld.CIT (A) while computing disallowance under section 14 A of the Act. We have already considered this issue while deciding ground No. 4 of appeal filed by assessee. Following our view taken hereinabove we dismiss this ground raised by revenue. ....
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....e has enduring benefit and were in the nature of capital expenditure. 7. On the facts and circumstances of the case and law, the Ld.CIT(A) has erred in deleting the disallowance of Rs. 28,07,055/- made by the AO, on account of prior period expenses ignoring that the assessee company was following the mercantile system of accounting and as such prior period expenses could not be allowed as deduction in computation of assessee's total income. 8.The Order of the CIT(A) is erroneous and not tenable in law and on facts." 29. Ground No.1 raised by revenue pertains to deleting disallowance of a sum of Rs. 2, 65, 46, 151/-out of commission expenditure. 29.1. Referring to the assessment order Ld.Sr.DR submitted that assessee was being commissioned to 3rd parties in respect of sales made to Indian Railways from its railway equipment division. He submitted that there was no role of a middleman in the whole process of award of orders by government and there was no scope for any private party to render any services for earning commission thereof. Accordingly learned AO called for assessee to produce the employee of company who deals with the sales et cetera in the railway equipment ....
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.... a whole. That apart, the AO put on the appellant the burden of filing the acknowledgement receipt of the return filed by the payees whereas it was his obligation to make requisite enquiries. 29.6. The learned counsel further contended that the statement of Mr. Ajay Razdan appended at pages 56 to 57 of documents submitted with written submissions dated 27/3/2007 in fact supports the case of the appellant company if the statement is read as a whole. Mr Razdan has clearly stated that the role of the third party is in the areas of liaisoning, promotion of products, order procurement and payment realization. Mr Razdan has further submitted in an answer to one of the questions, that the agents are involved in realization of payments and promotion of new products of the company and they are also involved in submission of bills and making good any deficiencies in the documents. The Assessing Officer has picked certain sentences from the statement of Mr. Razdan which according to him show that there is no role of a third party in the whole process of procuring business. As regards the role of third party in the evaluation of offers by Railways, it is true that the evaluation of offers i....
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....d. 33. Ground No.2 raised by revenue relates to deleting of proportionate disallowance of interest amounting to Rs,13,52,00,000/- vis-a-vis, amounts advanced to two group companies, namely Escorts Construction Equipment Ltd., and Escotel Mobile Communications Ltd. 33.1 Ld.Sr.DR submitted that Ld.AO in para 4.1 of assessment order has observed that assessee borrowed huge funds and was paying substantial amount of interest and bank charges, whereas loans aggregating to Rs. 112.62 crores had been advanced to group companies. He submitted that Ld.AO therefore made proportionate disallowance amounting to Rs. 13.52 crores, by adopting interest rate of 12%, which according to him was reasonable, and which assessee could have saved by using such funds for its own purposes. 33.2. On the contrary, Ld.Counsel placed reliance upon submissions made by assessee before Ld.CIT (A). For the sake of convenience we are reproducing the submissions advanced by Ld. Counsel before Ld.CIT (A) as under: 33.3. The sum of Rs. 112.62 crores subjected to the disallowance contained brought forward opening balance of Rs. 108.67 crores, which could not be taken into account for the said purpose. In ca....
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....ed substantial element of brought forward balances. It was urged that there was no justification either on facts or in law on part of Ld.AO, in making proportionate disallowance. 34. We have perused submissions advanced by both sides in the light of the records placed before us. It is observed that Ld. CIT (A) has analysed aforestated submissions of assessee as under: "6.2. I have considered the submissions of the learned counsel with reference to the material placed on record in the paper book as also the details appended to the written submissions and which admittedly have also been filed with the Assessing Officer. The two remand reports of the Assessing Officer have also been taken into account in deciding the present ground along with the counter comments of the appellant. 6.3. As rightly contended by the learned counsel, the Assessing Officer has not made any adverse observation in the remand report dated 27.7.2009 and it may be mentioned as a matter of record that in the remand proceedings the appellant placed on record detailed bank accounts, bank certificates, extracts m audited accounts and funds flow statement in the proceedings conducted y the Asses....
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....He submitted that assessee on one hand was paying huge amount of interest and bank/finance charges and on the other it placed its funds in investments which did not generate any income. Ld.Sr.DR submitted that, assessing officer was right in making proportionate disallowance by adopting rate of interest at 12%, which could have been saved in case assessee used the funds for its own business purposes. 36.2.On the contrary, Ld.Counsel placed reliance upon submissions made by assessee before Ld.CIT (A). For sake of convenience, we are reproducing submissions advanced by Ld.Counsel before Ld.CIT (A) as under: 36.3.Ld.Counsel on the other hand submitted that during the course of appellate proceedings, various submissions were made, which were placed on record, and copies thereof were forwarded to Ld.AO for his comments. Ld.Counsel submitted that disallowance had been made without confronting assessee during the course of assessment proceedings, which tentamounted to violation of principles of natural justice. On merits Ld.Counsel submitted that, no funds borrowed on interest had been utilized for purchase of shares of group companies/subsidiaries either in the past, or in the year....
