Income Tax Appellate Tribunal - Delhi
M/S. Technico Agri Sciences Ltd., ... vs Acit, New Delhi on 19 November, 2018
ITA No. 5847/Del/2010
3111 to 3114/Del/2013
AY:2001-02 03-04,04-05,05-06,06-07
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'D' NEW DELHI
BEFORE
SHRI G.D. AGRAWAL, VICE PRESIDENT
AND
SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER
ITA No. 5847/Del/2010
Assessment Year: 2001-02
ITA No. 3111/Del/2013
Assessment Year: 2003-04
ITA No. 3112/Del/2013
Assessment Year: 2004-05
ITA No. 3113/Del/2013
Assessment Year: 2005-06
ITA No. 3114/Del/2013
Assessment Year: 2006-07
Technico Agri Sciences Ltd., vs ACIT,
(Formerly known as Chambal Agritech Ltd.), Circle 3(1),
SCO-835, 1srt & 2nd Floor, New Delhi.
NAC Manimajra,
Chandigarh-160101
(PAN: AAACC9811G)
(Appellant) (Respondent)
Appellant by : Shri Rohit Jain, Advocate
Shri Dipesh Jain, CA
Respondent by : Shri Pradeep Singh Gautam, Sr.DR
Date of hearing: 21.08.2018
Date of pronouncement : 19.11.18
ORDER
PER BENCH:
All the five appeals have been preferred by the assessee. ITA 5847/Del/2010 is the assessee's appeal for assessment year 1 ITA No. 5847/Del/2010 3111 to 3114/Del/2013 AY:2001-02 03-04,04-05,05-06,06-07 2001-02 and is preferred against the order dated 4.11.2010 which has been passed by the Ld. CIT (A)-IV, New Delhi. ITA No. 3111/Del/2013 is the assessee's appeal for assessment year 2003-04 and is preferred against the order dated 28.2.2013 passed by the Ld. CIT (A)-IV, New Delhi. ITA No. 3112/Del/2013 is the assessee's appeal for assessment year 2004-05 and is preferred against the order dated 28.02.2013 which has been passed by the Ld. CIT (A)-IV, New Delhi. ITA No. 3113/Del/2013 is the assessee's appeal for assessment year 2005-06 and is preferred against the order dated 28.02.2013 which has been passed by the Ld. CIT (A)-IV, New Delhi. ITA No. 3114/Del/2013 is the assessee's appeal for assessment year 2005-06 and is preferred against the order dated 28.02.2013 which has been passed by the Ld. CIT (A)-IV, New Delhi.
1.1 All the five appeals were heard together and for the sake of convenience, they are being disposed of through this consolidated order.
2.0 Brief facts of the case for assessment year 2001-02 in ITA No. 5847/Del/2010 are that the assessee company was set up in March 1999 as a joint venture of M/s Chambal Fertilizers Ltd. and Technico Pty. Ltd. to produce tissue culture based high 2 ITA No. 5847/Del/2010 3111 to 3114/Del/2013 AY:2001-02 03-04,04-05,05-06,06-07 yielding seed potatoes. The assessee's business commenced on 14.09.2000, i.e. during the assessment year 2001-02. Out of the total net pre-operative/pre-commencement expenditure of Rs.8,97,91,659/-, the assessee had capitalized an amount of Rs.
2,88,77,659/- allocated to the fixed assets viz. building and plant and machinery. The amount of fixed assets on which depreciation was claimed was Rs. 2,57,95,922/- and depreciation of Rs. 50,81,747/- was claimed. The original assessment order u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as "the Act") was completed on 27.02.2004 wherein the Assessing Officer did not allow the assessee's claim of depreciation of Rs. 50,81,747/- alleging that the preoperative expenses of Rs. 2,57,95,922/- were not linked to business assets and, therefore, could not be capitalized. The assessee approached the Ld. CIT (A) and the Ld. CIT (A) directed the Assessing Officer to identify and capitalize the expenses which related to the period after the setup of business but before the commencement of operations to the cost of fixed assets and allow depreciation thereon. Aggrieved with the directions of the Ld. CIT (A), the assessee approached the ITAT and the ITAT in ITA No.1305/Del/2007, vide order dated 23.11.2008, set aside the 3 ITA No. 5847/Del/2010 3111 to 3114/Del/2013 AY:2001-02 03-04,04-05,05-06,06-07 issue to the file of the Assessing Officer with a direction to capitalize all the expenses which were having nexus with the fixed assets and allow consequential depreciation thereon. Further, the Assessing Officer had also not allowed capitalization of another amount of Rs. 30,81,737/- forming part of the preoperative expenses and which was upheld by the Ld. CIT(A) was also directed by the ITAT to be capitalized. 2.1 During the course of set aside proceedings before the Assessing Officer, the Assessing Officer required the assessee to furnish details of all the expenses which were capitalized along with relevant bills and vouchers and to prove nexus of the expenses with the fixed assets. However, in the second round also before the Assessing Officer, the Assessing Officer vide assessment order dated 20.11.2009, disallowed the claim of depreciation on preoperative expenses capitalized to fixed assets alleging that no documentary evidences/bills and vouchers were submitted by the assessee. The assessee again approached the Ld. CIT (A) and submitted that all the details required by the Assessing Officer were duly furnished before the Assessing Officer and were also examined by the Assessing Officer. However, the Ld. CIT (A) upheld the disallowance on depreciation on 4 ITA No. 5847/Del/2010 3111 to 3114/Del/2013 AY:2001-02 03-04,04-05,05-06,06-07 preoperative expenses capitalized to fixed assets on the ground that the details filed by the assessee were not backed by proper bills and vouchers.
