TaxTMI 
TaxTMI 
2003 (11) TMI 277
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....oan. (3) The entire public issue expenditure of Rs. 12,31,961 be treated allowed for amortisation under s. 35D of the Act instead of only Rs. 3,00,000 as held by the learned CIT(A). (4) The disallowance of alleged penal interest on sales-tax amounting to Rs. 2,75,610 be deleted, the same being of compensatory nature under s. 47(4A) of the Gujarat Sales-tax Act. (5) The claim of preliminary expenses under s. 35D of the Act at Rs. 1,83,385 be allowed in full. (6) The sales promotion expenses of Rs. 34,82,241 being conclusively held to be of revenue nature by the learned CIT(A) be allowed in full in the year in which the said expenses have been incurred. (7) The drawings and design expenses of Rs. 65,44,703 be treated as of revenue nature under s. 37 of the Act and not under s. 35AB of the Act. 3. The first ground relates to disallowance of expenditure incurred in relation to increase in authorised share capital amounting to Rs. 1,35,000. The learned counsel appearing for the assessee was fair enough to admit that the aforesaid issue is covered against the assessee by the judgments of the Hon'ble Supreme Court in the cases of Punjab ....
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....e audited statements. The learned counsel thus strongly urged that the interest income of Rs. 5,24,596 earned by the assessee on fixed deposits made out of money received from public issue should be treated as business income or it should be set off against the interest expenditure incurred by the assessee on bridge loan taken on the security of such deposits. 4.1 The learned CIT-Departmental Representative strongly supported the order of the CIT(A) and relied upon the elaborate reasons mentioned in the assessment order. He also relied upon the judgment of the Hon'ble Madras High Court in the case of South India Shipping Corpn. Ltd. vs. CIT (2000) 163 CTR (Mad) 617 : (1999) 240 ITR 24 (Mad) in which the judgment of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilisers Ltd. was followed. It was held by the Hon'ble Madras High Court that the interest paid on overdraft obtained for the purpose of business cannot be deducted from the interest earned on monies kept in fixed deposits as such income derived by way of interest on fixed deposits has to be taxed under the head "Income from other sources". 4.2 We have considered the submissions ma....
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....eration the judgement of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilisers Ltd., as the said judgment was delivered on 8th July, 1997, by the Hon'ble apex Court. This judgment of the Hon'ble Supreme Court has been applied and distinguished in subsequent judgments such as in CIT vs. Bokaro Steel Ltd. (1999) 151 CTR (SC) 276 : (1999) 236 ITR 315 (SC) and Bongaigaon Refinery & Petrochemicals Ltd. vs. CIT (2001) 170 CTR (SC) 257 : (2002) 251 ITR 329 (SC). It is also necessary to examine the nexus between the interest income derived by the assessee on fixed deposits made out of deposits of share application money and the interest paid on bridge loan taken from the bank in order to properly decide the assessee's claim for grant of benefit of netting of interest and also in order to properly ascertain the correct head of assessability of such interest income. Since the relevant facts have not been properly and fully brought on records by the learned AO nor by the learned CIT(A), we consider it just and proper to set aside the orders of the CIT(A) and the AO in relation to this common ground raised by the assessee as well as by the Revenue in....
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....s. 35D. The CIT(A) thus confirmed the action of the AO of not taking into consideration the balance expenditure aggregating to Rs. 9,31,969 for purpose of computing amortisation allowable under s. 35D. The learned counsel submitted that the Hon'ble Madhya Pradesh High Court in the case of Shree Synthetics Ltd. has clearly observed that the words used in s. 35D(2)(c) containing description of specific expenditure qualifying for amortisation are only illustrative and not restrictive. He, therefore, urged that the entire expenditure incurred for issue of shares for public subscription by a company will be entitled to deduction in accordance with s. 35D. 5.3 The learned CIT-Departmental Representative simply relied upon the reasons mentioned in the assessment order and the order of the CIT(A). 5.4 We have carefully considered the submissions made by the learned representatives of the parties and have gone through the orders of the learned Departmental authorities. The aforesaid expenditure aggregating to Rs. 12,31,969 have been incurred in connection with the issue for public subscription of shares. The Hon'ble Madhya Pradesh High Court in the case of Shree Synthetics Ltd....
