Bombay High Court
The Commissioner Of Income Tax-2 vs Raymond Ltd on 21 March, 2012
Author: D.Y. Chandrachud
Bench: D.Y. Chandrachud, M.S.Sanklecha
1
itxa-1357-2009
srk
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
INCOME TAX APPEAL NO.1357 OF 2009
The Commissioner of Income Tax-2,
Mumbai ...Appellant
Versus
Raymond Ltd. ...Respondent
Mr.Vimal Gupta for appellant.
Mr.Percy J. Pardiwala, Senior Advocate with Mr.Mohan Salian,
Ms.Vaijayanta Shete and Mr.Jainuddin Khan i/b. Gagrats for respondents.
CORAM: DR.D.Y. CHANDRACHUD &
M.S.SANKLECHA, JJ.
March 21, 2012.
ORAL JUDGMENT ( PER DR.D.Y. CHANDRACHUD,J.)
1. This appeal by the Revenue arises from a decision of the Income Tax Appellate Tribunal dated 22 March 2007; the Assessment Year to which appeal relates being AY 1994-95. The following substantial questions of law are raised by the Revenue:
(A) Whether on the facts and in the circumstances of the case and in law, the ITAT is right in deleting the increase in ::: Downloaded on - 09/06/2013 18:19:07 ::: 2 itxa-1357-2009 disallowance under Rule 6D made by the A.O.;
(B) Whether on the facts and in the circumstances of the case and in law, the ITAT is right in deleting disallowance of pre-operative expenses even though the said expenditure pertains to establishment of textile and files division is capital in nature;
(C) Whether on the facts and in the circumstances of the case and in law, the ITAT is right in allowing deduction of payment in respect of technical know-how under Section Section 37 while holding Section 35AB is not applicable;
(D) Whether on the facts and in the circumstances of the case and in law, the ITAT is right in directing the AO to exclude debenture issue expenses in connection with debenture and recompute the deduction under Section 35D;
(E) Whether on the facts and in the circumstances of the case and in law, the ITAT is right in allowing expenses on electricity and water charges in respect of the property owned by assessee company given to Directors for residential purpose and holding only perquisites value can be assessed in the hands of Directors;::: Downloaded on - 09/06/2013 18:19:07 ::: 3
itxa-1357-2009 (F) Whether on the facts and in the circumstances of the case and in law, the ITAT is right in allowing the actual premium paid in redemption of debentures as revenue expenditure;
(G) Whether on the facts and in the circumstances of the case and in law, the ITAT is right in allowing relief in respect of disallowance under Rule 6B;
(H) Whether on the facts and in the circumstances of the case and in law, the ITAT is right in deleting the addition on valuation made by A.O.;
(I) Whether on the facts and in the circumstances of the case and in law, the ITAT is right in allowing the deduction of lease rent and depreciation on leased assets while computing taxable profit for the purpose of 80HHC deduction?
2. Counsel appearing on behalf of the Revenue and the counsel appearing on behalf of the assessee are agreed that Questions (A), (B), (F) and (G) would stand covered in favour of the assessee and against the Revenue for the following reasons:
1. Question (A) is covered by the decision rendered by this Court on 20 March 2012 in Income Tax Appeal No.189 of 2011 for ::: Downloaded on - 09/06/2013 18:19:07 ::: 4 itxa-1357-2009 Assessment Year 1990-91;
2. Question (B) is covered by the decision rendered by this Court on 20 March 2012 in Income Tax Appeal No.189 of 2011 for Assessment Year 1990-91;
3. Question (F) is covered by the decision rendered by this Court on 20 March 2012 in Income Tax Appeal No.188 of 2011 for Assessment Year 1992-93; and
4. Question (G) is covered by the decision rendered by this Court on 20 March 2012 in Income Tax Appeal No.1276 of 2009 for Assessment year 1991-92.
For the aforesaid reasons upon which there is no dispute between the counsel appearing on behalf of the Revenue and the assessee, Questions (A), (B), (F) and (G) will not raise any substantial question of law.
3. As regards Questions (D) and (E), the judgment of the Tribunal would indicate that both the grounds arose in the appeal filed by the assessee against the order of the CIT(A). On Question (D), the Tribunal confirmed the order passed by the CIT(A) in paragraph 74 of its decision while on Question (E), the Tribunal confirmed the order passed by the CIT(A) in paragraph 81. In that view of the matter, since there was no appeal whatsoever by the Revenue on the findings of the CIT(A) on the ::: Downloaded on - 09/06/2013 18:19:07 ::: 5 itxa-1357-2009 aforesaid two questions where the Tribunal has confirmed the order passed by the CIT(A), no substantial question of law would arise from the decision of the Tribunal at the behest of the Revenue.
4. The appeal is admitted on Questions (C), (H) and (I). By consent the appeal is taken up for final hearing and disposal at this stage.