2.2 Now, the assessee has approached the ITAT challenging the order of the Ld. CIT (A) and has raised the following grounds of appeal in ITA No. 5847/Del/2010:-
"1. That the impugned order passed by the learned CIT (A) is contrary to the law and facts of the case.
2. That the learned CIT (A) erred in sustaining the adhoc depreciation disallowance of Rs. 50,81,747/- on the total pre-operative expenditure of Rs. 2,57,95,922/- (incurred by the appellant company before 14 September 2000 i.e. the date of commencement of commercial production) allocated to fixed assets.
3. That the learned CIT (A) also failed to appreciate that complete details as asked were provided to the learned AO. That a specific offer to submit all documents again was also made before the learned CIT (A) by the assessee, which was ignored.
4. That the learned CIT (A) failed to appreciate that the details of legitimate expenditure of Rs. 2,57,95,922/- incurred to set up the project, has direct nexus with the purchase and installation of Plant and Machinery and construction of Building.
5. That the learned CIT (A) also erred in failing to notice that the learned AO completely disregarded the instructions/ order of Hon'ble ITAT vide its order dated 21.11.2008, advising the learned AO to capitalize those expenses which has direct nexus with the fixed assets.
6. That the said action of the learned CIT (A) was arbitrary, conjectural and against law and facts of the case."5 ITA No. 5847/Del/2010
3111 to 3114/Del/2013 AY:2001-02 03-04,04-05,05-06,06-07 3.0 The facts for assessment year 2003-04 in ITA No. 3111/Del/2013 are that during the FY 1999-2000, the assessee had entered into a license agreement dated 19.07.1999 with M/s Technico Pty. Ltd. to carry out licensed operations with the use of latter's technology requirement for manufacture/distribution of miniature potato seeds. A service agreement dated 19.07.1999 was also entered into with M/s Technico for assistance in the management and production of the miniature seeds. During assessment year 2003-04, the assessee had paid licence fee of Rs. 6,09,14,000/- in terms of the license agreement and a further amount of Rs. 1,18,77,353/- as technology enhancement fee in terms of the licence agreement. Apart from this, the assessee also paid an amount of Rs. 47,86,525/- towards agronomy management fee in terms of the service agreement and a further sum of Rs. 17,62,065/- as production facility management fee again in terms of the service agreement. The Assessing Officer, vide assessment order dated 28.02.2006, held that these expenses/fees resulted in an enduring benefit to the assessee and treated the same as deferred revenue expenditure as against the assessee claiming the same as revenue expenditure. The Assessing Officer held that this expenditure was to be allowed 6 ITA No. 5847/Del/2010 3111 to 3114/Del/2013 AY:2001-02 03-04,04-05,05-06,06-07 over a period of five years and accordingly allowed only 1/5th of the expenditure as deductible in assessment year 2003-04. Apart from this, the assessee had claimed amortization of loose tools amounting to Rs. 55,036/- as being allowable over a period of three years. The Assessing Officer, however, held the same to be capital in nature and allowed depreciation thereon @25%. Apart from this, the Assessing Officer also made a disallowance of Rs. 34,78,817/- on account of alleged excess depreciation claimed by the assessee with respect to the preoperative expenditure which had been capitalized by the assessee in assessment year 2001-02 but was not allowed by the AO. This action of the Assessing Officer was affirmed by the Ld. CIT (A).
3.1 Now, the assessee has approached the ITAT against the impugned order and has raised the following grounds of appeal:-
"1. That the impugned order passed by the learned CIT (A) is contrary to the law and facts of the case.
2. That the learned CIT (A) erred in law and in facts in sustaining the addition of Rs. 3,478,817/- on account of alleged excess depreciation claimed by the appellant.
3. That the learned CIT (A) erred in law and in facts in disallowing 4/5th of the Agronomy Management Fee amounting to Rs. 47,86,525/- paid by the appellant company.
4. That the learned CIT (A) further erred in law and in facts in disallowing 4/5th of the Production Facility Management Fee amounting to Rs. 17,62,065/- paid by the appellant company.7 ITA No. 5847/Del/2010
3111 to 3114/Del/2013 AY:2001-02 03-04,04-05,05-06,06-07
5. That the learned CIT (A) further erred in law and in facts in disallowing 4/5th of the Technology Enhancement Fee amounting to Rs. 1,18,77,353/- paid by the appellant company.
6. That the learned CIT (A) further erred in upholding the above expenditure incurred on Agronomy Management Fee, Production Facility Management Fee and Technology Enhancement Fee to have an enduring benefit.
7. That the learned CIT (A) further erred in law and in facts in holding the loose tools amounting to Rs. 55,036/- to be of capital nature and accordingly upholding that the depreciation is allowable @ 25% on the same.