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....er u/s 250(4) of the I. T. Act by the then CIT (Appeals) vide order dated 3.10.2008, Ld.AO was directed to examine its applicability. Ld.Counsel further went on to state that, vide para 2 of the said order Ld.AO had been asked to examine, as to whether any interest bearing funds had been invested in acquisition of shares of group companies. For purpose of carrying out this verification, assessee was asked to file copies of accounts in respect of investment in shares linking the same to bank accounts for relevant periods, vis-a-vis nexus of funds with investments. According to Ld.Counsel, complete details were furnished to Ld.AO vide letter dated 10.11.2008 to enable Ld.AO to comply with order u/s 250(4) of the Act. 36.6. It was submitted that, assessee furnished complete details of fresh investments made during the period ending 31.3.2003 in shares amounting to Rs. 168.36 crores, and had also furnished fund flow statement for the proposition that during previous year under consideration, funds generated by sale of shares of certain companies amounting to Rs. 251.42 crores along with dividend income of Rs. 68 crores, aggregating to Rs. 319.42 crores, fully covers fresh investment....
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.... the case laws relied upon. The two remand reports received from the Assessing Officer and the counter comments of the appellant thereon have also been taken into account. 7.7 I would like to observe that the order of the Assessing Officer has proceeded on erroneous grounds in as much as relevant facts of the case have either been wrongly recorded or not noted at all. This has happened because the appellant was not put on notice during the course of the assessment proceedings leading to the adhoc disallowance in question. 7.8 There are two main limbs to the order of the Assessing Officer the first being that the investments are not for business purposes having not brought in any return and the second being that in case the funds had been utilized for business purposes then the burden of interest expenditure would have been lower. The material on record clearly nullifies the first observation since the investments are in shares of group companies and dividend income to the tune of Rs. 68 crores have been subjected to tax on these investments as appearing at page 7 of the assessment order. Further, capital gains on some investments sold during the year to the tune o....
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....te interest unless there was a finding of mis-use of funds for personal purposes by the directors of the company. It is the stand of the appellant before me that its case stands on a better footing since (i) the investments in the shares of group companies have resulted in substantial income and (2) the investments have not come out of borrowed funds but out of the appellant's self generated funds. The other decision relied upon is that of the Hon'ble Delhi High Court dated 24.7.2009 in the case of Dalmia Cement Bharat Limited wherein following the judgment of S.A. Builders (supra) it was held that investment in subsidiary companies was for commercial expediency and on business considerations. The other decisions relied upon were those of the Hon'ble Bombay High Court in the case of Reliance Utilities And Power Limited and a judgment of the Ahmadabad Bench of the I.T.A.T. in the case of Pinnacle Project And Infrastructure Pvt., reported in 290 ITR (AT) 45, the said decision also dealing with interest borrowed money being utilized for purchase of shares in group companies. 7.12 I have considered the aforesaid judgments and do hold that these are squarely applicable to the f....
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....rein question of upfront fee have been considered taking into account judgment of various High Courts including that of madras High Court in case of CIT vs. Sri Meenakshi Mills Ltd. 290 ITR 107. The issue of upfront fee in view of the aforesaid submission is covered in favour of appellant and disallowance of Rs. 32 lakhs is accordingly deleted." 38.2. We have upheld view of Ld.CIT(A) on similar issue in Ground No.2 for A.Y:2002-03, in para 12 herein above. Following the same we are inclined to uphold the view taken by Ld.CIT (A). In the result this ground raised by revenue stands dismissed. 39. Ground No.5(a) & 5(b) raised by revenue pertains to deleting of disallowance amounting to Rs. 35,75,330/- on account of proto-type development. 39.1.Ld.Counsel submitted that issue was covered in favour of assessee, by order of this Tribunal for Assessment Year 2001-02, which we followed in forgoing paragraphs, while deciding revenue's appeal for assessment year 2002-03. According to Ld.Counsel, there is no change in facts and issue stands squarely covered as contended therein. It was emphasized that Ld.AO in remand report dated 09.03.2007 had not made any comments on written sub....
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....venue expenditure. 41.3. Ld.Sr.DR placed reliance on order of Ld.AO, however, he could not controvert submissions of Ld.Counsel. 42. We have perused submissions advanced by both sides and perused records placed before us 42.1. It is observed that, Ld.CIT(A) decided this issue as under: "10.2. I have carefully considered the submissions and perused the material on record placed on the paper book. The written submissions filed from time to time as also the remand report dated 9.3.2007 have been taken into account. The remand report does not make any adverse comments on the claim or for that matter the written submissions of the appellant company filed during the course of hearing. In my view also the expenditure on professional charges paid in respect of day to day activities vis-a-vis the existing business the appellant company cannot be treated as of capital nature and have to allowed as revenue expense. Accordingly, the addition of Rs. 7,92,67,976/- deleted." 42.2.We uphold view of Ld.CIT(A), which is based on remand report by Ld.AO. Accordingly this ground raised by revenue stands dismissed. 43. Ground no.7 raised by revenue pertains to deleting additio....
