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Assistant Commissioner of Income Vs. Amtrex Appliances Ltd. - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Ahmedabad
Decided On
Judge
Reported in(2005)94TTJ(Ahd.)396
AppellantAssistant Commissioner of Income
RespondentAmtrex Appliances Ltd.
Excerpt:
1. these cross-appeals; one by the revenue and the other by the assessee are directed against order dt. 24th dec., 1996, passed by the learned cit(a) for asst. yr. 1992-93.2. we will first deal with the assessee's appeal. the assessee has raised argumentative grounds. however, summary of the grounds has been given at pp. 6-7 of the grounds of appeal, which are reproduced below : (1) the disallowance of expenditure on increase in authorised share capital amounting to rs. 1,35,000 be deleted. (2) the interest of rs. 5,24,596 received from deposits with bank out of money received from public issue be given set off against the public issue expenses, or in the alternative, against the interest paid by the appellant on bridge loan. (3) the entire public issue expenditure of rs. 12,31,961 be.....
Judgment:
1. These cross-appeals; one by the Revenue and the other by the assessee are directed against order dt. 24th Dec., 1996, passed by the learned CIT(A) for asst. yr. 1992-93.

2. We will first deal with the assessee's appeal. The assessee has raised argumentative grounds. However, summary of the grounds has been given at pp. 6-7 of the grounds of appeal, which are reproduced below : (1) The disallowance of expenditure on increase in authorised share capital amounting to Rs. 1,35,000 be deleted.

(2) The interest of Rs. 5,24,596 received from deposits with bank out of money received from public issue be given set off against the public issue expenses, or in the alternative, against the interest paid by the appellant on bridge loan.

(3) The entire public issue expenditure of Rs. 12,31,961 be treated allowed for amortisation under Section 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 Section 47(4A) of the Gujarat Sales-tax Act.

(5) The claim of preliminary expenses under Section 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 Section 37 of the Act and not under Section 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 State Industrial Development Corporation Ltd. v. CIT (1997) 225 ITR 792 (SC) and Brooke Bond India Ltd. v. CIT (1997) 225 ITR 798 (SC).

Hence, this ground is rejected.

4. As regards ground No. (2), the learned counsel appearing for the assessee submitted that the learned CIT(A) has erred in rejecting the assessee's contention for set off of interest income against public issue expenses. He has also erred in rejecting alternative contention of the assessee that the interest income should be set off against the interest paid by the appellant on bridge loan taken by them in anticipation of the public issue being subscribed. The learned counsel contended that the judgment of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilisers Ltd. v. CIT (1997) 227 ITR 172 (SC) will not be applicable on the facts of the present case, as is clear from the observations made by the Hon'ble Supreme Court at p. 180 of the said report. The Hon'ble Supreme Court has observed that in the case of the assessee, the business had not started and there could not be any computation of business income or loss incurred by the assessee.

In such a situation, the expenditure incurred by the assessee for the purpose of setting up its business cannot be allowed as deduction, nor can it be adjusted against any other income under any other head. The learned counsel submitted that in the present case the assessee was already engaged in business. He drew our attention to the audited statements for the year ended on 31st March, 1991, pertaining to asst.

yr. 1991-92 placed at p. 31 of the paper book, which, inter alia, show that the sales made by the assessee in the preceding two years ended on 31st March, 1991, were Rs. 7,88,91,810 and in the year ended on 31st March, 1990, it was Rs. 7,09,58,169. Our attention was also drawn to the quantitative details of products of air-conditioners and other articles given in the notes on account Schedule XI (copy at p. 38 of paper book), showing that the assessee had manufactured 2,829 air-conditioners in the year ended on 31st March, 1991, and 3,153 air-conditioners in the year ended on 31st March, 1990. The assessee was thus already engaged in the business of manufacture of air-conditioners and other articles of iron and steel, as shown in the notes on account annexed with the 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 Corporation Ltd. v. CIT (1999) 240 ITR 24 (Mad) in which the judgment of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilisers Ltd. (supra) 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 made by the learned representatives of the parties and have gone through the orders of the learned Departmental authorities. We have also gone through all the judgments cited by the learned representatives. The learned CIT(A) after taking into consideration the entire relevant material and the judgments cited before him, came to the following conclusion in para 5 of his order: "5. On consideration of these judgments, it is seen that the set off of interest receipts against interest expenditure has not been upheld by the Courts in the absence of nexus between the two activities. It is, therefore, difficult to appreciate the arguments of the learned counsel for the appellant that in this case the business has already commenced. This aspect is relevant only to decide the head in which interest income should be charged to tax.