8. That the said action of the learned CIT (A) was arbitrary, conjectural and against law & facts of the case."
4.0 The facts in assessment year 2004-05 in ITA No. 3112/Del/2013 are that the assessee had made a payment of Rs. 2,00,00,000/- to ICICI Bank Limited as an upfront fee in lieu of reducing the rate of interest payable from 10.5% to 8.5% on the loan taken from the Bank. The assessee had debited this upfront fee to the Profit & loss account on pro rata basis over the tenure of the loan and thus an amount of Rs. 2,04,000/- was debited as expenditure during assessment year 2004-05. However, while computing the taxable income, the assessee claimed the entire expenditure of Rs. 2,00,00,000/- as business deduction during the year under consideration but the Assessing Officer was of the view that this expenditure was to be allowed on pro rata basis since the benefit of reduction of interest in lieu of upfront fee was 8 ITA No. 5847/Del/2010 3111 to 3114/Del/2013 AY:2001-02 03-04,04-05,05-06,06-07 enduring in nature and was to be enjoyed by the assessee over the entire tenure of the loan. The Assessing Officer proceeded to disallow upfront fee of Rs. 1,97,96,000/- and only allowed Rs. 2,04,000/-. This action of the Assessing Officer was upheld by the Ld. CIT (A). Further, the Assessing Officer also made a disallowance of Rs. 27,53,533/- on account of alleged excess depreciation claimed on capitalization of preoperative expenses. A further disallowance of Rs. 6,181/- was made on account of amortization of loose tools. The Assessing Officer also made a disallowance of Rs. 47,86,525/- on account of agronomy management fee, Rs. 17,26,065/- on account of production facility management fee and Rs. 1,18,77,353/- pertaining to technology enhancement fee paid by the assessee. The Assessing Officer allowed only 1/5th of these amounts. The ld. CIT(A) upheld the action of the Assessing Officer and now, the assessee is before the ITAT challenging the adjudication by the ld. CIT(A) and has raised the following grounds of appeal:-
"1. That the impugned order passed by the learned CIT (A) is contrary to the law and facts of the case.
2. That the learned CIT (A) erred in law and in facts in sustaining the addition of Rs. 27,53,533/- on account of alleged excess depreciation claimed by the appellant.
3. That the learned CIT (A) erred in law and in facts in 9 ITA No. 5847/Del/2010 3111 to 3114/Del/2013 AY:2001-02 03-04,04-05,05-06,06-07 sustaining the addition of Rs 1,97,96,000/- on pro-rata basis on account of upfront fee paid by the appellant for reducing rate of interest on loan taken by the company from ICICI Bank.
4. That the learned CIT (A) further erred in law and in facts in holding the loose tools to be of capital nature and accordingly upholding that the depreciation is allowable @ 25% on the same. Without prejudice to the above the learned CIT (A) erred in upholding the addition of Rs 6,181/- after allowing depreciation @ 25%, as the actual cost of loose tools is Rs 22,000/-.
5. That the learned CIT (A) erred in law and in facts in sustaining the disallowance of the Agronomy Management Fee paid by the appellant company in A/Y 2003- 04 amounting to Rs. 47,86,525/- and charging l/5th of Agronomy Management Fee in the current A/Y.
6. That the learned CIT (A) erred in law and in facts in sustaining the disallowance of the Production Facility Management Fee paid by the appellant company in A/Y 2003-04 amounting to Rs. 17,26,065/- and charging 1/5th of Production Facility Management Fee in the current A/Y.
7. That the learned CIT (A) erred in law and in facts in sustaining the disallowance of the Technology Enhancement Fee paid by the appellant company in A/Y 2003-04 amounting to Rs. 1,18,77,353/- and charging l/5n of Technology Enhancement Fee in the current A/Y.
8. That the learned CIT (A) further erred in upholding the above expenditure incurred on Agronomy Management Fee, Production Facility Management Fee and Technology Enhancement Fee to have an enduring benefit.
9. That the said action of the learned CIT (A) was arbitrary, conjectural and against law & facts of the case.
10. The appellant craves leave to add, delete, alter or modify the above grounds of appeal."10 ITA No. 5847/Del/2010
3111 to 3114/Del/2013 AY:2001-02 03-04,04-05,05-06,06-07 5.0 For assessment year 2005-06, in ITA 3113/Del/2013, the issues are identical and the assessee is challenging the disallowance of Rs. 11,250/- on amortization of loose tools. The assessee is also challenging the action of the Ld. CIT(A) in sustaining the addition of Rs. 2,481,635/- on account of alleged excess deprecation claimed by the assessee on preoperative expenses capitalized. Similarly, the assessee is also challenging the disallowance of Rs. 47,86,525/- paid on account of agronomy management fee and Rs. 1,18,77,353/- paid on account of technology enhancement fee. In this regard the following grounds have been raised:-
"1. That the impugned order passed by the learned CIT (A) is contrary to the law and facts of the case.
2. That the learned CIT (A) erred in law and in facts in holding the loose tools to be of capital nature and accordingly upholding that the depreciation is allowable @ 25% on the same. Without prejudice to the above, that the learned CIT (A) erred in upholding the addition of Rs 11,250 after allowing depreciation @ 25%, as the actual cost of loose tools is Rs 15,000.
3. That the learned CIT (A) erred in law and in facts in sustaining the addition of Rs. 2,481,635/- on account of alleged excess depreciation claimed by the appellant on Pre- Operative expenses.
4. That the learned CIT (A) erred in law and in facts in sustaining the disallowance of the Agronomy Management Fee paid by the appellant company in A/Y 2003-04 amounting to Rs. 47,86,525/- and charging l/5th of Agronomy Management Fee in the current A/Y.
5. That the learned CIT (A) erred in law and in facts in sustaining the disallowance of the Production Facility Management Fee paid by the appellant company in A/Y 2003- 11 ITA No. 5847/Del/2010 3111 to 3114/Del/2013 AY:2001-02 03-04,04-05,05-06,06-07 04 amounting to Rs. 17,26,065/- and charging l/5th of Production Facility Management Fee in the current A/Y.
6. That the learned CIT (A) erred in law and in facts in sustaining the disallowance of the Technology Enhancement Fee paid by the appellant company in A/Y 2003-04 amounting to Rs. 1,18,77,353/- and charging l/5n of Technology Enhancement Fee in the current A/Y.