5. The ground which has been raised by the Revenue is whether the Tribunal was right in allowing a deduction under Section 37 and in holding that the provisions of Section 35AB were not applicable. In order to appreciate the issue, a brief reference to the facts would be in order. The assessee entered into two agreements with two Italian companies viz.
M/s. Marzotto & Figli and M/s. Fratalli Piacenza. The first agreement of 24 May 1993 provided that the foreign company would carry out a survey of the existing facilities of the assessee and submit a detailed study report complete with a firm offer for the consultancy services indicating the strength/weakness of the existing facilities, areas of possible co- operation, guarantees of performance of the assessee and estimation in respect of the investment for the purchase of new equipments. In respect of this agreement the assessee was liable to pay an amount of US $ 2,00,000/- on submission of a detailed study report. In the event that a collaboration agreement was subsequently entered into, this payment was to be treated as a part of the total consideration payable under the collaboration agreement. A collaboration agreement was entered into on 25 June 1994 for which a total consideration of US $ 10,00,000/- was payable in three equal installments. The first payment was on signing of ::: Downloaded on - 09/06/2013 18:19:07 ::: 6 itxa-1357-2009 the agreement, the second on handing over of technical documentation and the final on the satisfaction that the operation system had achieved the contractual parameters. The last payment was made in January 1997.
6. The second agreement was entered into by the assessee on 1 October 1993 for the acquisition of technical know-how for upgrading manufacture of high quality and high value woolen fabrics. The agreement was to be valid for three years and a total consideration of US $ 9,00,000/- was payable at the rate of US $ 3,00,000/- per year. Under the agreement the assessee paid an amount of US $ 1,50,000/- during the previous year relevant to the Assessment Year 1994-95.
7. Before the Assessing Officer the contention of the assessee was that Section 35AB was not attracted since the payment was not made in lump sum; that the payment of US $ 2,00,000 under the first agreement was in any event not a payment made for transfer of know-how and in the alternative if the provisions of Section 35AB were to be attracted, the assessee would be entitled to an amount of one-sixth of the total amount payable viz. US $ 2,00,000/-. The Assessing Officer held that the provisions of Section 35AB would stand attracted. However, the Assessing Officer gave to the assessee the benefit of a deduction under Section 35AB limited to one-sixth of the total amount of Rs.1.43 crores paid during the year which worked out to Rs.23.86 lakhs.
8. In appeal, the CIT(A) held that in so far as the first agreement dated 24 May 1993 was concerned, the amount which was paid was not for ::: Downloaded on - 09/06/2013 18:19:07 ::: 7 itxa-1357-2009 transfer of technical know-how but only in pursuance of an agreement for preliminary survey. Consequently, the Assessing Officer was of the view that the entire payment of US $ 2,00,000 which was made in the previous year relevant to the Assessment Year would not fall within the purview of Section 35AB and would be allowable under Section 37. As regards the payment made under the second agreement dated 1 October 1993, the CIT(A) held that the payment was on account of transfer of know-how and would, therefore, fall within the purview of Section 35AB. However, the CIT(A) granted to the assessee the benefit of a deduction of one-sixth of the total amount of US $ 9,00,000 in respect of which the assessee had incurred a liability towards its foreign partner. The CIT(A) held that though the payment was liable to be effected in installments, it was nonetheless a fixed sum which had been agreed between the parties and was, therefore, a lump sum within the meaning of Section 35AB. The order of the CIT(A) has been confirmed in appeal by the Tribunal.
9. Section 35AB, inter alia, provides that where the assessee has paid in the previous year relevant to the Assessment year commencing on or before 1 April 1998 any lump sum consideration for acquiring any know-
how for use for the purpose of his business, one-sixth of the amount so paid shall be deducted in computing the profits and gains of the business for that previous year and the balance amount shall be deducted in equal instalments for each of the five immediately succeeding previous years. Under the Explanation to Section 35AB, "know-how", inter alia, means any industrial information or technique likely to assist in the manufacture or processing of goods.
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10. Now so far as the first agreement dated 24 May 1993 is concerned the terms of the agreement have been set out in the order of the Assessing Officer and have been considered in a considerable amount of detail in the order passed by the CIT(A) which was eventually confirmed by the Tribunal. The agreement dated 24 May 1993 provided for a preliminary survey in respect of the existing facilities of the assessee and on the feasibility of a proposed project. Both the CIT (A) as well as the Tribunal have concluded that the agreement did not provide for a transfer of know-
how. If a technical collaboration agreement were not to culminate as a result of the preliminary survey which was carried out for the assessee, obviously there would be no transfer of technical know-how. There is a finding of fact based on the interpretation of the contractual provisions that there was no transfer of know-how involved in the agreement dated 24 May 1993 and that consequently the provisions of Section 35AB would not be attracted. In this view of the matter, we do not find any infirmity in the order of the CIT(A) in so far as he allowed a deduction under Section 37 in respect of a payment of US $ 2,00,000/- which was effected in pursuance of the agreement dated 24 May 1993. The CIT(A) has directed that the deduction under Section 35AB would be allowable for the succeeding Assessment Years with reference to the balance of the amount of the lump sum consideration which was payable upon the execution of the technical collaboration agreement on 25 June 1994. The question of law would consequently stand answered in the affirmative in favour of the assessee.