I, therefore, hold that the AO was justified in rejecting the contention of the appellant for the set off of this interest income against public issue expenses. For that matter even the alternative claim taken by the appellant before me that this income should be set off against income paid by the appellant-company on bridge loans also deserves to be turned down. However, having regard to the fact that in the case of the appellant the business had already commenced, unlike the case relied upon by the AO, I hold that the AO is not justified in insisting upon the assessment of these amounts under the head 'income from other sources'. He is, therefore, directed to assess this income as business income of the appellant." 4.3 The assessee has challenged the findings given by the learned CIT(A) for refusing to grant set off of the interest income against public issue expenses as well as against interest paid by the appellant on bridge loans taken by them in anticipation of the public issue being subscribed. The Revenue in their appeal has challenged the findings of the CIT(A) in relating to the aforesaid point by raising the following ground in their appeal: "The learned CIT(A) has erred in law and on facts in directing the AO to consider the income arising out of the public issue of equity shares amounting to Rs. 5,24,596 as income from business instead of income from other sources." 4.4 The learned Departmental authorities have decided that ...........(sic) the fact that the assessee ..............(sic) into consideration the judgment of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilisers Ltd. (supra), 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 v. Bokaro Steel Ltd. (1999) 236 ITR 315 (SC) and Bongaigaon Refinery & Petrochemicals Ltd. v. CIT (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 their appeals. The point relating to assessability of interest income amounting to Rs. 5,24,596 shall be decided afresh by the AO after examining the relevant facts and also taking into consideration all the judgments which may be brought to his notice at the time of fresh assessment. The AO will decide this point afresh in accordance with the provisions of law and after providing reasonable opportunity to the assessee. Hence, ground No. (2) of assessee's appeal and the only ground raised in Revenue's appeal are treated as allowed for statistical purposes.

5. As regards ground No. (3) relating to amortisation of public issue expenditure under Section 35D of the Act, the learned counsel drew our attention to the relevant paras of the assessment order and the order of the CIT(A). The assessee claimed amortisation of public issue expenses under Section 35D in respect of the following expenses :Brokerage 6,70,440.00Underwriting commission 5,31,266.00Advertisement 8,60,486.83Printing and stationery 7,81,315.00Others 12,31,969.00 ______________ 5.1 The AO observed that Section 35D(2)(c)(iv) specifically provides amortisation of certain public issue expenditure enumerated in the said provision. He, therefore, did not allow amortisation under Section 35D in respect of other expenditure under Section 35D aggregating to Rs. 12,31,969. The AO thus granted deduction under Section 35D in respect of the balance amount of expenditure of Rs. 28,43,507.

5.2 The learned CIT(A) has given the following details of the said sum of Rs. 12,31,061 on which amortisation under Section 35D was denied by the AO : 3,57,566.00 Fees to registrar to the issue 2,25,624.00 Fees to managers to the issue 82,148.98 Travelling exps.

38,234.00 Stamp duty for shares and debentures 15,000.00 Trustee fees 3,967.55 Courier, conveyance, xerox, etc._____________ The learned CIT(A) following the judgment of the Hon'ble Madhya Pradesh High Court in the case of CIT v. Shree Synthetics Ltd. (1986) 162 ITR 819 (MP) granted relief in relation to expenditure of Rs. 3,00,000 incurred for postage for purpose of computing deduction under Section 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 Section 35D. The learned counsel submitted that the Hon'ble Madhya Pradesh High Court in the case of Shree Synthetics Ltd. (supra) has clearly observed that the words used in Section 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 Section 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. (supra) has held as under at p. 826 : "Clause (c) of Sub-section (2) of Section 35D starts with the words 'where the assessee is a company, also 'expenditure', which if read with Sub-clause (iv) "in connection with the issue for public subscription of shares in or debentures of the company, being underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus' would indicate that the word 'being' used here is 'illustrative and not restrictive'. On the contrary, if after the words, 'also expenditure', Sub-clause (iv) would have started with the words 'being underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus, in connection with the issue, for public subscription, of shares in or debentures of the company', the submission of learned counsel for the Revenue would have some force because this word 'being' as it stands today in the section cannot be read backwards, but has to be read as a whole. Therefore, we are of the opinion that the word 'being' has been used here by way of illustration and is not restricted only to the words 'underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus'. Thus, question Nos. (1) and (2) have to be answered in favour of the assessee and against the Department." 5.5 The learned CIT(A) has observed that the other expenditure incurred by the assessee are in the nature of special efforts made to make the public issue success and the same cannot be construed as expenditure strictly necessary for public issue of shares of the company, The desirability or necessity of expenditure incurred in relation to public issue is solely within domain of the appellant-company and the opinion of the AO about this aspect cannot be substituted in place of the decision of the company. All such expenditure have been debited in the public issue expenditure and have been incurred in relation to public issue of shares. All the expenses will, therefore, qualify for being taken into consideration for purpose of computing amortisation allowable as deduction under Section 35D of the Act. We accordingly direct the AO to take into consideration the entire amount of Rs. 12,31,969 for purpose of computing the amount of amortisation allowable under Section 35D of the Act.

