TaxTMI 
TaxTMI 
2018 (8) TMI 2090
X X X X Extracts X X X X
X X X X Extracts X X X X
....Revenue : "1. On the facts and in the circumstances of the case, the Ld.CIT(A) erred in deleting the addition of Rs.37,80,388/- made on account of relocation expenses, as it is in the nature of enduring benefit to the assessee and does not partake the character of revenue expenditure. 2. On the facts and in the circumstances of the case, the Ld.CIT(A) erred in deleting the disallowance of Rs.47,71,593/- made out of travelling expenses, as it is not verifiable that the entire expenditure has been incurred wholly and exclusively for the purpose of assessee's business. 3. On the facts and in the circumstances of the case, the Ld.CIT(A) erred in deleting the entire addition of Rs.10,000/- lakhs (sic) made out of telephone expenses since the personal use of telephone cannot be ruled out. 4. The order of the CIT(A) may be vacated and that of the AO be restored. 5. The appellant craves leave to add, amend or alter any of the above grounds of appeal." Grounds by Assessee : "1. On the facts and in the circumstances of the case the CIT(A)-III, Pune has erred in : 1. Disallowing Rs.12,55,52,666/- towards portion of the Te....
X X X X Extracts X X X X
X X X X Extracts X X X X
....p; xx) Renovation expenses 21,78,402 xxi) Payments to clubs √ 1,67,600 xxii) Out of travelling expenses √ 47,71,593 xxiii) Out of telephone expenses √ 10,00,000 83,01,07,312 41,60,41,521 Add : Depreciation 9,56,75,000 Deduction u/s.35D 81,966 Deduction u/s.35AB √ 3,63,88,653 Warranty expenses 36,75,487 13,58,21,106 Business Income/Loss 55,18,62,627 Income from short term capital gain 28,45,218 Total income/loss 54,90,17,409 √ : denotes the disputed additions in these cross appeals. Out of the above additions, the additions u/s.35AB of the Act, write off of capital work in progress qua Mercedes Benz India's Car of Model W124, club expenses, relocation expenses, other adhoc disallowances on account of travel and telephone expenditure are the contentions/issues before the Tribunal by both the parties. 5. During the First Appellate proceedings, assessee raised various issues and the CIT(A) partly allowed the appeal of the assessee. While....
X X X X Extracts X X X X
X X X X Extracts X X X X
....bmissions of the assessee, the claims of the assessee were allowed in favour of the assessee. In the process, the CIT(A) relied on the finding of his predecessor for the subsequent A.Y. 1999-2000. Aggrieved with the relief granted by the CIT(A), the Revenue is in appeal before us with the grounds extracted above. 9. Ld. DR for the Revenue relied on the order of AO dutifully. 10. Before us, at the outset, Ld. Counsel for the assessee filed written submissions stating that the decision of the CIT(A) in granting relief to the assessee on this account for the A.Y. 1999-2000, was affirmed by the ITAT in its order dated 31-03-2009. Copy of the said order is placed in pages 1056 to 1062 of the paper book. In the written submissions, assessee submitted that similar claim was allowed in the subsequent assessment years 2001-02 and 2002-03 as Revenue expenditure. In this regard, Ld. Counsel for the assessee pleaded for confirming the relief granted by the CIT(A) on the issue of enduring benefit of relocation expenses as Revenue income. 11. On hearing both the sides on this issue, we perused the order of Tribunal in assessee's own case in ITA No.936/PN/2003 and C.O.No.27/PN/2004, date....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... proceedings, the CIT(A) granted relief relying on the order of his predecessor in the assessee's own case for the A.Y. 1999-2000. 13. Ld. DR for the Revenue relied on the order of the AO. 14. Before us, Ld. Counsel for the assessee submitted that the claim of expenditure on account of travelling expenses/conveyance expenses as well as the telephone expenses are genuine and adopting the adhoc manner of making disallowance is unsustainable in law. He submitted that the assessee has scrupulously maintained the requisite evidences after due process of internal audit system and therefore, no disallowance is called for on this account. The fact that Tribunal disapproved the manner of making such disallowance in the assessee's own case for the A.Y. 1999-2000 was demonstrated by bringing our attention to the decision of Tribunal, copy of which is placed at pages 1056 to 1062 of the paper book. 15. After hearing both the sides and on perusal of the order of Tribunal in assessee's own case for the A.Y. 2009-10 (supra), we find the Tribunal has not approved the system of making adhoc disallowance adopting the flat rate of 10%. Contents of Para No.9 of the order of Tribunal are relev....