7. That the learned CIT (A) further erred in upholding the above expenditure incurred on Agronomy Management Fee, Production Facility Management Fee and Technology Enhancement Fee to have an enduring benefit.
8. That the said action of the learned CIT (A) was arbitrary,conjectural and against law & facts of the case.
9. The appellant craves leave to add, delete, alter or modify the above grounds of appeal."
6.0 In assessment year 2006-07, in ITA No. 3114/Del/2013, again the issues are identical. Ground no. 2 is against the order of the ld. CIT (A) in sustaining the disallowance of Rs. 1,508,014/- on account of alleged excess depreciation on capitalization of preoperative expenses. Further, the assessee is also challenging the upholding the disallowances of Rs. 47,86,525/-, Rs. 17,26,065/- and Rs. 1,18,77,353/- pertaining to the various fees paid under the terms of the two agreements with M/s Technico. The following grounds of appeal have been raised by the assessee:-
"1. That the impugned order passed by the learned CIT (A) is contrary to the law and facts of the case.
1. 2. That the learned CIT (A) erred in law and in facts in sustaining the addition of Rs. 1,508,014/- on account of alleged excess depreciation claimed by the appellant.12 ITA No. 5847/Del/2010
3111 to 3114/Del/2013 AY:2001-02 03-04,04-05,05-06,06-07
2.
3. That the learned CIT (A) erred in law and in facts in sustaining the disallowance of the Agronomy Management Fee paid by the appellant company in A/Y 2003-04 amounting to Rs. 47,86,525/- and charging 1 /5th of Agronomy Management Fee in the current A/Y.
4. That the learned CIT (A) erred in law and in facts in sustaining the disallowance of the Production Facility Management Fee paid by the appellant company in A/Y 2003-04 amounting to Rs. 17,26,065/- and charging l/5th of Production Facility Management Fee in the current A/Y.
3. 5. That the learned CIT (A) erred in law and in facts in sustaining the disallowance of the Technology Enhancement Fee paid by the appellant company in A/Y 2003-04 amounting to Rs. 1,18,77,353/- and charging l/5th of Technology Enhancement Fee in the current A/Y.
4.
6. That the learned CIT (A) further erred in upholding the above expenditure incurred on Agronomy Management Fee, production Facility Management Fee and Technology Enhancement Fee to have an enduring benefit.
5. 7. That the said action of the learned CIT (A) was arbitrary, conjectural and against law & facts of the case.
6.
8. The appellant craves leave to add, delete, alter or modify the above grounds of appeal."
7.0 At the outset, the Ld. AR drew our attention to the application submitted by the assessee for admission of additional evidence in terms of Rule 29 of the ITAT Rules, 1963. The Ld. AR submitted that the details of preoperative expenses capitalised to fixed assets along with the invoices, bills and vouchers were being sought to be admitted as additional evidences. It was 13 ITA No. 5847/Del/2010 3111 to 3114/Del/2013 AY:2001-02 03-04,04-05,05-06,06-07 submitted that these additional evidences were relevant for adjudication of the issue relating to capitalization of certain preoperative expenses to fixed assets and consequential allowability of depreciation thereon. The Ld. AR submitted that after the set aside by the ITAT, the Assessing Officer had required the assessee to furnish details in respect of expenses along with bills and vouchers of amounts above Rs. 1 lakh and the assessee had filed complete details of the preoperative expenses capitalised to the fixed assets and explained the nature of each expense establishing the nexus with fixed assets. Our attention was drawn to assessee's reply dated 20.11.2009 which was placed at pages 76-97 of the paper Book filed by the assessee. The Ld. AR also submitted that the fact that the details were filed by the assessee was also recorded in the order sheet entry dated 20.11.2009. Our attention as drawn to copy of the order sheet placed at pages 99 and 99A of the assessee's Paper Book in this regard. It was submitted by the Ld. AR that, however, the Assessing Officer observed that the relevant details were not filed by the assessee and in appeal before the Ld. Commissioner of Income Tax (A) also, the Ld. Commissioner of Income Tax (A), after calling for the assessment record, had observed that the 14 ITA No. 5847/Del/2010 3111 to 3114/Del/2013 AY:2001-02 03-04,04-05,05-06,06-07 assessee had duly complied by filing all the details but observed that the details were not backed by invoices and vouchers and had, thereafter, upheld the disallowance. The Ld. AR submitted that in view of the factual matrix, in the present application under Rule 29 of the ITAT Rules, the assessee seeks to place on record copies of invoices and vouchers on sample basis which, although, were produced before the lower authorities were not filed before them. The Ld. AR submitted that in the interest of justice, these additional evidences admitted by the ITAT. 8.0 In response, the Ld. Senior DR opposed the assessee's application for admitting additional evidence and submitted that the assessee had not produced relevant vouchers and invoices even during the second round of assessment proceedings and, therefore, no further opportunity should be given to the assessee. 9.0 Having heard both the parties on the issue of admitting additional evidence, we are of the considered opinion that in view of the facts of the case and in the interest of justice, it is necessary to admit additional evidence which is being sought to be admitted by the Ld. AR on behalf of the assessee. The Hon'ble Delhi High Court in the case of CIT vs. Text Hundred India Pvt. Ltd. in 351 ITR 57(Del) had held that Rule 29 15 ITA No. 5847/Del/2010 3111 to 3114/Del/2013 AY:2001-02 03-04,04-05,05-06,06-07 permitting the Tribunal to admit additional evidence is made to enable the Tribunal to admit any additional evidence which would be necessary for substantial justice in the matter and further held that it was well settled that procedure should not be choked only because of some inadvertent error or omission on the part of one of the parties to lead evidence at the appropriate stage. Accordingly, we deem it fit to admit the additional evidence which has been placed in the form of paper book before us.