6. 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 Section 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 Section 35D.7.1 We have considered the submissions made by the learned representatives of the parties and have gone through the relevant provisions. Explanation (b) given below Section 35D(3), inter alia, defines capital employed as under : (i) in a case referred to in Clause (i) of Sub-section (1), the aggregate of the issued share capital, debentures and long-term borrowings as on the last day of the previous year in which the business of the company commences; 7.2 A plain reading of the language used in the aforesaid Explanation indicates that the aggregate of share capital, debentures and long-term borrowings as on the last day of the previous year in which the business of the company commences, has to be considered for computing the amount of capital employed in the business of the company for purpose of determining the ceiling of expenditure on which amortisation is allowable under Section 35D of the Act. We are, therefore, inclined to accept the assessee's contention that the amount of debenture application money should also be included for purpose of computing the total capital employed for purpose of working out deduction under Section 35D of the Act.

8. Ground No. (6) relates to disallowance of sales promotion expenses aggregating to Rs. 34,82,241. The learned CIT(A) has discussed this point in paras 16 to 30 on pp. 11 to 24 of his order. The amount of Rs. 34,82,241 claimed by the assessee as deduction on account of sales promotion expenses comprised of an expenditure of Rs. 10,63,000 incurred by the appellant on advertisement for launch of new Shizuka Air-conditioners and another sum of Rs. 24,82,181, representing the loss incurred by the appellant on sale of CKD Hitachi Air-conditioners.

Since this expenditure was incurred for promoting new Hitachi project, the appellant treated this expenditure as deferred revenue expenditure in its books of account and debited only 1/5th of the aforesaid amount as expenditure of the year in its P&L a/c. The company in its annual report has stated that this expenditure has been treated as deferred revenue expenditure, as it was incurred for product launching and market promotion benefit which was to endure for long period. The assessee however claimed the said expenditure as revenue 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. v. CIT (1980) 124 ITR 1 (SC), the expenditure cannot be disallowed on the ground that it is capital expenditure." 8.2 The learned CIT(A), however, further observed in paras 25 to 30 that the appellant-company cannot validly contend that irrespective of the treatment given by them in their books of account of spreading over such expenditure in five years, they should be allowed deduction of the entire sum of Rs. 34,82,241 in the assessment year under consideration.

The CIT(A) has elaborately discussed this point in paras 25 to 30 of his order and has also referred to various judgments relating to the aforesaid point. It may be relevant here to reproduce the findings given by the CIT(A) in paras 29 and 30 of his order : "29. During the course of proceedings before me, the appellant also argued that in his books of account the expenditure has been treated as deferred revenue expenditure and amortised over 5 years. There was, however, no provision for allowance as deferred revenue expenditure in the IT Act. This contention of the appellant is not correct. Provisions of Section 145(1) are wide enough to include any reasonable method including spread over of any receipt or expenditure over more than one accounting year provided doing so would be reflective of true nature of the transactions in accordance with well established principles of accountancy.

30. In view of the discussion in the foregoing paragraphs, I hold that the AO was not justified to disallow the entire sum of Rs. 34,82,241 as representing capital expenditure. At the same time the appellant is not entitled to claim deduction of the entire amount in asst. yr. 1992-93. The AO is directed to allow the appellant deduction of these amounts in the same manner the same have been charged to P&L a/c by the appellant-company as per their regularly maintained books of account." 8.3 Shri S.N. Soparkar, the learned senior advocate, contended that the absence or existence of book keeping entries does not decide the question relating to allowability of a particular expenditure as deduction. The allowability of deduction will depend on the relevant provisions of the IT Act. He placed reliance on the decisions of Tribunal in the cases of Core Health Care Ltd. v. Dy. CIT (2000) 70 TTJ (Ahd)(TM) 490 : (2001) 78 ITD 1 (Ahd)(TM), Bombay Housing Corporation v. Asstt. CIT (2002) 76 TTJ (Mumbai) 25 : (2002) 81 ITD 545 (Mumbai) and the judgment of the Hon'ble Gujarat High Court in the case of Dy.

CIT v. Core Health Care Ltd. (2001) 251 ITR 61 (Guj), and the judgment of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilisers (supra) 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 Corporation Ltd. v. CIT (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 valid by the Hon'ble Supreme Court. The same formula of spreading over the expenditure in question over a period of five years cannot be applied as there is no contractual or statutory obligation nor there is any certainty about the benefit of such expenditure over a period of five years. The accounting entries made by the appellant-company spreading over such expenditure in five years cannot, therefore, disentitle the assessee to get deduction of the entire expenditure in the year under consideration. The learned counsel thus strongly urged that deduction in respect of entire sales promotion expenses should be allowed.

8.4 The learned CIT--Departmental Representative drew our attention to the following notes on account contained in Schedule XI of audited statement: (i) The company imported certain components for the manufacture of a new brand of air-conditioner, namely, Shizuka as part of market promotical activity as a result of which the company penetrated the market by charging prices lower than the cost of components by an amount of Rs. 24,82,133. This amount has been treated as deferred revenue expenses being market promotion expenses incurred which would endure for long-term benefits and is written off over a period of 5 years.

(ii) Also a sum of Rs. 10,00,053 being advertisement, in the nature of sales promotion expenses, has been treated as deferred revenue expense as the same is incurred for product launching. This amount also is being written off over a period of 5 years.

The learned CIT--Departmental Representative also relied upon the detailed reasons given in the orders of the CIT(A) and the AO.8.5 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 judgments cited by the learned representatives of both sides.