X X X X Extracts X X X X
X X X X Extracts X X X X
....order and the same is reproduced as under : "8.3 The submissions have been considered. I agree with the Appellant's Representative that the adhoc disallowance is not supported by any material to show that any such part of the expenses was not incurred for the personal use. Similar issue was considered in the appellant's own case for A.Y. 99-00 (supra) and disallowance made by the Assessing Officer was deleted. The fact being similar, following that decision, the addition is deleted." Considering the above of the Tribunal against the adhoc disallowance in assessee's own case and the decision of CIT(A) on this issue, we are of the opinion that the disallowance made by the AO on this telephone expenses cannot be sustained. Accordingly, Ground No.3 raised by the Revenue is dismissed. 18. In the result, the appeal of the Revenue is dismissed. We shall now take up the appeal of the assessee. ITA No.1381/PUN/2003 - Assessee A.Y. 1998-1999 19. Following issues need adjudication in this appeal : a. Denial of deduction u/s.35AB of the Act in relation to technical knowhow fees paid in kind. b. Disallowance of expenditure in relation to write off of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....40 1,00,32,31,920 The total amount of Rs.1,00,32,31,920 was claimed as a deduction over the assessment years AY 1995-96 to AY 2001-02 AY Deduction Claimed (Rs.) Deduction Allowed (Rs.) Deduction under dispute (Rs.) 1995-96 8,01,76,046 8,01,76,046 0 1996-97 16,89,59,987 3,63,88,653 13,25,71,334 1997-98 16,89,59,987 3,63,88,653 13,25,71,334 1998-99 16,19,41,319 3,63,88,653 12,55,52,666 1999-00 16,72,05,320 3,46,33,986 13,25,71,334 2000-01 16,72,05,320 3,46,33,986 13,25,71,334 2001-02 8,87,83,941 1,82,83,944 7,04,99,997 Total 1,00,32,31,920 27,68,93,921 72,63,37,999 21. In the year under consideration, assessee claimed deduction in respect of technical know-how fee u/s.35AB of the Act amounting to Rs.16,19,41,319/- for the A.Y. 1998-99 in the return of income filed u/s.139(1) of the Act (Ref. table above). Out of this amount, Rs.3,63,88,653/- was paid by way of TDS and there is no dispute about the allowing of claim of deduction in this regard. However, the balance amount of Rs.12,55,52,666/- (Rs.16,19,41,319 - Rs.3,63,88,653) in the subject matter of litigation n....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Supreme Court in the case of CIT Vs. EIMCO & KCP Ltd. (supra). Further, the CIT(A) dismissed the appeal of the assessee on this issue after considering the submissions made by the assessee's counsel before the CIT(A)/AO in connection with the adjudication of the same issue in A.Y. 1999-2000. (Para 2 and its other paragraphs are relevant). Nothing much is discussed by the CIT(A) in his order for this year. "2.2 The Appellant's Representative reiterated the arguments given before the Assessing Officer and this issue was also decided in appeal in respect of A.Y. 1999-2000 in the case of the appellant vide appellate No. dated and the issue was considered against the appellant and the disallowance made by the Assessing Officer was confirmed. Following that order being on the same issue the disallowance made by the Assessing Officer is confirmed and the ground of appeal is rejected." 24. Aggrieved with the same, the assessee is in appeal before the Tribunal. BEFORE THE TRIBUNAL 25. AR's Arguments : Shri Pramod Achuthan, Ld. Counsel for the assessee along with his partners appeared before us and filed a written note on this issue giving various propositions. To sum up, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s regard, stating that the provision of section 35AB of the Act, being a deduction provision needs to be interpreted liberally and for this, Ld. Counsel relied on the decision of Delhi Bench of the Tribunal in the case of All India Lakshmi Commercial Bank Officer's Union and others 150 ITR 1 for the proposition on liberal interpretation. He further submitted the heading of section 35AB of the Act states "Expenditure and know-how" and there is no such requirement in the section that what can be deducted has to be necessarily "expenditure". The term "consideration" used in section 35AB of the Act is understood to have a wider meaning than "expenditure". He submitted that, while expenditure restricts itself to something which is paid out of the pockets of the assessee, the 'consideration' can be in the nature of monetary payment or any act or abstinence from doing something at the desire of concerned parties. He further submitted that the term "consideration" would include payment in kind and swapping of shares for the liabilities. For this proposition, he relied on various decisions. H submitted that meaning of the term "lump sum" used in section 35AB of the Income Tax Act include pa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tems Ltd.