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....Ground No. (4) relates to disallowance of penal interest on sales-tax amounting to Rs. 2,75,610. This ground was not pressed by the learned counsel at the time of hearing, in view of the fact that the CIT(A) had restored back this issue to the AO for deciding the same afresh in accordance with the directions given by him in paras 11 and 12 of his order. Hence, this ground is rejected, as not pressed. 7. Ground No. (5) relates to reduction in claim of preliminary expenses under s. 35D of the Act by a sum of Rs. 66,484 (Rs. 1,83,385 - Rs. 1,16,901). The learned CIT(A) in paras 14 and 15 of his order has confirmed the action of the AO that the debenture application money did not constitute the appellant's capital till such time the allotment of debentures was made to the applicants. Until then the money was lying with the appellant in trust and the right of the appellant to employ this money for the purposes of business accrued only on allotment of debentures. He, therefore, confirmed the action of the AO of excluding the amount of debenture application money received by the appellant from computation of capital employed for purpose of determining the ceiling/ deduction under s....
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.... expenditure while filing its return of income. The AO in para 5.7 on p. 18 of the assessment order has held that such expenses incurred for launching new project cannot be treated as revenue expenditure but it should be treated as capital expenditure. 8.1 The learned CIT(A) in para 24 of his order has given the following findings : "24. The AO has treated the expenditure as capital expenditure on the ground that the expenditure pertains to launch of new product and the advantage derived by the appellant from the expenditure was of long term benefit. At the same time, as has been rightly pointed out by the learned counsel of the appellant, the AO has not been able to allocate this expenditure to any of the fixed assets of the appellant-company. In the circumstances, the expenditure cannot be treated to be in the capital field as it has left the fixed capital of the company untouched. I, therefore, agree with the appellant that within the ratio of Hon'ble Supreme Court judgment in the case of Empire Jute Co. Ltd. vs. CIT (1980) 17 CTR (SC) 113 : (1980) 124 ITR 1 (SC), the expenditure cannot be disallowed on the ground that it is capital expenditure." 8.2 The learn....
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.... (2001) 169 CTR (Guj) 416 : (2001) 251 ITR 61 (Guj), and the judgment of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilisers to support his contentions. The learned counsel also submitted that the assessee's perception about enduring benefit of such sales promotion expenses and spreading it over a period of five years on the basis of such perception cannot result in denial of deduction of the entire amount of expenditure which has been accepted by the CIT(A) as expenditure of revenue nature. The Bench required the learned counsel to explain as to why the principles of law laid down by the Hon'ble Supreme Court in the case of Madras Industrial Investment Corpn. Ltd. vs. CIT (1997) 139 CTR (SC) 555 : (1997) 225 ITR 802 (SC) be not applied to the present case. The learned counsel replied that discount on issue of debentures resulted in continued benefit to the business of the company for a specified period. It was a contractual obligation. The number of years after which the debentures were to be redeemed were also fixed and certain and, therefore, spread over of such discount on issue of debentures over the period of debentures was held to be....
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....to the principles of law and not in accordance with accountancy practice. Accounting practice cannot override s. 56 or any other provision of the Act. As was pointed out by Lord Russel in the case of B.S.C. Footwear Ltd. (1970) 77 ITR 857, 860 (CA), the income-tax law does not march step by step in the footprints of the accountancy profession." 8.7 The aforesaid principles laid down by the Hon'ble Supreme Court were followed by the Tribunal in the decisions in the cases of Core Health Care Ltd. vs. Dy. CIT, Bombay Housing Corporation vs. Asstt. CIT and by the Hon'ble Gujarat High Court in the case of Dy. CIT vs. Core Health Care Ltd. There is no dispute about the aforesaid principles of law laid down by the Hon'ble Supreme Court that the accounting practice for ascertainment of profits adopted by a company cannot override the specific provisions contained in the IT Act relating to taxability of any income or relating to grant of deduction. These principles can be applied only in cases where there is a conflict between accounting practice adopted by the assessee and a clear and specific provisions relating to grant of deductions contained in the IT Act. The assessee t....
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....pay the discount in the year of issue of debentures, the payments were to secure a benefit over a number of years. There is a continuing benefit to the business of the company over the entire period. The liability should, therefore, be spread over the period of the debentures." 8.8 The assessee debited only 1/5th amount of the expenditure in its P&L a/c of the year under consideration and has spread over the said expenditure over a period of five years with a view to avoid presentation of distorted picture of the profits to its shareholders. Such spreading over of the said expenditure over a period of five years was made by the assessee in accordance with the accepted accounting practice which is in no way contrary to any specific provisions contained in the IT Act. On the other hand, such spreading over of the expenditure resulting in enduring benefit is in conformity with the aforesaid principles laid down by the Hon'ble Supreme Court in the case of Madras Industrial Investment Corpn. We, therefore, do not find any infirmity in the order passed by the CIT(A) directing the AO to allow deduction in respect of the aforesaid amount in the same manner as has been adopted by the....