8.6 The Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilisers Ltd. (supra), at p. 183, has held as under : "It is true that this Court has very often referred to accounting practice for ascertainment of profit made by a company or value of the assets of a company. But, when the question is whether a receipt of money is taxable or not or whether certain deductions from that receipt are permissible in law or not, the question has to be decided according to the principles of law and not in accordance with accountancy practice. Accounting practice cannot override Section 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. v. Dy. CIT (supra), Bombay Housing Corporation v.Asstt. CIT (supra) and by the Hon'ble Gujarat High Court in the case of Dy. CIT v. Core Health Care Ltd. (supra). 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 treated the expenditure of Rs. 24,82,133 and Rs. 10,00,053 as deferred revenue expenditure and has written off the said amount as expenditure over a period of five years. Such a decision of the company has been approved by the board of directors as well as by the shareholders in their annual general meeting. Such a decision of treating the said expenditure as deferred revenue expenditure and spreading the same over a period of five years, has also been approved by the auditors. They have not qualified their audit report in relation to such treatment given by the assessee in their books of account.

There is no specific provision relating to year of allowability of deferred revenue expenditure. The Hon'ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. v. CIT (supra), at pp.

812 and 813, has held as under: "The Tribunal, however, held that since the entire liability to pay the discount had been incurred in the accounting year in question, the assessee was entitled to deduct the entire amount of Rs. 3,00,000 in that accounting year. This conclusion does not appear to be justified looking to the nature of the liability. It is true that the liability has been incurred in the accounting year. But, the liability is a continuing liability which stretches over a period of 12 years. It is, therefore, a liability spread over a period of 12 years. Ordinarily, revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred. It cannot be spread over a number of years even if the assessee has written it off in his books over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. Thus, in the case of Hindustan Aluminium Corporation Ltd. v. CIT (1983) 144 ITR 474 (Cal), the Calcutta High Court upheld the claim of the assessee to spread- out a lump sum payment to secure technical assistance and training over a number of years and allowed a proportionate deduction in the accounting year in question.

Issuing debentures at a discount is another such instance where, although the assessee has incurred the liability to 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. (supra). 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 assessee for purpose of debiting the said expenditure in its P&L a/c prepared as per the books of account regularly maintained by the appellant-company.

8.9 It may be relevant here to mention that the matter relates to asst.

yr. 1992-93. The assessment for four subsequent years, viz., asst. yrs.

1993-94 to 1996-97 must have already been completed by now and the assessee must also have been granted deduction in respect of 1/5th amount of aforesaid expenditure in each of the four subsequent years.

It may be pertinent to make a useful reference to the judgment of the Hon'ble Bombay High Court in the case of CIT v. Nagri Mills Co. Ltd. (1958) 33 ITR 681 (Bom), in which the Hon'ble Bombay High Court has observed as under: "We have often wondered why the IT authorities, in a matter of such as this where the deduction is obviously a permissible deduction under the IT Act, raise dispute as to the year in which the deduction should be allowed. The question as to the year in which a deduction is allowable may be material when the rate of tax chargeable on the assessee in two different years is different; but in the case of income of a company, tax is attracted at a uniform rate and whether deduction in respect of bonus was granted in the asst. yr. 1952-53 or in the assessment year corresponding to the accounting year 1952, that is, in the asst. yr. 1953-54, should be a matter of no consequence to the Department; and one should have thought that the Department would not fritter away its energies in fighting matters of this kind. But, obviously judging from the references that come up to us every now and then, the Department appears to delight in raising points of the character which do not affect the taxability of the assessee or the tax that the Department is likely to collect from him whether in one year or the other." 8.10 In view of the aforesaid facts and discussion and in view of the judgment of the Hon'ble Supreme Court in the case of Madras Industrial Investment Corpn. Ltd. (supra) and aforesaid judgment of the Hon'ble Bombay High Court in the case of Nagri Mills Co. Ltd. (supra), which is equally applicable to the other litigant, i.e., the assessee, we are of the view that the order of the CIT(A) in relation to this ground is perfectly valid and justified. Hence, we do not find any justification to interfere with the findings given by the CIT(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 filed along with the written submission dt. 10th Jan., 1995).

9.1 The AO rejected the assessee's claim for grant of deduction of the entire sum of Rs. 65,44,703 as revenue expenditure by observing as under in para 6.5 of his order : "6.5 I have examined the abovementioned contentions of the assessee-company with reference to the facts of the case and has observed as under : (i) As stated above, in the audited books of account the assessee-company has claimed 1/6th of the total drawings and designing expenditure at Rs. 65,44,703, but at the time of filing of the return, the assessee-company has changed its stand and has claimed total expenditure of Rs. 65,44,703 as revenue expenditure in its statement of total income. However, no reasons for making such change is forthcoming.

(ii) It is a matter of record that the assessee-company has actually imported drawings and designs worth of Rs. 59,69,885 in asst. yr.

1991-92 and has made corresponding payments to Hitachi Ltd., Japan.