(supra) and the decision of Pune Bench of the Tribunal in the case of Kalyani Steels Ltd. DCIT 59 TTJ 316 (Pune). Ld. Counsel for the assessee made the following prayer : "Further, where accounts are settled by way of entries in the books of accounts and not 'actually paid by way of money', the same should also be treated as 'paid' or incurred'. In this regard, reliance is placed on the decision in case of Teletherm Instruments Co (P.) Ltd. Vs ACIT (1993) 45 ITD 203 (Mad) (refer page 981 to 984 of the Paper Book) where the definition of the term 'paid' as given under section 43(2) was applied in the context of section 35AB to mean that on execution of the agreement entire amount can be said to have been 'paid' as per the mercantile method of accounting. Hence, based on the aforesaid judicial precedents, it is our humble submission that the term 'paid' does not require actual payment in cash. The term 'paid' includes even incurrence of liability as per the mercantile method of accounting and the same also includes adjustment by way of accounting entries without actual cash outflow. Accordingly, where the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....39;s case, the deduction is claimed under section 35AB which was introduced later in the point of time due to change in intention of the Government (to attract flow of technology into India) to allow deduction for such payments. In MB India's case, the transfer of technical know-how for consideration (between MB India and MBAG) and allotment of shares (by MB India to DBAG) are two separate transactions entered after incorporation of the company. However, in EIMCO where there was only a single transaction I obligation of contribution of capital by the subscribers, which was made by EIMCO by way of contribution of technical know-how. b. Supreme Court decision in EIMCO was in the context of deduction under section 37, which required an item to be "expenditure" in order to be deducted as compared to words "Iumpsum consideration" used in section 35AB which is wider than the term "expenditure" . c. It should be noted that in MB India's case, it was much after incorporation and date of the technical know-how agreement that Daimler Benz AG exercised its option to contribute to share capital in kind by taking over MB India's liability to MB AG towards ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....i.e. AY 1996-97 and Daimler AG opted to contribute this payable by MB India as its capital contribution and accordingly was allotted 4,23,00,000 shares on 16th March, 1996, i.e. AY 1996-97. 4. MB India claimed deductions u/s 35AB of the IT Act for Rs.16,72,05,320 for the AY 1999-2000 out of which Rs.13,25, 71,334/- was disallowed and Rs.3,46,33,986/ - paid in cash was allowed. 5. The contention of the Assessing Officer(now referred as AO) was that technical know-how fees discharged by way of allotment of shares does not amount to 'expenditure' in view of the decision of the Hon'ble Supreme Court in the case of EIMCO K.C.P. Ltd. V. CIT [2000] 109 Taxman 151(SC). Thus the Revenue heavily relied on the above referred judgement and therefore, the reliance is placed on the orders of the AO and the Ld. CIT(A) in this regard by the undersigned. 6. The Ld. CIT(A) vide order dated 29th May, 2003 upheld the disallowance u/s. 35AB. The Hon'ble ITAT vide appeal 968/PN/03 remanded back the matter to the AO stating that adjudication on admissibility of the said deduction can only be done in the first year of the deduction. Now the first year i.e. the FY....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t to be accepted for the simple reason that heading of section 35AB itself is 'expenditure on know-how'. From the perusal of language of the section 35AB(1) which is reproduced here : ................................. ................................. it can be clearly seen that consideration has to be paid in cash and not in kind as claimed by the appellant. The wording in the section 'paid' and amount 'so paid' is quite clear as amount cannot be used in kind. 9. The above issue is also supported by the Hon'ble High Court of Bombay in the case of CIT vs Bharat Bijlee Ltd.(2014) 46 taxmann.com 257 (Born.). The Hon'ble Bombay High Court held that consideration determined by parties in terms of allotment or issue of bonds / preferential shares was not a sale and it was a case of exchange. The copy of the judgement delivered by the Bombay High Court is enclosed." DECISION OF THE TRIBUNAL 27. We heard both the parties on this legal issue of allowability of deduction u/s.35AB of the Act. We have also perused the written submissions as well as the case laws placed before us by both the representatives. In fact, som....