9.1 In view of this Bench admitting the additional evidences filed by the assessee, the issue in dispute must necessarily be set aside to the file of the Assessing Officer so as to enable him to examine and verify the same. Accordingly, we restore this issue to the file of the Assessing Officer with the direction to examine the documents and the submissions of the assessee, keeping in mind the directions of the ITAT in the first round of proceedings and, thereafter, adjudicate the issue as per law after giving due opportunity to the assessee. Accordingly, ground nos. 2, 3 and 4 in ITA No. 5847/Del/2010, ground no. 2 in ITA No. 3111/Del/2013, ground no. 2 in ITA No. 3112/Del/2013, ground no. 3 in ITA No. 3113/Del/2013 and 16 ITA No. 5847/Del/2010 3111 to 3114/Del/2013 AY:2001-02 03-04,04-05,05-06,06-07 ground no. 2 in ITA No. 3114/Del/2013 stand allowed for statistical purposes.
10.0 With respect to ground nos. 3, 4, 5 and 6 in assessment year 2003-04 pertaining to disallowance of 4/5th of the Agronomy Management fee, Production Facility Management Fee and Technology Enhancement fee by treating the same as deferred revenue expenditure, the Ld. AR submitted that the licence fee was paid for granting licence to carry out operations for operating horticulture and agronomic commercial production, marketing and distribution of miniature potato seeds. It was submitted that in view of the licence agreement, all the technology, IPRs, trademark etc. vested with M/s Technico Pty. Ltd. and the assessee was merely granted licence to use the mark in the prescribed manner. The Ld. AR further submitted that the licence fees paid in lump sum was capitalised by the assessee and the same was accepted by the revenue also. However, apart from the licence fee, the assessee was also obliged to pay technology enhancement fee which was for providing/sharing improvements in the existing technology as a result of Research and Development activities by M/s Technico Pty. Ltd. It was also submitted that the payment of technology enhancement fee was 17 ITA No. 5847/Del/2010 3111 to 3114/Del/2013 AY:2001-02 03-04,04-05,05-06,06-07 linked to production of seed potatoes and was, therefore, clearly revenue in nature. For this purpose, reference was made to clause 9.1 of the licence agreement. Similarly, it was submitted that Agronomy Management fee was paid under the service agreement for various agronomy services to be provided by M/s Technico Pty. Ltd. which included training of staff in modern agronomy practices, providing training personnel in the territory at locations in India as well as outside India, providing agronomy advices on request of the assessee. It was submitted that these services relate to routine activities like plantation, harvest handling and storage process and the same was paid as a stop gap arrangement till recruitment of regular agronomy staff by the assessee. It was also submitted that this fee was determined on per day basis. With respect to production facility management fee, it was submitted that this also was paid under the service agreement and was paid for management of production of seeds, appointing of production facility manager for assisting in day to day management, assistance in preparing production plans, program tissue culture operations and recruitment of staff and review use of technology, review processes and operations and adoption of ensure best practices etc. It was submitted that this 18 ITA No. 5847/Del/2010 3111 to 3114/Del/2013 AY:2001-02 03-04,04-05,05-06,06-07 fee was also linked to day to day production and was payable annually in four equal instalments. The Ld. AR submitted that this fee did not result in creation of any new capital asset and was for services rendered in connection with operations and production facilities and being so, they were purely revenue in nature and were to be allowed as business deduction in the year in which they were claimed. It was also submitted that there was no concept of deferred revenue expenditure under the Act and further these payments were accepted by the revenue as an allowable deduction in assessment year 2001-02 initially u/s 143(3) of the Act and also in assessment year 2003-04. The Ld. AR also submitted that in view of the judgment of the Hon'ble Apex Court in the case of Taparia Tools Ltd. vs. JCIT reported in 372 ITR 605(SC), the impugned payments were allowable as deduction in the year in which they were claimed/spent. 10.1 The Ld. AR also submitted that the grounds in assessment year 2003-04 were identical to ground no. 5, 6, 7 & 8 in assessment year 2004-05, ground no. 4, 5, 6 and 7 in assessment year 2005-06 and ground no. 3, 4, 5, 6 in assessment year 2006-07 and the arguments would be identical in all these years.
19 ITA No. 5847/Del/2010 3111 to 3114/Del/2013 AY:2001-02 03-04,04-05,05-06,06-07 10.2 In response, the Ld. Sr. DR placed heavy reliance on the orders of both the authorities below and vehemently argued that the disallowance had been rightly made in this regard. 10.3 With respect to ground no. 7 in assessment year 2003- 04, the Ld. AR submitted that this ground challenged the action of the Assessing Officer in capitalizing the expenses incurred on loose tools. It was submitted that the lower authorities had failed to appreciate that the loose tools were consumable in nature and did not have a span of life which was more than one year. It was also submitted that the assessee had also categorised loose tools as part of inventory and not as capital assets in the books of accounts and the accounting treatment had been approved by the statutory auditors who had not made any adverse comments on the same. It was prayed that the action of the Assessing Officer in capitalizing the expenditure and allowing depreciation @25% thereon deserves to be set aside.
10.4 The Ld. AR also submitted that this ground was also identical to ground no. 4 in assessment year 2004-05, ground no. 2 in assessment year 2005-06 and the arguments would be identical.
20 ITA No. 5847/Del/2010 3111 to 3114/Del/2013 AY:2001-02 03-04,04-05,05-06,06-07 10.5 In response, the Ld. Sr. DR placed reliance on the orders of the authorities below.