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....(A) in relation to this ground. 9. The last ground relates to disallowance of drawings and design expenses of Rs. 65,44,703. The AO has discussed this point in para 6 on pp. 18 to 31 of the assessment order. Brief facts as stated in para 6.1 are reproduced below : "6.1 The assessee-company has entered into a collaboration agreement with Hitachi Ltd., Tokyo, Japan, in accounting year 1991. The agreement has provided import on technical information. Designs and drawings from Hitachi which is to be subsequently utilised for manufacturing of the Shizuka range of room air-conditioner. Pursuant to this memorandum of understanding the assessee-company has paid a sum of Rs. 59,69,885 till March, 1991, i.e., asst. yr. 1991-92, to Hitachi Ltd., Japan, and has acquired drawings and designs in asst. yr. 1991-92 (refer statement of account of drawings and designs for asst. yr. 1991-92 as filed by the assessee-company vide written submission dt. 10th Jan., 1995). In the year under consideration, that is, asst. yr. 1992-93, the assessee-company has paid and imported few drawings and designs amounting to Rs. 5,74,818 (refer drawings and design account for asst. yr. 1991-92 as ....
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....n import of drawings and designs is the revenue expenditure and hence should be allowed under s. 37(i) of the IT Act." 9.2 The AO also considered the assessee's claim for grant of deduction under s. 35AB in relation to the aforesaid payment of Rs. 65,,44,703 and has held as under on pp. 30 and 31 of the assessment order : "(vi) The following important conclusions are emerged out in the case on the basis of discussion and finding as mentioned in paras (i) to (v). (a) The assessee-company has claimed deduction during the year under consideration of Rs. 59,69,885 which is debited in accounts of asst. yr. 1991-92 as lump sum technical know-how fees for imported drawings and design. Since the liability to incur such expenditure and payment in respect of such imported drawing and design worth Rs. 59,49,885 is made in asst. yr. 1991-92 and the assessee-company is not entitled to reopen its account, the claim of assessee for deduction of Rs. 59,49,885 during the year under consideration, i.e., 1992-93 is rejected and the assessee-company will not be entitled for any deduction including deduction under s. 35AB in respect of aforesaid amount, which pertains to asst. ....
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....ent for technical know-how was entered into with the object of improvement of products. This fact is evident from the findings given by the CIT(A) in para 42 of his order that the said expenditure has been incurred to enable the assessee to manufacture superior or improved quality of air-conditioners than the ones they were manufacturing earlier. The CIT(A) has observed that this fact cannot convert the capital expenditure into deduction of revenue expenditure. Such a finding given by the CIT(A) is patently incorrect, says the learned counsel. The learned counsel contended that the aforesaid issue is clearly covered in favour of the assessee by the following three decisions : (i) Goodyear India Ltd. vs. ITO (2000) 68 TTJ (Del)(TM) 300 : (2000) 73 ITD 189 (Del)(TM) (ii) Indian Petrochemicals Corpn. Ltd. vs. Dy. CIT (2002) 74 TTJ (Ahd) 281 : (2002) 81 ITD 263 (Ahd) (iii) Sayaji Industries Ltd. vs. Dy. CIT (2000) 68 TTJ (Ahd) 851. 9.5 The Tribunal, Ahmedabad Bench, in the case of Indian Petrochemicals Corpn. Ltd. vs. Dy. CIT has considered various judgments on this point including the judgment of the Hon'ble Supreme Court in the case of Eimco K.C.P. L....
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....nue expenditure for asst. yr. 1992-93 in the return of income for the said year while claiming only 1/6th of the same in the accounts as per the company law requirements." 9.6 The learned counsel contended that the CIT(A) has not found the aforesaid facts to be incorrect. The entire amount of Rs. 65,44,703 is, therefore, clearly allowable as revenue expenditure in the year under consideration in view of the aforesaid decisions. He, therefore, strongly urged that deduction may be allowed as claimed by the assessee. 9.7 The learned CIT-Departmental Representative simply relied upon the order of the CIT(A) and the reasons given in the assessment order. 9.8 We have carefully considered the submissions made by the learned representatives of the parties and have gone through the orders of the learned Departmental authorities. We have also carefully gone through all the decisions cited by the learned representatives and the judgments referred to in the order of the CIT(A). 9.9 The technical agreement for drawings and designs between the assessee and Hitachi Ltd., Japan, inter alia, indicates the following clauses : "Article III Grants During the term of this agr....
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....ion, drawings and designs provided by Hitachi Ltd. under the aforesaid agreement. But, the assessee only got rights/licence to use the said technical know-how for manufacture of their products. 9.11 It may be imperative to make a useful reference to the judgment of the Hon'ble Supreme Court in the case of Alembic Chemical Works Co. Ltd. vs. CIT (1989) 77 CTR (SC) 1 : (1989) 177 ITR 377 (SC). The Hon'ble Supreme Court at p. 390 has observed as under : "It would, in our opinion, be unrealistic to ignore the rapid advances in research in antibiotic medical microbiology and to attribute a degree of endurability and permanence to the technical know-how at any particular stage in this fast changing area of medical science. The state of the art in some of these areas of high priority research is constantly updated so that the know-how cannot be said to be the element of the requisite degree of durability and non-ephemerality to share the requirements and qualifications of an enduring capital asset. The rapid strides in science and technology in the field should make us a little slow and circumspect in too readily pigeon holding an outlay such as this as capital. The ci....