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11. In so far as the second agreement dated 1 October 1993 is concerned, both the Assessing Officer as well as the CIT(A) came to the conclusion that the agreement involved a transfer of know-how and consequently fell within the purview of Section 35AB. The Assessing Officer, however, had allowed to the assessee the benefit of a deduction of one-sixth only in respect of the payments which were actually effected during the previous year relevant to the Assessment Year in question. The CIT(A) has adverted to the provisions of Section 35AB. Section 35AB, as noted earlier, refers to a situation where any lump sum consideration for acquiring any know-how for the use for the purpose of the business of the assessee has been paid in any previous year. The expression "paid" must be understood in the context of the provisions of Section 43(2) which defines it to mean `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.' In a judgment of a Division Bench of this Court in Additional Commissioner of Income-tax Vs. Buckau Wolf New Indian Engineering Works Ltd.1 the issue arose in the context of an agreement under which an assessee was to pay an amount of Rs.1,00,000/- to its German collaborators in annual instalments of Rs.20,000/- and the question which was referred was whether the entire amount of Rs. 1,00,000/- represented revenue expenditure deductible while computing the total income of the assessee for the Assessment Year 1967-68. The Division Bench noted that the question which was required to be considered was whether there was accrual of liability in the assessment
1. [1986] 157 ITR 751 ::: Downloaded on - 09/06/2013 18:19:07 ::: 10 itxa-1357-2009 year, though with a facility of a deferred payment. The Court held that it was an admitted position that the assessee kept its accounts on the basis of the mercantile accounting system, and if the terms of the agreement were construed it would have to be held that the assessee had incurred the entire liability for the payment of Rs.1,00,000/- in the assessment year under consideration though the actual payment was spread over five years. The judgment of the Division Bench also followed a decision of the Supreme Court in Kedarnath Jute Mfg. Co. Ltd. Vs. CIT,2 in holding that the issue as to whether the assessee is entitled to a deduction will depend on the provisions under which it is claimed and not on the existence or absence of entries in the books of account which would not be conclusive or decisive. In the present case, there is a finding that though the payment of the consideration under the agreement dated 1 October 1993 was to take place by installments it would still constitute a lump sum consideration since the amount was fixed and was not variable on the basis of other unforeseen eventualities. The assessee had evidently incurred the liability to pay the entire amount under the agreement dated 1 October 1993. In that view of the matter the finding of the CIT(A) that the assessee would be entitled to a deduction of one-sixth of the entire amount in respect of which the assessee had incurred a liability in the previous year relevant to the Assessment Year in question is correct. The finding is also justified having regard to the meaning of the expression "paid" in Section 43(2).
12. Counsel appearing on behalf of the Revenue submitted that the
2. [1971] 82 ITR 363 (SC) ::: Downloaded on - 09/06/2013 18:19:07 ::: 11 itxa-1357-2009 Tribunal has merely affirmed the correctness of the findings which were recorded by CIT(A) without any independent application of mind. We have carefully considered the submission in order to assess whether the submission should be accepted by restoring the issue before the Tribunal. Upon careful evaluation of the findings which have been recorded by the CIT(A) and as confirmed by the Tribunal, we do not find any reason or justification to do so. Moreover, the question which has been formulated on behalf of the Revenue and the ground in the memo of appeal would essentially raise an issue of whether the Tribunal was justified in allowing a deduction under Section 37 as opposed to the provisions of Section 35AB. This issue in substance would pertain only to the findings in regard to the first agreement where the claim of the deduction under Section 37 has been allowed. For the reasons which we have already indicated, the Tribunal was justified in coming to the conclusion that the provisions of Section 35AB were not attracted to the first agreement which did not relate to the transfer of know-how within the meaning of Section 35AB. We accordingly answer the question of law in the affirmative.
13. As regards question (H), counsel appearing on behalf of the Revenue and the counsel appearing on behalf of the assessee are agreed that following the judgment which has been rendered by this Court on 20 March 2012 in Income Tax Appeal No.189 of 2011 for Assessment Year 1990-91, this ground would have to be restored to the Tribunal for a decision afresh. We order accordingly.
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14. As regards question (I), with the consent of the counsel appearing on behalf of the Revenue and the counsel appearing on behalf of the assessee and on their request, the aforesaid question is restored to the file of the Assessing Officer for a decision afresh.
15. The appeal shall accordingly stand disposed of. There shall be no order as to costs.
ig (DR.D.Y. CHANDRACHUD,J.)
(M.S.SANKLECHA, J.)
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