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uisite TDS worth of amount Rs.17 crores (rounded off) out of total sum payable of Rs.100.32 crores. This amount is credited to the Government too as per the TDS provisions. There is no dispute about it. It is not known as to why assessee did not allot shares to the supplier of the know-how, i.e. MBAG and instead, allotted the shares to the DBAG, the flagship company? Assessee could not demonstrate before us specifying the reasons as to why the assessee did not allot shares to the supplier of the know-how. It is also not known as to under what circumstances, the MBAG mandated the assessee to allot the shares to DBAG. Further, it is not known if the liability of MBAG is discharged or not till day. Ld. Counsel could not file the book entries if any on this issue in the books of account of the supplier of the know-how. In any case, the assessee failed to actually pay the money to MBAG and the liability was not discharged by way of payment of actual money to the MBAG. Further, it is also not known as to why MBAG waived of part of the consideration payable in the context of acquiring of the know-how. DM 19 million was waived of for some unknown reasons and net amount is Rs.100.32 crores ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....(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" This definition of 'paid' is applicable to the provisions of section 35AB of the Act. Relying on various decisions including the decision of Kalyani Steels Ltd. Vs. DCIT reported in 59 TTJ 316 and others, Ld. Counsel for the assessee submitted that 'paid' means 'actually paid' or 'incurred' according to the method of accounting. 28. On the other hand, the case of the Revenue is that the expression 'paid' always means 'actually paid' or 'incurred' refers to squiring up the liabilities by way of book entries. In the assessee's case, as per the AO, the amount is not 'actually paid' to the supplier or incurred on accrual basis involving the supplier. The allotment of shares is done to the DBAG who has nothing to do with the supply of the know-how to the assessee. Further, it is the case of the Revenue that even if it is deemed as shares allotted to the MBAG, supplier of the know-how, it is a case of 'exchange' of technical know-how against the allotment of shares and the same is out....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eferred to the definition 'consideration vide the Contract Act, (supra) and we find the same is different qua the expression 'expenditure' within the meaning of 'any lump sum consideration' if it covers the impugned transaction of allotment of shares to the DBAG, who is the sister concern. It is a case where assessee never paid money directly to the supplier of the technical know-how or allotted equivalent value of shares to the supplier. In our view, it is not a straight case of making payment/allotting shares to the supplier of the technical know-how. The expression 'consideration' is not synonymous with the word expression 'expenditure' used in section 37(1) of the Act despite the fact the title of section 35AB refers to the word expression 'expenditure'. D. Liberal Interpretation : Regarding the arguments linked to the liberal interpretation of the provisions of section 35AB of the Act, it is our observation that the said provisions are obviously deduction oriented provisions. The onus is on the assessee to demonstrate the facts leading to the applicability of the said section. As detailed in the preceding paragraphs of this order the information relating to the relationship....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d the order of the Tribunal in the case of Kalyani Steels Ltd. (supra), we find these decisions were delivered in the context of payments to the supplier of the technical know-how whereas the facts of the present case differ in principle as the shares were allotted not to the supplier of the company but to group concern of the supplier. Further, there is no information on the reasons which led the assessee to make allotment of shares to DBAG and not to the supplier MBAG. F. Regarding the Ld. Counsel's observation about linking the issue to the Tribunal orders for the A.Yrs. 1996-97 and others are concerned, we find the observation linked to the method of accounting is a casual observation and it does not provide any conclusive ratio which is useful for adjudication of the present appeal. Therefore, the same are dismissed as infructuous. From the above analysis from various angles, i.e. (a) the provisions of section 35AB of the Act; (b) the meaning 'paid' and 'actually paid'; (c) any lump sum consideration; (d) liberal interpretation; (e) judgment in the case of EIMCO K.C.P. Ltd.; and (f) linking the issue to the Tribunal orders for A.Y. 1996-97 and others, we find the facts r....