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....out the island CIT (A). We have upheld consistent view of Ld.CIT(A) on this issue for A.Y:2002-03, in preceding assessment years. Accordingly this ground raised by revenue stands dismissed. In the result, appeal filed by revenue for assessment year 2003- 04 stands dismissed. A.Y. 2005-06 ITA No. 5408/Del/2014 (Revenue's appeal) Grounds raised by revenue in this appeal are as under: 1. On the facts and circumstances of the case and law, the Ld.CIT(A) has erred in deleting the addition of Rs. 22,00,00,000/- made out of interest expenses. 2. On the facts and circumstances of the case and law, the Ld.CIT(A) has erred in deleting the addition of Rs. 98,25,000/- made by treating 25% of royalty payment as capital expenditure. 3. That the appellant craves leave to add, alter or amend any ground(s) of appeal raised above at the time of hearing. It is prayed that the order of the Ld.CIT(A)-XX, New Delhi being contrary to the facts on record and the settled position of law, be set aside and that of the A.O.be restored." 46.1. Ground No.1 raised by revenue pertains to deleting addition of Rs. 22 crores, made out of interest expenses. 46.2. Ld.CIT.DR....
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....est and lent to sister concern without charging interest, there could be no disallowance of proportionate interest, unless there was a finding of misuse of funds for personal purpose by the directors of the company. 46.4. Ld.Sr.DR placed reliance on order of Ld.AO, however, he could not controvert submissions of Ld.Counsel. 47. We have perused submissions advanced by both sides and perused records placed before us 47.1. It is observed that, Ld.CIT(A) decided this issue as under: ".....The facts of the present case are exactly similar to the facts as in AY 2003-04. Out of Rs. 183.40 crores, the appellant has explained that the investment of Rs. 175.74 crores in Subordinate Bond of Idea Mobile Communication is only a conversion of existing debts and there was no fresh investment. As regards the fresh investment of Rs. 7.66 crore in the share capital of M/s Escorts Agri Machinery incorporated in USA which is the wholly owned subsidiary company, the appellant has explained that the same has been made to supplement its existing investment. Respectfully following the decision of the Ld. CIT(A)-III for AY 2003-04, the AO is directed to delete the addition of Rs. 22 Crore....
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....el/2009 in the appellant's own case for AY 2004-05, the Hon'ble as held that "... From the record, we found that in terms of the agreement executed by the assessee with M/s Harprashad & Co., the assessee was to make recurring payment of royalty every year calculated at the rate of 0.25% of the turnover. Such payment has been confirmed by the deed of confirmation signed between directors of the assessee company and Company Secretary of M/s. Harparshad & Co. The royalty was payable for limited use of trade mark 'Escorts'. The genuineness of the expenditure was admittedly not in dispute. Assessee was making payment of royalty since AY 2001-02 and same was allowed as revenue expenses. Upto the assessment year under consideration, the royalty payment so claimed was allowed under scrutiny assessment u/s 143(3) as revenue expenditure. Only during the year under consideration, the CIT has invoked his powers u/s 263 on the plea that some of the facts are similar to the facts of the case of M/s. Southern Switchgear Ltd. (supra). In this case, Hon'ble Supreme Court affirmed the order of Hon'ble Madras High Court wherein on the finding of fact recorded by tow appellate authorities to the effec....
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....re. Only during the year under consideration, the CIT has invoked his powers u/s 263 on the plea that some facts are similar to the facts of the case of M/s. Southern Switchgear (supra). In this case Hon'ble Supreme Court affirmed the order of Hon'ble Madras High Court wherein on the finding of fact recorded by tow appellate authorities to the effect that duration of the agreement though of five years, assessee could use technical know-how even after expiry thereof which amounted to acquisition of know-how of enduring nature, part payment of technical know-how fee was held to be capital in nature. However, the facts in the instant case are distinguishable wherein only during the period of agreement, the assessee was having the right to use the trademark, which did not give any right of enduring nature and since the annual payment of royalty for use of trademark was based on turnover, the expenditure was essentially in the nature of revenue expenditure and not capital expenditure. On the other hand, Hon'ble Jurisdictional High Court in the case of J.K. Synthetics - 309 ITR 371 held that payment made for acquisition of know-how which facilitated day to day operation of its business, ....
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.... the A.O. for the disallowance is only base on the decision of Apex Court in the case of Southern Switchgear Ltd. Vs. CIT (supra). I have gone through the decision relied upon by the A.O. and on going through the same, I agree with the appellant that this decision is squarely distinguishable and not applicable to the facts of the appellant's case as in that case under the terms of the agreement that company agreed to pay to the foreign company as consideration for the services rendered by it, a royalty on sales and a lump sum for the technical aid, payable in five equal installments, the payment to be spread over a period of time. The Tribunal disallowed 25% of the technical fees and 25% of the royalty paid by the assessee to the foreign company. The Hon'ble Madras High Court has upheld the action of Tribunal of disallowing 25% of the royalty as in that case the Hon'ble Tribunal held that by making a payment towards royalty the appellant has obtained the technical knowledge which is an enduring advantage and benefits and same will be available to the assessee even after the termination of the agreement. This decision of the Hon'ble High Court has been upheld by the Hon'ble Supreme ....