This clearly indicates that the liability to make the payment of Rs. 59,69,885 is actually occurred in the asst. yr. 1991-92 and the assessee-company has made corresponding payments in the asst. yr.

1991-92 itself. In view of this, the claim of the assessee-company for the deduction of the earlier year's expenditure of Rs. 59,69,885 (pertaining to asst. yr. 1991-92) cannot be accepted. It is a well-settled principle of the law that if an expense is not claimed in the year in which it occures, the assessee looses the right to claim it as deduction altogether. Supreme Court of India in the case of CIT v. A. Gajapathy Naidu (1964) 53 ITR 114 (SC) has held that once the account has been closed, it is not permissible for the assessee-company to reopen his account of the past year and claim the expenses of deduction for the P&L a/c of the subsequent year. In view of the above said principle, it is held that the expenditure of Rs. 59,69,885, the liability of which has arisen and the payment of which is made in asst. yr. 1991-92, cannot be considered for the deduction during the year under consideration. It is pertinent to mention here that the assessee-company had failed to put up any justification for claiming earlier year's expenditure as revenue expenditure during the year.

(iii) It is contended by the assessee that the expenditure incurred on import of drawings and designs is the revenue expenditure and hence should be allowed under Section 37(i) of the IT Act." 9.2 The AO also considered the assessee's claim for grant of deduction under Section 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 Section 35AB in respect of aforesaid amount, which pertains to asst. yr. 1991-92 [refer para 6.5(iii)].

(b) In view of the discussion as mentioned in above paras, it is held that payment of lump sum technical know-how fees of Rs. 5,74,818 during the year under consideration is squarely covered under the provisions of Section 35AB and the assessee-company is entitled for deduction of 1/6th of the amount as paid during the year under consideration, i.e., an amount of Rs. 95,803 will be allowed as deduction during the year under consideration instead of claim of deduction of Rs. 65,44,703 by the assessee-company." 9.3 The learned CIT(A) in para 41 of his order has held that after enactment of the provisions of Section 35AB, it is no longer open to apply provisions of Section 35 to such expenditure. He however held that the assessee is entitled to grant of deduction of 1/6th amount under Section 35AB of the total expenditure of Rs. 65,44,703. The learned CIT(A) in para 44 of his order has rejected the assessee's claim for grant of deduction under Section 37 as under : "44. Before parting, it may be mentioned that if the appellant's claim of deduction under Section 37 is to be held tenable even then the appellant cannot for asst. yr. 1992-93 seek deduction of any sum exceeding Rs. 5,74,818. I see no force in the contention of the appellant that the expenditure last year was merely prepaid expenditure. In this case technical agreement has been signed during the previous year relevant to asst. yr. 1991-92. Acting on that agreement the appellant made huge payments and Hitachi also supplied to the appellant the bulk of drawings and designs during asst. yr.

1991-92, Merely because this activity, to some extent, spilled over the impugned assessment year, it cannot be said that the entire expenditure accrued during this assessment year and that no expenditure accrued during asst. yr. 1991-92." 9.4 The learned counsel appearing for the assessee purported that there are various restrictive clauses in the agreement executed with Hitachi Limited for providing technical know-how. It contains clause which prohibits transfer of technical know-how to any other party in any manner whatsoever, as also provides for return of entire drawings and design in the event of termination of agreement and further contains a secrecy clause even after the termination of the agreement. The learned counsel submitted that the assessee was already carrying on the business. The agreement 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 v. ITO (2000) 68 TTJ (Del)(TM) 300 : (2000) 73 ITD 189 (Del)(TM)Indian Petrochemicals Corporation Ltd v. Dy. CIT (2002) 74 TTJ (And) 281 : (2002) 81 ITD 263 (Ahd)Indian Petrochemicals Corporation Ltd. v. Dy. CIT (supra) has considered various judgments on this point including the judgment of the Hon'ble Supreme Court in the case of Eimco K.C.P. Ltd. v. CIT (2000) 242 ITR 659 (SC). The issue is fully and squarely covered in favour of the assessee by the above referred decisions. The learned counsel also drew our attention to the facts stated on pp. 21 and 22 of statement of facts submitted before the CIT(A) which are reproduced below : "6. As regards the Dy. CIT's observations that the drawings and designs of Rs. 59,69,885 having been imported during the previous relevant to asst. yr. 1991-92 and the corresponding payment to Hitachi Ltd., Japan, having also been made in asst. yr. 1991-92, the same are to be treated as earlier years expenses and hence the same cannot be allowed as a revenue expenditure during the year in question. It is submitted that the following facts needs due consideration for deciding the issue in question : (a) That the agreement entered into by the assessee-company with Hitachi Ltd., Japan, was a package deal for import of drawings and designs and the payment thereof was a lump sum payment as also confirmed by the Dy. CIT. (b) The assessee-company had acquired only some of the drawings and designs from Hitachi Ltd., Japan, for which the payment of Rs. 59.63 lakhs was made till March, 1991, which were in fact in the nature of prepaid expenses as the complete designs and drawings were received only during the previous year relevant to asst. yr. 1992-93 during which year the assessee-company had used the said designs and drawings in the manufacturing of the improvised models of air-conditioners.