10.6 With respect to ground no. 3 in assessee's appeal for assessment year 2004-05 pertaining to disallowance relating to upfront fee paid to ICICI Bank Ltd. in lieu of reducing the rate of interest payable from 10.5% to 8.5%, the Ld. AR submitted that the impugned upfront fee was allowable as a revenue expenditure because there was no concept of deferred revenue expenditure in the Income Tax Act and further because no capital asset had come into existence in lieu of incurrence of the upfront fee. The Ld. AR also submitted that the Assessing Officer, while disallowing the impugned amount, had primarily relied on the judgment of the Hon'ble Bombay High Court in the case of Taparia Tools Ltd. vs. JCIT wherein similar upfront fee payable for reduction of interest had been disallowed but this judgment of the Hon'ble Bombay High Court had been reversed by the Hon'ble Apex Court in the case of Taparia Tools Ltd. vs. JCIT reported in 372 ITR 605 wherein it was held that one time upfront interest payment was to be allowed as deduction in the year of payment itself and, therefore, the impugned disallowance deserved to be deleted.
21 ITA No. 5847/Del/2010 3111 to 3114/Del/2013 AY:2001-02 03-04,04-05,05-06,06-07 10.7 In response, the Ld. Sr. DR placed reliance on the findings and observations of both the lower authorities. 11.0 Having heard the rival submissions, we take up the issues one by one. In assessment year 2003-04, the assessee has challenged the 4/5th disallowance out of Technology Enhancement Fee, Agronomy Management Fee and Production Facility Management Fee and has raised the issue in grounds 3,4,5 and 6. The Ld. AR has drawn our attention to the Licence Fee Agreement as well as the Service Agreement and has emphasised that the amounts paid had been paid under the terms of the two agreements. It is the contention of the Ld. AR that although the licence fee paid by the assessee has been accepted by the department in earlier years, the other fees were not allowed on the ground that the benefit was of enduring nature and could not be said to have accrued only in one year. It is the contention of the Ld. AR that the impugned fees have been paid for the purpose of providing and sharing improvements in technology, training of staff, production facility management, technology review etc. It is seen that the Assessing Officer, while making the disallowance, has observed that technical services 22 ITA No. 5847/Del/2010 3111 to 3114/Del/2013 AY:2001-02 03-04,04-05,05-06,06-07 and training provided by M/s Technico to the assessee company had provided enduring advantage to the assessee company which would benefit the assessee over a number of years and, therefore, allowing the entire expenditure in one year might give a distorted picture of profits in a particular year. While making the disallowance, the Assessing Officer has also placed reliance on the judgment of the Hon'ble Apex Court in the case of Madras Industrial Investment Corporation vs. Commissioner of Income Tax reported in 225 ITR 802 (SC). The Ld. Commissioner of Income Tax (A), while upholding the disallowance, also seconded the view taken by the Assessing Officer. Thus, apart from observing that the impugned fees gave an enduring benefit to the assessee company and, therefore, the allowability of expenditure had to be spread over 5 years, the lower authorities have not given any cogent reason for making the disallowance. Undisputedly, the factum of the fees having been paid is not disputed. Nor it is disputed that the impugned fees were paid for services which were, in fact, rendered by Technico Pty. Ltd. to the assessee company. Undisputedly, the impugned expenditure is not in the nature of capital expenditure. The lower authorities have placed reliance on the judgement of the Hon'ble Apex Court 23 ITA No. 5847/Del/2010 3111 to 3114/Del/2013 AY:2001-02 03-04,04-05,05-06,06-07 in the case of Madras Industrial Corporation Ltd. vs. CIT (supra) while holding that since the benefit was accruing to the assessee over a number of years, the same could not be allowed as a deduction in one year. However, it is seen that the judgment of the Hon'ble Apex Court in the case of Madras Industrial Corporation Ltd. vs. C.I.T. (supra) was rendered in the context of allowability of discount on debentures and, admittedly in this case, the liability was to accrue from year to year for a period of 12 years. It is in this context that the Hon'ble Apex Court held that since the payment was to secure a benefit over a number of years and there was a continuing benefit to the business of the assessee company for a number of years, the liability should, therefore, be spread over a period of debentures. However, we find that the instant case is squarely covered by the judgment of the Hon'ble Apex Court in the case of Taparia Tools Ltd. vs JCIT (supra) wherein it has been laid down by the Hon'ble Apex Court that normally the revenue expenditure incurred in a particular year has to be allowed in the year the assessee claims that expenditure and the department cannot deny the same. The Hon'ble Apex Court went on to hold that even the fact that the assessee had deferred the expenditure in the books of account 24 ITA No. 5847/Del/2010 3111 to 3114/Del/2013 AY:2001-02 03-04,04-05,05-06,06-07 would be irrelevant. In this judgment, the Hon'ble Apex Court has also taken note of its earlier judgment rendered in the case of Madras Industrial Investment Corporation Ltd. vs. C.I.T. (supra) and has, thereafter, held that the Income Tax Act enables and entitles the assessee to claim entire expenditure in the manner it is claimed u/s 37(1) of the Act as long as the same is not capital in nature. Therefore, respectfully following the ratio of the judgment of the Hon'ble Apex Court in the case of Taparia Tools Ltd. vs. JCIT (supra), we are unable to concur with the findings of the Ld. Commissioner of Income Tax (A) in this regard and while setting aside the order of the Ld. Commissioner of Income Tax (A) on this issue, we direct the Assessing Officer to allow the entire expenditure in the assessment year in which it is claimed. Accordingly, ground nos. 3, 4, 5 and 6 in assessment year 2003- 04 and identical ground nos. 5, 6, 7, and 8 in assessment year 2004-05, ground nos. 4, 5, 6, 7 in assessment year 2005-06 and ground nos. 3, 4, 5, and 6 in assessment year 2006-07 stand allowed.
