TaxTMI 
TaxTMI 
2018 (8) TMI 2090
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....nces 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 Technical Know-how expenses paid in kind and claimed by the assessee under section 35AB of the Incom....
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.... 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 the issues relating to disallowance u/s.35AB of the Act, capital work in progress and the club expenses are decided against the assessee, the other issues on account of relocation expenses, adhoc expenses on account of travel and telephone expenses are allowed in favo....
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....xtracted 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, dated 31-03-2009 for the A.Y. 1999-2000. The Tribunal vide the discussion given in Para No.5 of the said order dismissed the ground raised by the Revenue and held the issue in favour of the assessee. Therefore, we find it appropriate to extract the finding given by the Tribunal here as under : "5. We have ....
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....ance 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 relevant. For the sake of completeness, the said para is extracted as under : "9. We have heard both the parties and perused the material available on record. It is seen that all the expenses were incurred for the purposes of business and the details thereof were furnished before the AO. The expenses were booked against vo....
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....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 capital work in progress (CWIP) due to discontinuation of MB India Car Model W 124. c. Disallowance of payment towards membership fees for Poona Golf Club and Hyatt Regency New Delhi, for Managing Director and other executives of the company considering the same as non-business expenditure. Issue wise adjudication : 20. Denial of Claim of deduction u/s.35....
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....1,319 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 now. During the assessment proceedings, the said manner of payment towards the liability of technical know-how supplied by MBAG to assessee was not accepted by the AO. AO is of the opinion that the said allotment of shares towards capital contribution in DCIPL-the Indian company, does not amount to expenditure at all to become eligible for claim of deduction u/s.35AB of the Act. AO relied heavily on the judgment of Hon'ble Supreme Court i....
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.... 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, it is the case of the Ld Counsel for the assessee was critical of AO relying on the judgment of Supreme Court in the case of CIT Vs. EIMCO & KCP Ltd. (supra) and held that the same is inapplicable to the facts of the present case. According to Ld. AR, therefore, the claim of the assessee should be allowed. Further, referring to the judgment of Bombay High Court in the case of CIT Vs. Paul Brothers 216 ITR 548, Ld. Counsel for the assessee submitted that ....
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....ement 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 payment of consideration in instalments if the same is fixed upfront and relied on various decisions. Further, Ld. Counsel relied on the decision of Pune Bench in the assessee's own case for the A.Yrs. 1996-97, 1997-1998 and mentioned that the Tribunal made some references to the issues under consideration though the re-assessment orders/revisions orders was quashed on technical grounds. Ld. Counsel mentioned that, in the context of the observation of the Tr....
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....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 liability towards technical know-how fee is incurred by MB India upon signing the technical know-how agreement with MBAG, and further the said liability is settled by issuing shares to DBAG, the same should be considered to have satisfied the term 'paid' for section 35AB." It is the argument of the Ld. Counsel for the assessee that, by allotment of shares, by the assessee to Daimler Benz AG at the instance of MBAG who supplied the technical know-how to the assessee ....
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....on 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 technical knowhow. However, in case of EIMCO, the subscribers to the memorandum of association at the very outset agreed that share capital would be contributed in kind as a part of subscription capital. d. Reliance is also placed on the judicial pronouncement of the Hon'ble Delhi High Court in the case of Commissioner of Income Tax vs Reinz Talbras Pvt. Lid. (2001) 252 ITR 637 (Del) (refer page 968 to 970 of the Paper book). While interpreting the ratio of EIMCO decision, the Hon'ble High Court held that the amount....
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....; 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 1994-95 relevant to the AY 1995-96 the AO reopened the assessment proceedings u/s 147, which was quashed by the Hon'ble ITAT on account of technical grounds as the reassessment proceedings were not held to be valid. The contention of the Revenue therefore, is that adjudication on admissibility on deduction u/s.35AB could not be examined on merits and, therefore, deduction u/s. 35AB cannot be said to have been allowed in the AY 1995-96 i.e. the first year on merit. During the course of the hearing before the Hon'ble ITAT, the judgement of the Hon'ble Supreme Cou....
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....f 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, some of the paragraphs of the written submissions from both the sides are extracted in this order considering the immediate relevant of the same. Therefore, we proceed to adjudicate this issue as per the contents in the succeeding paragraphs. A. The provisions of section 35AB : The provisions of section 35AB of the Act relating to 'expenditure on know-how is extracted here as under : "35AB(1) Subject to the provisions of sub-section (2), where the assessee has paid in any previous year [relevant to the assessment year commencing on or before the Ist day of April, 1998] any lump sum consideration for acquiring an....
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....er, 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 only. Assessee considered the same as deduction u/s.35AB of the Act, deductible in various assessment years commencing from 1995-96 onwards. The following chart shows the transaction among MB India Ltd., MBAG and DBAG : With this legal and factual background of the issue, we proceed to explain if the expression "paid" used in the sub-section (1) of section 35AB covers this arrangement of assessee in not paying the money at all to the supplier MBAG and allotting of shares equivalent of Rs.100.32 crores to the DBAG, the flagship company of the assessee. B. Meaning 'Paid', 'Actually paid' Etc.: During the proceedings befor....