(c) Thus, the drawings and designs acquired during the previous year relevant to asst. yr. 1991-92 were utilised for business operations only during the year in question and hence was rightly claimed as revenue expenditure for asst. yr. 1992-93.

(d) The Dy. CIT has himself observed on p. 20 of his order that the project has been implemented successfully by the assessee-company only in asst. yr. 1992-93 and hence quite logically the entire expenditure has been treated as revenue expenditure pertaining to asst. yr. 1992-93.

(e) Thus, the case law of the Supreme Court relied upon by the Dy.

CIT is not applicable in the present case, the facts being totally different.

Thus, keeping in view the aforesaid facts, the assessee-company has rightfully claimed the entire expenditure of Rs. 65,44,703 as revenue 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 : During the term of this agreement, Hitachi hereby agrees to grant to Acquest a non-exclusive, non-sub-licensable and non-transferable licence to make, use and sell Acquest Products in India under technical information and/or other technical information furnished hereunder, and/or under Hitachi patents.

E. Upon expiration or termination of this agreement as provided herein or by operation of law or otherwise, all rights granted or obligations undertaken hereunder shall terminate forthwith except: 2. Acquest's obligations to pay any amounts accrued hereunder upon or prior to the date of termination.

3. If this agreement is terminated by Hitachi due to a reason attributable to acquest under this Article VII, licensee shall promotly return to Hitachi all originals of technical information and other technical information furnished hereunder and all copies thereof which have been made by Acquest on and before the termination date.

Technical information and other technical information furnished or made available hereunder shall be for the sole use by Acquest.

During the term of this agreement and thereafter, Acquest shall take all reasonable care to make sure that technical information and/or any technical information furnished by Hitachi hereunder shall not be disclosed to a third party or parties exception so far as ; (1) Such information is necessarily disclosed by its use in Acquest products.

9.10 The aforesaid clauses clearly show that Hitachi Ltd., Japan, had provided the technical know-how, drawings and designs, etc. to the assessee for use thereof for manufacture of air-conditioners. The assessee was not entitled to transfer or give on sub-lease/sub-licence to anyone else. In the event of termination of the said agreement, the assessee was liable to return to Hitachi Ltd., all originals of technical information and all copies thereof to Hitachi Ltd. All rights granted under the said agreement will stand terminated forthwith upon expiration of the said agreement. All these restrictive clauses clearly indicate that the assessee did not acquire ownership rights on the technical information, 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 v. CIT (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 circumstances that the agreement insofar as it placed limitations on the right of the assessee in dealing with the know-how and the conditions as to non-partibility, confidentiality and secrecy of the know-how incline towards the inference that the right pertained more to the use of the know-how than to its exclusive acquisition." Thereafter, the Hon'ble Supreme Court, inter alia, relying upon the earlier judgments of the Hon'ble apex Court in the cases CIT v.Associated Cement Companies Ltd. (1988) 172 ITR 257 (SC), Empire Jute Co. Ltd. v. CIT (1980) 124 ITR 1 (SC) and CIT v. CIBA of India Ltd. (1968) 69 ITR 692 (SC) observed as under (at pp. 391-392) : "The improvisation in the process and technology in some areas of the enterprise was supplemental to the existing business and there was no material to hold that it amounted to a new or fresh venture.

The further circumstances that the agreement pertained to a product already in the line of the assessee's established business and not to a new product indicates that what was stipulated was an improvement in the operations of the existing business and its efficiency and profitability not removed from the area of the day-to-day business of the assessee's established enterprise.

It appears to us that the answer to the questions referred should be on the basis that the financial outlay under the agreement was for the better conduct and improvement of the existing business and should, therefore, be held to be revenue expenditure. Reference may also be made to the observations of this Court in CIT v. CIBA of India Ltd. (1968) 69 ITR 692 (SC).

There is also no single definitive criterion which, by itself, is determinative as to whether a particular outlay is capital or revenue. The 'once for all' payment test is also inconclusive. What is relevant is the purpose of the outlay and its intended object and effect, considered in a commonsense way having regard to the business realities. In a given case, the test of 'enduring benefit' might break down. In CIT v. Associated Cement Companies Ltd. (1988) 172 ITR 257 (SC) at p. 262, this Court said : 'As observed by the Supreme Court in the decision in Empire Jute Co.

Ltd. v. CIT (1980) 124 ITR 1 (SC), that there may be 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 in view of the aforesaid judgments of the Hon'ble apex Court.

9.13 The AO and the CIT(A) have observed that the expenditure to the tune of Rs. 59,69,885 out of total expenditure of Rs. 65,44,703 was incurred in asst. yr. 1991-92. The same, therefore, cannot be allowed in the year under consideration, viz., in asst. yr. 1992-93. Reliance has been placed by the learned Departmental authorities, inter alia, on the agreement of the Hon'ble apex Court in the case of CIT v. A.Gajapathy Naidu (supra). It may be relevant here to reproduce the relevant facts of that case : "The assessee, who supplied bread to a Government hospital under a contract during the period 1st April, 1948 to 31st March, 1949, made certain representations to the Government after the close of the year that he had incurred loss. The Government directed payment of the sum of Rs. 12,447 to the assessee by way of compensation for the loss sustained in respect of the supply of bread. That amount was received by the assessee in the accounting year 1950-51.