11.1 Ground no. 7 in assessment year 2003-04 challenges the action of the Assessing Officer in holding the expenditure with respect to loose tools as being capital in nature and allowing 25 ITA No. 5847/Del/2010 3111 to 3114/Del/2013 AY:2001-02 03-04,04-05,05-06,06-07 depreciation @25% thereon. A perusal of the assessment order shows that the Assessing Officer has simply mentioned that the expenditure on loose tools is of capital nature, the same was to be capitalized and depreciation had to be allowed thereon. The Ld. Commissioner of Income Tax (A), while upholding the disallowance, has noted that the assessee had submitted before the Assessing Officer that the depreciated value of loose tools was arrived at on the basis of amortisation of cost over a period of three years as per the regular accounting policy being followed by the assessee company. The Ld. Commissioner of Income Tax (A) went on to hold that since the assessee company itself had admitted that they were amortising the cost of the loose tools over a period of three years as per the regular accounting policy, the Assessing Officer was justified in treating the same as being capital in nature and allowing 25% depreciation thereon. Thus, apparently, the assessee has taken contradictory stands before the lower authorities and, therefore, it is our considered opinion that it will be in the fitness of things if the issue is re-examined by the Assessing Officer. Accordingly, we restore the issue of expenditure on loose tools having been treated as capital expenditure by the AO/Ld. CIT (A) to the file of the Assessing 26 ITA No. 5847/Del/2010 3111 to 3114/Del/2013 AY:2001-02 03-04,04-05,05-06,06-07 Officer with the direction to re-examine the issue and, thereafter, adjudicate the issue as per law after giving due opportunity to the assessee to present its case. Accordingly, ground no. 7 in assessment year 2003-04, and identical Ground no. 4 in assessment year 2004-05, ground no. 2 in assessment year 2005-06 stand allowed for statistical purposes. 11.2 Ground no. 3 in assessment year 2004-05 challenges the action of the department in dis-allowing the upfront fee of Rs. 2,00,00,000/- paid to ICICI Bank Ltd. for reducing the rate of interest payable on pro rata basis and spreading the same over the entire period of the loan. We find that this issue is also covered in favour of the assessee by the judgment of the Hon'ble Apex Court in the case of Taparia Tools Ltd. vs. JCIT (supra) wherein the Honble Apex Court held that the treatment in the books of accounts was not determinative of the taxability. The relevant observations of the Hon'ble Apex Court are contained in Para, 10,11,12,15,16, 18, 19 20 and 21 and the same are being reproduced hereunder for a ready reference:-
"10. The only reason which persuaded the AO to stagger and spread the interest over a period of five years was that the term of debentures was five years and that the assessee had itself given this very treatment in the books of account, viz, spreading it over a period of five years in its final accounts by not debiting the entire 27 ITA No. 5847/Del/2010 3111 to 3114/Del/2013 AY:2001-02 03-04,04-05,05-06,06-07 amount in the first year to the Profit and Loss account and it has, in fact, debited l/5th of the interest paid to the Profit and Loss account from the second year onwards. The High Court, in its impugned judgment, has based its reasoning on the second aspect and applied the principle of 'Matching Concept' to support this conclusion.
11. Insofar as the first reason, namely, non-convertible debentures were issued for a period of five years is concerned, that is clearly not tenable. While taking this view, the AO clearly erred as he ignored by ignoring the terms on which debentures were issued. As noted above, there were two methods of payment of interest stipulated in the debenture issued. Debenture holder was entitled to receive periodical interest after every half year @ 18% per annum for five years, or else, the debenture holder could opt for upfront payment of Rs. 55 per debenture towards interest as one time payment. By allowing only l/5th of the upfront payment actually incurred, though the entire amount of interest is actually incurred in the very first year, the AO, in fact, treated both the methods of payment at par, which was clearly unsustainable. By doing so, the AO, in fact, tampered with the terms of issue, which was beyond his domain. It is obvious that on exercise of the option of upfront payment of interest by the subscriber in the very first year, the assessee paid that amount in terms of the debenture issue and by doing so he was simply discharging the interest liability in that year thereby saving the recurring liability of interest for the remaining life of the debentures because for the remaining period the assessee was not required to pay interest on the borrowed amount.
12. The next question which arises for consideration is as to whether the assessee was estopped from claiming deduction for the entire interest paid in the year in which it was paid merely because it had spread over this interest in its books of account over a period of five years. Here, the submission of learned counsel for the assessee was that there is no such estoppel, inasmuch 28 ITA No. 5847/Del/2010 3111 to 3114/Del/2013 AY:2001-02 03-04,04-05,05-06,06-07 as, the treatment of a particular entry (or for that matter interest entered in the instant case) in the books of account is entirely different from the treatment which is to be given to such entry/expenditure under the Act. His contention was that assessment was to be made in accordance with the provisions of the Act and not on the basis of entries in the books of account. His further argument was that had the assessee not claimed the payment of entire interest amount as tax in the income tax returns and had claimed deduction over a period of five years treating it as deferred interest payment, perhaps the AO would have been right in accepting the same in consonance with the accounting treatment which was given. However, learned counsel pointed out that in the instant case the assessee had filed the income tax return claiming the entire deduction which was allowable to it under the provisions of Section 36(l)(iii) of the Act as all the conditions thereof were fulfilled and, thus, it was exercising the statutory right which could not be denied.