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....r '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 outside the scope of the expressions 'paid' or 'actually paid', as the case may be. 29. On hearing both the sides on the meaning of the expression 'paid', we are of the opinion that the expression 'paid' is already defined in the statute which means 'actually paid'. The use of the expression 'actually paid' in section 35ABA of the Act is necessary in the context of actual payment and not otherwise. Therefore, the expressions used in section 35AB and the expression 'actually paid' in section 35ABA has to be interpreted after considering the definition specifying the said expression 'paid' in section 43(2) of the Act. If the same is consider....
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....sed 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 between the DBAG and MBAG are not coming forth from across the borders. It is an admitted fact that the reasons are absent as to why the shares were allotted to the non supplier of the technical know-how. We understand had the assessee eventually allotted the shares directly to the supplier, our inference could have been different. The payment by way of allotment of shares is never to the supplier of the technical know-how in this case which makes inapplicability of the principle of liberal interpretation to the facts of the present case. The transactions between the assessee on one side and the MBAG and DBAG on other side are not transparent....
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....ethod 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 relating to not squaring up the liability directly with the supplier-MBAG and allotment of shares to the DBAG are peculiar to the factual matrix of this case. In effect, the supplier did not receive any payment literally to its account either in the form of cash or in the form of kind from the assessee. As such, it is the admitted position that there is no direct case law on any one of the issues discussed in (a) to (f) above. Therefore, we are of the opinion that despite the laborious arguments made by the Ld. Counsel for the assessee, the ground No.1 raised by the assessee need to be dismissed. Accordingly, the Ground No.1 of the assessee's appeal is....
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....2. 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 relation to similar matter of write off of factory layout expenses due to abandonment of the plans for new factory, had observed that the decision for writing off of expenses of a new plant was based on commercial expediency of the Appellant. Hence, the same has to be treated as business loss deductible under section 28 of the Act. The relevant observations of the Hon'ble ITAT are reproduced below : (Refer Pages 690 to 754 of the Paper Book): "Such a claim can at best be examined on the touchstone of principles regarding admissibility of business losses, but that exercise has not been done by any of the authorities below.......he claim of deduction arose when th....
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....d 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 commercial expediency. 33. In support of his submissions, Ld. Counsel for the assessee placed his reliance on the following judgmental laws giving brief details of the findings in those cases : 1. M/s. Binnal Cement Ltd. Vs. CIT - Income Tax Appeal No.265 of 2009 (Cal.) 2. CIT Vs. Anjani Kumar Co. Ltd. 259 ITR 114 3. Excel Industries Ltd. Vs. DCIT 86 TTJ 840 (Mumbai) 4. Lawkim Ltd. Vs. JCIT 1 SOT 908 (Mum.) 5. CIT Vs. M/s. Idea Cellular Ltd. - Appeal No.516 of 2015 (Bombay High Court) Thus, it is the case of the Ld. Counsel for the assessee that in a case where assessee had a proposal to expand business into different product lines of manufacturing of Cars, i.e. W-124 and when the project has to be aborted for the reasons of business op....
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....diture 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 factory for manufacturing passenger car series W-124 model was abandoned as it could not penetrate the market and generate the targeted sales. Further, the assessee's counsel cites that when the assessee wrote off the factory layout expenses in the A.Y. 1999-2000, the same was finally allowed by the Tribunal vide order dated 21-01-2009. The write off of the said sum of Rs.9,79,25,979/- constitutes business loss. Relying on the various decisions, Ld. Counsel demonstrated that the said claim is allowable as the project failed to take off eventually. Referring to the Calcutta High Court judgment in the case of M/s. Binani Cement Ltd. Vs. CIT ( a case of construction of a new facility which is abandoned at the work in progress stage), CIT Vs. Anjani Kumar Co. Ltd. 259 ITR 114 (Raj.) (a case where....
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....xamine 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 disallowed the same as non-business expenses and made addition of Rs.25,600/- and the same was confirmed by the CIT(A). 38. Before us, Ld. Counsel for the assessee filed the written submissions and submitted that Para No.79 to 86 contain the relevant discussion, decision of the AO/CIT(A) as well the assessee's contentions. 39. Relevant facts of the case include that assessee made payment of Rs.1,67,600/- to various clubs and hotels for conducting meeting/conferences for the employees of the assessee. Assessee claimed the said expenses as business expenses. AO disallowed the said expenses treating the same as personal in nature and not wholly for the purpose of business of the assessee. CIT(A) gave part relief to the assessee and restricted the disallowance to Rs.25,600/-. 40. On this issue, Ld. ....
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....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 (Para No.8 of the assessment order). As per the discussion given by the CIT(A) in Para No.5 and its sub-paras, we find CIT(A) restricted the disallowance to Rs.25,600/- (Golf Course fee of Rs.14,600/- for Dr. Volkar and Shri Leoffler) and other payment of club membership in respect of Mr. Thomas Weigand and Dr. Till Becker Defreitas. Considering the appearance of individual names of the employees, the CIT(A) held that these are in the nature of personal expenditure. Contents of Para No.5.3 are relevant. On perusal of the note given by the Ld. Counsel for the assessee which is extracted above, we find the facts of the decisions cited by the Ld. Counsel for the assessee are distinguishable. It is not the case of the assessee that the employees were not benefitted and the expenditure is wholly and exclusively for the business purposes of the assessee. For the sake of completeness, we reproduce the finding given by the CIT(A) in Para No.5.....