Held, that the amount ought to be included in the profits of the year 1950-51 relevant to the asst. yr. 1951-52, and that it could not be related back to the earlier year during which the assessee actually supplied bread to the hospital." 9.14 This was a case relating to the year of assessability of an income of Rs. 12,447 received by the assessee by way of compensation for the loss sustained in respect of supply of bread. The said judgment does not in any manner help the Revenue for determining the year of allowability of a revenue expenditure of such a nature which has been discussed hereinbefore. It may also be relevant here to point out that the AO in para 6.2 had examined the copies of annual report, audited balance sheets and made the following observations in para 6.2 of the assessment order : "6.2 Nature of the expenditure and its treatment by the assessee-company in the books of account and in directors' report.

In order to understand the claim of the assessee-company, copies of the annual report for asst. yr. 1991-92 and asst. yr. 1992-93 are examined along with the copies of audited P&L a/c and the balance sheet for the respective years which has revealed the following important points. It is evident from the annual report for the accounting years 1990-91 and 1991-92 that the expenditure on 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 : "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 : 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 evident from the abovementioned facts of the case that the expenditure on import of drawings and designs are the part of the new project which is implemented successfully by the assessee-company in asst. yr. 1992-93." 9.15 The AO has himself arrived at the conclusion that the import of drawings and designs are part of new project which has been successfully implemented, by the assessee-company in asst. yr. 1992-93.

Furthermore, once it is held that the expenditure is of a revenue nature and is allowable as deduction for computing taxable income, the year of allowability is not of much significance, as has been aptly explained by the Hon'ble Bombay High Court in the case of CIT v. Nagri Mills Co. Ltd. (supra), the relevant extracts of which have already been reproduced hereinbefore. It may be relevant here to mention that the assessment of assessee's income for asst. yr. 1991-92 was made at loss of Rs. 13,51,830 vide order under Section 143(3) dt. 1st Feb., 1994. The AO has allowed carry forward of unabsorbed depreciation accounting to the aforesaid sum of Rs. 13,51,830. Even if this amount is treated as allowable in asst. yr. 1991-92, the assessee will be eligible to get the benefit of carry forward of the said amount by way of business loss eligible to be carried forward in subsequent years.

9.16 It may also be necessary to refer to the judgment of the Hon'ble Gujarat High Court in the case of Saurashtra Cement & Chemical Industries Ltd. v. CIT (1995) 213 ITR 523 (Guj) which directly relates to allowability of expenditure relating to earlier years. The Hon'ble Gujarat High Court has cited with approval the judgment of the Hon'ble Gauhati High Court in the case of CIT v. Nathmal Tolaram (1973) 88 ITR 234 (Gau), has observed as under (at pp. 531 and 532) : "In this connection, it is useful to refer to a decision of the Gauhati High Court in the case of CIT v. Nathmal Tolaram (1973) 88 ITR 234 (Gau), a case arising under the Indian IT Act, 1922, as to the interpretation of Section 10(2)(xv) which is corresponding to Section 37(1) of the 1961 Act. The question related to the claim of deduction on account of the sales-tax liability paid during the year 1957-58, whereas the liability related to the accounting year 1949-50. The Division Bench in that case observed as under (at p.

238) : "Under Section 4 of the IT Act, the income that accrues or arises during 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 Section 10(2)(xv) of the Act.

We are, therefore, unable to accede to the submission of learned counsel for the Department.

Section 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 Section 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 which can be ignored only at the peril of the assessee. This expenditure had never been taken note of in the earlier years for one reason or other. In the absence of any legal bar in the way of the assessee claiming this expenditure in the year of demand for which provision has already been made in his accounting year, deduction under Section 10(2)(xv) is permissible in law and has been rightly allowed by the Tribunal.

We are in respectful agreement with the said view expressed by the Gauhati High Court. We, therefore, answer question No. 5 in the negative, i.e., in favour of the assessee and against the Revenue." 9.17 In the present case, the AO has himself observed that the expenditure on technical know-how and drawings and designs acquired by the assessee relate to a new project which was successfully implemented in the year under consideration. Apart from this, the assessee, in the statement of facts, submitted before the CIT(A) that the payments of Rs. 59.69 lakhs made till March, 1991, were in fact in the nature of prepaid expenses, as complete drawings and designs were received in the previous year relevant to asst. yr. 1992-93 during which year the assessee-company had used the said drawings and designs in the manufacturing of the improvised models of air-conditioners. These facts stated by the assessee before the AO and the CIT(A) have not been controverted by bringing on records any material to disprove the correctness of these facts.