............
15. What is to be borne in mind is that the moment second option was exercised by the debenture holder to receive the payment upfront, liability of the assessee to make the payment in that very year, on exercising of this option, has arisen and this liability was to pay the interest @ Rs. 55 per debenture. In Bharat Earth Movers v. CIT [2000] 245 ITR 428/112 Taxman 61 (SC), this Court had categorically held that if a business liability has arisen in the accounting year, the deduction should be allowed even if such a liability may have to be quantified and discharged at a future date.
.............
16. Judgment in Madras Industrial Investment Corpn. Ltd. v. CIT [1997] 225 ITR 802/91 Taxman 340 (SC) was cited by the learned counsel for the Revenue to justify the decision taken by the courts below. We find that the Court categorically held even in that case that the general principle is that ordinarily revenue expenditure 29 ITA No. 5847/Del/2010 3111 to 3114/Del/2013 AY:2001-02 03-04,04-05,05-06,06-07 incurred wholly and exclusively for the purpose of business is to be allowed in the year in which it is incurred. However, some exceptional cases can justify spreading the expenditure and claiming it over a period of ensuing years. It is important to note that in that judgment, it was the assessee who wanted spreading the expenditure over a period of time and had justified the same. It was a case of issuing debentures at discount; whereas the assessee had actually incurred the liability to pay the discount in the year of issue of debentures itself. The Court found that the assessee could still be allowed to spread the said expenditure over the entire period of five years, at the end of which the debentures were to be redeemed. By raising the money collected under the said debentures, the assessee could utilise the said amount and secure the benefit over number of years. This is discernible from the following passage in that judgment on which reliance was placed by the learned counsel for the Revenue herself:
............
18. What follows from the above is that normally the ordinary rule is to be applied, namely, revenue expenditure incurred in a particular year is to be allowed in that year. Thus, if the assessee claims that expenditure in that year, the IT Department cannot deny the same. However, in those cases where the assessee himself wants to spread the expenditure over a period of ensuing years, it can be allowed only if the principle of 'Matching Concept' is satisfied, which upto now has been restricted to the cases of debentures.
19. In the instant case, as noticed above, the assessee did not want spread over of this expenditure over a period of five years as in the return filed by it, it had claimed the entire interest paid upfront as deductible expenditure in the same year. In such a situation, when this course of action was permissible in law to the assessee as it was in consonance with the provisions of the Act which permit the assessee to claim the expenditure in the year in which it was incurred, merely 30 ITA No. 5847/Del/2010 3111 to 3114/Del/2013 AY:2001-02 03-04,04-05,05-06,06-07 because a different treatment was given in the books of account cannot be a factor which would deprive the assessee from claiming the entire expenditure as a deduction. It has been held repeatedly by this Court that entries in the books of account are not determinative or conclusive and the matter is to be examined on the touchstone of provisions contained in the Act [See -
Kedarnath Jute Mfg. Co. Ltd. v. CIT[1971] 82 ITR 363 (SC); Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 227 ITR 172/93 Taxman 502 (SC); Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1 (SC) and United Commercial Bank v. CIT [1999] 240 ITR 355/106 Taxman 601 (SC).
20. At the most, an inference can be drawn that by showing this expenditure in a spread over manner in the books of account, the assessee had initially intended to make such an option. However, it abandoned the same before reaching the crucial stage, inasmuch as, in the income tax return filed by the assessee, it chose to claim the entire expenditure in the year in which it was spent/paid by invoking the provisions of Section 36(l)(iii) of the Act. Once a return in that manner was filed, the AO was bound to carry out the assessment by applying the provisions of that Act and not to go beyond the said return. There is no estoppel against the Statute and the Act enables and entitles the assessee to claim the entire expenditure in the manner it is claimed.
21. In view of the aforesaid discussion, we are of the opinion that the judgment and the orders of the High Court and the authorities below do not lay down correct position in law. The assessee would be entitled to deduction of the entire expenditure of Rs. 2,72,25,000 and Rs. 55,00,000 respectively in the year in which the amount was actually paid. The appeals are allowed in the aforesaid terms with no orders as to costs/' (emphasis supplied) 11.2.1 Accordingly, respectfully following the judgment 31 ITA No. 5847/Del/2010 3111 to 3114/Del/2013 AY:2001-02 03-04,04-05,05-06,06-07 of the Hon'ble Apex Court as aforementioned, we are of the considered views that the entire upfront fee was allowable as a deduction in assessment year 2004-05 itself and accordingly, we set aside the order of the Ld. Commissioner of Income Tax (A) on the issue and direct the Assessing Officer to allow the entire amount in the year under consideration.
11.3 Ground no. 1 in assessment year 2001-02, ground nos. 1,8 ,9 in assessment year 2003-04, ground nos. 1, 9 and 10 in assessment year 2004-05, ground nos. 1,8 and 9 in assessment year 2005-06 and ground nos. 1, 7 and 8 in assessment year 2006-07 are general in nature and do not require any adjudication.
12.0 In the result, all the five appeals of the assessee stand partly allowed in terms of our observations contained in the preceding paragraphs.
Order pronounced in the open court on 19th November, 2018.
Sd/- Sd/- (G.D. AGRAWAL) (SUDHANSHU SRIVASTAVA) VICE PRESIDENT JUDICIAL MEMBER Dated: 19th NOVEMBER, 2018 'GS' 32 ITA No. 5847/Del/2010 3111 to 3114/Del/2013 AY:2001-02 03-04,04-05,05-06,06-07 Copy forwarded to: - 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT By Order ASSTT. REGISTRAR 33