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....e cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, nonetheless, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principles laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test'." 9.12 In the present case also the agreement executed with Hitachi Ltd. places limitations on the right of the assessee in dealing with the technical know-how and conditions as to non-partibility, confidentiality and secrecy of know-how, etc. as in the aforesaid case. The assessee was already engaged in the business of manufacture of air-conditioners. The technical know-how was acquired for improvisation of the products. The lump sum payments made by the assessee for acquiring the aforesaid technical know-how, drawings and designs only for purpose of user thereof for manufacture of their products, is therefore clearly an expenditure of revenue nature ....
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....n import of drawings and designs is the part of the expenditure of new project. The relevant portion of the director's report is quoted as under for the sake of clarification : Project implementation "The project has been successfully implemented and completed inspite of difficulties faced on account of import curbs. Our technical team has been trained both in India and in Japan by Hitachi Engineers. Most of the capital goods have already been received and we have commenced production. The outstanding feature has been the success achieved in compressing the indigenisation programme. 95 per cent indigenisation has been achieved in the window AC. In the annual report of the year under consideration, it is mentioned as under : Project implementation "The project for the manufacturing of the Shizuka range of RAC, with the technical know-how obtained from Hitachi Corporation of Japan, has been successfully implemented. The engineers from your company were trained in the Hitachi plants located in Japan and the engineers from the Hitachi Corporation worked with your company in India while the project was being implemented." It is e....
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....uring any previous year alone is to be taken note of. There is, therefore, a bar to include any income that accrues or arises outside the previous year subject to the deeming provisions in the Act. There is, however, no express bar in law, nor one by necessary implication, restricting the power of the ITO to exclude the expenditure laid out or expended under s. 10(2)(xv) of the Act. We are, therefore, unable to accede to the submission of learned counsel for the Department. Sec. 10(2)(xv), shorn of other details for our purpose, provides for making allowance of any expenditure "laid out" or "expended". The words "laid out" are with reference to the mercantile system while the word "expended" is with regard to the cash system. Once there was the sales-tax demand in this case, which was an enforceable liability and as such a real expenditure, for which the assessee laid out the amount by debiting his account in the accounting year which was also the year of demand of the Department, deduction can be legitimately claimed under s. 10(2)(xv). Here is a case where there is no doubt about the genuineness of the expenditure. There is also the compulsiveness in the sales-tax demand....
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.... of the decision of the Tribunal, Delhi Bench, in the case of Goodyear India Ltd. vs. ITO, in which one of us, viz., AM, was a party : "As regards whether the expenditure in question was a revenue or capital expenditure, the question was whether the technical know-how was obtained for manufacturing a new product. In this connection, it was to be noted that the assessee had already been manufacturing tyres and that in the asst. yr. 1984-85 the Tribunal while holding the payment of technical know-how fee for manufacture of extra large OTR tyres as revenue expenditure, observed that the agreement was not made for the manufacture of an entirely new product, and the consideration was made for augment and enlargement of the existing product of the existing business. It was neither a new product nor a new business. The agreement considered in the asst. yr. 1984-85 did not have any significant difference with the present agreement relevant for the asst. yr. 1986-87 and, therefore, the Tribunal's decision in the asst. yr. 1984-85 in the assessee's own case should be treated as applicable for the assessment year in question. Next issue to be considered was whether t....
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....retation that s. 35AB is applicable both to capital expenditure and revenue expenditure will defeat the very purpose of s. 35AB and the legislative intent of introducing this section as vividly brought out in Finance Minister's speech and memorandum explaining the said provision. Sec. 35AB is an enabling section and not disabling or prohibitive one and, therefore, it should be held to be applicable to that consideration paid for acquiring technical know-how, which would otherwise be disallowable as being on capital account. The words "for acquiring" here means acquiring the know-how as owner thereof and as such s. 35AB is applicable to a case of acquiring the know-how as owner thereof and not to a case where the know-how is acquired merely for use and ownership thereof remained with its licenser. Therefore, s. 35AB is not applicable to the present case." 9.20 The Tribunal, Ahmedabad, Bench, in the case of Indian Petrochemicals Corpn. Ltd. vs. Dy. CIT has taken a similar view, inter alia, after taking into consideration various judgments including the judgment of the Hon'ble apex Court in the case reported in (2000) 159 CTR (SC) 137 : (2000) 242....