9.18 The learned CIT(A) has directed the AO to allow deduction under Section 35AB on the entire expenditure of Rs. 65,44,703. In other words, he has directed the AO to allow 1/6th of the said expenditure in asst. yr. 1992-93 and in equal amounts in each of the five subsequent years. The Revenue has not challenged the aforesaid findings given by the learned CIT(A) in their appeal. The assessee must have, therefore, also got deduction of the entire amount over a period of six years as contemplated in Section 35AB, as a result of aforesaid findings given by the learned CIT(A). This fact will also have to be kept in mind while giving a final finding in relation to this point.

9.19 The learned CIT(A) has given a finding in his order that after enactment of the provisions of Section 35AB, the provisions of Section 37 cannot be applied in relation to such a deduction. It may be imperative to reproduce the extract from the headnote of the decision of the Tribunal, Delhi Bench, in the case of Goodyear India Ltd. v. ITO (supra), 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 the expenditure resulted in acquiring advantage of any asset of enduring benefit to the assessee. From the above discussion about the nature and terms of the agreement, it became clear that the assessee had not acquired any asset as such but it had acquired only the right to use for a limited period. There was also no absolute certainty of its continued use for the business for a long period because of existence of the terms of the agreement for its termination even before 8 years. The assessee had not acquired any advantage in capital field. The advantage consisted merely of facilitating the assessee's manufacturing and trading operation to be carried on more profitably while leaving other capital untouched. Moreover, every enduring advantage is not of capital nature. The Supreme Court's decision in Empire Jute Co. Ltd. v. CIT (supra) makes this position very clear. Again in these days of fast changing world of technology the advantage under the agreement could not be considered as advantage of enduring nature. In view of the above discussions it could be said that the expenditure in question was a revenue expenditure.

As regards the applicability of Section 35AB, no doubt, the use of the words "in lump sum consideration for acquiring know-how" and the absence of words like "expenditure of a capital nature" in the provisions which have been used in Sections 35A and 35ABB give prima facie impression that the view of the JM, i.e., that Section 35AB is applicable to both capital or revenue expenditure, was correct but the issue is not that simple. The provisions of Section 35AB have to be understood in the light of the scheme of the IT Act and other relevant provisions. No non obstance clause like "notwithstanding contrary contained in any other provisions of the Act" or "notwithstanding anything contained in Sub-section (1) of Section 37" has been used in Section 35AB which would mean that it does not override Sub-section (1) of Section 37, under which the revenue expenditure is allowable as deduction in full. Section 35AB is an enabling as well as incentive section, which allows deduction of lump sum payment for technical know-how in six equal instalments, i.e., 1/6th for six years. How can it be said to be an enabling and incentive section, if it brings within its mischief a revenue expenditure also, which is allowable in full in the relevant year under Section 37(1) of the Act Therefore, the interpretation that Section 35AB is applicable both to capital expenditure and revenue expenditure will defeat the very purpose of Section 35AB and the legislative intent of introducing this section as vividly brought out in Finance Minister's speech and memorandum explaining the said provision.

Section 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 Section 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.Indian Petrochemicals Corporation Ltd. v. Dy. CIT (supra) 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) 242 ITR 659 (SC) (supra). The relevant extracts from the head note are reproduced below : "The assessee was an existing and old undertaking. It was carrying on the business of manufacture and sale of petrochemical items for several years. The technical know-how was acquired for improvisation of the existing products and for widening the range of its products by way of backward integration and forward integration. The new projects commenced by IPCL with the technical know-how were a part of expansion of the existing business. A new unit of existing business is distinct from commencing an altogether new business.

The lump sum payment made by the assessee for acquiring technical know-how for improving its existing products and for extending the range of its existing business and/or for expanding the said business was clearly allowable as revenue expenditure. Therefore, the AO was to be directed to allow deduction of the sum incurred by the assessee in respect of payments on account of know-how and technical fees to 'T' as a revenue expenditure. The AO was also to be directed to simultaneously withdraw the amount of investment allowance and depreciation granted to the assessee in respect of the said amount in the year under consideration as well as in the subsequent years. The assessee had agreed that it would have no objection to such withdrawal of deduction already granted by way of investment allowance and depreciation on the aforesaid lump sum amount paid for acquiring technical know-how. With that condition, the AO was directed to allow deduction of the aforesaid amount as revenue expenditure in the asst. yr. 1984-85." 9.21 On a careful consideration of the entire relevant facts and the principles of law emerging from the above referred decisions, we are of the considered opinion that deduction in respect of expenditure amounting to Rs. 65,44,703 should be allowed as revenue expenditure in the year under consideration, viz., in asst. yr. 1992-93 on the condition that the AO should simultaneously withdraw deduction of 1/6th amount of the aforesaid expenditure allowed to the assessee in asst.

yr. 1992-93 and in five subsequent years. In case the withdrawal of such deduction allowed under Section 35AB in the year under consideration or in any of the five subsequent years is objected to by the assessee or is legally found to be not possible, the deduction as revenue expenditure in the year under consideration will not be allowed. This is to ensure that the assessee does not get double deduction in respect of the same amount in more than one year.

10. In the result, both the appeals are treated as allowed for statistical purpose.


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