X X X X Extracts X X X X
X X X X Extracts X X X X
....O denied the decision on the ground that the said loss constitutes a capital loss and not allowable as deduction. AO rejected the contention of the assessee that the write off should be considered as capital loss u/s.45 of the Act eligible to be carried forward for set off in future. The CIT(A) upheld the disallowance on the basis that expenditure incurred with a view to acquire a capital asset and therefore, needs to be treated as capital expenditure. 32. Before the Tribunal in this regard, Ld. Counsel for the assessee made various arguments and filed the written submissions. For the sake of completeness, the relevant parts are extracted as under : "72. Income under the head "Profits and Gains of Business or Profession" is to be computed as per provisions of section 28 of the Act (i.e. the charging section). It has been principally held in numerous judicial precedents that expenditure/losses incurred in connection with business operations are deductible in deriving profits/income of that business even in cases where the same may not be explicitly provided in the Act. 73. Hon'ble ITAT in its order dated 21 January 2009 in case of MS India for AY 1999-00, in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d (100/day as against 20/day) would have resulted in underutilization of capacity which would lead to inefficiency and losses • More manpower to run and maintain the assembly line (Proposed 82 workstation as against the required 25 work station) • Excessive cycle time due to low volume as it would require to pass 82 workstation taking 24 minutes as against 7.2 minutes per operator. • Modification and installation cost were very high (around Rs 2 crores). This required change in the power grid from 380 volts to 415 volts etc. • Further the installation demanded major modification to accommodate change of line from W124 series to W 210 series. In view of the above commercial expediency and to avoid future business losses, MB India decided to discard the parts of the machinery, forming part of CWIP, procured for industrialization phase. Thus, due to abandonment of the plans for industrialization, the parts of the machinery could not have been of any use to result in enduring benefit for the Appellant. Hence, it is our humble submission that the same should be treated as business loss of the Appellant incurred due to commerci....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... to acquire capital asset failed, would not change the capital nature of the expenditure. The decision in Alembic Chemical Works Ltd. 177 ITR 377 (SC) relied upon by the Appellant's Representative is not applicable to the facts of the case. In that case the decision was in regard to the improvisation in the process and technology which was supplemented to the existing business. In the case of the appellant it is a direct expenses for acquiring new capital asset. In 196 ITR 845 (Cal.) the expenditure on miscellaneous expenses and law charges incurred on proposed factory project was held as deductible expenses. But in the case of the appellant the expenses was squarely incurred for the purchase of machinery for the production of W 124 series of Mercedese Benz Cars. This is beyond doubt expenditure incurred for capital asset. Therefore, the claim of the deduction of capital expenses is not allowable is therefore rejected." However, the above finding is given by the CIT(A) against the assessee without considering the following legal propositions existing at the relevant point of time. It is the case of the assessee that the Project Industrial Production Phase, i.e. starting a new fa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s already discussed by the Hon'ble jurisdictional High Court as well as Hon'ble Apex Court. The legal propositions described by other High Courts also contribute to the evolution of thought on this issue. Therefore, in our view, there is requirement of remanding this issue to the file of AO for want of a decision on facts as well as application of legal propositions. As such, we never had the benefit of knowing the details of expenditure amounting to Rs.9,79,25,979/- aggregated under the head "capital work in progress". It is relevant to know what are the details of break-up of the expenditure on one side and the genuineness of the same on the other. Neither the AO nor the CIT(A) has examined this angle of the claim of the assessee. Therefore, in the set-aside proceedings, AO is directed to examine the same and decide the issue afresh after giving reasonable opportunity of being heard to the assessee. Accordingly, relevant ground raised by the assessee is allowed for statistical purposes. 37. Allowability of Club Expenditure : Coming to the last issue raised by the assessee towards membership fee for Poona Golf Club and Hyatt Regency New Delhi, for the Managing Director, AO disa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....omponent. In support of this, the Appellant would like to place reliance on the following decisions: • Sayaji Iron & Engg Co. Vs. CIT (2002) (253 ITR 749) (Guj) (Refer pages 1063 to 1067 of the Paper Book) • Ador Technologies Ltd v DCIT (112 TTJ 24) (Pune ITAT) (Refer pages 1068 to 1083 of the Paper Book) • Bajaj Auto Finance Ltd. v DCIT (112 TTJ 437) (Pune ITAT) (Refer pages 1084 to 1090 of the Paper Book) • Bajaj Finance Ltd vs DCIT (ITA No.1175 and 1273/PN/2012) (Pune ITAT) (Refer pages 1091 to 1100 of the Paper Book) 41. On the other hand, Ld. DR for the Revenue submitted that the order of the CIT(A) is reasonable and the same may be confirmed. 42. On hearing both the sides on this limited issue of allowability of club expenses, we find that the assessee claimed Rs.1,67,600/- in the account and the CIT(A) granted part relief to the assessee confirming the sum of Rs.25,600/- only. On considering the above, we find there is no dispute on the fact of claim of club expenses of Rs.1,67,600/- in the account. AO disallowed the same suspecting the personal nature of the expenditure. AO placed his reliance on the Auditors Report ....